UK: Bank’s Liability On Defective Cheques – Useful Guidance

Guidance has recently been provided to banks looking to avoid liability for dealing with a cheque on behalf of a customer who in fact had defective or no title in it. It is a defence for a bank to show that it was "acting in good faith and without negligence" in dealing with a defective cheque (Section 4 of the Cheques Act 1957) and this case concerned the negligence element of this test.

A businessman used his group, specifically a Caymans Islands subsidiary company ("AWCI"), to sell long term, forward wine contracts with the intention of fraudulently misappropriating payments made. When AWCI was investigated and its bank accounts frozen, he directed that US dollar cheques to AWCI should be paid to a UK group company ("AWUK"). The cheques were made out to AWCI but paid into AWUK’s specially prepared US dollar account with the defendant bank.

Both parties applied for summary judgment, both of which applications were heard before the Court in this case. The key questions were: first, whether the businessman had validly authorised the payment of the cheques in AWUK’s bank account (the Court found he had); and secondly, whether the bank could show it had a realistic prospect of succeeding in its argument that it had acted in good faith and without negligence, in order to obtain the Section 4 defence.

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Banks must disprove negligence in order to obtain a Section 4 defence. Therefore banks need to ensure that they have appropriate early-warning systems to detect any issues with cheque validity. Equally they need to ensure that there is someone who can consider and deal with any issues and ‘exercise judgment on the matter’.

In particular, a bank should ensure that:

• The payee details on the cheque itself are thoroughly checked against the account details – inspection of internal forms but not the cheque itself is insufficient

• Its cheque receiving and sanctioning systems should be as integrated as possible – a bank may be negligent if the receiving branch is aware of issues that are not communicated to the sanctioning branch, or vice versa

• Specific knowledge the bank has about the customer and its business is taken into account when sanctioning cheques. For example had the customer put the bank on notice that it anticipated receiving large foreign currency cheques from unknown third parties?

In this case it was found that while the bank had acted in good faith, it had fallen well short of establishing any realistic prospect of success on the issue of negligence. The bank did have a system for checking and approving payment of foreign cheques, but it was split between the receiving branch and a central checking department and the bank was unable to prove anyone had checked the account details against the actual cheques. The cheque details should have put the bank on notice (and so obliged them to make further enquiries before approving the payments) because: (i) the cheques were addressed to AWCI, not AWUK; (ii) all cheques were in US dollars; and (iii) about 10% of the cheques gave the payee’s address as being in the Cayman Islands. Lastly, the bank already knew from a previous meeting with AWUK representatives that AWUK’s business was UK-based and that it did not expect to receive large US dollar payments, except from its parent from time to time.

As the bank could show no realistic prospect of successfully disproving negligence, the Court awarded judgment on liability to the claimant and ordered an enquiry as to quantum.

Architects of Wine Limited v Barclays Bank [2006] EWHC 1648 (QB).

Section 4 Cheques Act 1957

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 25/09/2006.