Commercial Transactions Module 10 Negotiable Instruments Summer 1718

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Commercial Transactions Module 10 Negotiable Instruments Summer 1718 ©MNoonan 2009

This presentation and Copyright therein is the property of Maureen Noonan and is prepared for the benefit of students enrolled in the Commercial Transactions course conducted by the Law Extension Committee and is available for their individual study. Any other use or reproduction, including reproduction by those students for sale without consent is prohibited. ©MNoonan 2009

Negotiable Instruments In this module, we focus on financial instruments which replaced the need for physical exchange of money or other valuables in commercial transactions, and which could facilitate complex arrangements that were not possible with physical only settlements. We start with Bills of Exchange and Promissory Notes and then discuss Cheques-- a subset of Bills of Exchange. A good working knowledge of the Bills of Exchange Act and Cheques Act is required. A physical Negotiable Instrument is a “good” ; (usually associated with a debt) while the underlying obligation is a “chose in action”. As a result, we must remember contract, conversion, title and assignment of choses in action, as well as the law of Negotiable Instruments. ©MNoonan 2009

Negotiable Instruments-our focus We will look at the use of negotiable instruments for payment, finance and structuring. Students will be expected to: o. Understand the required form and formality for such instruments so they can recognise whether an instrument is or is not a valid negotiable instrument, or what qualities certain characteristics or crossings impart that affect dealing in these instruments. o. Be able to work through problems involving fraud (with or without forgery) and o Understand the contract between customer and banker in the light of both Statute and common law. ©MNoonan 2009

CONCEPT OF NEGOTIABILITY u A System of payment designed to eliminate the difficulties and risks involved in having large sums of cash, gold or silver always and immediately available and to overcome problems with transporting them over dangerous distances. u Grew out of Merchant practice. Later codified in statute. Used in trade as they enable seller to arrange collection of account before parting with title to goods. Letters of credit now very common due to credit risk. u All negotiable instruments are transferable…. bills of exchange, cheques, bearer debentures, promissory notes, some bonds…. but not all things transferable are negotiable…. share certificates, money orders, IOUs. u As well as payment method, extensive use in liquidity management (ability to discount) and in financing (commercial bill acceptance or paper facilities). ©MNoonan 2009

Characteristics of Negotiable Instruments • • • Title is capable of transfer by mere delivery (or where payable “to order”, by endorsement and then delivery) No requirement for notice of transfer to be given to person liable. (Contrast s. 12 Conveyancing Act) Holder can sue in their own name. Holder who takes in good faith and for value takes it free of equities and may obtain better title than transferor. A presumption of bona fides and consideration. ©MNoonan 2009

What is a Bill of Exchange? A document drawn up by 1 person (Drawer) ordering another person (the Drawee) to pay a sum of money (e. g. in return for goods sold) either to the Drawer or a third person (the Payee). When the Drawee accepts the obligation by signing, the Drawer gives the Bo. E to the payee who either presents it for payment at the due date to the Drawee or negotiates it to someone else in the meantime. The person in possession at maturity (the Holder, whether that is the original payee or a later recipient) presents it to the Drawee for payment. ©MNoonan 2009

What does a Bill of Exchange look like? No 22 AUD 100, 000 Due 22/10/2012 Sydney 22/07/12 Three months after date pay to the order of M. Jones without days of grace the sum of One Hundred Thousand Dollars To: R Connor S. Lambert ©MNoonan 2009

Negotiable instruments -illustrations of use-payment DOCUMENTARY COLLECTION FOR AN IMPORTER What is it? A documentary collection consists of a Bill of Exchange plus various shipping documents relating to the goods you are importing…invoice, bill of lading, other transport documents, insurance policy…delivered to you-via your agent bank. These documents are released to you in exchange for: ·On the spot payment (sight documentary collection) ·Your signing the Bill of exchange as a promise to make payment at a future date, as negotiated and specified in the Bill of exchange (term documentary collection) o. Who initiates it? Your supplier, once terms have been agreed with you usually via their bank to yours. ©MNoonan 2009

Documentary collection 2. Shipment 8. Buyer (importer) 1. Contract of Sale 3. Seller (exporter) 4. Lodgement of shipping documents 9 a. Payment 9 b. Shipping documents 6. Shipping documents 7. Presenting bank 11. Payment 5. Remitting Bank 10. Payment ©MNoonan 2009

Documentary Collection 1. 2. 3. 4. 5. 6. 7. 8. 9 a. 9 b. 10. 11. Contract is negotiated between buyer seller. Method of payment -documentary collection, shipment prior to payment. Exporter prepares shipping documents, BOE and instructions Documents lodged with remitting bank, who acts in accordance with instructions from exporter Remitting bank examines documents Remitting bank dispatches documents to presenting bank. Upon receipt shipping documents, presenting bank presents BOE to importer Importer will either agree to make payment or refuse If importer agrees to payment, payment or acceptance of BOE Shipping documents released to importer on payment or return of accepted BOE Presenting bank makes payment to remitting bank Remitting bank makes payment to exporter. ©MNoonan 2009

BOE and International Trade o Facilitates granting of trade credit in legal format by permitting o o o payments on agreed future dates Provides formal evidence of demand for payment from seller to buyer Provides seller with access to finance by permitting them to transfer their debts to bank or financier by endorsement Permits banker or financier to retain valid legal claim on both buyer and seller. If HDC bank/financier may have a stronger legal claim under a Bill than the party that sold them the debt. Permits seller to obtain greater security over the payment by enabling a bank to guarantee a drawee’s acceptance by endorsing the Bill Allows a seller protect their access to the legal system by easier access -few defences to liability & benefit of treaties. ©MNoonan 2009

FINANCE Commercial Bill Acceptance Facility –Accommodation Bills KD Morris & Sons Ltd (In Liq) v. Bank of Qld Ltd (1980) 146 CLR 165 In 1973, Keith Morris Construction Ltd group was Queensland’s largest building contractor. A subsidiary, KD Morris & Sons Pty Ltd needed $2 m. Bank of Qld and Tricontinental agreed to provide Co with commercial bill acceptance facilities of $1 m each. The Company would draw bills on Bank of Qld payable in 180 days, which it could immediately discount with Tricontinental providing it with cash to the value of the bills less discount. Each 180 days bills would be “rolled over”, meaning new bills would take the place of those retired on maturity. Method had advantage to Bank that it involved no actual advance of funds by the Bank. Instead, the money came from the discounter, Tricontinental and ultimately other operators in the commercial bill market to whom Tricontinental might in turn discount the bills. The Bank supplied acceptability in the market place i. e. credit enhancement. It added its name. In this case, security was required (land) but not always so if credit rating (often dependent on strong cash flow, debt service ability) sufficient. ©MNoonan 2009

USING A BILL OF EXCHANGE when structuring transactions/settlements A in Australia owes B in NZ AUD 100, 000 for goods B owes C in Australia AUD 100, 000 for goods To satisfy B’s debt to C, B could assign the debt owed to B by A to C by means of the statutory machinery for assignment of choses in action (NSW Conveyancing Act) Instead of A sending currency to B and B sending money to C, B could send a written order to A to pay C the amount of B’s debt. The drawing of a Bof. E is distinct from the underlying sale of goods. ©MNoonan 2009

DRAW BILL TO IMPLEMENT ABC transaction Sydney 10 th March 2015 AUD 100, 000 60 days after sight, pay C or order the sum of one hundred thousand Australian dollars (AUD 100, 000) To: A Accepted Signed A…………………. . Signed B…………… To be effective the bill must comply with s. 8 BEA B is drawer, A is drawee (and if A accepts, the acceptor), C is the payee This bill is an unconditional order in writing given by B, signed by B, requiring A to pay not on demand, but at a fixed or determinable future time a sum certain in money to the order of C…. there is no bearer in this bill ©MNoonan 2009

Structuring transactions Care must be exercised when using Negotiable Instruments when structuring transactions. Recent cases make clear that sham transactions will not be made real by the use of Negotiable Instruments. ©MNoonan 2009

BILLS OF EXCHANGE DEFINITION S. 8 BILLS OF EXCHANGE ACT UNCONDITIONAL ORDER IN WRITING ADDRESSED BY ONE PERSON TO ANOTHER SIGNED BY DRAWER REQUIRING DRAWEE TO PAY ON DEMAND OR AT FIXED OR DETERMINABLE FUTURE TIME A SUM CERTAIN IN MONEY ©MNoonan 2009

IRREVOCABLE AND UNCONDITIONAL John Shearer Limited and Arrowdrest Group P/L and Gehl Company (1995) 17 ACSR 350 (1995) 130 ALR 732 John Shearer was a dealer in Agricultural machinery and for many years distributed machinery manufactured by Gehl terminated the distributorship and Shearer dishonoured various Bills of Exchange Gehl served statutory demands pursuant to the provisions of the Corporations Law s. 459 (part of 1993 amendments). Shearer claimed it was a new basis whereby a company could apply to the court to set aside that demand by disputing the genuineness of the debt or relying on an offsetting claim. Court reviewed authorities (under Bills of Exchange Act, possible only to dispute in exceptional circumstances (if bill procured by fraud, duress or for a consideration which had failed, ) interaction with the provisions of the corporations law (was not a Code which replaced the law re Bills of Exchange and must be read together) and policy (need for certainty in law merchant). In view of the importance of the preservation of the law merchant in international and intranational transactions, would not permit law of Bills of Exchange to be ©MNoonan 2009 amended by implications. It had to fit very specifically within the meanings.

