Cheques Act 1957, Chase Manhattan Bank NA v Israel-British Bank - Essay Example

Banking Law Module Module Number Academic Year Seminar Essay Question: Banking Law Questions number Question A cheque is not just an order to a bank to authorise a payment; it is an order that can be transferred and, if it the drawer did not mark it as not negotiable, it will be a negotiable instrument. In the United Kingdom, the Cheques Act 1957 is the primary body of law which regulates the transfer of the order from one party to another and specifies each holder’s liabilities. Except under the Cheques Act 1957, section 4(2) (a) cheques are generally transferrable by negotiation1. As such the holder of a cheque is the party who retains the custody of it; therefore, the holder can be either the person to whom the cheque was written or the individual in possession of it by virtue of a transfer by negotiation2. In this case, the order which has been fraudulently obtained and negotiated by Clara to their debtor is an illegal order cheque requiring an indorsement by the legitimate holder who in this case is Megan. As such, she reserves the right to file charges of cheque fraud against Clara and seek an injunction against any cashing of the cheque by Jason’s bank for purposes of reclaiming the money amounting to 15,000. Regardless, Megan’s success would depend on her ability to prove that: a) Jason’s bank owes her the duty of care; b) there is proximity between her and the bill collecting bank; and c) cashing the money to Jason would result in material injury upon her. In Yuen Kun-Yeu v Attorney-General of Hong Kong (1987) PC, the plaintiff made deposits of money with an accredited deposit taker, but lost the deposits when it became insolvent3. He argued that the Commission regulating the activities of the deposit taken was liable because it was aware or should have been aware of the difficulties facing the depositor. However, in its decision the court said there was no proximity between the Commission and the deposit taker vis-à-vis the claimant. In respect of this decision, Megan would lose the case, which then allows her the option to seek compensation for a breach of banker-customer relationship if the banker proceeds and authorises payment by a fraudulent indorsement. In Foley v. Hill and Others (1848), the court said the banker owes the customer money that is equivalent to the deposits4. The verdict considered the banker the owner of the deposits and the client the investor taking risk. In light of the verdict, Megan could successfully bring claims against the bank for fraud and obtain a refund of all of her money ‘owned’ by the bank courtesy of the fraudulent Clara and her husband if the banker settled the order payment5. As researchers have said, Megan would rely on the principle of “conversion by relation back” as brought into the limelight by judges in the case of Morison v London County and Westminster Bank Ltd [1914] 3 KB 356 where the court held the bank liable for cashing a fraudulent cheque6. The court established that when the banker was doing the conversion, the holder of the cheque held it illegally7. The collecting bank claimed that when the customer held title to the cheques the orders were worthless because the order to release the equivalent payment had been expended8. However, the court refused this line of argument, saying instead that a reasonable bank has the obligation to make sufficient enquiries when cashing such cheques9. Remedy Megan would rely on the ruling in Chase Manhattan Bank NA v Israel-British Bank [1981] Ch 105 to reclaim the lost money under the doctrine of unjust enrichment10. Chase Manhattan Bank NA v Israel-British Bank is a popular English trusts law case focussing on constructive trusts such as the ones developed from Angus through to Megan, but broken when Clara illegally negotiated the cheque to herself and finally to Jason11. The case held that there is a trust to secure any payments made under an error and issue a proprietary remedy to the deserving party12. In this case, Megan might successfully argue that whichever bank Jason will deposit the cheque owes her the remedy of unjust enrichment for failing to notice the fraudulent indorsement13. Question # 2 Eric is a victim of cheque fraud. As such, neither the collecting bank nor the original payees of the cheque to who the cheque was negotiated are liable in this case. The best way to go is seek an explanation as to why the cheque was dishonoured and file two cases: a) a civil suit against Lawrence to claim his debt and or any other damages caused upon him following the fraud forgery; b) ask the police to investigate the issue and bring criminal charges of cheque fraud against Lawrence. In Joachimson v Swiss Bank Corp [1921] 3 KB 110 the court said that due to the relationship between banks and their customers the primary role of the banker is to accept money and bills for every client14. Eric is one such customer whose bank should accept bills which in this case is the cheque15. The bank has acted in good faith by blocking the cheque, because Eric had no title to it, despite the reasonable expectations that the order would settle the debts which Lawrence owed him. As such, Eric’s bank is simply enjoying the special privilege of blocking the conversion after banks were given more latitude in law in respect of cheque crossings16. Although cheque crossings were initially made in the best interests of bankers as far as collection and clearing of cheques was concerned, the Crossed Cheques Act 1856 (UK), the Crossed Cheques Act 1858 (UK) and the Crossed Cheques Act 1876 (UK) required that they have to be paid to an individual with a bank account17. Since it became a duty of banks to handle certain cheques, they were provided an exceptional defence against conversion actions. As such, under section 4 of the Cheques Act 1957, the banker’s decision to dishonour the cheque is well within the law and hence not actionable by Eric. In Arab Bank v Ross (1942) 2 QB 216, the court was tasked to determine the validity of misrepresented cheques; and whether a cheque lacking the name of the individual who indorsed it was