Alan L Tyree

Cheque washing - Part 2

Alan L Tyree*

Abstract: Parts of a cheque may be obliterated by chemicals and then rewritten with a new payee and amount. The process is known as “cheque washing” and has become a favoured method of cheque misappropriation. This article is the second of a two-part series discussing the applicable Australian law.

1  Introduction

Cheque washing uses common household chemicals to lift the ink from cheques. The washer then rewrites the payee and/or the amount. Acetone, benzene, bleach and carbon tetrachloride may all be used to remove various inks. Cheque washing is typically done on stolen cheques and the effect is difficult or impossible to detect with the naked eye. The problem is serious enough that blank cheque manufacturers are exploring special papers and technologies which will address the problem.

This article continues the examination of the legal effects of cheque washing in Australia.1 As in the first part, I will generally assume that:

2  Position of the holder

A cheque is not always discharged by an alteration,2 but when it is s 82(3) of the Cheques Act 1986 gives the “holder” certain rights:

(a) a person who, but for the discharge of the cheque, would be the holder may enforce payment of the cheque, according to the tenor of the cheque as altered, against:
  • (i) the person who made the alteration;
  • (ii) a person who authorized or agreed to the alteration; or
  • (iii) a person who indorsed the cheque after the alteration was made; as if the cheque had not been discharged; …

This section is not as useful as it first appears. As noted in the first part, a “washed” order cheque will seldom be discharged by alteration, and even if it is, there can be no holder under the (necessarily) forged indorsements. The section will apply to the person in possession of a bearer cheque which has been discharged by alteration, but it obviously gives rights which are of very limited application. Most importantly, however, is that a washed cheque is not “avoided” as under the UK legislation.

Strictly interpreted, the section does not even provide the protection accorded by the common law position for order cheques. Since we are assuming that the indorsement is forged, there can be no “holder” except for the original holder from whom the cheque was stolen. That is, there is no person who “but for the discharge” would be the holder.

Therefore, strictly interpreted, the section will not apply. Since the cheque has been “discharged” it may be questionable if the “holder” can take action against previous post-alteration indorsers under the usual warranty sections. Presumably, the section will be interpreted more generously than this.

Section 82(3)(b) provides more extensive rights to the “holder in due course”:

in a case where the alteration is not apparent–a person who, but for the discharge of the cheque, would be a holder in due course may enforce payment of the cheque, according to the original tenor of the cheque, against any other person as if the cheque had not been discharged.

Again, this is of little use for the typical “washed” order cheque. For a bearer cheque, the section could be useful, but of obviously limited value if the amount of the cheque has been substantially raised. Again note, however, that the washed cheque is not without value.

An alteration is “apparent” an inspection shows that the text has undergone some change, that is, there has been some revision of the text after its original completion.3 This might be the case where the rogue has used white-out, but is unlikely if the cheque has been properly “washed”.

3  Position of the collecting bank

The position of the collecting bank has been discussed at some length in Tyree [2] and in Edwards [1]. In short, if the cheque has been “discharged”, then the rule in Smith v Lloyds Bank plc [2001] 1 All ER 424 would hold that no action in conversion will succeed. The case is criticised in the above mentioned articles. As noted there and above, the typical washed order cheque will not be discharged.

Assuming that Smith v Lloyds Bank plc will not be blindly followed in Australia, the question arises as to the amount of damages. The general rule in tort is that damages should be assessed so as to return the plaintiff to the position he or she would have been in had the tort not occurred.4 In the case of conversion, the amount is normally the market value of the goods at the time of the conversion.5

These rules have never been easy to apply to the conversion of negotiable instruments. Scrutton J traces the evolution of the remedy in Lloyds Bank Ltd v Chartered Bank of India, Australia and China. 6 He explains (at 55–6) that the tort applies to such instruments ‘ by treating the conversion as of the chattel, the piece of paper, the cheque under which the money was collected, and the value of the chattel converted as the money received under it’.

Smith v Lloyds Bank plc applied this version of the rule in a simple-minded way: at the time of the conversion, the “cheque” was avoided and therefore the paper was worthless.

However, the “face value” rule is merely a prima facie rule for establishing damages. It is a rule which implements the basic principle of restitutio in integrum in the normal case. It is not a “legal fiction” as described in the Smith case, but a well-founded rule which implements a well-established principle.

Also note that the rule is merely a prima facie rule. It is well understood that the defendant may bring evidence to reduce the value of awarded damages: see [4, at para 15.1310].

