Collection and Payment of Cheques

COLLECTION AND PAYMENT OF CHEQUES
T h e Current Law and the Need for a Reform*
Most cheques drawn in Britain, Australia and New Zealand are

handled by two banks. If the cheque is not crossed, the payee or
holder may, of course, present it for payment at the counter of the
paying (or drawee) banker. When this is done only one banker is
involved. But the general tendency among tradesmen and professional
men is to forward all the cheques which they receive to their own
bankers, who present each cheque for payment to the bank on which
it is drawn. I n this type of case the cheques are, obviously, handled
by two banks.
The banker who presents the cheque to the drawee banker on
behalf of the payee nlay assume one of two roles. If he acts merely
as agent of the payee, he assumes the role of a "collecting banker".
He becomes a "discounting banker" if, apart from presenting the
cheque to the paying banker, he allows his customer (the payee) an
overdraft against the cheque before its clearance or gives the customer
some other consideration for it.
I n the normal course of events the collecting (or the discounting)
banker as well as the paying banker render their services to the satis-
faction of all concerned. But complications may arise when cheques
are forged or stolen. If a cheque is collected on behalf of a rogue and
honoured by the paying banker, the drawer or a subsequent holder
may attempt to recover his loss from the bankers or either of them.
I t will be shown that in the majority of cases the defence of a
paying, collecting or discounting banker depends on the provisions of
the law of negotiable instruments. I n England, these are codified in
the Bills of Exchange Act 1882, in Australia in the Bills of Exchange
Act 1909-1958 and in New Zealand in the Bills of Exchange Act
1908. The Acts of Australia and New Zealand are similar to the
English 0ne.l
This article is based on a paper presented at the A.U.L.S.A. Conference in

Wellington on August 18 1969. I am grateful to those who attended, and
particularly to Professor K. C. T . Sutton, for their comments.
1 References are to sections of the English Act. Where sections in the Austra-
lian and New Zealand Acts vary or are numbered differently, references
to them are given in square brackets.
102 WESTERN A USTRALIA LAW REVIEW
The most recent amendment to the provisions of the Bills of EX-

change Act is the Cheques Act 1957 of England, and the almost
identical Cheques Act 1960 of New Zealand. There is no correspon-
ding Act in Australia. However, the report of the Australian Bills of
Exchange Committee2 includes proposals which are partly based on
the Cheques Act.
I n most cases a paying, collecting or discounting banker obtains a
good defence under the provisions of the Acts, provided his conduct
complies with two standards, the first baing a subjective one whilst
the second is of an objective nature. The subjective standard is
invariably that of good faith.3 The objective one varies. In some
cases the banker must be able to show that he acted "without neg-
ligence", in others that he acted "in the ordinary course of business"
and in others still that he took an instrument which was "complete
and regular on its face".
I t is probable that the variation in the required objective mode of
conduct results from the fact that the provisions relating to the position
of paying, discounting and collecting bankers are scattered through-
out the Bills of Exchange Act and the Cheques Act. Thus, the provisions
governing the rights of the paying banker are sections 59, 60 and 80
of the English Act [64, 65, and 86 of the Australian Act] and section
1 of the Cheques Act [section 2 of the New Zealand Act]. The position
of a collecting banker is governed by section 4 of the Cheques Act
[section 5 N.Z.]. This section replaced section 82 of the English Bills
of Exchange Act, which appeared in the part relating to crossed
cheques. The provisions governing the rights of the discounting
banker are sections 29 and 38(2) of the Bills of Exchange Act [section
34 and 43 ( b ) Australia] and sections 2 and 4 of the Cheques Act
[N.Z. sections 3 and 51. I t may very well be that, if all the provisions
relating to the defences of paying, collecting and discounting bankers
were grouped in one part of the relevant Act or Acts, there would
have been a greater degree of uniformity.
Due to the complexity of the prevailing provisions the position of
the paying, collecting and discounting banker requires separate
analysis. Apart from discussing the position of these bankers, an
2 Published on May 1, 1964. Some proposals of the Committee are discussed

in the course of this paper.
3 Under section 90 of the English Act [Australia s. 96; New Zealand s. 911 a
thing is deemed to be done in good faith, where it is in fact done honestly,
whether it is done negligently or not. See also Raphael v. Bank of England
(1855) 17 C.B. 161; 139 E.R. 1030; Jones v. Gordon (1877) 2 App.Cas. 616,
628; Baker v. Barclays Bank [I9551 1 W.L.R. 822.
COLLECTION AND PAYMENT OF CHEQUES 103
attempt will be made in this paper to put forward some proposals

for a reform.
11. THE PAYING BANKER

A. NATURE OF RELATIONSHIP WITH CUSTOMER
The contract between the customer who draws a cheque and the
"paying banker" on whom it is drawn comprises elements of two types
of contract. First, any amount paid by the customer to the credit of his
current account constitutes a loan made to the banker. I t is repayable
on demand at the branch in which the account is maintained.4 Second,
when the customer draws a cheque he instructs the banker to pay the
amount specified in it to the order of a specified payee or to bearer.
The customer (drawer) acts as principal and the banker, when pay-
ing the amount, as an agent.6
I t follows that the paying banker, or agent, must adhere strictly
to the terms of his authority or mandate. If he exceeds his authority,
by paying a cheque which should be dishonoured, he cannot debit
the customer's account with its amount. This is so even if the trans-
gression is of a minor nature and causes thC customer, or principal,
a relatively small loss. The point has been explained most clearly by
Devlin J., in a case relating to the liability of a banker who deviated
from the instructions given to him by his customer regarding the
terms of a documentary credit:
It is a hard law sometimes which deprives an agent of the right
to reimbursement if he has exceeded his authority, even though
the excess does not damage his principal's interests. The corollary
. . . is that the instruction to the agent must be clear and unam-
biguous.%
This, then, is the position in which the banker finds himself, if he
pays a cheque that should have been di~honoured.~ Such cases arise
when a banker ignores a notice countermanding payment of a cheque
4 Joachimson v. Swiss Bank Corporation [I9211 3 K.B. 110; Arab Bank v.

Barclays Bank D.C.O. [I9541 A.C. 495. Cf., as regards the need for a demand
before suing: Tunstall Brick and Pottery Co. v. Mercantile Bank of Aus-
tralia (1892) 18 V.L.R. 59.
5 London Joint Stock Bank v. Macmillan [I9181 A.C. 777; Westminster Bank
v. Hilton (1926) 43 T.L.R. 124.
6 Midland Bank Ltd. v. Seymour [I9551 2 Lloyd's Rep. 147, 168.
7 T h e banker may also commit a breach of contract by wrongfully dishonour-
ing a cheque. T h e law concerning this type of case is well settled: PAGET,
LAW OF BANKING, 295-296 (7th ed.) (hereafter cited as PAGET) ; CHITTY,
CONTR.~CTS, Vol. TI, para. 389-390 (23rd ed.) (hereafter cited as C H ~ Y ) .
104 WESTERN A U S T R A L I A LAW REVIEW
or if he pays an irregular one. A cheque may be irregular, for ex-

ample, because it is signed by one instead of by two directors of a
company; because the amount expressed in figures differs frorn that
expressed in words; or because a relevant detail, such as the payee's
name, is missing. However, in some cases a banker who exceeds his
authority may be able to rely against the customer on a defence
available at common law or under the Bills of Exchange Act or the
Cheques Act.
B. DEFENCES AGAINST T H E CUSTOMER I N CASES O F WRONGFUL

PAYMENT
The defences available to the paying banker against his customer

in cases of wrongful payment of cheques can be classified into defences
available under the principles of the common law relating to agency
and into defences provided by the Bills of Exchange Act and the
Cheques Act. The former include estoppel, payment occasioned by
the customer's negligence, and ratification. The latter include "pay-
ment in the ordinary course of business", payment "without negli-
gence" of a crossed cheque and, it is sometimes said, "payment in
due course". For reasons that will become apparent, it is convenient
to start with the discussion of "payment
- .
in due course". This will be
followed by a discussion of the common law defences and these by a
study of the remaining defences available under the Act.
( i ) Payment in due course

Under section 59 ( 1 ) of the Bills of Exchange Act 1882 [section
64 ( 1 ) Australia] a bill of exchange is discharged by payment in due
course by or on behalf of the drawee or acceptor. According to
section 73 [section 78 Australia] a cheque is a bill of exchange pay-
able on demand. I t follows that section 59 ( 1 ) applies to payment in
due course of cheques.
The remaining part of section 59 ( 1 ) clarifies the meaning of "pay-
ment in due course". I n the case of cheques, it is payment by the
drawee banker to a holder, provided it is made in good faith and
without knowledge of a defect in the holder's title. The word "holder"
is defined in section 2 of the Bills of Exchange Act [section 4 Aus-
tralia] and means "the payee or indorsee of a cheque who is in pos-
session of it or the bearer".
I t must be emphasised that not every person who has the possession
of a cheque or a bill is a "holder". Thus, a person who takes a cheque
payable to the order of a specified payee, whose indorsement has been
forged by a thief, is not the payee, indorsee or bearer of the cheque

and therefore not a holder.* Payment of a cheque to him will not
constitute payment in due course. The position is different if a person
takes a cheque payable to bearer (or to ''X or bearer") which bears
a forged indorsement. Under section 31 ( 2 ) of the Bills of Exchange
Act [section 36 (2) Australia] such a bearer cheque is transferred by
delivery. The person who takes it does not, therefore, derive his title
from an indorsement but from its delivery to him. Moreover, he is a
"bearer" and therefore a "holder". Payment to him is made "in duc
course".
I t is said that the paying banker is protected against an action by
a customer if he can prove that he has paid the chequr in due
. ~ this view is, it is submitted, inaccurate. Section 59 ( 1 )
c o u r ~ e But
enacts that, by such payment, the cheque is discharged; but it does
not specifically provide that such a discharge protects the paying
bankrr against an action by his customer. I t is important to bear in
mind that the relationship between the paying banker and his cus-
tomer is not governed by the cheque: the banker, as drawee, is not
even a party to it. Their contract is regulated by the terms agreed
upon at the time of the opening of the current account. This contract
requires the banker to adhere to the customer's instructions. If the
banker fails to adhere to these instructions, he commits a breach of
his contract even if he pays the cheque in due course. A good example
is that in which a banker pays a cheque which has been counter-
manded by his customer. If the banker pays the cheque in the honest
belief that the payee has a good title, then, despite the fact that the
banker may have been negligent, this constitutes payment in due
course. But as the banker has exceeded his mandate,1° he will not be
entitled to debit the customer's account.
Undoubtedly, in many cases, "payment in due course" protects the
paying banker against claims of his customer. But this is due to the
fact that, in most cases, the customer instructs the banker to pay it in
8 Lacave & Co. v. Credit Lyonnais [I8971 1 Q.B. 148; Embiricos v. Anglo-
Austrian Bank [1905] 1 K.B. 677; CHITTY,para. 287; PAGET,322: CHALMERS,
BILLSOF EXCHANGE 127-128 (13th ed.) (hereafter cited as CHALMERS).
Q PAGET,308-310.
10 s. 75 (1) of the Bills of Exchange Act 1882 [Australia s. 81 (a) ] and before
the Act: Marzetti v. Williams (1830) 1 B. & Ad. 415; 109 E.R. 842. Another
example is that in which a cheque is drawn on the company's account by
one instead of by two directors. As against the holder of such a cheque, it
is discharged by payment in due course. But the banker will not be entitled
to debit the company's account.
106 W E S T E R N A U S T R A L I A L A W REVIEU'
such manner. For cxarnplc, a thequc p a ~ a b l c to the order of a

specified payce may be indorsed by him in blank and posted to his
bankers. Under section 8 ( 3 ) [section 13 ( 3 ) Australia] an indorsement
in blank renders the cheque payablc to bcarer. If thc cheque is stolen
while in transit and is finally paid by the paying banker to a person
who has obtained it from the thief, this constitutes paymrnt in due
course. The reason for this is that payment has been made to a
bearrr.ll Moreover, the paying banker is protected against an action
by the customer. But the reason for this is that, in effect, payment
has been made in compliance with the mandate. The customer in-
structed the banker to pay the cheque to the original payee or to his
order. By indorsing the cheque in blank the original payee ordered
that it should be paid to the bearer, and this was done by the banker.
Thus. the banker is not necessarily protected against claims by his
customer by paying a cheque in due course. He must, basically, be
able to show that he paid the cheque in compliance with his mandate.
I n point of fact, section 59 (1) appears in the part of the Act
which is concerned with the discharge of bills of exchange. Its aim
is to protect an acceptor (or drawee) of a bill, who pays it in due
course, against claims by previous parties, such as the original payee
who lost the bill after indorsing it. But, as pointed out above, the
relationship between the paying banker and his customer is not governed
by the cheque; and it is to be doubted whether section 59 (1) was
meant to apply in this type of relationship.
(ii) Estoppel and the customer's negligence

