Banking law in Australia [Ninth edition.] 9780409344899, 0409344893

Table of contents :
Full Title
Copyright
Preface
Table of Cases
Table of Statutes
Table of Contents
1 The Australian Banking System
1.1 Introduction
1.2 Wallis report
1.3 The financial system inquiry 2014
1.4 Regulatory bodies
1.5 Trading banks and savings banks
1.6 Building societies and credit unions
1.7 Mutual banks
1.8 State banks
1.9 AML/CTF legislation
1.10 Proceeds of crime
2 Regulation
2.1 Introduction
2.2 The background to modern regulation
2.3 Banking Act 1959
2.4 The Basel Accord
2.5 Basel II and III
3 Banker and Customer
3.1 Introduction
3.2 Debtor-creditor
3.3 Who is a customer?
3.4 Terminating the relationship
3.5 Altering the relationship
3.6 Failure of the bank
3.7 Limitation Acts
3.8 Special customers
3.9 Dormant accounts
3.10 The ‘business of banking’
4 Accounts
4.1 Introduction
4.2 Major types of accounts
4.3 Appropriation
4.4 Combining accounts
4.5 Overdraft accounts
4.6 Trust accounts
4.7 Joint accounts
4.8 Protected accounts
4.9 Statements and passbooks
4.10 Internet fraud
4.11 Stopping the account
4.12 Garnishee orders
5 Bills of Exchange
5.1 Introduction
5.2 Legislation
5.3 The concept of negotiation
5.4 Formal requirements
5.5 Transfer/negotiation
5.6 Principles of liability
5.7 The chain of liabilities
5.8 Obligations of the holder
5.9 Termination or alteration of liabilities
6 Duties of the Banker
6.1 Introduction
6.2 The duty of secrecy
6.3 Bankers’ references
6.4 Duty to question a valid mandate
6.5 Duties to third parties
6.6 Safe custody
7 Duties of the Customer
7.1 Introduction
7.2 The Macmillan duty
7.3 The Greenwood duty
7.4 Possible other duties
8 Cheques
8.1 Introduction
8.2 Background
8.3 Types of cheques
8.4 Crossings
8.5 Dealings with cheques
8.6 Liability of parties
8.7 The paying institution
8.8 The collecting institution
8.9 Presentment of cheques
8.10 ‘Payment’ by cheque
9 Payment and Payment Systems
9.1 Payment
9.2 Payment obligations arising from contract
9.3 Tender and acceptance
9.4 Payment of another’s debt
9.5 Common payment methods
9.6 Payment by account transfer
9.7 The concept of a payment system
9.8 Elements of a payment system
9.9 Messages in a payment system
9.10 Electronic signatures
9.11 Clearing and settlement
9.12 International payments
9.13 Domestic payments
9.14 Completion of payment
9.15 Credit cards
9.16 Computer money
9.17 The New Payment Platform
10 Payment Under a Mistake
10.1 Introduction
10.2 Basis of recovery
10.3 Elements of the cause of action
10.4 Defences
10.5 Payment orders
10.6 Mistaken Internet payments
11 Consumer Protection
11.1 Introduction
11.2 Unfair contract terms
11.3 Responsible lending
11.4 Consumer warranties
11.5 The Code of Banking Practice
11.6 The ePayments Code
11.7 The Financial Ombudsman Service
12 Lending: General Principles
12.1 Introduction
12.2 Types of lending
12.3 Types of borrowers
13 Secured Lending: Real Property
13.1 Securities
13.2 Securities over real property
14 Secured Lending: Personal Property
14.1 Introduction
14.2 Historical problems of securities over chattels
14.3 Complexity
14.4 Meaning of personal property
14.5 Security interest
14.6 The grantor
14.7 Creating the security: security agreements
14.8 The chattel mortgage under the Personal Property Securities Act 2009
14.9 Leases
14.10 Attachment
14.11 Third parties
14.12 Perfection
14.13 Priority rules
14.14 Fixed/floating charges
14.15 Example: Broadlands Finance Ltd v Shand Miller
14.16 Taking free of security interests
15 Lending: Guarantees
15.1 Nature of a guarantee
15.2 Guarantor’s rights against the other parties
15.3 Avoidance
16 Banker’s Lien and Freezing Orders
16.1 The banker’s lien
16.2 Freezing orders
17 Documentary Credits
17.1 Introduction to international trade problems
17.2 Documentary transactions: CIF contracts
17.3 Banks in international trade
17.4 Documentary credits
17.5 Related instruments
17.6 The credit and payment
17.7 The International Chamber of Commerce standard terms
17.8 Terminology
17.9 When the UCP applies
17.10 Some basic principles
17.11 Form of the credit
17.12 Modes of payment
17.13 Conditions not evidenced by documents
17.14 Participating banks
17.15 Documents
17.16 Some special problems
Bibliography
Index

Citation preview

Banking Law in Australia Ninth Edition Alan L Tyree BSc, MSc, PhD, LLB (Hons) LexisNexis Butterworths Australia 2017



LexisNexis AUSTRALIA LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au ARGENTINA LexisNexis Argentina, BUENOS AIRES AUSTRIA LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA BRAZIL LexisNexis Latin America, SAO PAULO CANADA LexisNexis Canada, Markham, ONTARIO CHILE LexisNexis Chile, SANTIAGO CHINA LexisNexis China, BEIJING, SHANGHAI CZECH REPUBLIC Nakladatelství Orac sro, PRAGUE FRANCE LexisNexis SA, PARIS GERMANY LexisNexis Germany, FRANKFURT HONG KONG LexisNexis Hong Kong, HONG KONG HUNGARY HVG-Orac, BUDAPEST INDIA LexisNexis, NEW DELHI ITALY Dott A Giuffrè Editore SpA, MILAN JAPAN LexisNexis Japan KK, TOKYO KOREA LexisNexis, SEOUL MALAYSIA LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR NEW ZEALAND LexisNexis, WELLINGTON POLAND Wydawnictwo Prawnicze LexisNexis, WARSAW SINGAPORE LexisNexis, SINGAPORE SOUTH AFRICA LexisNexis Butterworths, DURBAN SWITZERLAND Staempf i Verlag AG, BERNE TAIWAN LexisNexis, TAIWAN UNITED KINGDOM LexisNexis UK, LONDON, EDINBURGH USA LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO

National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition: ISBN:

Tyree, Alan L. Banking Law in Australia. 9th edition. 9780409344882 (pbk).

Notes: Subjects:

9780409344899 (ebk). Includes index. Banking Law — Australia — textbook. Banks and banking — Australia — textbooks.

© 2017 Reed International Books Australia Pty Limited trading as LexisNexis. First edition 1990; Second edition 1995 (reprinted 1997); Third edition 1998 (reprinted 2000); Fourth edition 2002; Fifth edition 2005; Sixth edition 2008; Seventh edition 2011; Eighth edition 2014; Ninth edition 2017. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Optima and Bembo. Printed in Australia. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Preface Surveys show that banking law teachers do not teach much about cheques these days. As those who know me will appreciate, I think this is a pity. In spite of that, LexisNexis tells me that textbooks must respond to the market, no matter how reluctant the author might be. As it turns out, I was not too reluctant, since reducing the material on cheques has given me the opportunity to indulge my other interest: payment and payment systems. Payment systems are often misunderstood even by experienced lawyers. Part of the misunderstanding is due to the language. Students sometimes find it difficult to believe there are no funds transferred in a ‘funds transfer’. Journalists love to talk about the ‘hidden’ banking system that ‘mysteriously’ transfers funds outside the established system, never realising that the legal principles involved are precisely the ones that govern the ‘normal’ banking system. The second major change from the 8th edition is the extended coverage of the Personal Property Securities Act 2009. The Act is a complex piece of legislation, replacing 71 Commonwealth and state Acts. Parliament recognised the complexity at the time of drafting, and s 343 calls for a review of the operation of the Act after three years. Bruce Whittaker conducted the review and his comprehensive report, tabled on 18 March 2015, makes 394 recommendations. The report is a mustread for anyone interested in personal property securities. Though expanded, the chapter must be considered as a brief introduction only. Security problems may be complex, and specialist texts should be consulted. In Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, the High Court settled the long, sorry saga of the euphemistically named ‘exception fees’ in favour of the banks. In so doing, the High Court redefined and expanded the notion of contractual penalties: see the discussion in Chapter 4 and the comments by Sackville AJA in National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242. The High Court also considered the question of ‘change of position’ as a defence to a claim for money paid under a mistake of fact: see Australian Financial Services

and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 and the discussion in Chapter 10. Books are not written in a vacuum. I am grateful to the staff at LexisNexis. They have been efficient and helpful always. I am also very grateful to my editor, Rebecca Gumbley, for saving me from endless embarrassment. I (reluctantly) acknowledge that any remaining errors are mine alone. Finally, and most of all, I am grateful to my wife Allison for her years of support and encouragement. Katoomba February 2017

Table of Cases References are to paragraph numbers

20991 Ontario Ltd v Canadian Imperial Bank of Commerce (1998) 8 PPSAC 135 …. 14.8

A A J Bekhor & Co Ltd v Bilton [1981] 2 All ER 565 …. 16.2.6 A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314 …. 9.3.6, 9.14, 9.14.3 Abbatt v Treasury Solicitor [1969] 3 All ER 1175; [1969] 1 WLR 1575 …. 3.8.1 Abigail v Lapin [1934] AC 491 …. 13.2.5 Abou-Rahmah v Abacha [2006] EWCA Civ 1492 …. 4.6.6 Accolade Wines Australia Ltd, In the matter of [2016] NSWSC 1023 …. 14.12.3 Adelaide Cooperative Society Ltd, Re [1964] SASR 266 …. 3.10.5 Adour Holdings Pty Ltd v Commonwealth Bank (1991) ATPR 41–147 …. 6.3.5 Aiken v Short (1856) 1 H & N 210; 25 LJ Ex 321 …. 10.3, 10.3.2, 10.4.2 Airservices Australia v Ferrier [1996] HCA 54 …. 4.11.3 Akbar Khan v Attar Singh [1936] 2 All ER 545 …. 4.2.2, 5.4.5 Akins v National Australia Bank (1994) 34 NSWLR 155 …. 15.3.1 Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465 …. 4.9, 16.1.4 Aktas v Westpac Banking Corp Ltd [2007] NSWSC 1261 …. 4.12.6 — v — [2009] NSWCA 9 …. 6.3.2 — v — [2010] HCA 25 …. 6.3.2, 8.7.2 Alan (W J) & Co Ltd v El Nasr Export & Import Co [1972] EWCA Civ 12

…. 17.6 Albert Del Fabbro Pty Ltd v Wilckens and Burnside Pty Ltd [1971] SASR 121 …. 4.11.4 Albion Insurance Co Ltd v GIO (NSW) [1969] HCA 55 …. 15.2.2 Alexandre v New Zealand Breweries Ltd [1974] 1 NZLR 497 …. 13.2.5 Alington Group Architects Ltd v Attorney-General [1998] 2 NZLR 183 …. 4.5.1, 12.2.2 Alliance Bank v Kearsley (1871) LR 6 CP 433 …. 3.8.3 ALYK (HK) Limited v Caprock Commodities Trading Pty Ltd [2012] NSWSC 1558 …. 17.10.2 American Express International Inc v Commissioner of State Revenue [2003] VSC 32 …. 9.15.4 Amey v Fifer [1971] 1 NSWLR 685 (NSWCA) …. 3.8.1 Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 …. 4.5.2 Anglican Development Fund Diocese of Bathurst, Re [2015] NSWSC 185 …. 12.3.2 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 70 ALR 641; [1987] HCA 15 …. 15.3.2, 15.3.3 ANZ Banking Group Ltd v Karam [2005] NSWCA 344 …. 15.3.1 ANZ Savings Bank Ltd, Re; Mellas v Evriniadis [1972] VR 690 …. 3.2.4, 4.2.2, 4.12.2, 4.12.3 Aotearoa International v Westpac Banking Corp [1984] 2 NZLR 34 …. 17.14.2 Arab Bank v Barclays Bank (DCO) [1954] AC 495 …. 4.4.1, 4.12.7 — v Ross [1952] 2 QB 216 …. 5.5.5, 5.5.8 Arcedeckne, Re (1883) 24 Ch D 709 …. 15.2.2 Ardern v Bank of New South Wales [1956] VLR 569 …. 4.7.3 Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1947–1948) 76 CLR 584 …. 8.10.1 Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588 …. 15.3.1

Aronis v Hallett Brick Industries Ltd [1999] SASC 92 …. 9.2.3 Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81 …. 4.9.3, 7.4.1, 8.8.3 ASB Bank Ltd v South Canterbury Finance Ltd [2011] NTCA 368 …. 13.2.6 Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25 …. 14.3 Associated British Ports v Ferryways NV [2009] EWCA Civ 189 …. 12.2.6 Astley v Austrust Ltd [1999] HCA 6 …. 7.4.3 Attenborough v Solomon [1913] AC 76 …. 4.6 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 …. 3.5.1 Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq) [1978] HCA 45 …. 4.4.3 Australia and New Zealand Banking Group Ltd v Curlett Cannon and Galbell [1992] 2 VR 647 …. 16.1.2 Australia and New Zealand Group Ltd v Westpac Banking Corporation (1988) 78 ALR 157; [1988] HCA 17 …. 4.3.2, 4.3.3, 9.8.2, 9.12.2, 9.14.4, 10.4.1, 10.6 Australian and New Zealand Banking Group Ltd v Aldrick Family Company Pty Ltd [2010] NSWSC 1000 …. 6.2.7 Australian Bank Ltd v Stokes (1985) 3 NSWLR 174 …. 15.3.3 Australian Competition and Consumer Commission v Chaste Corp (in liq) [2003] FCA 180 …. 16.2.3 Australian Elizabethan Theatre Trust, Re; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 …. 4.3.1 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 …. 10.2, 10.3.1, 10.4.1, 10.4.3 Australian Independent Distributors Ltd v Winter [1964] HCA 78 …. 1.6, 3.10.5 Australian Prudential Regulation Authority v Siminton (No 6) [2007] FCA 1608 …. 3.10.2 Automobile Finance Co of Australia Ltd v Law [1933] HCA 52 …. 5.9 Avon County Council v Howlett [1983] 1 WLR 605 …. 4.9.2

B Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40 …. 17.5 Backhouse v Charleton (1878) 8 Ch D 444 …. 3.8.3 Baden, Delvaux and Lecuit v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; [1983] BCLC 325 …. 4.6.4 Bagley v Winsome and National Provincial Bank Ltd [1952] 2 QB 236 …. 4.12.3 Baker v ANZ Bank Ltd [1958] NZLR 907 …. 8.7.2 — v Barclays Bank Ltd [1955] 1 WLR 822 …. 8.8.4 Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155 …. 16.2.3 Baltic Shipping Co v Dillon [1993] HCA 4 …. 9.14.5 Banbury v Bank of Montreal [1918] AC 626 …. 6.3.4, 6.3.5 Banco Santander SA v Banque Paribas [2000] EWCA Civ 57 …. 17.12.2, 17.14.4 Bank of Adelaide v Lorden (1970) 127 CLR 185 …. 3.7.5, 15.3.2 Bank of Chettinad v Commissioner of Income Tax, Colombo [1948] AC 378 …. 3.10.1 Bank of England v Vagliano Bros [1891] AC 107 …. 7.4.2, 8.7.3 Bank of Ireland v Evans Charities Trustees in Ireland [1855] 5 HL Cas 389 …. 7.4.2 Bank of New South Wales v Barlex Investments Pty Ltd (1964) 64 SR (NSW) 274 …. 4.12.4 — v Brown [1983] HCA 1 …. 4.5.1, 12.2.2 — v Commonwealth (1948) 76 CLR 1; [1948] HCA 7 …. 2.2.1, 3.10.1, 3.10.5 — v Goulburn Valley Butter Co Pty Ltd [1902] AC 543 …. 4.6.1 — v Laing [1954] AC 135 …. 3.2.4, 3.2.5, 8.7.1 — v Murphett [1983] 1 VR 489 …. 9.8.2, 10.5.2 — v Rogers [1941] HCA 9 …. 15.3.1

