Exam Notes - Cheque PDF

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Module'2'Cheques' What'is'a'cheque' •

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Legal!definition!of!a!cheque-!s10'Cheques'Act! o (1)!!A'cheque'is'an'unconditional'order'in'writing!that:! § !(a)!!is!addressed!by!a!person!to!another!person,!being!a!financial'institution;!and! • financial'institution!defined!in!s3(1)! o the!RBA! o a!bank:!a!body!corporate!that!is!an!authorised!deposit!taking!institution! o a!building!society! o a!credit!union! § !(b)!!is!signed!by'the'person'giving'it!(Drawer);!and! § !(c)!!requires!the!financial!institution!to!pay!on'demand!a!sum'certain!in!money.! 2!parties!to!a!cheque:! o 1-!drawer:'customer!of!the!bank! § drawer!draws!the!cheque!from!their!financial!institution! o 2-!drawee'bank! § drawer’s!bank! o Payee-!person!who!is!named!to!receive!the!money! § Bearer!cheque!does!not!have!to!specify!payee,!cheque!can!be!payable!as!cash! o Payee’s*bank-!collecting!bank! Don’t'need'a'date'on'the'cheque'for'it'to'be'valid!BUT!can’t'bank'the'cheque'before'the'cheque'date-'s61(2)!!

Function'of'drawer’s'signature' • •

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1-'Formal'requirement'for'creation'of'a'“cheque”'is'that'it'must'be'signed-'s10(b)'CA! 2-'Pre-condition'to'liability'of'drawer/indorser:!! o Person'is'not'liable'as'the'drawer/indorser'of'a'cheque'unless'they'themselves'signed'the'cheque'as'the' drawer/indorser'-'s31'CA;' o Liabilities'of'drawer-!s71! § (a)'Drawer'is'primarily'liable'for'a'cheque-'When!the!cheque!is!on!due!presentment!for!payment,!the! cheque!will!be!paid!according!to!its!tenor' § (b)!If!cheque!is!dishonoured,!and!cheque!is!not!paid!by!the!drawer!then!the'drawer'will'compensate'the' holder'or'an'indorser'who'is'compelled'to'pay'the'cheque! § if!cheque!is!negotiated,!drawer!owes!liability!to!a!third!party!(holder)! o Liabilities'of'the'indorser-!S73! § Indorsement:!! • Payee!can!‘negotiate!the!cheque’!and!transfer!title/ownership!of!a!cheque!to!someone!else! • When'payee'signs'the'cheque,'payee'becomes'the'indorser'and'takes'on'position'and'liabilities' as'indorser' § Liability's73:'' • (a)!On!due!presentment!for!payment,!the'cheque'will'be'paid'according'to'its'tenor'as'indorsed' by'the'indorser! • (b)!If!the!cheque!is!dishonoured,!the'indorser'will'compensate'the'holder'or'a'subsequent' indorser'who'is'compelled'to'pay'the'cheque! § Indorser!owes!liability!to!parties!who!have!no!contractual!relationship!to!payee'! • If*there*is*a*holder*of*a*cheque*>*holder*can*recover*from*the*indorser>*and*indorser*can*recover* from*the*drawer* 3-'Mandate'to'banker'to'debit'drawer’s'account.! o Signature!gives!authority!to!drawee!bank!to!debit!and!remove!funds!from!drawers!account!

Forged'or'Unauthorised'Signature' • •

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s32:!'a'forgery'will'not'bind'the'victim'drawer! o (1),!the'signature'is'wholly'inoperative!as!that!of!the!relevant!person!! Unless:! o (a)!!the!person!against!whom!it!is!sought!to!assert!a!right!on!the!cheque!is!estopped'from'denying'the' genuineness'of'the'signature'or'the'existence'of'authority'for'the'signature,!as!the!case!requires;!or! o (b)!!the!signature'is'ratified'or'adopted'by'the'relevant'person;! Liability!arises!through!signature!-!s31'CA! If!a!bank!pays!out!on!the!basis!of!a!forged!signature!on!a!cheque,!it!does!so!without!its!customer’s!mandate!and!is!generally' required'to'make'good'any'loss'that'the'payment'causes'the'customer.!

