Alan L Tyree

Simms revisited

Alan L Tyree*

1  Introduction

In Barclays Bank Ltd v W J Simms Son and Cooke (Southern) Ltd [1979] 3 All ER 522, Robert Goff J considered a case where the bank had paid a countermanded cheque. The bank was attempting to recover the payment from the payee as a payment made under a mistake of fact.

In the course of his justifiably famous judgment, he said (at 539):

…a bank which pays a cheque drawn or purported to be drawn by its customer pays without mandate. …unless the customer is able to and does ratify the payment, the bank cannot debit the customer’s account, nor will its payment be effective to discharge the obligation (if any) of the customer on the cheque, because the bank had no authority to discharge such obligation. It is against the background of these principles, which were not in dispute before me, that I have to consider the position of a bank which pays a cheque under a mistake of fact.

The purpose of this note is to dispute some of the principles which were not disputed before Robert Goff J.

2  Payment by cheque

Payment by cheque is conditional payment. The condition is a condition subsequent, namely that the cheque will be met on presentment. The debt is paid at the time when the cheque is accepted and revives if the condition subsequent is not met: National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 163 CLR 668; Tailby v Official Receiver (1888) 13 App Cas 523.

Being ’met on presentment’ means that the cheque is paid in due course. A cheque is paid in due course if it is paid by the drawee to the holder in good faith and with no notice of any defect in title (including a complete absence of title): s 79.

If the cheque is dishonoured, the holder has the option of suing on the cheque or on the original debt. Suit on the cheque is almost always the better choice and, indeed, it is one of the reasons that cheques are often taken as ’security’ in a money lending transaction.

If, however, the cheque is paid in due course, then it is discharged: s 78. Subject to some exceptions which need not concern us here, all rights on a cheque are extinguished when the cheque is discharged: s 82(1).

Consequently, payment in due course has the following consequences:

When tendering a cheque as payment, there is also an implied contractual term that the cheque will be met on presentment: R v Page [1971] 2 QB 330.

3  Money paid by mistake

Money paid in mistake of fact or law is prima facie recoverable from the payee by the payer: David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353. It is only relevant that the mistake caused the payment in the sense that the payer would not have made the payment if aware of the true facts: David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353; Porter v Latec Finance (Qld) Pty Ltd (1964) 111 CLR 177. It is not relevant that the mistake was caused by the negligence of the payer: Kelly v Solari (1841) 9 M&W 54.

The payee may resist the claim for return of the payment for a number of reasons. The principal reason that concerns us here is that the payee has changed position in reliance on the payment. Change of position has been recognised as a defence in Australia, in New Zealand and England: David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353; National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211; Barclays Bank Ltd v W J Simms Son and Cooke (Southern) Ltd [1980] QB 677.

The change of position must be caused by reliance on the payment. A change of position induced by some extraneous material or information is not a defence: State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350. Merely spending the money is not, without more, a change of position: Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161.

Another defence that is relevant in our context is that the recipient of the payment has given consideration for the payment: David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353. The relevance of this when a bank pays a cheque is considered below.

4  Payment of a countermanded cheque

A drawer is given a non-excludable right of countermand: ss 6(2) and 90(1) Cheques Act 1986. The effect of a countermand is to relieve the bank of both the duty and the authority to pay the cheque: s 90(1)(a).

When a bank mistakenly pays a cheque that has been countermanded, the payment is made under a mistake of fact. At one time, it was thought that the payment could not be recovered since the mistake was not between the payer and the payee: see, for example, National Westminster Bank Ltd v Barclays Bank International Ltd [1975] 1 QB 654. As explained above, that argument is no longer available to the payee of the cheque.

These cases have caused a wide division in the opinions of commentators simply because neither obvious solution seems fair. Denying recovery to the bank means that the drawer gets a major windfall. Allowing recovery means that all the precautions and certainty sought and bargained for by the payee is lost.

As noted above, the prima facie position is:

4.1  Authority to pay

The basic argument advanced by Simms is that the bank has no authority to pay the cheque and that, consequently, the debt is not discharged. While this might be the law in England, it does not represent the law of Australia. The debt is not discharged by the payment of the cheque. It is discharged conditionally by the delivery of the cheque and the condition is discharged by payment of the cheque: National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 163 CLR 668; Tilley v Official Receiver (1960) 103 CLR529.

The bank does not need the authority of the drawer to pay a cheque. The paying bank pays its own money when it pays a cheque. What it needs authority for is to debit the customer’s account with the amount of the cheque.

This can be seen from the Cheques Act itself. It is not necessary to be a customer of a bank in order to draw a valid cheque on the bank: s 10 Cheques Act 1986. Far from being invalid, the bank has an obligation to either pay or dishonour the cheque as soon as is reasonably practicable: s 69(1). The bank may pay it or not as it sees fit but in so doing it does not rely in any way upon the “authority” of the drawer.