In many cases the customer's conduct might preclude him from
asserting that the banker exceeded his mandate by paying a cheque.
Thus, if the customer assured the banker, before the cheque was paid,
that the signature was genuine or that the cheque was regular, he
would later on be precluded from alleging that the signature had
been forged or that the cheque was irregular. In Brown v. Westmin-
ster Bank,12 the servants of the plaintiff, an aged woman, forged her
signature on cheques drawn on her bankers. The manager of the
11 Smith v. Sheppard (1776) cited by CHI^, BILLSOF EXCHANGE 278 (11th

ed.) Contrast: PAGET,309.
12 [I9041 2 Lloyd's Rep. 187. See also Leach v. Buchanan (1802) 4 Esp. 226,
170 E.R. 700: Brook v. Hook (1871) L.R. 6 Ex. 89; M'Kenzie v. British
Linen Co. (1881) 6 App.Cas. 82; Greenwood v. Martins Bank [I9331 A.C. 51.
Cf. Ontario Woodsworth Memorial Foundation v. Crozbord (1964) 48
D.L.R. (2d) 385; Jarvis B. Webb Co. v. Bank of Nova Scotia (1965) 49
D.L.R. (2d) 692.
C O L L E C T I O N AND PAYlZlENT OF CHEQUES 107
branch with which she kept her account called on her on several
occasions to inquire about some cheques, but was assured by her that
all were regular and genuine. I t was held that her conduct precluded
her from asserting, subsequently, that some of these chrques were
forged.
In West v. Commercial Bank of Australia Ltd.13 the plaintiff
opened an account with the defendant bank. The account was to be
used for the purpose of a business managed by the plaintiff's son and
the defendant bank was instructed to pay cheques signed jointly by the
son and by the plaintiff's wife. After a few months the son arranged
with a teller of the defendant bank to honour cheques signed only by
himself. The plaintiff became aware of this arrangement but took no
steps to stop this practice. Moreover, on one occasion, when a promis-
sory note was executed for the purposes of the business and made
payable at the defendant bank, the plaintiff indorsed it although it
was not signed by the wife. I t was held that the plaintiff was, under
these circumstances, estopped from denying the authority of the
defendant bank to honour the cheques signed by the son alone. The
plaintiff could not acquiesce in the practice and then depart from
the assumption to the detriment of the defendant bank.
I t should be added that estoppel may arise not only from a repre-
sentation or course of conduct of the customer but can also be based
on a single negligent act. Thus, if the customer has been so careless
when drawing a cheque as to facilitate a fraud by a third party, he is
precluded from asserting the forgery against the bank. In London Joint
Stock Bank v. M ~ c r n i l l a n la~ clerk prepared a cheque for £2 payable
to bearer. There was no sum in words then written on the cheque,
but after it had been signed by his employers the clerk altered the
figures to £120 and wrote the words "one hundred and twenty
pounds" in the space provided. The clerk presented the cheque, and
as the forgery was not readily apparent, received payment and ab-
sconded. The banker was held entitled to debit the customer's account.
Lord Finlay L.C. said:
A cheque drawn by the customer is in point of law a mandate
to the banker to pay the amount according to the tenor of the
cheque. I t is beyond dispute that the customer is bound to exer-
cise reasonable care in drawing the cheque to prevent the banker
being misled. If he draws the cheque in a manner which facilitates
fraud, he is guilty of a breach of duty as between himself and
13 (1935) 55 C.L.R. 315.

14 [1918] A.C. 777. See also Will v. Bank of Montreal [I9311 3 D.L.R. 526.
Contrast: Colonial Bank of Australasia v. Marshall [I9061 A.C. 559.
108 WESTERN AUSTRALIA LAW REVIEW
the banker, and he will bc responsible to the banker for any loss
sustained by the banker as a natural and direct consequence of
this breach of duty.15
But a customer is not always considered negligent if he leaves a
blank space in a cheque. The question is, always, whether a reasonable
man would leave such a blank space. I n Slingsby v. District Bank16
the customer left a blank space between the name of the payee and
the words "or order", and a rogue filled up this space by making the
cheque payable to the payee "per pro" himself. The rogue then nego-
tiated the cheque by indorsing it in his own name. I t was held that the
customer was not negligent and that, although the alteration was not
apparent, the banker could not debit the cusomer's account with the
amount paid against the cheque.
I n point of fact, the estoppel principle has a rather narrow scope
of application. Negligence which is not connected with the actual draw-
ing of a cheque does not, usually, give rise to an estoppel. Parke B.
in Bank of Ireland v. Evansy Trustees, which related to the negligent
keeping of a seal, expressed to the House of Lords the unanimous
opinion of the judges: 'If there was negligence in the custody of the
seal, it was very remotely connected with the act of transfer'. The
learned judge went on to explain that:
If such negligence could disentitle the Plaintiffs, to what extent
is it to go? If a man should lose his cheque-book, or neglect to
lock the desk in which it is kept, and a servant or stranger should
take it up, it is impossible in our opinion to contend that a banker
paying his forged chequc would be entitled to charge his customer
with that payment. Would it be contended that if he kept his
goods so negligently that a servant took them and sold them, he
must be considered as having concurred in the sale, and so be
disentitled to sue for their conversion on a demand and refusal?''
I n Lewes Sanitary Steam Laundry Co. Ltd. v. Barclay €3 Co. Ltd.18
the secretary of a company who, to the knowledge of the chairman of
the board of directors, had been convicted of forgery, was made a
joint signatory and was entrusted with keeping the company's cheque
book and pass book. I t was held that the company's bankers were not
15 [I9181 A.C. 777, 789. The quoted passage bases the customer's liability on
negligence but the effect is the same as if he were precluded from suing.
16 [I9311 2 K.B. 588, affirmed [I9321 1 K.B. 544.
17 (1855) 5 H.L.C. 389, 410-411; 10 E.R. 950, 959. See also Welch v. Bank of
England [I9551 Ch. 508.
18 (1906) 95 L.T. 444. See also Kepitigalla Rubber Estates v. National Bank
of India [1909] 2 K.B. 1010.
COLLECTION A N D PAYMENT OF CHEQUES 109
entitled to debit the account with the amount of a cheque on which

the secretary forged the signature of one of the directors, and that
the company was not estopped from alleging the forgery. Thus, while
a customer must be careful not to facilitate fraud when drawing
cheques, he is not under a duty to his banker to take reasonable care
in organising his business so as to prevent opportunties for others to
forge his cheques.
This is a serious limitation of the estoppel and negligence doctrine.
I t is difficult to see why it applies only in cases where the customer's
negligence is directly connected with the drawing of a cheque. I t
seems unreasonable that a customer, who facilitates a fraud by en-
trusting a forger with his cheque book, can recoup from the paying
banker a loss resulting from the forger's activities. This is particularly
so in cases like the Lewes Sanitary Steam Laundry case where the
directors failed to inspect the cheque book from time to time.
(iii) Ratification
The paying banker, it will be recollected, is the agent of the cus-
tomer. I t follows that the customer can ratify the act of a banker who
pays a cheque which he is not authorised to honour. I n so far as the
customer's act of ratification is done voluntarily, and is not due to
pressure by the banker, it should be valid.
A question of some difficulty is whether the customer can ratify
the payment by a banker of a forged cheque. There is authority for
the proposition that a person cannot ratify a forgery of his signature.19
The basis of this doctrine is that the forgery constitutes an illegal act
which the forger does not purport to execute as an agent. The prin-
cipal, therefore, cannot adopt it.20 However, if a cheque is drawn by
an agent who fraudulently exceeds his authority, the principal can,
probably, ratify his act.21
On this basis, it is arguable that the customer may ratify the act
of a banker who pays a forged cheque. The banker who pays such a
cheque, without discovering the forgery of the customer's signature,
19 Ex p. Edwards (1841) 2 Mon. D. & D. 241; Williams v. Bayley (1866) L.R.

1 H.L. 200; Brook v. Hook (1871) L.R. 6 Ex. 89; M'Kenzie v. British Linen
Co. (1881) 6 App.Cas. 82: Imperial Bank of Canada v. Begley [1936] 2 All
E.R. 367: Stoney Stanton Supplies (Coventry) Ltd. v. Midland Bank Ltd.
119661 2 Lloyd's Rep. 373.
20 C H I ~ Ypara.
, 21.
21 Braidwood v. Turner & Forrest (1908) 10 W.A.L.R. 105 (the facts, un-
fortunately, are not clearly stated). Note that it is doubtful whether a
signature made by an agent in excess of his authority is a forgery: PAGET,
442-443; C H ~para., 285.
purports to pay it on behalf of the customer. Moreover, he does not

commit an illegal act. It is submittad that the banker's payment of
the forged cheque may, therefore, be ratified. It should be noted that
by ratifying the banker's act, the customer does not ratify the forged
signature.
(iv) Payment in the ordinary course of business

As pointed out above, if the banker pays an order cheque to a
person who holds it under a forged indorsement of the payee, he does
not pay it in due course. Neither is it payment in compliance with
the customer's instructions. But if the payee is not one of the paying
banker's customers, the banker is not familiar with his signature and
cannot verify his indorsement. Section 60 of the Bills of Exchange Act
gives some defence to bankers who pay cheques with such forged
indorsements. T h e section reads :*"
Where a bill payable to order on demand is drawn on a banker,
and the banker on whom it is drawn pays the bill in good faith
and in the ordinary course of business, it is not incumbent on the
banker to show that the indorsement of the payee or any sub-
sequent indorsement was made by or under the authority of the
person whose indorsement it purports to be, and the banker is
deemed to have paid the bill in due course, although such in-
dorsement has been forged or made without authority.
Thus, when the cheque is paid in the ordinary course of business, the
banker does not have to show that the payee's indorsement is genuine.
I t follows that the customer cannot bring an action based solely on
the forgery of the indorsement.
I t is important to stress that this section applies only in cases con-
cerning forgeries of indorsements. I t does not apply if the forged
signature of the payee, on the back of the cheque, is just a receipt and
not made for the purpose of negotiating the cheque. I n Smith v . Com-
mercial Banking C O . *the ~ appellant, who was about to sail from
England to Sydney, obtained a draft payable to his own order on the
respondents, a firm of bankers. The draft was issued in two parts.
T h e appellant retained the first part [or exchange] and sent the second
to himself c / o the G.P.O., Sydney. The second copy was stolen by a
thief who presented it for payment to the respondents. He was asked
to sign his name on the back of the bill and, after comparing his
23 In Australia section 65 (1). Sub-section (2) , which extends the application

of the section to drafts drawn by one branch of a bank on another, appears
in the Australian and New Zealand Acts, but not in the English Act.
23 (1910) 11 C.L.R. 667.
signature with a specimen signature of the appellant, the draft was

paid to the thief. The High Court of Australia gave judgment for
the appellant, the payee. I t was held that the respondents, the paying
bankers, could not rely on section 60 as the signature of the thief was
not an indorsement. O'Connor J. said:
The reason of the protection conferred by the section is the obliga-
tion of the banker to pay on indorsements which come to him in
the ordinary course of business under circumstances in which it
is in most cases impossible to test their genuineness. Where pay-
ment is made to the holder, as holder, and not as indorse?, wherr
he is not bound to indorse before obtaining payment, and he is
asked to put his name on the back merely as a receipt, or as test
of identity, the reason for the protection is at an end. In such
a case the bank pays because it is satisfied as to the identity of
the payee, and not because it is satisfied as to the genuineness
of the i n d o r ~ e m e n t . ~ ~
The most important question concerning section 60 is the meaning
of the words "in the ordinary course of business". The phrase probably
means the mode of transacting business which is adopted by the
banking community at large.25
I t is not certain whether a banker, who acts negligently when pay-
ing a cheque, may nevertheless be considered as paying it in the
ordinary course of business. I n Carpenters' Co. v . British Mutual
Banking C O .Greer ~ ~ L.J. expressed the view that, when a banker acts
negligently, he cannot be regarded as paying a cheque in the ordinary
course of business. Slesser J., who concurred with Greer L.J.'s j u d g ~
ment on other grounds, thought that a banker may be acting in the
ordinary course of business despite his negligence. His view was sup-
ported by MacKinnon L.J., who delivered a dissenting judgment.
The question whether negligence is compatible with the ordinary
course of business is complicated by the existence of section 80 [section
86 Australia]. Under this section, if a banker pays a crossed cheque
( a ) in conformity with the tenor of the crossing, ( b ) in good faith,
and (c) "without negligence", he is placed in the same position as
if he had paid the cheque to the true owner. Unlike section 60, sec-
tion 80 is not specifically confined to cases of cheques bearing forged
indorsements of the payee. But section 80 is not likely to apply in
other cases. The reason for this is that if a banker pays a cheque
bearing a genuine indorsement, this will in most cases be payment in
24 Id. at 678.
25 PAGET,113.
26 [I9381 1 K.B. 511.
112 WESTERN AUSTRALIA LAW R E V I E W
compliance with the banker's authority. The bankcr therefore does

not have to rely on the defence of section 80. Thus, section 60 and
section 80 have a similar scope of application, except that s~ction80
applies solely to the payment of crossed cheques while section 60
relates to crossed as well as to uncrossed cheques
However, while section 60 uses the phrase "in the ordinary course
of business", section 80 uses the phrase "without negligence". At first
glance it could be assumed that the use of different phrases indicates
an intention of tha legislature to emplo\ different standards. Inderd.
if section 80 appeared immediately before or after section 60 this
would be an inescapable conclusion. But section 60 appears in the
part of the Act on "discharge". This part relates to all types of bills
of exchange, including the species of cheques. Section 80, on the
other hand, appears in the part relating to crossed cheques. Its inclu-
sion in this part of the Act, despite the obvious overlap between it
and section 60, can be explained by its history. Section 80 reproduces
section 9 of the Crossed Cheques Act 1876. Other provisions of this
Act were reproduced in the part of the Bills of Exchange Act relating
to crossed cheques. I t is therefore likely that section 80 was incor-
porated in the Bills of Exchange Act because the draftsman over-
looked the overlap between it and section 60. Indeed, the need to
include section 80 in the Act has been q ~ e s t i o n e d . ~ ~
Thus, it may be concluded that the difference between the termi-
nology of section 60 and that of section 80 is accidental. I n section
60 the legislature provides that a banker is protected if he pays a
cheque in accordance with ordinary business practice. This ordinary
business practice of bankers aims at their exercising reasonable care
to protect their customers. Section 80 says, specifically, that the banker
is protected only in so far as he acts without negligence. I n other
words, he is protected only if he exercises due care and skill in order
to protect his customer's interest.
Authorities confirm that the two tests lead to similar results. If a
banker pays a crossed cheque over the counter,28 or honours a cheque
bearing an irregular indorsement29 he does not pay it in the ordinary
course of business. I t seems obvious that a banker who pays a crossed
27 HOLDEN, HISTORY OF NEGOTIABLE INSTRUMENTS IK ENGLISH LAW229 (London