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! Order'and'Bearer'Cheques' •

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Order'cheque:!s21'–'cheque'is'expressed'to'be'payable'to'specified'person/s!! o Order!cheque!require*the*drawee*institution*to*pay*the*sum*ordered*to*be*paid*by*the*cheque*to*or*to*the*order*of:! § (a)!a!person'specified'in'the'cheque'as'payee'or'indorsee;!or! § (b)!2'or'more'persons'specified'in'the'cheque,!jointly!or!in!the!alternative,!as!payee!or!indorsee! Bearer'cheque:!s22'–'Cheque'payable'any'way,'except'by'order! o (b)!Order!cheque!shall!be!taken!to!require*the*drawee*institution*to*pay*the*sum*ordered*to*be*paid*by*the*cheque* to*bearer!

Crossed'cheques' •

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1-'2'parallel'transverse'lines' o s53(1)(a)! o s54-!crossing!is!a!direction!by!the!drawer!to!the!drawing!bank,!not'to'pay/cash'the'cheque'over'the'counter,! rather!to'pay'cheque'to'a'financial'institution'only! 2-'2'parallel'transverse'lines'with'‘not'negotiable’'written'in'between' o s53(1)(b)' o words!‘NN’:!goes!towards!the!quality!of!the!title!the!transferee!can!take>!the'receiver'will'not'get'better'title'than' the'person'who'first'took'the'cheque! o effect!of!taking!cheques!crossed!‘NN’-!s55:!the'person'receiving'a'negotiated'cheque'does'not'receive,'and'is'not' capable'of'giving,'a'better'title'to'the'cheque'than'the'title'that'the'person'from'whom'the'first-mentioned' person'took'the'cheque'had.! If!the!bank!pays!contrary!to!the!crossing!then!bank!has!to!bear!the!costs! Crossing'of'a'cheque'does'not'affect'the'transferability'of'a'cheque'by'negotiation-!s39(3)! Crossing!may!be!added!by-!s56:! o (a)!Drawer!or! o (b)!Any!other!person!in!possession!of!the!cheque!

' Negotiability' •

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Negotiability-'means'capability'of'an'instrument'of'being'transferred'by'delivery'or'indorsement,'so'transferee,'taking' bona'fide'and'for'value,'becoming'true'owner'and'has'good'title,'notwithstanding'any'defect'of'title'in'the'transferor' o Permewan'Wright*&*Co*Ltd!(1914)!19!CLR!457,!474!per!Isaacs!J.! Cheques'are'inherently'a'negotiable'instrument!!

Concept'of'negotiability' •

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(1)'A'method'of'transfer:! o Negotiable!instruments!are!transferable!by:! o Delivery!for!value!to!another!person!! § Where!cheque!made!payable!to!a!named!person,!or!to!bearer:!s'40! o Indorsement!by!the!holder!and!delivery!to!another!person!so!as!to!complete!the!contract!between!holder!and! other!person!-s41! § Payee'signing'on'the'cheque'then'deliver'to'that'person!-!minimum!requirement! • Don’t!have!to!write!on!the!cheque!who!it!is!being!transferred!to,!the'indorsement'must'be' written! § Payee'then'holds'liability'as'indorser!(s73)! o Method!required:!s40! § Bearer*Cheque=!Delivery-!s40(3)! § Order*Cheque=!Delivery!+!Indorsement-!s40(2)! '(2)'Transfer'free'of'equities'(enhancement'of'title)' o Possible!for!bona'fide!purchaser!of!the!instrument!without'actual'notice!of!any!defect!in!the!instrument!to!receive! title!to!the!instrument!free'of'the'interests'of'previous'parties.! o Only'holder'can'enforce'payment' § S!3:!“Holder”! • (1)!Order*cheque—the'payee'or'an'indorsee'who'is'in'possession!of!the!cheque!as!payee!or! indorsee,!as!the!case!may!be;!and! • (2)Bearer*cheque—the!bearer! o A'holder'in'due'course'(s50)'can!take!title!free!from!any!defect!in!title!of!prior!parties!and!enforce!the!cheque! against!the!liable!person!(s49)! § S50-!The!holder!of!a!cheque!is!a!holder!in!due!course!if! • (a)!at!the!time!they!negotiated!the!cheque! o (i)!the!cheque!was!complete'and'regular!on!the!face!of!it;!

