Principles of business law

Business Management Study Manuals Diploma in Business Management PRINCIPLES OF BUSINESS LAW The Association of Business Executives 5th Floor, CI Tower  St Georges Square  High Street  New Malden Surrey KT3 4TE  United Kingdom Tel: + 44(0)20 8329 2930  Fax: + 44(0)20 8329 2945 E-mail: info@abeuk.com  www.abeuk.com © Copyright, 2008 The Association of Business Executives (ABE) and RRC Business Training All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, electrostatic, mechanical, photocopied or otherwise, without the express permission in writing from The Association of Business Executives Diploma in Business Management PRINCIPLES OF BUSINESS LAW Contents Unit Title Page Nature and Sources of Law Nature of Law Historical Origins Sources of Law The European Union and UK Law: An Overview 12 Common Law, Equity and Statute Law Custom Case Law Nature of Equity Application of Principles of Equity Equity and Common Law Classification of Equity Legal and Equitable Rights Nature of Statute Law Interpretation of Statutes Codification and Consolidation Appraisal of Statute Law Delegated Legislation 23 25 26 32 34 36 37 38 39 41 44 45 45 The Administration of Justice Organisation of the Courts Administrative Justice Public International Law Judges and Juries Organisation and Role of the Legal Profession 49 50 61 64 65 67 The Law Relating to Associations The Concept of Corporations Corporations in Law Companies Companies in Law Unincorporated Associations Partnerships 73 75 77 79 84 93 93 Contract Law 1: Fundamentals of Contracts and their Creation What is a Contract? The Agreement Classification of Statements and Terms Consideration The Intention to Create Legal Relations Capacity to Contract 101 103 107 115 117 125 127 Unit Title Page Contract Law 2: Contract Regulations Privity of Contract Joint Obligations Assignment Mistake Misrepresentation Undue Influence Void and Illegal Contracts 131 133 138 139 140 148 151 155 Contract Law 3: Performance and Discharge Performance Discharge by Agreement Discharge by Breach Discharge by Frustration Remedies for Breach of Contract 165 166 169 171 173 178 The Sale of Goods 1: The Contract, Property and Title Sale of Goods Distinction between Sale and other Supply Contracts Formation of Contract of Sale Passing of Property Transfer of Title by Non-Owners 187 188 191 193 196 207 The Sale of Goods 2: Terms and Conditions Frustration Delivery Acceptance and Payment Statements Relating to Goods Statutory Implied Terms as to Description and Quality Exemption Clauses 211 212 214 218 220 222 229 10 The Sales of Goods 3: Disputes and Remedies Remedies of the Seller Remedies of the Buyer Supply of Goods and Services Act 1982 Role of the Commercial Court Resolution by Arbitration Rules for the Conduct of Arbitration Arbitration Proceedings Rights and Duties of the Arbitrator Arbitration Awards 235 237 244 247 247 248 251 253 254 256 11 Law of Agency 1: Agency Agreements and Agents General Nature of Agency How Agency Arises Ratification Categories of Agents Duties of Agents to their Principals Rights of Agents against Principals Commercial Agents (Council Directive) Regulations 1993 259 261 263 266 270 272 278 282 Unit Title 12 Law of Agency 2: Authority, Liability and Termination Authority of Agents Delegation of Authority Rights and Liabilities of the Principal to Third Parties Liability of the Principal for the Wrongs of the Agent Relations between Agents and Third Parties Termination of Agency 285 287 290 291 293 294 298 13 Employment Law 1: The Contract of Employment Distinction between Independent Contractor and Employee Other Categories The Need to Distinguish between Categories Contract of Employment Equal Pay Other Terms and Conditions 303 304 307 309 310 314 316 14 Employment Law 2: Termination of the Contract, Discrimination and Tribunals Notice Written Statement of Reasons for Dismissal Constructive Dismissal Redundancy Unfair Dismissal Employment Tribunals Race Relations Act 1976 Sex Discrimination Acts 1975 and 1986 Disability Discrimination Act 1995 Health and Safety at Work Act 1974 323 325 326 326 327 329 332 335 339 343 345 15 16 Page Principles of Consumer Credit Hire Purchase Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006) The Consumer Credit Agreement Withdrawal and Cancellation Rights during the Currency of the Agreement Obligations of the Creditor in Relation to the Quality (etc.) of the Goods 349 350 Consumer Protection Introduction Trade Descriptions Act 1968 Fair Trading Act 1973 Consumer Safety The Role of Local Government Manufacturers and Product Liability under the Law of Tort 367 368 368 372 373 377 378 350 357 359 360 364 Unit Title Page 17 Negotiable Instruments 1: Bills of Exchange Introduction Characteristics of a Bill of Exchange Acceptance Transfer of Bills of Exchange Methods of Discharge Liability of Parties on the Bill Release from Liability Liability "Outside" the Bill Forgeries Dishonour of a Bill Consequences of Dishonour Incomplete Bills and Alterations 383 385 385 387 390 394 394 398 399 399 401 403 405 18 Negotiable Instruments 2: Cheques Introduction The Nature of a Cheque Banker/Customer Relationship Crossing a Cheque Special Protection of Paying Banker Special Protection of Collecting Banker Promissory Notes 409 411 411 413 416 418 420 422 Study Unit Nature and Sources of Law Contents Page A Nature of Law Definition Classification of Laws Criminal and Civil Liability The Set of Rules Objectivity Enforcement Impartiality The Rule of Law 3 5 5 B Historical Origins The Anglo-Saxons The Danes Position before the Norman Conquest The Normans Curia Regis Itinerant Judges Court of Admiralty The Law Merchant Canon Law Court of Chancery 6 6 8 9 C Sources of Law Unwritten Law Written Law The Pattern of English Law The Law of the European Union 9 10 10 11 D The European Union and UK Law: An Overview Composition of the European Union Institutions of the European Union Application of Union Law The European Union and Interpretation of Law 12 12 13 14 14 (Continued over) © ABE and RRC Nature and Sources of Law Parliamentary Sovereignty and the European Union Single European Act 1986 The Treaty on European Union 1992 (The Maastricht Treaty) European