Overview of Collecting Bank

A. DUTY TO PRESENT/ DISHONOUR/ TRUNCATION SYSTEM.................................................................................................. 2

B. CAUSES OF ACTION AGAINST CB....................................................................................................................................... 2
1. Conversion................................................................................................................................................................... 2
(a) Is the claimant the true owner?......................................................................................................................................2
 Per Majority in OBG v Allan........................................................................................................................................
Allan........................................................................................................................................2
2
d) Should cheques continue to be the class of chose in action that is susceptible to conversion?..............................
conversion?..............................2
2
 No. Baroness Hale dissent..........................................................................................................................................
dissent..........................................................................................................................................2
2
 Read academic articles...............................................................................................................................................
articles...............................................................................................................................................2
2
e) Who can sue CB?........................................................................................................................................................
CB?........................................................................................................................................................2
2
 True owner of the cheque (Marquess
(Marquess of Bute v Barclays Bank [1954].....................................................................
[1954].....................................................................2
2
o True owner =..............................................................................................................................................................
=..............................................................................................................................................................2
2
(b) What defences are available to CB?...............................................................................................................................3
(i) Holder in Due Course (HIDC)...........................................................................................................................................3
(ii) Statutory defence: s 86 BEA............................................................................................................................................3
- Lumsden..........................................................................................................................................................................
Lumsden..........................................................................................................................................................................4
4
(iii) Forgery/Alteration\.........................................................................................................................................................5
2. Unjust Enrichment....................................................................................................................................................... 5
3. Negligence................................................................................................................................................................... 5
o Natwest v Barclays [1975]..........................................................................................................................................
[1975]..........................................................................................................................................6
6
o Customs & Excise v Barclays [2006]...........................................................................................................................
[2006]...........................................................................................................................6
6
C. CARD PAYMENTS............................................................................................................................................................. 6
1. Regulation of credit/charge cards................................................................................................................................ 6
2. Contractual relations between the parties.................................................................................................................... 6
Re Charge Card Services [1989]............................................................................................................................................
[1989]............................................................................................................................................6
6
OFT v Lloyd’s TSB [2007].......................................................................................................................................................
[2007].......................................................................................................................................................7
7
 The contracts that exist under this ‘web’.............................................................................................................................7
3. Selected Legal Issues.................................................................................................................................................... 7
(a) Discharge of underlying debt btw Customer and Merchant..........................................................................................7
(b) Countermand..................................................................................................................................................................7
(c) Liability in event of credit card fraud..............................................................................................................................8
4. Debit / ATM cards........................................................................................................................................................ 8
A. DUTY TO PRESENT/ DISHONOUR/ TRUNCATION SYSTEM

Collection Presentment
- Process where Collecting Bank (CB) fetches the money - More specific process of presenting the cheque for
- CB will go to Paying Bank (PB) to collect money on payment
customer’s behalf
- In reality, CB will not physically go to PB. Banks will set
off each other’s demands through the process of
clearing.

Truncation system
(ss 89 – 90 BOEA)
- An image is taken of the back
and front of the cheque. The
image is sent to the clearing
system and the image is sent to
the drawer’s bank.
- They never get to see the actual
cheque, unless they demand for
it.
Legal r/s btw CB • Duty to present for payment (s 45)
and Customer  essential to avoid discharge of drawer/indorsers
(Payee)  within a reasonable time - s45(3b)
- CB is agent of o Time when it is considered presented = when
Payee the cheque goes to the drawer’s branch.
o As modified by truncation
 If necessary - notice of dishonour (NoD) to preserve
rights
o Most common situation of dishonor = Dwer
no $$
 In that case, NoD is statutorily
exempted (s 50(3))

B. CAUSES OF ACTION AGAINST CB

1. Conversion
(a) Is the claimant the true owner?
a) The biggest risk that a CB can face is the tort of conversion.
 CB is being sued for intervening with true owner’s prop rights
 It is strict-liability
o No element of fault is required in order to commit conversion. CB does not need to have been
negligent

b) When does it happen?

 CB’s customer (payee) has got a defective title
o Eg. Customer has stolen the cheque
o The customer is himself committing conversion and the CB, being his agent, is also converting.

c) Cheques can be converted

 Per Majority in OBG v Allan
o law applies a fiction - value of the paper is the face value of the cheque

d) Should cheques continue to be the class of chose in action that is susceptible to conversion?
 No. Baroness Hale dissent.
 Read academic articles

e) Who can sue CB?