— v Ross, Stuckey and Morowa [1974] 2 Lloyds Rep 110 …. 5.5.2, 16.1.4 Bank of New South Wales Savings Bank Ltd v Fremantle Auto Centre Pty Ltd [1973] WAR 161 …. 4.12.3 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 …. 3.8.7 Bank of Queensland Ltd v Grant (1984) 54 ALR 306 …. 16.2.3, 16.2.5 Bank of Tokyo Ltd v Karoon [1987] AC 45 …. 6.2.1, 6.2.5 Bank Polski v KJ Mulder & Co [1942] 1 KB 497 …. 5.2 Bankers Trust Co v Shapira [1980] 3 All ER 353; [1980] 2 WLR 1274 …. 4.6.8 — v State Bank of India [1991] 1 Lloyd’s Rep 587 …. 17.15 Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 …. 4.6.8 Banque Brussels Lambert S A v Australian National Industries Ltd (1989) 21 NSWLR 502 …. 12.2.6 Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 …. 17.10.4, 17.13, 17.15.4, 17.15.5 Barclays Bank v Quincecare Ltd [1992] 4 All ER 363 …. 6.4.2 Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527 …. 5.5.2, 5.5.5, 16.1.4, 16.1.6 — v Okenarhe [1966] 2 Lloyds Rep 87 …. 4.2.2, 4.4.2 — v Quistclose Investments Ltd [1968] UKHL 4 …. 4.4.3 — v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677 …. 9.8.2, 10.3.1, 10.4, 10.5.1, 10.5.2, 10.5.3, 10.5.4 Barclays Bank plc v Bank of England [1985] 1 All ER 385 …. 8.9.2, 9.8.2 — v O’Brien [1993] 3 WLR 786 …. 15.3.1 Barclays Bank plc (trading as Barclaycard) v Taylor [1989] 3 All ER 563 …. 6.2.3 Barlow Clowes International Ltd v Eurotrust International [2005] UKPC 37 …. 4.6.6 Barnes v Addy (1874) 9 Ch App 244 …. 4.6.2, 4.6.5, 10.4.5 Barrow v Bank of New South Wales [1931] VLR 323 …. 6.3.5 Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515 …. 4.6.9

Beatty, Re [1965] ALR 291 …. 4.11.3 Beckett v Addyman (1882) 9 QBD 783 …. 15.3.3 Beil v Pacific View (Qld) Pty Ltd [2006] QSC 199 …. 4.5.2, 12.2.2 Bellamy v Marjoribanks (1852) 7 Exch 389 …. 8.4.1 Belo Nominees Pty Ltd v Barellan Nominees Pty Ltd (1986) 3 SR(WA) 140 …. 5.5.2 Bennett & Fisher Ltd v Commercial Bank of Australia Ltd [1930] SASR 26 …. 8.8.4 Berry v Gibbons (1873) LR 8 Ch App 747 …. 3.8.5 Betterbee v Davis (1811) 3 Camp 70; 170 ER 1309 …. 9.3.5 Bevan, Ex parte (1803) 9 Ves 223; 32 ER 588 …. 12.2.2 Bhogal v Punjab National Bank; Basna v Punjab National Bank [1988] 2 All ER 296 …. 4.4.3, 6.2.1 Bilbie v Lumley (1802) 2 East 469; 102 ER 448 …. 10.2 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 …. 12.2.6 Birch v Treasury Solicitor [1951] Ch 298 …. 4.9.1 Black v Smith Peake’s NPC 121 …. 9.3.5 Bobbett v Pinkett (1875-1876) LR 1 Ex D 368 …. 8.4.2 Bodnar v Townsend [2003] TASSC 148 …. 6.2.1 Bolton v Buckenham [1891] 1 QB 278 …. 15.3.2 Bond Worth Ltd, Re [1980] Ch 228; [1979] 3 All ER 919 …. 13.1.4 Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564 …. 5.6.2, 8.6.1 Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713 …. 17.10.5 Bos International (Australia) Limited v Strategic Nominees Ltd (in receivership) [2013] NZCA 643 …. 4.5.1, 12.2.2 Bourne, Re [1906] 2 Ch 427 …. 3.8.3 Bowes, Re; Earl of Strathmore v Vane (1886) 33 Ch D 586 …. 16.1.5 Box v Midland Bank [1979] 2 Lloyds Rep 391 …. 6.3.5

— v — [1981] 1 Lloyds Rep 434 …. 6.3.5 BP Exploration Co (Libya) Ltd v Hunt [1976] 3 All ER 879 …. 16.2.2 — v — (No 2) [1982] 1 All ER 986 …. 16.2.2 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40 …. 3.2.4, 3.5.1 Bradbury v Morgan (1862) 1 H & C 249; 158 ER 877 …. 15.3.2 Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 …. 3.7.4, 3.7.5, 3.7.6, 4.4.3, 12.2.3, 15.3.2 Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 3 WLR 212 …. 8.3.3 Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622 …. 5.5.2, 16.1, 16.1.2, 16.1.4 Brewer v Westminster Bank [1952] 2 All ER 650 …. 4.7.3 Brien v Dwyer (1978) 141 CLR 378 …. 8.2.5 Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 …. 15.3.3 British and North European Bank Ltd v Zalzstein [1927] 2 KB 92 …. 4.9.1, 4.9.2 British Eagle & International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 …. 9.11.6 Broadlands Finance Ltd v Shand Miller Musical Supplies Ltd [1976] 2 NZLR 124 …. 14.3, 14.10, 14.15 Brophy v Brophy (1974) 3 ACTR 57 …. 4.7.2 Brown v Westminster Bank Ltd [1964] 2 Lloyds Rep 187 …. 7.3.3 Brown’s Estate, Re; Brown v Brown [1893] 2 Ch 300 …. 3.7.5, 3.7.6 Bucknell v Commercial Banking Co of Sydney Ltd [1937] HCA 35 …. 3.7 Buller v Crips (1703) 6 Mod 29 …. 5.4.5 Burnett v Westminster Bank Ltd [1966] 1 QB 742 …. 3.5.2, 7.2.3, 11.5.5 Burns v Stapleton (1959) 102 CLR 97 …. 4.11.3 Byrne v Australian Airlines Ltd [1995] HCA 24 …. 3.2.4

C

Caason Investments Pty Ltd v Ausroc Metals Ltd [2016] WASC 267 …. 14.12.3 Caltex Oil (Aust) Pty Ltd v Alderton (1964) 81 WN (Pt 1) (NSW) 297 …. 15.3.3 — v The Dredge ‘Willemstad’ [1976] HCA 65 …. 6.5, 9.14.5 Canadian Pacific Hotels Ltd v Bank of Montreal [1987] 1 SCR 711 …. 7.4.1, 7.4.3 Canadian Pioneer Management v Labour Relations Board (1980) 107 DLR (3d) 1 …. 3.10.6 Capri Jewellers Pty Ltd v Commonwealth Trading Bank of Australia [1973] ACLD 152 …. 6.5 Cardile v LED Builders Pty Ltd [1999] HCA 18 …. 16.2.1, 16.2.3 Carl Zeiss Stiftung v Herbert Smith (No 2) [1969] 2 Ch 276 …. 4.6.4 Carlos v Fancourt (1794) 5 TR 482; 101 ER 272 …. 5.4.2 Carter v White (1883) 25 Ch D 666 …. 15.3.3 Catalano v Managing Australian Destinations Pty Ltd (No 3) [2013] FCA 1194 …. 4.12.1 Catlin v Cyprus Finance Corp (London) Ltd [1983] 1 All ER 809 …. 4.7.3 Cebora SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyds Rep 271 …. 5.3.2 Central City Pty Ltd v Monevento Holdings Pty Ltd [2011] WASCA 5 …. 3.2.4 Chapman Bros v Verco Bros (1933) 49 CLR 306; [1933] HCA 23 …. 3.2.2 Charge Card Services Ltd, Re [1987] Ch 150 …. 9.2.3, 9.15.4, 14.5.3 Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] 1 Ch 105 …. 4.6.8 Chatterton v Watney (1881) 17 Ch D 259 …. 4.12 Chen v Song [2005] NSWSC 19 …. 15.3.3 Choice Investments Ltd v Jeromnimon [1981] QB 149 …. 4.12.1 Christofi v Barclays Bank plc [1999] EWCA Civ 1695 …. 6.2.2, 6.2.5 Church of England Building Society v Piskor [1954] 1 Ch 553 …. 14.13.5

CIBC Mortgages plc v Pitt [1993] 3 WLR 802 …. 15.3.1 Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195 …. 4.4.2, 4.4.3, 12.2.3 Citadel Finance Corporation Pty Limited v Elite Highrise Services Pty Ltd (No 3) [2014] NSWSC 1926 …. 14.11 Citibank Ltd v FCT (1988) 83 ALR 144 …. 6.2.3 — v Papandony [2002] NSWCA 375 …. 8.7.3 Citigroup Pty Ltd v National Australia Bank Ltd [2012] NSWCA 381 …. 10.4.1 City and Country Property Bank Ltd, Re (1895) 21 VLR 405 …. 12.2.2 Clarke & Walker Pty Ltd v Thew [1967] HCA 28 …. 15.1.3 Clayton v Le Roy [1911] 2 KB 1031 …. 6.6.2 Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136 …. 17.10.5 Club Securities Ltd v Hurley [2007] NZHC 1166 …. 5.4.2 Cocks v Masterman (1829) 9 B & C 902; 109 ER 335 …. 10.5.4 Colburt (D J) & Sons Pty Ltd v Ansen; Commercial Banking Co of Sydney Ltd (Garnishee) [1966] 2 NSWR 289 …. 4.12.6 Coles Myer Finance Ltd v Federal Commissioner of Taxation [1993] HCA 29 …. 12.2.4 Colonial Bank of Australasia v Kerr (1889) 15 VLR 314 …. 4.3.1, 15.1.3 Colonial Bank of Australasia Ltd v Marshall [1904] HCA 31 …. 7.2.1 Columbia Graphophone Co v Union Bank of Canada (1916) 38 OLR 326; 34 DLR 743 …. 4.9.3, 7.4.1 Combined Weighing and Advertising Machine Co, Re (1889) 43 Ch D 99 …. 4.12 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14 …. 15.3.1, 15.3.3, 11.5.6 — v Barnett [1924] VLR 254 …. 5.5.10 — v Carruthers (1964) 6 FLR 247 …. 15.3.2 — v Colonial Finance, Mortgage, Investment and Guarantee Corp Ltd (1906)

4 CLR 57 …. 3.7.5 — v Flannagan (1932) 47 CLR 461 …. 8.8.4 — v Younis [1979] 1 NSWLR 444 …. 9.8.2, 10.3.2, 10.5.2 Commercial Bank of South Australia v Wake (1880) 14 SALR 31 …. 16.1.7 Commercial Banking Co v Hartigan (1952) 86 ILT 109 …. 3.10.5 Commercial Banking Co of Sydney Ltd v Federal Commissioner of Taxation (1950) 81 CLR 263 …. 3.10.5 — v Jalsard Pty Ltd [1973] AC 279 …. 4.3.1 — v Patrick Intermarine Acceptances Ltd (1978) 52 ALJR 404 …. 17.16.4 — v Pollard [1983] 1 NSWLR 74 …. 15.3.3 — v R H Brown & Co [1972] HCA 24 …. 6.3.1, 6.3.3, 6.3.4 Commercial Union Assurance v Revell [1969] NZLR 106 …. 3.7.5 Commissioner of Inland Revenue v Thomas Cook (NZ) Ltd [2002] NZAR 625 …. 3.9.2 — v — [2003] 2 NZLR 296 …. 3.9.2 Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683 …. 3.3.2, 3.3.3, 8.8.4 Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457; [1914] HCA 83 …. 3.10.2, 3.10.5, 8.4.4, 8.8.4 — v Patrick Intermarine Acceptances Ltd (in liq) [1981] 1 NSWLR 175 …. 12.2.4 Commonwealth v Bank of NSW [1950] AC 235 …. 2.2.1 Commonwealth Bank of Australia v Cohen (1988) ASC 55-681 …. 15.3.1 — v Dale [2016] WADC 25 …. 8.6.2 — v Greenhill International Pty Ltd [2013] SASCFC 76 …. 17.16.1 Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 148 CLR 304; [1981] HCA 43 …. 7.2.1, 7.2.2, 9.8.2, 9.10.1 Compafina Bank v ANZ Banking Group [1982] 1 NSWLR 409 …. 6.3.3, 6.3.4 — v — (1984) Aust Torts Rep 80–546 …. 6.3.3

Compagnie d’Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1970] 2 Lloyds Rep 99 …. 17.10.5 Connolly Bros (No 2), Re [1912] 2 Ch 25 …. 14.13.5 Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8 …. 4.6.4, 4.6.5, 4.6.6 Contronic Distributors Pty Ltd v Bank of New South Wales [1984] 3 NSWLR 110 …. 17.10.5 Cook v Cook [1986] HCA 73 …. 7.4.2 — v Lister (1863) 32 LJCP 121 …. 12.2.4 Coolbrew Pty Ltd v Westpac Banking Corporation [2014] NSWSC 1108 …. 4.7.2 — v — [2015] NSWCA 135 …. 4.3.1 Cooper v National Provincial Bank Ltd [1946] KB 1 …. 15.3.1 Coshott v Barry [2016] FCAFC 173 …. 16.1.4 Cosmedia Productions Pty Ltd v Australia and New Zealand Banking Group Ltd [1996] 434 FCA 1 …. 9.15.3, 9.15.4 Coulthart v Clementson (1879) 5 QBD 42 …. 15.3.2 Coutts & Co v Browne-Lecky [1947] 1 KB 104 …. 12.3.1, 15.3.2 Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 …. 15.3.2 Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 …. 4.6.4 Credit Lyonnais Bank Nederland v Export Credits Guarantee Dept [2000] 1 AC 486 …. 6.6.6 Crestsign Limited v National Westminster Bank PLC [2014] EWHC 3043 …. 3.3.3 Cretanor Maritime Co v Irish Marine Management; The Cretan Harmony [1978] 3 All ER 164; [1978] 1 Lloyds Rep 425 …. 16.2.5 Croton v R [1967] HCA 48 …. 3.2.1, 3.2.2, 8.8.3 Crouch v Credit Foncier Co (1873) LR 8 QB 374 …. 5.3.1 Crumplin v London Joint Stock Bank Ltd (1913) 109 LT 856 …. 8.8.4 Cunliffe, Brooks & Co v Blackburn and District Benefit Building Society

(1884) 9 App Cas 857 …. 3.8.7 Cunningham v National Australia Bank (1987) 15 FCR 495 …. 6.3.3, 6.3.5 Currabubula Holdings Pty Limited v State Bank of New South Wales Ltd S74/2001 [2002] HCATrans 117 …. 4.11 Customs and Excise Commissioners v Diners Club Ltd [1989] 2 All ER 385; [1989] 1 WLR 1196 …. 9.15.4 Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226 …. 4.5, 8.7.1, 10.5.1, 12.2.2, 16.1.4

D D & J Fowler (Aust) Ltd v Bank of New South Wales [1982] 2 NSWLR 879 …. 12.2.4 Daily Telegraph Newspaper Co v McLaughlin [1904] AC 776 …. 4.11.1 Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 …. 7.4.3 Dale v Bank of New South Wales (1876) 2 VLR (L) 27 …. 16.1.4 — v Powell (1911) 105 LT 291 …. 15.3.3 Dalgety Ltd v Hilton [1981] 2 NSWLR 169 …. 5.4.3 Dan v Barclays Australia Ltd (1983) 46 ALR 437 …. 15.3.2 DAR International FEF Co v AON Ltd [2004] EWCA Civ 921 …. 4.7.3 David Securities v Commonwealth Bank of Australia [1990] FCA 148 …. 12.2.2 — v — [1992] HCA 48 …. 10.2, 10.3, 10.3.2, 10.3.3, 10.4, 10.4.2, 10.4.3, 10.5.4, 12.2.2 David Securities Pty Ltd v Commonwealth Bank of Australia [1990] FCA 148 …. 4.5.1 Davies v London and Provincial Marine Insurance Co (1878) 8 Ch D 469 …. 15.3.1 Davis v Radcliffe [1990] 2 All ER 536 …. 2.3.4 Davis O’Brian Lumber Co v Bank of Montreal [1951] 3rd DLR 536 …. 17.10.3 Day v Bank of New South Wales (1978) 19 ALR 32 …. 7.4.2 — v Longhurst (1893) 62 LJ Ch 334 …. 5.5.9

Dean v James (1833) 4 B & Ad 546; 110 ER 561 …. 9.3.5 Deane v City Bank of Sydney [1904] HCA 44 …. 15.3.2 Dearle v Hall (1828) 3 Russ 1; 38 ER 475 …. 5.3.2 Deeley v Lloyds Bank Ltd [1912] AC 756 …. 4.3.1 Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332 …. 4.6.6 — v Ghaly [2016] FCA 707 …. 4.12.6 Deputy Commissioner of Taxation (NSW) v Westpac Savings Bank Ltd (1987) 72 ALR 634 …. 4.7.1, 4.12.6 Deputy Commissioner of Taxation (Vic) v Rosenthal (1984) 16 ATR 159 …. 16.2.2 Derry v Peek (1889) 14 App Cas 337 …. 6.3.4 Deutsche Bank v Banque des Marchands de Moscou (1931) 4 LDAB 293 …. 4.5.1, 12.2.2 Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767; [1816] EngR 677 …. 3.7.4, 3.7.5, 4.3.2, 4.3.3, 4.11.2, 4.11.3, 10.6, 12.3.2, 13.2.6, 15.1.2, 15.3.3 Dever, Ex parte; Re Suse (No 2) (1885) 14 QBD 611 …. 12.2.4 DFC New Zealand Ltd v Goddard [1992] 2 NZLR 445 …. 3.2.2 — v McKenzie [1993] 2 NZLR 576 …. 3.7.1, 3.7.4 Diamanti v Martelli [1923] NZLR 663 …. 6.3.4 Dimond (HH) (Rotorua 1966) Ltd v ANZ Banking Group Ltd [1979] 2 NZLR 739 …. 6.5, 8.10.2, 9.8.2 Diplock, Re [1948] Ch 465 …. 4.3.3, 4.6.8 Direct Acceptance Corp v Bank of New South Wales (1968) 88 WN (Pt 1) NSW 498 …. 4.4.1, 4.4.3 Discount Records Ltd v Barclays Bank Ltd [1975] 1 Lloyds Rep 444 …. 17.10.5 Dixon v Bank of New South Wales (1896) 12 WN (NSW) 101 …. 4.2.2 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643; [1935] HCA 49 …. 4.9.3, 15.3.3 Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1 …. 17.15.8