Rosenhain v. Commonwealth Bank of Aust. (1922) 31 CLR 46 Document purported to be Bill of Exchange. US Company sent it to Melbourne Co (R) Ordered R to pay “Sixty days after sight” approx 1, 471 pounds to order Caravel “ with interest at the rate of 8% per annum until arrival of payment in London to cover”. Was it a Bill of Exchange? A sum certain? Sum not capable of being ascertained at time fixed for payment Time fixed for payment 60 days after sight Sum certain even if it is plus interest provided it can be calculated with certainty at date in question Interest was to run until arrival of payment in London. Uncertain when or if this would happen Uncertain both on face document and in fact Not a Bill of Exchange ©MNoonan 2009

BILLS OF EXCHANGE ADVANTAGES TRANSFERABILITY - easy, no notice required SECURITY - no need for cash DISCOUNT - liquidity when desired NEGOTIABILITY - transferee can hold free of prior defects in title PAYMENT - facilitate payments at a distance FINANCING - commercial paper, flexible, liquid DISHONOUR - can sue on bill rather than establish facts of debt DEFENCES LIMITED - no set- off for unliquidated damages USE IN MULTIPLE TRANSACTION SCENARIO - can eliminate need for some ©MNoonan 2009

BILLS OF EXCHANGE CLASSES OF BILLS INLAND BILL - Drawn and Payable Within Australia FOREIGN BILL - Any Bill not an inland Bill More complex procedure on dishonour Clean foreign bill has no documents attached Documentary foreign bill has documents attached Protest necessary for non-acceptance, non-payment ACCOMMODATION BILLS S. 33 - Drawn for purpose of financing Most commercial paper Accommodation party lends name Can improve credit and make it discountable. INCHOATE OR INCOMPLETE BILLS S. 25 - Lack some material particular Person in possession prima facie authority to complete Must be filled within reasonable time and in accordance with authority ©MNoonan 2009

ACCEPTANCE Ø The assent of the drawee to the order Ø Drawee not liable until acceptance Ø Invalid if not written on the bill and signed by Drawee Ø Mere signature enough Ø Person not liable as acceptor unless he has signed as such s. 28 Acceptance can be general or qualified Qualified acceptance varies effect and must be clear and unambiguous Ø Conditional Ø Partial Ø States expressly that acceptor will only pay at specified place and no other Ø Limits time of acceptance Ø Made by less than all drawees indicated on bill Ø Holder may refuse qualified acceptance and may treat it as dishonoured for non-acceptance Ø Must dissent within time or deemed to have assented to it ©MNoonan 2009

Parties to a Bill Drawer-person who issues the order. Usually a creditor of drawee. Drawee-party being asked to pay. They become the acceptor when they accept the obligation by signing. Payee-entitled to payment Indorser-holder of an order bill who negotiates it to another party by delivery Bearer-person in possession of bill payable to bearer Holder-everyone who has possession of a bearer bill; or in the case of an order Bill, the original payee or an indorsee. Holder for value-holder who has given value, or subsequent holder Holder in due course -see definition in Act ©MNoonan 2009

INDORSEMENTS BLANK - Signature of indorser; no indorsee named. SPECIAL - Signature indorser and indorsee named. CONDITIONAL - See s. 38 BEA which permits disregard of condition. RESTRICTIVE - Further transfer restricted. See s. 40. SANS RECOURS - No recourse. Indorser or drawer negatives liability to holder in event dishonour. ©MNoonan 2009

Forged or unauthorised signature. S. 29 Bills of Exchange Act Subject to the provisions of this Act, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority. Provided that nothing in this section shall affect the ratification of an unauthorized signature not amounting to a forgery. ©MNoonan 2009

Forged or unauthorized signatures A person in possession of a Bill under a forged indorsement is not the payee. Because the indorsement is inoperative, they cannot be the indorsee. Because it cannot make the bill payable to bearer (see definition of bearer), it follows that they cannot be a holder (see definition of holder) or a holder in due course (see s. 34, and exception in circumstances and to extent in 60(2)(b)) Subject to the provisions of this Act…in s. 29…include s. 12(3) fictitious payee, s. 59(b)(i) estoppel of acceptor, 60(2)(b) estoppel of indorser, and banker protections ©MNoonan 2009

HOLDER IN DUE COURSE Note assumption in s. 35 S. 34 A holder in due course is one who takes a Bill Ø Complete and regular on the face of it Ø Before it was overdue Ø Without notice of dishonour Ø In good faith Ø For value Ø Without notice, at the time bill was negotiated to him, of any defect in title of person who negotiated it ©MNoonan 2009

LIABILITIES OF PARTIES S. 58 FUNDS IN HANDS OF DRAWEE A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee of a bill who does not accept as required by this Act is not liable on the instrument. S. 59 LIABILITY OF ACCEPTOR The acceptor…engages that he will pay it according to the tenor of his acceptance; and is precluded from denying to holder in due course, the existence of drawer genuineness of his signature and his capacity and authority to draw the bill and…. . S. 60 LIABILITY OF DRAWER OR INDORSER The drawer engages that on due presentment it shall be accepted and paid according to its tenor and that if it is dishonoured he will compensate the holder or any indorser who is compelled to pay it, provided that the requisite proceedings on dishonour are duly taken and is precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse. ©MNoonan 2009

LIABILITIES OF PARTIES CONT. S. 61 STRANGER SIGNING BILL LIABLE AS INDORSER Where a person signs a bill otherwise than as drawer or acceptor, he thereby incurs the liabilities of an indorser to a H in due course. S. 63 TRANSFEROR BY DELIVERY AND TRANSFEREE Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it, he is called a transferor by delivery (who) is not liable on the instrument…warrants to his immediate transferee being a holder for value that the bill is what it purports to be, that he has a right to transfer it, and that at the time of transfer he is not aware of any fact which renders it valueless. ©MNoonan 2009

DISCHARGE OF BILLS S. 64 PAYMENT IN DUE COURSE - A bill is discharged by payment in due course by or on behalf of the drawee or acceptor. Payment in due course means payment made at or after maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective……. S. 69 ALTERATION OF A BILL - (1) Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. Provided that where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenor. (2) In particular, the following alterations are material…any alteration of the date, the sum payable, the time of payment, the place of payment, and, where a bill has been accepted generally, the addition of a place of payment without the acceptor’s assent. ©MNoonan 2009

ARAB BANK V. ROSS (1952) 2 QB 216 Ross drew 2 promissory notes for 10, 000 pounds each in favour of Fathi and Faysal Nabulsy Company. He later alleged they were to pay for shares he did not receive. PNs subsequently indorsed Fathi and Faysul Nabulsy. Handed to Arab Bank who sued Ross and succeeded. Appeal to CA. Lord Denning Was Arab bank holder in due course? Depends on whether at time they took it, it was complete and regular on the face of it (which includes back of it). Regularity different to invalidity or liability. Irregular indorsement can still mean liability. Evidence of bankers of City of London they would not have accepted endorsement. Company not description. Part of the name. Was the irregularity waived? No unconditional waiver Not holders in due course because of irregularity. Open to claim as holders, but get no better title than person he took it from No defect shown in title Nabulsy brothers. Allegations of fraud not proven ©MNoonan 2009 Appeal dismissed

HELLER FACTORS V. TOY CORP (1984) 1 NSWLR 121 In mid May, Toy drew BE to its own order, mistakenly dated 3. 12. 82; the due date. Accepted by Cassidy. Indorsed by Lumsden, MD of Toy and handed to Heller, financiers of Toy. In June 82, Beech of Heller wrote Invoice No 7190 on Bill. In Sept 82, altered date on bill to 14. 5. 82. Lumsden initialled alteration. Bill presented to Cassidy 31. 12. 82. Dishonoured. Heller sued Toy (Receivers) and Cassidy in SC Yeldham J. Irregular on its face. Indorsement irregular-did not mention name indorser. Original date and date of maturity same. (s. 34 not holder in due course if bill not “complete and regular on the face of it”). Prima facie, Plaintiff is holder in due course s. 35(2). Regularity differs from validity and liability (Arab Bank). Would indorsement or obvious error in date reasonably give rise to doubt? No, Lumsden was MD and no doubt his signature was one on behalf of company. s. 8. Bill not invalid by reason only undated. Heller was holder in due course. Addition of Invoice No 7190 material alteration? No Change to date material alteration? Refer to s. 69(2)-yes, defined as so. On this ground alone, not assented to by Cassidy, claim against Cassidy fails ©MNoonan 2009