1955) ; CHALMERS, 268.
28 Smith v. Union Bank (1875) L.R. 10 Q.B. 291, 296, affirmed (1876) 1
Q.B.D. 31, 35.
29 Charles v. Blackwell (1877) 2 C.P.D. 151, 159-160; Slingsby v. District Bank
[I9311 2 K.B. 588, affirmed [I9321 1 K.B. 544. But see infrn as regards the
position after the Cheques Act.
cheque over the counter acts negligently. As regards irregular indorse-

ments, it has been held that if a banker collects a cheque with such
an indorsement, he does not act "without n e g l i g e n ~ e " . A
~ ~ fortiori
if a banker pays an irregularly indorsed cheque he must be regarded
as acting with negligence. The reason for this is that the banker is
authorised to pay the cheque only at the order of the payee and, if
the indorsement is irregular, the banker cannot be certain that it is
that of the true payee.
Thus, in most cases where a banker does not act in the ordinary
course of business, his departure from established practice is, by itself,
an indication of negligence. Similarly, if a banker acts with negligence,
his carelessness, it is submitted, involves some departure from sound
business practice or from the "ordinary course of business".
As pointed out above, both section 60 and section 80 protect the
banker if he pays a cheque bearing a forged indorsement. But neither
of the two applies if the indorsement (whether genuine or forged) is
executed in a way which renders it irregular on its face. The indorse-
ment of the payee is irregular whenever it differs materially from the
name by which he is described by the drawer of the cheque. If a
cheque is payable to "John Williams" and indorsed "J. Williams", the
indorsement is not irregular. But where the payee is described on the
face of the cheque by the wrong name (e.g. W. Williams) and then
indorses it in his true name, (e.g. John Williams) the discrepancy
between the front and back of the cheque renders the indorsement
irregular, even though it may be effective for the purpose of negotia-
tion. Similarly, if a company indorses the cheque without adding the
word ''company" or "Ltd.", which forms part of its description as
payee of the cheque, the indorsement is i r r e g ~ l a r . ~ ~
I t is obvious that cheques are indorsed in an irregular manner on
many occasions. Rejection of cheques irregularly indorsed would,
frequently, be a disservice to the customer. If the customer misspelt
the payee's name, and the banker dishonoured the cheque because
the indorsement in the payee's true name was irregular due to this
misnomer, the rejection could cause embarrassment to the customer.
I n England and New Zealand the problem has been solved by the
Cheques Act. Section 1 [section 2 N.Z.] protects a banker who, in
good faith and in the ordinary course of business, pays a cheque which
is not indorsed or is irregularly indorsed. I t provides that a banker
who pays such a cheque is deemed to have paid it in due course
30 Bavins Junr. & Sims v. London and South Western Bank [1900] 1 Q.B. 270.
31 Arab Bank Ltd. v. Ross [I9521 2 Q.B. 216.
within the meaning of section 59 of the Bills of Exchange Act 1882,

and that he does not assume any liability by reason only of the absence
of or an irregularity in indorsement.
However, the Committee of London Clearing Bankers has taken the
view that the public interest would best be served by retaining the
need for indorsements in certain circumstances. These circumstances
are set out in a circular of September 23, 1957 forwarded by that
Committee to Clearing Bank Managers. The procedure laid down in
this Circular may, no doubt, be taken as establishing "the ordinary
course of business". A banker who disregards it may lose the protec-
tion of section 1. This is especially so because section 1 provides that
the banker does not incur liability by "reason only of" the irregular
indorsement. If the banker pays an irregularly indorsed cheque in
circumstances where this contravenes the provisions of the Circular,
he becomes liable not by reason of the missing indorsement but
because of the disregard of standard banking practice.
I n so far as this Circular relates to the paying banker, it provides
that indorsements continue to be required where cheques are cashed
over the counter, but that otherwise the paying banker need not con-
cern himself with indorsements unless the instruments are combined
cheques and receipt forms marked "R.", travellers' cheques, bills of
exchange (other than cheques) and promissory notes. When a cheque
is not marked "R." the banker must concern himself with indorse-
ments only if it is presented for payment over the counter and not
through a collecting bank. A similar circular was issued by the bankers
in New Zealand on November 17, 1960.
I n Australia, where there is no ~ c corresponding
t to the Cheques
Act, the law continues to be governed by the provisions of the Bills
of Exchange Act. A banker who pays an order cheque bearing an
irregular indorsement, does so a t his own peril. A reform has been
suggested by the Australian Bills of Exchange C ~ m m i t t e e .Clause
~~
65 ( 1 ) of the draft bill, attached to the Committee's report, absolves
the paying banker from the duty to concern himself with indorsements
when the cheque is presented by a collecting banker. But under clause
65(2) a banker will have to continue checking the indorsements when
a cheque is presented for payment over the counter. In the last type
of case the paying banker is the first bank to handle the cheque and,
in the Committee's view, a greater degree of care can be expected
from the banker in such a situation than when a cheque reaches him,
together with others, through ordinary banking channels.
34 Paras. 139-145,
C O L L E C T I O N A N D P A Y M E N T OF CHEQUES 115
Is the banker obliged to consider the validity of instructions given

to him by a customer? Should he do any more than satisfy himself
that the signature of the customer is genuine? This problem arises
mainly in connection with trust accounts, accounts of companies and
partnerships and ordinary accounts operated upon by the customer's
relation or agent under a power of attorney. A typical example is
that in which directors of a company draw a cheque payable to a
well-known gambler or racketeer, or draw a cheque for a large amount
payable to one of them. Should the banker question the validity of
the cheque, or does he perform his duty by simply verifying the sig-
nature and satisfying himself that the cheque is signed by an authorised
person?
I t is important to stress that, if the banker pays a cheque of the
type described above, he acts within the apparent scope of his man-
date, and that such payment does not constitute "wrongful payment"
in the sense discussed in the foregoing part of this article. The prob-
lem in the type of case here under discussion is whether the banker
owes the customer any duty of care or of trust beyond ascertaining
that cheques are paid in compliance with the general instructions, as
to signing and of drawing, given to the banker when the account is
opened.
Two doctrines are relevant as regards this problem:
( a ) constructive trust, and
( b ) negligence.
The question of constructive trust arises when a banker knows that
a cheque is drawn on the customer's account by a person who abuses
his authority to do so. A recent case on this problem, as well as on the
question of negligence, is the decision of Ungoed-Thomas J. in Selan-
gor United Rubber Estates Ltd. v. C r ~ d d o c kThe
. ~ ~ plaintiff company
which had sold all its estates in Malaya, became a "shell" company,
that is, a company which has liquidated assets but no business enter-
prise. It appears that such companies are of specific value for tax
avoidance purposes. Investors, who purchase the shares in such a
company, "inject into" it (i.e. sell it) some of their properties or
enterprises a t an amount lower than the market value. As a result of
this "injection" process the value of the shares of the shell company
33 [I9681 2 Lloyd's Rep. 289. For a general statement see State of New South
Wales v. Commonwealth of Australia (1932) 46 C.L.R.246, 265; PAGET,
74-75.
increases. The investor sells these shares, and it is thought in some

quarters that the profit so made by the investor is not subject to tax.
I n the Selangor United Rubber Estates case an investor, Craddock,
offered to purchase the majority of the plaintiff's (the shell com-
pany's) shares from its shareholders for an amount of £195,000. He
did not have the necessary liquidated funds and the transaction was
therefore arranged in a rather complicated way. The plaintiff opened
an account with the branch of the District Bank at which Craddock
kept his own account, and paid into this new account an amount of
£232,764. The plaintiff agreed to lend an amount of £232,500 (out
of this balance) to a finance company at 8% p.a., and the finance
company agreed to lend this amount to Craddock at 9% p . a Crad-
dock agreed to pay this amount into his account with the District
Bank. The latter agreed to issue against the credit balance so acquired
a draft for £195,000 payable to a middleman, who was to use the
proceeds for paying the price of the shares sold to Craddock by the
shareholders of the plaintiff. The entire transaction was carried out
in one meeting, attended by the directors of the plaintiff, the repre-
sentative of the finance company, the middleman, an employee of the
District Bank and by Craddock. The directors of the plaintiff drew
a cheque on the new account with the District Bank and made it
payable to the finance company. The representative of the finance
company there and then indorsed the cheque to Craddock, who im-
mediately delivered it to the employee of the District Bank. The latter
thereupon gave the bank draft for the amount of £195,000 to the
middleman.
I t is clear that in this manner the amount standing to the credit
of the plaintiff with the District Bank was used in order to enable
Craddock to pay for his shares in the plaintiff. The transaction,
therefore, involved a contravention of the provision which prohibits
the use of a company's funds for the payment or purchase of its own
shares. When the plaintiff went into liquidation, the Official Re-
ceiver brought an action to recover the amounts paid from the direc-
tors, the finance company, the middleman, Craddock and from the
District Bank. The action against the District Bank was for breach
of duty as constructive trustee and, alternatively, in negligence for a
breach of duty of care owed by the Bank to its customer, the plaintiff.
Ungoed-Thomas J. gave judgment against the District Bank on
both counts. He held that the District Bank had knowledge, or ought
to have known, that the plaintiff's money was used for the purchase
of its own shares by Craddock. As the District Bank was aware of
the breach of trust committed by the directors of the plaintiff, it

became a constructive trustee and, by issuing the draft, it committed
a breach of the duty imposed on it in equity. His Lordship said:
The knowledge required to hold a stranger liable as constructive
trustee in a dishonest and fraudulent design is knowledge of cir-
cumstances which would indicate to an honest, reasonable man
that such a design was being committed or would put him on
inquiry, which the stranger failed to make, whether it was being
committed. Acts in the circumstances normal in the honest con-
duct of affairs do not indicate such a misapplication, though
compatible with it; and answers to inquiries are prima facie to
be presumed to be honest . . .34
Ungoed-Thomas J. stressed that, in his view, actual knowledge of
the fraudulent design was not necessary in order to constitute the
banker a constructive trustee. He felt that there may be circumstances
which give rise to a duty to inquire and that if the banker fails to
make inquiries he must be deemed to have knowledge of the facts.
He felt that, in the case before him, there were such circumstances.
I t should be borne in mind that in this case the employee of the
District Bank attended the meeting in which the scheme was put into
operation and was familiar with the details of the transaction. I t is
therefore clear that the District Bank had actual knowledge of the
nature of the transaction.
Ungoed-Thomas J. then turned to the question of negligence. He
came to the conclusion that a banker owes a duty of care to his
customer, which goes beyond the duty of verifying the genuineness of
the signature and the regularity of the cheque. His Lordship referred
to two types of cases. First, he considered authorities relating to
situations where bankers acted negligently when paying cheques, and
arrived at the conclusion that these cases establish that the banker
owes a general duty of care under his contract with his customer. His
Lordship reinforced his view by citing the second type of cases, namely
those relating to actions by true owners of cheques against collecting
bankers. He thought that these cases, although not relating to the
relationship of paying banker and customer, indicate the type of care-
less acts for which any banker is liable. Ungoed-Thomas J. then said:
T o my mind . . . a bank has a duty under its contract with its
customer, to exercise "reasonable care and skill" in carrying out
its part with regard to operations within its contract with its
customer. The standard of that reasonable care and skill is an
objective standard applicable to bankers. Whether or not it has
34 [I9681 2 Lloyd's Rep. 289, 313.

