Negotiable Instruments Mann “Essentials of Business Law” pp 829 – 833 & pp 838 - 848

Negotiable Instruments Mann “Essentials of Business Law” pp 829 – 833 & pp 838 - 848

Payment Of Cheque A cheque is either payable • To order - requires drawee to pay to or to order of a person specified (s. 21) or • To bearer • can be paid to whoever holds the cheque • this is the default position if not payable to order (s. 22) • Only 2 choices!

Converting from Order to Bearer (s23) A cheque may be converted from • payable to bearer to • payable to order Where • the only, or last , indorsement of a cheque requires the drawee institution to pay to bearer, • the holder may, convert the cheque into a cheque payable to order by changing the indorsement.

Account Payee Only • A direction to pay only to the bank account of the payee named on the cheque • Has no legal status under Cheques Act • Operates as a cheque payable to order • Puts collecting bank on notice to make further enquiries before paying someone other than named payee

Signature • You must have signed a cheque, either as drawer or indorsee, to be liable on it (s31)

Unauthorised Signatures (s32) • Where any signature is placed on a cheque without authority then it is inoperative unless • The person against whom the signature is being asserted is estopped from denying its genuineness • It has been ratified by the alleged signatory • But it operates as a valid signature in favour of any person who takes the check bona fide for value and without notice of the defect

Holder in Due Course (s3) • A person is a holder in due course if • the cheque was transferred by negotiation to the holder and, • at the time when the holder took the cheque, it was; • Complete and regular on the face of it • Not a stale cheque; and • Not crossed “not negotiable”. • And took the cheque in good faith, for value and without notice of defect in title

Stale Cheques (s3(5)) • A cheque becomes stale after 15 months • Banks have option to pay stale cheques • Customer has right to tell banks not to pay stale cheques

Holder in Due Course (s3) (cont.) • The holder took the cheque: • In good faith; • For value; and • Without notice of any: • dishonour of the cheque; or • defect in, or lack of, title of the person who transferred the cheque to the holder

Holder in Due Course (s3) (cont.) • The holder is deemed to have taken a cheque with notice of defect in title if he had notice that the cheque was transferred to him • In breach of faith; or • In fraudulent circumstances

Holder In Due Course • Person to whom a cheque has been negotiated • Person has taken cheque • in good faith • for value and • without notice of defect • Cheque is • regular on the face of it • not stale • Not crossed “not negotiable”

Negotiation • Normally, a person cannot get a better title to goods than the title of the person who transferred it to him (the “Nemo Dat” Rule) • Negotiable instruments are an exception • Person who holds a negotiable instrument obtains good title to it even if they have unknowingly dealt with someone who is not the rightful owner

Cheque Crossings (s 53) • Required • 2 parallel transverse lines; or • 2 parallel transverse lines with the words not negotiable between, or substantially between, the lines • Just putting the words not negotiable is NOT ENOUGH

Effect Of Crossing A Cheque • A direction by drawer to drawee not to pay the cheque otherwise than to a financial institution (s54) • Where a cheque that bears a crossing and is transferred by negotiation to a person, the person does not receive a better title to the cheque than the title of the person from whom he took the cheque (s55).

Effect of crossing a cheque • Cheque cannot be cashed • Acts as a safeguard against fraud • Makes the cheque easier to trace • A crossing may be added to a cheque by • drawer or • any body else in possession of cheque

Effect of crossing a cheque • If bank pays out cash on a not negotiable cheque then bank then bank has converted the cheque and must account to true owner of cheque for his loss • If person wrongfully obtains not negotiable cheque and then transfers it, then transferee has converted the cheque and must account to true owner of cheque for his loss • Cary v Rural Bank of NSW (Mann 844) • Radford v Ferguson (1947) 50 WALR 14

Radford v Ferguson (1947) 50 WALR 14 • Plaintiff contracted with Johnson to build a house • Johnson not a registered builder • Plaintiff drew cheque and crossed it “Not Negotiable” • Gave cheque to Johnson • Johnson cashed cheque with third party • Third party paid cheque paid to bank who honoured it • Plaintiff’s account debited

Radford v Ferguson (1947) 50 WALR 14 Decision • Cheque obtained by false pretences • Cheque voidable at option of plaintiff • Johnson did have good title to cheque • Third party did not get good title to cheque • Third party had to pay plaintiff value of cheque

Effect of crossing a cheque • A collecting bank honouring a “not negotiable” cheque gets no better title than the person presenting it to them • This means they could be liable in conversion to the true owner of the cheque

Effect of crossing a cheque • But Bank that honours cheque • in good faith • without notice of defect • Without negligence Is protected (s 95) • So bank that credits not negotiable cheque to customer’s account cannot be sued

Bank Cheques • Do not comply with s. 10 definition. • Is not drawn by one person on another • Drawn by a financial institution on itself • s. 5 clarifies and excludes operation of certain sections with respect to bank cheques.