Communities (Amendment) Act 1998 15 16 17 21 © ABE and RRC Nature and Sources of Law A NATURE OF LAW Definition The word "law" is difficult to define, particularly as it is used in many different ways It contains, however, the concepts of orderliness, universality and objectivity It is concerned with behaviour and not with causes, and either contains an element of inevitability, e.g scientific laws, such as the laws of gravity, or of sanction, e.g divine laws Some philosophers have postulated the existence of natural law by which they mean the Law of God which regulates the actions of mankind This concept is often known as the principles of natural justice In the narrower concept of law, there must be a set of rules which can be applied objectively with someone to enforce them There have been many attempts to put these into a workable definition, some more successful than others One of the better is that of Salmond: "Law consists of any principle which is recognised and enforced by the courts in the administration of justice" Another, which is possibly superior to that of Salmond, since it has a slightly wider application, is that of James: "A body of rules for the guidance of human conduct which are imposed upon and enforced among the members of a given state" Classification of Laws Salmond, after stating that law in its general sense includes any rule of action, says that it includes the following categories:  Imperative Law These are rules of action imposed on men by authority, e.g by the state  Physical or Scientific Law These are rules which formulate the uniformities of nature, e.g the law of gravitation You can distinguish them from man-made laws, in the sense that they merely state observations on a state of affairs that already exists  Natural or Moral Law These are rules formulating the principles of natural justice This conception of law is derived from Greek philosophy and Roman law, and has found more favour with Continental jurists than in English jurisprudence It overlaps to some extent with physical or scientific law In the English language, law and justice are two separate words, showing that we recognise them to be two separate things – a distinction that is not made in most other languages  Conventional Law These are rules agreed upon by persons for the regulation of their conduct towards each other Agreements entered into by, for example, the parties to a contract or members of a company (who agree to be bound by the rules of its Articles of Association) are enforceable under the law of the land Other agreed systems of rules, e.g the rules of a football club or the laws of chess, may not be enforceable by law © ABE and RRC Nature and Sources of Law  Customary Law These are rules of action embodied in custom We shall consider later the importance of custom in the development of the English legal system  International Law These are rules which govern sovereign states in their relations with each other  Civil Law This is the law of the state, as applied in the state's courts of justice It is into this category that English law falls Criminal and Civil Liability In essence, it can be said that a crime is a wrong against the state, while a civil wrong is one against an individual You should note the following major distinctions:  State Action and Private Action In the case of a crime, while under certain circumstances an individual may prosecute, the prosecution will normally be brought by the state In a civil wrong, such as breach of contract, the injured party may bring an action against (or "sue") the party liable, and may recover damages or other forms of satisfaction  Redress and Punishment The purpose of a civil action is to redress a wrong, whereas the aim of a criminal prosecution is to punish the wrongdoer, to prevent him or her from repeating the crime and to discourage others from committing similar crimes  Settlement and Withdrawal A criminal action can be withdrawn only with the leave of the Crown, whereas the claimant in a civil action can settle out of court or withdraw his/her claim at any time  Indictment and Writ Criminal proceedings are initiated by indictment or summary procedure, whereas civil proceedings are commenced by action resulting from the issue of a Claim Form A fundamental difference thus exists between criminal law (dealing with crimes) and civil law (dealing with civil wrongs) and each branch is, in general, administered by different courts on different principles Criminal law is concerned with offences against the state, i.e crimes such as murder, burglary, theft The more serious criminal cases are dealt with by a judge and jury; less serious offences (the overwhelming majority) are dealt with by magistrates The two parties are the prosecution and the accused The prosecution is conducted on behalf of the Crown via the Crown Prosecution Service, in important cases by the Attorney-General If the accused is found guilty by the jury, he/she is convicted and sentenced by the judge; if not, he/she is acquitted Civil law is concerned with private litigation, e.g breaches of contract, disputes concerning property The claimant issues a Claim Form, setting out the facts he/she alleges against the defendant and asking for damages or other remedy The defendant puts in a defence to the allegations of the claimant The case is then tried by a judge and jury, or by a judge sitting alone, without a jury Today, there is normally no jury in civil cases, unless one of the parties makes special application that a jury should be summoned If there is a jury, it decides the facts of the case and the judge decides the law Then, the judge, if the jury has found for the © ABE and RRC 410 Negotiable Instruments 2: Cheques Liability of Maker Joint Notes Joint and Several Notes Application of Bills of Exchange Act 1882 423 423 423 423 © ABE and RRC Negotiable Instruments 2: Cheques 411 A INTRODUCTION In this study unit we will be considering the law relating to cheques Remember that a cheque is merely one form of negotiable instrument It is being considered separately because there are special rules relating to banks and their customers There are also slight differences which we must note between a cheque and a bill