Current Legal Issues Affecting Central Banks, Volume V
Chapter

Chapter 7 Checks and Check Collection: A Comparison Between the Common Law and Geneva Systems

Author(s):
Robert Effros
Published Date:
May 1998
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Author(s)
ANTHONY G. GUEST1

This chapter sets out some comparisons between the common law and Geneva systems relating to the legal incidents of checks and their collection.

Special Features of a Check

Banks

Checks are associated with banks. This is clear from the definition in Section 73 of the Bills of Exchange Act (BEA),2 “[a] cheque is a bill of exchange drawn on a banker payable on demand” and in Section 3-104(f) of the Uniform Commercial Code (UCC)3 where a check is defined to mean “(i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier’s check or teller’s check.” A “draft” is the term used by the UCC to describe a bill of exchange.4 A “cashier’s check” is the American term for a banker’s draft,5 and a “teller’s check” means “a draft drawn by a bank (i) on another bank, or (ii) payable at or through a bank.”6 Although, under the Geneva system,7 a check is not a bill of exchange with special features but an instrument in its own right, Article 3 of the Uniform Law on Cheques (ULC)8 requires that a check be drawn on a banker, but in addition prescribes that it has to be “drawn on a banker holding funds at the disposal of the drawer and in conformity with an agreement, express or implied, whereby the drawer is entitled to dispose of those funds by cheque.” It is generally accepted that the funds so held need not be money deposited by the drawer with the bank but may also comprise a line of credit or overdraft granted to the drawer by the bank.

Article 3 of the ULC includes a proviso under which the noncompliance with these provisions does not invalidate the check. However, under Article 4 of Annex II of the Convention Providing a Uniform Law for Cheques,9 each state was granted the right to determine “that instruments drawn on persons other than bankers or persons or institutions assimilated by law to bankers” are not to be valid as checks. This reservation has been used by a number of states.10

What Is a Bank?

Determining what is a bank is a difficulty that arises in a number of contexts. English law has attempted to solve the problem by providing in Section 2 of the BEA that the word “‘[b]anker’ includes a body of persons whether incorporated or not who carry on the business of banking.” However, this only takes one back to what is the “business of banking.” Paradoxically, the case law on this subject then refers back to the requirement that one of the main features of the business of banking is the payment and collection of checks. To some extent, the English courts have attempted to sidestep this issue by holding that an institution may be considered a bank, regardless of the precise nature of its business, if it has gained a general reputation as a bank.11 A marginally better definition is found in Section 4-105(1) of the UCC: “‘Bank’ means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company.” The vague reference to “banking business” is thus augmented by the express inclusion of certain types of institutions.

The ULC seeks to solve this difficulty in a different way. First, Article 54 provides that “the word ‘banker’ includes the persons or institutions assimilated by the law to bankers.” Second, under Article 4 of Annex II of the Convention Providing a Uniform Law for Cheques, which incorporates the reservations available to the contracting states, a state is granted the right to embody in its national law the provisions of Article 3 of the ULC, requiring that a check be drawn on a banker, “in the terms best suited” to local needs. So, for example, in Belgium, France, and Germany, checks may be drawn on registered banks and on certain other specified institutions pursuant to the domestic law.

Tenor

A check issued in a common law system is, by definition, payable on demand.12 The position is the same under Article 28 of the ULC, under which a check is so payable, and “[a]ny contrary stipulation shall be disregarded.” These latter words lead to a difference between the Anglo-American and Geneva systems. Under the common law, an instrument drawn on a banker13 and payable other than “at sight” or “on demand” is not a check but a bill of exchange. Under the ULC, if the instrument is defined in its body as a “check,” any attempt to make it payable other than at sight is ineffective and does not alter its status as a check.