PROMISSORY NOTES S. 89 DEFINITION Ø An unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to or to the order of a specified person or to bearer Not a Bill of Exchange BUT Main BEA provisions apply with modification Note their use in financing and why No need to go into underlying debt If signed by more than, one deemed joint and several ©MNoonan 2009

Form In Woods v. Australian Taxation Office & Ors [2017]QCA 28, a plaintiff tried to pay her tax with a PN “…. redeemable on demand at…Nerang Queensland at 10. 45 hours…on the third day of December 2015” Case decided on other things, but found that it was not a valid PN…. not payable on demand nor at a fixed future time. Not pleaded or proven PN had been delivered earlier than 10. 45 on 3/12/15. ©MNoonan 2009

Promissory Notes in the news AFP 26/1/2016 Two junior employees of Agricultural Bank of China replaced Promissory Notes stored in a safe with newspapers. They then sold the Notes to finance speculation on the stockmarket, hoping to make an enormous profit and replace the missing items before theft was noticed. Unfortunately the Chinese markets went down rather than up in mid 2015, and there are likely 3. 9 m. Yuan in losses. ©MNoonan 2009

Promissory Notes and Finance A promise to pay which relies on credit for marketability Simple to draw up Very few defences Summary judgement possible Unsecured Alternative to a loan agreement A separate obligation to others Outside definition of debenture in Corporations Act Consider the Westpoint Note Issue. Used in international capital raising. ©MNoonan 2009

Westpoint Issued PNs Emu Brewery Trust Emu Brewery Mezzanine P/L 2 nd FF Charge Senior Debt Provider 1 st FF Charge Emu Brewery site owner 1 st Mortgage 2 nd Mortgage Westpoint Guarantee Development Manager ©MNoonan 2009

Emu/Westpoint Promissory Note PROMISSORY NOTE Promissory Note No: 8518 Expiry Date: 21 August 2006 Issue Date: 21 August 2003 1. Emu Brewery Mezzanine Pty Ltd (Emu Brewery Mezzanine) promises to pay to R & L Andrew Pty Ltd ATF R & L Andrew Superannuation Fund (the Investor) of 13 Gertrude Street Sunshine VIC 3020 Australia (a) the sum of $71, 000 and (b) interest (Interest) in accordance with the terms set out below 2. This Note is non-negotiable and non-transferable 3. The Principal Sum plus 2% will be paid on the Expiry Date 4. Interest will be paid at the rate of 12% per annum on a monthly basis in arrears. ©MNoonan 2009

Emu Brewery Mezzanine Ltd (in Liq) v. ASIC (2006)WASCA 105 Westpoint use of Promissory Notes ASIC claimed in cross appeal $35 m raised by promissory note issue that PNs were “securities” and Emu/Westpoint offered to issue securities (a debenture) to investors without preparing lodging or providing a disclosure document as required by Corporations Act. Not so, said majority. Did a right of early repayment prevent there being a fixed or determinable future time for payment? Or, sum certain? No ©MNoonan 2009

Westpoint cases Many aspects of PNs explored in Westpoint cases: ASIC v. Emu Brewery Mezzanine Ltd [2004] WASC 241, 187 FCR 270 The Matter of York Street Mezzanine Pty Ltd (inliq)[2007] FCA 932 ©MNoonan 2009

PN issues discussed in the Matter of York Street Mezzanine Whether PN payable on 30/11/2005 or earlier at York Street Mezzanine’s discretion was conditional and therefore not a PN. Court followed ASIC v. Emu and said No, but noted that there are conflicting decisions. Discharge not limited to payment of money-if parties agree, payment can be by book entry, set off, delivery of goods, a bond, cheque. ©MNoonan 2009

Promissory notes and investment Promissory notes are used extensively in investment products. ©MNoonan 2009

PERLS V In 2009 the Commonwealth Bank issued 10 m. “Perpetual Exchangeable Resaleable Listed Securities V” Each of these PERLS V comprised a preference share stapled to an unsecured promissory note issued out of the Bank’s NZ branch with an aggregate issue price of $2 b. In a tax case, the HC held that although the bank had a purpose of enabling PERLS V holders to obtain an imputation credit, that purpose was incidental to its purpose of raising Tier 1 capital. Mills v. FCT [2011] FCAFC 158 concerning s. 177 EA of ITAA 1936. ©MNoonan 2009

Great Southern Plantations Limited Investors were offered--Perpetual subordinated reset convertible Note with the acronym TREES 2 (Transferable Reset Exchangeable Security series 2) which is an “equity interest” for Australian tax purposes. ©MNoonan 2009

Cheques A subset of Bills of Exchange While declining in importance as a payment mechanism, they are still important for settlements, charities, small businesses, sporting clubs. In July 2011, a review was conducted by the Australian Payments Clearing Association due to the relative high cost of processing paper payments…. would like to do away with them…. still used for property settlements, government benefits. See www. apca. com. au Subject to their own regulation, the Cheques Act…. rather than Bills of Exchange Act…but same concept. ©MNoonan 2009

CHEQUES ACT 1986 DEFINITION s. 10 (1) A cheque is an UNCONDITIONAL ORDER IN WRITING that; (a) Is addressed by a person to another person (being a FINANCIAL INSTITUTION) (b) Is signed by the person giving it and (c) Requires the FINANCIAL INSTITUTION to pay ON DEMAND A SUM CERTAIN in money (2) An instrument that does not comply with subsection (1) or that orders any act to be done in addition to the payment of money, is not a cheque. See also: s. 3 for definitions of FIC INSTITUTION, FINANCIAL INSTITUTION CODES s. 11 for what is an ORDER s. 12 for what is the meaning of UNCONDITIONAL ORDER TO PAY s. 13 for what is meant by ORDER ADDRESSED TO A FINANCIAL INSTITUION s. 14 for meaning of ORDER TO PAY ON DEMAND s. 15 for ORDER TO PAY A SUM CERTAIN ©MNoonan 2009

CHEQUES ACT INTERPRETATION S. 3 FINANCIAL INSTITUTION means: a) The Reserve Bank of Australia; or b) A body corporate that is an ADI (authorised deposit-taking institution) for the purposes of the Banking Act 1959; or c) An FIC institution; or d) A person who carries on State banking within the meaning of paragraph 51 (xiii) of the Constitution; or e) A person (other than a person referred to in paragraph (a) (b) (c) or (d) who carries on the business of banking outside Australia FIC INSTITUTION means a body corporate that is, for the purposes of any of the Financial Institutions Codes; a) A building society; or b) A credit union; or c) A special services provider FINANCIAL INSTITUTIONS CODES means the following codes; The Financial Institutions (NSW) Code of New South Wales And so on for the other states. ©MNoonan 2009

Definitions cont. s. 11 CHEQUES ACT Order to pay An order to pay must be more than an authorization or request to pay. s. 12 CHEQUES ACT Unconditional order to pay (1) An order to pay on a contingency is not an unconditional order to pay and the happening of the event does not make the order an unconditional order to pay. (2) An order to pay shall not be taken not to be an unconditional order to pay by reason only that the order is coupled with either or both of the following: (a) An indication of a particular account to be debited by the financial institution to which the order is addressed; (b) A statement of the transaction giving rise to the order ©MNoonan 2009

Definitions cont. s. 13 CHEQUES ACT Order addressed to a financial institution (1) An order to pay is not addressed to a financial institution unless: (a) The order is addressed to a financial institution and to no other person; (b) the order is addressed to one financial institution only; and (c) the financial institution is named, or otherwise indicated with reasonable certainty, in the instrument containing the order. (2) An order to pay may be an order to pay addressed to a financial institution notwithstanding that a person other than the financial institution on which the instrument containing the order is drawn, the payee or the drawer is specified in the instrument. ©MNoonan 2009

Definitions cont. s. 14 CHEQUES ACT Order to pay on demand (1) Subject to subsections (2) and (3), an order to pay is an order to pay on demand if: (a) the order is expressed to require payment on demand, at sight or on presentation; or (b) no time for payment is expressed in the instrument containing the order. (2) Subject to subsection 16(3), an order to pay is not an order to pay on demand if the order is expressed to require, or requires by implication, payment otherwise than on demand, at sight or on presentation. (2) Without limiting the generality of subsection (2), an order to pay is not an order to pay on demand if the order is expressed to require, or requires by implication, payment only: (a) at or before a particular time; or (b) where the instrument containing the order is presented at or before a particular time. ©MNoonan 2009

