Collection of third party cheques
Alan L Tyree

In Joachimson v Swiss Bank Corp [1921] 3 KB 110, Lord Atkin observed (at p 127) that the banker customer contract included the requirement that the bank

\ldots undertakes to receive money and to collect bills for its customer's account.

In collecting bills and cheques for the account of the customer, the bank is acting as the customer's agent. As such, it must perform its obligations with a view to its customer's interests. In particular, the collection of bills and cheques must be done without undue delay.

A bank which fails in its duty to collect cheques without undue delay will be liable to the customer for losses arising from the delay. In Lubbock v Tribe (1838) 3 M & W 607 the bank lost a cheque deposited for collection by K. The cheque was drawn by T on the Bank of England, and at the request of the bank T stopped payment on the cheque. T was then requested by the bank to give a replacement cheque. He agreed to do so, but later wrote to the bank saying that he could not conveniently send the cheque but would send them the funds at the earliest opportunity.

Lord Abinger, CB noted (at p 612) that T's cheque to K discharged the debt and that the bank was liable to K for the amount of the cheque having neglected to present the cheque in due time. Parke B found (at p 613) that when the plaintiff bank "received it [the cheque] to the account of the Kellewerris Company, they became liable to the company for the due presentation of the cheque." Other members of the court concurred.

The bank will be liable for the usual damages associated with a breach of contract. So, for example, in Forman v Bank of England (1902) 18 TLR 339 the bank was held liable for damage to the customer's credit when cheques were dishonoured which would have been met if the collection had proceeded without delay.

Since the duty stated by Lord Atkin is a contractual one, it is liable to be changed by explicit contractual terms. Perhaps for this reason, the Cheques Act 1986 included a statutory obligation to the same effect. Section 66(1) provides:

Subject to sections 59 and 70B, where the holder of a cheque lodges the cheque with a financial institution (the deposit institution) for collection for the holder, the deposit institution shall duly present the cheque for payment itself, or ensure that the cheque is duly presented for payment on its behalf, as soon as is reasonably practicable and, if the deposit institution fails to do so, it is liable to the holder for any loss that the holder thereby suffers.

Section 6(2) of the Act prevents the parties from "contracting out" of this obligation. Section 59 deals with circumstances where the presentment is not necessary. Section 70B deals with the consequences of a deemed dishonour of the cheque.

A bank may not simply refuse to collect cheques lodged by a customer. This includes so-called "third party cheques" where the name of the payee is different from that of the customer.

Contractual terms and conditions issued by banks which indicate that the bank has a discretion to collect or not collect third party cheques are therefore misleading and deceptive. In other words, the terms are a breach of the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974).

For example, several banks have terms similar to the following:

If you present a cheque which is payable to someone else or appears to belong to someone else, the bank may, in its discretion, refuse to accept that cheque for deposit, refuse to cash that cheque or may require you to comply with some conditions before it will accept that cheque for deposit or cash it.

Simply refusing to collect the cheque is clearly a breach of s66. The Act does not authorise the bank to impose any conditions.

In this author's opinion, a bank may require that the cheque be lodged in person rather than through some form of "quick deposit". This follows from the discussion below on the right and the duty of the bank to make inquiries in certain circumstances.

Section 66 itself provides some guidance as to the requirement that the cheque be presented 'as soon as is reasonably practicable'. There are two general classes of direction in s66:

• general directions that add little in a practical sense; and
• some more useful directions concerning the presentment of cheques "by particulars".

As an example of the first, "the fact that the instrument is a cheque and that it is reasonable to expect a cheque to be presented for payment promptly". Perhaps more useful, but still in the same tenor, we may consider "the usage of financial institutions".

The second class concerns requests made under s62(5) or 62A(2). These sections allow the drawee to request more information about the cheque when the cheque is presented "by particulars", that is, the cheque is not physically transmitted to the drawee institution.

For the purposes of this note, the relevant section is s66(3)(f), "any other facts of the particular case including \ldots". One of the most important cases will concern the deposit of a cheque which is "suspicious" in some sense.

As is well known, s95 provides the bank with a defence to an action in conversion brought by the "true owner" of the cheque. In order to shelter under s95, the bank must collect "without negligence" and in good faith for a customer. "In good faith" merely means "honestly": s3(2).

"Without negligence" will depend upon all the facts. Every court faced with the problem begins by announcing that there is no general formulation, and then proceeds to give a general formulation. The most famous is the formulation of the Privy Council in Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683 on appeal from the High Court of Australia at 688:

\ldots the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make inquiry.

The words in brackets were added by the Privy Council while approving the statement of Isaacs J in the High Court in Commissioners of State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83.