Postdated Checks

Under the common law, a drawer may postdate a check issued by him or her, with the object of ensuring that it will not be paid if presented for payment before the date written on the check.14 In English law, a post-dated check is valid and negotiable (although there is some dispute as to whether it is in fact a check, and not a bill of exchange or promissory note, before the date written on it has arrived). This is expressly provided in Section 13(2) of the BEA, which states that a bill is not invalid by reason only of its being postdated or antedated. Moreover, a transferee can become a holder in due course even where he or she takes the check prior to the purported date of drawing written on the check. A bank in the United Kingdom will, in practice, refuse to honor a check presented before the date written on it, and there is authority for the view that, if it does so, it is not entitled to debit the drawer’s account until that date has arrived. The drawer is entitled to countermand payment of the check at any time before it is presented for payment at or after the date written on it has arrived. Under Section 3-113(a) of the UCC, a check may similarly be postdated and it is not payable before the date of the instrument. However, under Section 4-401(c), a bank may charge against the account of a customer a check that is properly payable from the account, even though payment was made before the date of the check, unless “the customer has given notice to the bank of the postdating describing the check with reasonable certainty.”

The approach of the ULC is very different. Under Article 28, “[a] cheque presented for payment before the date stated as the date of issue is payable on the day of presentment.” It is also accepted that, if a post-dated check is dishonored upon such early presentment, the holder acquires his usual right of recourse.

Assignment of Funds

In English law, the drawing of a check does not give rise to an assignment by the drawer to the payee or holder of funds held for the drawer by the drawee bank.15 The same is true under Section 3-408 of the UCC. Moreover, in the common law systems, there is, of course, no express provision under which the check has to be drawn against funds available to the drawer with the drawee bank.

The position may differ in the case of some countries that have adopted the ULC. According to Article 3, a check must be drawn against funds available to the drawer with the drawee. It was left to each country to determine the moment at which the drawer must have funds available with the drawee.16 While most countries have left Article 3 unchanged, some countries—France,17 for example—have provided that funds must be available at the time the check is drawn, while others have provided that cover need be available only when the check is presented for payment. Article 3 does not, of course, confer any rights to the cover on the payee or holder.18 However, rights to the cover may be acquired outside the ULC. For example, in France, where the principle of provision originates, once the check is endorsed the holder has right to the cover.19 In other ULC states, such as Germany,20 the payee or holder acquires no direct rights to the funds available to the drawer with the drawee.

Transferability

In English law, as in the case of bills, a check may contain words prohibiting transfer or indicating an intention that it should not be transferable, in which case it is valid between the parties thereto but is not negotiable.21 At one time, this was achieved by writing the words “not transferable” on the check or, more often, “pay X only.” In 1992, how-ever, the BEA was amended by the Cheques Act, 1992, to create a new method of rendering checks nontransferable by the addition of the words “a/c Payee.”22 Most domestic checks are now preprinted with these words, so that the check has become in effect a mere payment order and ceased to be a negotiable instrument. This has caused considerable difficulties for “unbanked payees,” that is, payees who do not themselves have a bank account but who previously were able to get a friend or shop-keeper to cash the check for them.

Article 14 of the ULC also permits the restriction of the transferability of a check. “A cheque made payable to a specified person, in which the words ‘not to order’ or any equivalent expression have been inserted, can only be transferred according to the form and with the effects of an ordinary assignment.”23 Further, Article 7 of Annex II of the Convention Providing a Uniform Law for Cheques permits a country to reserve “the right to prescribe, as regards cheques payable in [its] territory, and marked ‘not transferable,’ that a cheque of this description may be paid only to the holder who has received it thus marked.” Some countries have used this reservation as, for example, Italy, where such a check has to be paid over the counter to the specified payee or to the credit of the specified payee’s account with a collecting bank nominated by him or her.

In contrast, Australia has, with the introduction in 1986 of a form of nontransferable payment order, invalidated clauses or notations that seek to destroy the transferability of a check. In the United States, too, checks are expressly excluded from the ambit of UCC Section 3-104(d), which makes provision for the drawing of nonnegotiable bills and notes.

Certification

The duty that the drawee bank owes to the drawer does not arise under the law of negotiable instruments. It is the product of the contractual relationship between the bank and the drawer, its customer. The drawing of a check creates no contract between the drawee bank and the holder. The question, however, arises whether the holder can acquire direct rights against the drawee bank because the bank has accepted the check or done some other act, such as marking the check “good for payment.”