Definitions cont. s. 15 CHEQUES ACT Order to pay a sum certain (1) Subject to subsection (2), an order to pay is not an order to pay a sum certain unless the sum ordered to be paid is specified with reasonable certainty in the instrument containing the order. (2) Where more than one sum is expressed to be payable in an instrument containing an order to pay, the lesser or least, as the case may be, of the sums so expressed to be payable shall be taken to be the only sum ordered to be paid by the instrument. (3) An order to pay may be an order to pay a sum certain notwithstanding that the order requires a sum to be paid according to a rate of exchange specified in, or to be ascertained as directed by, the instrument containing the order. (4) Where an instrument contains: (a) an order to pay a specified sum; and (b) an order to pay not more than a specified sum; the instrument shall be taken to require payment of the lesser of the sums so specified. ©MNoonan 2009

Definitions cont. S. 19 CHEQUES ACT Meaning of specification of person as payee or indorsee (1) A person shall not be taken to be specified in a cheque as payee or indorsee unless the person: a) Is named or otherwise indicated with reasonable certainty, in the cheque: and b) Is not a fictitious or non-existing person (2) Where the holder for the time being of an office is specified in a cheque as payee or indorsee, the person who is the holder for the time being of the office shall be taken to be named in the cheque as payee or indorsee, as the case may be. SO--When is a payee or indorsee NOT a payee or indorsee for the purposes of the Cheque Act? When: A fictitious person / A non-existing person / Reference is too obscure or uncertain ©MNoonan 2009

Definitions cont. S. 20 CHEQUES ACT A CHEQUE IS EITHER PAYABLE TO ORDER (REQUIRES DRAWEE TO PAY TO ORDER OF A PERSON SPECIFIED, OR 2 OR MORE PERSONS JOINTLY OR IN THE ALTERNATIVE AS PAYEE OR INDORSEE S. 21) OR PAYABLE TO BEARER (IF NOT PAYABLE TO ORDER WITHIN S. 21…SEE S. 22) ONLY 2 CHOICES! ©MNoonan 2009

Definitions cont. S. 23 CHEQUES ACT A cheque may be converted from payable to bearer to one payable to order. Where the only, or last , indorsement of a cheque requires the drawee institution to pay the sum ordered to be paid by the cheque to bearer, the holder may, using the signature of the indorser, convert the cheque into a cheque payable to order by adding to, or altering, the indorsement so that the cheque is expressed to 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 indorsee; or b) 2 or more persons specified in the cheque, jointly or in the alternative, as indorsee. ©MNoonan 2009

Liability of Drawer Primarily liable. By drawing cheque, they undertake: o That on due presentment cheque will be paid according to tenor as drawn and o That if the cheque is dishonoured, drawer will compensate the holder or an indorser who is compelled to pay the cheque. S. 71 And they are estopped from denying to a holder in due course that the cheque was a valid cheque at the time issued s. 72…first delivery to a person who takes as holder…s. 3 ©MNoonan 2009

Liability of Indorsers By indorsing, they undertake o. That on due presentment cheque will be paid according to its tenor as indorsed and o. That if the cheque is dishonoured when duly presented, indorser will compensate holder or a subsequent indorser who is compelled to pay the cheque s. 73 And is estopped from denying to a holder in due course the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements. S. 74. Also estopped from denying to indorsee from them or subsequent indorsee or a holder not an indorsee that cheque was at the time when they indorsed it a valid and undischarged cheque and that the indorser had at that time a good title to the cheque. S. 74 ©MNoonan 2009

UNAUTHORISED SIGNATURE S. 32 CHEQUES ACT (1) Where a signature is written or placed on a cheque as that of the drawer without the authority of the person whose signature it purports to be (in this subsection referred to as the relevant person), the signature is wholly inoperative as that of the relevant person unless: (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 (b) the signature is ratified or adopted by the relevant person; but the signature operates as the signature of the person who wrote or placed it on the cheque in favour of any person who, in good faith and without notice that it had been written or placed on the cheque without the authority of the relevant person, pays the cheque or takes the cheque for value. ©MNoonan 2009

S. 32 CHEQUES ACT Cont. (2) Subject to sections 74 and 92, subsection 93(2), section 94 and subsections 95(1) and (3) and 98(1), where a signature is written or placed on a cheque otherwise than as that of the drawer without the authority of the person whose signature it purports to be (in this subsection referred to as the relevant person), the signature is wholly inoperative as that of the relevant person unless: (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 (b) the signature is ratified or adopted by the relevant person; but the signature operates as the signature of the person who wrote or placed it on the cheque in favour of any person who, in good faith and without notice that it had been written or placed on the cheque without the authority of the relevant person, pays the cheque or takes the cheque for value. ©MNoonan 2009

HOLDER IN DUE COURSE DEFINED S. 50 CHEQUES ACT (1) The holder (def. s. 3)of a cheque is a holder in due course if; (a) The cheque was transferred by negotiation to the holder and, at the time when the holder took the cheque, the cheque; (i) Was complete and regular on the face of it; (ii) Was not a stale cheque; and (iii) Did not bear a crossing of the kind referred to in 53(1)(b)… 2 parallel transverse lines with the words not negotiable between…; and (b) The holder took the cheque: (i) In good faith; (ii) For value; and (iii) Without notice; A. Of any dishonour of the cheque; or B. Of any defect in the title of the person who transferred the cheque to the holder or that the person who transferred the cheque to the holder had no title to the cheque (2) Without limiting the generality of paragraph (1)(b) the holder of a cheque shall, for the purposes of that paragraph, be deemed to have taken the cheque with notice of a defect in the title of the person who transferred the cheque to the holder if the holder took the cheque with notice that the person transferred the cheque to the holder in breach of faith or under circumstances amounting to a fraud. ©MNoonan 2009

CHEQUES ACT S. 53, 54, 55 CHEQUE CROSSINGS S. 53 Crossing and crossed cheque defined Ø 2 parallel transverse lines; or Ø 2 parallel transverse lines with the words not negotiable between, or substantially between, the lines Just putting the words not negotiable is NOT ENOUGH s. 54 Effect of crossing on payment of a cheque A crossing has effect as a direction by drawer to drawee not to pay the cheque otherwise than to a financial institution s. 55 Effect of taking cheque crossed not negotiable Where a cheque that bears a crossing of the kind referred to in paragraph 53 (1)(b) is transferred by negotiation to a person, the person 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 ©MNoonan 2009 cheque had.

DISTINGUISH CHEQUES from BILLS OF EXCHANGE AND PROMISSORY NOTES A CHEQUE is • Drawn only on a financial institution • Mostly for commercial transactions within a country • Drawn on a financial institution and payable on demand • Financial institution pays because of banker/customer relationship rather than acceptance • Is a subset of Bills of Exchange A BILL OF EXCHANGE • Can be drawn on anyone • Often used for international transactions • Does not use crossings • Accepted by party on whom drawn A PROMISSORY NOTE • Bilateral legal relationship and not tripartite • Unconditional promise rather than unconditional order ©MNoonan 2009

BANK OF ENGLAND V. VAGLIANO BROS (1891) AC 107 Vucina regularly drew bills upon Vagliano who accepted them. Bills drawn payable to order C Petridi. Glyka, a Vagliano clerk forged number of Vucina Bills. Unwittingly accepted by Vagliano. Glyka forged indorsements by Petridi, cashed bills at Bank of England. By time fraud detected 71, 500 pounds paid out! Vagliano Bros sued Bank of England won. Appeal to Court of Appeal dismissed. Appeal to HL. Lords Halsbury LC and Lord Herschell Have bankers paid away money under circumstances enabling Vagliano to refuse to acknowledge payments made on his behalf? Not bill of exchange because forged. Bore in mind what one would import in mind if it was. Was bank misled into doing something by Vagliano? Bank misled. Vagliano careless in not checking. Query settled by Vagliano clerk. If, payable to fictitious person, it is payable to bearer. Bank not obliged to hold up mercantile practice to check signature ©MNoonan 2009

CLUTTON AND CO V. GEORGE ATTENBOROUGH & SON (1897) AC 90 Mr. Piper was clerk with Clutton and Co. He tricked employer to draw cheques in favour of “George Brett”. No such person. Piper took cheques, endorsed them as Brett and gave them to Attenborough, pawnbrokers to redeem goods. He was known to pawnbrokers as Brett. Clutton and Co’s bank paid out on cheques Piper was found out. Clutton and Co sued pawnbrokers. Not successful. Appeal dismissed. Appeal to HL Lord Halsbury LC - Cheque made payable to fictitious or nonexistent person still considered payable to bearer although drawer believed it was a real person. NOTE Bearer cheque can be negotiated by delivery. Order cheque must be negotiated by endorsement and delivery. Payable to bearer When it explicitly says Pay Bearer. Last or only endorsement is one in blank. Payee is fictitious or nonexistent person ©MNoonan 2009