4.2  Implied authority

Goode and others have argued that the payment is not recoverable since the bank has implied authority to pay the cheque: see [1]. His argument is that this implied authority is sufficient to discharge the debt and therefore the payee has given consideration for the payment.

The implied authority argument was accepted in a different context by Hunter J in Majesty Restaurant Pty Ltd (in liq) v Commonwealth Bank of Australia NSW SCt 25 Nov 1998.

There are, however, difficulties with the argument. It was considered in Lloyd’s Bank plc v Independent Insurance Co Ltd [2000] QB 110 where the court noted that implied authority is based on estoppel. There is no representation made by the bank to the payee and, even if one could be found, it is unlikely that the payee relied on it in a way to support an estoppel.

In Australia, the argument is even more doubtful since the right to countermand cannot be taken away by agreement between the parties: s 6(2). Consequently, any implied authority would necessarily be subject to the exception of countermand.

4.3  Discharge of debt

Goode’s argument of implied authority was put forward to support the claim that the debt is discharged by payment. As noted above, in Australia this argument is unnecessary. The debt is paid when the cheque is handed over subject to possible revival if the cheque is not paid. Where the cheque is paid, that is the end of the matter.

4.4  Change of position

On the face of it, it would seem that the payee has suffered a change of position which should prevent recovery. The cheque has been discharged so that it is not possible to sue on the cheque. The debt has been unconditionally discharged so that it is not possible to sue on the debt.

This argument was raised in Bank of New South Wales v Murphett [1983] 1 VR 489 but was dismissed in a most peculiar fashion. Starke J said that the argument had no merit since “if this claim succeeds [the cheque will in fact not have been paid”: at 493. While there might have been some basis under the Bills of Exchange Act 1909 for this extraordinary notion, the clear words of the Cheques Act 1986 preclude their acceptance as an accurate statement of the law today.

Murphett was defended primarily on the grounds that the mistake was not between the payer and the payee, a theory that has been discredited. It was decided before the David Securities case so that change of position as a defence was, perhaps, not as well understood.

Recovery was also allowed in Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444 where the NSW Court of Appeal simply noted that there “has been no prejudice to Younis, as a result of the payment or of the negligence [in overlooking the countermand], which would make it unjust to require the repayment of the money”. There was no discussion of the discharge of the cheque or of the debt. Again, note that the case came before David Securities and that the clear words of the Cheques Act show that the cheque has been discharged.

4.5  Liggett

It may be that the bank may debit the customer’s account on the basis of the Liggett principle: Liggett (B) Liverpool Ltd v Barclays Bank Ltd [1928] 1 KB 48.

Apart from any other difficulty with the Liggett principle, the use of it in these circumstances effectively negates the statutory right of the drawer to countermand a cheque. Also note that the negligence of the bank in overlooking a countermand is not relevant in the action for recovery of money paid in mistake: David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353; Porter v Latec Finance (Qld) Pty Ltd (1964) 111 CLR 177; Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444.

In view of the non-excludable right to countermand, it is submitted that the Liggett principle should not apply when a payment has been made contrary to a valid countermand.

5  Conclusion

Simms and other cases have erroneously concluded that payment of a countermanded cheque does not discharge the debt owed by the drawer since it is made without authority. The true position is that the debt is conditionally discharged when the cheque is delivered. The condition is a condition subsequent that the cheque will be paid on presentment. The cheque is paid even though the bank overlooks the countermand.

Recovery of money paid under a mistake of fact is based on a concept of unjust enrichment. It is hard to see how a holder of a cheque who presents it for payment is unjustly enriched when receiving payment. If the bank cannot debit the account of its customer, then the customer is enriched, but that is of no concern to the payee.

Of course, “unjust enrichment” is not determined by appeal to some subjective evaluation of what is unfair or unconscionable. Equally, the right of the payee to retain payment should not be decided on some subjective feeling that someone, somewhere is gaining a windfall.

None of the cases, including Simms itself, has given satisfactory attention to the discharge of the cheque and its effect on the payee. The clear words of the Cheques Act 1986 show that the cheque is discharged. It is hard to imagine a more prejudicial change of position for the payee than to go from being paid to being the “holder” of a discharged cheque.

The courts seem inordinately pleased with the Simms solution, but it is hard to see why. The bank has overlooked, usually negligently, a countermand. The drawer has broken his contract with the payee by ordering a countermand. The payee is the only one of the trio who has done nothing “wrong”, yet the payee is the one who is penalised. To argue that the payee may pursue the drawer is to be out of touch with the realities of the real world of litigation.

References

[1]
Roy Goode. The bank’s right to recover money paid on a stopped cheque. LQR, 97:254, 1981.
*
Consultant; 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.