Fundamentals of Law (BL502)
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Transcript Fundamentals of Law (BL502)
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 or to order
of a person specified (s. 21) or
To bearer
can be paid to whoever holds the cheque
this is the default position if not payable to
order (s. 22)
Only 2 choices!
Commercial Law
Converting from Order to Bearer (s23)
A cheque may be converted from
payable to bearer to
payable to order
Where
the only, or last , indorsement of a cheque
requires the drawee institution to pay to bearer,
the holder may, convert the cheque into a
cheque payable to order by changing the
indorsement.
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 (s31)
Commercial Law
Unauthorised Signatures (s32)
Where any signature is placed on a cheque
without authority then it is inoperative unless
The person against whom the signature is
being asserted is estopped from denying its
genuineness
It has been ratified by the alleged signatory
But it operates as a valid signature in favour of
any person who takes the check bona fide for
value and without notice of the defect
Commercial Law
Holder in Due Course (s3)
A person is a holder in due course if
the cheque was transferred by negotiation
to the holder and,
at the time when the holder took the
cheque, it was;
Complete and regular on the face of it
Not a stale cheque; and
Not crossed “not negotiable”.
And took the cheque in good faith, for value
and without notice of defect in title
Commercial Law
Stale Cheques (s3(5))
A cheque becomes stale after 15 months
Banks have option to pay stale cheques
Customer has right to tell banks not to pay stale
cheques
Commercial Law
Holder in Due Course (s3) (cont.)
The holder took the cheque:
In good faith;
For value; and
Without notice of any:
dishonour of the cheque; or
defect in, or lack of, title of the person
who transferred the cheque to the holder
Commercial Law
Holder in Due Course (s3) (cont.)
The holder is deemed to have taken a cheque
with notice of defect in title if he had notice that
the cheque was transferred to him
In breach of faith; or
In fraudulent circumstances
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
(s54)
Where a cheque that bears a crossing and is
transferred by negotiation to a person, the
person does not receive a better title to the
cheque than the title of the person from whom
he took the cheque (s55).
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 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 SG54 of 1992 FED No 812/94
Lyritzis opal miners and dealers in Coober Pedy
Mr Lyritzis accepted 4 bank cheques drawn on ANZ from
interstate buyer unknown to him
Before transaction Westpac Bank Manager told him that
a bank cheque was “as good as cash” and acceptable to
any bank as a good and valid order for payment and
failed to advise him that there were circumstances in
which a bank cheque could be dishonoured
The bank cheques had been stolen
Interstate buyer disappeared with the opals
Commercial Law
Lyritzis and Lyritzis v. Westpac Banking
Corporation No SG54 of 1992 FED No 812/94
Federal Court:
Advice was misleading and deceptive due to
failure to warn of possibility of dishonour (s52
TPA)
A case where s. 52 TPA conduct may be
constituted by silence
Negligence because duty to exercise reasonable
care and skill when advising customer.
Commercial Law
Defects in Title
Where a person obtains a cheque by
fraud
duress
other unlawful means
they do not get title to it (s3(3))
This does not limit the circumstances in which
they do not get title (s3(4))
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) 1NSWLR 444
Hallitt Bros owed Younis money
Thought it was $3,000 and gave him a cheque
Discovered more like $2,000
Cancelled the $3,000 and gave him a new
cheque for $2,000
Younis presented both and both paid by bank
Bank could not collect from drawer
Commercial Law
COMMERCIAL BANK OF AUSTRALIA V
YOUNIS (1979) 1NSWLR 444
Hallitt Bros owed Younis money
Thought it was $3,000 and gave him a cheque
Discovered more like $2,000
Cancelled the $3,000 and gave him a new
cheque for $2,000
Younis presented both and both paid by bank
Bank could not collect from drawer
Commercial Law
COMMERCIAL BANK OF AUSTRALIA V
YOUNIS (1979) 1NSWLR 444
Decision
Bank was entitled to recover money paid under
mistake of fact
Unjust enrichment for Y to keep the money
Note that it might have been different if Y had
changed his circumstances in reliance on money
as this is a defence to a claim for return of
money paid under a mistake of fact
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) (s90(1)(a))
It has notice of
Drawer’s mental incapacity (s90(1)(c))
Drawer’s death (s90(1)(c))
Drawer being an undischarged bankrupt (ss
125 and 126 of Bankruptcy Act )
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)