been attained in any particular case has to be decided in the light

of all the relevant facts. which can vary almost infinitely. The
relevant considerations include the prima facie assumption that
men are honest, the practice of bankers, the vrry limited time in
which banks have to decide what course to take with regard to a
cheque presented for payment without risking liability for delay,
and the extent to which an operation is unusual or out of the
ordinary course of business. An operation which is reasonably
consonant with the normal conduct of business (such as payment
by a stockbroker into his account of proceeds of sale of his client's
s h a m ) of necrssity does not suggest that it is out of the ordinary
course of business. If "reasonable care and skill" is brought to the
consideration of such an operation, it clearly does not call for
any intervention by the bank. What intervention is appropriate
in that exercise of reasonable care and skill again depends on
circumstances. Where it is to inquire, then failure to make inquiry
is not excused by the conviction that the inquiry would be futile.
or that the answer would be false.35
Three objections may be raised against this conclusion. First, the
authorities cited by Ungoed-Thomas J. do not support the wide
conclusion which he bases on them. The cases relating to the negli-
gence of the collecting banker are hardly in point. A collecting banker
does not owe an independent duty of care to the true owner of a
cheque. The collecting banker has to prove that he has acted "with-
out negligence'' solely for the purpose of relying on a defence given
to him by the Cheques Act against his strict liability to the owner of
a converted cheque.36 But where no action in conversion lies against
the collecting banker, the true owner cannot sue him in negligence
for the breach of a duty of care. The cases cited by Ungoed-Thomas
J. as regards the duty of care of a paying banker, are all cases in
which bankers exceeded their actual mandate. Thus, in Westminster
Bank v . H i l t ~ na ~banker
~ paid a cheque which had been counter-
manded by an ambiguous letter of his customer. The court examined
whether a reasonable banker, acting carefully, would have stopped
the cheque on the basis of this instruction. In Curtice u. London City
and Midland Bank,38 due to an oversight, a cable countermanding
a cheque was not collected on time from the banker's letter box. The
court considered whether the banker acted negligently when paying
the cheque. Likewise, in the remaining cases cited by his Lordship,
35 Id. at 324.
36 Discussed post p. 132. T h e Acts substitute, in effect, a duty to act carefullv
for a strict liability in tort.
37 (1926) 43 T.L.R. 124.
38 [1908] 1 K.B. 293.
the question of the banker's duty of care to his customer was discussed
in connection with the banker's failure to observe specific instructions.
There does not appear to be a single case in which a banker was held
negligent because he failed to examine the validity of instructions
given to him by an authorised person.
The second objection to the rule formulated by Ungoed-Thomas J.
is based on the relationship between the banker and the customer.
This, it will be recollected, is a relationship of debtor and creditor,
as well as that of agent and principal. Normally, the banker is not a
trustee of the customer and, while he is under a duty to obey instruc-
tions, he does not appear to be in a fiduciary position.39 It is therefore
difficult to see why the banker should concern himself with anything
apart from his instructions. I t is to be doubted whether the banker
should disobey his instructions and dishonour a cheque drawn on the
customer's account by authorised persons because he fears that the
signatories commit a breach of trust. Indeed, if a banker dishonours
a cheque on such grounds, he may find himself in deep waters. If the
suspicions are unfounded, the dishonour of a cheque may cause his
customer considerable damage and the banker himself may be sued
for breach of contract. It is one thing to say that a banker, who
knows of a fraud committed by his customer's agent, may be liable
as constructive trustee if he participates in the transaction. To impose
on a banker a general duty of care, which requires him to assess more
than the apparent validity of instructions given to him, is, it is sub-
mitted, far-fetched and unreasonable.
The third and last objection to the principle of Ungoed-Thomas J.
is based on the business exigencies of the banking world. Cheques
have to be honoured or rejected promptly. This is the basis on which
the clearing houses function. Of course, if a banker is aware that his
customer is being defrauded, he should dishonour the fraudulently
drawn cheque. This object is achieved by the constructive trust prin-
ciple as applied by the learned judge. But it is submitted that the
banker does not have the time, nor necessarily the experience, to
enable him to inquire into or investigate the regularity of acts of
agents appointed by the customer. Thus, in the Selangor United
Rubber Estates case the employee of the District Bank, who attended
the relevant meeting, had no experience in "take-overs" of companies.
Neither, in fact, did the branch manager. This ignorance was largely
the cause of their failure to realise the irregularity of the transaction.
39 Foley v. Hill (1848) 2 H.L.C. 28, 9 E.R. 1002; Joachimson v. Swiss Bank
Corporation [I9211 3 K.B. 110.
But did this ignorance constitute negligence? His Lordship held

that it did. But it is difficult to agree with a proposition that may
involve bankers in an obligation to familiarize themselves with the
details of transactions or with the type of business carried on by their
customers. Their main function is to collect cheques, to receive de-
posits of money and to pay cheques drawn by their customer^.*^ TO
put bankers under a duty to assist in securing that the customer is not
defrauded by those trusted and appointed by him, seems to put on
them an unjustifiably onerous burden.
Actually, that the customer should not expect too much from his
banker, is a point stressed by Ungoed-Thomas J. I t arose in connection
with a second transaction in the case before him. Craddock, the
original investor and purchaser, agreed to sell his shares in the plaintiff
company to one of its directors. For this purpose the account of the
plaintiff was transferred to a branch of the Bank of Nova Scotia with
which the director concerned had his own account. The sale of the
shares was effected by a process of drawing three cheques and, in the
end, by debiting and crediting the accounts of the director and of the
plaintiff with similar amounts. As in the first transaction this process
was used to enable the director to purchase the shares with the money
of the plaintiff. An employee of the branch of the Bank of Nova
Scotia, who in point of fact made no inquiry, was told that the process
was for 'internal accounting purposes'. Ungoed-Thomas J. held that
the Bank of Nova Scotia was not liable in negligence or as a construc-
tive trustee. While the information given to its employee might not
have satisfied a lawyer, a banker (or his clerk) was entitled to treat
it as a satisfactory explanation. The employee of the bank saw that,
a t the end of the three cheques operation, the balance in the accounts
would be exactly the same as before. There was, thus, nothing to
raise his suspicion. I t is important to note that, in this second transac-
tion, the employee of the Bank of Nova Scotia did not attend a
meeting concerning the transaction and was, in fact, not familiar
with its details.
Thus, even in the view of Ungoed-Thomas J. the negligence prin-
ciple propounded by him has a very narrow scope of application. I t
is difficult to see what purpose is served by it. If the banker knows
(or, in view of the facts, ought to know) of a fraud or misapplication
40 Commissioners of the State Savings Bank of Victoria v. Permewan, Wright

& Co. Ltd. (1915) 19 C.L.R. 457, 470-471; Bank of Chetinad Ltd. v. Com-
missioner of Income Tax, Colombo [I9481 A.C. 378, 383; United Dominions
Trust Ltd. v. Kirkwood [1966] 2 Q.B. 431.
COLLECTION AND PAYMENT O F CHEQUES 121
of funds, the constructive trust principle comes into operation. As the

negligence principle does not appear to be more extensive, there is
really no need for it.
Finally, it may perhaps be doubted whether a paying banker should
be liable as a constructive trustee because he "ought to have known"
of the fraud or irregularity committed by the customer's agent. The
cases cited by Ungoed-Thomas J. appear to base the banker's liability
as constructive trustees on actual knowledge of the agent's act. A
similar view was taken by the Supreme Court of N.S.W. in Dixon v .
Bank of New South Wales.41
D. RIGHTS OF T R U E O W N E R AGAINST PAYING BANKER
( i ) Estdblishing the cause of action

Can the "true owner" of a cheque, which has been paid to a person
without a title, sue the paying banker in conversion? While textbook
writers answer this question in the a f f i r m a t i ~ e ?an ~ attempt will be
made to show that this may not be so. I t will be convenient to discuss
first who is the "true owner" of a cheque and then whether he may
establish a cause of action in conversion against the paying banker.
The phrase "true owner" of a cheque is not defined in the Bills of
Exchange Act, but it is mentioned in section 79 (2) and 80 ( 2 )
[sections 85 ( 2 ) and 86 ( 2 ) A ~ s t r a l i a ] .I ~t ~is important to note that
the person who has the physical possession of a cheque is not neces-
sarily its owner. For example, an order cheque may be stolen from
the payee's desk while unindorsed. As no title can be transferred
without a genuine indorsement of the payee, it follows that the payee
remains its true owner. O n the other hand, if a cheque payable to
bearer is stolen and transferred to an innocent purchaser for value,
41 (1896) 17 L.R. (N.S.W.) Eq. 355. See also Gray v. Johnston (1868) L.R. 3
H.L. 1; Gray v. Lewis (1869) L.R. 8 Eq. 526 (for further proceedings in this
case see (1873) L.R. 8 Ch.App. 1035) ; Backhouse v. Charlton (1878) 8
Ch.D. 444; Lawson v. Commercial Bank of South Australia (1888) 22
S.A.L.R. 74; Thomson v. Clydesdale Bank [I8931 A.C. 282; Coleman v.
Bucks and Oxon. Union Bank [I8971 2 Ch. 243; McMahon v. Brewer (1897)
18 L.R. (N.S.W.) Eq. 88; Bank of New South Wales v. Goulburn Valley
Butter Co. [I9021 A.C. 543; Quistclose Investments Ltd. v. Rolls Razor Ltd.
[I9681 3 W.L.R. 1097, 1105. Most of the English cases are cited by Ungoed-
Thomas J. in the Selangor United Rubber Estates case, but appear to require
actual knowledge in order to make the banker liable as constructive trustee.
42 BYLES,BILLSOF EXCHANGE 267 (22nd ed.) ; PACET,310-311.
43 See also the Cheques Act 1960, s. 4 [N.Z. s. 51 and the Australian Bills of
Exchange Act, s. 88.
WESTERN AUSTRALIA LAW REVIEW
the latter becomes a holder in due course. As such, he becomes the

true owner of the cheque.44
An Australian authority throws further light on this point. I n
Channon v. English, Scottish and Auctralian Bank45 the plaintiff, who
owed some money to a firm, posted to it a crossed cheque drawn on
the defendants (his bankers). The cheque was stolen from the post
by a thief, who obliterated the crossing and obtained payment by
presenting the cheque at the defendant's counter. The Supreme Court
of N.S.W. held that the plaintiff's (customer's) right to sue the
defendants (his bankers) in conversion, depended on whether he was
the true owner of the cheque. If he was asked by the firm to post
the cheque, then the post office would be the firm's agent for delivery
and the firm (the payee) would, when the cheque was posted, become
the "true owner". If, on the other hand, the plaintiff was not asked
to post a cheque, then the post office would be his agent, and he
would remain the true owner of the cheque. As there was no direct
evidence on this point, a new trial was ordered.
Thus, the true owner of a cheque is the person who, under the
provisions of the Bills of Exchange Act, must be regarded as having
the property in the instrument. He is the last person, including a
holder in due course, to whom the property in the cheque is validly
transferred.
That the true owner of a cheque can bring an action for its con-
version, follows from the well established principle by which cheques,
bills of exchange and other types of negotiable instruments are treated
as a species of personal property.46 The principle is too well estab-
lished to be disputed. But the question remains as to whether the
paying banker commits an act of conversion by paying a cheque to a
person who is not entitled to it.
I t must be conceded that authorities suggest that the paying banker
can be sued in conversion if he pays a cheque to a person other than
the true owner. I n Smith v. Union Bank47 a debtor of the plaintiff
sent him a cheque and crossed it to his own bankers. The cheque was
stolen and, eventually, came into the hands of a holder in due course.
44 Smith v. Union Bank (1876) 1 Q.B.D. 31, 35-36.

46 (1918) 18 S.R. (N.S.W.) 30. See also London Bank of Australia v. Kendall
(1920) 28 C.L.R. 401, 409.
46 Morison v. London County and Westminster Bank [I9141 3 K.B. 356; Under-
wood (A.L.) Ltd. v. Barclays Bank [I9241 1 K.B. 775; Lloyds Bank v. Savory
& Co. [I9331 A.C. 201; Bute (Marquess of) v. Barclays Bank [I9551 1 Q.B.
202; Marfani & Co. Ltd. v. Midland Bank [I9681 1 W.L.R. 956.
47 (1875) L.R. 10 Q.B. 291, affirmed (1876) 1 Q.B.D. 31.
The defendant bank paid the cheque, although the bankers who pre-
sented it for payment on behalf of the holder were not the bankers
on whom it was specially crossed. Blackburn J. dismissed the action.
He held that as the person to whom the cheque was paid was a holder
in due course, the plaintiff was not its true owner and could, there-
fore, not sue in conversion. But his Lordship explained that 'if the
cheque be crossed to a particular banker, and [the paying banker]
pays it, however bona fide, to another banker to whom it is not crossed,
then [the paying banker] is not protected, and trover would lie against
him at the suit of the true holder'.48 Therefore, if the cheque had
been paid to a person holding it under a forged indorsement, who
could not be a holder in due course, the plaintiff would have suc-
ceeded. This dictum was approved in the Court of Appeal by Cairns
L.C.49 A similar view was expressed, though also obiter, by the High
Court of A u ~ t r a l i a . ~ ~
However, two objections may be raised against treating the paying
banker, who honours a cheque, as a person who commits an act of
conversion. First, it is to be doubted whether the banker who pays a
cheque, makes a "disposition" over it. He retains the cheque mainly
as evidence of his payment to the holder, and does not transfer it to
any further party.
Some support for this submission can be found in the decision of
Cockburn C.J. in Charles v . B l a c k ~ e l l .The
~ ~ defendant drew a
cheque and sent it to the plaintiffs in order to settle a debt due to
them. The plaintiffs' clerk executed an unauthorised indorsement on
the cheque and obtained payment from the drawee bank. The bank
eventually returned the cancelled cheque to the defendant. The
plaintiffs' action in conversion was dismissed. It was held that the
bank was authorised to pay the cheque and that the plaintiffs were
precluded from assailing the validity of the indorsement by the clerk.
Cockburn C.J. also observed :62
A cheque taken in payment remains the property of the payee
only so long as it remains unpaid. When paid the banker is entitled
to keep it as a voucher till his account with his customer is
settled. After that, the drawer is entitled to it as a voucher be-
tween him and the payee. If the cheque was duly paid, so as to
deprive the payees of a right of action, either on it or in respect
48 (1875) L.R. 10 Q.B. 291, 296.