In English law, generally a check cannot be accepted. So far as certification or the marking of a check as “good for payment” is concerned, the leading authority (Bank of Baroda v. Punjab National Bank Ltd.)24 indicates that a certification does not in itself give the holder any right to sue the certifying banker. It has, however, been suggested that the banker may be estopped from pleading that the drawer’s account did not have a credit balance sufficient to meet the check at the date of the certification. However, it does not constitute a promise or guarantee by the drawee bank that the check will be paid when presented. Nor does certification entitle the bank to earmark any amount standing to the credit of the drawer’s account for the purpose of meeting this check, and the bank will be compelled to pay any check presented for payment prior to the presentation of the certified check and to carry out any instruction by the drawer that countermands (stops) payment of the certified check. In practice, therefore, English banks and those in most Commonwealth countries do not certify or mark checks.

The position is otherwise in the United States. Under Section 3-409(d) of the UCC a “‘[c]ertified check’ means a check accepted by the bank on which it is drawn.” Acceptance can be made either in the same manner, as in the case of a bill of exchange, or by a “writing on the check which indicates that the check is certified.”25 The drawee bank is not under any “obligation to certify the check, and refusal to certify is not dishonor of the check.”26 Under Section 4-303(a), once a check has been certified or accepted, the drawer loses his or her right to countermand payment.

The ULC draws a distinction between acceptance and certification. Under Article 4, a check cannot be accepted, and a statement of acceptance on a check is to be disregarded. To preclude indirect acceptance by the drawee, Article 15 provides that an endorsement by the drawee is null and void. However, Article 6 of Annex II of the Convention Providing a Uniform Law for Cheques states that a country “may provide that a drawee may write on the cheque a statement of certification, confirmation, visa, or other equivalent declaration, provided that such declaration shall not operate as an acceptance, and may also determine the legal effects thereof.” This reservation has been used by a number of countries to permit the “visa” or confirmation of checks by the drawee bank, although they differ, in particular, as to whether (i) the bank is or is not obliged to give such confirmation at the holder’s request; (ii) such a confirmation constitutes merely an assurance that cover is available at that time or that the check will be paid on presentment; (iii) cover is or is not then earmarked for the holder until the expiry of the time allowed for presentment; and (iv) the confirmation discharges the drawer from liability to the holder.

The natural desire of traders and others to ensure that checks taken by them in payment will be satisfied on presentment has, of course, been met by the more recent development of the check card or “check guarantee card.” The binding effect of the bank’s promise to the trader or other recipient of the check that the check will be paid has been recognized in both the common law and civil law systems. The exact nature of the promise given by the bank has to be ascertained from the terms of the undertaking given by the bank. In a recent English case, First Sport Ltd.v. Barclays Bank plc.,27 the Court of Appeal held that the terms of the bank’s undertaking were not sufficiently unambiguous to permit the bank from disclaiming liability when the customer’s signature on the check resembled that on the card but was in fact a forgery. Apparently, no attempt has been made by British banks to tighten up their conditions so as to entitle them to refuse to pay the holder where the customer’s signature appears on its face to resemble that on the card but is nevertheless a forgery—no doubt because such an amendment would greatly reduce the efficacy of bank guarantee cards. It is also generally accepted that the issue of a check by the drawer supported by such a card takes away any right that he or she may have to countermand payment of the check.

Presentment for Payment

The BEA does not set out time limits within which a check must be presented for payment. Nevertheless, British banks will normally refuse to honor a check presented after six months from its date of issue (unless specifically instructed to do so by the drawer), and there is little doubt that this time limit is now sanctioned by usage and banking practice. (However, Section 74(1) of the BEA to some extent casts upon the holder of a check that is not presented for payment “within a reasonable time” of its issue certain risks associated with the delay in the event of the insolvency of the drawee bank.) In the United States, Section 4-404 of the UCC specifically allows the dishonor of a check that is presented more than six months after its date, although the bank is entitled to debit the customer’s account with the amount of the stale check provided that it has paid it in good faith. Section 4-404 does not apply to certified checks.

A very different system is provided for in the ULC. Under Article 29, “[a] cheque payable in the country in which it was issued must be presented for payment within eight days” from the date stated on the check as the date of issue. Where a check is issued in a country other than that in which it is payable, it must be presented “within a period of twenty days or of seventy days, according as to whether the place of issue and the place of payment are situated respectively in the same continent or in different continents,”28 and countries bordering on the Mediterranean are to be regarded as in the same continent.29 However, under Article 14 of Annex II to the Convention Providing a Uniform Law for Cheques, a state adopting this reservation may alter the prescribed time limits, and it is perhaps only a minority of states that have not done so.