Inherent in the quotation is that the way to collect "without negligence" is to make reasonable inquiries, and this is borne out by an examination of the case law. If the inquiries are satisfactory, then the bank will be able to establish the crucial requirements of s95.

What is a reasonable inquiry? It may be sufficient to ask the customer depositing the cheque about the circumstances surrounding the deposit. This was the case, for example, in Savings Bank of South Australia v Wallman [1935 HCA 13 where the customer had a name almost identical to the payee of the cheque.

However, not every answer by the customer will be satisfactory. In Commercial Bank of Australia Ltd v Flannagan [1932] HCA 51 the customer was a tax agent depositing a cheque made out to "State tax or bearer". His explanation was that the cheque included his fees, an explanation that was dismissed by the High Court. Dixon J observed that "to rely exclusively upon the agent's own explanation of his use of such a cheque is to encounter the risk, not to exercise care to avoid it."

The bank cannot merely argue that an inquiry would have been fruitless. As Priestly J pointed out in National Commercial Banking Co of Australia Ltd v Robert Bushby Ltd [1984] 1 NSWLR 559, it will simply not be known what an inquiry might uncover. In order to rely on the "fruitless inquiry" argument, the bank will need to prove that the inquiry would have yielded nothing, a nearly impossible task.

There is no general agreement whether third party cheques are "suspicious" merely by virtue of being third party cheques. There is no doubt that "account payee" third party cheques are "suspicious", but confusion over third party cheques that are merely crossed "not negotiable".

In this author's opinion, the mere fact of being a third party cheque crossed "not negotiable" does not, of itself, call for an inquiry. The opposite view was held by the Manning Committee Report (see para 77), and Griffith CJ in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83 said that the words were a "danger signal" to anyone who dealt with the cheque.

On the other hand, Gavan Duffy and Rich JJ in Commissioners of State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83 thought that "not negotiable" must be accompanied by some other indication of a special purpose. In that case, some cheques were marked with "duty" as well as being crossed "not negotiable".

If we are to consider "banking practice" as a guide in this matter, then it may be that the banks have made a rod for their own backs. By including terms such as the one above, they leave the impression that they consider all third party cheques to be "suspicious". If that is the case, then inquiry must be made for all third party cheques.

Where a duty arises to make reasonable inquiries, the inquiries must be made promptly and without undue delay in order to satisfy the requirements of s66.

The author knows of no cases which are directly on point, but the facts in Agricultural and Rural Finance Pty Limited v John Edward Atkinson [2010] NSWSC 635 provide a possible example. The case had a plethora of defendants, but it is circumstances of Mr Holmes that provides the example.

Holmes obtained a bank cheque, crossed "not negotiable" in favour of himself. He indorsed the cheque payable to the plaintiff. The plaintiff deposited the cheque for collection but the bank returned it with an "authorisation" form. The bank instructed the plaintiff to obtain Holmes' "authorisation" to deposit the cheque in the plaintiff's account.

The form is largely meaningless. The plaintiff was the holder of the cheque and Holmes had no authority to give. If the bank was required to make inquiries to obtain the protection of s95, then giving the "authorisation form" to the plaintiff was a wholly inadequate inquiry and led to unnecessary delays. It is submitted that the plaintiff could have held the bank liable for the amount of the cheque under s66.

Suppose that the bank does make inquiries and that the inquiries lead it to believe that its customer is not the true owner of the cheque. If it proceeds to collect the cheque under those circumstances, it can hardly be said to collect "without negligence" or "in good faith".

Rather surprisingly, the Cheques Act 1986 itself gives the bank no relief. Section 59, to which s66 is subject, provides circumstances where the bank is excused from presenting the cheque for payment, but none is relevant to the current fact situation.

There is one Malaysian authority. Tan ah Sam v Chartered Bank 1 MLJ 28; (1971) 45 ALR 770 held that a bank may refuse to collect a cheque if by so doing it could not rely on the statutory protection against conversion. This certainly makes sense, but it is too bad that the Cheques Act does not incorporate such a provision. See also (Weaver et al. 2003)

Section 66 of the Cheques Act 1986 places a duty on the collecting bank to collect cheques for its customer. Section 6(2) prevents "contracting out" of this obligation. Terms and conditions which purport to give the bank the right to refuse third party cheques are misleading and deceptive within the meaning of the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974).

Failure to comply with s66 has the consequence that the bank is held liable to the customer for "any loss" which the customer suffers. As a statutory duty, the dispute falls within the terms and conditions of the Financial Ombudsman Service.

The Cheques Act 1986 fails to give any relief to a bank which determines that the cheque should not be collected for the customer, but case law and textbooks suggest that the bank may refuse.