49 (1876) 1 Q.B.D. 31, 35.
50 Smith v. Commercial Banking Co. (1910) 11 C.L.R. 667.
51 (1877) 2 C.P.D. 151.
52 Id. at 162-163.
of the goods in payment for which it was given, they no longer

have any property in it.
This observation shows that in his Lordship's opinion the property
in a cheque is transferred from the "true owner" when it is paid.
This point may be doubted. Property in a cheque is normally trans-
ferred by valid negotiation. But the other observation is, it is submitted,
good law. The banker retains the cheque as a voucher, or as evidence
of payment. This tends to indicate that he does not really make a
disposition which constitutes trover or conversion.
As regards the second objection to treating the paying banker as
liable in conversion in cases of wrongful payment of a cheque, it is
important to note that the paying banker acts under instructions of
the customer. If the cheque is paid in accordance with these instruc-
tions the "true owner" may be deemed to have consented to such
payment. The reason for this is that the true owner takes the cheque
as it is. If it includes an instruction to the banker to pay to "bearer",
the true owner can hardly complain if the paying banker pays it in
this manner.53 Thus, even if the true owner has a right to sue the
paying banker in conversion, this right can be exercised only if the
cheque is paid otherwise than in compliance with the customer's
mandate.
This argument is likely to apply if a cheque, payable to "X or
order", is indorsed in blank by the payee and then lost and paid to
a bearer. The drawer has instructed the banker to pay the cheque
at the payee's (X's) order. The payee has ordered that it be paid
to bearer.54 Therefore, the payee as "true owner" must be taken to
consent to the payment of the cheque to a bearer.
I t follows that an action in conversion by a true owner can, in any
event, be brought mainly in two types of cases. The first is where a
cheque payable to order has been stolen and paid to a person holding
under a forged indorsement. The second is where the cheque has
been materially altered. Such an alteration avoids the cheque,55 and
the banker is not authorised to pay it. As some authorities indicate
53 I t is important to note that not every "bearer" is the "true owner". If a

bearer cheque is stolen from the true owner and given by the thief to
another person as a present, the donee becomes a "bearer". Payment to him
is made in due course. But the original true owner appears to retain the
title. T h e same is true whenever the "bearer" cannot plead to be a "holder
in due course", e.g. if the cheque is not regular on its face due to a missing
detail.
54 AS to the effect of a blank indorsement, see ante p. 106.
55 Section 64 (1) of the Bills of Exchange Act; [Australia section 69 (1) 1.
that in such cases the true owner can sue the paying banker in con-
version, it is important to consider how far the banker may be able
to rely on the specific defences of the Bills of Exchange Act against
such actions.
(ii) Defences available to paying banker against true owner under

the Bills of Exchange Act
Three defences were discussed as regards the protection given to a
paying banker under the Act against actions by the customer. These
were "payment in due course", "payment in the ordinary course of
business" and "payment without negligence". I t is important to con-
sider whether a paying banker, who pays a cheque under circum-
stances that would entitle him to rely on one of these defences against
the customer's action, is likewise protected against an action by the
"true owner". I t will also be important to consider the problem of
irregular indorsements.
As has been pointed out, the effect of "payment in due course" is
to discharge the bill. I t protects the paying banker against an action
by the customer only if such payment is made within the scope of
the banker's mandate. I t has been shown that in such a case it will,
also, protect the paying banker against an action by the true owner.
The latter must be treated as consenting to payment of the cheque
if made within the scope of the banker's authority.
But if "payment in due course" is not made within the scope of
the paying banker's mandate, it is to be doubted if it protects him
against a n action by the true owner. The reason for this is that pay-
ment in due course only has the effect of discharging the bill or
cheque; it does not have the effect of discharging the paying banker.
In point of fact, the undue discharge of the bill is the very thing of
which the true owner complains. I t is important to note that the
action of the true owner is not based on the cheque. He does not sue
to enforce it, but complains of its conversion. I t follows that the
discharge of the cheque is not, by itself, a defence.
I t will be recollected that payment in the "ordinary course of busi-
ness" protects a banker who has paid an order cheque, with a forged
indorsement of the payee, against an action of the customer. But it is
to be doubted whether section 60 is wide enough to protect the paying
banker against an action by the true owner. The section provides that
where a banker pays a cheque in the ordinary course of business, he
is deemed to have paid in due course and does not have to prove the
genuineness of an indorsement. But payment in due course does not,
by itself, protect the paying banker against an action by the true

owner. Similarly, the fact that the paying banker does not have to
prove that an indorsement is genuine is not, by itself, significant. If
the true owner can establish his title to the cheque, he can bring an
action in conversion; the fact that the banker does not have to prove
the genuineness of an indorsement, does not defeat this a c t i ~ n . ~ "
I t is interesting to note that section 1 of the Cheques Act can in
certain circumstances protect the paying banker against an action in
conversion by the true owner. Under this section the banker does not
incur 'any liability by reason only of the absence of, or irregularity in,
indorsement, and he shall be deemed to have paid it in due course'.
Of course, payment in due course does not, by itself, protect the pay-
ing banker against an action in conversion by a true owner. But the
fact that the banker does not incur liability by reason only of the
absence of or irregularity in an indorsement is of some value. In
many cases a person to whom the banker pays the cheque may not
be a holder in due course by reason only of the irregularity in or ab-
sence of an indor~ernent.~~ If the paying banker pays the cheque to
such a person he should perhaps be deemed to be in the same position
as if he had paid the cheque to a holder in due course.68If this were
so, then the banker would be protected: Payment to a holder in due
course defeats an action by a person claiming to be a "true owner"
because, as shown above, the holder in due course is regarded as the
actual "true owner" of the cheque.
In a way, these conclusions lead to an unexpected result. I t has
been shown that the banker is not protected against the true owner
if he pays the cheque, in the ordinary course of business, to a person
holding it under a forged indorsement of the payee. It seems strange
that the banker may be protected if, in the ordinary course of busi-
ness, he pays a cheque which does not bear an indorsement at all,
or which bears an irregular one. From the banker's point of view it is
much easier to detect the irregularity in or the absence of an indorse-
ment than the forgery of an apparently regular one.
56 However, the defence succeeds against the customer. It may perhaps be

argued that, as the customer cannot sue the paying banker, who paid a
cheque with a forged indorsement of the payee, the payee or true owner
must likewise be precluded from suing and be deemed to have consented
to such payment.
57 See post pp. 139, 140.
58 Support for this argument may be derived from authorities interpreting
s. 2 of the Cheques Act 1957 [N.Z. s. 31, as to which see post p. 140.
An even more haphazard result follows from the wording of sec-

tion 80. Under this section, if a banker pays a crossed cheque in good
faith, without negligence and according to the tenor of its crossing,
he is 'entitled to the same rights and be placed in the same position
as if payment of the cheque had been made to the true owner thereof'.
Obviously, if the banker is deemed to have paid the cheque to the
true owner, the latter cannot sue him in conversion even if a cheque
payable to order has been paid to a person holding it under a forged
indorsement of the payee.
I t is to be doubted whether the legislature had the intention of
putting the paying banker in such an anomalous position uis-2-uis the
"true owner". The difference between, on the one hand, the language
of section 60 of the Bills of Exchange Act as well as section 1 of the
Cheques Act and, on the other hand, the wording of section 80 of
the Bills of Exchange Act, stems basically from historical reasons.59
I t is irrational to make the paying banker's position dependent on
whether the cheque is crossed or uncrossed. Moreover, it is most sur-
prising that the banker is in a better position when paying an un-
indorsed cheque than if he pays an uncrossed cheque bearing a forged
indorsement of the payee.
It seems obvious that this position results from the fact that, when
passing the Bills of Exchange Act, the legislature did not bear in
mind the possibility of an action in conversion by the true owner
against the paying banker. The reason for this oversight is, probably,
due to the fact that the Bills of Exchange Act is mainly concerned
with the rights of parties seeking to enforce a negotiable instrument.
Apart from the position of the collecting banker, the Act did not
make comprehensive provisions for regulating the rights of the true
owner against persons liable in conversion.
An attempt to rationalise the position was made before the enact-
ment of the Bills of Exchange Act. I t was suggested in Charles v.
BlackwelleO that when a banker paid a cheque under circumstances
that would entitle him to protection against his customer, he could
not be sued by the true owner of the cheque. Unfortunately, there is
nothing to indicate that this view was adopted by the draftsman of
the Act. Admittedly, under section 97(2) of the Bills of Exchange
Act 1882 [Australia section 5 (2) ; New Zealand section 98 (2)], the
rules of the common law and law merchant, except when inconsistent
with the express provisions of the Act, continue to apply to cheques
-
59 See ante p. 112.

60 (1876) 1 C.P.D. 548, 555, affirmed (1877) 2 C.P.D. 151, 162-163.
and bills. But apart from the dictum in Charles v. Blackwell, it is not
at all clear what the position was before the 1882 Act.
(iii) T h e plea of contributory negligence

Can the paying banker raise a plea of contributory negligence
against the true owner of a cheque who sues him in conversion? I t is
obvious that in many cases where a cheque is lost or stolen, the care-
lessness of the true owner starts the chain of events ending in the
conversion of the cheque. But it is important to note that the true
owner and the paying banker are strangers and that the true owner
cannot be regarded as owing a duty of care to the banker.
At the same time, the wording of section 1 ( 1 ) of the Law Reform
(Contributory Negligence) Act 1945, of the United Kingdome1 may
be wide enough to enable the banker to raise a plea of contributory
negligence. The section reads :
Where any person suffers damage as the result partly of his own
fault and partly of the fault of any other person or persons, a
claim in respect of that damage shall not be defeated by reason
of the fault of the person suffering the damage, but the damages
recoverable in respect thereof shall be reduced to such extent as
the court think? just and equitable having regard to the claimant's
share in the responsibility for the damage . . .
The question is whether the defence available under the Act can
be raised against a plaintiff suing in conversion. I n New Zealand the
Court of Appeal has given an affirmative answer. I n Helson v .
McKenzies ( C u b a Street) Ltd.62 the plaintiff forgot her bag in the
department store of the defendants. Within a few minutes it was
claimed from the defendants' employee by a thief, who described it
accurately. I t was thereupon handed to him. The Court of Appeal
held the defendants liable in conversion, but allowed the plea of
contributory negligence. I t was further held that the plaintiff con-
tributed to the loss to a greater degree than the defendants and the
proportion was fixed at three-fourths on her part and one-fourth on
the part of the defendants.
I t is important to stress that all three judges in the Court of Appeal
held that the defence of contributory negligence may be raised not
only against a plaintiff who sues a defendant in negligence but also
against a plaintiff relying on other causes of action in tort. The Court
61 s. 3 (1) of the Law Reform (Contributory Negligence) Act 1947 of New

