Payment by cheque
Alan L Tyree

The NSW Court of Appeal recently considered issues raised when a payment is made by cheque. Wardle v Agricultural and Rural Finance Pty Ltd; Agricultural and Rural Finance Pty Limited v Brakatselos [2012] NSWCA 107 arose as an appeal from Agricultural and Rural Finance Pty Ltd v Atkinson [2010] NSWSC 635.

Atkinson arose from proceedings where ARF sued some 216 defendants for amounts claimed to be due. Only the case against Mr H is relevant to this note. Mr H entered into a loan agreement with ARF in 1997 which required, among other things, that he make a payment of $8750 on or before 31 October 1997.

Mr H obtained a Westpac bank cheque dated 20 October, 1997 which was drawn in favour of 'AP \& AM H or bearer'. Mr and Mrs H indorsed the cheque 'Please pay into the account of Agricultural and Rural Finance Pty Limited'. They signed their names beneath this.

ARF received the cheque on 24 October, entered the payment into an electronic spreadsheet and deposited the cheque for collection with ANZ Port Macquarie.

A few days later, ANZ returned the cheque along with an 'authorisation form'. This form was required, ANZ said, to be signed by Mr and Mrs H before the bank would collect the cheque. ARF sent the form by post to Mr and Mrs H with the following note:

We acknowledge receipt of your cheque for \$8,750 being a principal reduction payment. Unfortunately this bank cheque has been drawn in favour of AP and AM H and we are unable to deposit the funds into our own account without further authorisation from yourselves.

We have enclosed an ANZ bank form which needs to be completed, signed and returned to us in the enclosed envelope.

Please note that the form must be completed by both persons (AP and AM H).

The letter and the form probably reached Mr H on Thursday 30 October. Mr and Mrs H signed the 'authorisation' and faxed it to the plaintiffs the following Monday 3 November. The plaintiff then deposited the cheque for collection with ANZ that same day. Mr H admitted in cross examination that he could have faxed the form on Friday 31 October.

The Court of Appeal considered some well established basic principles concerning payment by cheque. In particular (at para 160-165):

• unless the contract calls for payment by cheque, the creditor may refuse tender; if, however, the creditor takes the cheque without objecting to it on the grounds that it is not legal tender, then the creditor is taken to have accepted the cheque as payment: George v Cluning (1979) 28 ALR 57;
• Tilley v Official Receiver in Bankruptcy [1960] HCA 86 held where a cheque was accepted as tender for a debt, the debt is discharged conditional on the cheque being met on presentment;
• National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65 confirmed Tilley and emphasised that the payment is complete at the time when the tendered cheque is accepted by the creditor;
• where a cheque is accepted it is a question of fact whether the payment is conditional or absolute, but the fact finding begins from the prima facie position that the payment is conditional: see Tankexpress A/S v Compagnie Financiere Belge Des Petroles SA [1949] AC 76 at 103 and Tilley v Official Receiver in Bankruptcy [1960] HCA 86.

The rule in Tilley is quite old. In Bottomley the Younger v Robert Nuttall (1858) 5 CB (NS) 122; [1858] EngR 1197, the plaintiff had drawn a bill of exchange which had been accepted by a member of a firm. In the course of the judgment, Cockburn CJ said (at page 139):

It is true the acceptance operates a suspension of the drawer's remedy until the maturity of the bill; but, the bill being unpaid when it becomes due, the drawer may treat it as waste-paper, and proceed for the original consideration.

In the same case, Williams J says (at page 144) that acceptance of a bill or note operates as a 'conditional payment'. Byles J said (at page 148)

… it is the first learning that taking a bill for and on account of a debt does not operate as an absolute discharge of the debt. At the most it is only a conditional payment, which is defeated by the subsequent dishonor of the bill, whether total or partial.

Throughout the case, it is clear that the judges considered that 'conditional payment' meant that the debt had been paid subject only to the condition that the bill be met on presentment.

Applying these principles to Mr H's situation was where the Court of Appeal differed from the judgment of the Supreme Court. The Court of Appeal held that the entry into the spreadsheet was consistent with ARF accepting the cheque as tender for the debt. Entry of the payment into the spreadsheet coupled with deposit of the cheque for collection was clear acceptance of the tender. The cheque was met on presentment, even though there was some delay, and therefore the payment was timely.

In the Supreme Court, Einstein J held that the payment was not timely. The plaintiff argued that had Mr H faxed the signed authority to the plaintiff on Friday the payment would have been made punctually. They further argued that in fact it was not paid until the plaintiff was able to bank it upon receipt of the signed authority.