whole18. The court decided that the title to a cheque cannot be automatically transferred to the payee without passing through the intermediate step. As such, Eric cannot claim any immediate rights to the payment as ordered on the cheque, because it is at the intermediate step where its invalidity led to its dishonouring19. Although, Eric is the victim of forgery in this case, the ruling in the Lipkin Gorman v Karpnale Ltd [1988] UKHL 12 may deny him any claims from the banker. Unlike in Lipkin, Eric cannot claim for unjust enrichment because the money was not paid to anybody else. Question # 3 Kuldip is a victim of Jaswinder’s misfeasance in public office. As such, Kuldip may take a legal action against Jaswinder on the grounds that the latter party misused his power of making payments to defraud Kuldip. The tort first featured in the English law in the early 18th century when in Ashby v White (1703), Justice Holt declared that the landowner could validly file a case against a police officer for denying him of his right to cast a ballot. In most cases, a claimant will be successful in a misfeasance suit if he or she proves: a) that the defendant owed him or her a duty of care; b) the defendant violated that duty by performing a legitimate action inappropriately; and c) the inappropriate action resulted in injury upon him or her20. In this case, Jaswinder performed a legal act of (authorising payment) inappropriately by negotiating the cheque to himself. As such, he is liable for the act. The offense of misfeasance in office has taken a new turn in the wake of strengthened human rights legislation and EU Directives to that effect21. The category of misfeasance prompted two landmark commercial cases following the enactment of the Human Rights Act 1998. The first one is Three Rivers DC v Governor and Company of the Bank of England (No.3) [2000] 2 AC 1, which resulted from the suit filed by the creditors of the defunct BCCI against the Bank of England22. BCCI had become insolvent while the claimants’ money was in their possession. The second case is Weir and others v Secretary of State for Transport and Oers [2005] EWHC 2192 (Ch), in which the Railtrack shareholders sought compensation for their materially devalued shares23. The plaintiffs in the latter case alleged predetermined sabotage by government. Unlike in the two cases where the plaintiffs failed to secure any restitution because of overwhelming burden of proof, all that Kuldip needs is to prove that Jaswinder’s actions constituted targeted malice24. Jaswinder’s definite intent to harm Kuldip or the employer class to which he belongs is adequate grounds for actionable malice. In addition, unlike in Three Rivers and Weir and others, Kuldip has the grounds for a dispute that he had incurred material damage amounting to 10,000. Based on these facts, the claimant has a lesser evidential burden to carry as compared to the plaintiffs in Three Rivers and Weir and Others25. Since the verdicts in the two cases consider what had been limited by common law, Jaswinder might fight back with the common floodgates argument26. Specifically he may argue that by virtue of his responsibilities, his decision to misrepresent facts to Kuldip and the subsequent negotiation of the cheque to himself was not driven by any malice; that the damage caused by his actions is too insignificant to cause any material injury to Kuldip. However, the argument might appear a little bizarre, judging by the high level of trust which the claimant had bestowed upon him in respect of processing cheque payments for their suppliers27. In addition, the English common law has evolved to consider constitutional rights of the claimants and or the defendants in examining misfeasance in public office. A breach of this right renders any claims of material damage irrelevant. The court established in R v Home Secretary ex p Leech (No 2) [1994] QB 198, that even in the English unwritten constitution every individual has the right to access a court without any hurdles, and that an inmate’s free right to legal counsel for the reason of beginning civil court proceedings is fundamental28. In this case, Jaswinder might cite his right to fair remuneration as another primary reason for his misfeasance action, for instance29. However, a careful look at the relationship between him and Kuldip would reveal that he could approach Kuldip for a better pay and if that was not possible under the arrangement, he could seek employment elsewhere rather than engaging in misfeasance. As such, Kuldip would succeed in tracing the same amount of money negotiated to Jaswinder back to his account30. In the legal dispute, the banker is blameless because the process of writing the cheque, its holding, submission, collection and the subsequent action on the payment order specified therein was legal. Bibliography Aldohni, Karim Abdul, (2012), The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia, Routledge, London, pp.60-67 Belohlávek, J. Alexander, (2011), Rome Convention - Rome I Regulation, Juris Publishing, Inc., London, pp.330-335 Bohm, Nicholas and Lang, Jack, (2011), ‘How to abolish the cheque clearing system but keep and improve cheques,’ Digital Evidence & Electronic Signature Law Review, 8, pp.107- 110 Gillies, Peter, (2004), Business Law, Federation Press, New York, p.795 Kennedy, P.T., (2011), European Law, Oxford University Press, Oxford, pp.331-332 Khan, Anichul H., Khan, Haider A., and Dewan, Hasnat, (2013), Central bank autonomy, legal institutions and banking crisis incidence, International Journal of Finance & Economics, 18(1), pp.51-73 Maffey, Riccardo, (2005), Dud Cheque, Lulu.com, London, p.103 Myles, Danielle, (2013), ‘AFMEs Brian Harte: UK banking under Parliamentary Commission changes,’ International Financial Law Review, 32(6), p.40 Pampallis, A., Van Der Merwe, Amelia, and Mdluli, L., (1999), Banking in the New Millennium, Juta and Company Ltd, London, pp.56-61 Roebuck, Derek, (1991), Cheques: Building for Joint Ventures, Hong Kong University Press, Hong Kong, pp.22-46 Stokes, Robert, (2011), ‘The Genesis of Banking Confidentiality,’ Journal of Legal History, 32(3), pp.279-294 Read More