Alan L Tyree

Delivery of cheques by a stranger

Alan L Tyree*

Abstract: If A procures from B, by means of deception, a cheque in favour of C, which is delivered to C who receives it bona fide, without notice and for value, C will obtain title to the cheque on which B remains liable to C. Does “notice” include constructive notice that A’s authority has been exceeded?

1  Watson v Russell

The defendant in Watson v Russell 1 was a shipbroker in Liverpool. In November of 1860, he arranged a charter-party of the ship “Martje Flors”. The ship was chartered to Keys for a period of six calendar month from the day when the ship was placed at his disposal. The agreement called for Keys to pay £30 per week, to be paid every four weeks in advance.

The charter-party also contained a clause which allowed the defendant to withdraw the ship should Keys default on a payment. The first payment, due when Keys took possession of the ship, was paid on 19 November 1860.

Keys did not intend to operate the ship himself. The plaintiff, also a shipbroker in Liverpool arranged, on Keys’ behalf, to sub-charter the ship to another party.

The second payment was due the defendant on 17 December. Keys was unable to pay the £120 due on that day. On the following day, the defendant sent a telegram to the plaintiff noting that the amount was due and in default. He suggested, however, that he would accept late payment “if remitted by to-night’s post”.

The plaintiff passed this on to Keys who replied that he would “remit charter money on Friday.” Friday was December 21, and the defendant was unwilling to wait. He replied that he would withdraw the ship if payment was not made promptly. Keys could not make the payment, and asked the plaintiff for assistance.

The plaintiff drew a cheque for £60, made payable to the defendant, dated Saturday, 22 December, 1860. He enclosed the cheque with a letter that the cheque was given “in consideration that The ’Martje Flors’ should perform the charter and go to Gibraltar and back.”

Keys posted the cheque to the defendant, and it was received the following Monday along with a letter from Keys explaining that he had returned too late on Friday for bank hours. The defendant was not happy. He telegraphed Keys that he was stopping the ship.

The plaintiff sued in an action for money had and received to recover the amount of the cheque. The Court found for the defendant on the grounds that there was no privity of contract between the plaintiff and defendant, and that the action, if any, should have been brought by Keys.

In the course of the judgment, the majority set out the following formulation:2

If A., by means of a false pretence or a promise or condition which he does not fulfil, procures B. to give him a note of cheque or acceptance in favour of C., to whom he pays it, and who receives it bona fide for value, B. remains liable on his acceptance. His acceptance imports value and liability prima facie, and he can only relieve himself from his promise to pay C. by shewing that c. is not the holder for value, or that he received the instrument with notice or not bona fide.

In Watson v Russell, the defendant clearly received the cheque bona fide and for value. He was owed the money, he had communicated with the plaintiff asking for it, and he received it from Keys with whom he had had business dealings. He was expecting to be paid for the ship charter and received the cheque from a person who might be expected to make the payment. The plaintiff drawer was a person who might be expected to draw the cheque for that purpose.

In other words, there was nothing in the transaction to lead the defendant to suspect that Keys might be exceeding his authority.

Watson v Russell was affirmed on appeal.3

2  Watson v Russell: a perturbation

Let’s change the facts of Watson v Russell. Suppose that Keys delivered the cheque to the defendant with the following instructions: “Please hold this sum on account for my wife.”

Can anyone imagine that the judgment of the Court would have been the same? Even if it could be assumed that the defendant received the cheque bona fide and for value, both very doubtful, the other conditions mentioned above do not apply.

The answer to the question is “Yes, the NSW Court of Appeal can imagine it.”

3  Heperu

A swindle was at the heart of Perpetual Trustees Australia Ltd v Heperu Pty Ltd.4

The appeal involved the misappropriation of six cheques. Three of these were personal cheques signed by Dr Landa on behalf of the investing companies. These cheques were crossed generally with the word “bank” between two transverse lines. Three other cheques were Westpac bank cheques crossed “not negotiable”. All cheques were made payable to the appellant.

Dr Landa was persuaded by one Cincotta to invest substantial sums in a “mortgage offset” scheme operated, so Cincotta said, by Perpetual. In fact, no such product was offered by Perpetual. Dr Landa handed the cheques to Cincotta for the purpose of making the investments.

Cincotta deposited into an account in the name of Mrs Cincotta. According to the Court of Appeal, this account had been opened in 1995 by Mr Cincotta who forged his wife’s signature. The Court did not consider this fact further. Cincotta later withdrew funds and used them for his own purposes.

4  Authority and apparent authority

The Court examined the relationship between Cincotta and the respondents in some detail.

As to Cincotta’s authority, the Court found (at para 52 and 53 that:

Cincotta, of course, exceeded that authority by directing that the cheque be deposited to the account of his wife. The question was whether that action was within his apparent authority.

The Court went on (in para 56) to paraphrase the quote above:

If A procures from B, by means of deception, a cheque in favour of C, which is delivered to C who receives it bona fide, without notice and for value, C will obtain title to the cheque on which B remains liable to C.

Relying on this, the Court held that Cincotta’s actions were within his apparent authority and that, therefore, Perpetual received good title to the cheques.

5  Notice

Section 50 of the Cheques Act 1986 defines a “holder in due course” as a person to whom the cheque is transferred by negotiation who takes the cheque in good faith, for value and without notice that the cheque has been dishonoured or of any defect in the title of the transferor.