 True owner of the cheque (Marquess of Bute v Barclays Bank [1954])
o True owner = last person to whom the cheque was validly transferred.
 Eg. stolen cheque book/forms – account holder is true owner
 a cheque stolen before delivery to payee, drawer is the true owner
 after delivery - payee/indorsee is true owner
 o A thief can be a holder if it is a bearer instrument but it was never validly transferred to him.
 A party who was did not have title = not true owner = cannot sue in conversion: Yeow Chern Lean v Neo Kok
Eng

Yeow Chern Lean v Neo Kok Eng (SGCA)

• Neo issued bearer cheques as loans to a Co and handed them to Lim – Co’s agent. Lim
misappropriated the proceeds. Neo claimed in conversion.
• Held: claim failed
– Claimant must show possession or entitlement to possession.
– Title in the cheques passed to the Co when delivered to Lim.
– Hence, the Co, not Neo, had the right to claim in conversion.

(b) What defences are available to CB?

(i) Holder in Due Course (HIDC)
 HIDC cannot be liable in conversion bec it gets better title than the ‘true owner’. As the new true owner,
no rights are being interfered.

 When can a CB be a HIDC?

o When, in good faith, it negotiates (gives value) a complete and regular cheque – discounts
 Gives value = eg customer allowed to draw on cheque before it clears (Barclays Bank v
Astley)
 Merely crediting acct =/= giving value

 HIDC defence is practically never possible bec

o “A/C Payee Only” cheques  Bank cannot get title at all
o “Not Negotiable” cheques  he cannot get better title than his predecessor (ie. rogue customer)

(ii) Statutory defence: s 86 BEA

 S 86: collecting bank not liable if it received payment in good faith and without negligence for a
customer

1) CB must be acting for a customer

- a customer is one who holds an account with the bank
2) CB must be receiving payment FOR the customer (ie. acting as an agent).
- Or they must credit the customer’s account (almost always done bec banking practice
automatically credits a customer’s acct)
3) CB must act in good faith. Defined in the banking act as acting honestly.
- usually not a problem
4) *Key element: burden on bank to prove the absence of negligence.

 Time for ascertaining negligence

o When scrutinizing CB’s actions for negligence, up to what stage do we look at?
 Up to the stage when CB pays out proceeds to customer (Lumsden v London Trustee
Saving Bank [1971])

 Examples of bank negligence

1) Failure to make sufficient inquiries when opening the acct
- Very often a rogue opens an acct with the CB for the very purpose of processing the stolen
cheque
- Bank must be careful who they accept as customer bec once he is let in as a customer,
they MUST collect his cheques.
- (Bank’s duty to take care when opening acct squares with their anti-money laundering
regulations anyway. So if they meet it, they will satisfy this requirement as well)
- When a bank is negligent in opening the account, its negligent transfers to the collection of the
cheque as well.
 - *This is especially the case when there is a short span of time from the opening the
account to the collection of cheque.
- If there is a long time btw the two, then there is less likelihood (but not
impossible) that the negligence flows over to the collection of the cheque.

Lumsden
 In opening acct they asked for a reference – bank failed to insist on referee’s bank acct information – referee
turned out to be the rogue himself – bank liable.

Marfani
 Rogue wanted to open acct – bank relied on its own customer’s word that Rogue was Mr X – opened acct
under Mr X. Bank did not ask for rogue to prove in any way that he was Mr X.
 ECA: not liable
 It was a very borderline decision. ECA warned that banks must still do more.
 This case represents the highwater mark for a bank (the very minimum that a bank must do to not be negligent).
 [Booyesen: This case is very much linked to the English psyche bec they do not regularly carry ID or passport.]

2) Failure to follow bank’s own internal procedures (aka Banking Manuals)

• These procedures are very impt. They usually represent best practices (altho court can rule that
they are negligent despite them having followed procedures).
• *So the failure to follow internal procedures is the surest indication of negligence.