Donkin (dec’d), Re; Riechelmann v Donkin [1966] Qd R 96 …. 4.6 Donovan, Re; Ex parte ANZ Banking Group Ltd (1972) 20 FLR 50 …. 4.11.3 Douglass v Lloyds Bank (1929) 34 Com Cas 263 …. 3.9.3 Dovey v Bank of New Zealand [1999] NZCA 328 …. 9.12.3, 9.13.2, 9.14.4 — v — [2000] 3 NZLR 641 …. 9.6 DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd [1974] 1 NSWLR 443 …. 4.6.5 Dugh v Dugh HC Napier [2011] NZHC 132 …. 4.12.1 Duke Finance Ltd (in liq) v Commonwealth Bank of Australia (1990) 22 NSWLR 236 …. 16.1.1, 16.1.4, 16.1.6 Duncan v American Express Services Europe Ltd [2009] ScotCS CSIH 1 …. 7.4.1 Duncan, Fox & Co v North & South Wales Bank (1880) 6 App Cas 1 …. 15.2.3 Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092 …. 15.3, 15.3.2 Durack v West Australian Trustee Executors and Agency Co (1946) 72 CLR 189 …. 5.7.4 Durham Bros v Robertson [1898] 1 QB 765 …. 5.3.2

E Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484 …. 4.6.4 Edgar v Commissioner of Inland Revenue [1978] 1 NZLR 590 …. 4.7.2 Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 …. 12.2.5, 17.5 Edwards v Legal Services Agency [2002] NZCA 273 …. 3.8.1 El Awadi v Bank of Credit and Commerce International SA Ltd [1990] 1 QB 606 …. 5.3.3, 8.3.3 Emu Brewery Mezzanine Ltd (in liq) v ASIC [2006] WASCA 105 …. 5.4.2 Equitable Trust Co of New York v Dawson Partners Ltd (1927) Ll LR 49 …. 17.10.4 Equity Trustees Executors & Agency Co Ltd v New Zealand Loan &

Mercantile Agency Co Ltd [1940] VLR 201 …. 4.3.2 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) [1997] HCA 8 …. 6.3.3 Essington Investments Pty Ltd v Regency Property Ltd [2004] NSWCA 375 …. 3.8.7 Esso Petroleum Co Ltd v Milton [1997] 2 All ER 593 …. 8.10.1 Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyds Rep 445 …. 16.2.3 European Asian of Australia Ltd v Kurland (1985) 8 NSWLR 192 …. 15.3.1 European Bank Ltd v Citibank Ltd [2004] NSWCA 76 …. 9.6, 9.12.6 Evans v European Bank Ltd [2004] NSWCA 82 …. 4.6.8, 10.4.5 Evra Corp v Swiss Banking Corp 522 F Supp 820; 673 F 2d 951 (1981) …. 9.14.5 Ewart v Latta (1865) 4 Macq 983 …. 15.2.3 Eyles v Ellis (1827) 4 Bing 11 …. 9.14.4

F Fabre v Ley (1973) 127 CLR 665 …. 8.3.2 Falzon v Adelaide Development Co Ltd [1936] SASR 93 …. 3.7.3 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 …. 4.6.4, 4.6.5 Farquharson Bros & Co v King & Co [1902] AC 325 …. 7.4.2 Fenton, Re; Ex parte Fenton Textile Association Ltd [1931] 1 Ch 85 …. 15.2.1 Fergusson v Fyffe (1841) 8 Cl & Fin 121; [1835–42] All ER 48 …. 12.2.2 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 …. 10.1 First Mortgage Managed Investments Pty Limited v Pittman [2014] NSWCA 110 …. 15.3.3 Fistor v Riverwood Legioin and Community Club Ltd [2016] NSWCA 81 …. 10.4.5 Fleming v Bank of New Zealand [1900] AC 577 …. 8.7.1

Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812 …. 17.10.5 Flexi-Coil Ltd v Kindersley District Credit Union Ltd (1993) 107 DLR (4th) 129 …. 14.13.6 Flocast Australia Pty Ltd v Purcell (No 3) [2000] FCA 1020 …. 3.3.2 Focus Metals Pty Ltd v Babicci [2014] VSC 380 …. 10.4.5 Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 …. 3.2.1, 3.2.4, 3.10.6, 4.1, 4.6, 9.6, 9.7.1, 9.8.2, 9.12.6 Foods Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201 …. 5.4.7, 8.2.4, 8.4.6 Forbes v Jackson (1882) 19 Ch D 615 …. 15.2.3 Ford v Perpetual Trustees Victoria Ltd [2009] NSWCA 186 …. 15.3.3 Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631 …. 17.9, 17.12.1 Foskett v McKeown [2001] 1 AC 102 …. 9.12.6 Foxman v Mitzev [2006] NSWSC 1404 …. 9.2.3 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 …. 3.8.7 French Caledonia Travel Service Pty Ltd (in liq), Re (2003) 59 NSWLR 361 …. 4.3.3 Fried v National Australia Bank Ltd [2001] FCA 907 …. 3.8.3, 4.6.2, 7.1, 7.3.2, 7.3.3 Fung Kai Sun v Chan Fui Hing [1951] AC 489 …. 7.3.4 Furlong v Wise & Young Pty Ltd [2016] NSWSC 1839 …. 3.2.1

G Galaxia Maritime SA v Mineralimportexport; The Eleftherios [1982] 1 All ER 796 …. 16.2.3, 16.2.5 Garcia v National Australia Bank Ltd [1998] HCA 48 …. 15.3.1 Garnett v M’kewan (1872) LR 8 Ex 10 …. 3.3, 4.4.1, 4.4.2, 4.4.3, 4.4.4, 11.5.5 Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004]

NSWSC 149 …. 12.2.6 Gattellaro v Westpac Banking Corp [2004] HCA 6 …. 15.3 GE Capital Australia v Davis [2002] NSWSC 1146 …. 15.3.2 Geju Pty Ltd v Central Highlands Regional Council (No 2) [2016] QSC 279 …. 6.3.3 Gellibrand v Murdoch [1937] HCA 10 …. 16.1.2 George Whitechurch Ltd v Cavanagh [1902] AC 117 …. 10.4.4 Giacci v Giacci Holdings Pty Ltd [2010] WASCA 233 …. 3.7 Gibbons v Wright [1954] HCA 17 …. 4.11.1 Giblin v McMullen (1868) LR 2 PC 317 …. 6.6.1, 6.6.6 Gilfoyle Shipping Services Ltd v Binosi Pty Ltd [1984] 2 NZLR 742 …. 16.2.5, 16.2.7 Gillard v Game [1954] VLR 525 …. 5.3.3 Gloria Jean’s Coffees International Pty Ltd v Chief Commissioner of State Revenue [2008] NSWSC 1327 …. 3.3.2 Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2011] EWHC 56 …. 9.10 Golodetz & Co Inc v Czarnikow-Rionda Co Inc (the Galatia) [1980] 1 WLR 495 …. 17.15.7 Good v Walker (1892) 61 LJQB 736 …. 5.5.9 Goodman v J Eban Ltd [1954] 1 QB 550 …. 5.6.2 Gore v Octahim Wise Ltd [1995] 2 Qd R 242 …. 5.4.2 Gosling v Gaskell [1897] AC 575 …. 4.11.4 Gosnells City v Duncan (1994) 12 WAR 437 …. 3.8.1 Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766 …. 4.6.8, 9.8.2, 10.4.1, 10.6 Graham v Portacom New Zealand Ltd [2004] NZLR 528 …. 14.15 Gramophone Co Ltd v Leo Feist Incorporated [1928] HCA 23 …. 3.2.4 Gray v Johnston (1868) LR 3 HL 1 …. 4.6.2 Great Western Railway Co Ltd v London & County Banking Co Ltd [1901]

AC 414 …. 3.3.1, 3.3.6 Greene King Plc v Stanley [2001] EWCA Civ 1966 …. 15.3.2 Greenhill International Pty Ltd v Commonwealth Bank of Australia [2014] HCATrans 46 …. 17.16.1 Greenwood v Martins Bank Ltd [1933] AC 51; [1932] All ER Rep 318 …. 7.3.1, 7.3.3, 7.4.3, 11.5.5, 9.8.2 Gregg v Tasmanian Trustees Ltd (1996) 143 ALR 328 …. 15.3.1 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 …. 4.6.4 Gross, Re; Ex parte Kingston (1871) 6 Ch App 632 …. 4.6.1 Guaranty Trust Co of New York v Hannay & Co [1918] 2 KB 623 …. 5.5.3 Guthrie v Spence [2009] NSWCA 369 …. 4.11.1 Gye v McIntyre [1991] HCA 60 …. 4.4.5, 4.11.3

H H Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159 …. 5.7.4, 5.9.10, 8.5.2 Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767 …. 4.5.1 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 …. 8.7.2, 9.14.5, 17.16.3 Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1971] 1 QB 1 …. 4.4.3, 4.4.4 Hall v Poolman [2007] NSWSC 1330 …. 4.4.5 Haller v Ayre [2005] QCA 224 …. 3.7.1, 3.7.4 Hallett’s Estate, Re; Knatchbull v Hallett (1880) 13 Ch D 696 …. 4.3.3, 4.6.8 Hamilton v Bank of New South Wales (1894) 15 LR (NSW) L 100 …. 16.1.4 — v Watson (1845) 12 Cl & Fin 109; 8 ER 1339 …. 15.3.1 Hamzeh Malas & Sons v British Imex Industries [1958] 2 QB 127 …. 17.10.3 Hanchett-Stamford v Attorney General [2008] EWHC 330 …. 3.8.1 Hansson v Hamel and Horley Ltd [1922] 2 AC 36 …. 17.16.2 Harmer v Steele (1849) 4 Exch 1; 154 ER 100 …. 5.9.6 Harrison v Watson (1925) 4 LDAB 12 …. 15.3.1 Harrods Ltd v Tester [1937] 2 All ER 236 …. 4.12.6

Hart v Sangster [1957] 1 Ch 329 …. 4.2.2 Hasler, Re (1974) 23 FLR 139 …. 4.11.3 Hawkins v Clayton [1988] HCA 15 …. 7.4.3 Haythorpe v Rae [1972] VR 633 …. 4.7.2 Healey v Commonwealth Bank of Australia [1998] NSWSC 678 …. 4.3.1 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 3.3.3, 6.3.3, 6.3.4 Helby v Matthews [1895] AC 471 …. 14.2.3 Heller Factors Pty Ltd v Toy Corp Pty Ltd [1984] 1 NSWLR 121 …. 5.5.5, 5.7.4, 5.9.4 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 …. 7.4.3 Heppenstall v Jackson [1939] 1 KB 585 …. 4.12.4 Her Majesty’s Commissioners of Customs and Excise v Barclays Bank Plc [2006] UKHL 28 …. 16.2.6 Hibernian Bank Ltd v Gysin and Hanson [1939] 1 KB 483 …. 8.4.4 Higgins v Beauchamp [1914] 3 KB 1192 …. 3.8.3 Higton Enterprises Pty Ltd v BFC Finance Ltd [1997] 1 Qd R 168 …. 13.2.5 Hill v National Bank of New Zealand Ltd [1985] 1 NZLR 736 …. 8.7.2 Hiort v London and North Western Railway Co (1879) 4 Ex D 188 …. 6.6.2 Hirschorn v Evans; Barclays Bank Ltd, Garnishee [1938] 3 All ER 491; [1938] 2 KB 801 …. 4.12.6 Hodgson & Lee Pty Ltd v Mardonius Pty Ltd (1986) 5 NSWLR 496 …. 8.2.5 Holland Colombo Trading Society Ltd v Alawdeen Segu Mohammed Khaja [1954] 2 Lloyd’s Rep 45 …. 17.16.2 Hollicourt (Contracts) Ltd v Bank of Ireland [2000] 2 WLR 290 …. 4.11.3 Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999 …. 14.7, 14.10, 14.15 Honourable Society of the Middle Temple v Lloyds Bank plc [1999] 1 All ER(Comm) 193 …. 8.4.6 Hookway v Racing Victoria Ltd [2005] VSCA 310 …. 10.3.2 Hoon v Maloff (Jarvis Construction Co Ltd, Garnishee) (1964) 42 DLR (2d)

770 …. 4.12.6 Hopkinson v Rolt (1861) 9 HL Cas 514 …. 13.2.6, 14.3 Houghland v R R Low (Luxury Coaches) Ltd [1962] 1 QB 694 …. 6.6.1 Houlahan v ANZ Banking Group Ltd [1992] 110 FLR 259 …. 13.1.4 Hua Wang Bank Berhad v Commissioner of Taxation [2013] FCAFC 28 …. 4.12.7 Huenerbein v Federal Bank of Australia (1892) 9 WN (NSW) 65 …. 4.3.1 Hunter BNZ Finance Ltd v Maloney Pty Ltd (1988) 18 NSWLR 420 …. 8.4.3, 8.8.4 Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 …. 4.11.3

I I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41 …. 15.3.3 Ian Stach Ltd v Baker Bosley Ltd [1958] 1 Lloyd’s Rep 127 …. 17.16.3 Ibrahim v Barclays Bank Plc [2012] EWCA Civ 640 …. 9.4.2 Ideas Plus Investments Ltd v National Australia Bank Ltd [2006] WASCA 215 …. 17.5 Impact Traders Pty Ltd v Australia and New Zealand Banking Group Ltd [2003] NSWSC 964 …. 3.4.1 Imperial Bank of Canada v Bank of Hamilton [1903] AC 49 …. 10.5.4 Importers Co Ltd v Westminster Bank Ltd [1927] 2 KB 297 …. 3.3.4 Inflatable Toy Co Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243 …. 5.5.1, 17.10.5 Ingham v Primrose (1859) 7 CB(NS) 82; 141 ER 145 …. 5.9.3 Inglis v Commonwealth Trading Bank of Australia [1969] HCA 44 …. 1.4.1 Initial Services Ltd v Putterill [1967] 3 All ER 145 …. 6.2.4 International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3 …. 9.11.6 International Ore & Fertilizer Corp v East Coast Fertiliser Co Ltd [1987] 1 NZLR 9 …. 5.3.2 Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyds Rep 256 …. 16.2.6

Iraqi Ministry of Defence v Arcepey Shipping Co SA (Gillespie Bros Ltd Intervening) [1980] 1 All ER 480 …. 16.2.5

J J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 45 ALJR 625 …. 13.2.5 J H Raynor v Hambro’s Bank Ltd [1943] 1 KB 37 …. 17.10.3 Jackson v Royal Bank of Scotland [2005] UKHL 3 …. 6.2.7 — v Sterling Industries Ltd (1987) 162 CLR 612 …. 16.2.2 — v White and Midland Bank Ltd [1967] 2 Lloyds Rep 68 …. 4.7.1, 4.7.3 Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] 3 All ER 104 …. 5.5.6 James v ANZ Banking Group (1986) 64 ALR 347 …. 6.3.5 Joachimson v Swiss Bank Corp [1921] 3 KB 110 …. 3.2.3, 3.2.4, 3.2.5, 3.4, 3.7.2, 3.10.6, 4.12.2, 7.2.1, 9.8.2 Johns Period Furniture v Commonwealth Savings Bank of Australia (1980) 24 SASR 224 …. 6.5, 11.5.5 Johnson v Peppercorne (1858) 28 LJ Ch 158 …. 16.1.5 Jones v Gordon (1877) 2 App Cas 616 …. 5.5.5 Jones & Co v Coventry [1909] 2 KB 1029 …. 4.12.4 Jones (R E) Ltd v Waring & Gillow Ltd [1926] AC 670 …. 5.5.1 JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 …. 6.3.5 JS Brookshank and Company (Australasia) Ltd v EXFTX Ltd (rec apptd & in liq) [2009] NZCA 122 …. 14.10 JSC BTA Bank v Ablyazov (Rev 1) [2013] EWCA Civ 928 …. 16.2.1 Justin Seward Pty Ltd v Commissioners of Rural and Industries Bank (1980) 60 FLR 51 …. 8.3.2

K K D Morris & Sons Pty Ltd (In Liq) v Bank of Queensland Ltd [1980] HCA 20 …. 5.3.2 Kabwand Pty Ltd v National Australia Bank [1989] FCA 131 …. 6.3.5