of exchange B THE NATURE OF A CHEQUE General Comparison with Bills of Exchange The statutory law relating to cheques is mainly contained in the Bills of Exchange Act 1882 and the Cheques Act 1957 Section 73, Bills of Exchange Act 1882, defines a cheque as: "A bill of exchange drawn on a banker, payable on demand." Note the two special requirements for a cheque:  It must be drawn on a banker  It must be payable on demand Although cheques are a special type of bill of exchange, and the Bills of Exchange Act applies to cheques, there are a number of important points of difference: (a) Because of the contractual relationship between banker and customer, there are a number of special obligations on these parties (b) The rules relating to acceptance not apply to cheques; the banker on whom the cheque is drawn never "accepts" it, so that the drawer is the party primarily liable on the instrument (c) There are special provisions for the crossing of cheques which not apply to ordinary bills of exchange (d) Special statutory protection is given to bankers in relation to forged endorsements It may be observed further that, in practice, cheques are rarely used in the way of bills of exchange as negotiable instruments The vast majority of cheques are presented for payment by the person to whom they are initially given, and negotiation of a cheque is comparatively rare In effect, cheques are generally used merely as a directive by the drawer to his/her bank to transfer money from an account to the account of the payee It may be convenient here to indicate diagrammatically the normal course of a cheque © ABE and RRC 412 Negotiable Instruments 2: Cheques Figure 18.1 If A draws a cheque in favour of B, B may either take it to A's bank and obtain payment (Figure 18.1), or he can pay it into his own bank who will, on his behalf, collect payment from A's bank (Figure 18.2) A's bank (the paying bank) will debit A's account as they meet the cheque and B's bank (the collecting bank) will credit B's account with the money collected Figure 18.2 Cheques and Receipts In addition to the principal points of difference between cheques and bills of exchange referred to above (and to be considered in detail later), there are a number of other special features of cheques that may be noted here Prior to 1957, it was common practice for the payee of a cheque to endorse it on the back as he paid it into his bank for collection, and a cheque so endorsed was sufficient evidence of receipt of payment for the drawer of the cheque (to whom, of course, the paying bank would return the discharged cheque in due course) This practice was generally found rather tedious, and the Cheques Act 1957 contained various provisions to make it unnecessary, of © ABE and RRC Negotiable Instruments 2: Cheques 413 which S.3 provides that "an unendorsed cheque which appears to have been paid by the banker on whom it is drawn is evidence of the receipt by the payee of the sum named in the cheque" Thus a paid cheque, whether or not endorsed by the payee (but not if endorsed in favour of some other person) will nowadays normally be adequate evidence of receipt of payment by the payee (for auditors, etc.), and the payer is unlikely to ask for any other receipt However, if he/she does so the payee is bound to provide it In this connection it may be noted that some cheques are found with a form of receipt attached, and require as a condition that the receipt must be duly completed before the cheque can be paid Since such an instrument does not constitute "an unconditional order in writing", it is not strictly a cheque, and falls outside the Bills of Exchange Act; therefore bankers usually require an indemnity from customers using such instruments, in order to safeguard themselves Post-dated Cheques The Bills of Exchange Act 1882 allows bills to be dated as at a date subsequent to that on which they are actually drawn In the case of cheques such a practice should strictly invalidate the instruments as they cannot be said really to be payable on demand, but in fact such cheques are held to be valid as payable on demand as from the date entered Overdue Cheques A bill payable on demand must be presented for payment within a reasonable time of the bill's date and if this is not done the drawer and prior endorsers are discharged from liability In the case of cheques, however, the drawer cannot escape liability in this way (though any endorser will), and will remain liable on the cheque for the normal limitation period of six years In practice, a cheque presented more than six months after date will be returned as "stale", but the holder can obtain a fresh cheque from the drawer Where, however, the cheque has been held for more than a reasonable time and the drawer suffers actual loss through this delay, then the drawer will be discharged to the extent of such loss This might arise where, after the cheque has been held for more than a reasonable time, the drawer's bank goes into liquidation and is only paying £0.25 in the £ Since the holder of the cheque is responsible for the drawer having the excess funds represented by the unpresented cheque in the bank at this time, he/she will be able to claim from the drawer only one-quarter of the value of the cheque and must him-/herself prove in the liquidation (i.e seek funds owed as a proven creditor) for the balance C BANKER/CUSTOMER RELATIONSHIP The relationship between banker and customer is a contractual one whereby the customer deposits money with the bank on the understanding that the bank will meet cheques drawn by the customer on the account up to the amount of the balance standing therein or of any agreed overdraft Bank's Duties The duties of the banker under this contract are two-sided: to honour cheques duly drawn up to the amount available, and not to pay without proper authority In Schioler v Westminster Bank Ltd (1970) it was also said that a bank owes a duty to credit a customer's account with dividends received on the customer's behalf and it owes a duty to take care in doing so The limitations on this duty are illustrated by United Overseas Bank v Jiwani (1977) where the defendant had been informed by his bank that his balance amounted to 31,000 