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)