Zealand; W.A.: Law Reform (Contributory Negligence and Tortfeasors Con-
tribution) Act, 1947, s. 4.
62 [I9501 N.Z.L.R. 878.
COLLECTION AND P A Y M E N T OF CHEQUES 129
\\,as also unanimous in that the "fault" of the defendant necd not be
a breach of duty owed by him to the plaintiff. Gresson J. explained
this point most clcarly: 'to constitute contributory negligent c under
thc Act, it is not necessary that the conduct should have been a brcac 11
of any duty owcd, but it is sufficient if it amounted to lack of ieason-
able rare for safety of person or p r ~ p e r t y ' . ~ "
On this basis, Gresson and Northcroft JJ. reached the conclusion
that the plaintiff's fault constituted contributory negligence. Finlay J.
dissented as hc thought that the fault of the plaintiff did not cause
or contribute to the loss 111 his opinion 'there is a c,lear line to be
drawn betwcen the negligcmce of the [plaintiff] and the negligence of
the [defendants] . . .'" Hc held, thcrrfore, that thrre was no loom
for a plea of contributory negligence.
This difference of opinion between thc majority of the Court and
Finlay J. may prove of relevance to most cases concerning the con-
version of cheques. Normally, such casrs ari4e when the true owner
loses the cheque or, by carelessly leaving it around, enables a rogue
to steal it. I n the view of the majority of the Court such a negligent
act can contribute to the eventual conversion of the cheque by the
paying banker; Finlay J.'s judgment takes the opposite view.
I t is submitted that the view of the majority of the Court of Appeal
is the better one. I t is difficult to see how the "fault" of the plaintiff
in the Helson case could be separated from the conversion of the
bag. I t seems clear that her carelessness made the conversion possible.
T o say that the defendants had the "last opportunity" and that,
therefore, thc plaintiff's fault did not contribute to the loss, is a
dubious argument. O n this basis a plaintiff is likely to be exonerated
from any contributory negligence whenever the final negligent act is
committed by the defendant.
The availability of the defence of contributory negligence is of
major importance to a paying banker who is sued in conversion by
the true owner of the cheque. As there is no proximity between these
two parties, the true owner's negligence cannot preclude him from
suing the paying banker, to whom he does not owe a duty of care.
However, under the doctrine of contributory negligence the court
may take into account the blameworthiness of the true owner and
reduce the damages.
63 Id. at 920. See also Davies v. Swan Motors (Swansea) Ltd. [1949] 2 K.B. 291,
309. CLERKAND LINDSFLL, TORTS,para. 810 (12th ed.) .
04 [I9501 N.Z.L.R. 878, 913.
WESTERN AUSTRALIA LAW REVlEW
E. CONCLUSIONS CONCERNING T H E POSITION OF THE PAYING BANKER
I t is submitted that the law relating to the protection of the paying

banker against actions by the customer (drawer) and by the true
owner in cases of wrongful payment of cheques, leaves much to be
desired. I t has been shown that there are certain inconsistencies as
regards the defences available to the banker against actions by the
customer and that others prevail as regards defences to actions by
true owners. For example, too much depends on whether the cheque
is crossed or uncrossed.
But the most disturbing- result is that, in some cases, the banker
has a more adequate protection against actions by his own customer
than against actions by the true owner. Thus, the customer's negli-
gence in drawing a cheque may preclude him from suing the paying
banker. Negligence of the true owner, on the other hand, can at best
enable the banker to plead contributory negligence. Moreover, as
against the customer, the banker is protected if he pays a cheque
"in the ordinary course of business" or if he pays a crossed cheque
"without negligence". The second defence is also available against
the true owner but, apparently, not the first one.
From a commercial point of view this position is objectionable. The
banker is employed by the customer and is willing to assume a con-
tractual duty of care towards him. But the banker knows nothing
about the true owner and has no relationship of contract with him.
I t seems, therefore, strange- that at law the banker may be liable to
this unknown third party even in situations where he is protected
against his own customer.
The position of the paying banker is, in a business sense, different
from that of an agent who handles chattels or goods at the authority
of his principal. I t is well understood by the business community that
goods are not negotiable and that a person who disposes of them
without due inquiry as to the title of the principal or transferor as-
sumes a calculated risk. Negotiable instruments, on the other hand,
are meant to be readily transferable. I t seems irrational to expect a
banker, who is appointed the paymaster of such an instrument, to
verify more than that the customer's signature is genuine and that
the cheque is regular on its face. T o make him liable to a third party
because, for example, an indorsement turns out to be forged, is un-
justifiable from any practical point of view.
A reform has been suggested by the Australian Bills of Exchange
Committee. Clause 65 of the draft bill attached to the report absolves
the paying banker from liability towards the true owner in all cases
where the banker is not liable to the customer. The question is

whether such a reform is adequate. Before considering this matter
further it will be convenient to consider the position of collecting and
discounting bankers.
111. COLLECTING AND DISCOUNTING BANKERS

A. DISTINCTION BETWEEN COLLECTING AND DISCOUNTING BANKER
When a banker receives a cheque payable to his customer and

presents it for payment to the paying banker, he may act either as a
collecting banker or as a discounting banker. I n both cases, if it turns
out that the customer's title to the cheque is defective, the discounting
or collecting banker can be sued in conversion by the true owner.
However, it will be shown that the defences available to the two types
of bankers are not always the same. I t is therefore important to
distinguish between them.
The distinction between a discounting banker and a collecting
banker is that the former gives the customer value for the cheque
before its clearance. He therefore becomes a holder of the instrument.
The collecting banker, on the other hand, acts merely as an agent
of the customer and does not become a holder of the cheque. Whether
the banker acts, in a specific case, as a collecting banker or as a
discounting banker depends on the facts. At one time it was thought
that whenever the banker credits the amount of the cheque to the
customer's account before clearance, he becomes a discounting
banker.@ But on this view any collecting banker is a discounter: the
crediting of cheques to customers' accounts before clearance is a
matter of accountancy practice, which is used even if the banker is
not prepared to allow the customer to utilise the proceeds before
clearance. At present, it is well established that the banker becomes
a discounter only if, apart from crediting the cheque to the customer's
account before its clearance, he agrees to grant an overdraft or
actually permits the customer to draw against it.66The banker becomes
a discounter also by reducing a revolving overdraft by the amount
of the cheque before its c l e a r a n ~ e . ~ ~
65 Capital and Counties Bank Ltd. v. Gordon [I9031 A.C. 240. Cf., Bank of
New South Wales v. Barlex Investments Pty. Ltd. [1964-51 N.S.W.R. 546,
549-550.
66 Re Farrows Bank [I9231 1 Ch. 41; Underwood (A.L.) Ltd. v. Barclays Bank
[I9241 1 K.B. 775; Westminster Bank Ltd. v. Zang [I9661 A.C. 182.
67 M'Lean v. Clydesdale Banking Co. (1883) 9 App.Cas. 95.
I t should be added that in many cases the banker docs not make a
specific decision as to whether he is willing to act solely as a collecting
banker or whether he is prepared to discount a cheque payable to
his customer. Obviously, if the customer's account is in sufficient
credit for meeting outstanding cheques drawn by him, then the
question of his being allowed to draw against uncleared cheques
payable to him (and credited to his account) does not arise. If the
customer's balance is insufficient for meeting some cheques and he is
of good standing with his bankers, they will (at least in New Zealand)
allow him to draw against uncleared cheques without raising many
questions, and in most cases even if no specific arrangement has been
made.
Thus, while from a legal point of view there is a clear distinction
between the position of a collecting banker and a discounting banker,
it is often a purely accidental matter whether a banker acts in the
one capacity or in the other.
B. DEFENCES OF T H E COLLECTING BANKER
A defence available to the collecting banker against an action in

conversion by the true owner of the cheque is provided by section 4
of the Cheques Act 1957 [section 5 N.Z.]. This section replaced sec-
tion 82 of the Bills of Exchange Act 1882. I n Australia, where there
is no counterpart to the Cheques Act, section 82 (as amended by the
Bills of Exchange (Crossed Cheques) Act 1906) still applies: it is
section 88 of the Bills of Exchange Act 1909-1958.6s The distinction
between section 88 of the Australian Act and section 4 of the Cheques
Act is, however, of importance mainly as regards the position of the
discounting banker. I n the case of the collecting banker, it is of con-
sequence only where a cheque is irregularly indorsed.
Under section 4 a banker is not liable to the true owner of the
cheque despite any defect in the customer's title, if the banker has
received payment of it for a customer, in good faith and without
negligence. The position is similar under section 88 of the Australian
Act. I n most cases the banker has no difficulty in proving that he
has acted for a customer and in good faith. A customer is a person
in whose name the banker has aither opened or agreed to open a
current or a deposit account.69
68 As regards the recommendations of the Bills of Exchange Committee see

post p. 137.
69 Lacave & Co. v. Credit Lyonnais El8971 1 Q.B. 148 (by opening an account) :
Great Western Ry. v. London and County Banking Co. [1901]A.C. 414 (do.) ;
The crucial question in most cases concerning sections 4 and 88 is

whether the banker has acted "without negligence". The type of
situation in which a collecting banker is regarded as not having acted
"without negligence" can be divided into cases where the banker is
careless when opening a customer's account and cases in which the
carelessness is directly connected with the cheque received for col-
lection.
The banker is considered as acting negligently when opening tha
account, if he does so without making due inquiries about his cus-
tomer. Thus, the banker is negligent if he fails to take up reference^,^'
or if he fails to ascertain the occupation of his prospective customer
and, if it turns out that he is an employee, the name of his employer.71
But the banker is not obliged to ascertain from time to time whether
his customer has changed his e m p l ~ y m e n t .Moreover,
~~ if tha pros-
pectivr customer is introduced to the banker by another well-known
customer, who also acts as referee, the banker is not negligent by
reason only of his failure to require that the prospective customer
produce a document of i d e n t i f i ~ a t i o n . ~ ~
The banker may be considered negligent in connection with specific
cheques received for collection in several types of case. First, if an
employee, official or agent wishes to pay into his private account
cheques payable to, or in some cases drawn by, the employer, the
bankar should not permit this without making some inquiry.74 The
fact that an inquiry is not likely to disclose that a fraud is involved,
Ladbroke v. Todd (1914) 30 T.L.R. 433 (do.) ; Commissioners of Taxation

v. English Scottish and Australian Bank [1920] A.C. 683, 20 S.R. (N.S.W.)
401 (do.) ; Woods v. Martins Bank [I9591 1 Q.B. 55 (by agreeing to open
the account). T h e habitual performance of some services for a person who
does not have an account with the banker does not constitute him a cus-
tomer: Robinson v. Oriental Bank (1872) 3 V.R. (L.) 177; Great Western
Ry. v. London and County Banking Co., supra; Commissioners of Taxation
v. English and Scottish and Australian Bank, supla.
70 Ladbroke v. Todd (1914) 30 T.L.R. 433; Hampstead Guardians v. Barclays
Bank (1923) 39 T.L.R. 229; London Bank of Australia v. Kendall (1920)
28 C.L.R. 401.
71 Lloyds Bank v. Savory & Co. [I9331 A.C. 201.
72 Orbit Mining and Trading Co. v. Westminster Bank [I9631 1 Q.B. 794.
73 Marfani & Co. Ltd. v. Midland Bank Ltd. [1968] 1 W.L.R. 956.
74 Morison v. London County and Westminster Bank Ltd. [1914] 3 K.B. 356;
Ross v. London County and Westminster Bank [I9191 1 K.B. 678; Souchette
Ltd. v. London County and Westminster Bank (1920) 36 T.L.R. 195; Under-
wood (A.L.) Ltd. v. Bank of Liverpool [I9241 1 K.B. 775; Bennet & Fisher
Ltd. v. Commercial Bank of Australia [I9301 S.A.S.R. 26; Lloyds Bank v.
Savory & Co. [I9331 A.C. 201.
131- LI'ES7'L:'RAi AUSl'RALIA LAW REVIEW
does not excuse the banker's failure to i n v c ~ t i g a t e .However,

~~ if an
explanation or an inquiry indicates that businrss efficacy requires the
collection of some cheques payable to an employer through the account
of an employee or agent, the banker is not considered negligent be-
cause he permits such ~ o l l e c t i o n . ~ ~
Secondly, a banker is considered negligent if, without making due
inquiry, he credits to the private account of an agent a chequr pay-
able to him in his representative capacity.77 Third, the banker acts
negligently if hr collects a cheque crossed "A/C payee only" for a
person othcr than thr ostensible payee.78 Finally, a banker is negligent
if he collects, without inquiry, a cheque for an amount clearly out of
proportion to the known position in life of the c u s t ~ r n e r . ~ ~
At the same time, the banker is not rrquired to play the role of
the amateur detective and he does not have to be unduly suspicious.80
Thus, the banker is not considered negligent merely because he fails
to compare the signature of the drawer with an indorsement, and as
a result does not discover that the customer is not only the payee but
also the drawer of a company's cheque paid into his private a c c ~ u n t . ~ '
Actually, the standard of care by which the absence or presence of
negligence is to be determined must be ascertained by reference to
the practice of reasonable men carrying on the business of bankers
and endeavouring to do so in such manner as may be calculated to
protect themselves and others against fraud.82
This principle is extremely well illustrated by the recent decision of
the English Court of Appeal in Marfani &? Co. Ltd. u . Midland Bank
Ltd.83 The plaintiffs, a Manchester importing firm, had a client
75 Ilnderwood (A.L.) Ltd. v. Bank of Liverpool [I9241 1 K.B. 775, 789.