dollars © ABE and RRC 414 Negotiable Instruments 2: Cheques when in fact it was 25,000 dollars The defendant then ordered the bank (he claimed in good faith), to make a payment of 30,000 dollars to a third party, being the purchase price of a hotel sold by the third party On being asked by the bank for repayment, the defendant claimed that he was protected by an estoppel arising from the bank's representation The court refused this argument, pointing to the fact that there must be a reliance on the representation and a change in position such as to make it inequitable to order repayment Satisfied that the defendant would have purchased the hotel in any event, borrowing a part of the purchase price if necessary, the court concluded that there was in this case no such change in position If the bank fails to meet a cheque that is duly drawn where there are funds available to meet it, it will be liable for damages to the drawer Where the drawer is a trader, damages will be awarded without proof of actual loss, but in other cases loss must be established On the other hand, the bank will be liable if it pays a cheque on which the drawer's signature is forged, or if it pays a cheque not properly drawn (e.g if a company's cheques require the signature of two directors and only one signature is present) The bank will also be liable if it meets a cheque after the customer has countermanded payment Note that where the countermand is received by telephone or telegram (so that the bank cannot verify the authority) the bank should return the cheque to the payee marked "payment countermanded by telephone – present again" and then obtain written confirmation from the customer Such action will not amount to refusal to meet the cheque which would render the bank liable if the countermand was unauthorised The bank's authority to meet cheques will also be terminated in the following circumstances:  Notice of the customer's death or insanity  Notice of an act of bankruptcy by the customer or the making of a receiving order against the customer  Receipt of a garnishee order (an order awarded to a judgment creditor which "freezes" the balance then standing in the customer's account) The effect of computers upon this relationship between banker and customer is illustrated by the case of Momm v Barclays Bank International (1976) in which it was decided that a bank transfer is effected when the bank accepts the instructions of a customer to credit another customer and the bank computer processes for doing so are set in motion The fact that the entry can be later reversed has no bearing on the transaction Two companies banked at the same branch and transactions were computerised Final balances on customers' accounts were not known until the date after, and transactions were reversed if a customer's indebtedness was unacceptable One of the companies instructed the bank to transfer £120,000 on 25 June to the second company and on 26 June the computer process was set in motion On the afternoon of 26 June, the company making the payment announced it was going into liquidation; on the following day its account was in debit and the bank reversed the entries The company which should have received payment claimed the money from the bank It was held that, as the bank could not accept countermanding instructions from the paying-in company once the computer process had been set in motion, the transfer was then completed It was not essential that notice to the payee should be given Customer's Duties The customer owes the bank a duty of care in the way a cheque is drawn Where the amount of a cheque is altered and the cheque is met by the bank, the position will be as follows: (a) If the alteration was apparent, the bank must bear the loss © ABE and RRC Negotiable Instruments 2: Cheques (b) 415 If the alteration was not apparent but was not facilitated by negligence on the part of the customer in drawing the cheque, then the customer will be chargeable with the original amount but the bank must bear the excess So far, the position is comparable to the general rule of bills of exchange; however: (c) If the alteration was not apparent and was made possible through the careless way in which the customer drew the cheque, then the loss will fall on the customer In London Joint Stock Bank v Macmillan & Arthur (1918), a bearer cheque was drawn for £2 in figures, but with sufficient space for this to be changed to £120 without the alteration being apparent, and without the amount being written in words at all, so that a fraudulent clerk was able to write in "one hundred and twenty pounds" It was held that the customer had to accept the full charge of £120 when the cheque was met The case of Slingsby v District Bank (1931) may also be noted in this context The drawer left a gap between the inserted name of the payee and the printed words "or order", into which gap one Cumberbitch inserted the words "per Cumberbitch and Potts" He then endorsed the cheque and obtained payment It was held that this did not constitute negligence on the part of the drawer so that the bank had to bear the loss Acting in excess of authority created by the relationship can give rise to criminal liability, as in the case of R v Charles (1976) C had authority to overdraw his account up to £100 and he also had a cheque card which contained an undertaking by the bank that any cheque not exceeding £30 would be honoured subject to the usual conditions In the course of one evening at a gambling club, C drew 25 cheques for a total of £750 He was convicted under the Theft Act 1968 of dishonestly obtaining a pecuniary advantage for himself by deception In the course of judgment, it was said that, where the holder of a cheque card presents the card together with a cheque made out in accordance with the conditions of the card, it is open to the court to infer that a representation has been made by the drawer that he has the authority as between himself and the bank to use the card in order to oblige the bank to honour the cheque If that representation is false and the payee has been induced to accept the cheque by reason of that false representation, the drawer has thereby obtained a pecuniary advantage by deception