Counsel for Mr H cited Tilley v Official Receiver [1960] HCA 86 to the court, but Einstein J rejected this submission on the grounds that (at para 314) '… an intermediate step was necessary before the bank cheque could be of utility to ARF.' and that (at para 315) '… ARF did not have in its possession [and had not acquired] immediate rights under the Bank cheque …'

It is difficult to understand what Einstein J meant in this passage. The indorsement of the cheque was valid so that, along with delivery, ARF became the holder of the cheque at the time when it was accepted as tender for the debt: see s40(2) of the Cheques Act 1986. The indorsement was irregular since Mr H was named as 'AP H' as payee but indorsed as 'Allen H'. The irregularity does not prevent the indorsement from being effective to pass title to ARF: see the discussion of Lord Denning in Arab Bank v Ross [1952] 2 QB 216.

As holder of the cheque, both the Common Law and the Cheques Act 1986 grant ARF considerable 'immediate rights' to the cheque. Indeed, ARF was the 'true owner' of the cheque and could bring action against any person who interfered with their right to possession.

The principles outlined by the Court of Appeal have been reaffirmed in many other cases and in many other contexts.

If the creditor objects to the tender of a cheque, then the objection must be to the form of tender. If the objection is for any other reason, then tender of a cheque is a valid tender. The rule is surprisingly old: in In Polglass v Oliver (1831) Cr \& J 15; [1831] EngR 176, the debtor made a tender in country bank notes. The creditor objected to the amount of the sum tendered, but not to the character of the money tendered. It was held that the creditor could not afterwards object that the mode of payment was improper.

Bayley B noted (at p 18) that there was good reason for the rule:

… for, if you objected expressly on the ground of the quality of the tender, it would have given the party the opportunity of getting other money and making a good and valid tender; but, by not doing so, and claiming a larger sum, you delude him.

Where there is a deadline, payment is timely if the cheque is tendered and accepted before the deadline in spite of the fact that the cheque could not be presented for payment before the deadline. In Homes v Smith [2000] Lloyd's Rep Bank 139, a payment was due for the settlement of a house purchase. The deadline was 2pm. A cheque tendered and accepted late morning was held to be a timely payment.

Even more dramatically, in Petroleo Brasileiro SA v ENE Kos 1 Ltd [2009] EWCA Civ 1127 a cheque handed in at 4:30pm was held to be a timely payment when the deadline was 5pm.

The rule is also relevant for the Statute of Limitations. In Marreco v Richardson [1908] 2 KB 584 a cheque was tendered and accepted for part payment of a debt. It was delivered on 10 May, but the parties agreed that it would not be presented until 20 June. Six year later, an action was commenced on 18 June. The Court held that the part payment was made on 10 May so the action was barred by the Statute of Limitations.

Contractual terms calling for 'cleared funds' or the like must be carefully framed. In Deputy Commissioner of Taxation v BK Ganter Holdings Pty Ltd [2008] FCA 1730 was an application by the DCT for a winding up order. During negotiations, the DCT advised that a winding up order would be sought 'unless payment in full in cleared funds is received on or before 13 November 2008'. A cheque was tendered and accepted but was not cleared before the deadline. The court held that, far from altering the usual rule, the reference to 'cleared funds' was an affirmation.

The actions of the collecting bank in the Agricultural and Rural Finance case are of some interest. Einstein J seemed to accept that both the bank and ARF had the right to call upon H to complete the 'authorisation' form. Campbell JA seemed to accept that the collecting bank had the right to ask for the authorisation, observing (at para 268):

The ANZ Bank was evidently unwilling to act as ARF's agent to collect the cheque without proof that ARF had title to the cheque. Even though it was a bearer cheque, the fact that it was crossed "Not Negotiable" meant that ARF would have a good title to the cheque only if it had acquired the cheque from someone who himself had a good title. As it happened, that was the case, but the ANZ Bank evidently wanted proof that that was the case before it would act as ARF's collecting bank.

The first thing to note is that the form was meaningless as an authorisation. H was in no position to authorise anything with respect to the cheque. ARF was the holder and the 'true owner' of the cheque and H had no rights in it. He had nothing to authorise.

That is not to say that the form was meaningless. In the event of the collecting bank being sued in conversion, the form would be evidence that the bank had made inquiries in order to gain statutory protection under s95 of the Cheques Act 1986. It is not clear that such an inquiry would have been adequate since it sent the form to ARF, not to H. In other words, it made the inquiry of its own customer. Such an inquiry may or may not be sufficient to establish lack of negligence for the purpose of s95.¹

The second point is that a bank has no choice in deciding whether to act as its customer's agent for collection of cheques. Section 66(1) of the Cheques Act 1986 provides:

… 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) prevents the parties from 'contracting out' of this obligation. It is not clear what remedies the bank may have when it suspects that a cheque is misappropriated: see (Tyree 2010)

ANZ was under both a common law and a statutory obligation to collect cheques deposited for collection: see s66(1) of the Cheques Act 1986. The bank may delay collection while it makes reasonable inquiries since by accepting the tender of the cheque and depositing it for collection, the customer must be taken to accept the delays inherent in the cheque system: see Dimond (HH) (Rotorua 1966) v Australia and New Zealand Banking Group Ltd [1979] 2 NZLR 739. If the delays were unreasonable, then that is a matter between the customer and its bank and has nothing to do with the person who tendered the cheque.