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(ii)!!was!not'a'stale'cheque;!and! § stale!cheque-!s3(5):!cheque!written!more!than!15!months!previously! o (iii)!!did!not!bear!a!crossing!of!the!kind!referred!to!in!paragraph!53(1)(b);!and! § Did'not'have'parallel'transverse'lines'with'‘NN’'added' • (b)!!the!holder!took!the!cheque:! o (i)!!in!good'faith;! o (ii)!!for'value;!and! o (iii)!!without'notice:! § (A)!!of!any!dishonour!of!the!cheque;!or! § (B)!any!defect!in!title! § Advantage:'holder'in'due'course'can:-!s49! • (2)(a)!Hold'title'free'from'any'defect'in'title!of!prior!parties! o If!cheque!is!crossed!NN!and!a!third!party!hold!the!cheque,!holder!can’t!take!a!better!title! than!the!thief!that!picked!it!up=!holder'does'not'have!good'title'free'from'defect,'so' can'NOT'be'a'holder'in'due'course'and'cannot'get'advantages'under's49(2)' • !(2)(b)!May!enforce'payment'of'the'cheque'against'any'person'liable'on'the'cheque! o If!cheque!is!not!marked'“not'negotiable”,!a'bond'fide'purchaser'without'notice'can' enforce'it,'provided'that'the'person'is'the'holder-'s55! o no!title!can!derive!from!forged!indorsement! (3)'Holder'of'cheque'may'sue'in'his'or'her'own'name'any'party'who'is'liable'on'the'instrument'-!s'49(1)! o Exception!to!the!common!law!of!privity!of!contract! o

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Stolen'cheques' •

Cheques'are'property'capable'of'being'stolen-'Parsons'v'R![1999]!HCA!1;!(1999)!160!ALR!531'

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Duties'and'Liability'on'the'cheque' MacMillan'Duty'

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Customer'has'a'duty'to'take'usual'and'reasonable'precautions'in'drawing'a'cheque'to'prevent'a'fraudulent'alteration' which'might'occasion'loss'to'the'banker.' o London'Joint'Stock'Bank'Ltd'v'MacMillan'[1918]!AC!777,!787-790,!811-822.!! o The!MacMillan!duty!was!adopted'by'the'High'Court'in!Commonwealth*Trading*Bank*of*Australia*v'Sydney'Wide' Stores*Pty*Ltd!(1981)!148!CLR!304.! Bank'had'a'duty'to'inquire'into'the'circumstances'where'there'is'a'suspicious'cheque,'and'bank'has'knowledge'of'certain' factors! o Varker*v*The*Commercial*Banking*Co*of*Sydney! Where'both'the'bank'and'customer'breach'the'duty'>'the'bank'bears'the'loss' London'Joint'Stock'Bank'Ltd'v'MacMillan'[1918]:! o Facts:!The!partner!signed!the!cheque,!and!the!clerk!subsequently!wrote!“1”!and!“0”!on!each!side!of!the!figure!“2”,! and!added!the!words!“one!hundred!and!twenty!pounds”! o Held:!drawers!could!not!recover!the!amount!of!the!loss!on!the!cheque!due!to!their!negligence-!they!have!breached! the!duty!owed!to!the!bank! o Main!points! § 1-!customer(drawer)'owed'bank'(drawee'bank)'duty'to'draw'cheques'in'a'careful'way,'including'taking' reasonable'precautions'to'prevent'forgery! § 2-!blank'spaces'facilitates'fraud'and'can'be'evidence'of'a'breach'of'a'customer’s'duty'to'the'bank!(as! was!in!this!case)! § 3-!No!defence!that!the!drawer!trusted!its!agent/employee!to!do!the!right!thing! • duty!is!not!to!employ!clerks!that!they!think!they!are!honest,!the!duty'is'to'draw'cheques' carefully'and!be!responsible'for'the'direct'consequences'of'carelessness! • faith'that'drawer'has'in'their'employee'is'NO'excuse'to'the'duty' § 4-!if'drawer'gives'authority'to'an'agent'to'fill'the'cheque'in'blank,'then'drawer'is'bound'by'that'action! § 5-!duty!only!applies!to!cheques! If!bank!receives!a!cheque!where!the!spelled!out!amount!is!different!to!the!number!amount! o conflicting*legislative*position-*seems*that*lesser*amount*will*be*paid-*s15(1)!and!(2)! Sydney'Wide'Stores*Pty*Ltd*(1981)*148*CLR*304! o Facts:!company!did!business!with!CAS.!Dishonest!clerk!changes!‘Pay!CASH!order’! o HC!note-!drawer!will!be!responsible!for!agents’!action!when!drawer!sign!the!cheque,!and!is!liable!for!drawing!the! cheque!carelessly! Varker'v'The'Commercial'Banking'Co'of'Sydney'

