Question 2

a.) The extent of protection afforded by the law to the paying bank in a situation where the paying
banker pays a cheque to a person who is not the rightful owner may include

Defense under common law

Banks are afforded defenses by the principles found in common law since they function as agents of
their customers when making payment on cheques. These are;

Defense of estoppel
This is the doctrine of law that precludes a person from denying the truth of some statement formerly
made by him or the existence of facts which he has led others to believe in either by word or conduct.
Section 115 of the evidence ordinance states that when one person has his declaration, act or omission
intentionally caused or permitted another person to believe a thing to be true and to act upon such
belief, neither he nor his representative shall be allowed in any suit or proceeding between himself and
such person or his representative to deny the truth of that thing. The defense can be raised by the
paying bank in an instance where the customer alleges that the bank has acted on a payment order
which was given without authority.

Ratification
In terms of the principles of agency law, when the principal ratifies an act of the agent, the principle is
bound by such ratification. The customer can ratify a payment by his bank on a cheque. Such ratification
precludes the customer from disputing later. It is mandatory that the ratification by the customer is
made voluntarily with the full knowledge of material facts and should not be under duress from the
bank. The defense is applicable to the bank for wrongful payment of a cheque where the customer had
later ratified an unauthorized signature or alteration of the cheque.

Customer’s ambiguous instructions

This helps in circumstances where those instructions have misled the bank, i.e. where the customer fails
to effectively countermand the payment of a cheque. In such circumstances the bank is entitled to
reimbursement as long as it has acted on what it honestly considered to have been the customers
intention.

Statutory protection
In instances where the customers behavior can not be described as faulty, the protection then afforded
to the bank generally depends on whether the bank made the payment for the cheque

i.) In due course. Meaning payment made at or after the maturity of the bill to the holder and
without notice that his title is defective.
ii.) In good faith, while acting either in the ordinary course of business or without negligence