NORTH AND SOUTH WALES BANK V. MACBETH (1908) AC 137 White pretended to Macbeth he had bought 5, 000 shares from Kerr and needed finance. Macbeth drew a cheque in favour of Kerr for 11, 250 pounds. White forged Kerr’s indorsement and paid cheque into his own account with NSW Bank. White was found out. Macbeth sued Bank and won. Appeal dismissed. Appeal to House of Lords. Lord Loreburn LC - Bank liable unless could show “fictitious” payee. Could not do so. ØWhere drawer has designated real person as payee, intends him to be payee, impossible payee can be fictitious ØDistinguish from Vagliano and Clutton. ØIn former, drawer did not intend payee to receive proceeds ØIn Clutton, payee was non-existent person whom no one could or meant to be recipient ©MNoonan 2009

GREENWOOD V. MARTIN’S BANK (1933) AC 51 Greenwood opened cheque account with Martins. Wife forged signature Most drawn in favour of non-existing person. She indorsed them and obtained payment from bank. 11 months later, Mr. G found her out. Allowed another 7 months to go by before reporting. She then shot herself. He claimed bank could not debit him for cheques. Bank denied claim. He sued and was successful. Appeal to CA successful. Greenwood appealed to HL. Crockett J - No question of ratification or of adoption. Estoppel? Essential factors giving rise to estoppel: --A representation or conduct amounting to same to induce a course of conduct --An act or omission resulting from representation, whether actual or by conduct by the person to whom the representation made. --Detriment to such person as a consequence Mere silence not representation BUT When there is duty and then deliberate silence this may become a representation. As in this case. Duty to disclose forgery to bank admitted. Appeal dismissed ©MNoonan 2009

BANK CHEQUES THEIR STATUS? • Do not comply with s. 10 definition-- It 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. IS CONFIDENCE IN THEM JUSTIFIED? • Bank has no duty to warn public if cheques stolen. No duty to ensure they do not come into hands unauthorised persons. See text 28. 48. • Not negotiable crossing means holder is not holder in due course. Which means holder can obtain no better title than person from whom he took cheque. • Can be met with defence of total failure of consideration. This happened in Sidney Raper case. • Note however, successful action for misleading and deceptive conduct, in Lyritzis v. Westpac. • Some attention to problem by ABA • Still situations where they will be dishonoured. ©MNoonan 2009

SIDNEY RAPER V. COMMONWEALTH TRADING BANK OF AUSTRALIA (1975) 2 NSWLR 227 Ø Jacobsen was American Ø Possessed a bank cheque, called cashiers cheque from Bank California Ø Wife used it to open account for them with CTB Ø 12 days later obtained bank cheque in favour Sidney Raper PL Ø Dishonoured Ø Cashier’s cheque had been dishonoured Ø Raper sued and won and bank appealed to CA Moffitt P o No value given by Raper for cheque. Total failure of consideration o Credit in account conditional on clearance of cashier’s cheque o Bank cheque equivalent to cash? o Not in this case. Unwarranted assumption. o Still a cheque ©MNoonan 2009

Athanasios Lyritzis and Janelle Ronda Lyritzis v. Westpac Banking Corp. No SG 54 of 1992 FED No 812/94 Lyritzis opal miners and dealers in Coober Pedy. Mr Lyritzis accepted 4 bank cheques purportedly drawn on ANZ from interstate buyer unknown to him. He alleged that shortly before transaction, Pearson, Manager of W told him that a bank cheque was “as good as cash” and acceptable to any bank as a good and valid order for payment, but failed to advise him that there were circumstances in which a bank cheque could be dishonoured (in particular, that if bank cheque fraudulently obtained and completed, the bank on whom it was drawn could refuse to honour it$170, 000 cheque dishonoured because ANZ said form had been stolen). Interstate buyer disappeared with the opals. Federal Court SA Flourishing cash economy. Almost all deals in cash between miners and dealers. Only exceptions being when dealing with trusted and well established friends. W was only bank in town. Turned on credit. Court believed evidence of Lyritzis and Ms. Braun who introduced deal rather than Pearson. ©MNoonan 2009

Athanasios Lyritzis and Janelle Ronda Lyritzis v. Westpac Banking Corp. No SG 54 of 1992 FED No 812/94 Cont. ABA Guidelines for Dishonour • • • 1. Forged or counterfeit instruments 2. Bank cheques materially altered 3. Bank cheques reported lost or stolen 4. Failure of consideration for the issue of a bank cheque 5. Court order restraining payment Advice was misleading /deceptive –failure to warn possibility of dishonour Circumstances where s. 52 TPA conduct may be constituted by factual matrix which includes silence as well as overt activity …silence is to be assessed as a circumstances like any other. Failure to qualify plainly misleading No doubt on evidence that Mr. L relied on the advice. Negligence would also succeed. Established customers…duty to exercise reasonable care and skill when advising customer…. failure to qualify advice a breach of that duty. ©MNoonan 2009

DISHONOUR MAIN CONTRACTUAL OBLIGATION OF FINANCIAL INSTUTION TO CUSTOMER CAN BE LIABLE for BREACH OF CONTRACT/DEFAMATION EXCEPTIONS: BANK CAN REFUSE PAYMENT STALE CHEQUES (S. 3(5) 15 months; see also ss. 89, 60) COUNTERMAND i. e. stopping. Unambiguous and identify particular cheque concerned, made to responsible person, by drawer s. 90. Note Commercial Bank of Australia v. Younis re mistake in fact. NOTICE CUSTOMER’S MENTAL INCAPACITY S. 90(1)(b) NOTICE of CUSTOMER’S DEATH s. 90(1)(c) NOTICE BANKRUPTCY ss. 125 and 126 of Bankruptcy Act NOTICE of WINDING UP of A COMPANY SERVICE of GARNISHEE POST DATED CHEQUES s. 16 KNOWLEDGE by BANK of DEFECT IN TITLE of PRESENTER NOTICE OF ASSIGNMENT ©MNoonan 2009

COMMERCIAL BANK OF AUSTRALIA V. YOUNIS (1979) 1 NSWLR 444 Ø Hallitt Bros owed Younis money Ø Thought it was $3, 000 and gave him a cheque Ø Discovered more like $2, 000 Ø Cancelled the $3, 000 and gave him a new cheque for $2, 000 Ø He presented both and both paid. Ø Bank sued him on first and succeeded. He appealed. Hope JA o Recovery of money paid under mistake of fact o Unjust enrichment for Y to keep the money o Bank to recover o Note: Might be different if Y had changed his circumstances in reliance on money ©MNoonan 2009

FORGED & UNAUTHORISED ENDORSEMENTS THE DRAWER’s SIGNATURE - General position is that financial institution cannot debit customer’s account. Unless situation is within s. 32. INDORSEMENTS - Financial Institution receives protection under s. 94 (1) Not restricted to situation where cheque paid to another financial institution. 94 Protection of drawee institution paying cheque lacking indorsement or with irregular or unauthorised indorsement (1) Subject to subsection 32(1), where: (a) the drawee institution, in good faith and without negligence, pays a cheque, whether or not to a financial institution; and (b) an indorsement has been written or placed on the cheque without the authority of the person whose indorsement it purports to be the drawee ©MNoonan 2009 institution:

FORGED & UNAUTHORISED ENDORSEMENTS Cont. (c) does not, in paying the cheque, incur any liability by reason only of: (i) the indorsement having been written or placed on the cheque without the authority of the person whose indorsement it purports to be; or (ii) its failure to concern itself with the genuineness of, or the existence of authority for, the indorsement; and (d) shall be deemed to have paid the cheque in due course. Also protected even where there is no indorsement on an order cheque or the indorsement is irregular, but only if payment made to another financial institution. S. 94(2) Subject to subsection 32(1), where: (a) the drawee institution, in good faith and without negligence, pays a cheque to a financial institution; and (b) the cheque is not indorsed or is irregularly indorsed; the drawee institution: (c) does not, in paying the cheque, incur any liability by reason only of the absence of, or the irregularity in, the indorsement; and (d) shall be deemed to have paid the cheque in due course. ©MNoonan 2009

BANKER CUSTOMER RELATIONSHIP at common law ØCONTRACT ØPRACTICES AND USAGES OF BANKERS CUSTOMER DUTIES with respect to forgery, unauthorised signature 1) Duty to take care to prevent fraudulent alterations of cheques which might cause loss to banker Commonwealth Trading Bank of Australia v. Sydney Wide Stores which confirmed Macmillan (English case). In absence of express agreement to contrary, customer’s duty is limited to duty to refrain from drafting a cheque in such a manner as to facilitate fraud or forgery. 2) Duty to inform bank of any unauthorised cheques as soon as aware No duty to check statements Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd (1986), Applying Greenwood Attempts to expand duty failed: Tai Hing Cotton Mill Ltd (1986); National Australia Bank Ltd v. Hokit (June 96). But notice in Westpac v. Metlej (1987)-court prepared to contemplate ©MNoonan 2009 wider duty.

