UNIT 16 The Cheque
Whilst cards are on the increase, a traditional cheque payment is still a widely used
method of payment in Zambia especially with the high value payments. The cheque is
the customer’s mandate to the bank to pay on a current account. In common law
countries, the laws governing the use of cheques are the Bills of Exchange Act 1882
and the Cheques Act 1957.
The Bills of Exchange Act 1882 section 73 defines a cheque as “a bill of exchange
drawn on a banker payable on demand”. This definition could then be adapted to the
present day cheque under section 3(i) of the Cheques Act 1957 as, “……an
unconditional order in writing, addressed by the drawer to the bank, signed by the
drawer, requiring the bank to pay on demand a certain sum of money to or to the order
of a specified person or to the bearer”.
(i) Parties to a Cheque Transaction
(a) The drawer - the person who makes the cheque
(b) The drawee - the person to whom the order is addressed (bank)
(c) The payee - the person to whom the cheque is made payable.
Where the cheque is transferred (negotiated) to another person, the endorser becomes
a party. However, the payee or any other endorsees have no claim against the bank
where the bank wrongly returns a cheque. Their only right of action is against the
drawer who then has a right of action against the bank for breach of contract.
CHEQUE
DRAWER DRAWEE PAYEE
The customer who The banker on whom the The beneficiary to
writes (draws) the cheque is drawn whom the cheque is
cheque on his account payable
Therefore, a cheque could in short be said to be a written promise by the drawer that
the bank on which it is drawn will pay the payee on demand the stated amount.
Therefore, a cheque must be made payable to a specified person or to the bearer. This
means that cheques made payable to ‘cash’ are not cheques even though they are
@Christopher Mwansa Mulenga, LL.M Commercial Law, LL.B (Hons) (Derby), CIoB, (London) Page 1
treated and look as such by the banks as they are not negotiable. The Bills of Exchange
Act 1882 section 7(3) refers to a cheque payable to a fictitious or non-existent person as
being a bearer cheque.
In modern day banking, the paying bank will prescribe a standard cheque format which
it then issues to its customers. It is normal practice that the inside of the cheque book
will have advice notes on the use of the cheques such as:
(a) The customer with more than one account needs to have a cheque book for each
account. This implies that only cheque forms supplied by the bank should be
used on an account. This aids in the processing of cheques as they bear
particulars in magnetic computer readable ink.
(b) Various precautions to prevent fraud such as
(i) Use of ball point and not erasable ink pens
(ii) Commencing the amount both in words and figures as far left as possible
leaving no gaps so as to avoid/prevent any additions.
(iii) Countersigning with full signature any material alterations even though
some banks will not pay a cheque with any alterations even if endorsed
with a full signature.
(c) Cross any cheques which the customer does not wish to use
(d) Keep cheque book in safe place and to inform the bank immediately if lost or
stolen.
The other major precaution which the banks include is the issuing of cheques on
insufficiently funded accounts which is a criminal offence under the National Payments
System Act No. 1 of 2007. Ref: The People v George Mpombo (2010)
(ii) Different Types of Cheques
(a) Open Cheque
A cheque is classified as ‘Open’ when the drawer has cancelled the crossing and it can
be cashed over the counter of the bank.
(b) Bearer Cheque
This is an open cheque which is payable to any person or bearer who holds and
presents it for payment over the bank counter. It is transferred by mere delivery without
any endorsement.
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(c) Order Cheque
This is a crossed cheque payable to a named person or to order. Such a cheque can
only be transfer by endorsement to another person by signing his name on the back of
the cheque.
(iii) Cheques as Payment Instructions
A cheque will only be a valid payment instruction if it has the customer’s signature and
the customer’s account has sufficient funds or an agreed overdrawn limit. Therefore, a
cheque bearing a forged signature is not a valid mandate to pay and the bank cannot
debit the customer’s account. However, there are exceptions to this rule where the
customer would be stopped from denying the genuineness of the signature such as
were:
(a) The customer facilitates the forgery in the way he has drawn the cheque.
(b) The customer’s failure to inform the bank where he suspects his cheques are
being fraudulently used.
For a properly drawn cheque, the customer has to insert the following particulars:
(a) The date
An undated cheque is a valid bill of exchange and the person in possession of it has
authority to insert the date under the Bills of Exchange Act 1882, section 20. The bank
may equally insert the date but in practice return the cheque with answer “date
required”.
(b) The payee:
The payee must be stated with reasonable certainty as provided by the Bills of
Exchange Act 1882 section 6(1) and 7(1).
(c) The amount in words and in figures.
