Negotiable Instruments

Negotiability
Able to be transferred by delivery (or indorsement) so as to give good title of instrument to the
bona fide holder notwithstanding that transferor may have defective title: State Savings Bank of
Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 at 474 per Isaacs J.
Types of Instruments
Cheques - payment instrument: regulated by Cheques Act 1986
Bills of exchange - payment or credit instrument: regulated by Bills of Exchange Act 1909
Promissory notes - payment or credit instrument: reg by Bills of Exchange Act 1909
Advantages
Convenient payment (or credit) device more secure.
Not an assignment of funds (ie debt); a transfer of obligation
Represents a security separate from the obligations of the transaction for which they are created
(ie an enforceable obligation separate from the related commercial contract)
NB importance of consideration
TYPES
Cheque: unconditional order in writing that is addressed by a person to another person (being a
bank), and is signed by the person giving it, and requires the bank to pay on demand a sum certain
in money.
Bill of exchange: unconditional order in writing, addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed
or determinable future time, a sum certain in money to or to the order of a specified person, or to
bearer
Promissory note: unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in
money, to or to the order of a specified person, or to bearer. OPP of BOE.
Account holders mandate (order)
Commonwealth Trading Bank v Reno Auto Sales [1967] VR 790
Cheque is revocable mandate not assignment of customers funds.
Not contractual relationship between bank and 3rd party no duty to pay
THUS: 3rd party cannot sue bank for non-payment.
Ceborah SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyds Rep 271
BF holder for value of bill of exchange has right (exceptions) to have it treated as CASH.
Thus: pay bill of exchange first pursue claims later.
Inflatable Toy Company Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243
Importer (not satisfied with import) tried to prevent bank from paying bill of exchange.
Held:
o letters of credit be treated more or less as sacrosanct and that any possibility of
rendering them valueless by court action should be avoided
o used on basis that obligations of financial institutions would be met without exception.
o One exception (refuse payment) notice of fraud.

Cheques
Cheques Act 1986 (Cth) s 10(1)
Cheque is an unconditional order in writing that:
(a) is addressed by a person to another person (payee), being a financial institution (ie. Bank); and
(b) is signed by the person giving it (payer); and
(c) requires the financial institution to pay on demand a sum certain in money.
Negotiability
 Transferable by holder endorsing and delivering cheque (ie. Payee can negotiate cheque to 3rd
person/Holder to satisfy debt)
o Every cheque is transferable by neg UNTIL discharged even if crossed: s39
o Order cheque: transferred by neg if indorsed and delivery: s40(2)
o Bearer cheque: transferred by neg if delivery: s40(3)
Holder able to sue in own name (without reference to previous holders or original drawer)
If acquired in good faith for value [ie consideration] good title obtained even if previous holder
had stolen it
Types of cheques
Order cheques: payable to the named person or indorsed payee (indorsee)CA s 21
o Pay _________ or order.
o Negotiable by indorsement to another person.
Bearer cheques: payable to person in possessionCA ss 3, 22
o Pay _________ or bearer.
o Negotiable by simply delivery to another person.
Crossing (parallel lines): CA ss 53-57
PURPOSE: provides greater protection against stolen cheque.
Parallel lines only: cheque to be paid to another bank, not in cash over the counter (ie paid into
payees bank account): s 54
Parallel lines with writing not negotiable between parallel lines: transferee cannot have better title
than transferor and takes it subject to defects in title of transferor (ie. Take at own risk): s 55
Cheque essentials
Legal capacity:
o If capacity to contract capacity to incur liability on cheque: CA s 30(1).
o If drawn, issued, indorsed by NO capacity will not be liable, but cheque is still valid: s
30(3),(4)
Signature of drawer or endorser: not liable unless signed: s 31(1)
Delivery:
o Transfer of possession from one person to another: ss 3(1) creates legally binding rights
o Drawing/indorsing of cheque is NOT complete and is revocable UNTIL delivery: s25
o Delivery must be made by the drawer or indorser: s26
o There is a presumption of delivery: s 28
Conclusive presumption that drawer delivered cheque to holder in due course
complete contract.
Rebuttable presumption that drawer delivered cheque to holder complete contract.