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Facts:! §

An!accountant,!on!one!occasion,!rang!to!tell!him!to!be!more!careful!and!insert!the!name!of!the!payee! (mechanism!against!fraud).!The!brother-in-law!added:!the!sum!of!“SIXTY!ONE!HUNDRED!AND!FORTY! DOLLARS”! Issue:!was!the!bank!liable!for!the!unauthorised!transaction! Case!decided!before!Aust*Wide*Stores,!HC!had!not!yet!adopted!the!MacMillan!duty! § Prior:!Cant!infer!authority!due!to!blanks!spaces!on!the!cheque!! § Position!changed!after!MacMillan!duty!adopted>!blanks'will'mean'breach'of'duty,'as!it!is!a!common!way! to!facilitate!fraud! Held:!V!breached!his!duty!to!the!banker.!But!V!still!won,!because!of!reciprocal!breaches!by!drawer!and!bank.! § 1.!Customer’s!duty!to!bank! • Bank'increase'the'level'of'care'owed'by'the'customer'to'the'bank,'by'the'bank'giving'the' explicit'instruction'concerning'the'drawing'of'the'cheque.! § 2.!Bank’s!duty!of!reasonable!care!owed!to!customer! • Bank'owes'a'duty'to'the'drawer,'to'inquire'in'to'suspicions'circumstance,'and'has'a'duty'to' question'the'circumstances'of'the'cheque' o If!bank!breached!its!duty!due!to!negligence,!it!is!prevented!from!debiting!the!customer’s! account' • Where'both'the'parties'breached'their'contractual'duty'to'each'other,'the'loss'would'be'born' entirely'on'the'bank.! § Relevant!facts!were!unusual:!the!bank'knew'that'V'was'vulnerable'to'be'defrauded!and!it!actually'rang' the'customer!up!saying!stop!drawing!the!cheque!carelessly.!Cheque!was!unique!and!for!large!amount;! presented!shortly!after!V!being!warned!to!draw!cheque!carefully;!the!writing!of!“sixty!one!hundred”!not! “six!thousand”!etc.!

Duty'of'the'Drawee'Bank' •

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S67'Drawee'institution'to'pay'or'dishonour'promptly! o Drawee'bank'duty'to'pay'cheque!as!soon!as!reasonably!practicable!when:! § Cheque!is!drawn!in!a!proper!manner! § There!are!funds!available!in!the!customer’s!account!to!pay!entire!amount!of!cheque! § There!is!no!legal!impediment!to!payment! § The!cheque!is!duly!presented! o If'the'drawee'institution'fails'to'pay'the'cheque!the!drawee'institution:! § (a)!!may'not'dishonour'the'cheque;!and! § (b)!!is'liable'to'pay'the'cheque'to'the'holder.! § Unless-*drawee!has!become!aware!of!a!defect!in!the!holder's!title!or!that!the!holder!has!no!title!to!the! cheque! S88'CA:!A!cheque!is!not!an!assignment!of!funds! o Drawer!of!a!cheque!by!signing!it,!does!not!assign!funds!to!the!payee,!the!payee'is'the'beneficiary! o If'the'paying'bank'pays'the'wrong'person,'they'are'only'liable'to'the'customer,!not!the!payee.!Payee!will!have!to! take!action!otherwise!

Greenwood'duty' • •

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The'customer'has'a'duty'to'notify'the'Drawee'Bank'of'known'forgeries,'irregularities'or'unauthorised'transactions'on'the' account'which'are'known'to'the'customer' Greenwood'v'Martins'Bank' o Facts:!The!appellant’s!wife!defrauded!the!appellant.!Wife!begged!him!not!to!tell!bank!about!the!forgery.! o Held:!the!defrauded!appellant!can!NOT!resist!the!debiting!of!his!accounts!by!the!bank! o Reasonable!duty!on!the!drawer!because!a!bank!would!be!acting!to!its!detriment!if!it!pays!out!cheques!on!a!forged! drawer!signature.! § Estoppel*by*silence* Tina'Motors'v'ANZ'! o Facts:!! § PS!prepared!the!cheques!that!Mrs!I!would!sign.!S!formed!the!habit!of!forging!I’s!signature.! § The!branch!manager!of!the!bank!phoned!Mrs!I!to!confirm!the!suspicions!on!one!of!the!cheques.!I!told! bank!manager!not!to!worry.!I!then!became!suspicious!and!found!out!PS’s!forgery.!It!turned!out!that!PS! forged!54!cheques!with!the!face!value!of!over!$70,000.! o Held:! § The!bank'has'a'duty'of'reasonable'care,'and'an'obligation'to'inquire'where'suspicious'circumstances' arise.This!inquiry!must!be!communicated!to!the!customer! § When'the'bank'puts'the'customer'on'inquiry,'customer'has'a'duty'to'investigate'and'notify'the'bank'of' the'detection'of'any'impropriety'or'fraud'

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