Where the amounts in words and figures differ, the banks would normally return the
cheques with answer, “Amount in words and figures differ”. Even though section 9(2)
provides that the amount in words prevails.
(d) The drawer’s signature
The cheque should carry a genuine or authorised signature.
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(iv) Crossing of Cheques
The banks have made it a standard to supply their customers with cheque forms that
are crossed and pre-printed with the words “Account Payee” or “A/C Payee”. Cheque
crossings are a unique feature of a cheque and are mainly used to thwart fraud. The
crossing of cheques has developed from banking practice so as to reduce the possibility
of fraud as the cheque cannot be paid over the counter. This makes it more difficult for a
fraudulent person to obtain the proceeds of the cheque. The crossing on a cheque is an
instruction given by the drawer to the paying banker to pay the amount of the cheque
only through a bank account and not over the counter to the person presenting it.
A cheque crossing consists of two traverse lines across the face of the cheque.
(v) Types of Crossings
(a) General Crossing
A general crossing consists of two parallel transverse lines drawn across the cheque
from top to bottom with or without the words, “not negotiable” or “and Company” or “and
Co” (Bills of Exchange Act section 76(1)). The Bills of Exchange Act 1882 section 76 (1)
provides that such a cheque should be presented for payment through a bank account.
Therefore, a holder of a crossed cheque cannot present it over the counter for cash.
The general crossing directs the customer’s bank to pay only to another bank or into a
bank account of the named payee and is liable to the true owner of the cheque if he
suffers loss owing to the cheque not having been so paid (Bills of Exchange Act 1882
section 79(2).
To the general crossing may be added the words “account payee” or a/c payee” with or
without the word “only”. This makes the cheque not transferable and is only valid
between the drawer (customer) and the payee (Bills of Exchange Act 1882 section
8(1)). Therefore, the advantage of this type of crossing on a cheque is the reduction of
fraud which may result from fraudulent endorsements.
CBU BANK Plc
KITWE Date..........................
Pay........................................................................................................... or Order
THE SUM OF Kwacha............................................................ K
................................................................................................
...................................................................................................
12345 009 009000000000001 ...............................................
@Christopher Mwansa Mulenga, LL.M Commercial Law, LL.B (Hons) (Derby), CIoB, (London)
Signature Page 4
Therefore, the bank receiving a crossed cheque must pay in accordance with the
crossing failure to which the bank cannot debit the customer’s account. It should be
noted that the crossing on the cheque is part of the customer’s mandate to which the
bank must adhere.
(b) Not Negotiable
Where ‘not negotiable’ is added to the general crossing, the cheque losses its
negotiability such that a person taking it does not receive and cannot give a better title
than the person transferring it. This crossing does not affect the transferability of a
cheque but means that the person taking it cannot have a better title than that of the
person from whom it was taken (Bill of Exchange Act 1882 section 81)
This means that if the transferor of the cheque had a defective title, then the transferee
is in a far much weaker position to any claim on the cheque.
(c) Account Payee or Account Payee Only
The Bills of Exchange Act section 81 prevents the title of a cheque with a crossing
bearing the words ‘account payee’ or ‘account payee only’ from being transferred. This
means that the cheque is only valid between the drawer and the payee and no other
person can obtain title to it. This crossing is a direction to the collecting bank to only
collect the cheque for the account of the named person. The addition of ‘not negotiable’
to this crossing is redundant as title to the cheque cannot be transferred at all.
(d) Special Crossing
A special crossing may consist of the name of a particular bank (collecting bank) and its
address across the face written traversely with or without parallel lines of general
crossing. (Bills of Exchange Act section 76(2))
It is possible for a drawer to ‘open’ a printed crossing by making it payable to cash and
adding a full signature. However, such a cheque will usually only be paid at the counter
if presented by the drawer or his known agent. The bank is under an obligation not to
pay a cheque where the crossing has been altered unless counter-signed by the
drawer. The bank is liable for any loss occasioned by the drawer by paying a cheque
contrary to the crossing.
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(vi) Obliterating Crossings on Cheques
The Bills of Exchange Act 1882 section 78 provides that a crossing is a material part of
the cheque and it shall be unlawful for any person to obliterate, add to or alter the
crossing.
Obliteration of the crossing on a cheque without the consent or authority of the drawer is
a material alteration. Where a drawee bank pays a bill under a forged or unauthorised
endorsement, the true owner can recover from the drawee.
The Penal Code Act, Cap 87 section 355 provides that a person commits a crime if with
the intention to defraud he takes the following actions:
(a) Obliterates, adds to or alters the crossing on a cheque; or
(b) Knowingly utters a crossed cheque, the crossing on which has been obliterated,
added to or altered.