Greenwood v Martins Bank Ltd (1933) illustrates how the bank will be protected in the event of the customer's negligence Greenwood's wife had been drawing money from his account by forging his signature on his cheques In order to protect his wife, he did not inform the bank The wife later committed suicide and he then decided to sue the bank for the return of the money HELD: The husband was under a duty to disclose what had happened, and as he had failed to so his conduct precluded him from alleging the forgery An important case showing the limit of the customer's duty to his bank was decided by the Privy Council in Tai Hing Cotton Mill v Ling Chong Hing Bank (1985), where the bank had over a period of time paid out on cheques that had been forged by an employee of the appellant company The total involved was in excess of $5 million and the fraud had continued for some considerable time The bank argued that the appellant customer company had been negligent because they had received bank statements over the period which showed that the bank had been paying out on the forged cheques The customer should have noticed the errors and informed the bank Since it had not done so it was negligent and, the bank argued, that it should bear the loss The Privy Council held that the customer did not owe a duty to inform the bank of errors on bank statements unless it was expressly agreed If the customer actually knew about the forgeries then he had to tell the bank but he was not under any duty to take steps to find out © ABE and RRC 416 Negotiable Instruments 2: Cheques about the forgery by, for example, checking the accuracy of his bank statements Therefore the bank was held liable to bear the loss The case shows how the law, when it comes to cases between banks and their customers, tends to side with the customer, presumably on the basis that the bank is more able to bear the loss In the absence of express contractual terms, there has been a general unwillingness on the part of the courts to further extend the duties of customers to their banks in the way in which customers operate their accounts – see Patel v Standard Chartered Bank (2001) D CROSSING A CHEQUE Purpose of Crossings The Bills of Exchange Act 1882 makes provision for the "crossing" of cheques, and this provision does not apply to any other type of bill of exchange The effect of a crossing is that the cheque may be met only by payment to a banker, and cannot be cashed over the counter of the paying bank The object of this is that it is thus possible for the drawer of the cheque to trace it after it has been paid through a bank account, to a known holder Also, it gives more time to countermand payment The crossing does not initially affect the negotiability of the cheque, nor does it mean that the cheque must be endorsed General and Special Crossings There are two types of crossing – "special" and "general"  Special Crossing In a special crossing, the name of a particular bank is written between the lines of the crossing, e.g Barclays; a cheque bearing a special crossing must be met only by payment to that particular bank, i.e Barclays  General Crossing A general crossing is made by drawing across the face of the cheque two parallel lines with or without the words "and company", or any abbreviation thereof, e.g "& Co." The original intention was that the payee could insert the name of his/her bank, making it a special crossing, but the bank usually does this by stamping its name on the crossing The crossing must appear on the face of the cheque and it is desirable that it should be across the middle of the document Lloyds Bank Ltd a/c Payee only Lloyds Bank Ltd Not negotiable Lloyds Bank Ltd Examples of special crossings are: © ABE and RRC Negotiable Instruments 2: Cheques 417 a/c Payee only & Co Not negotiable & Co & Company And here are some examples of general crossings: "Not Negotiable" S.81 of the Bills of Exchange Act also provides for the addition of the words "Not negotiable" to the crossing The effect of these words is to take away the attributes of negotiability from the instrument (though not the right of transfer), so that no person taking a cheque bearing such a crossing can obtain a better title than that of the transferor Let us consider a cheque which has been crossed "not negotiable" and which has been stolen Obviously, the thief's title to the cheque is a bad one and henceforth all successive holders of that cheque, no matter how innocently they may have acted or how great has been their good faith, have defective titles to the cheque If the drawer has succeeded in stopping the cheque, the holder with defective titles acquired through the thief cannot compel the drawer to remove his/her stop Moreover, the holder with a defective title who succeeds in cashing such a cheque (paid in through his account) is liable to refund the proceeds to the true owner This liability extends for the statutory period of six years "A/c Payee Only" The Cheques Act 1992 (which became law on 16 June 1992) amended the law on cheques crossed with an "account payee" crossing by adding a new section (Section 81(A)) to the Bills of Exchange Act 1882 which stipulates that:  Where 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 as between the parties thereto  A banker is not to be treated for the purposes of Section 80 above as being negligent by reason only of his/her failure to concern him-/herself with any purported endorsement of a cheque which under Sub-section (1) or otherwise is not transferable Thus, account payee cheques are now non-transferable, and it seems clear that a bank collecting such a cheque for a person other than the payee will lose its statutory defence (see below) contained in the Bills of Exchange Act 1882 and the Cheques Act 1957 This is in keeping with the purpose of the 1992 Act which is to diminish the possibility of fraud by making appropriately crossed cheques impossible to transfer Drawer and Banker The authority to cross cheques is set out in S.77, Bills of Exchange Act 1882, as follows: © (1) "A cheque may be crossed generally or specially by the drawer (2) Where a cheque is uncrossed, a holder may cross it generally or specially (3) Where a cheque is crossed