Kalil v Standard Bank of South Africa Ltd [1967] 4 SA 550 …. 15.3.3 Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602 …. 6.4.1, 6.4.2, 12.3.3 Karam v ANZ Banking Group Ltd [2003] NSWSC 866 …. 4.3.1, 13.1.4 KBA Canada, Inc v Supreme Graphics Ltd (2014) BCCA 117 …. 14.15 KD Morris & Sons Pty Ltd v Bank of Queensland Ltd [1980] HCA 20 …. 12.2.4 Keever (A Bankrupt), Re; Ex parte Trustee of Property of Bankrupt v Midland Bank Ltd [1967] Ch 182 …. 4.11.3, 16.1.1 Kelly v Solari (1841) 9 M & W 54; 152 ER 24 …. 10.2, 10.3.1 Kennison v Daire (1986) 160 CLR 129 …. 9.15.5 Kenny & Good Pty Ltd v MGICA (1992) 77 FCR 307 …. 6.3.5 Kepitigalla Rubber Estates Ltd v National Bank of India Ltd [1909] 2 KB 1010 …. 7.4.1, 11.6.8 Kerrigan, Re [1916] VLR 516 …. 3.8.5 Kibby v Registrar of Titles [1999] 1 VR 861 …. 3.8.1 Kiriri Cotton Co Ltd v Dewani [1960] AC 192 …. 10.2 KJ Davies (1976) Ltd v Bank of New South Wales [1981] 1 NZLR 262 …. 10.5.2 Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 …. 4.11.3 Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785 …. 12.2.6 Knight v Hughes (1828) 172 ER 504 …. 15.2.2 Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 …. 4.6.4 Korea Exchange Bank v Debenhams (Central Buying) Ltd [1979] 1 Lloyds Rep 548 …. 5.4.4 — v Standard Chartered Bank [2005] SGHC 220 …. 17.9, 17.13 Koster’s Premier Pottery v Bank of Adelaide (1981) 28 SASR 355 …. 8.8.3 Koufos v Czarnikow Ltd (The Heron II) [1969] 1 AC 350 …. 9.14.5 Kumagai-Zenecon Construction Pte Ltd v Arab Bank Plc [1997] 3 SLR 770

…. 17.9, 17.13 Kydon Compania Naviera SA v National Westminster Bank Ltd (The Lena) [1981] 1 Lloyd’s Rep 68 …. 17.10.3

L Ladbroke & Co v Todd (1914) 30 TLR 433 …. 3.3.2, 8.8.4 Lane v Conlan [2004] WASC 15 …. 13.1.3 Laney v Gates (1935) 35 SR (NSW) 372 …. 5.5.8 Langtry v Union Bank of London (1896) 1 LDAB 229 …. 6.6.2 Laughton, Re [1962] Tas SR 300 …. 4.3.3, 4.6.8 Lazarus Estates Ltd v Beasley [1956] 1 QB 702 …. 5.6.2 LBI HF v Stanford [2014] EWHC 3921 …. 6.3.4 Lee v Butler [1893] 2 QB 318 …. 14.2.3 Lee Gleeson Pty Ltd v Sterling Estates Pty Ltd (1991) 23 NSWLR 571 …. 6.2.6 Len Vidgen Ski & Leisure Ltd v Timaru Marine Supplies (1982) Ltd [1986] 1 NZLR 349 …. 13.1.4 Les Edwards & Son Pty Ltd v Commonwealth Bank (unreported, SC NSW Giles J, No 50456/89 4 Sept 1990) …. 7.4.3 Lewes Sanitary Steam Laundry Co Ltd v Barclay & Co Ltd [1906] 95 LT 444; 11 Com Cas 255 …. 7.4.3 Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 …. 6.2.4, 9.6 Liggett (B) Liverpool Ltd v Barclays Bank Ltd [1928] 1 KB 48 …. 4.11.1, 8.7.3 Lindsay v O’loughnane [2010] EWHC 529 …. 9.10 Ling v Enrobook Pty Ltd (1997) 74 FCR 19 …. 16.2.6 Lipkin Gorman v Karpanale Ltd [1988] UKHL 12 …. 6.4.2 Little v Slackford (1828) 1 Mood & M 171; 173 ER 1120 …. 5.4.2 Liverpool City Council v Irwin [1977] AC 239 …. 3.2.4 Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286 …. 6.3.5 — v Grace, Smith & Co [1912] AC 716 …. 6.6.1, 6.6.6, 7.4.3

Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161 …. 4.9.2, 4.9.4, 10.3.4 — v Chartered Bank of India, Australia & China [1929] 1 KB 40 …. 8.8.3, 8.8.4 — v EB Savory & Co [1933] AC 201 …. 3.3, 8.8.4 — v Margolis [1954] 1 All ER 734 …. 3.7.6 Lloyds Bank plc v Independent Insurance Co Ltd [2000] QB 110 …. 10.5.2 LM Investment Management Limited v BMT & Assoc Pty Ltd [2015] NSWSC 1902 …. 6.3.3 London and Globe Finance Corp, Re [1902] 2 Ch 416 …. 16.1.5 London and Harrogate Securities Ltd v Pitts [1976] 2 All ER 184 …. 3.10.5 London and River Plate Bank v Bank of Liverpool [1896] 1 QB 7 …. 5.3.1, 10.5.4 London Bank of Australia Ltd v Kendall (1920) 28 CLR 401 …. 8.8.4 London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777 …. 6.4.2, 7.2.1, 7.4.2, 8.7.1, 9.8.2, 9.10.1 Loteka Pty Ltd, Re [1990] 1 Qd R 322 …. 4.11.3 Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283 …. 17.10.5 Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd [2001] NSWCA 479 …. 15.3.3 Lumsden v London Trustee Savings Bank [1971] 1 Lloyds Rep 114 …. 8.8.4 Lyritzis v Westpac Banking Corp [1994] FCA 1458 …. 8.3.2

M Ma v Adams [2015] NSWSC 1452 …. 8.2.5 McColl’s Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365 …. 12.2.4 McDonald’s Australia Limited v Bendigo and Adelaide Bank Ltd [2014] VSCA 209 …. 13.2.6 McEntire v Crossley Bros Ltd [1895] AC 457 …. 14.2.3 McEvoy v ANZ Banking Group Ltd [1988] Aust Torts Rep 80–151 …. 6.3.5 McHenry, Re [1894] 3 Ch 290 …. 3.7.3

McHugh v Union Bank of Canada [1913] AC 299 …. 13.2.5 McKay v National Australia Bank [1998] 1 VR 173 …. 15.1.3 Mackenzie v Albany Finance Ltd [2003] WASC 100 …. 3.2.4 — v — [2004] WASCA 301 …. 3.2.4, 3.3.5, 3.7.1, 3.9.1, 3.9.3 — v Royal Bank of Canada [1934] AC 468 …. 15.3.1 McLaughlin v The City Bank of Sydney (1914) 18 CLR 598 …. 16.1.4 Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 …. 4.6.6 Magill v National Australia Bank Ltd [2001] NSWCA 221 …. 4.4.3, 4.5.1 Maguire v Simpson (1977) 52 ALJR 125 …. 3.7.7 Mahoney v McManus [1981] HCA 54 …. 15.2.2 Majesty Restaurant Pty Ltd (in liq) v Commonwealth Bank of Australia (1998) 47 NSWLR 593 …. 10.5.2 Mal Bower’s Macquarie Electrical Centre Pty Ltd, Re [1974] 1 NSWLR 254 …. 4.11.3 Manbre Saccharine Co Ltd v Corn Products Co Ltd [1919] 1 KB 198 …. 17.2, 17.15.8 Manzel Equipment Pty Ltd v APE Pty Ltd [2000] NSWSC 1172 …. 17.10.5 Maran Distributors Pty Ltd, Re [1994] 2 Qld R 45 …. 4.11.3 Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850 …. 9.3.2, 9.12.2, 9.14, 9.14.3, 9.14.4 Mareva Compania Naviera SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509 …. 16.2.1, 16.2.2 Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 968 …. 3.3.5 Mather v Bank of New Zealand (1918) 18 SR (NSW) 49 …. 8.4.3 Matthews v Williams, Brown & Co (1894) 10 TLR 386 …. 3.3.1 Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 …. 13.2.6 Maxal Nominees Pty Ltd v Dalgety Ltd [1985] 1 Qd R 51 …. 12.2.4 May v Brahmbhatt [2013] NSWCA 309 …. 15.3.1 MBF Australia Ltd v Malouf [2008] NSWCA 214 …. 10.4.5

Meadow Springs Fairway Resort Ltd (in Liq) (ACN 084 358 592) v Balanced Securities Limites (No 2) [2008] FCA 471 …. 4.5.1 Meates v Attorney-General [1983] NZLR 308 …. 6.3.3 Mecca, The [1897] AC 286 …. 4.3.1, 4.3.3 Mehta v J Pereira Fernandes SA [2006] EWHC 813 …. 9.10 Melbourne Corp v Commonwealth (1947) 74 CLR 31 …. 1.8, 2.2.1 Meldov Pty Ltd v Bank of Queensland [2015] NSWSC 378 …. 12.2.2 Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32 …. 15.3.1 Mercedes Benz (NSW) Pty Ltd v ANZ and National Mutual Royal Savings Bank Ltd (Supreme Court, NSW, Palmer J No 50549/1990 Comm Div, 5 May 1992, unreported) …. 7.4.3 Mercedes Benz (NSW) Pty Ltd v National Mutual Royal Savings Bank Ltd [1996] NSWSC 70 …. 7.4.3 Meyappan v Manchanayake (1961) 62 NLR 529 …. 5.6.2 Midland Bank Ltd v Seymour [1955] 2 Lloyds Rep 147 …. 9.12.1 Miller v Race (1758) 1 Burr 452 …. 9.7.3 Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 …. 5.4.7, 5.7.4, 8.2.4 Minories Finance v Arthur Young [1989] 2 All ER 105 …. 2.3.4 Minson Constructions Pty Ltd v Aquatec-Maxon Pty Ltd [1999] VSC 17 …. 17.10.5 Mirza (t/a Hamza Travel) v Dayman [2016] EWCA Civ 699 …. 3.2.1 Misa v Currie (1876) 1 App Cas 554 …. 16.1.3, 16.1.4 MLC v Evatt [1971] AC 793 …. 6.3.3 Mobil Oil Australia Ltd v Caulfield Tyre Service Pty Ltd [1984] VR 440 …. 8.10.1 Molton Finance Ltd, Re [1968] Ch 325 …. 13.2.5 Momm v Barclays Bank International [1977] QB 790 …. 2.4, 9.3.2, 9.14, 9.14.1 Mond v Lipshut [1999] VSC 103 …. 5.6.4

Morel (E J)(1934) Ltd, Re [1962] Ch 21 …. 4.4.3 Morgan v Ashcroft [1938] 1 KB 49 …. 10.3, 10.3.2 Morris v Martin & Sons Ltd [1966] 1 QB 716 …. 6.6.1, 6.6.4 Moss Steamship Co Ltd v Whinney [1912] AC 254 …. 4.11.4 Motor Traders Guarantee Corp Ltd v Midland Bank Ltd [1937] 4 All ER 90 …. 8.8.4 Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383 …. 9.14 Muirhead v Commonwealth Bank of Australia (1996) 139 ALR 561 …. 5.6.2 Multi-Span v Portland [2001] NSWSC 696 …. 15.3.3 Municipal Council of Sydney v Bank of Australasia (1914) 14 SR(NSW) 363 …. 3.7.2 Murphy v Esanda Finance Corp Ltd (1988) ASC 55–650 …. 15.3.3 Music Masters Pty Ltd v Minelle and the Bank of New South Wales Savings Bank Ltd [1968] Qd R 326 …. 4.12.3 Mutton v Peat [1900] 2 Ch 79 …. 4.4.1 Mutual Life and Citizens’ Assurance Co v Evatt [1968] HCA 74 …. 6.3.1, 6.3.3, 6.3.5

N Nairn’s Application, Re [1961] VR 26 …. 13.2.5 Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31 …. 3.2.4, 12.2.2 Nash v De Freville [1900] 2 QB 72 …. 5.9.5 National Australia Bank Ltd v Bond Brewing Holdings Ltd [1990] HCA 10 …. 16.2.7 — v Dessau [1988] VR 521 …. 16.2.3 — v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242 …. 4.9.1, 4.9.3, 7.2.3, 7.3, 7.4.1, 7.4.2, 7.4.3, 10.5.1 — v Hokit Pty Ltd [1996] NSWSC 198 …. 4.9.1, 7.3.2, 7.4.3, 9.8.2, 10.6 — v KDS Construction Services Pty Ltd [1987] HCA 65 …. 4.11.3, 8.10.1, 9.3.3, 9.14, 9.15.4, 10.5.3, 16.1.1, 16.1.4, 16.1.6 — v Meeke [2007] WASC 11 …. 6.4.2

— v Nemur Varity Pty Ltd [2002] VSCA 18 …. 4.6.2 National Bank v Silke [1891] 1 QB 435 …. 8.4.6 National Bank of Australasia v United Hand-in-Hand and Band of Hope Co (1879) 4 App Cas 391 …. 12.2.2 National Bank of Commerce v National Westminster Bank [1990] 2 Lloyds Rep 514 …. 3.7.2, 3.9.3 National Bank of Dallas v Northwest National Bank of Fortworth 578 SW 2d 109 (1978) …. 17.5 National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637 …. 3.4.3, 4.5.1, 12.2.2 National Bank of New Zealand v Grace (1890) 8 NZLR 709 …. 4.4.2 National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211 …. 10.4.3 — v Walpole and Patterson Ltd [1975] 2 NZLR 7 …. 4.9.1, 7.4.1, 7.4.3, 10.6, 11.6.8 National Bank of Nigeria Ltd v Oba M S Awolesi [1964] 1 WLR 1311 …. 15.3.2 National Bank of Tasmania Ltd v McKenzie [1920] VLR 411 …. 3.7 National Commercial Banking Co of Australia Ltd v Robert Bushby Ltd [1984] 1 NSWLR 559 …. 8.8.4 National Mortgage and Agency Co of New Zealand Ltd v Tait [1929] NZLR 235 …. 15.3.2 National Mutual Life Association of Australasia Ltd v Walsh (1987) 8 NSWLR 585 …. 10.4.2 National Provincial Bank of England Ltd v Glanusk [1913] 3 KB 335 …. 15.3.1 National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 …. 7.4.2, 9.9.2, 10.3.1, 10.5.4 — v Halesowen Presswork & Assemblies Ltd [1972] AC 785 …. 4.4.2, 4.4.3, 4.4.5, 4.11.3, 16.1.3 National Westminster Bank v Frankham [2013] EWHC 1199 …. 3.3.3 — v Morgan [1985] 1 All ER 821 …. 4.7.2

National Westminster Bank Plc v Somer International (UK) Ltd [2001] EWCA Civ 970 …. 7.3.3 Naxatu Pty Limited v Perpetual Trustee Company Ltd [2012] FCAFC 163 …. 13.2.6 NCR Australia v Credit Connections [2004] NSWSC 1 …. 4.6.6 Netglory Pty Ltd v Caratti [2013] WASC 364 …. 3.7.3 Network Finance Ltd v Deposit & Investment Co Ltd [1972] QWN 19 …. 13.2.6 New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781 …. 4.6.4 New South Wales v Commonwealth (1990) 169 CLR 482 …. 3.8.7 — v — (No 3) [1932] HCA 12 …. 4.6.1 New Zealand Banking Co, Re (1867) LR 4 Eq 226 …. 12.2.4 Newham v Diamond Leisure Pty Ltd [1994] NTSC 83 …. 5.4.2 Nimmo v Westpac Banking Corp [1993] 3 NZLR 218 …. 4.6.3 Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132 …. 4.6.4 Nioa v Bell (1901) 27 VLR 82 …. 13.2.6 Nippon Yusen Kaisha v Karageorgis [1975] 3 All ER 282 …. 16.2.1 Nisbet v Smith (1789) 2 Bro CC 579; 29 ER 317 …. 15.3.2 Nobile v National Australia Bank Ltd (1987) ASC 55–580 …. 15.3.1 Norman v Federal Commissioner of Taxation [1963] HCA 21 …. 5.3.2 North Shore Ventures Ltd v Anstead Holdings Inc [2011] EWCA Civ 230 …. 15.3.1 Northside Developments Pty Ltd v Registrar-General [1990] HCA 32 …. 3.8.7, 7.4.2 Norwich Union Fire Insurance Society Ltd v Price Ltd (1934) AC 455 …. 10.3 Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 …. 5.3.2, 8.10.1 Nu-Stilo Footwear Ltd v Lloyds Bank Ltd (1956) 7 LDAB 121 …. 8.8.4