(vii) Payment of Cheques
The customer of the bank is provided with a cheque book so that they use the cheques
to authorise the bank to make payment on presentation and to debit the customer’s
account.
The bank owes a duty to the customer to pay cheques drawn by him as long as the
cheques are properly drawn, signed in accordance with the mandate and the account
has sufficient funds or an overdraft facility.
Whilst the accounting and processing of cheques is now automated, each cheque has
to be examined carefully by the paying bank. Such physical scrutiny has to be done by
the bank staff as here is no substitute for human scrutiny to see that the cheque may be
paid. The bank which pays a cheque drawn or purportedly drawn by a customer without
a mandate is paying without mandate, and cannot debit the customer's account.
(viii) Points to Note when Paying a Cheque
(a) The date – must not be ‘out of date’, is ‘stale’ or postdated
(b) The payee – must be a name with reasonable certainty
(c) The amount – amount in words and figures must correspond
(d) The crossing – must only pay in accordance to the crossing
(e) The signature – the bank is required to distinguish between the customer’s
genuine signature and a forgery by reference to the customer’s mandate
(f) Authority to pay has not been terminated.
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It is only after such scrutiny that a bank official if satisfied should initialize through the
customer’s signature and authorise payment of the cheque. The bank has no authority
to pay if any of the above information proves unsatisfactory. Where the cheque is to be
unpaid, an unambiguous answer should be written on the face of the cheque and details
entered in a register.
Barclays Bank Ltd v WJ Simms, Son & Cooke (Southern) Ltd [1980] 1 QB 677
The customer made out a cheque to his builder, but immediately the builder went into
receivership and therefore, as provided under the building contract, the customer
countermanded the cheque before it was presented. The bank paid it by mistake and
therefore was not entitled to claim the money from its customer as it had acted in
breach of its instructions, so it claimed the money back from the builder under the
principles of restitution.
Held
That a person who pays money under a mistake of fact is prima facie entitled to recover
it as money paid under a mistake of fact.
(ix) Termination of Authority to Pay
The customers’ authority to pay may be terminated by way of:
(a) Countermand
(b) Death
(c) Insolvency
(d) Garnishee order
(e) Injunction
(f) Whether endorsement is required
(g) Whether the cheque has been altered in any way
(h) Whether there are sufficient funds to meet the payment.
(a) Countermand by the Customer
It is provided for by the Bills of Exchange Act section 75 that the customer may revoke
the bank’s authority to pay the cheque in a manner commonly called “stopped cheque”.
The countermand will only be effective if it meets the following conditions:-
(i) Must be made by the drawer
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(ii) Must be absolutely unequivocal – in writing with necessary and accurate details
with the cheque number’s the most important
(iii) Must be communicated or brought to the attention of the account holding branch
(iv) Must give complete details of the cheque.
Westminster Bank Limited v Hilton (1926) HL
Hilton countermanded payment of a cheque by telegram giving the number as 117283
for amount £8-08 and naming the payee. He later confirmed the telegram by telephone
without mentioning the cheque number. A cheque numbered 117285 for the same
amount and payee was presented and paid by the bank. Hilton sued the bank for paying
the cheque without authority. The bank argued that the cheque presented could have
been a duplicate issued by the customer to replace the countermanded cheque.
Held
The serial number of a cheque was the one certain means of its identification. The
customer had failed to give that essential information correctly and the bank was
justified in paying a cheque with similar details but having a different number.
Whilst the countermand must be made by the drawer, there is an exception on a joint
account where any party to the joint account can make a ‘stop payment order’ of a
cheque even if they were not the ones who drew the cheque. The countermand order is
only effective once it comes to the attention of the bank.
Curtice v London City and Midland Bank Limited (1908)
Curtice arranged to buy horses which were handed over to him later that day. He paid
by cheque. The horses were not delivered as agreed. Curtice sent a telegram to the
bank countermanding payment but the telegram was only delivered after banking hours
and placed in the bank’s letter box on 31st October. The telegraphic countermand
remained unnoticed until 2nd November by which time the cheque had been paid on 1st
November. Curtice claimed the bank was in breach of contract and was not entitled to
debit his account.
Held
The countermand was not effective unless and until it came to the actual attention of the
drawee bank.
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However, a customer cannot stop a cheque which was backed by a cheque guarantee
card.
(x) Answer on Returned Countermanded Cheque
The bank must on returning a countermanded cheque indicate clearly the reason for
returning it. The normal answer would be, ‘Payment countermanded by order of the
Drawer’.
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