generally, the holder may cross it specially ABE and RRC 418 Negotiable Instruments 2: Cheques (4) Where a cheque is crossed generally or specially, the holder may add the words 'not negotiable' (5) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker for collection (6) Where an uncrossed cheque, or a cheque crossed generally is sent to a banker for collection, he may cross it specially to himself." Once a cheque has been crossed, the crossing can be "opened" only on the authority of the drawer Following the introduction of the Cheques Act 1992, the major clearing banks changed the standard format of their cheque books so that they are now pre-printed with the "Account Payee" crossing and, in some cases, the word "only" on the payee line replacing the words "or order" Let us now consider the position of the paying bank in relation to crossed cheques Quite simply, it is bound to pay in accordance with the crossing, and S.79, Bills of Exchange Act 1882 provides that a banker who pays a crossed cheque otherwise than in accordance with the crossing will be liable to the true owner of the cheque for any loss the latter may incur by reason of the banker's default Where, however, a crossing has been obliterated or altered without this being apparent, a banker who pays in good faith and without negligence within the apparent terms of the cheque will not incur any liability under S.79 E SPECIAL PROTECTION OF PAYING BANKER The Bills of Exchange Act 1882 and the Cheques Act 1957 between them provide special protection for bankers paying and collecting cheques If the paying bank meets a cheque without discharging it, so that the true owner is able to claim the cheque and demand payment him-/herself, the bank will be liable to the customer in conversion in respect of the first payment and will have to bear the loss A relevant case is that of National Westminster Bank v Barclays Bank International Ltd and Another (1974) During a burglary, a cheque was stolen from the cheque book of X, a customer of the National Westminster Bank Subsequently, he learned that his account had been debited with a cheque for £8,000, which had been collected by Barclays Bank and credited to the second defendant, one of their customers The claimants admitted that the cheque had been forged and that they were not entitled to debit it to X's account They brought an action to recover the £8,000 from the defendants as money paid under a mistake of fact It was contended by the second defendant that the claimants were prevented from recovering the £8,000 since their action in honouring the cheque amounted to a representation that it was genuine This plea was rejected It was held that, merely by honouring a forged cheque without negligence, the claimants had not impliedly represented to the payee that the signature was genuine so as to prevent recovery from him Bank as Customer's Agent Protection is, however, afforded under S.1, Cheques Act 1957 In order to discharge a bill, payment must be made to "the holder" defined as "the payee or endorsee of a cheque who is in possession of it, or the bearer thereof" Where a cheque is paid in by a customer to his/her bank for collection, this will not normally constitute a "negotiation" of the cheque, for the banker does not purport to be a holder but acts as agent for the customer © ABE and RRC Negotiable Instruments 2: Cheques 419 Bank as Holder In some circumstances, however, the collecting bank does not act as a mere agent, but as a holder in its own right, namely in the following cases:  The cheque is paid in to reduce the customer's overdraft  The bank credits the customer's account before the cheque is cleared, and there is an express or implied agreement between the parties that the customer can draw against such cheques before they are cleared In such cases, if the cheque is payable to the customer and he/she is not required to endorse it before it is paid in, payment by the drawee bank to the collecting bank will not discharge the cheque because the latter will not come within the definition of a holder Of course, where the collecting bank is merely acting as an agent, the endorsement of the holder of the instrument is not required for payment by the drawee to discharge it, but, since the paying bank cannot know of the circumstances in which the cheque is paid in by the customer, it was the practice prior to the Cheques Act 1957 to refuse to meet any cheque not endorsed by the payee Endorsement when Paying In The practice of endorsement was extremely inconvenient, and both the business and banking communities pressed for measures to render it unnecessary As a result, S.1, Cheques Act 1957 was enacted, providing that "Where a banker in good faith and in the ordinary course of business pays a cheque drawn on him which is not endorsed or is irregularly endorsed, he does not, in doing so, incur any liability by reason only of the absence of, or irregularity in, endorsement, and he is deemed to have paid it in due course." Notwithstanding their objection to the endorsement of cheques as a general practice, however, the committee of London Clearing Banks subsequently announced that, as a matter of practice, banks would still require the endorsement of cheques in the following cases: (a) If the payee (or endorsee) presents it to the bank on which it is drawn for payment over the counter, his/her endorsement will be required (b) If the cheque is paid in for the credit of an account other than that of the payee or last endorsee, the endorsement of the payee or last endorsee will be required (Under the wide drafting of the section, intermediate endorsement also could be missing and the protection would still apply.) But where the payee pays in the cheque for the credit of his/her own account, his/her endorsement will not be required; equally, in case (b) above, the endorsement of the person to whose account the cheque is to be credited will not be required The effect of this announcement is that, if a bank pays a cheque in the stipulated circumstances without requiring the endorsement specified, the cheque would not be paid "in the ordinary course of business" and the protection would not apply In Lumsden and Co v London Trustee Savings