Consideration: any consideration sufficient for a contract, including an antecedent debt s 35
Invalid signatures CA s 32
Unauthorised drawer (s32(1)):
Inoperative UNLESS:
o Person is estopped from denying genuiness/authority of sig
o Drawer ratifies/adopts sig.
Sig will be operate as sig of person (forgerer) who puts it on cheque, in favour of person
(takes cheque in good faith or without notice).
Unauthorised indorser (s32(2)):
Same as above.
Holders
Holder defineds 3
Holder has right to present cheque for payment, negotiation or valid discharge. Can sue on cheque
in own name: s49.
 holder means:
(a) in relation to a cheque payable to orderthe payee or an indorsee who is in possession of the
cheque as payee or indorsee, as the case may be; and
(b) in relation to a cheque payable to bearerthe bearer.
Holder in Due Course CA ss 49-52
Defects of title and personal defences: s49
Holds cheque free of defect in title of prior parties
May enforce payment against any person liable on cheque
Holder is a HIDC if: s50
Cheque transf by neg to holder and at that time:
Cheque complete and regular on face of it
Not a stale cheque (< 15 months old)
Not crossed not neg
Holder took in good faith, for value
Without notice of any dishonour of cheque OR any defect in title
Presumption that holder is HIDC: s51
Rebuttable presumption that holder is HIDC.
Holder who:
Derives title through a HIDC; and
Not party to any fraud/duress/illegality
Has all rights of HIDC
Discharge of cheque: CA s 78
Payment by drawee institution (ie drawers bank)
Renunciation of holders rights: holder renounces his rights against the drawer on cheque and
effects this by delivering cheque back to drawer.
Cancellation: holder intentionally cancels the cheque or drawers signature. Must be apparent on
cheque. Assumed to be intentional unless proven to be mistake.
Material alternation/fraud: holder fraudulently alters cheque in any respect of a right/duty/liability
of the drawer/indorser/drawee institution.
Dishonour of cheques
Duly presented BUT drawee institution refuses payment (refusal is communicated): s 69
Drawer/indorser liable for dishonoured cheque with or without notice of dishonour: s 70
May dishonour if: revoked authority of bank OR insufficient funds.
Wrongfully dishonoured: bank may be sued for breach of implied contract to pay cheque.
Liabilities of drawer and indorsers
NO liability unless cheque presented for payment: s 58
DRAWER: on presentment, cheque will be paid or (failing which) drawer will compensate
holder or liable indorsers (who is compelled to pay cheque): s 71
INDORSER: on presentment, cheque will be paid or (failing which) indorser compensates
holder or liable subsequent indorsers (who is compelled to pay cheque): s 73
Financial institutions duties
When cheque duly present for payment drawee bank must pay/dishonour cheque as soon as
reasonably practical. UNLESS it is aware of defect in holders title (or lack of title): s67
Example 1
D gives an uncrossed bearer cheque to P as payment for goods. T steals the cheque and hands it to
G as payment for groceries.
If G takes cheque in good faith, for value without notice of theft G becomes holder in due course
and is entitled to the cheque despite flaw in titless 49, 50
Example 2
D gives an order cheque to P. T forges Ps indorsement to transfer the cheque to G.
 G doesnt have entitlement to the cheque. S 31 signature essential to liability on cheque. See also s
40must be indorsed by holder.
T is not drawer, or payee or endorsee.
Example 3
Example 1 with the same facts: cheque is crossedG can become holder in due course because
crossed cheque is only instruction to bankit does not determine title rights
But if Cheque is crossed and marked non negotiableG can never be holder in due course
Wrongfully dishonouring a cheque
S70
If wrongfully dishonoured bank may be liable for breach of implied contract to pay cheque.
Baker v ANZ [1958] NZLR 907
Three cheques returned by bank with the note present again; sufficient funds were available.
Responsibility of customer to bank
To draw cheques with reasonable care so as not to facilitate forgery.
Gaps or spaces in cheques breach of this duty?
PREV LAW:
Colonial Bank of Australasia Ltd v Marshall (1906) 4 CLR 196 (Privy Council):
Cheques drawn with spaces that enabled easy alteration eg 10 110.
