Hand Out 21- G

(Session 23)
Cheques

If you recall, a thief can give good title to a holder in due course, provided the
instrument is in order.

A cheque ceases to be negotiable also when the words “not negotiable” are added.

For a description of the contractual relationship between a bank and it

customers, see Hand Out 22.

Statutory protection has been provided to banks for cheques paid or collected in
due course (i.e., in good faith and without negligence). The Bills of Exchange Act 1882
(in England) and the Negotiable Instruments Act 1881 (in the Indian sub-continent).

So-called paying bank because that bank will be paying the money to the bank
into which the cheque has been paid for collection called the collecting bank.

Under English law (Bills of Exchange Act, 1882), the bank is under no
obligation to look behind an endorsement to discover if it is genuine or authorized; in
other words, if it pays on forged endorsement, it is protected if it pays in good faith
and ‘in the ordinary course of business,’ which has been interpreted by the courts to
mean ‘normal banking hours’ or a few minutes outside such hours (Baines v. National
Provincial Bank (1927)). Also, under English law, the paying bank is protected if he
pays to a holder in due course (applies to all bills); i.e., a thief holding a bearer
cheque, but not a thief holding an order cheque (containing an endorsement forged by
him).

A bank has been known to collect a cheque for a customer, even where he
opened with the very cheque that is the subject matter with respect to which
protection is being claimed by the bank. (See Ladbroke below.)

Where a thief posing as a ‘University man used a stolen cheque as the initial
deposit to open a new account, the court held that the thief was the bank’s customer,
and the bank was negligent in not checking his antecedents before opening the
account (Ladbroke & Co v. Todd (1914)).

Ladbroke & Co v. Todd (1914): customer falsely posing as a “university

man,” something the banker opening a new account for him should have inquired into.

A banker is held negligent where he collects for the customer’s private account a
cheque (a) payable to a public official (Ross v. London County, Westminster and
Parr’s Bank Ltd (1919)); (b) drawn by or in favor of the customer’s employer (Savory
(E B) & Co v. Lloyd’s Bank Ltd (1932); (c) payable to the customer ‘as agent’ (Bute
 2

v. Barclays Bank Ltd (1954)); (d) payable to the company of which the customer is a
director (AL Underwood Ltd v. Bank of Liverpool and Marin’s Bank Ltd (1924).
This is also the case where the banker collects (a) a cheque marked “payee account” for
some other account (Ladbroke v. Todd (1914); or (b) a cheque without obtaining or
following up references when an account is being opened for a prospective customer
or waiting for references which the bank has asked for to come in (Marfani & Co v
Midland Bank Ltd (1967); or (c) an amount inconsistent with the status of the
customer (e.g., a freelance agent just starting business) (Nu-Stilo Footwear Ltd v.
Lloyd’s Bank Ltd (1956).