3) Employer/director pays company’s cheques into his personal acct

- Bank should be alert for Co cheques being paid into personal acct, when those cheques are
deposited at irregular intervals + for fluctuating amts
- These would indicate they are not salary payments
- But today, people change jobs frequently.
- Banks may not be expected to keep an eye on changes in a customer’s employment
(Orbit Mining)

4) Non-transferable crossings deposited into a acct other than the payee

• If a cheque is non-transferable, only the payee can be a holder.
• Prima facie, if a bank deposits into an acct other than the payee, it would be negligent.
• While it is theoretically possible that there was a good explanation that satisfied the
bank, *this is usually one of the surest way that a bank is negligent.

5) Payee name and a/c name not matching

• When this happens + there is no indication of negotiation, the bank should raise their eyebrows
and make inquiries.
• But bank not liable if the discrepancy is not great (Architects of Wine v Barclays)

6) Cheques inconsistent with customer’s situation: eg foreign cheques, large amounts, peculiar drawing
- Architects of Wine v Barclays; Orbit Mining
- Architects: only extreme case would amt in cheque be a factor in putting bank on inquiry

In Summary
- Generally if bank comply with its internal procedure + money laundering requirements, it will be
ok

 Contributory Negligence
- Lumsden: court accepted that Contributory Negligence Act applied
o means the true owner’s damages for conversion can be reduced if he has negligently contributed to
the loss
o On facts, the cheques were negligently drawn eg ‘Brown’ with spaces so as to facilitate alteration
 - Singapore’s position?
o Unlike UK BA (s 47), our BA does not expressly permit contributory neg.
 But courts could follow approach in Zanda – read our CN Act into BA.

(iii) Forgery/Alteration\
- Forged cheque
o Forged cheque = wholly inoperative (s 24)
 Hence, it cannot create a chose in action. (Arrow Transfer v RBC [1971] SCA)
 CB cannot be liable for converting a nullity.
o Effectively, ‘drawer’ will bear the loss, subject to an action against PB for breach of mandate.

- Materially altered cheque

o S 64: avoids the bill
o Singapore has an illogical decision on this point: Bintai Kindenko v Sanwa Bank [1994] SHC
 On the one hand, Ct said bank liable in substantial damages (implying that bill was not void)
 On the other hand, Ct also said s 86 defence not available to CB bec cheque is null and void
o A more sound decision: Smith v Lloyd’s TSB Group plc [2001] ECA
 Effect of s 64 BEA - a materially altered cheque is ‘a worthless piece of paper’ ie no
substantial damages for conversion

2. Unjust Enrichment
 Three elements for UE claims (Lipkin Gorman)
1. Conferment of benefit by one on another
2. There must be an unjust factor
[Only can claim under recognised categories of unjust factors – it has been recognised that
conversion creates an unjust factor]
3. No change of position (COP) defence

 If Pf cannot prove conversion, he generally cannot claim in UE as well

o This is why the claim for UE piggybacks on conversion.
 (When there is no conversion, there is no automatic right to claim in UE but one can still possibly
raise other unjust factors. )

 The only diff from Conversion is the defences:

o Change of position defence
 Bank would almost certainly change position whenever they pay the rogue customer.
 Normally, once the CB has credited the acct of the rogue, the rogue would almost certainly
withdraw the sum quickly.
 Bank could easily raise the COP defence.

 True owner can bring a claim in both conversion and UE at once.

o But if claim proven, Pf has to choose a remedy:
 in tort (damages for conversion); or
 in restitution (proceeds of the conversion)

3. Negligence
- We have always been discussing negligence against a bank (but actually its conversion “transformed” into a
negligence claim).
o What if the true owner wants to sue in the standalone ground of negligence?

- Difficult for true owner (who is usually not a customer) to show a duty of care being owed by the collecting
bank.
- Contractual DOC: True Owner usually does not have a contract with the collecting bank.
 - Even if he has one (supposing he does have a bank acct with the CB), it is not a relevant
contractual relationship (ie. for the purpose of collection). True Owner has no business asking CB
to collect the cheque.
- Tortious DOC: Must satisfy the proximity factors + this is pure EC loss

 Cases suggest that it will be difficult:

o Natwest v Barclays [1975]
o Customs & Excise v Barclays [2006]

C. CARD PAYMENTS

o Credit and charge cards

 Credit cards – minimum payment each month, pay interest on o/s balance
o eg Visa, Mastercard
 Charge Cards – must be paid in full each month
o eg Amex, Diner’s Club