“Notice” in this situation has long been understood to be actual notice. There is no room for constructive notice. The Court of Appeal, however, appeared to extend this idea somewhat. At para 108, it said:

It is not necessary to explore the extent to which constructive notice could undermine the apparent authority of Mr Cincotta to pass title to Perpetual …This approach is consistent with the long-expressed view that lack of negligence is not a pre-condition for the transfer of title to a bill of exchange by delivery from someone who, as against the true owner, has no right to transfer the bill …

In this quotation, the Court cited Hasan v Willson5 which will be discussed below.

The Court also quoted from the famous speech of Lord Herschell in London Joint Stock Bank v Simmons:6

One word I would say upon the question of notice, and being put on inquiry. I should be very sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments. But regard to the facts of which the taker of such instruments had notice is most material in considering whether he took in good faith. If there be anything which excites the suspicion that there is something wrong in the transaction, the taker of the instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicions aside without further inquiry.

6  Notice of what?

Lord Herschell was discussing negotiation. The actual instruments in Simmons were pledged, but the House of Lords made it clear that this form of transfer was to be treated the same as negotiation. In this context, Lord Herschell’s comments are useful but unremarkable. It is clear that “notice” means notice of some prior defect in title of the transferor.

That could hardly be the issue in Heperu. Cincotta had no title to the cheques and did not represent himself as having title. He was not negotiating the cheques, he was delivering them. The situation is quite outside that of Lord Herschell’s remarks.

Other authority suggests that the question of apparent authority is quite different when the cheque is not being negotiated.

In Nelson v Larholt,7 an executor fraudulently drew eight cheques on the account of the testator’s estates. The cheques were in favour of the defendant who received the cheques for value and in good faith. It was held that the defendant was liable for the amounts of the cheques since he knew or ought to have known of the executor’s want of authority. Lord Denning explicitly mentions that had the cheque been negotiated the question would have been different. Would the payee’s position be stronger if a third party had procured the drawing of the cheques and delivered them to the defendant?

Brennen J put the matter slightly differently in National Commercial Banking Corp of Aust Ltd v Batty:8

if a transaction appears not to be in the ordinary course of a firm’s business, though on inquiry it may prove to be so, a person who deals with a partner in that transaction and makes no inquiry or fails to obtain a satisfactory answer to his inquiry, cannot hold the firm liable if the partner does not have the authority of the firm to act in the transaction.

Let’s consider a slight variation on Heperu. Suppose that Dr Landa had been so careless as to sign the cheques in blank and hand them to Cincotta with instructions on how to complete and deal with them.

This is surely more favourable to Perpetual than the actual facts, yet there is authority that Perpetual would not be able to retain the funds. The situation is precisely analogous to that in Herdman v Wheeler9 where the defendant signed a blank stamped form of a promissory note. He handed it to A who filled it for an amount greater than that authorised and, again without authority, named the plaintiff as payee. The plaintiff received the notes for value and without notice of the fraud. It was held that the plaintiff, who, like Perpetuatl, was not a holder in due course, could not recover since s20 of the Bills of Exchange Act 1882 (UK) did not apply. Section 18 of the Cheques Act 1986 is in similar terms.

There are also hints of this distinction in Simmons itself. Immediately before Lord Herschell’s speech quoted above, he takes some time to argue that had the recipient bank made inquiry that it would have received satisfactory answers. This argument would be unnecessary if constructive notice were irrelevant to the scope of the apparent authority.

As noted above, the Court cited Hasan v Willson10 in support of its views. However, in that case, Robert Goff J explicitly found that the plaintiff did not willfully abstain from inquiry. At page 443, he said:

His suspicion therefore was not that the defendant’s cheque had been procured by some form of deceit, but quite simply that it would bounce. He had already suffered the experience of Mr. Ashley Smith’s cheque being dishonoured; he did not trust Mr. Ashley Smith any longer after that event. He thought that the defendant was involved with Mr. Ashley Smith, and feared that precisely the same thing might happen in the case of the defendant’s cheque. This was the nature of his suspicion; and this was why he asked his bank for special clearance. This is not enough, in my judgment, to call for inquiry on his part so as to fix the plaintiff with notice of Mr. Ashley Smith’s fraud.

It is quite clear that Robert Goff J thought that there could be circumstances that call for inquiry, that the form of the cheque is not sufficient. This followed a finding that there was no actual notice of fraud.

7  The Result

Is there anything which excites the suspicion that there is something wrong in the Heperu transaction? The Court of Appeal thought not, but in any of the cases relied on, the result seems ridiculous if the delivery person adds a condition saying “Hold the proceeds on account for my wife!”. In each case, one would expect to be the response to be something on the order of “WHAT!!??” or perhaps something unprintable in a family journal such as this.11

This is particularly so in the case of the personal cheques. Perpetual was a trustee company that accepted investments. It doesn’t seem too far fetched to imagine that a personal cheque addressed to Perpetual was intended to be invested for the person who signed the cheque, not for the wife of the person who delivered it. It might be different with the bank cheques if they bear no indication of their purpose.


Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are those of the author and do not reflect the views of any other person or organisation.
(1862) 3 B & S 34; 122 ER 14; aff’d [1864] EngR 819; 122 ER 1090; (1864) 5 B & S 968
at page 38
[1864] EngR 819; 122 ER 1090; (1864) 5 B & S 968
[2009] NSWCA 84
[1977] 1 Lloyd’s Rep 431
[1892] AC 201 at 221
[1948] 1 KB 339
(1986) 160 CLR 251 at para 24
(1902) 1 KB 361
[1977] 1 Lloyd’s Rep 431
This is true also in Orix Australia Corp Ltd v M Wright Hotel Refrigeration Pty Ltd [2000] SASC 57, another case relied upon by the Court of Appeal.