Under Article 31 of the ULC, “[p]resentment of a cheque at a clearinghouse is equivalent to presentment for payment.” However, the most recent authority indicates that, in English law, this is not the case and that presentment for payment takes place only when the check is presented for payment at the branch address of the bank stated on the check, where the effective banking decision is taken whether to dishonor the check or not.30

Countermand of Payment

Under Section 75(1) of the BEA, the duty and authority of the drawee bank to pay a check drawn on it is determined by countermand of payment by its customer. The countermand may be communicated at any time prior to its payment by the bank on presentment. A similar situation prevails under Section 4-303 of the UCC, although certain events prior to actual payment may preclude countermand.

In contrast, Article 32 of the ULC provides that “[t]he countermand of a cheque only takes effect after the expiration of the limit of time for presentment” and that, “[i]f a cheque has not been countermanded, the drawee may pay it even after the expiration of the time-limit.” However, Article 16 of Annex II to the Convention Providing a Uniform Law for Cheques permits states to allow countermand of a check even before the expiration of the time limit or to prohibit countermand even after the expiration of the time limit. It also permits a state to “determine the measures to be taken in the case of the loss or theft of a cheque” and to “regulate the legal consequences thereof.”31

Death of Drawer

Under Section 75(2) of the BEA, the bank’s duty and authority to pay a check is determined by notice of the customer’s death. The position is similar under Section 4-405 of the UCC, except that the bank has authority to pay a check within 10 days following the customer’s death, even if it has notice thereof, unless ordered to stop payment by a person having an interest in the account. However, under Article 33 of the ULC, neither the death of the drawer nor his incapacity taking place after the issue of the check is to have any effect as regards the check.

Crossings

The practice of crossing checks is not found in the United States, although U.S. banks will apparently accept for collection crossed checks drawn on a foreign bank. Both the BEA and ULC provide for crossings and with approximately similar effects. Most Geneva system countries permit crossings, although Germany and Austria (acting under a reservation in Article 18 of Annex II of the Convention Providing a Uniform Law for Cheques) recognize in their national laws only checks “payable in account,” while nevertheless treating such checks as crossed checks issued abroad but payable in those countries. It is almost universal practice in the United Kingdom for banks to issue to their customers only checks with crossings pre-printed on them. If the customer/drawer wishes for some reason to issue an uncrossed check, then he or she “opens the crossing” by writing across it the words “pay cash” and signing the alteration.

Other Annotations on Checks

BEA: Not Negotiable

Under Section 81 of the BEA, “where a person takes a crossed cheque which bears on it the words ‘not negotiable,’ he or she shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he or she took it had.” The check therefore remains transferable, but the holder takes the check at his or her own risk and will be subject to all the defenses available against prior parties even though he or she acquires the check in good faith, for value, and without notice of the defective title of the transferor. This Section will also affect the original payee of a check who is affected by fraud.

BEA: a/c Payee

As previously mentioned, the original effect of such a notation on a crossed check was not to make the check nontransferable but merely to act as a warning to the collecting bank that the check should not be collected for a person other than the specified payee. However, the law has been changed in the United Kingdom by the enactment of the Cheques Act, 1992, which inserted a new Section 81A in the BEA.32 Under Section 81A(1), “[w]here a cheque is crossed and bears across its face the words ‘account payee’ or ‘a/c payee,’ either with or without the word ‘only,’ the cheque shall not be transferable, but shall only be valid between the parties.” Since the majority of checks in the United Kingdom are now preprinted with these words on them, it follows that the check is now reduced to the status of a payment order and is not a negotiable instrument at all. A similar provision has been enacted in Singapore,33 but, so far, other countries with systems derived from the BEA have not followed suit.

UCC: Checks Payable Through a Bank

Under Section 4-106(a) of the UCC, if a check is “payable through” a bank identified in the item, (i) the check designates the bank as a collecting bank and does not by itself authorize the bank to pay the check, and (ii) the check may be presented for payment only by or through the bank. This annotation therefore has a similar effect to a special crossing under the BEA and ULC.