COMMONWEALTH TRADING BANK OF AUSTRALIA V. SYDNEY WIDE STORES (1981) 148 CLR 304 Sydney Wide drew cheques on CTB ØCAS or order (Computer Accounting Services) ØCrossed and marked Not negotiable and A/c Payee Only ØEmployee named Prior, added H to CAS=CASH and cashed the cheques ØSydney Wide sued the bank and won ØCTB appealed to HC Arising from the contract between banker and customer, there is a duty upon the customer to take usual and reasonable precautions in drawing a cheque to prevent a fraudulent alteration which might occasion loss to the banker. Whethere is a breach of this duty by neglecting some usual and reasonable precaution in the drawing of cheques is a question of fact. Appeal allowed and remitted back to SC. ©MNoonan 2009

TAI HING COTTON MILL V LIU CHONG HING BANK (1986) 1 AC 80 Leung (accounts clerk) with Tai Hing in HK, forged signature MD over 5 yrs on 300 cheques/HK D 5. 5 m--paid into accounts with names similar to real suppliers. Leung took money, fled to Taiwan. Cheques drawn on 3 banks. Company sued 3 banks and won against Liu Chong. Appeal to CA by banks successful. Appeal to PC by Tai Hing. Lord Scarman DOES LAW RECOGNISE ANY DUTY OF CARE OWED BY CUSTOMER TO BANK BEYOND: 1) Duty to refrain from drawing cheque in way which facilitates fraud, forgery London Joint Stock Bank Ltd. V. Macmillan (1918) 2) Duty to inform bank of any forgery as soon as he (customer) becomes aware of it? Greenwood v. Martins Bank Ltd (1933) AC 51 Banks alleged duty wider…implied term in contract …to take reasonable precautions in management of business with bank to prevent forged cheques to be presented…and in tort, duty to check periodic statements and advise of irregularities Test of whether a term should be implied in contract is necessity. Not necessary here. If banks want it, they have to put it in contracts expressly, or use influence to get it into legislation. Any obligations in tort no greater than those in contract. None here ©MNoonan 2009

WESTPAC BANKING CORP V. METLEJ (1987) Aust Torts Rep 80 -102 M was a partner in a building partnership with Cheque account with Westpac. 2 people to sign cheques, one of whom solicitor. Solicitor signed a number of cheques and M would add signature when it needed to be paid. Kept cheque book in lunch box in car. Someone stole 3 cheques, forged M’s signature and got away with money. M sued Westpac and won. Westpac appealed to CA Court was prepared to contemplate wider duty than in Tai Hing However, not necessary No breach of duty in circumstances Even if breach, not sufficiently relevant Legal cause of loss is Westpac failure to detect forger ©MNoonan 2009

NATIONAL AUSTRALIA BANK LIMITED V. HOKIT P/L (95040542) SCNSW CA Hokit, R and M operated hairdressing salons. Companies employed Banno as bookkeeper. In 1990 -94 Banno signed cheques in name of Mark and Peter. Mark controlled Hokit and later other companies, knew that Banno was signing cheques in his name and was writing amounts larger than amounts recorded. He allowed her to sign his name and gave her signed blank cheques as a means of obtaining cash for himself WHO BEARS BURDEN FORGED CHEQUES? Bank argued for extension of customer duties to include 1. Obligation to take reasonable care to prevent presentation forged Cheques 2. Companies estopped from denying regularity of cheques signed because they knew of and acquiesced in her signing other cheques ©MNoonan 2009

NATIONAL AUSTRALIA BANK LIMITED V. HOKIT P/L cont. Appeal dismissed: NAB failed to show any circumstances justifying creation of extension of duties customers owe their banks. Impossible to contend implied term-not necessary to give business efficacy to contract, nor can it be said that term “goes without saying” Banks do not seem to pay attention to signatures any more. Bank can increase fees to cover losses or change contract. The fact that companies knew of and acquiesced in employee signing cheques for certain purposes and did not tell Bank about these arrangements, did not constitute a representation that the forged cheques could be paid and did not generate estoppel. Failure of Bank to call evidence on matters solely within its knowledge is fatal to argument that, had the Bank known these facts, it would have taken steps to avoid the risk of loss flowing from employee signing her name to unauthorised cheques. ©MNoonan 2009

NATIONAL WESTMINSTER BANK V. BARCLAYS BANK INTERNATIONAL (1975) 1 QB 654 Commander Bill lived in Nigeria and had cheque account with NW. Kept cheque book in locked cupboard. Someone broke in and stole one of the cheques. Cheque brought to Mr. Ismail by Mr. Haider. Ismail said he would pay Haider 10, 400 Nigerian pounds for it if it were met. Entered his name as payee and asked Barclays to arrange for special collection Barclays did so. Cheque honoured and Barclays credited Ismail’s account. Ismail paid Haider. Commander Bill discovered theft and told bank. Bank agreed they could not debit his account. NW sued Barclays and Ismail in HC Kerr J Succeeds against both. Circumstances in which it came into hands of Ismail and lack of writing on it reeked of suspicion. Mistake of fact Estoppel argued ©MNoonan 2009

Contract o Note that since the time of many of the previous cases, Banks have tightened the terms and conditions in their express contracts to place greater duties and obligations on their customers than the courts were prepared to do at common law. ©MNoonan 2009

BANKER CUSTOMER RELATIONSHIP, DUTIES CROSSINGS Paying Bank Drawee bank’s duty is to pay cheques in terms of customer’s order. See ss. 88 -94. . Where bank pays crossed cheque otherwise than to a bank, it will be liable to the true owner for any loss suffered subject to defences there set out. Collecting Bank Risk is that bank may pay cheque to a person who is not true owner. Bank might be liable in conversion from true owner because indorsement might be forged. s. 95 Where a bank in good faith and without negligence receives payment, bank does not incur liability to true owner by reason only of having received payment. For “without negligence” see. S. 95 Note in this context both practice of banks generally and internal rules and procedures. ©MNoonan 2009

Banker Customer Contract Protection for Banks Paying bank Duty to pay cheques where sufficient funds Where crossed, direction to pay to financial institution. Where it does so in good faith and without negligence, deemed to be paid in due course (s. 92) and not liable to true owner. Where payee bank pays order cheque with forged indorsement, whether or not to another financial institution in good faith and without negligence, deeded to have paid the cheque to the true owner (s. 93) Payee bank also protected even where no indorsement or irregular indorsement if payment to another financial institution in good faith and without negligence (s. 94(2)). If Drawer’s signature forged, wholly inoperative unless drawer estopped, signature ratified or adopted. (s. 32(1)) Tina Motors ©MNoonan 2009

TINA MOTORS V. ANZ BANKING GROUP (1977) VR 205 Ø Mr. and Mrs I had used car business - Tina Motors Pty Ltd. Ø Cheque account with ANZ. Bank Manager was Hardy. Ø Mrs I could sign cheques. Ø Brother in law Mr. Stella worked in business Ø He forged her signature on cash cheques over 7 months. Paid on cheques by bank Ø Subsequently found out. Tina Motors sued. Crockett J 1. Normally Tina Motors would succeed because a signatory did not sign the cheques 2. However in this case evidence showed Mr. Hardy had twice been doubtful of authenticity of signature and been reassured by Mr. I put on inquiry and chose not to examine situation 3. Continuing duty to act with reasonable care to ensure proper ©MNoonan 2009 working of account

BANK OF NEW SOUTH WALES V. DERHAM (1979) 25 ACTR 3 AMP drew a cheque on Bank NSW in favour of Mr. and Mrs Derham. Stolen by Volters. Forged Derham’s signature on front and wrote “Pay W. Volters” on the back. Paid cheque into ANZ, which collected from Bank NSW. Derham sued Bank NSW in conversion and money had and received and won on former. No finding on latter. Bank appealed to SC Bank claimed benefit s. 65 BEA (Paying banker…pays in good faith and in ordinary course of business…). Note Cheques Act now correct Act. Found to apply. Ordinary course of business despite irregular endorsement because of section and expert evidence other bankers practice. Also. S. 86…where banker on whom crossed cheque is drawn in good faith and without negligence…pays…found to be in good faith and no negligence here…. but no need to discuss. See s. 94 Cheques Act. ©MNoonan 2009

Banker and Customer Protection for Banks Collecting Bank Not liable to true owner where it collects a cheque for a customer who either has no title or a defective title where it acts in good faith and without negligence (s. 95) ©MNoonan 2009