HELD: mere fact of spaces is NOT sufficient breach.
London Joint Stock Bank Ltd v Macmillan [1918] AC 777
Dishonest employee clerk presents cheque to customer for signature. Words line left blank. Clerk
amends cheque 2 120. Employer sued bank for return of money.
HELD: bank NOT liable. Customer has duty to take reasonable/ordinary precautions against
forgery. Alteration in amount direct result of that breach liable to bear loss.
CF: this is stricter than Colonial v Marshall.
CURRENT LAW:
Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 35 ALR 513
SWW had cheque account with CTB. Had cheques signed and made out to CAS (Computer
Accounting Services). Employee changed to pay CASH or order. SWW argued CTB neg in paying
their cheques. CTB argue SWW neg in making cheques payable to CAS not C.A.S. or actual
name.
HELD: duty on customer to take usual and reasonable precautions to prevent a fraudulent
alteration.
(a) Between banker and customer: customer should bear responsibility for the loss when it is his
careless drawing of the cheque that facilitates that loss through forgery
(b) Marshall imposes heavy burden on banks: NOT followed.
(c) Macmillan ensures that drawer (by neg) will not increase risk of loss through fraud: APPLIED.
THUS: duty to take reasonable care NOT to leave gaps/spaces which would facilitate fraudulent
increase.
Knowledge of forgery of signature Macmillan applied;
Greenwood v Martins Bank Ltd [1933] AC 51
Husband knew wife forged sig on cheques from his account. Estopped from denying genuine
signature.
HELD: duty to disclose forgeries that they are aware of allow bank to recover money.
National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377
Employee of family companies used to sign her employers name (with his knowledge) for
company purposes. Also signed for her own benefit.
HELD: duty does not extend to take reasonale precautions in management of their business to
prevent forged cheques being presented for payment or to cheque bank statements to notify bank
of unauthorised debits.
 Approved: Greenwood (obligation to inform bank of forgeries as soon as known); Macmillan
(obligation to draw cheques so as to minimise possibility of forgery)
Varker v The Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967
V banks $98K in cheque account. Does cheque so M change $140 to $6,140.
Held: customer breach duty to bank, bank breach duty to customer
Stopping a cheque
Commonwealth Trading Bank v Reno Auto Sales [1967] VR 790
P changes mind about car purchase. Wife calls bank, talks to receptionist and instructs to hold
cheque (wait for confirmation from husband). Receptionist fail to pass on message.
HELD: not effective countermand of cheque. Need precise instruction to responsible officer of
bank.
Bank and Payee (not contractual rel)
Barclays Bank Ltd v WJ Simms Son & Cooke Ltd [1979] 3 All ER 522
Bank pays cheque after countermand by mistake.
HELD: bank's payment is without mandate cannot debit customers account. Bank entitled to
recover money from the payee.
1. If a person pays money to another under a mistake of fact which causes him to make the payment,
he is prima facie entitled to recover it as money paid under a mistake of fact.
2. His claim may however fail if:
(a) the payer intends that the payee shall have the money at all events, whether the fact be true or
false, or is deemed in law so to intend;
(b) the payment is made for good consideration, in particular if the money is paid to discharge, and
does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to
receive the payment) by the payer or by a third party by whom he is authorised to discharge the
debt;
(c) the payee has changed his position in good faith, or is deemed in law to have done so.
Commercial Bank of Australia Ltd. v Younis [1979] 1 NSWLR 444
Cheque stopped by drawer. Payment of cheque refused by drawers bank. But done anyway in
error.
Held: for person to recover money paid under mistake of fact, it is sufficient if the mistake was
fundamental to the payment, even though the payer would not have been liable to pay it, if the
supposed fact had existed. Banks negligence irrelevant.
Bank of NSW v Murphett [1983] VR 489
House and bus deposit paid by cheque. Changed mind stop by phone and writing. Cheque
paid by mistake.
Held: bank who mistakenly overlooks notice of countermand by customer can recover
money from payee. Apply Barclays v Simms.
Bills of Exchange Act 1909
8 Bill of exchange defined
(1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed
or determinable future time, a sum certain in money to or to the order of a specified person, or to
bearer.