ULC: Checks Payable in Account

Under Article 39 of the ULC, “[t]he drawer or the holder of a cheque may forbid its payment in cash by writing transversally across the face of the cheque the words ‘payable in account’ (‘à porter en compte’) or a similar expression.” In such a case, the check can only be settled by the drawee by means of book entry (that is, credit in account, transfer from one account to another, setoff, or clearinghouse settlement). Settlement by book entry is equivalent to payment. The effect of these words is, therefore, similar to that of a general crossing. It may, however, be the case that, where the drawer and the holder of a check bearing a general crossing maintain their accounts with the same branch of the drawee bank, then Article 38 may allow payment of the item in cash. However, a check marked “payable in account” has to be discharged by a book entry even in that case (although the holder or payee is entitled to with-draw funds from his or her account immediately once they have been effectively credited).

Bankers’ Drafts

Under Section 3(1) of the BEA, a bill of exchange (including a check) must be “addressed by one person to another.” A check drawn by a bank on itself (whether on its head office or on another branch of the same bank) is therefore not a check. However, under Section 5(2) of the BEA, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. The instrument is therefore negotiable, and the holder may enforce it against the bank as drawer. Further, the protection afforded in the United Kingdom by the Cheques Act, 1957, to the paying and collecting banker extends to bankers’ drafts payable on demand.34 Bankers’ drafts therefore give rise to no special problems in English law. Under Section 3-104(a) of the UCC, a negotiable instrument need not be drawn by one person on another, and, under Section 3-104(f), the definition of a check includes a “cashier’s check.” The issuer will be liable under Section 3-412 if it dishonors such an instrument.

Under Article 6 of the ULC, “[a] cheque may not be drawn on the drawer himself unless it is drawn by one establishment on another establishment belonging to the same drawer.” This provision equates a banker’s draft with a check so long as it is drawn on a department or branch other than that which draws it. A banker’s draft will therefore be transferable and enforceable against the drawer in the same manner as any other check.

Forged and Stolen Checks: The Paying Banker

Forged Signature of the Drawer

The question, whether a drawee bank is entitled to debit its customer’s (the drawer’s) account where the purported signature of the drawer is a forgery, depends on the terms of the contract between the bank and its customer. In principle, in English law, the bank is not entitled to debit the account with the amount paid out, and British banks and building societies have so far refrained from departing by contract from this regime. If the customer has not authorized the payment, the bank cannot charge the customer with it. It is also well established in English law that the failure by the customer to keep his checkbook in safe custody or to take adequate steps in his business to prevent or detect fraud by his employees does not disentitle the customer from asserting that his account has been wrongly debited with the amounts paid out.35 Nor is there any duty, in the absence of a contractual obligation to that effect, on the part of the customer to examine the bank statements periodically sent to him or her and to notify the bank of any discrepancy. Any stipulation by the bank in its standard conditions that, in the absence of such notification within a specified period of time, the account shall be deemed to be correct will be strictly construed and must be clear and unambiguous to achieve this result.36 However, a failure by the customer to inform the bank that his or her signature on a check or checks is a forgery when this comes to the customer’s knowledge will prevent the customer from asserting that his or her account has been wrongly debited if the bank has in consequence been prejudiced, for example, because the bank has lost the opportunity to recover the money from the forger due to his or her disappearance or because the bank has continued to pay money to the forger. Negligence on the part of the bank appears then to be immaterial. The customer also owes a duty to the bank to refrain from drawing a check in such a manner as to facilitate fraud or forgery, that is to say, he or she must take reasonable and ordinary precautions when drawing a check to ensure that it is complete and not capable of being easily altered.37 The current position in the United Kingdom, whereby the bank is in general liable regardless of whether the negligence of the customer contributed to the loss, has been criticized as unfair to banks, and the government proposes to consider whether contributory negligence on the part of the customer should be introduced as a defense so as to reduce the amount of the bank’s debt or damages.