76 Australia and New Zealand Bank Ltd. v. Ateliers de Constructions Electriques
de Charlroi [I9671 1 A.C. 86, [1966] 1 N.S.W.R. 19.
77 Bute (Marquess of) v. Barclays Bank [I9551 1 Q.B. 202.
78 Bevan v. National Bank (1906) 23 T.L.R. 65; House Property Co. of London
v. London County and Westminster Bank (1915) 31 T.L.R. 479; Universal
Guarantee Pty. Ltd. v. National Bank of Australasia Ltd. [I9651 N.S.W.R.
342, [I9651 1 W.L.R. 691. As regards a cheque payable to "tax or bearer"
and collected for a private account of drawer's employee see Commercial
Bank of Australia Ltd. v. Flannagan (1932) 47 C.L.R. 461.
79 Lloyds Bank v. Chartered Bank of India [I9291 1 K.B. 40.
80 Penmount Estates Ltd. v. National Provincial Bank (1945) 173 L.T. 344,
346. Cf., Gippsland and Northern Co-operative Co. Ltd. v. English Scottish
and Australian Bank Ltd. [1922] V.L.R. 670.
81 Orbit Mining and Trading Co. v. Westminster Bank [1963] 1 Q.B. 794.
82 Lloyds Bank v. Savory & Co. [I9531 A.C. 201, 221.
83 [I9681 1 W.L.R. 956. Cf., Union Bank of Australia Ltd. v. McClintock [I9221
1 A.C. 240, 22 S.R. (N.S.W.) 293.
called Eliaszade. A clerk of the plaintiffs, whose true name was K.,
introduced himself as "Eliazade" to a respectable customer of the
defendant bank. This customer introduced the clerk, K., to the de-
fendant bank as "Eliaszade" and, by giving him in good faith a
favourable reference, induced the defendant bank to open an account
for K . under the assumed name of "Eliaszade". K . first paid £160 in
cash into this account. After a few days, K. stole a cheque for £6,000
drawn by his employers, the plaintiffs, and payable to the true "Elias-
zade". The defendant bank collected this cheque, credited the proceeds
to the "Eliaszade" (K's) account, and permitted K. to withdraw the
proceeds.
I t was held that the defendant bank acted without negligence and
was, therefore, entitled to plead the defence of section 4. Diplock L.J.
said that the section substituted for the banker's strict liability in con-
version, a duty to act without negligence. The phrase, in his Lord-
ship's opinion, must be interpreted with regard to current banking
practice. The fact that a mode of conduct by a banker may have been
regarded as negligent under authorities decided thirty years ago is
not necessarily conclusive. Banking facilities were a t that period much
less widespread than today and the required standard of care may
have changed. Diplock L.J. held that, whether a banker acted with-
out negligence, should be determined according to the following test:
were the circumstances such as would cause a reasonable banker
possessed of such information about his customer as a reasonable
banker would possess, to suspect that his customer was not the
true owner of the
If the answer is negative, then the banker has acted in accordance
with established banking practice: in his Lordship's opinion a court
should be hesitant before condemning as negligent a practice generally
adopted by the banking world.
However, Cairns J., who delivered a concurring judgment, indicated
that bankers should not, in reliance on this decision, relax the practice
applying to the collection of cheques. He thought that while 'the
defendant bank here exercised sufficient care, it was . . . only just
suffi~ient'.~~
This case shows that, generally, a banker discharges his duty of
acting "without negligence" by adhering to established banking prac-
tice. A major development as regards the nature of banking practice
was achieved by the Cheques Act 1957.
84 [I9681 1 W.L.R. 956, 973.

85 Id. at 982.
Before the Act it was held that if a banker collected a cheque bear-
ing an irregular indorsement, he acted negligently and was, therefore,
not protected by section 82 of the Bills of Exchange Act 1882.8'jAt
present this is the position in Australia. Under section 88 of the Aus-
tralian Bills of Exchange Act, an irregular indorsement may put the
banker on inquiry even if it is executed on a cheque payable to "X or
bearer". I t is true that such a cheque is transferred by delivery and
that X's indorsement is, therefore, not n e c e s ~ a r y For
. ~ ~ that reason, a
paying banker may be protected if he honours such a cheque: it is
arguable that he pays it in compliance with his rnandatca8 The
defence of the collecting banker against the true owner of a converted
cheque, on the other hand, is based on his having acted without
negligence. Ordinary banking practice, where the Cheques Act is not
applicable, requires the collecting banker to check the regularity of
indorsements. If he fails to do so he is careless, and the fact that the
cheque is payable to bearer and could have been transferred by
delivery, does not necessarily protect the collecting banker against the
true owner's action.s9
I t is, however, obvious that the need to check the regularity - of
indorsements is a most cumbersome task, especially in view of the
large number of cheques handled by bankers every day. I n England,
section 4 (3) of the Cheques Act 1957 [section 5 ( 3 ) N.Z.] provides
that a banker is not negligent by reason only of his failure to concern
himself with the absence of or the irregularity in indorsements. How-
ever, the Committee of London Clearing Bankers felt that in certain
cases bankers should continue to require indorsements. Under the
Circular of September 23, 1957 the collecting banker should require
indorsements in any cheque :
( i ) which is tendered for an account other than that of the osten-
sible payee (in such a case the banker must look for the indorsement
of the payee and of all subsequent indorsees other than that of the
customer for whose account it is to be collected),
(ii) on which the payee's name is misspelt, or the payee is incorrect-
ly designated, and the surrounding circumstances are suspicious, or
86 Bavins Junr. & Sims v. London and South Western Bank [I9001 1 Q.B. 270.
As to when an indorsement is irregular see ante p. 113.
87 See ante p. 105.
88 See ante pp. 106, 124, which show that this may protect him against an action
by the true owner.
89 A bearer does not necessarily have the title, which may remain vested in
the "true owner". See ante p. 124 and n. 53.
C O L L E C T I O N AND P A Y M E N T OF CHEQUES 137
(iii) which is payable to joint payees and tendered for an account

to which not all are parties.
Similar requirements apply in New Zealand under a Circular of the
Bankers Institute dated 1 7 November 1960. If a banker collects a
cheque mentioned in the Circular despite its being unindorsed or
bearing an irregular indorsement, he must be considered as having
acted "with negligence". This argument is based on the wording of
section 4, which emphasises that the banker is not to be considered
negligent "by reason only" of the defective or absent indorsement.
I f he disregards the provisions of the Circular he is negligent not
"by reason only" of the irregular indorsement but because he ignores
established banking practice.
The reform recommended by the Australian Bills of Exchange
Committee is similar to the principles adopted by the English Circular.
Under clause 63 of the draft bill a collecting banker must concern
himself with indorsements where a cheque is collected for an account
other than that of the ostensible payee and also where the description
of the payee by the drawer of the cheque does not reasonably identify
him as the customer for whom the cheque is presented. Whether the
payee is sufficiently identified or whether a misnomer is such as to
render the identification doubtful is a matter of fact.
I f a collecting banker is not entitled to rely on the defence of section
4, he will not, usually, have any valid defence against the true owner
of a converted cheque. The true owner's negligence does not preclude
him from suing the collecting banker. The true owner cannot be re-
garded as owing a duty of care to the collecting banker. However, the
collecting banker may probably raise a plea of contributory negligence,
based on the true owner's "fault".
c. DEFENCES AVAILABLE TO DISCOUNTING BANKERS
( i ) I s the protection of a collecting banker available t o a discounting

banker?
Some textbook writers suggest that the defence of section 4 of the
Cheques Act 1957 [section 5 N.Z.] is not available to a discounting
banker.90 Some support for this view can, perhaps, be found in the
marginal note (or section heading) which refers to "protection of
bankers collecting payment of cheques, etc." But the language of
section 4 (1) ( b ) leads to a different conclusion. Under this sub-
90 PAGET,415; BYLES,288; CHALMERS, 311. CHORLEY, LAWOF BANKING 117-120

(5th ed.) . See also Report of the Australian Bills of Exchange Committees,
paras. 130-133.
138 M'BSTERN AUSTRALIA LAM' REVIEW
section the bankc1 is protectcd if 'having credited tht. custom el'^

account with the amount of the instrument [he] receives paymcnt
thereof for himself'.
The key to the meaning of section 4 is to be found in its historical
background. Indeed, the defence available under the original scction
82 of the Bills of Exchange Act 1882 could be claimed only if thr
collecting banker received payment of the cheque for his customer.
In 1903 it was held in Capital and C o u n t i ~ sBank v. Coldongl that
if a banker credited a cheque to the customer's account before its
clearance, he received payment for himself and not for thr customer.
He was therefore not entitled to rely on the defence of section 82.
It is important to note that Gordon's case did not draw a distinction
between a discounting banker on the one hand and a collecting banker
on the other hand. I t proceeded on the presumption that any banker
-whether he acts as a discounter or as an agent-who credits a
customer's account with uncleared cheques, collects them for himself.
As the crediting of cheques to a customer's account before clearance
is a mere matter of accountancy practice, and does not indicate
an intention to permit drawing against them, this conclusion is a
hard one to swallow.
The law was remedied by the Bills of Exchange (Crossed Cheques)
Act 1906 which stipulated that '[a] banker receives payment of a
crossed cheque for a customer . . . notwithstanding that he credits his
customer's account with the amount of the cheque before receiving
payment thereof'. I t is important to note that this section did not
purport to extend the protection of section 82 to a banker who re-
ceived payment of a cheque for himself. I t only stated that by credit-
ing the account before clearance, a banker was not deemed to receive
payment of the cheque for himself. Where a banker in fact collected
a cheque for himself, that is, where he discounted it, the 1906 Act
did not extend him the protection of section 82. Thus, between 1906
and 1957 the defence of section 82 was open only to a collecting
banker and not to a discounting banker. This is still the position in
Australia, where section 88 of the Bills of Exchange Act 1909-1958
adopts the language of the 1906 Act.02
I t is submitted that the effect of section 4 ( I ) ( b ) of the Cheques
Act 1957, the language of which has been adopted by the Australian
Bills of Exchange Committee in clause 63 ( 1 ) ( b ) of the draft bill, is
to extend the defence originally provided by section 82 of the Bills of
$1 [1903] A.C. 240.

92 RILEY,BILLSOF EXCHANGE
IN AUSTRALIA
273-274 (2nd ed.)
Exchange Act to a discounting banker. As pointed out above, under

this sub-section a banker is protected (provided he acts in good faith
and without negligence) even if, having credited the customer's
account, he receives payment for himself. This is exactly what is done
by a discounting banker. As he grants the customer an overdraft or
cash against the uncleared cheque he really receives payment of it to
reimburse himself. Actually, the departure in the Cheques Act 1957
from the language of the 1906 Act is evidence of the intention to
amend the law. If the intention had been to retain the law prevailing
before 1957, this could have been done easily by adopting the language
of the 1906 Act in section 4 of the Cheques Act.
However, it is important to bear in mind that even a discounting
banker can rely on the defence of section 4 only if the cheque has
gone through the customer's account. I t is clear from the language
of the sub-section ( 1 ) ( b ) that the banker cannot rely on the section
if he has, for example, paid the customer cash against the cheque
without crediting it to his account.
(ii) T h e defence of being a holder i n d u e course

A second defence which may, on occasions, be open to the discount-
ing banker is to rely on his position as the holder in due course of a
cheque. If he can bring himself within the definition of a holder in
due course, he is to be regarded as the true owner of the cheque and
an action in conversion against him will faiLg3
In order to be considered a holder in due course, the banker must
be able to prove that he took the cheque in good faith and for value
and that the cheque was, at that time, complete and regular on its
face: this follows from section 29 ( 1 ) of the Bills of Exchange Act
1882 [section 34 ( 1 ) Australia]. Usually the discounting banker has
no difficulty in proving that he has acted in good faith and that he
has given value for the cheque. Indeed, if he has not given value for
it he is a collecting banker and not a discounting banker.
But the requirement of "completeness and regularity on the face of
the cheque" can frequently prove a pitfall. A cheque is considered
incomplete if any material detail, such as the name of the payee or
the amount payable, is missing.% A cheque is considered irregular
whenever anything can give rise to doubts or suspicion: for example,
93 See s. 38 (2) of the Bills of Exchange Act 1882 [Australia s. 43 (1) ( b )] and
ante pp. 121, 122.
94 Whistler v. Forster (1863) 14 C.B. (N.S.) 248, 258, 143 E.R. 441, 445;
Slingsby v. District Bank [I9311 2 K.B. 588, affirmed [I9321 1 K.B. 544.
140 WESTERN AUSTRALIA LAW REVIEM'
if there is a discrepancy between the words and figures denoting the

amount, or if the cheque is pasted together after having been torn.95
Moreover, the word "face" in section 29 includes the back of the
cheque. Thus, a cheque is considered irregular on its face if it is
payable to order and is not indorsed, or is irregularly indorsed by the
payee.96 However, in England and in New Zealand this requirement
has been mitigated, in so far as a discounting banker is concerned, by
section 2 of the Cheques Act 1957 [section 3 N.Z. and clause 63 (5)
of the draft bill attached to the report of the Australian Bills of Ex-
change Committee]. This section confers on a banker who gives value
for a cheque payable to order, which the holder delivers to him for
collection without indorsing it, such rights as he would have had if
it had been indorsed in blank.
Two cases show that a discounting banker may rely on this section
in order to establish that he is a holder in due course of an unindorsed
cheque. I n Midland Bank Ltd. v. R. V. Harris Ltd.g7 a customer of
the plaintiffs paid into his account with them two cheques drawn by
the defendant on Lloyds Bank and payable to the customer's firm.
The cheques were dishonoured by Lloyds Bank and the plaintiffs
brought an action claiming to be holders in due course of the cheques.
I t was proved that the customer was allowed to draw against the
cheques before their clearance. Although the cheques did not bear
an indorsement, it was held that, by section 2, the plaintiffs should be
treated as holders in due course of the cheques despite the absence
of an indorsement.
I n Westminster Bank u. Zangg8 a customer of the plaintiffs paid
into the account of a company of which he was a director an unin-
dorsed cheque, drawn by the defendant and payable to the customer's
order. The defendant stopped the cheque and it was dishonoured bv
the drawee bank. The plaintiffs brought an action to enforce payment,
claiming to be holders in due course. As it was proved that the
plaintiffs did not give value for the cheque it was held that they were
95 Scholey v. Ramsbottom (1810) 2 Camp. 485, 170 E.R. 1227; Ingha~nv. Prim-
rose (1859) 7 C.B. (N.S.) 82, 141 E.R. 745; Cf., Redmayne v. Burton Lloyd
& Co. (1860) 2 L.T. 324.
96 Whistler v. Forster (1863) 14 C.B. (N.S.) 248, 143 E.R. 441; Slingsby v.
District Bank [I9311 2 K.B. 588, affirmed [1932] 1 K.B. 544; Arab Bank Ltd.
v. Ross [1952] 2 Q.B. 216, 226. As to when an indorsement is irregular see
ante p. 113. (Note that an irregularly indorsed cheque payable to "X or
hearer" is probably regular on its face. The position differs from that raised
at p. 136 ante because here the regularity is required for negotiation.)
97 [1963] 1 W.L.R. 1021.
98 [I9661 A.C. 182.
not holders in due course or for value, and could not enforce pay-
ment. The House of Lords held, however, that if they had given value
for the cheque, they would have been holders in due course despite
the missing indorsement. I t was further held that the fact that the
cheque was not collected for the original payee was of no relevance.
Thus, a banker may be considered to be a holder in due course in
circumstances in which an ordinary member of the public-who is less
familiar with negotiable instruments than a banker-would not be so
con~idered.~~
D. COMPARISON OF POSITION OF COLLECTING AND DISCOUNTING