UNDERWOOD V. BANK OF LIVERPOOL AND MARTINS (1924) 1 KB 775 Underwood was merchant and had a Cheque account with Bank. He formed a company, owned all shares except one with wife. Sole director. Opened cheque account with King and Co. When cheques came in he paid them to own cheque account after indorsement. By the time he died, had misappropriated 8. 500 pounds. Company and Lloyds (held debenture and had taken over King) sued Bank and succeeded Bank appealed to CA BEA protection to bankers who in good faith without negligence collect crossed cheques for customer. Bank put on inquiry No matter that he was sole director etc Made no suitable inquiry Can take the consequences ©MNoonan 2009

MARFANI AND CO V. MIDLAND BANK (1968) 1 WLR 956 Kureshy worked for Marfani. Made himself known to restaurateur (Ali) as Mr. Eliaszade. K went to Midland bank and opened cheque account in name of E. Nominated as referees Mr. Ali and Mr. Syeed. Bank wrote to both. Same day Mr. K paid a crossed cheque for 3, 000 into account drawn by Marfani in favour of E. Specially cleared. Next day Ali visited bank and told manager that in his opinion E all right. Within a fortnight Mr. K had withdrawn all money and gone. Marfani sued Midland without success Appealed to CA Was the bank put on inquiry? Not on facts as presented to judge No need to upset that Appeal dismissed ©MNoonan 2009

WESTMINSTER BANK V. ZANG (1966) AC 182 Zang handed Tilley cheque for 1, 000 pounds in favour of J Tilley or Order. Tilley paid cheque into Tilley Autos A/C with Westminster. Paying in slip said bank reserved right to postpone payment of cheques drawn against unclear effects. Zang’s bank did not meet cheque. Tilleys solicitors obtained cheque from Westminster so he could sue Zang. Suit dismissed, they returned it to W bank. Bank sued Z in HC and succeeded. His appeal allowed. Bank appealed to HL. Holder defined. Westminster received cheque without indorsement and therefore not holder within BEA act? Bank relied on section of Cheques Act…banker who give value for or has lien on cheque…without indorsement…has such rights as he would have had if, upon delivery, holder had indorsed… Lost any rights by handing cheque over to Tilleys solicitors? Normal practice of bank to require indorsement of cheque by payee when it is to be credited to some account other than payee. Not done here. Tilley handed cheque for collection and appellants received it for collection. Gave value? No. Bank did not establish they had allowed Tilleys Autos to draw against cheque. Appeal dismissed ©MNoonan 2009

CROSSINGS --Other Crossings A/C PAYEE ONLY NOT MENTIONED IN THE CHEQUES ACT THEREFORE NO STATUTORY SIGNIFICANCE CAN, however, PUT COLLECTING BANK ON NOTICE CAN BE NEGLIGENCE A bank which collects the proceeds of a cheque crossed “not negotiableaccount payee only” for a customer who is NOT the named payee of the cheque without making inquiry as to how the customer came to be paying the cheque into their own account has not acted without negligence and will not be protected by s. 95 against an action in conversion by the true owner of the cheque. See Universal Guarantees Pty Ltd v. NAB Found to apply even where there was an apparently proper indorsement of the cheque by the payee. Hunter BNZ Finance Ltd v. CG Maloney P/L (1988) 18 NSWLR 420 ©MNoonan 2009

UNIVERSAL GUARANTEE V. NATIONAL BANK OF AUSTRALASIA (1965) 1 WLR 69 Universal was finance company. Moffitt was acceptance officer for HP applications. He began creating fictitious applications which he accepted. Later, he arranged cheques drawn in favour fictitious applicants. When he banked money for company, he would extract some cash and replace it with one of the cheques endorsed by him back to the company. Stole 60, 000 pounds. Moffitt was found out. Company sued the National Bank without success. Appealed to PC Lord Upjohn In circumstances nothing paid out or in. Debtor creditor relationship unaffected. Analysis on basis paying /collecting banker unrealistic. Has Bank failed in contractual duty? Should have been put on inquiry because it was not paid to payee. Had not been paid through another bank? s. 86 BEA crossing s. 87 not negotiable a/c payee etc operate as warning but do not prevent negotiation. Found nothing suspicious to put bank on inquiry. ©MNoonan 2009

Case Study. Westpac v. Hughes [2011] QCA 42 Mr. & Mrs Hughes decided to invest in a management investment scheme operated by Drury Management P/L. As part of that they lent Drury $250, 000. The terms of the loan were evidenced by a PN and deed dated 22/6/2001. The Hughes obtained the money to lend from Cairns Penny Bank Limited which drew a cheque for $250, 000 on Westpac (bank cheque), payable to RE & ME Hughes and gave it to the Hughes. They attended the offices of Drury, signed the PN and deed and handed over the cheque. An employee of Drury deposited the cheque into its account with NAB collected the proceeds of the cheque from Westpac and credited Drury’s account. Loan to be repaid 22/6/2002. A receiver was appointed to Drury on 27 September, 2002 and managed scheme wound up because Drury not appropriately licensed. The Hughes money had been invested in the scheme but not in the promised investment. They did not recover their money. They claimed Westpac was liable to them for conversion of the cheque. ©MNoonan 2009

Westpac v. Hughes cont. 2 Conversion Aspect Who was entitled to possession of the cheque? Person entitled to bring action in conversion. Court decided that transaction was voidable due to fraud but not void. Intended to lend Drury the $250, 000 and delivered cheque intending that Drury should take title and be paid the proceeds. Title therefore passed to Drury. By promising to repay the loan with interest, they gave value for the cheque. At the time Westpac paid the cheque, Hughes had no title. Subsequent avoidance did not retrospectively confer title on Hughes. Cheque had been paid to someone authorised by Cheques Act to receive it, it had been discharged. Drawee cannot be compelled to pay twice. ©MNoonan 2009

Westpac v Hughes cont 3 Did it make any difference that cheque was crossed “not negotiable” and “account payee only”? No, see paragraph 93 of judement. Fact of being marked “not negotiable” immaterial. Hughes passed good title to Drury. The notation “account payee only” operate as a warning to collecting bank to inquire if it collects the cheque for someone other than the payee that person has title to it. Drury had such title. The words do not impose on paying bank any obligation to satisy itself that the collecting bank is collecting it on behalf of the named payee. ©MNoonan 2009

Westpac v. Hughes cont. 4 Cheques Act protections for Westpac s. 92. This made the payment by Westpac to Drury a payment in due course…if made in good faith, without negligence and to a financial institution. No allegation of bad faith. No negligence in paying to Drury because it was the holder in due course from Hughes. Paid to NAB. s. 94 incorrect or no indorsements ©MNoonan 2009

Exam QA 1 March 2008 Bank Limited (Opal). Lillian won Lotto and on Jan 1 2007 received $2. 2 m into her cheque account with Opal An associate, Flynn, said that he had just been offered an exclusive master franchise for Supatanks Inc, (Supatanks) a large American firm engaged in marketing and selling a superior quality water tank, which would soon take over a large share of the market, as it had done already in California. He said that he was unable to take up the offer unless he found a partner to fund the licence fee of $550, 000. Lillian looked at the US website for Supatanks and asked to see more. Flynn, who had no agreement with Supatanks, but had seen a copy of an agreement on the internet, downloaded a copy, inserted his own details, printed it off and showed it to Lillian. She agreed to fund acceptance of the offer in return for 49% of the total franchise and the rights to an exclusive franchise for the Sydney region. Lillian wrote and gave Flynn two cheques; one for $325, 000 payable to Supatanks and one for $225, 000 to Supatanks IP (which he explained was the entity granting all intellectual property rights under the franchise). Lillian drew two parallel transverse lines across each cheque and wrote "Account payee only" between them. Flynn deposited them into his personal account with Town & Country Bank limited (T&C), which was overdrawn by a similar amount. T&C collected the proceeds from Opal and credited the amount of $550, 000 to the account of Flynn, who promptly closed his account and disappeared. The teller at T&C, when accepting the cheques from Flynn, saw a letterhead with Supatanks at the top proffered by Flynn, and accepted his word that he had a new business of that name, but that it was more convenient to bank the cheques to his personal account because of the overdraft and the need to clear it before he could open a new business account in the name of Supatanks. The teller did not consult a superior and did not ask for further evidence of registration of the business name. Six weeks later, when Flynn could not be contacted, Lillian contacted Supatanks Inc via their website and shortly thereafter, the police. Advise Lillian on what legal action(s) she might take to recover her money; against whom; and the likely outcome of any such action. ©MNoonan 2009

Past Exam Q March 2008 QA 1 MARKING GUIDE Understood Q Answered the Q What legal actions Against whom Likely outcome Negotiable instruments/Cheques, fraud, Conversion, Cheques Act s. 19, 22, crossings Misleading and deceptive conduct, negligence Fraud, misrepresentaton Flynn, T&C, Opal Theoretical actions against Flynn Realistic chance of success in Conversion against T&C Cheques Act s. 95 2 2 8 Reasoning Other Undesirability of bringing action in negligence because of contributory negligence, difficulties with duty of care 2 TOTAL 25 1 ©MNoonan 2009