1. Regulation of credit/charge cards

o Card issuers need not be banks
 However, non-bank issuers need a license from MAS

• Singapore: Banking Act, Part VIII: card issuers generally require a license
– Banks - exempt
• Singapore: Banking (Credit and Charge Card) Regulations 2004: covers
– minimum income requirements for cardholders
– credit limits
– limits on solicitation
– disclosure of payment terms, late payment charge/penalty
– provision of information by card issuer to MAS
– enforcement: offence, fine

2. Contractual relations between the parties

o Basic framework: Re Charge Card Services

Re Charge Card Services [1989]

• Held: Customer paying by card is a complete discharge of the obligation to pay the supplier.

1) CA: the cardholder’s tender of the card and the merchant’s acceptance of the card is made on the
assumption that the transaction is regulated by the underlying contracts
- Although there was always a party not privy to one of the 3 contracts, each time you will be
aware of the contract you are not privy to, and you are aware of the obligations of that contract that you
are not privy to and you tacitly accept the terms of that contract. (• *This is significant)

2) The presentation of the charge card by customer was an absolute, not conditional, discharge of his
obligation to pay the supplier.
- Although suppliers can take alternative “backup” means of payment (eg. cheques), they
do not; they also do not take down particulars of customers  shows they do not intend to have any
recourse to the customer if the charge card Co defaults.
- The one thing that all parties agree = customer shd not be paying twice.
- Thus, it must be a conditional discharge.

The unconditional nature of the discharge makes credit cards diff from BOEs.

[The issue in the case:]

 To facilitate cash flow, charge card Co would assign its debts (owed by cardholders) to a 3rd P “Factor”
 Charge card Co went insolvent.
o But garages did not wish to claim against the insolvent estate of the charge card Co. They failed:
  Charge Card Co owes garage $$
 Customers owe money to Factor
 Factor does not owe $$ to garage bec no contract btw them. No consideration by garage

o The modern (and more complicated) relationship today :

OFT v Lloyd’s TSB [2007]:

1) Acquiring bank / merchant acquirer

– It is the bank that signs in the merchant into the system.
It MAY OR MAY NOT be the card issuer1.
2) Card network
– the VISA/ MASTERCARD/ AMEX/ DINER’S CLUB
 They are something like a clearing house for credit card payments

 The contracts that exist under this ‘web’

1. Btw Cardholder and card issuer (bank)
– Std T&C on payment
Card issuer
2. Btw Cardholder and merchant
– Sale of goods contract
3. Btw Merchant and Acquiring bank
– Merchant Services Agreement: eg merchant must follow security procedures before processing a
transaction
4. Issuing bank/Acquiring bank/card network:
– Network agreement/Scheme Rules, eg:
• Acquiring bank must conduct due diligence before signing up a merchant, ongoing monitoring ( Do-
Buy 925 at [14])
• Network provides certain services eg clearing, advertising, promotions

3. Selected Legal Issues

(a) Discharge of underlying debt btw Customer and Merchant
- when the customer signs the voucher (Millet J)

(b) Countermand
- No concept of countermand in a credit card payment. Customer cannot tell Card Co not to pay merchant.
- By definition, countermanding is allowed by law bec the customer has not discharged the
underlying debt
- In a cheque payment, Dwer writing out cheque =/= discharge of underlying debt. If Dwer
countermands, merchant can sue Dwer.
- In card payments, signing voucher = absolute discharge. No countermanding can happen.

- How about when the cardholder goes back to return goods to the merchant and tells Card Co to void
payment?
- After purchase, Card Co credits merchant and debits customer.
- If goods returned, it is a contractual right for customer to tell Card Co to charge back the amt
credited to merchant. This is not a countermand.

(c) Liability in event of credit card fraud

- Depends entirely on the T&Cs btw the parties.
- Cardholder’s job = notify Card Co of loss of card
- Merchant’s job = follow security procedure eg verify signature
- Failure to do as such might cause that party to bear loss
1
Usually it is the merchant’s bank (but the merchant’s bank may be the same as the cardholder’s bank).
4. Debit / ATM cards
 Used to withdraw cash from holder’s a/c or to pay a 3P eg a retailer
o Diff from credit card = no extension of credit to customer
o Similarity to credit card = rules wrt discharge and countermand