O Obvious Deadline Pty Ltd v Clancy [2016] NSWSC 1837 …. 15.2.2 O’Ferrall v Bank of Australasia (1883) 9 VLR (L) 119 …. 3.7.2 Official Assignee in Bankruptcy v Westpac Banking Corporation [1989] NZHC 908 …. 4.4.2 Ogilvie v Adams [1981] VR 1041 …. 3.7.1, 3.7.8 — v West Australian Mortgage and Agency Corp [1896] AC 257 …. 7.3.4 Olex Focas Pty Ltd v Skodaexport [1998] 3 VR 380 …. 17.10.5 Oliver v Davis [1949] 2 KB 727 …. 5.5.2 Omlaw Pty Ltd v Delahunty [1993] QCA 420 …. 15.2.3 Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794 …. 1.9.3, 5.4.6, 8.2.3, 8.8.3 Orient Co Ltd v Brekke and Howlid [1913] 1 KB 531 …. 17.15.8 Oriental Financial Corporation v Overend, Gurney and Co (1871) LR 7 Ch App 142 …. 12.2.4 Orix Australia Corp Ltd v M Wright Hotel Refrigeration Pty Ltd [2000] SASC 57 …. 10.4.3 Orton v Collins [2007] EWHC 803 …. 9.10 Orwell Steel (Erection and Fabrication) Ltd v Asphalt and Tarmac (UK) Ltd [1985] 3 All ER 747 …. 16.2.3 Ostabridge Pty Ltd (in liq) v Stafford [2001] NSWSC 131 …. 3.7.7 Osterreichische Landerbank v S’elite Ltd [1980] 3 WLR 356 …. 5.5.5 Overseas Chinese Banking Corp Ltd (OCBC) v Malaysian Kuwaiti Investment Co (MKIC) [2003] VSC 495 …. 13.2.6 Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388 …. 9.14.5 Owners — Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317 …. 15.3.1

P Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 …. 3.8.7

Pacific South (Asia) Holdings Ltd v Million Unity International Ltd [1997] HKCA 641 …. 9.3.4 Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35 …. 3.1, 3.7.2, 4.5.2 — v — [2016] HCA 28 …. 4.5.2 Papandony v Citibank Ltd [2002] NSWSC 388 …. 8.7.3 Parr’s Banking Co Ltd v Yates [1898] 2 QB 460 …. 3.7.4, 3.7.5, 3.7.6 Parras Holdings Pty Ltd v Commonwealth Bank of Australia [1998] FCA 682 …. 12.2.2 Parry-Jones v Law Society [1969] 1 Ch 1 …. 6.2.3 Parsons v R [1999] HCA 1 …. 8.10.2 Parsram Brothers (Aust) Pty Ltd v Australian Foods Co Pty Ltd [2001] NSWSC 436 …. 16.2.3 Paton (Genton’s Trustee) v IRC [1938] AC 341 …. 12.2.2 Patroni v Conlan [2004] WASC 16 …. 13.1.3 Paynter v Willems [1983] 2 VR 377 …. 9.3.4 Peacocke & Co v Williams (1909) 28 NZLR 354 …. 5.4.2 Pearce v Creswick (1843) 2 Hare 286; 12 LJ Ch 251 …. 4.2.2 Pedna Pty Ltd v Sitep Society per Azioni (SC(NSW), Santow J, No 1032/1997, 8 January 1997, unreported, Santow J) …. 17.10.5 Penfolds Wines Pty Ltd v Elliott (1946) CLR 204 …. 8.8.2 Permanent Custodians Ltd v AGB Development Pty Ltd [2010] NSWSC 540 …. 13.2.5 Perpetual Trustee Co Ltd v Bowie [2015] NSWSC 328 …. 6.5 — v Khoshaba [2006] NSWCA 41 …. 15.3.3 Perrin v Morgan [1943] AC 399 …. 3.2.1 Perry v National Provincial Bank of England Ltd [1910] 1 Ch 464 …. 15.3.2 Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27 …. 4.4.3, 4.9.3, 7.4.1 Pham v ANZ Banking Group Ltd [2002] VSCA 206 …. 15.3.1

Pillans v Van Mierop (1765) 3 Burr 1663; 97 ER 1035 …. 17.10.5 Pitman v Pantzer [2001] FCA 957 …. 15.2.1 Pitt Son & Badgery Ltd v Proulefco SA [1984] HCA 6 …. 6.6.1, 6.6.3 Polglass v Oliver (1831) 2 Crompton & Jervis 15; 149 ER 7 …. 9.3.4 Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580 …. 6.6.1, 6.6.3 Porter v Latec Finance (Qld) Pty Ltd [1964] HCA 49 …. 10.3.1, 10.3.2 Portman Building Society v Dusangh [2000] 2 All ER(Comm) 221 …. 15.3.1 Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 …. 17.10.5 Powles v Hargreaves (1853) 3 De GM & G 430; 43 ER 169 …. 12.2.4 PP Consultants Pty Ltd v Finance Sector Union [2000] HCA 59 …. 3.10.1, 3.10.5 Precious Metals Australia v Xstrata (Schweiz) Ag [2005] NSWSC 141 …. 15.1.1 Price v Neal (1762) 3 Burr 1354; 97 ER 871 …. 10.5.4 Prince v Oriental Bank Corp (1878) 3 App Cas 325 …. 4.4.2 Proctor v Jetway Aviation [1982] 2 NSWLR 264 …. 3.7.7 Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203 …. 15.3.3 Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372 …. 3.4.1, 3.4.2, 4.11, 11.5.8 PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36 …. 16.2.1, 16.2.3, 16.2.5 Public Service Employees Credit Union Cooperative Ltd v Campion (1984) 56 ACTR 74 …. 15.3.1

Q Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266 …. 4.11.3 Queensland Trustees Ltd v Registrar of Titles (1893) 5 QLJ 46 …. 13.2.6 Quikfund (Australia) Pty Limited v Airmark Consolidators Pty Ltd [2014] FCAFC 70 …. 15.3.3

R R v Baxter (1987) 84 ALR 537; [1988] 1 Qd R 537 …. 9.15.5 — v Evenett [1987] 2 Qd R 753 …. 9.15.5 — v Federal Court of Australia; Ex parte WA National Football League [1979] HCA 6 …. 3.8.3 — v Hughes (2000) 171 ALR 155; [2000] HCA 22 …. 3.8.7 — v Johnson [2006] QCA 362 …. 4.10, 11.6.3 — v Jost [2002] VSCA 198 …. 3.10.2 — v Page [1971] 2 QB 330 …. 8.10.4 — v Parsons (1999) 195 CLR 619 …. 3.2.1 — v Trade Practices Tribunal; Ex parte St George County Council [1974] HCA 7 …. 3.8.3 Rabobank New Zealand Ltd v McAnulty (February Syndicate) [2011] NZCA 212 …. 14.10 Redmond v Allied Irish Banks Plc [1987] FLR 307 …. 6.4.2 Rees v Bank of New South Wales (1964) 111 CLR 210 …. 4.11.3 Reid Murray Holdings Ltd v David Murray Holdings Pty Ltd (1972) 5 SASR 386 …. 15.1.3 Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47 …. 9.3.2, 9.14.1, 9.14.4 Rennie v Remath Investment No 6 Pty [2002] NSWSC 672 …. 4.4.5 Republic of Haiti v Duvalier [1990] 1 QB 202 …. 16.2.3 Richards v Commercial Bank of Australia (1971) 18 FLR 95 …. 13.1.4 Richardson v Commercial Banking Co of Sydney (1952) 85 CLR 110 …. 4.11.3 Rick Dees Limited v Larsen [2006] NZCA 25 …. 9.14.3 Riedell v Commercial Bank of Australia Ltd [1931] VLR 382 …. 8.8.1, 9.8.2, 9.15.4, 11.6.8 Rigg v Commonwealth Bank of Australia [2001] FCA 1340 …. 5.6.2 Riley McKay v McKay [1982] 1 NSWLR 264 …. 16.2.5

Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 …. 4.5.2, 12.2.2 River Steamer Co, Re; Mitchell’s claim (1871) LR 6 Ch App 822 …. 3.7 Roberts v State of Western Australia [2005] WASCA 37 …. 3.9.3 Robertson v Canadian Imperial Bank [1995] 1 All ER 824 …. 6.2.3 Robinson v Midland Bank Ltd (1925) 41 TLR 402 …. 3.3.5 Robinson’s Motor Vehicles Ltd v Graham [1956] NZLR 545 …. 15.3.2 Roe’s Legal Charge, Re; Park Street Securities Ltd v Albert William Roe [1982] 2 Lloyds Rep 370 …. 3.10.5 Rogers v Whiteley [1892] AC 118 …. 4.12.1, 4.12.2 Rolls Razor Ltd v Cox [1967] 1 QB 552 …. 4.4.5 Ross v Bank of New South Wales (1928) 28 SR (NSW) 539 …. 15.3.1 Rose & Frank Co v J R Crompton & Bros Ltd [1925] AC 445 …. 12.2.6 Rouse v Bradford Banking Co Ltd [1894] AC 586 …. 12.2.2 Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798 …. 4.6.2, 4.6.3 Royal Bank of Canada v IRC [1972] 1 Ch 665 …. 6.2.2 — v Pampellonne [1987] 1 Lloyds Rep 218 …. 6.3.5 Royal Bank of Scotland v Commercial Bank of Scotland (1882) 7 App Cas 366 …. 12.2.4 — v Greenshields [1914] SC 259 …. 15.3.1 Royal British Bank v Turquand (1856) 119 ER 886 …. 3.8.7 Royal Brunei Airlines v Tan [1995] 2 AC 378 …. 4.6.5, 4.6.6 Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194 …. 9.6, 9.8.2, 9.12, 9.12.1, 9.12.2, 9.12.3 Ruff v Webb (1794) 1 Esp 129; 170 ER 301 …. 5.4.2 Russell v Scott (1936) 55 CLR 440 …. 4.7.2 Russian Commercial and Industrial Bank, Re [1955] 1 Ch 148 …. 3.4.3, 3.6 Rust v Abbey Life Assurance Co [1978] 2 Lloyds Rep 385 …. 6.3.5 Ryan v Bank of New South Wales [1978] VR 555 …. 6.4.2

S Saffron v Societe Miniere Cafrika [1958] HCA 50 …. 17.6 Salomon v Salomon & Co Ltd [1897] AC 22 …. 3.8.7 Sam Management Services (Australia) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320 …. 11.5.1, 11.5.3 San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 [1986] HCA 68 …. 6.3.3 Sandell v Porter (1966) 115 CLR 666 …. 4.11.3 Sass, Re; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12 …. 15.3.3 Saudi Arabian Monetary Agency v Dresdner Bank AG [2004] EWCA Civ 1074 …. 4.4.3 Savings Bank of South Australia v Wallman (1935) 52 CLR 688 …. 8.8.4 Savory (E B) & Co v Lloyds Bank Ltd [1932] 2 KB 122 …. 3.3, 8.8.4 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 …. 4.6.4 Schioler v Westminster Bank Ltd [1970] 2 QB 719 …. 6.3.5 Scholfield v The Earl of Londesborough [1895] 1 QB 536 …. 5.9.4 Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562 …. 12.2.4 Scott v Forster Pastoral Co Pty Ltd [2000] NSWCA 241 …. 15.1.3 Scottish Equitable plc v Derby [2001] 3 All ER 818 …. 7.3.3 Sea Rose Ltd v Seatrain in (UK) Ltd [1981] 1 Lloyds Rep 556 …. 16.2.7 Secretary of State for Employment v Wellworthy (No 2) [1976] ICR 13 …. 10.3.4 Securitibank Ltd, Re [1978] 1 NZLR 97 …. 12.2.4, 12.3.4 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 …. 6.4.1, 6.4.2, 12.3.3 Shaddock & Associates Pty Ltd v Parramatta City Council [1981] HCA 59 …. 6.3.3, 6.3.5 Shaw, Re; Ex Parte Andrew v Australia and New Zealand Banking Group Ltd [1977] FCA 18 …. 4.4.2 Shields v Westpac Banking Corp [2008] NSWCA 268 …. 10.4.5

Shields’ Estate, Re (1901) IR Ch 172 …. 3.10.5 Shirt v Wyong Shire Council [1978] 1 NSWLR 631 …. 9.14.5 Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia [1975] 2 NSWLR 227 …. 8.3.2 Simic v New South Wales Land and Housing Corporation [2016] HCA 47 …. 17.5, 17.10.4 Siminton v Australian Prudential Regulation Authority [2007] FCA 2098 …. 3.10.2 Simonovski v Bendigo Bank Ltd [2005] VSCA 125 …. 4.9.1 Simos v National Bank of Australasia Ltd (1976) 45 FLR 97 …. 4.7.3 Simpson, Re (1935) 8 ABC 234 …. 4.11.3 Simpson v Eggington (1855) 10 Exch 845 …. 9.4.2 Sinclair v Brougham [1914] AC 398 …. 3.8.7 Singer & Friedlander v Creditanstalt-Bankverein [1981] Com LR 69 …. 17.16.5 Singer Co (UK) v Tees & Hartlepool Port Authority (1988) 2 Lloyds Rep 164 …. 6.6.4 Skandinaviska Kreditaktie-Bolaget v Barclays Bank Ltd (1925) 22 Ll L Rep 523 …. 17.15.3 Skipton Building Society v Stott [2000] 2 All ER 779 …. 15.3.3 Slingsby v District Bank Ltd [1932] 1 KB 544 …. 5.6.2, 7.2.2 — v Westminster Bank Ltd (No 2) [1931] 2 KB 583 …. 8.8.3 Smith, Ex parte (1789) 3 Bro C C 1 …. 15.3.2 Smith v Bush [1990] 1 AC 831 …. 6.3.3 — v Lloyds TSB Bank plc [2001] 1 All ER 424 …. 8.8. — v Prosser [1907] 2 KB 735 …. 5.6.6 Smith, Re v Commmonwealth Bank of Australia [1991] FCA 73 …. 6.3.5 Smorgon v Australia and New Zealand Banking Group Ltd [1976] HCA 53 …. 6.2.3, 6.6.1 Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] UKHL 30 …. 4.12.1, 4.12.7

Soproma SpA v Marine & Animal Byproducts Corp [1966] 1 Lloyd’s Rep 367 …. 17.10.4 South Australia Cold Stores Ltd v Electricity Trust of South Australia [1957] HCA 69 …. 10.2 South Australian Banking Co v Horner (1868) 2 SALR 109 …. 12.2.2 Southage Pty Ltd v Vescovi [2015] VSCA 117 …. 10.4.3 Southland Savings Bank v Anderson [1974] 1 NZLR 118 …. 9.8.2, 10.5.2 Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 3 All ER 75 …. 4.6.9 Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 …. 4.6.6 Spencer v Crowther [1986] BCL 422 …. 5.5.2 — v Lotz (1916) 2 TLR 373 …. 15.3.2 Spina v Conran Associates Pty Ltd; Spina v M & V Endurance Pty Ltd [2008] NSWSC 326 …. 15.3.1 St George Bank Ltd v Emery [2004] WASC 35 …. 15.3.3 — v Mctaggart [2007] WASC 150 …. 13.2.6 Stafford v Henry (1850) 12 Ir Eq R 400 …. 3.10.5 Stage Club Ltd v Millers Hotels Pty Ltd (1981) 56 ALJR 113 …. 3.7.7 Standard Bank of Canada v Wildey (1919) 19 SR (NSW) 384 …. 5.4.3, 8.2.2 Standard Insurance Co Ltd (in liq) and Companies Act 1936, Re [1970] 1 NSWR 392 …. 12.2.4 Star v Silvia; Silvia v Genoa Resources & Investments Ltd (No2) (1994) 36 NSWLR 685 …. 12.2.4 State Bank of New South Wales v Currabubula Holdings Pty Ltd [2001] NSWCA 47 …. 3.4, 3.5.1, 4.11 State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587 …. 15.3.3 — v Hibbert [2000] NSWSC 628 …. 15.3.1 — v Swiss Bank Corp (1995) 39 NSWLR 350 …. 10.4.3 Steel Wing Co Ltd, Re [1921] 1 Ch 349 …. 5.3.2

Steele v M’kinlay (1880) 5 App Cas 754 …. 5.7.4 Stein v Torella Holdings Pty Ltd [2009] NSWSC 971 …. 12.2.2 Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 …. 12.3.1 Stephens Travel Service International Pty Ltd (recs & mgrs appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331 …. 4.6.2, 4.6.4 Stephenson v Hart (1828) 4 Bing 476; 130 ER 851 …. 6.6.2 Stern v McArthur (1988) 165 CLR 489 …. 15.3.1 Stevens, Re (1929) 1 ABC 90 …. 4.11.3 Stock Motor Ploughs Ltd v Forsyth [1932] HCA 40 …. 5.5.2 Stoney Stanton Supplies Ltd v Midland Bank Ltd [1966] 2 Lloyds Rep 373 …. 3.3.5 Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 …. 3.8.7 Strategic Finance Limited v Bridgman [2013] NZCA 357 …. 3.2.1 Streicher v ES&A Bank Ltd [1945] SASR 207 …. 3.7.2 Studman v Commonwealth Director of Public Prosecutions [2007] NSWCA 285 …. 1.10.1 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11 …. 15.1, 15.1.1 Sunderland v Barclays Bank (1938) 5 LDAB 163 …. 6.2.5, 6.2.7 Suriya and Douglas (a firm) v Midland Bank Plc [1999] EWCA Civ 851 …. 6.3.5 Sydney Concrete and Contracting Pty Ltd v BNP Paribas Equities (Australia) Ltd [2005] NSWSC 408 …. 4.3.1 Sztejn v J Henry Schroder Banking Corp 31 NYS 2d 631 (1941) …. 17.10.5