Past Exam Q March 2008 QA 1 cont. (2) WHAT LEGAL ACTION? Breach of Contract? Probable answer is that the purported contract between Lillian and Flynn not a contract at all i. e. void-complete lack of consideration, writing and supply of cheques induced by fraud. If there was a contract, because Flynn telling truth regarding Supertanks offer, misrepresentation, whether Flynn was agent of those companies, possible action against Supatanks, bearer cheque question. Fraud? Yes, Flynn. Anyone else? No. Civil or criminal action re fraud? Will it help recover money? Conversion- Who was true owner/entitled to immediate possession? If void, Lillian. Conversion of cheque by both Flynn and T&C If it is accepted that the cheques were crossed because of the transverse parallel lines, no one could acquire a better (s 55) If contract not void, T&C may argue that because the payee was fictitious etc, the cheques became bearer cheques or that Flynn as agent for the other enterprises was entitled to the cheques and not Lillian. T&C unlikely to be able to use s. 95 protection because of its negligence. Indications of negligence may have been ignoring inconsistency between the payee and Flynn's personal account, ignoring the words Account payee only and making no further inquiry, and the paucity of checks re Flynn's story. Negligence? T&C likely Misrepresentation? If a misrepresentation, contract would have been voidable and there might have been an argument that the contract was not avoided before other parties had acted and changed their positions. (T&C) Very weak argument, unlikely to succeed because of the rather clear facts describing fraud. Misleading and deceptive conduct? Yes, definitely by Flynn. T&C No AGAINST WHOM Flynn Theoretical, because he has disappear T&C More likely to assist in recovering money Anyone else Unlikely. Supatanks Inc not involved. No other persons, advisers involved. LIKELY OUTCOME Flynn Waste of time with reasons T&C Successful in conversion with reasons ©MNoonan 2009 Sections of Cheques Act-95 Cases-Nemur v. NAB, Universal case.

Past Exam Q March 2005 QB 2 Colleen drew a bearer cheque on Transworld Bank to pay for an airfare to London for $1, 450. The cheque was made payable to “I Smith or bearer”. I Smith was the principal of I Smith Travel, the travel agent organising her ticket. As it was a Saturday when Colleen made the booking and paid for the ticket, Smith placed the cheque in her safe. The premises were broken into on Sunday and the safe was ransacked and all contents taken by the burglars. Ian, one of the burglars changed the amount by adding twenty in front of the words and 2 in front of the numbers in the spaces left by Colleen. Ian negotiated the cheque on Sunday afternoon to Sorrento Motors for a car, pretending he was Ian Smith. Sorrento Motors presented the cheque at their bank on Monday, and Transworld Bank paid it. ©MNoonan 2009

Exam Q March 2005 QB 2 cont (2) (a) Colleen argues that Transworld Bank should not have paid the cheque to sorrento Motors because they were not named as payee on the cheque. Is she correct? Discuss. (b) Would your answer be different if the cheque were crossed with two parallel transverse lines and marked “not negotiable”? Explain. (c) Transworld Bank claims that it was entitled to debit Colleen’s account in the circumstances. Do you agree? Please explain your answer. (d) Colleen also argues that even if Transworld Bank paid the cheque to Sorrento, they should only be able to debit her account for the original amount of $1, 450 and not $21, 450. Is she correct? Discuss. ©MNoonan 2009

Exam Q March 2005 QB 2 cont (3) (a) The cheque has been drawn as a bearer cheque, which is negotiable by simple delivery (s. 22). Sorrento are a holder. As the thief has negotiated the cheque for a car and given a plausible reason for having the cheque, then Sorrento will probably be considered to be holders in due course. If they can establish that they came by the cheque in good faith and for value with no notice of the fact that it had been stolen by the person who negotiated it to them, they will have good title. (ss. 49, 50, 51). Colleen, in drawing a bearer cheque was instructing her bank to pay whoever presented the cheque for payment. In this case, that was Sorrento. See s. 94 for protection of a paying bank. ©MNoonan 2009

Exam Q March 2005 QB 2 cont (4) (b) If the cheque had been crossed it would no longer be a negotiable instrument. The cheque can still be transferred from one person to another but the person receiving it cannot obtain or give any better title than that held by the transferor (s. 55). In this case, the cheque had been stolen and the thief would have had no title, so Sorrento would not have received any title either. They would have been holders for value but take subject to equities. In this case, Smith will have a stronger claim to the proceeds of the cheque than Sorrento as the true owner but she is not a holder in due course as the cheque is issued to her and not negotiated to her. The only recourse for Sorrento is against Ian, the burglar. ©MNoonan 2009

Exam Q March 2005 QB 2 cont (5) (c) The Cheques Act gives the paying bank certain limited rights where the amount of the cheque is fraudulently increased (s. 91) and it may debit the account for the original amount for which the cheque is drawn. In addition to the Cheques Act protection, the bank could pursue the drawer (Colleen) for breach of her common law implied duty of care or an express term in her contract with the bank not to draw the cheque in a way which facilitates fraud or forgery. Leaving spaces would most likely be a breach of that duty. Reference to relevant cases was expected e. g. Commonwealth Trading Bank v. Sydney Wide Stores. (d) Colleen could be liable for the full amount of the altered cheque in the circumstances in part (a) as explained above. In part (b), where the cheque was crossed, Sorrento would have to surrender the full value, Smith would ask for $1, 450 and the rest should be recredited to Colleen’s account. ©MNoonan 2009

Student Questions A Exam March 2008 QA 1 (Lillian, Flynn, T&C Bank) 1. Is there any difference between “account payee only” and “not negotiable”? 2. Can I use s. 55 if she wrote “account payee only”. 3. Where a cheque bears a crossing with words “Not negotiable”, this does not affect transferability. It affects the ability of the transferee to obtain the cheque free from defects in title. Correct? Exam March 2010 QB 4 (Rafi, Jerome. Stern, WX Bank) 1. An action in conversion lies against Jerome Stern and WX Bank. Right? 2. Can I use s. 55 in this case? ©MNoonan 2009

Student Question A You are correct in that similar issues arise with respect to the collecting bank in both QA 1 in the March 2008 exam paper and QB 4 in the March 2010 paper; i. e. o Whether the cheque in question bears a crossing o Whether the banks. . T&C and WX Bank respectively…are liable in conversion. However, the crossing and it’s effect covered by your questions covers only one issue. The other issue is whether an action in conversion can be brought against the bank (are Rafi or Lillian the “true owner” of the cheque or the person entitled to immediate possession? . . . giving them the standing to bring an action in conversion? ) and if conversion is dealing with the cheque inconsistent with such a person’s right, has that happened? and if so, can the bank (the collecting bank in both cases) claim the protection in s. 95? (does it meet the criteria in that section? ) Back to your specific questions…see following slides. ©MNoonan 2009

Student Questions A Exam March 2008 QA 1 1. Is there any difference between “account payee only” and “not negotiable”? Yes, there certainly is. Please see ss. 50, 53, 54 and 55. The only crossing with statutory effect is the one described in s. 53…note that it is the lines which are essential and not the words not negotiable. Putting “account payee only” has no statutory effect. It may, however, be relevant to whether a bank can show that it received payment in “good faith and without negligence” when claiming the benefit of s. 95. 2. Can I use s. 55 if she wrote “account payee only”. No, “account payee only” has no statutory effect, s. 55 does not apply. See s. 53(2). 3. Where a cheque bears a crossing with words “Not negotiable”, this does not affect transferability. It affects the ability of the transferee to obtain the cheque free from defects in title. Correct? A crossing has the effect you describe. However, see s. 53…. it is the lines, not the words that are essential for a crossing. A crossing is both a direction to the bank as per s. 54, and prevents a person being a holder in due course. . see s. 55 and s 50. ©MNoonan 2009

Student Questions A cont. Exam March 2010 QB 4 1. An action in conversion lies against Jerome Stern and WX Bank. Right? You are correct in that such actions should have been explored. However, it is for you to determine…. whether Jerome Stern and WX Bank are persons entitled to bring such an action…that conversion…dealing with the cheque contrary to the rights of the person entitled to immediate possession (who is? ) has occurred and whether they are likely to be successful with any defence, especially use of s. 95 by the bank. It does not matter what conclusion is reached, as long as the issues are explored. 2. Can I use s. 55 in this case? s. 55 is relevant. However, so is s. 95, because WX Bank would attempt to claim the benefit of that section in any action taken against it for conversion. Note that it would have had similar difficulties with disproving negligence as in the question in March 2008. ©MNoonan 2009

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