Collecting bank's duty of care
Alan L Tyree

Lord Atkin, in Joachimson v Swiss Bank Corp [1921] 3 KB 110, said that, as part of the banker-customer contract, "The bank undertakes to receive money and to collect bills for its customer's account." "Bills", of course, included cheques since the cheque was, and is, a special form of the bill of exchange.

Collection of cheques and bills will, if the customer has no title to the instrument, expose the bank to an action in conversion by the "true owner" of the instrument. At first, banks enjoyed no special privileges with respect to the action in conversion, but when crossings were given legal significance, this changed.

Although crossings on cheques were originally a convenience for bankers at the clearing house, the Crossed Cheques Act 1856 (UK), the Crossed Cheques Act 1858 (UK) and the Crossed Cheques Act 1876 (UK) provided that they must be paid only to a banker. In practical terms, this meant that a crossed cheque must be deposited into an account and collected by a bank. Since it was now seen as an obligation on banks to deal with certain cheques, banks were given a special defence against actions in conversion.

The defence was originally restricted to crossed cheques, but in response to lobbying from the banks, was extended to all cheques by s4 of the Cheques Act 1957 (UK). In Australia, the defence was included in the Bills of Exchange Act 1909 as s88D and later in s95 of the Cheques Act 1986 and later extended to "financial institutions" as defined by the Act.

It is for the bank to establish the defence. In order to do so, it must show that it collected the cheque:

• for a customer
• in good faith
• without negligence

If the defence is established, the consequence is that "the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque": s95(1)(b).

As is well known, the "without negligence" is an unfortunate term which has nothing to do with the tort of negligence: see (Weaver et al. 2003, para. 9.6710).

Although the section does not deal with the tort of negligence, might not the collecting bank be liable to one or more parties for negligence?

For example, in spite of this author's best efforts, it seems established that a forged cheque is not the subject of an action in conversion: see Koster's Premier Pottery v Bank of Adelaide (1981) 28 SASR 355, yet the plaintiff suffered losses by virtue of the collection of the forged cheque.

One possibility is that the collecting bank might owe a duty of care to other parties associated with the cheque. These would normally be parties to the cheque, but may include apparent parties such as in the Premier Pottery case.

The issue does not appear to have been considered by any Australian Court, but has come before the British Colombia Court of Appeal.

In Groves-Raffin Construction Ltd v Canadian Imperial Bank of Commerce [1976] 2 WWR 673; 64 DLR (3d) 78 G was a director of the plaintiff who improperly drew a cheque on the companies account with the Bank of Nova Scotia. He deposited the cheque into his account with the Canadian Imperial Bank of Commerce. G withdrew the funds the same afternoon and, according to the report, "departed posthaste for Australia" (at para 29).

The company would have succeeded against the Bank of Commerce in conversion, but the bank invoked the protection of the Canadian Bills of Exchange Act which provides substantially greater protection to the collecting bank than does s95.

The company also sought to hold the Bank of Commerce liable in negligence. The trial judge found that there was a duty of care on the basis of the generalised "neighbour" test as formulated in M'Alister (Donoghue) v. Stevenson [1932] AC 562. All three members of the Court of Appeal rejected this very general approach, holding that the collecting bank owed no duty of care to the company.

In Arrow Transfer v Royal Bank (1969) 9 DLR (3d) 693, Seaton J also held that the collecting bank owed no duty of care to the drawer of a cheque drawn on another bank. The judgment was affirmed in the Court of Appeal: 19 DLR (3d) 420 and in the Supreme Court of Canada: 27 DLR (3d) 81, but the issue was not pursued in either of the appeal cases. The alleged duty of care in Arrow Transfer was that the collecting bank should know the signature of the drawer, a claim that was destined for certain failure.

The reasons given in the above cases for rejecting a duty of care vary. In the two cases mentioned, there were three basic arguments:

• the "all banking will come to a halt" argument
• the "statutory duty" argument
• the Dorset Yacht argument

The first argument was put forcefully by Robertson JA at para 142, but it was in the context of knowing the signature of the drawer. The negligence argument was bound to fail since it has long been known that there is not even a contractual duty for the paying bank to know its customer's signature: National Westminster Bank Ltd v Barclays Bank International Ltd [1975] 1 QB 654. Imposing a duty of care on a collecting bank may cause all banking to come to a halt, but surely it depends on the content of the duty.