(2) An instrument which does not comply with these conditions, or which orders any act to be done in
addition to the payment of money, is not a bill of exchange.
Example:
Perth, 1 January 2004
$100,000
183 days after sight, pay B or order the sum of AUD$100,000 for value received.
To: A
Accepted [signed A] _________
[signed B] _________

Characteristics:
More secure than cash
Used in international trade eg shipping
May be negotiated before maturity at a discount
Independent of contract
Unlike cheques - both a payment instrument and a credit instrument
Cheque is a type of bill of exchange
a sum certain in money
Is certain EVEN if required to be paid with interest/charges, by stated instalments (incl with
provision that upon default, all is payable), according to rate of exchange: s14(1)
Rosenhain v The Commonwealth Bank of Australia (1922) 31 CLR 46
Bill of exchange worded: ...pay to the order of Caravel Company Incorporated 1471 10s 7p
value received, with interest at the rate of 8%...sixty days after sight...until arrival of payment in
London
Held: NOT certain difficult to determine exact date the funds would arrive in London.
Negotiatiability
May be bearer bills or order bills.
Bearer bills no indorsement to be neg to another person (just delivery is ok)
Order bills must be indorsed to be neg.
Liability of Parties
Requires:
(a) Signature
28 Signature essential to liability
(a) Person NOT liable (as drawer/acceptor) UNLESS:
o Person signs a bill in a trade name or an assumed name liable as if signed in own
name
o Sig of name of firm is = sig of all persons liable as partners in that firm.
(b)Acceptance
22 Definition and requisites of acceptance
(1) The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer.
(2) An acceptance is invalid unless it complies with the following conditions, namely:
(a) It must be written on the bill and be signed by the drawee. The mere signature of the
drawee, without additional words, is sufficient.
(b) It must not express that the drawee will perform his promise by any other means than the
payment of money.
Liability of Acceptor
59 Liability of acceptor
By accepting it:
(a) Engages that they will pay according to tenor of his acceptance;
(b) Is precluded from denying to a holder in due course the genuineness of drawers signature and
existence/capacity.
(c) Is NOT precluded from denying validity of indorsements;
Liability of drawer
60(1) Liability of drawer or indorser
 By drawing it:
(a) Engages that on due presentment shall be accepted and paid according to its tenor
(b) If dishonoured compensate holder (or indorses who is compelled to pay) provided
that requisite proceedings on dishonour are duly taken;
(c) Is precluded from denying to a holder in due course - existence of the payee and his
then capacity to indorse.
Liability of indorser
60(2) Liability of drawer or indorser
By indorsing it:
(a) Engages that on due presentment shall be accepted and paid according to its tenor
(b) If dishonoured compensate the holder (or a subsequent indorser who is compelled to pay it)
provided that the requisite proceedings on dishonour are duly taken;
(c) Is precluded from denying to a holder in due course - the genuineness and regularity in all
respects of the drawers signature and all previous indorsements; and
(d) Is precluded from denying to his immediate or a subsequent indorsee bill was (at the time of
his indorsement) valid and subsisting bill (and he had good title)
Holders
Holder: the person in possession of the bill (s4)
Can sue in their own name but absence of consideration means they cannot sue
immediately preceding indorser
Holder for value where negotiated with consideration (given something for bill) AND any
subsequent older after consideration given.
Can sue in own name and can sue any preceding indorser
Holder in due course -
Can receive better title than prior holder
34 Holder in due course
Is a holder taken bill:
o Complete and regular on the face of it;
o Before overdue;
o Without notice of dishonour;
o In good faith and for value;
o Without notice at time bill neg of defect in title of transferor.
s34(2) Defective obtained bill/acceptance by fraud, duress, force, fear, unlawful means, illegal
consideration
s34(3): Holder who gets title through HIDC (not party to fraud/illegality) has all rights of
HIDC.
Discharge
64 Payment in due course
(1) A bill is discharged by payment in due course by or on behalf of the drawee or acceptor.
Payment in due course - payment made at or after maturity of the bill to the holder (in good
faith and without notice that his title to the bill is defective).