T T & H Greenwood Teale v William Williams Brown & Co (1894) 11 TLR 56 …. 4.4.3 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 …. 3.1, 3.5.1, 3.5.3, 4.9.1, 4.9.3, 6.5, 7.2.3, 7.3.2, 7.4.1, 7.4.2, 7.4.3, 9.8.2, 9.15.3, 10.6, 11.6.8 Tamer v Official Trustee in Bankruptcy [2016] NSWSC 680 …. 10.3.1 Tankexpress v Compagnie Financiere Belge SA [1949] AC 76 …. 9.3.6

Tarn v Commercial Banking Co of Sydney (1884) 12 QBD 294 …. 4.11.2 Taurus Petroleum Limited v State Oil Company of the Ministry of Oil, Republic of Iraq [2013] EWHC 3494 …. 4.12.7 Tawil v Public Trustee of NSW [2009] NSWSC 256 …. 4.9.1 Tayeb v HSBC Bank Plc [2004] EWHC 1529 …. 9.14.2 Taylor v National Bank of New Zealand [1985] BCL 895 …. 4.7.2 — v Russell [1892] AC 244 …. 13.1.3 Tenax Steamship Co Ltd v Reinante Transocianica Navegacion SA (The Brimnes) [1975] QB 929 …. 9.3.6, 9.12.2, 9.14, 9.14.1 Territory Sheet Metal Pty Ltd v ANZ Banking Group Ltd [2009] NTSC 31 …. 7.2.4 Theodore v Mistford [2003] QCA 580 …. 13.2.5 Thomas v Hollier [1984] HCA 35 …. 5.3.3, 5.4.5 — v Houston Corbett & Co [1969] NZLR 151 …. 10.4.3 Thomas Cook v Kumari [2002] NSWCA 141 …. 5.3.3, 8.3.3 Thomas Cook (New Zealand) Ltd v Inland Revenue (New Zealand) [2004] UKPC 53 …. 3.9.2, 8.3.3 Thompson & Morgan (United Kingdom) Ltd v Erica Vale Australia Pty Ltd (1995) 31 IPR 335 …. 3.2.4 Thompson Land Ltd v Lend Lease Shopping Centre Development Pty Ltd [2000] VSC 140 …. 17.10.3 Thomson v Clydesdale Bank Ltd [1893] AC 282 …. 4.6.1, 4.6.3 Thorpe v Jackson (1837) 2 Y & C Ex 553; 160 ER 515 …. 4.7.2 Three Rivers DC v Bank of England (No 3) [2001] 2 All ER 513 (HL) …. 2.3.4 — v BCCI [2006] EWHC 816 (Comm) …. 2.3.4 Tidal Energy Ltd v Bank of Scotland plc [2014] EWCA Civ 1107 …. 9.14.2 Tilley v Official Receiver (1960) 103 CLR 529; [1960] HCA 86 …. 8.10.1, 9.14 Tina Motors Pty Ltd v Australian and New Zealand Banking Group Ltd [1977] VR 205 …. 7.3.3

Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660; [1903] AC 414 …. 17.16.5 Tomlin v Ford Credit Australia Ltd [2005] NSWSC 540 …. 6.5 Toscano v Holland Securities Pty Ltd (1985) 1 NSWLR 145 …. 15.3.3 Total Oil Products (Aust) Pty Ltd v Robinson [1970] 1 NSWR 701 …. 15.3.2 Tournier v National Provincial & Union Bank of England [1924] 1 KB 461 …. 6.2, 6.2.1, 6.2.4, 6.2.5, 6.2.6, 6.2.7, 6.3.1, 11.5.5, 11.7.2, 16.2.6 Trans Trust SPLR v DAnubian Trading Co Ltd [1952] 2 QB 297 …. 17.16.3 TSB Bank of Scotland plc v Welwyn Hatfield District Council and Council of the London Borough of Brent [1993] 2 Bank LR 267 …. 9.14.3 Tsolakkis Nominees Pty Ltd v National Australia Bank Ltd (unreported, Vic SCt CA No 8125 of 1992, 4 June 1998) …. 6.2.7 Tunstall Brick & Pottery Co v Mercantile Bank of Australia Ltd (1892) 18 VLR 59 …. 3.2.4 Turner v Royal Bank of Scotland plc [1998] EWCA Civ 529 …. 6.2.6, 6.3.1 — v Sylvester [1981] 2 NSWLR 295 …. 16.2.3 — v Windever [2005] NSWCA 73 …. 15.3.1 Turner Manufacturing Co Pty Ltd v Senes [1964] NSWR 692 …. 15.1.1 Turvey v Dentons (1923) Ltd [1953] 1 QB 218 …. 10.3.4 Twinsectra Ltd v Yardley [2002] 2 AC 164 …. 4.6.4, 4.6.6 Twyne’s case (1601) 3 Co Rep 80b; 76 ER 809 …. 14.2.1

U Union Bank of Australia Ltd v Murray-Aynsley [1898] AC 693 …. 4.4.3 United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 …. 17.10.5 United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 …. 3.10.2, 3.10.5, 3.10.6 United Overseas Bank v Jiwani [1977] 1 All ER 733; [1976] 1 WLR 964 …. 4.9.2 United Service Co (Johnston’s Claim), Re (1870) LR 6 Ch App 212 …. 6.6.1, 16.1.4

Universal Guarantee Pty Ltd v Derefink [1958] VR 51 …. 4.12.4 — v National Bank of Australasia Ltd [1965] NSWR 342 …. 8.4.6 Universe Tankships Inc of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] AC 366 …. 15.3.1 Upton v Westpac Banking Corporation [2016] QCA 220 …. 13.2.5 Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 …. 17.10.2, 17.16.3

V Valamios v Demarco [2005] NSWCA 98 …. 5.6.2, 8.6.1 Varker v Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967 …. 6.4.2, 7.2.3, 7.2.4 Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 …. 4.7.3, 8.3.2 Vicars v Commissioner of Stamp Duties (NSW) [1945] HCA 24 …. 4.4.2 Vinden v Hughes [1905] 1 KB 795 …. 8.7.3 Visa International Service Association v Reserve Bank of Australia [2003] FCA 977 …. 9.15.4 Visini v Cadman [2012] NZCA 122 …. 4.7.3 VL Finance Pty Ltd v Legudi [2003] VSC 57 …. 3.7.1 Voss v Suncorp-Metway Ltd (No 2) [2003] QCA 252 …. 8.8.4

W W P Greenhalgh & Sons v Union Bank of Manchester [1924] 2 KB 153 …. 4.3.1 Wade’s Case (1601) 5 Co Rep 114a; 77 ER 232 …. 9.3.5 Walker v Manchester and Liverpool District Banking Co Ltd (1913) 108 LT 728; 29 TLR 492 …. 7.4.1 Walsh, Spriggs, Nolan and Finney v Hoag & Bosch Pty Ltd [1977] VR 178 …. 5.5.2 Walton v Mascall (1844) 13 M & W 452 …. 3.2.4 Wambo Coal; Heperu Pty Ltd v Belle [2009] NSWCA 252 …. 10.4.5 Ward v National Bank of New Zealand (1883) 8 App Cas 755 …. 15.3.3

Waring, Ex parte (1815) 19 Ves 346; 34 ER 546 …. 12.2.4 Watts v Public Trustee (1949) 50 SR (NSW) 130 …. 4.9.1 Wayfoong Credit Ltd v Remoco (HK) Ltd [1983] HKCFI 117 …. 8.4.6 Webb v Stanton (1883) 11 QBD 518 …. 4.12.1 Weiss, Re; Ex parte White v John Vicars & Co Ltd [1970] ALR 654 …. 4.11.3 Weld-Blundell v Stephens [1920] AC 956 …. 6.2.4 West v AGC (Advances) Ltd (1986) 5 NSWLR 611 …. 15.3.3 — v Commercial Bank of Australia [1935] HCA 14 …. 7.3.2 — v Williams [1899] 1 Ch 132 …. 13.2.6 Western Australia v Bond Corp Holdings Ltd [1991] FCA 313 …. 15.3.2 Westminster Bank Ltd v Arlington Overseas Trading Co [1952] 1 Lloyds Rep 211 …. 10.3.4 Westpac v Commissioner of Inland Revenue [2008] NZHC 1695 …. 3.9.2, 8.3.3 Westpac Banking Corp v AGC (Securities) Ltd [1983] 3 NSWLR 348 …. 12.2.4 — v Billgate Pty Ltd [2013] NSWSC 1304 …. 15.3.1 — v Clemesha (SC NSW, Cole J, No 18226/87, 29 July 1988, unreported) …. 15.3.1 — v Commissioner of Inland Revenue [2009] NZCA 376 …. 3.9.2 — v Metlej (1987) Aust Torts Reports 80–102 …. 7.4.2, 7.4.3, 9.8.2 — v Ollis [2007] NSWSC 956 …. 10.4.5 — v Royal Tongan Airlines [1996] NSWSC 409 …. 6.6.3, 6.6.4 — v Savin [1985] 2 NZLR 41 …. 4.6.4, 4.6.7 — v ‘Stone Gemini’ [1999] FCA 434 …. 17.10.4 — v Sugden (1988) NSW Conv R 55–377 …. 15.3, 15.3.3 Westpac Banking Corporation v Diagne [2014] NSWSC 822 …. 6.5 — v Hughes [2011] QCA 42 …. 8.8.3 Westpac, BNZ and ANZ National v CIR [2011] NZSC 36 …. 3.9.2, 8.3.3

WGH Nominees Pty Ltd v Tomblin (1985) 39 SASR 117 …. 6.6.3 Whistler v Forster (1863) 14 CBNS 248; 143 ER 441 …. 5.5.9 Williams and Glyn’s Bank v Barnes [1981] Com LR 205 …. 12.2.2 Williamson v Rider [1963] 1 QB 89 …. 5.4.2 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 …. 6.2.1 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443; [1979] HCA 21 …. 17.5, 17.10.5 Woods v Martins Bank Ltd [1959] 1 QB 55 …. 3.3.3, 6.3.5 Woollatt v Stanley (1928) 138 LT 620 …. 5.9.6 World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd [2007] FCA 114 …. 5.6.2 World Tech Pty Ltd v Yellowin Holdings Pty Ltd (1992) 5 BPR 11,729 …. 13.2.5 Wragge v Sims Cooper & Co (Australia) Pty Ltd [1933] HCA 59 …. 5.5.2 Wright v NZ Farmers Co-operative [1936] NZLR 157; [1939] AC 439 …. 3.7.5

X X AG v A Bank [1983] 2 All ER 464 …. 6.2.5

Y Yamaha Music Australia Pty Ltd v Blakeley [2016] VSC 391 …. 14.13.5 Yan v Post Office Bank Ltd [1994] 1 NZLR 150 …. 8.3.2 Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd [1978] HCA 42 …. 3.10 Yeoman Credit Ltd v Latter [1961] 1 WLR 828 …. 5.5.5, 12.3.1, 15.1.1, 15.3.2 Yeovil Glove Co Ltd, Re [1965] Ch 148 …. 4.11.3 Yerkey v Jones [1939] HCA 3 …. 15.3.1 York Street Mezzanine Pty Ltd (in liq), Re [2007] FCA 922 …. 5.4.2 Young v Grote (1827) 4 Bing 253; 130 ER 764 …. 7.2.1

— v Queensland Trustees Ltd [1956] HCA 51 …. 3.7.1, 3.7.4, 3.9.3 Yourell v Hibernian Bank Ltd [1918] AC 372 …. 4.5.1, 12.2.2

Z Z Ltd v A [1982] QB 558 …. 16.2.3, 16.2.6

Table of Statutes References are to paragraph numbers

Commonwealth Anti-Money Laundering and Counter-Terrorism Financing Act 2006 …. 1.9.1, 1.9.3, 1.9.4, 1.9.5, 6.6.7 Pt 3 …. 1.9.3 Pt 8 …. 1.9.3 Pt 16 …. 1.9.5 Div 5A …. 1.9.3 s 3 …. 1.9.3 s 5 …. 1.9.3, 6.6.7 s 6 …. 1.9.3 s 32 …. 1.9.3 s 35A …. 1.9.3 s 35B …. 1.9.3 s 36 …. 1.9.3 s 41 …. 1.9.3 s 45 …. 1.9.3 s 46 …. 1.9.3 s 47 …. 1.9.3 s 51 …. 1.9.3 s 64(2) …. 1.9.3 s 69 …. 1.9.3 s 72 …. 1.9.3 s 206 …. 1.9.3

s 210 …. 1.9.5 s 212 …. 1.9.5 Anti-Money Laundering and Counter-Terrorism Financing Regulations 2008 …. 1.9.3 Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 …. 1.9.3 Ch 4 …. 1.9.3 Pt 4.9 …. 1.9.3 Pt 4.10 …. 1.9.3 Pt 7 …. 1.9.3 r 1.2.1 …. 1.9.3 r 4.2.10 …. 1.9.3 Australian Consumer Law …. 3.5.3, 3.5.6, 4.5.2, 4.9.3, 6.3.3, 6.6.5, 7.4.1, 9.8.1, 9.15.3, 11.2, 11.6.8, 15.3, 15.3.1, 15.3.3 Pt 2-3 …. 11.2 Pt 5-2 …. 15.3.3 s 2 …. 11.2, 11.4 s 3(3) …. 11.4 s 3(4) …. 11.4 s 3(9) …. 11.4 s 18 …. 6.3.3, 15.3.1, 15.3.3 s 20 …. 17.10.5 s 21 …. 15.3.3, 17.10.5 s 21(1) …. 15.3.3 s 21(2) …. 15.3.3 s 23(3) …. 11.2 s 24 …. 11.2 s 24(3) …. 11.2 s 25 …. 11.2

s 26(1) …. 11.2 s 26(1)(c) …. 11.2 s 27 …. 11.2 s 28 …. 11.2 s 60 …. 6.6.5, 11.1, 11.4 s 61 …. 6.6.5 s 64 …. 6.6.5 s 236 …. 15.3.3 Australian Notes Act 1910 …. 2.2.1 Australian Prudential Regulation Authority Act 1998 …. 1.4.5 Australian Securities and Investment Commission Act 2001 …. 1.4.4, 3.2.5, 3.5.3, 3.5.6, 3.8.7, 11.2, 15.3.3 Pt 2 Div 2 Subdiv BA …. 3.5.6 Div 2 …. 1.4.4 s 8 …. 1.4.4 s 12BF(3) …. 11.2 s 12BG(1) …. 11.2 s 12BK …. 11.2 Bank Notes Tax Act 1910 …. 2.2.1 Banking Act 1945 …. 2.2.1 s 48 …. 2.2.1 Banking Act 1947 …. 2.2.1 Banking Act 1959 …. 1.2, 1.4.1, 1.4.5, 1.5, 2.3, 2.3.1, 2.3.2, 2.3.4, 2.3.5, 3.6, 3.9.3, 3.10, 3.10.2, 3.10.3, 3.10.4, 3.10.5, 4.8, 10.5.4 Pt II Div 1AA …. 3.10.3 Pt II Div 2 …. 2.3.4 Pt II Div 2AA …. 4.8 Div 2AA …. 3.6 s 5 …. 4.8

s 5(1) …. 2.3.5, 3.10.2 s 7 …. 2.3.2 s 7(1) …. 3.10.2 s 8 …. 2.3.2 s 9 …. 2.3.2, 2.3.4 s 11A …. 2.3.5 s 11AA …. 2.3.2, 3.10.3 s 11AA(i) …. 3.10.3 s 11AF …. 1.4.5, 2.3.5, 3.6 s 11B(a) …. 2.3.5 s 11B(b) …. 2.3.5 s 11B(c) …. 2.3.5 s 11D …. 2.3.4 s 11E(1) …. 2.3.4 s 11E(2) …. 2.3.4 s 11F …. 2.3.4 s 12 …. 2.3.4 s 13(1) …. 2.3.4 s 13(3) …. 2.3.4 s 13(4) …. 2.3.4 s 13A …. 9.11.6 s 13A(3) …. 2.3.4, 3.6 s 13A(4) …. 2.3.4 s 16AG …. 3.6 s 36 …. 2.5.8 s 36(1) …. 12.1 s 36(2) …. 2.5.8 s 36(3) …. 2.5.8

s 50 …. 2.5.8 s 53 …. 10.5.4 s 54 …. 10.5.4 s 55(2)(c) …. 10.5.4 s 66 …. 1.7, 2.3.2 s 69 …. 3.9.1, 3.9.2 s 69(1) …. 3.9.1 s 69(1A) …. 3.9.1 s 69(1B) …. 3.9.1 s 69(1C) …. 3.9.1 s 69(1D) …. 3.9.1 s 69(1E) …. 3.9.1 s 69(4) …. 3.9.1 s 69(5) …. 3.9.1 s 69(7) …. 3.9.1 s 69(9) …. 3.9.1 s 69(11A) …. 3.9.1 s 69AA(1) …. 4.11.2 s 69B …. 4.11.2 s 69B(2) …. 4.11.2 Banking Legislation Amendment Act 1989 …. 1.5 Banking Regulations 1966 …. 2.3.5, 3.6 reg 3 …. 3.10.2 reg 4 …. 3.10.2 reg 5 …. 3.6 reg 20 …. 3.9.1 reg 20A …. 3.9.1 reg 21 …. 3.9.1