The statutory duty argument is based on a misconception. Bull J quoted (at para 34) from the 8th edition of Paget's Law on Banking, but, in fact, the quotation comes from Scrutton LJ in Lloyds Bank Ltd v Chartered Bank of India, Australia \& China [1929] 1 KB 40 at page 59:

Negligence involves duty; and as the collecting bank, apart from statute, owed no duty to the owner of the cheque, the duty must be one created by the statute itself.

The misconception, still promulgated by some well-known textbooks, is that s95 and its predecessors imposed a new duty on banks to collect "without negligence". The use of the word "negligence" is very unfortunate since the section has nothing to do with the tort of negligence.

Indeed, far from imposing a new duty, the provisions provided the banks with a defence to what was otherwise a tort of strict liability. Banks have a defence against a claim in conversion, a defence that is not available to the general public.

In Groves-Raffin, Bull J relied in part on the House of Lords decision in Home Office v Dorset Yacht Co [1970] AC 1004, and in particular, Lord Reid's speech at 1026-1027. In that passage, Lord Reid cited pure economic loss as a category where the "neighbour principle" of M'Alister (Donoghue) v. Stevenson should not be applied in a mechanical fashion.

Groves-Raffin was decided in 1976, the very year that the High Court considered the question of negligence when the loss is pure economic loss: Caltex Oil (Aust) Pty Ltd v The Dredge Willemstad (1976) 136 CLR 529. The court in Caltex Oil found its way around the difficulties envisaged by Lord Reid. At least for Australia, the Dorset Yacht argument does not apply.

The present situation is far from clear. In Perre v Apand Pty Ltd [1999] HCA 36 it was alleged that the defendant negligently imported diseased seed which affected some potatoes in the vicinity of the appellant's farm. It did not directly infect the potatoes of the appellant, but appellant suffered economic harm because it was forbidden from exporting its potatoes. A majority of the High Court held that the appellant could recover since there was a reasonable likelihood of harm and the appellant fell into an ascertainable class of those likely to be harmed by the respondent's actions.

In both Perre and Woolcock the notion of "vulnerability" was discussed and considered important. "Vulnerability" is the inability of the plaintiff to protect against the consequences of the defendants actions, either entirely or in a way that would put the losses on the defendant: see para 23 in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16.

In both Perre and Woolcock, McHugh J set out five principles which he thought were relevant. These are principles concerned with:

• reasonable foreseeability of loss (see Woolcock at para 74),
• indeterminacy of liability,
• autonomy of the individual,
• vulnerability to risk, and
• knowledge of the risk and its magnitude.

He emphasised that there may be other factors to guide and determine the outcome of the case, but that these five principles must always be considered.

In Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, a purchaser of a commercial building sued a firm of consulting engineers who had designed the foundations for a warehouse and offices. The plaintiffs were not the original owners, but had purchased the buildings some years later.

The majority of the Court dismissed the suit on the grounds that the plaintiff was not "vulnerable". On the facts, there was nothing to show that the plaintiffs could not have defended themselves from the consequences of the defendants' actions.

McHugh J analysed the case on each of the "principles". He noted that

• the damage suffered was clearly foreseeable
• indeterminacy was not a problem because liability will ordinarily be restricted to the person who owned the building at the time when the damage is discovered
• since the defendants were already under a duty to the first owner, imposing a duty to avoid economic loss does not impinge on the interests of those who design or construct the building
• a subsequent purchaser of a commercial building has the means of protecting against economic loss arising from the condition of the building.

Kirby J also, reluctantly, applied the five criteria. He agreed with McHugh on all except the question of vulnerability on which he would have applied a less stringent test. Kirby J would have allowed the case to proceed.

In any case, if the "five principles" test is the correct one to begin with, then there is little problem with finding that the collecting bank owes a duty of care at least to the other parties on the cheque.

The "five principles" test will seldom, if ever, be the final word on the question of duty of care when the loss is purely economic. McHugh J, after finding the plaintiff not to be vulnerable, went on to mention several other considerations:

• the floodgates argument
• proportionality: is the liability proportional to the defendant's fault?
• lack of a definitive standard of care
• conflict with statutory provisions.

Without going into detail, it seems clear that imposing a duty of care on a collecting bank would not run foul of any of these principles.

The present situation is far from clear, and the application of the "principles" is uncertain at best. However, in an appropriate case, there may be an argument that the collecting bank owes a duty of care to the drawer or the true owner of a cheque or, again in a suitable case, some other party clearly associated with the cheque.