Bank Cheques (cont.) • Bank has no duty to warn public if cheques stolen • No duty to prevent use by unauthorised persons. • Not negotiable crossing means holder is not holder in due course. • This means holder can obtain no better title than person from whom he took cheque • Can be met with defence of total failure of consideration • However may be misleading and deceptive conduct

Bank Cheques (cont.) • ABA Guidelines for dishonour of bank cheques • Forged or counterfeit instruments • Bank cheques materially altered • Bank cheques reported lost or stolen • Failure of consideration for the issue of a bank cheque • Court order restraining payment • Still situations where they will be dishonoured.

Raper V. Commonwealth Trading Bank Of Australia (1975) 2 NSWLR 227 • Jacobsen possessed a bank cheque drawn on US Bank • Wife used it to open account for them with CTB • 12 days later obtained bank cheque in favour Sidney Raper PL • Used ank cheque to obtain goods from Raper • US Bank Cheque dishonoured • So, Commonwealth Bank dishonoured its bank cheque

RAPER V. COMMONWEALTH TRADING BANK OF AUSTRALIA (1975) 2 NSWLR 227 Decision • No value given by Raper to bank for cheque. Total failure of consideration • Credit in account conditional on clearance of US Bank cheque • Bank cheque not equivalent to cash

Lyritzis and Lyritzis v. Westpac Banking Corporation No SG54 of 1992 FED No 812/94 • Lyritzis opal miners and dealers in Coober Pedy • Mr Lyritzis accepted 4 bank cheques drawn on ANZ from interstate buyer unknown to him • Before transaction Westpac Bank Manager told him that a bank cheque was “as good as cash” and acceptable to any bank as a good and valid order for payment and failed to advise him that there were circumstances in which a bank cheque could be dishonoured • The bank cheques had been stolen • Interstate buyer disappeared with the opals

Lyritzis and Lyritzis v. Westpac Banking Corporation No SG54 of 1992 FED No 812/94 Federal Court: • Advice was misleading and deceptive due to failure to warn of possibility of dishonour (s52 TPA) • A case where s. 52 TPA conduct may be constituted by silence • Negligence because duty to exercise reasonable care and skill when advising customer.

Defects in Title • Where a person obtains a cheque by • fraud • duress • other unlawful means they do not get title to it (s3(3)) • This does not limit the circumstances in which they do not get title (s3(4))

Defects in Title • However, where a person lacks capacity or power to incur a liability issues a cheque the cheque is still valid (s 30(3))

COMMERCIAL BANK OF AUSTRALIA V YOUNIS (1979) 1NSWLR 444 • Hallitt Bros owed Younis money • Thought it was $3,000 and gave him a cheque • Discovered more like $2,000 • Cancelled the $3,000 and gave him a new cheque for $2,000 • Younis presented both and both paid by bank • Bank could not collect from drawer

COMMERCIAL BANK OF AUSTRALIA V YOUNIS (1979) 1NSWLR 444 Decision • Bank was entitled to recover money paid under mistake of fact • Unjust enrichment for Y to keep the money • Note that it might have been different if Y had changed his circumstances in reliance on money as this is a defence to a claim for return of money paid under a mistake of fact

Drawing Bank’s Duty to Customer • Pay any cheque presented for payment if there are sufficient funds • Will be liable for defamation if it doesn’t • Pay only in accordance with instructions given by drawer • Not to pay if cheque materially altered or signature forged • Will be protected if pays in good faith and without negligence

Drawing Bank’s Duties The bank is not to honour a cheque if • Countermanded (i.e. stop payment) (s90(1)(a)) • It has notice of • Drawer’s mental incapacity (s90(1)(c)) • Drawer’s death (s90(1)(c)) • Drawer being an undischarged bankrupt (ss 125 and 126 of Bankruptcy Act )

Drawing Bank’s Liability Drawing bank that honours cheque • in good faith • without notice of defect • Without negligence is protected (s 94)

Customer’s Duty to Bank • Inform bank if it becomes aware of forged signature • Write cheques carefully so as to reduce forgery • Greenwood v Martins Bank (mann p 843) • Commonwealth Trading Bank v Sydney Wide Stores (Mann p 843)

Negotiable Instruments Mann “Essentials of Business Law” pp 829 – 833 & pp 838 - 848