Banking (Savings Banks) Regulations 1960 …. 1.5 Bankruptcy Act 1966 …. 4.11.3, 12.2.2, 15.3.2 s 40 …. 4.11.3 s 40(1)(b)(i) …. 4.11.3 s 40(1)(c)(i) …. 4.11.3 s 40(1)(g) …. 4.11.3 s 41 …. 4.11.3 s 43 …. 4.11.3 s 44 …. 4.11.3 s 44(2) …. 4.11.3 s 44(3) …. 4.11.3 s 55(1) …. 4.11.3 s 55(4) …. 4.11.3 s 55(4A) …. 4.11.3 s 58(1) …. 4.11.3 s 58(1)(b) …. 4.11.3 s 86 …. 4.4.5, 4.11.3 s 86(2) …. 4.4.5 s 112 …. 4.5.1 s 115 …. 4.11.3 s 116 …. 4.11.3 s 121(1) …. 4.11.3 s 121(2) …. 4.11.3 s 121(4) …. 4.11.3 s 121(5) …. 4.11.3 s 122 …. 4.11.3 s 122(1) …. 4.11.3 s 122(2) …. 4.11.3

s 122(4)(c) …. 4.11.3 s 123 …. 4.11.3 s 123(1) …. 4.11.3 s 123(2) …. 4.11.3 s 123(3) …. 4.11.3 s 124 …. 4.11.3 s 125 …. 4.11.3 s 125(1) …. 4.11.3 s 125(2) …. 4.11.3 s 126 …. 4.11.3 s 126(2) …. 4.11.3 Banks (Shareholding) Act 1972 …. 2.3.3 s 10 …. 2.3.3 Bills of Exchange Act 1909 …. 3.10.4, 3.10.5, 5.2, 5.3.1, 5.3.3, 5.4.1, 5.4.3, 5.4.7, 5.5.1, 5.5.2, 5.5.4, 5.5.5, 5.5.6, 5.5.8, 5.5.10, 5.5.11, 5.6, 5.6.2, 5.6.4, 5.7, 5.7.1, 5.8.3, 5.9.2, 5.9.4, 5.9.5, 5.9.6, 5.9.8, 5.9.10, 5.9.11, 8.2.1, 8.2.2, 8.2.3, 8.3.2, 8.4.1, 8.5.3, 12.1, 12.2.4 Pt III …. 5.2 Div 5 …. 5.8 s 2 …. 3.10.4 s 4 …. 5.4.6, 5.5.4, 5.5.5 s 6(2) …. 5.2, 8.2.2 s 8(1) …. 5.4.1, 5.8.1, 8.2.3 s 8(2) …. 5.4.2 s 8(3) …. 5.4.2 s 8(3)(a) …. 5.4.2 s 10 …. 8.2.1 s 12(3) …. 5.4.6 s 13(3) …. 5.4.6, 5.4.7

s 13(4) …. 5.4.6 s 13(5) …. 5.4.6, 5.4.7 s 14 …. 5.4.3, 8.2.2 s 14(1) …. 5.4.3 s 14(2) …. 5.4.3 s 15 …. 5.8.1 s 15(1) …. 5.4.4 s 16 …. 5.4.2, 5.8.1 s 16(a) …. 5.4.4 s 16(b) …. 5.4.4 s 19 …. 5.5.11 s 19(1) …. 5.5.11 s 19(2)(b) …. 5.5.11 s 19(2)(c) …. 5.5.11 s 19(2)(d) …. 5.5.11 s 21 …. 5.9.11 s 22(1) …. 5.5.7 s 22(2)(a) …. 5.5.7 s 22(2)(b) …. 5.5.7 s 23(1)(a) …. 5.5.7 s 23(1)(b) …. 5.5.7 s 24(3)(c) …. 5.5.7 s 25 …. 5.6.6 s 25(1) …. 5.6.4 s 25(2) …. 5.6.4 s 25(3) …. 5.6.4 s 26 …. 5.6.6 s 26(1) …. 5.6.5

s 26(2) …. 5.6.5 s 28 …. 5.5.10, 5.6.1 s 31 …. 5.6.2 s 31(1) …. 5.6.2 s 31(2) …. 5.6.2 s 32(1) …. 5.5.5 s 32(1)(a) …. 5.5.2 s 32(1)(b) …. 5.5.2 s 32(2) …. 5.5.2 s 32(3) …. 5.5.2, 16.1.2 s 33 …. 12.2.4 s 33(1) …. 12.2.4 s 33(2) …. 12.2.4 s 34 …. 5.5.1, 5.5.4 s 34(1) …. 5.5.5, 5.6.2 s 34(2) …. 5.5.5 s 34(3) …. 5.5.6 s 35 …. 5.3.2 s 35(1) …. 5.5.5 s 35(2) …. 5.5.5 s 36(1) …. 5.5.4 s 36(2) …. 5.5.4 s 36(4) …. 5.5.9 s 37(a) …. 5.5.8 s 37(b) …. 5.5.8 s 37(c) …. 5.5.8 s 37(d) …. 5.5.8 s 37(e) …. 5.9.10

s 37(f) …. 5.5.8 s 39 …. 8.2.1 s 39(1) …. 5.5.8 s 39(2) …. 5.5.8 s 39(3) …. 5.5.8 s 39(4) …. 5.4.7, 5.5.8 s 40(1) …. 5.5.8 s 40(2) …. 5.5.8 s 40(3) …. 5.5.4, 5.5.8 s 41(2) …. 5.5.11 s 41(3) …. 5.5.11 s 42 …. 5.9.8 s 43(1)(a) …. 5.3.2, 5.5.1, 5.5.2 s 43(1)(b) …. 5.5.3 s 44 …. 5.8.1 s 44(2) …. 5.8.1 s 44(3) …. 5.8.1 s 45(1) …. 5.8.1 s 45(2) …. 5.8.1 s 46 …. 5.7.2, 5.8.1 s 47 …. 5.8.2 s 49(1) …. 5.5.7 s 50 …. 5.7.2 s 50(1) …. 5.8.3 s 50(2) …. 5.8.3 s 51 …. 5.7.2 s 51(1) …. 5.6.3, 5.8.3 s 51(2) …. 5.6.3

s 51(2)(a) …. 5.6.3 s 51(2)(b) …. 5.6.3 s 51(2)(c) …. 5.6.3 s 51(2)(d) …. 5.6.3 s 51(2)(e) …. 5.6.3 s 53 …. 5.8.3 ss 53–57 …. 5.7.2 s 54 …. 5.8, 5.8.3 s 57 …. 5.8.4 s 57(1) …. 5.8.4 s 57(3) …. 5.8.4 s 57(4) …. 5.8.4 s 58 …. 5.3.2 s 59(a) …. 5.7.1 s 59(b) …. 5.7.1 s 60 …. 5.6.3 s 60(1)(a) …. 5.7.2 s 60(1)(b) …. 5.7.2 s 60(2)(a) …. 5.7.3 s 60(2)(b) …. 5.7.3 s 60(2)(c) …. 5.7.3 s 61 …. 5.7.4 s 63 …. 5.5.10 s 63(1) …. 5.5.10 s 63(2) …. 5.5.10 s 63(3) …. 5.5.10 s 64(1) …. 5.9.1 s 64(2)(a) …. 5.9.9

s 64(2)(b) …. 5.9.9 s 64(3) …. 5.9.5, 12.2.4 s 65 …. 5.9.5 s 66 …. 5.9.5 s 67 …. 5.9.7 s 67(1) …. 5.9.2 s 67(2) …. 5.9.2 s 67(3) …. 5.9.2, 5.9.6, 5.9.7 s 68 …. 5.9.7 s 68(1) …. 5.9.3 s 68(2) …. 5.9.7 s 68(3) …. 5.9.7 s 69 …. 5.9.6 s 69(1) …. 5.9.6 s 69(2) …. 5.9.4 s 75 …. 5.6.2 s 78 …. 8.2.3 s 89(1) …. 5.4.5 s 96 …. 5.5.5 s 97(1) …. 5.6.2 s 98 …. 5.5.11 s 101 …. 5.3.3 Cash Transaction Reports Act 1988 …. 1.9.1, 1.9.5 Cheques Act 1986 …. 3.4.3, 3.10.4, 4.11.1, 4.11.3, 5.2, 5.3.3, 5.4.6, 5.5.5, 5.5.8, 5.9.6, 7.4.3, 8.2.1, 8.2.2, 8.2.3, 8.2.4, 8.2.5, 8.3.2, 8.4.3, 8.4.4, 8.4.5, 8.4.6, 8.5.1, 8.5.3, 8.7.3, 8.8.3, 8.9, 8.9.2, 8.10.4, 10.5, 10.5.2, 10.5.4, 15.3.2 Pt III Div 3 …. 8.4.1 s 3 …. 8.3.1

s 3(1) …. 3.10.4 s 3(2) …. 8.8.4 s 5 …. 8.3.2 s 5(2) …. 8.3.2 s 5(8) …. 8.5.3 s 10 …. 5.2, 8.2.3 s 15(4) …. 8.7.3 s 16 …. 8.2.5 s 16(1) …. 8.2.5 s 16(2)(a) …. 8.2.5 s 17(2) …. 5.9.11 s 18 …. 5.6.4 s 19 …. 8.7.3 s 19(2) …. 8.7.3 s 21 …. 8.2.3, 8.2.4, 8.5.2, 8.7.3 s 22 …. 8.2.3, 8.2.4, 8.5.2, 8.7.3 s 23(1) …. 8.2.4 s 23(2) …. 8.2.4 s 30 …. 3.8.6 s 31(2) …. 8.6.1 s 31(3) …. 8.6.1 s 32(1) …. 8.7.3 s 39 …. 8.4.4, 8.4.6, 8.5.1 s 40(1) …. 8.5.1 s 40(2) …. 8.5.1 s 40(3) …. 8.5.1 s 41(1) …. 8.5.2 s 41(3) …. 8.5.2

s 41(4) …. 8.5.2 s 44 …. 8.5.2 s 45 …. 8.5.2 s 48 …. 8.5.2 s 49(1) …. 8.5.1 s 49(2)(a) …. 8.5.1 s 53 …. 8.4.4 s 53(1) …. 8.4.3, 8.4.6 s 53(2) …. 8.4.3 s 53(3) …. 8.4.4 s 54 …. 8.4.2 s 55 …. 8.4.4 s 56 …. 8.4.2, 8.4.5 s 57 …. 8.4.5 s 58 …. 8.2.5, 8.9 s 59 …. 8.9 s 60(2) …. 8.9 s 61(2) …. 8.2.5, 8.9 s 62 …. 8.9.2 s 63 …. 8.9.1 s 64 …. 8.9.1 s 65 …. 8.9.2 s 66 …. 8.8.1 s 66(1) …. 8.8.1 s 66(3) …. 8.8.1 s 67 …. 6.5, 8.10.2 s 67(1) …. 8.7.1 s 67(2) …. 8.7.1

s 68 …. 8.8.3 s 70 …. 10.5.4 s 71 …. 8.6.2 s 72 …. 8.6.2 s 73(a) …. 8.6.3 s 73(b) …. 8.6.3 s 78 …. 10.5.2 s 78(1)(a) …. 8.5.3 s 78(1)(b) …. 8.5.3 s 78(1)(c) …. 8.5.3 s 78(2) …. 8.5.3, 8.7.3 s 79 …. 8.5.3, 10.5.2 s 80 …. 8.5.3 s 81 …. 8.5.3 s 81(1) …. 8.5.3 s 82 …. 5.9.6, 8.5.3 s 88 …. 8.10.2 s 90 …. 8.3.1, 10.5.2 s 90(1)(b) …. 4.11.1, 8.3.1 s 90(1)(c) …. 4.11.2, 8.3.1 s 90(2) …. 4.11.2, 15.3.2 s 90(2)(b) …. 4.11.2 s 91 …. 8.7.3 s 92 …. 8.7.3 s 94 …. 8.7.3 s 95 …. 3.3, 6.4.1 s 95(1) …. 8.8.4 s 95(3) …. 3.3.4

s 96 …. 16.1.2, 16.1.6 s 113 …. 8.10.3 s 118 …. 5.3.3 s 161(1) …. 8.9 Cheques and Payment Orders Act 1986 …. 5.2, 8.2.1 Code of Banking Practice …. 3.5.5, 4.4.2, 11.1, 11.5, 11.5.1, 11.5.2, 11.5.3, 11.5.4, 11.5.5, 11.5.9 Pt C …. 11.5.3 Pt D …. 11.5.4, 11.6.2 Pt E …. 11.5.5 cl 19.1 …. 4.4.2 s 2.2 …. 11.5.1 s 3.1 …. 11.5.1, 11.5.3 s 3.2 …. 11.5.1 s 4 …. 11.5.3 s 5 …. 11.5.3 s 6 …. 11.5.3 s 7 …. 11.5.3 s 8 …. 11.5.3 s 9 …. 11.5.3 s 10 …. 11.5.3 s 11 …. 11.5.3 s 12 …. 11.5.4 s 12.1(a) …. 11.5.4 s 12.1(b) …. 11.5.4 s 12.1(c) …. 11.5.4 ss 12.2–12.5 …. 11.5.4 s 12.2(e) …. 11.5.4 s 12.3 …. 11.5.4

s 12.4 …. 11.5.4 s 12.4(e) …. 11.5.4 s 12.4(f) …. 11.5.4 s 12.4(g) …. 11.5.4 s 12.4(j) …. 11.5.4 s 12.5 …. 11.5.4 s 13 …. 11.5.4 s 13.1 …. 11.5.4 s 13.2 …. 11.5.4 s 13.4 …. 11.5.4 s 13.5 …. 11.5.4 s 13.6 …. 11.5.4 s 13.7 …. 11.5.4 s 14 …. 11.5.4 s 15 …. 11.5.4 s 15.1 …. 11.5.4 s 15.2 …. 11.5.4 s 16 …. 11.5.4 s 16.2 …. 11.5.4 s 18.1 …. 11.5.5 s 18.2 …. 11.5.5 s 18.3 …. 11.5.5 s 19.1 …. 11.5.5 s 19.2 …. 11.5.5 s 20.1 …. 3.5.5, 11.5.5 s 20.2 …. 3.5.5, 11.5.5 s 20.3 …. 3.5.5, 11.5.5 s 21 …. 11.5.4

s 21.1 …. 11.5.5 s 21.2 …. 11.5.5 s 22 …. 11.5.5 s 23.1(i) …. 11.5.5 s 23.1(ii) …. 11.5.5 s 23.2 …. 11.5.5 s 24 …. 11.5.5 s 25.1 …. 11.5.5 s 25.2 …. 11.5.5 s 25.3 …. 11.5.5 s 26.1 …. 11.5.5 s 26.2 …. 11.5.5 s 26.3 …. 11.5.5 s 26.4 …. 11.5.5 s 27.1 …. 11.5.5 s 28 …. 11.5.7 s 28.2 …. 11.5.5 ss 28.3–28.6 …. 11.5.5 s 28.7 …. 11.5.5 s 28.9 …. 11.5.5 s 29 …. 11.5.5 s 29.1 …. 11.5.5 s 29.2 …. 11.5.5 s 29.3 …. 11.5.5 s 30.1 …. 11.5.5 s 30.2 …. 11.5.5 s 30.3 …. 11.5.5 s 31 …. 11.5.2

s 31.1 …. 11.5.6 s 31.2 …. 11.5.6 s 31.3 …. 11.5.6 s 31.4 …. 11.5.6 s 31.4(a)(i) …. 11.5.6 s 31.4(a)(ii) …. 11.5.6 s 31.4(a)(iii) …. 11.5.6 s 31.4(a)(iv) …. 11.5.6 s 31.4(a)(v) …. 11.5.6 s 31.4(b) …. 11.5.6 s 31.4(b)(i) …. 11.5.6 s 31.4(b)(ii) …. 11.5.6 s 31.4(c) …. 11.5.6 s 31.4(d) …. 11.5.6 s 31.4(d)(i) …. 11.5.6 s 31.4(d)(ii) …. 11.5.6 s 31.4(d)(iii) …. 11.5.5 s 31.4(d)(iv) …. 11.5.6 s 31.4(d)(v) …. 11.5.6 s 31.4(d)(vi) …. 11.5.6 s 31.4(d)(vii) …. 11.5.6 s 31.4(e) …. 11.5.6 s 31.5 …. 11.5.6 s 31.5(a) …. 11.5.6 s 31.5(b) …. 11.5.6 s 31.6 …. 11.5.6 s 31.6(a) …. 11.5.6 s 31.7 …. 11.5.6

s 31.8 …. 11.5.6 s 31.9 …. 11.5.6 s 31.10 …. 11.5.6 s 31.11(a) …. 11.5.6 s 31.11(b) …. 11.5.6 s 31.12 …. 11.5.6 s 31.13 …. 11.5.6 s 31.14 …. 11.5.6 s 31.15 …. 11.5.6 s 31.16 …. 11.5.6 s 32.1 …. 11.5.7 s 32.2 …. 11.5.7 s 32.3 …. 11.5.7 s 33 …. 11.5.8 s 36(a) …. 11.5.9 s 36(b) …. 11.5.9 s 36(h) …. 11.5.9 s 37.1 …. 11.5.9 s 37.3 …. 11.5.9 s 37.3(b) …. 11.5.9 s 37.3(d) …. 11.5.9 s 38.1 …. 11.5.9 s 41 …. 11.5.2 s 41.7 …. 11.5.2 s 42 …. 11.5.1, 11.5.6 s 42.1(a) …. 11.5.2 s 42.1(b) …. 11.5.2 Commonwealth Bank Act 1945 …. 2.2.1

