Commercial Law Negotiable Instruments Mann Essentials of Business

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

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

Commercial Law Converting from Order to Bearer (s 23) A cheque may be converted from § payable to bearer to § payable to order Where § the only, or last , indorsement of a cheque requires the drawee institution to pay to bearer, § the holder may, convert the cheque into a cheque payable to order by changing the indorsement.

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

Commercial Law Signature § You must have signed a cheque, either as drawer or indorsee, to be liable on it (s 31)

Commercial Law Unauthorised Signatures (s 32) § Where any signature is placed on a cheque without authority then it is inoperative unless § The person against whom the signature is being asserted is estopped from denying its genuineness § It has been ratified by the alleged signatory § But it operates as a valid signature in favour of any person who takes the check bona fide for value and without notice of the defect

Commercial Law Holder in Due Course (s 3) § A person is a holder in due course if § the cheque was transferred by negotiation to the holder and, § at the time when the holder took the cheque, it was; § Complete and regular on the face of it § Not a stale cheque; and § Not crossed “not negotiable”. § And took the cheque in good faith, for value and without notice of defect in title

Commercial Law Stale Cheques (s 3(5)) § A cheque becomes stale after 15 months § Banks have option to pay stale cheques § Customer has right to tell banks not to pay stale cheques

Commercial Law Holder in Due Course (s 3) (cont. ) § The holder took the cheque: § In good faith; § For value; and § Without notice of any: § dishonour of the cheque; or § defect in, or lack of, title of the person who transferred the cheque to the holder

Commercial Law Holder in Due Course (s 3) (cont. ) § The holder is deemed to have taken a cheque with notice of defect in title if he had notice that the cheque was transferred to him § In breach of faith; or § In fraudulent circumstances

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

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

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

Commercial Law Effect Of Crossing A Cheque § A direction by drawer to drawee not to pay the cheque otherwise than to a financial institution (s 54) § Where a cheque that bears a crossing and is transferred by negotiation to a person, the person does not receive a better title to the cheque than the title of the person from whom he took the cheque (s 55).

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

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

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

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

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

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

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

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

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

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

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

Commercial Law Lyritzis and Lyritzis v. Westpac Banking Corporation No SG 54 of 1992 FED No 812/94 § Lyritzis opal miners and dealers in Coober Pedy § Mr Lyritzis accepted 4 bank cheques drawn on ANZ from interstate buyer unknown to him § Before transaction Westpac Bank Manager told him that a bank cheque was “as good as cash” and acceptable to any bank as a good and valid order for payment and failed to advise him that there were circumstances in which a bank cheque could be dishonoured § The bank cheques had been stolen § Interstate buyer disappeared with the opals

Commercial Law Lyritzis and Lyritzis v. Westpac Banking Corporation No SG 54 of 1992 FED No 812/94 Federal Court: § Advice was misleading and deceptive due to failure to warn of possibility of dishonour (s 52 TPA) § A case where s. 52 TPA conduct may be constituted by silence § Negligence because duty to exercise reasonable care and skill when advising customer.

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

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

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

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

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

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

Commercial Law Drawing Bank’s Duties The bank is not to honour a cheque if § Countermanded (i. e. stop payment) (s 90(1)(a)) § It has notice of § Drawer’s mental incapacity (s 90(1)(c)) § Drawer’s death (s 90(1)(c)) § Drawer being an undischarged bankrupt (ss 125 and 126 of Bankruptcy Act )

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

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