Bank (1971) damages for conversion were reduced by apportionment under the Law Reform (Contributory Negligence) Act 1945 A clerk employed by the claimants opened an account at the defendants' bank in the fictitious name of John Arthur George Brown, the defendants failing fully to carry out their own procedure for checking on new customers The clerk then converted cheques properly drawn on the claimants’ business to the name of J A G Brown, paid them into his account, and eventually absconded with the proceeds When sued in conversion the bank pleaded the statutory defence of S.4(1), Cheques Act 1957 and in the alternative contributory negligence © ABE and RRC 420 Negotiable Instruments 2: Cheques HELD: S.4 did not apply owing to the bank's negligence in opening the account, but the defence of contributory negligence did The claimants were negligent in signing cheques with a gap before the word "Brown" and in not ensuring the words "and Co." were added, thus allowing the clerk to add the fictitious name Judgment was given for the claimants, amounting to 90% of their claim Forged Endorsements Even where payment is made to the holder, the cheque will not generally be discharged if it bears a forged endorsement S.60, Bills of Exchange Act 1882, however, affords special protection to bankers in its provision that, if an order cheque with a forged endorsement is paid by a banker in good faith and in the ordinary course of business, the cheque will be deemed to have been discharged, notwithstanding the forgery In Goldman v Cox (1924) Goldman drew a number of cheques in favour of X In the meantime, Goldman's clerk obtained the cheques, forged X's endorsement and negotiated the cheques to Cox Cox took them in good faith and for value, and he received payment from the bank for the cheques HELD: Although the bank was protected under S.60, as Cox had received money under a forged endorsement he was liable to Goldman as the true owner Goldman could therefore recover the money Note that the protection of this section applies only to cheques drawn to order Further protection is afforded by S.80, Bills of Exchange Act 1882, which covers the event of a cheque bearing a forged endorsement, or the situation where a thief, having stolen an order cheque, opens a bank account in the name of the payee and obtains payment by this device instead of forging the payee's signature (the cheque is not discharged by payment, since it is not in fact made to the payee) Note, however, the following points:  S.80 applies only to crossed cheques and only if the terms of the crossing are complied with  To obtain the protection of S.80, the banker must act "without negligence" and not just "in the ordinary course of business" S.80 expressly extends its protection to the drawer, provided the cheque has actually passed through the payee's hands, and the true owner of the cheque cannot claim payment on the drawer's account Under S.60, the cheque is actually discharged, so the drawer is thus cleared from liability F SPECIAL PROTECTION OF COLLECTING BANKER If the customer presenting the cheque has not title thereto, the collecting banker would normally be liable to the drawer for conversion if the latter suffered loss However, S.4, Cheques Act 1957 (which repeals and replaces S.82, Bills of Exchange Act) provides that the bank collecting a cheque for a person who has no title thereto (including the holder of a cheque that bears a forged endorsement) will not itself incur any liability for this action The limits of S.4 should be noted: (a) The bank must act without negligence As usual, this must be determined by reference to general practice, but it would probably be deemed negligent if different endorsements appeared in the same handwriting (indicating forgery) or if, without adequate enquiry, it collected a cheque payable to a customer's employer for the account of the customer, even if it carried an endorsement purporting to be that of the employer © ABE and RRC Negotiable Instruments 2: Cheques 421 (b) The bank must be acting for a customer The person for whom the cheque is collected must have an account with the bank, though it would probably be sufficient if the account were opened only with the disputed cheque (c) The following guidelines have been laid down by the Courts in order to determine whether the bank has been negligent and thereby loses the protection of S.4, Cheques Act 1957 or S.80, Bills of Exchange Act 1882 The rules were decided upon in the case of Marfani v Midland Bank (1968)  The standard of care required of banks is that of the ordinary careful banker  The duty, however, does not extend to the thorough examination of accounts  If negligence is alleged in relation to a bank receiving a cheque and collecting money for it, the court must look carefully at the circumstances in which the bank accepts customers and opens new accounts  The burden of proving that he/she acted without negligence is on the defendant It has been held that the bank is negligent in the following circumstances (i) If the bank opens an account without enquiring as to the identity of the customer (Lumsden & Co v London Trustee Savings Bank (1971)) (ii) If it fails to scrutinise the customer's accounts occasionally to see if they are proper and correct (Lloyds Bank v Chartered Bank of India (1919)) (iii) If it receives payment for a customer when the cheque is drawn either in favour of the customer's employer (Underwood v Martins Bank (1924)), or when the cheque is drawn in favour of a third party and the bank fails to enquire into the customer's title to the cheque (Lloyds Bank v Savory (1933)) Collecting Bank as Holder in Due Course As we have already noted, the banker normally acts as an agent of the customer, but in certain circumstances, he will be regarded as a holder in his own right In these cases, provided he satisfies the conditions of a holder in due course he will be able to avoid any liability in conversion on this ground In this connection, it should be noted that, just as S.1, Cheques Act 1957 provided statutory protection for the paying bank even if the cheque was not endorsed by the customer to the collecting bank, S.2 preserves the rights of the collecting bank as a