In contrast, a greater measure of protection is afforded to the bank by the UCC. Section 4-406 of the UCC expressly provides that the customer is under a duty to exercise reasonable care and promptness to examine his or her bank statements or items to discover an unauthorized payment and promptly to notify the bank if he or she discovers a discrepancy. If the bank proves that the customer has failed to do so, he or she is precluded from asserting against the bank any forgery or alteration, provided that the bank also proves that it has suffered loss by reason of the failure. A further consequence is that if, after a reasonable period for examination of the statement on which the first item appears (the period not to exceed 30 days), the bank pays in good faith any other item on which there is an unauthorized signature or alteration by the same wrongdoer and on which payment is made prior to the bank’s receiving notification, the customer is precluded from asserting against the bank the unauthorized signature or alteration on that other item. Provision is made in Section 4-406(e) for apportionment of the loss where the bank has failed to exercise ordinary care in paying the item. Further, irrespective of whether the customer is careless or not, Section 4-406(f) takes away his or her right to object after one year from the time when the statement and items are made available to the customer. These provisions do not however affect the duty of the customer in any event to notify the bank of a known forgery. Nor do they affect the protection afforded to the bank by Section 3-406 where the customer has, by his or her negligence, substantially contributed to a material alteration of the check or to the making of a forged signature where the bank has paid the check in good faith.

Stolen Checks

A completed check may be stolen from the drawer, intercepted and stolen while in transit to the payee, or stolen from the payee. In each case, the thief is likely to forge any necessary endorsement of the payee on the check and then present the check or cause it to be presented to the drawee bank for payment, possibly by opening an account with the collecting bank in the payee’s name. In English law, in principle, the drawee banker’s mandate is to pay only to a holder. The thief is not a holder, since the forged endorsement to him or her is wholly inoperative. Therefore, the drawee banker will not have paid in accordance with this mandate even though it makes the payment in good faith and without knowledge that the thief has no title to the instrument. Accordingly, the drawee banker is not entitled to debit its customer’s account with the amount paid out. However, protection is afforded the drawee banker, under Section 60 of the BEA, if it pays in good faith and in the ordinary course of business a check payable to order drawn on it and, under Section 80, if the banker pays in good faith and without negligence a crossed check to a banker. Furthermore, Section 1 of the Cheques Act, 195738 virtually eliminated the need for an endorsement where the check is tendered for the credit of an account of the ostensible payee, because it provides that a banker who pays in good faith, in the ordinary course of business and in due course, a check that is drawn on it and that is not endorsed does not incur any liability by reason only of the absence of endorsement.

In the United States, a bank may charge against the account of a customer an item that is properly payable from the account,39 but a check containing a forged endorsement is not properly payable. Section 3-201 (b) of the UCC provides that negotiation of an instrument payable to order requires endorsement by the holder.40 Again, however, Section 3-406 (regarding negligence that contributes to a forged signature or alteration of instrument) may assist the paying bank, as may also Section 3-404 (regarding impostors and fictitious payees) and Section 3-405 (regarding the employer’s responsibility for fraudulent endorsement by an employee)

The ULC is significantly different. Under Article 35, “[t]he drawee who pays an endorsable cheque is bound to verify the regularity of the series of endorsements, but not the signature of the endorsers.” This is consistent with the philosophy of the Geneva system, which allows title to a bill, note, or check to be acquired through or under a forged endorsement. Under Article 19 of the ULC, “[t]he possessor of an endorsable cheque is deemed to be the lawful holder if he or she establishes his title to the cheque through an uninterrupted series of endorsements, even if the last endorsement is in blank.” In addition, under Article 21,

[w]here a person has, in any manner whatsoever, been dispossessed of a cheque (whether it is a cheque to bearer or an endorsable cheque to which the holder establishes his right in the manner mentioned in Article 19), the holder into whose possession the cheque has come is not bound to give up the cheque unless he has acquired it in bad faith or unless in acquiring it he has been guilty of gross negligence.

Collection of Checks

Liability and Protection of the Collecting Bank

Most checks issued in the United Kingdom are not presented by the payee directly to the drawee bank for payment, but are remitted by the payee to his or her own bank, which arranges for their clearance. In such a case, the payee’s bank may act as a collecting bank or as a discounting bank. When the bank presents the check to the drawee for payment on behalf of its customer, it acts as collecting bank and as the customer’s agent. If the bank gives the customer value before the check is cleared—for example, if it grants the customer an overdraft against the check, or if it allows him or her to draw against it before clearance—then it acts as a discounting bank. The bank, in fact, presents the check in order to obtain payment for itself. However, the two roles are not necessarily exclusive. The bank may be, at one and the same time, an agent for collection and a discounter and holder of the check for value.