BANKER
The discounting banker is in a better position than the collecting

banker. Apart from being able to plead the defence available to the
collecting banker under section 4 as well as contributory negligence,
the discounting banker can on occasions rely on his position as holder
in due course of the cheque.
This additional defence is of value especially when the discounting
banker is unable to prove that he has acted "without negligence".
Unlike the collecting banker, who thereupon is without adequate
defence, the discounting banker may be able to prove that he is a
holder in due course: a person may be a holder in due course even
if he has acted carelessly in giving value for a cheque, provided he
has acted in good faith. Of course, the cheque must have been com-
plete and regular on its face when negotiated to the discounting
banker. But this is a narrower requirement than that of having acted
without negligence within the meaning of section 4.
The following two examples illustrate this point. If the discounting
banker's negligence has been his failure to observe an irregularity in
the cheque (such as a discrepancy between the amount denoted by
the words and the figures) he is unable to rely on section 4 because
of this carelessness and is equally unable to plead that he is a holder
in due course because of the irregularity on the face of the cheque.
If the banker's negligence arises at the time of the opening of the
account or by agreeing to credit a cheque payable to a principal to
his agent's account, the defence of section 4 is unavailable but the
99 The Australian Bills of Exchange Committee felt that when a banker gives
value for a cheque and thus becomes a discounter he should be treated as
any other holder for value of a cheque and should not be given a specia'l
defence, such as that of section 4 of the Cheques Act, (report paras. 130-133).
The adoption of sections 4 (1) (b) and 2 of the Cheques Act in clause 63
of the draft bill is, therefore, puzzling.
discounting banker may be able to prove that he is a holder in due

course.
Moreover, the discounting banker may be in a better position than
a collecting banker when a required indorsement is missing. I t has
been shown that if an order cheque does not bear an indorsement of
the payee, the discounting banker may nevertheless be a holder in due
course. But if this cheque is of a type in which an indorsement is
required by the Circular, the absence of the required indorsement
prevents the banker from pleading that he has acted without neg-
ligence.
I n effect, the discounting banker has the best of both worlds. If
he has failed to act without negligence, he may be able to defeat an
action of the "true owner" by relying on his own position as holder in
due course. If he cannot prove that he is a holder in due course, he
may still be able to escape liability by proving that he has acted
without negligence within the meaning of section 4.
I t is to be doubted whether, from a commercial point of view,
there is any justification for the difference in the defences available
to the two types of banker. As pointed out at the beginning of this
part of the article, it is frequently an accidental matter whether a
banker acts as a collecting banker or as a discounting banker. I t is,
therefore, artificial to base the defences available to the banker on the
particular role assumed by him. Under the present state of the law,
a banker reduces his liability to the "true owner" of a cheque by
granting his customer an overdraft against it. But from a commercial
point of view, if the granting of an overdraft to a customer against
uncleared cheques is to influence the rights available to the banker
against the true owner, it should put him under a more stringent duty
of care. Basically, acts done for a customer who does not require an
overdraft, appear to be more regular than those done for a customer
who hurries to realise the proceeds of cheques before their clearance.
IV. NEED FOR A REFORM

I t appears to be clear that the existing law concerning the defences
available to paying, collecting and discounting bankers leaves much
to be desired. I t has been shown that the paying banker may be under
a more stringent liability to the true owner of a cheque than to his
own customer. Moreover, too much depends, as regards the paying
banker, on whether the cheque is crossed or uncrossed and on the
specific type of irregularity which prohibits payment.
COLLECTION AND P A Y M E N T OF CHEQUES 143
I t is, of course, inevitable that the liability of a discounting banker

and of a collecting banker is generally different from that of a paying
banker. The commercial roles assumed by these bankers are of a
different nature. I t is desirable to discuss these roles briefly and, on
their basis, suggest some tests for suitable defences.
The paying banker, it should be recollected, acts as an agent of
his customer. When a cheque is presented through the clearing house,
the paying banker is mainly concerned with two questions. First, is
the amount standing to the credit of the customer's account sufficient
for meeting the cheque? Second, is the cheque regular on its face?
If it is signed by the customer or by a person authorised by him and
does not appear to be irregular then, in accordance with standard
banking practice, it must be honoured. There is no room for detailed
inquiries and prolonged investigation. I n point of fact, the Cheques
Act and the Circular confirm that under modern practice the banker
cannot even be expected to check the regularity of indorsements,
except in certain types of case, including that in which a cheque is
presented for payment over the counter.
Usually it is unreasonable to expect the paying banker to do more
than verify that payment is effected within the scope of his authority
and in conformity with ordinary banking practice. The large volume
of cheques handled every day makes it impossible to expect a banker
to examine in each case whether the directors of a company abuse
their authority by drawing a specific cheque or whether a trustee
commits a breach of trust. I t is wrong to say, as has been done by
Ungoed-Thomas J. in the Selangor United Rubber Estates case, that
a banker is liable as constructive trustee or in negligence if he "ought
to have known" of a fraud or abuse of authority by the Yiduciary
agents of his customer. It is easy to be wise after an event! But if a
banker were to dishonour a cheque drawn on a company's account
due to an alleged breach of trust by the directors, he could in the
end find himself involved in an action for wrongful dishonour or for
defamation of character. I n any event, it is unreasonable to expect
the paying banker, who is not a trustee of the customer, to exercise
control over the acts of the latter's agent.
Finally, as regards the paying banker, it appears unreasonable to
make him liable in conversion to the true owner of a cheque which
has been wrongfully paid. The banker pays the cheque because it is
drawn by his customer, who is entitled to make such a demand. I n
the normal course of events the paying banker cannot discover whether
a cheque is collected for the true owner or for a thief. Moreover, the
WESTERN AUSTRALIA LAW REVIEW
true owner has a right of action in conversion against thc roilecting

or discounting banker, who is in a much better position than the
paying banker to discover who is the owner of the cheque. The present
state of the law, which gives the collecting banker the defence of
section 4 but denies a similar defence against the true owner to a
paying banker, is absurd.loO
The commercial role assumed by the collecting or discounting
banker differs from that of a paying banker. The collecting (or dis-
counting) banker receives the cheque from the person in possession
and puts it into tran~missionfor clearing. He is in a better position
for asking any questions than the paying banker; the latter, in fact,
has to assume that it is presented by the collecting banker for the
true owner. The collecting banker should, therefore, be liable for a
careless act to the true owner of the cheque. Section 4 of the Cheques
Acts 1957 appears to adopt a suitable standard. The banker is pro-
tected as long as he acts in good faith, without nagligence and for a
customer. In other words, he is protected as long as he acts in accor-
dance with ordinary banking practice. The abrogation of the banker's
defence in cases where a cheque is collected for a person other than
the ostensible payee and the other limitations provided by the Circular
and proposed by the Australian Bills of Exchange Committee are, it
is submitted, sound and useful for protecting the public.
But, from a commercial point of view, there is no justification for
the additional defence available to a discounting banker. The object
of section 29( 1) of the Bills of Exchange Act 1882 is to protect the
ordinary transferee of a cheque, who should be allowed to rely on its
negotiable character when seeking to enforce it against the drawer. A
banker who discounts or collects cheques can be expected to be more
careful than any other holder or transferee of a cheque. The reason
for this is that the banker's main business is concerned with cheques:
he can therefore be expected to act in a manner aimed at protecting
the general interests of the public. Probably, the solution is to provide
that a discounting banker is prevented from setting up his rights as
true owner (or holder in due course) against a person suing for the
conversion of a cheque, unless the banker has obtained it in the
ordinary course of business.
I t is further submitted that the standard of acting "in the ordinary
course of business" is preferable to that of acting "without negligence".
The former phrase provides a guideline assisting in the determination
loo However, a greater degree of care can be expected from the paying banker
when a cheque is presented for payment over the counter: see ante p. 114.
of the degree of care which must be assumed by the collecting banker.

Finally, there appears to be no need to provide an elaboratr defini-
tion of the "ordinary course of business". First, the practice may vary
from time to time. Secondly, the banking community itself is inclined
to set up a standard aimed at protecting the interests of the public.
I t is typical that when the Cheques Act purported to exempt bankers
from any duty to check indorsements, the banking community miti-
gated this wide exemption. This was not done for any philanthropical
reason. Banking business depends on the reliance of the public on
the banker's care in handling money and cheques. To maintain this
trust the banker has to observe a high standard of care in order to
protect his customers. I t is felt that the determination of what con-
stitutes the "ordinary course of business" may be left in the hands of
the banking world.
* M.]ur.(Jerusalem); D.Phil.(Oxon); Professor of Law at T'ictoria University of

Wellington.

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COLLECTION AND PAYMENT OF CHEQUES

T h e Current Law and the Need for a Reform*

Most cheques drawn in Britain, Australia and New Zealand are

This article is based on a paper presented at the A.U.L.S.A. Conference in

The most recent amendment to the provisions of the Bills of EX-

2 Published on May 1, 1964. Some proposals of the Committee are discussed

attempt will be made in this paper to put forward some proposals

11. THE PAYING BANKER

4 Joachimson v. Swiss Bank Corporation [I9211 3 K.B. 110; Arab Bank v.

or if he pays an irregular one. A cheque may be irregular, for ex-

B. DEFENCES AGAINST T H E CUSTOMER I N CASES O F WRONGFUL

The defences available to the paying banker against his customer

( i ) Payment in due course

forged by a thief, is not the payee, indorsee or bearer of the cheque

such manner. For cxarnplc, a thequc p a ~ a b l c to the order of a

(ii) Estoppel and the customer's negligence

11 Smith v. Sheppard (1776) cited by CHI^, BILLSOF EXCHANGE 278 (11th

13 (1935) 55 C.L.R. 315.

entitled to debit the account with the amount of a cheque on which

19 Ex p. Edwards (1841) 2 Mon. D. & D. 241; Williams v. Bayley (1866) L.R.

purports to pay it on behalf of the customer. Moreover, he does not

(iv) Payment in the ordinary course of business

23 In Australia section 65 (1). Sub-section (2) , which extends the application

signature with a specimen signature of the appellant, the draft was

compliance with the banker's authority. The bankcr therefore does

27 HOLDEN, HISTORY OF NEGOTIABLE INSTRUMENTS IK ENGLISH LAW229 (London

cheque over the counter acts negligently. As regards irregular indorse-

within the meaning of section 59 of the Bills of Exchange Act 1882,

Is the banker obliged to consider the validity of instructions given

increases. The investor sells these shares, and it is thought in some

the breach of trust committed by the directors of the plaintiff, it

34 [I9681 2 Lloyd's Rep. 289, 313.

been attained in any particular case has to be decided in the light

But did this ignorance constitute negligence? His Lordship held

40 Commissioners of the State Savings Bank of Victoria v. Permewan, Wright

of funds, the constructive trust principle comes into operation. As the

D. RIGHTS OF T R U E O W N E R AGAINST PAYING BANKER

( i ) Estdblishing the cause of action

the latter becomes a holder in due course. As such, he becomes the

44 Smith v. Union Bank (1876) 1 Q.B.D. 31, 35-36.

48 (1875) L.R. 10 Q.B. 291, 296.

of the goods in payment for which it was given, they no longer

53 I t is important to note that not every "bearer" is the "true owner". If a

(ii) Defences available to paying banker against true owner under

by itself, protect the paying banker against an action by the true

56 However, the defence succeeds against the customer. It may perhaps be

An even more haphazard result follows from the wording of sec-

59 See ante p. 112.

(iii) T h e plea of contributory negligence

61 s. 3 (1) of the Law Reform (Contributory Negligence) Act 1947 of New

E. CONCLUSIONS CONCERNING T H E POSITION OF THE PAYING BANKER

I t is submitted that the law relating to the protection of the paying

where the banker is not liable to the customer. The question is

111. COLLECTING AND DISCOUNTING BANKERS

When a banker receives a cheque payable to his customer and

B. DEFENCES OF T H E COLLECTING BANKER

A defence available to the collecting banker against an action in

68 As regards the recommendations of the Bills of Exchange Committee see

The crucial question in most cases concerning sections 4 and 88 is

Ladbroke v. Todd (1914) 30 T.L.R. 433 (do.) ; Commissioners of Taxation