holder in due course Without the endorsement of the customer paying in the cheque (being an order cheque) for collection, the banker will not be a holder within the definition of the Bills of Exchange Act (since he/she is not the payee or endorsee), but by S.2, Cheques Act 1957, the cheque will be deemed to have been endorsed in blank so that the collecting bank meets the definition as a bearer S.4 gives much wider protection, and a banker cannot claim as holder in due course if there is a forged endorsement on the cheque On the other hand, in the appropriate circumstances, the banker may be able to claim as a holder in due course even if he/she has been negligent (which negligence would lose him/her the protection of S.4) © ABE and RRC 422 Negotiable Instruments 2: Cheques G PROMISSORY NOTES Definition S.83, Bills of Exchange Act 1882 states: "(1) A promissory note is an 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 (2) An instrument in the form of a note payable to maker's order is not a note within the meaning of this section unless and until it is endorsed by the maker (3) A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof (4) A note which is, or on the face of it purports to be, both made and payable within the British Isles is an inland note Any other note is a foreign note." Where a promissory note specifies payment at a particular place, presentment at that place is necessary to render the maker liable In Re British Trade Corporation Ltd (1932) it was held that the document, though in the form of a bill of exchange, had the same drawer and drawee If treated as a promissory note, it would require to be presented for payment if it was "in the way of it made payable at a particular place" In this case, the place for payment was not inserted in the body of the note Consequently, time began to run under the Statute of Limitations from the date of the note The following is a specimen of a promissory note payable on demand London, 30 April 2008 £75.20 On demand I promise to pay at the English Bank Limited, Chelmsford, to A Smith or order, the sum of Seventy Five Pounds and Twenty Pence only for value received J Brown An IOU, as generally understood, is not a promissory note, since it does not strictly contain any promise to pay, and in this form it does not constitute a negotiable instrument Necessity of Delivery "A promissory note is inchoate and incomplete until delivery thereof to the payee or bearer" (S.84) No precise form is necessary for a promissory note, but the essential feature is that there must be an unconditional promise in writing to pay a certain sum in money In a similar manner to a bill of exchange, the note must not be made payable on a contingency, although a note may contain a pledge of collateral security with authority to sell or dispose thereof © ABE and RRC Negotiable Instruments 2: Cheques 423 Liability of Maker S.88 specifies that: "The maker of a promissory note, by making it: (1) Engages that he will pay it according to its tenor (2) Is precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse." Joint Notes "A promissory note may be made by two or more makers, and they may be liable thereon jointly, or jointly and severally, according to its tenor" (S.85(1)) Joint liability is not the individual liability of each of the makers but the collective liability of them all together Thus a joint note is good against the makers jointly Should one of the makers of a joint note die or become bankrupt, his/her estate is freed from all liability, and the liability falls entirely on the remaining maker or makers Again, all the parties of a joint note must be sued together If any party is not included in the action he/she will be released from liability Should judgment be obtained against one or some of the parties, whether that judgment is satisfied or not, then the other or others will be released Joint and Several Notes S.85(2) defines a joint and several note: "Where a note runs 'I promise to pay' and is signed by two or more persons it is deemed to be their joint and several note." Joint and several liability is the liability of all the makers together collectively and of each of them separately In other words, where a note is a joint and several one made by two or more makers, the note is good against all the makers jointly or against each one of them separately for the full amount of the note If one of the makers to a joint and several note dies or becomes bankrupt his/her estate is not freed from liability Again, it is not necessary for the holder of a joint and several note to sue all the parties together; the holder can sue the parties singly or in any way he/she pleases and the remedy against them is not satisfied until "twenty shillings in the pound" (i.e the full amount) has been recovered Application of Bills of Exchange Act 1882 S.89 provides as follows: "(1) Subject to the provisions in this part and, except as by this section provided, the provisions of this Act relating to bills of exchange apply, with the necessary modifications, to promissory notes © (2) In applying those provisions the maker of a note shall be deemed to correspond with the acceptor of a bill, and the first endorser of a note shall be deemed to correspond with the drawer of an accepted bill payable to drawer's order (3) The following provisions as to bills not apply to notes; namely, provisions relating to: (a) presentment for acceptance; (b) acceptance; (c) acceptance supra protest; (d) bills in a set (4) Where a foreign note is dishonoured, protest thereof is unnecessary" ABE and RRC 424 Negotiable Instruments 2: Cheques © ABE and RRC ... Association of Business Executives Diploma in Business Management PRINCIPLES OF BUSINESS LAW Contents Unit Title Page Nature and Sources of Law Nature of Law Historical Origins Sources of Law The... Itinerant Judges Court of Admiralty The Law Merchant Canon Law Court of Chancery 6 6 8 9 C Sources of Law Unwritten Law Written Law The Pattern of English Law The Law of the European Union 9... European Union and UK Law: An Overview 12 Common Law, Equity and Statute Law Custom Case Law Nature of Equity Application of Principles of Equity Equity and Common Law Classification of Equity Legal