Negotiable Instruments

1

• Negotiable Instruments
• Mann Essentials of Business Law
• pp 829 833 pp 838 - 848

2

• 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!

3

• 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.

4

• 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

5

• Signature
• You must have signed a cheque, either as drawer
  or indorsee, to be liable on it (s31)

6

• 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

7

• 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

8

• 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

9

• 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

10

• 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

11

• 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

12

• 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

13

• 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

14

• 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).

15

• 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

16

• 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

17

• 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
• Plaintiffs account debited

18

• 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

19

• 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

20

• 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
  customers account cannot be sued

21

• 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.

22

• 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

23

• 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.

24

• 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

25

• 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

26

• 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

27

• 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.

28

• 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))

29

• 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))

30

• 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

31

• 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

32

• 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

33

• Drawing Banks Duty to Customer
• Pay any cheque presented for payment if there are
  sufficient funds
• Will be liable for defamation if it doesnt
• 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

34

• Drawing Banks Duties
• The bank is not to honour a cheque if
• Countermanded (i.e. stop payment) (s90(1)(a))
• It has notice of
• Drawers mental incapacity (s90(1)(c))
• Drawers death (s90(1)(c))
• Drawer being an undischarged bankrupt (ss 125 and
  126 of Bankruptcy Act )

35

• Drawing Banks Liability
• Drawing bank that honours cheque
• in good faith
• without notice of defect
• Without negligence
• is protected (s 94)

36

• Customers 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)