The question is: what is the value of the washed (or otherwise altered) cheque to the true owner at the time of the conversion? Smith said “nothing”. In response to the argument that it was the conversion by the bank that robbed the true owner of rights to a replacement, Potter LJ said:

However, this does not seem to me to meet the point that the claim for conversion was in respect of a specific cheque or draft which at the date of conversion (which is the relevant date at which to assess the value of the chattel) had no value as a piece of paper and no value as a chose in action, because it had earlier been robbed of such value as at the date it was materially altered.

That is to apply the prima facie rule as a hard and fast rule. Some pieces of paper have substantial value even if they are not choses in action. Obvious examples are books and drawings, but there is no reason that an “avoided” cheque cannot fall within the same principles. If the true owner could use the “piece of paper” to obtain a replacement cheque, then certainly it has value as a piece of paper.

What is the value of a washed cheque? There are several circumstances. If it is a washed order cheque then it is not discharged unless fraudulently altered by the holder. The value to the true owner is the face value of the original cheque.

If it is a washed bearer cheque, then it can be enforced by the bearer against the person who made the alteration. Its value is at least the face value of the original cheque, possibly more since it can be enforced for its new face value against the washer.

If the alteration is not apparent (as is the case with any properly washed cheque) then it can be enforced by a “holder in due course” against any party for the amount of the original cheque. Since the true owner is the person entitled to possession, it would seem that the value is again at least the face value of the original cheque.

4  Position of the paying bank

If the cheque was originally drawn in a manner which facilitates the alterations, then the paying bank may debit the account under the principles of the Macmillan and Sydney Wide cases.7 However, this is not likely to be the case in the normal case of cheque washing since the original markings are completely obliterated.

Section 91 of the Act deals with the situation where the cheque has been raised. Provided that the alteration is fraudulent and the only material alteration, the paying bank may debit the account for the cheque as originally drawn.8

A washed cheque could fall within the operation of s 91. The principal problem is the requirement that the raised sum payable be the only material alteration. Washed cheques are likely to have the name of the payee changed. If the original cheque is an order cheque, then the alteration of the payee’s name is certainly a material alteration. If the original cheque is a bearer cheque, then the alteration may not necessarily be material.

In any case, the operation of s91 is not of great importance if the amount raised is substantially more than the amount of the original cheque. The paying bank may only recover the original amount of the cheque.

If section 91 does not apply, then it appears that the paying bank must bear the loss, at least initially. As acknowledged in Smith, the paying bank cannot debit the drawer’s account with the amount of the cheque.

It may, of course, bring action against the collecting bank to recover money paid under a mistake of fact, but this will only succeed if the collecting bank has not accounted to its principal.9 Merely crediting the account of the customer is not “accounting” to the customer for this purpose.10 Even if the receiving bank has accounted to the customer, it must show that it has done this on the basis of good faith, believing that the customer was entitled to the funds. This belief must be induced by the actions or representations of the payer, not the representations of the customer.11

In the case of a washed cheque, the most likely scenario is that the fraudulent washer will have "cleaned out" the account. Unless the paying bank can show some unusual circumstances, it will be unlikely to be able to recover from the collecting bank.

References

[1]
Robin Edwards. Non-liability of banks for conversion of materially altered cheques. Australian Banking & Finance Law Bulletin, 16(3):41, Sep 2000.
[2]
Alan L Tyree. Conversion of altered cheques. JBFLP, 12(2):119, Jun 2001.
[3]
Alan L Tyree. Cheque washing – part 1. JBFLP, 13(2):101, Jun 2002.
[4]
George Weaver and CR Craigie. The Law Relating to Banker and Customer in Australia. Law Book Company, second edition, 1990.

*
Consultant, Mallesons Stephen Jaques, Sydney; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are my own and do not necessarily reflect the views of any other person or organisation.
1
See [3]
2
See [3]
3
Automobile Finance Co of Australia Ltd v Law (1933) 49 CLR 1.
4
Halsbury’s Laws of Australia, para 415-215.
5
Halsbury’s Laws of Australia, para 135-1100.
6
[1929] 1 KB 40
7
London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777; Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 55 ALJR 574.
8
Provided, of course, that the cheque is paid in good faith and without negligence to the holder.
9
ANZ v Westpac (1988) 164 CLR 602 at 673 - 674; David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353; (1992) 109 ALR 57; Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] All ER 766.
10
ANZ v Westpac (1988) 164 CLR 602 at 673 - 674
11
Stae Bank of NSW v Swiss Bank (1995) 39 NSWLR 350 at 355 - 357.