A bank may collect for a customer a check to which the customer has no title—for example, because it has been stolen. In that event, in English law, the bank will be liable to the true owner in tort (delict) for conversion of the check, because it is treated by the law as a tangible movable that is capable of being wrongfully appropriated. The measure of damages recoverable by the true owner from the bank is the face value of the check. Alternatively, the true owner could claim from the bank the sum collected on the check in restitution, because the bank has been unjustly enriched at the true owner’s expense. However, this latter remedy would no longer be available once the bank had paid the proceeds of the check to its customer, the payee.

Protection against these claims is extended both to the collecting and discounting bank by Section 4 of the Cheques Act, 1957.41 This section provides that a banker is not to be liable to the true owner of a check if he or she has received payment of it for a customer in good faith and without negligence despite any defects in the customer’s title. There is quite considerable case law on this Section and on its predecessor, Section 82 of the BEA. Examples of negligence include placing to the credit of a customer’s account checks drawn payable to his or her employer or to a company and failing to take up references when opening an account for the customer. However, the standard of care required is that of a reasonable man carrying on the business of a banker, and, in most instances, the banker will succeed in discharging the burden of proof placed upon him or her by showing that he or she has acted in accordance with prevailing banking practices. Under Section 4(3) of the Cheques Act, 1957, “[a] banker is not to be treated … as having been negligent by reason only of his failure to concern himself with the absence of, or irregularity in, indorsement of an instrument.” Even in those rare cases where the banker is found to have been negligent, damages may be reduced if the negligence of the true owner, for example, the payee, contributed to his or her own loss.

In addition, if the bank collects a check as discounting bank, it may in some circumstances be entitled to claim that it has become a holder in due course and, as a consequence, is to be regarded as the owner of the instrument. Again, under Section 2 of the Cheques Act, 1957, the bank need not show that the check (if payable to order) has been endorsed to it by the payee, since an unendorsed order check delivered to a bank for collection is deemed to have been endorsed in blank and so payable to bearer.

In the United States, Section 3-420 of the UCC provides that “[t]he law applicable to conversion of personal property applies to instruments.” This Section also states that “[a]n instrument is converted if it is taken by transfer other than a negotiation, from a person not entitled to enforce the instrument or a bank obtains payment with respect to the instrument for a person entitled to enforce the instrument or receive payment.”42 This covers cases, for example, where a depositary bank takes a check bearing a forged endorsement. It will not acquire any greater rights by virtue of Section 4-205, which provides that a depositary bank becomes the holder of an item received for collection if the customer was at the time the holder of the item, whether or not the customer endorses it. Apart from the protection afforded to collecting banks other than the depositary bank by Section 3-420(c), there is no special protection given, as in English law, to bank collections. Moreover, the depositary bank that presents a check for payment to the drawee bank will be liable, on obtaining payment, on the presentment warranties imposed by Section 4-208. Again, however, the bank may be assisted by the previously noted Sections 3-404 to 3-406.

Delays

Sections 4-202, 4-214, 4-301, and 4-302 of the UCC impose time limits for the handling of certain items, and Section 4-109 deals with the possibility of a limited extension of these time limits by unilateral action on the part of the bank and in events of force majeure. In English law, a bank is allowed a “reasonable time” to present a check for payment. There are no statutory time limits. In practice, in the ordinary course the clearing of a check takes three days. The time taken to clear checks is often the subject of adverse (and perhaps unjustifiable) criticism by customers, in the press, and elsewhere. The Bank of England has now given its approval for the introduction of a new system, the Real Time Gross Settlement System, which will greatly speed up interbank settlements.

Truncation of Checks

The present system used in the United Kingdom to clear checks requires the physical transfer of the paper to the branch of the drawee bank on which it is drawn. However, the BEA has now been amended43 to permit the “truncation” of checks, that is, the transmission in electronic form of the details contained in the magnetic ink codeline on the bottom of the check rather than the check itself. A photocopy or some other reproduction in legible form, suitably marked and authenticated, is also accorded the status of evidence of the receipt by the payee of the sum payable by the check.44 The truncation of checks will eliminate the transportation of millions of checks around the country each day. Some other European countries already have systems of truncation in place, and electronic presentment is permitted by Section 4-110 of the UCC.

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