Commonwealth Banks Amendment Act 1985 …. 2.2.2 Commonwealth Banks Amendment Act 1987 s 23 …. 2.2.2 Commonwealth Debt Conversion Act 1931 …. 3.10.5 Competition and Consumer Act 2010 …. 1.4.4, 3.2.5, 11.1, 15.3.1, 17.10.5 Pts 2–3 …. 6.3.3 Sch 2 …. 3.5.3, 3.5.6, 4.5.2, 4.9.3, 6.3.3, 6.6.5, 7.4.1, 9.8.1, 9.15.3, 11.1, 11.2, 11.4, 15.3, 15.3.1, 17.10.5 Constitution …. 1.8, 3.8.7, 3.10.4 s 51 …. 1.8 s 51(v) …. 1.10.2 s 51(xiii) …. 1.1 Consumer Credit Code …. 11.1, 11.5.7, 12.3.4 Corporations Act 1989 …. 3.8.7 s 82 …. 3.8.7 Corporations Act 2001 …. 1.4.4, 2.3.2, 3.8.3, 3.8.7, 4.4.2, 4.11.3, 11.5.2, 11.7.2, 12.3.3 Ch 2J …. 12.3.3 Ch 7 …. 3.5.5, 11.5.2, 11.5.4, 11.5.5 Pt 5.2 …. 4.11.4 Pt 5.7B Div 2 …. 4.11.3 s 115(2) …. 3.8.4 s 118 …. 3.8.7 s 119 …. 3.8.7 s 124 …. 3.8.7 s 125(1) …. 3.8.7 ss 128–130 …. 3.8.7 s 128(3) …. 3.8.7 s 128(4) …. 3.8.7

s 129 …. 3.8.7, 12.3.3 s 129(1) …. 3.8.7 s 129(2) …. 3.8.7 s 129(3) …. 3.8.7 s 129(4) …. 3.8.7 s 130(1) …. 3.8.7 s 131(1) …. 3.8.7 s 131(2) …. 3.8.7 s 131(3) …. 3.8.7 ss 134–141 …. 3.8.7 s 153 …. 5.6.2 s 224B …. 3.8.7 s 227 …. 4.11.3 s 419 …. 4.11.4 s 419(1) …. 4.11.4 s 420 …. 4.11.4 s 424 …. 4.11.4 s 468(1) …. 4.11.3 s 468(2) …. 4.11.3 s 553C …. 4.4.5 s 588FA …. 4.11.3 s 588FE …. 4.11.3 s 588FF …. 4.11.3 s 588FG …. 4.11.3 s 588FM …. 14.12.3 s 761G …. 11.7.2 s 912A(1)(g) …. 11.7.1 Corporations Legislation Amendment Act 1990 …. 3.8.7

Crimes Act 1914 s 29B …. 9.15.5 Criminal Code Act 1995 …. 1.10.2 Pt 10.2 …. 1.10 Div 400 …. 1.10.3 s 134 …. 9.15.5 s 135 …. 9.15.5 s 400.1(1) …. 1.10.1 s 400.1(2) …. 1.10.1 s 400.2 …. 1.10.4 s 400.2(1) …. 1.10.2 s 400.2(1)(a) …. 1.10.2 s 400.2(1)(a)(i) …. 1.10.2 s 400.2(1)(a)(ii) …. 1.10.2 s 400.2(1)(a)(iii) …. 1.10.2 s 400.2(1)(b) …. 1.10.2 s 400.2(2) …. 1.10.2 s 400.2(2)(a) …. 1.10.2 s 400.2(2)(a)(i) …. 1.10.2 s 400.2(2)(a)(ii) …. 1.10.2 s 400.2(2)(a)(iii) …. 1.10.2 s 400.2(2)(b) …. 1.10.2 ss 400.3–400.7 …. 1.10.3 s 400.8 …. 1.10.3 s 400.8(1) …. 1.10.3 s 400.8(2) …. 1.10.3 s 400.8(3) …. 1.10.3 s 400.9 …. 1.10.4

s 400.9(2) …. 1.10.4 s 400.9(3) …. 1.10.4 s 400.9(5) …. 1.10.4 s 400.10 …. 1.10.3 Currency Act 1965 …. 9.3.5 s 23 …. 9.7.3 EFT Code of Conduct …. 11.1, 11.6.1, 11.6.2, 11.6.3, 11.6.4, 11.6.5, 11.6.7, 11.6.8 cl 4.4 …. 11.6.7 Electronic Transactions Act 1999 …. 9.10, 12.3.4 s 3 …. 9.10 s 8 …. 9.10 s 10 …. 9.10 s 14(3) …. 12.3.4 ePayments Code …. 3.2.5, 3.5.2, 3.5.4, 3.5.5, 9.13.3, 9.15.1, 9.15.3, 10.6, 11.5.2, 11.6, 11.6.3, 11.6.4, 11.6.5, 11.6.6, 11.6.7, 11.6.8, 11.6.9, 11.6.10, 11.6.11, 11.6.12 Ch F …. 11.6.12 cl 2.1 …. 11.6.4 cl 2.2 …. 11.6.5 cl 2.3 …. 11.6.4 cl 2.4 …. 11.6.4 cl 2.5 …. 11.6.4 cl 2.6 …. 11.6.4, 11.6.9 cl 4.1 …. 11.6.5 cl 4.2 …. 11.6.5 cl 4.6 …. 11.6.5 cl 4.9 …. 11.6.5 cl 4.11 …. 3.5.4, 11.6.6

cl 4.12 …. 3.5.4, 11.6.6 cl 4.13 …. 3.5.4, 11.6.6 cl 4.14 …. 3.5.4 cl 4.15 …. 11.6.6 cl 4.16 …. 3.5.4, 11.6.6 cl 5.1 …. 11.6.7 cl 5.5 …. 11.6.8 cl 5.7 …. 11.6.7 cl 5.8 …. 11.6.7 cl 7 …. 11.6.7 cl 7.1 …. 11.6.7 cll 7.1–7.6 …. 11.6.7 cl 7.2 …. 11.6.7 cl 7.4 …. 11.6.7 cl 7.4(g) …. 11.6.7 cl 7.6 …. 11.6.7 cl 7.8 …. 11.6.7 cl 10 …. 11.6.8 cl 10.1(a) …. 11.6.8 cl 10.1(b) …. 11.6.8 cl 10.1(c) …. 11.6.8 cl 10.1(d) …. 11.6.8 cl 10.1(e) …. 11.6.8 cl 10.2 …. 11.6.8 cl 10.3 …. 11.6.8 cl 10.4 …. 11.6.8 cl 10.5 …. 11.6.8 cl 11 …. 11.6.8

cl 11.2 …. 11.6.8 cl 11.3 …. 11.6.8 cl 11.4 …. 11.6.8 cl 11.5 …. 11.6.8 cl 11.8 …. 11.6.8 cl 11.9 …. 11.6.8 cl 11.9(a) …. 11.6.8 cl 11.9(b) …. 11.6.8 cl 11.9(c) …. 11.6.8 cl 11.10 …. 11.6.8 cl 12 …. 11.6.8 cl 12.2 …. 11.6.8 cl 12.3 …. 11.6.8 cl 12.8 …. 11.6.8 cl 12.9 …. 11.6.8 cl 13 …. 11.6.8 cl 18.1 …. 11.6.5 cl 18.2 …. 11.6.5 cl 19 …. 11.6.12 cl 20 …. 11.6.9 cl 21 …. 11.6.12 cl 28 …. 11.6.10 cl 30.2 …. 11.6.10 cl 32.1 …. 11.6.10 cl 43 …. 11.6.4 cl 44 …. 11.6.10 Federal Court Rules O 37 r 7(2) …. 4.12.4

Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 s 8A …. 1.4.1 s 10(1) …. 1.4.2 s 10(2) …. 1.4.2 s 10C …. 1.4.1 Financial Sector Reform (Amendments and Transitional Provisions) Act (No 1) 1999 …. 1.6 Financial Sector Reform (Amendments and Transitional Provisions) Regulations 1999 reg 12 …. 2.3.5 Financial Sector (Shareholdings) Act 1988 …. 2.3.3 s 14 …. 2.3.3 Financial Transaction Reports Act 1988 …. 1.9.1, 1.9.3, 1.9.4, 1.10.1, 1.10.3, 1.10.4, 1.10.5, 6.6.7, 9.16.3, 11.5.5 Pt VIA …. 1.10, 1.10.5 s 3(1) …. 6.6.7 s 7 …. 1.9.4 s 17 …. 1.10.3, 1.10.4 s 40D …. 1.10.5 s 40F …. 1.10.5 s 40H …. 1.10.5 s 40H(2)(a) …. 1.10.5 FOS Terms of Reference …. 11.7.2, 11.7.3, 11.7.4 cl 4.1 …. 11.7.2 cl 4.2 …. 11.7.2 cl 4.2(b) …. 11.7.2 cl 5 …. 11.7.2, 11.7.3 cl 5.1(a) …. 11.7.2 cl 5.1(a)(ii) …. 11.7.2

cl 5.1(o) …. 11.7.3 cl 5.2 …. 11.7.2, 11.7.3 cl 5.2(b) …. 11.7.3 cl 5.2(c)(1) …. 11.7.3 cl 6.3 …. 11.7.3 cl 7.2 …. 11.7.5 cl 7.2(a) …. 11.7.5 cl 7.2(c) …. 11.7.5 cl 7.5 …. 11.7.5 cl 8.1 …. 11.7.4 cl 8.4(b)(ii) …. 11.7.5 cl 8.4(c) …. 11.7.5 cl 8.5 …. 11.7.4 cl 8.5(a) …. 11.7.4 cl 8.5(c) …. 11.7.4 cl 8.7(b) …. 11.7.4 cl 8.8 …. 11.7.4 cl 8.9 …. 11.7.4 cl 9.1 …. 11.7.6 cl 9.2 …. 11.7.6 cl 9.3 …. 11.7.6 cl 9.4 …. 11.7.6 cl 9.5 …. 11.7.6 cl 9.6 …. 11.7.6 cl 9.7 …. 11.7.6 cl 10.1(a) …. 11.7.3 cl 10.1(b) …. 11.7.3 cl 10.1(c) …. 11.7.3

cl 10.2 …. 11.7.3 cl 14.1 …. 11.7.2 cl 20.1 …. 11.7.2 Income Tax Act 1930 …. 3.10.5 Income Tax Assessment Act 1936 s 261 …. 10.2 Income Tax Assessment Act 1997 …. 3.9.1 Insurance Act 1973 …. 2.3.5 Law and Justice Legislation Amendment Act 1991 …. 5.5.11 Marine Insurance Act 1909 …. 17.15.8 National Consumer Credit Protection Act 2009 …. 11.3 Ch 3 …. 11.1, 11.3 Pt 3-3 …. 11.3 Pt 3-4 …. 11.3 s 6 …. 11.3 s 8 …. 11.3 s 29 …. 11.3 s 111 …. 11.3 s 113 …. 11.3 s 114 …. 11.3 s 116 …. 11.3 s 117 …. 11.3 s 121 …. 11.3 s 123 …. 11.3 s 125 …. 11.3 s 126 …. 11.3 s 129 …. 11.3 s 130 …. 11.3

s 133 …. 11.3 Sch 1 …. 4.4.2, 12.3.4, 15.1.4 National Credit Code …. 3.5.5, 4.4.2, 6.5, 9.15.1, 11.1, 11.2, 11.5.4, 11.5.5, 12.3.1, 12.3.4, 15.1.4, 15.3.2, 15.3.3 s 5(1) …. 12.3.4 s 5(1)(c) …. 12.3.4 s 5(1)(d) …. 12.3.4 s 6 …. 12.3.4 s 6(1) …. 12.3.4 s 6(4) …. 12.3.4 s 6(7)(a) …. 12.3.4 s 7(1)(a) …. 15.1.4 s 8(1) …. 15.1.4 s 8(2) …. 15.1.4 s 8(3) …. 15.1.4 s 16 …. 12.3.4 s 16(8) …. 12.3.4 s 17 …. 12.3.4 s 20 …. 12.3.4 s 23(3) …. 12.3.4 s 43 …. 12.3.4 s 55(1) …. 15.1.4 s 55(2) …. 15.1.4 s 55(3) …. 15.1.4 s 55(4) …. 15.1.4 s 56(1)(a) …. 15.1.4 s 56(1)(b) …. 15.1.4 s 57 …. 12.3.4 s 58(1)(a) …. 15.1.4

s 58(1)(b) …. 15.1.4 s 60(1) …. 15.1.4 s 60(3) …. 15.1.4, 15.3.2 s 60(4) …. 15.1.4 s 76 …. 12.3.4 s 76(1) …. 12.3.4, 15.1.4, 15.3.3 s 76(2) …. 12.3.4, 15.1.4 s 76(8) …. 12.3.4, 15.1.4, 15.3.3 s 111 …. 12.3.4 s 111(1) …. 12.3.4 s 111(2) …. 12.3.4 s 187 …. 12.3.4 s 196(1)(c) …. 12.3.4 National Security (Wartime Banking Control) Regulations 1941 …. 2.2.1 Payment Systems and Netting Act 1998 …. 2.3.5, 9.11.6, 14.4.2 Payment Systems (Regulation) Act 1998 …. 1.4.3, 2.3.5, 2.5.9, 3.10.2, 9.7.1 s 7 …. 2.3.5, 2.5.9, 9.7.1 s 11 …. 2.3.5 s 12 …. 2.3.5 s 12(1) …. 2.5.9 s 12(2) …. 2.5.9 s 12(3) …. 2.5.9 s 14 …. 2.3.5 s 18 …. 2.3.5 s 29 …. 2.3.5 Personal Property Securities Act 2009 …. 13.1.3, 13.1.4, 14.1, 14.2.4, 14.3, 14.4.1, 14.5.2, 14.6, 14.8, 14.9, 14.10, 14.12, 14.12.3, 14.12.4, 14.12.6, 14.12.7, 14.13.1, 14.13.5, 14.13.6, 14.14, 14.15, 14.16.2, 14.16.6, 14.16.7, 14.16.8, 16.1.3

Ch 5 …. 14.12.3 Pt 2.4 …. 14.12.7 Pt 2.6 …. 14.13.1, 14.13.3 Pt 5.4 …. 14.12.3 s 8 …. 14.5.5 s 8(1) …. 14.4.2, 14.5.5 s 8(1)(a) …. 14.4.2 s 8(1)(b) …. 14.4.2, 14.5.5 s 8(1)(c) …. 14.4.2, 14.5.5 s 8(1)(d) …. 14.4.2 s 8(1)(e) …. 14.4.2 s 8(1)(f) …. 14.4.2 s 8(2) …. 14.4.2, 14.5.5 s 10 …. 14.4.1, 14.6, 14.7, 14.12.3 s 12(1) …. 14.5.1 s 12(2) …. 14.5.2 s 12(2)(d) …. 14.5.2 s 12(2)(e) …. 14.5.2 s 12(2)(g) …. 14.5.2 s 12(2)(l) …. 14.5.2 s 12(3) …. 14.5.4 s 12(3)(c) …. 14.9 s 12(3A) …. 14.5.3 s 12(4) …. 14.5.3 s 12(4)(b) …. 14.5.3 s 12(6) …. 14.5.5 s 13 …. 14.9 s 13(2) …. 14.9

s 13(3) …. 14.9 s 14 …. 14.13.5 s 14(2) …. 14.13.5 s 14(2)(a) …. 14.13.5 s 18(1) …. 14.7 s 18(2) …. 14.7 s 18(3) …. 14.7 s 18(4) …. 14.7 s 18(5) …. 14.7 s 19 …. 14.10 s 19(1) …. 14.10 s 19(2) …. 14.10 s 19(3) …. 14.10 s 19(5) …. 14.10, 14.15 s 20 …. 14.11 s 20(2) …. 14.11 s 20(2)(b)(ii) …. 14.11 s 20(4) …. 14.11 s 20(5) …. 14.11 s 21 …. 14.12.2, 14.13.3 s 21(1)(b) …. 14.12.2 s 21(1)(d) …. 14.12.5 s 21(2)(b) …. 14.12.4 s 21(2)(c) …. 14.12.6 s 21(2)(c)(v) …. 14.12.6 s 21(4) …. 14.12.2 s 22 …. 14.12.5 s 22(1)(b) …. 14.12.5

s 22(1)(c) …. 14.12.5 s 22(2) …. 14.12.7 s 22(4) …. 14.12.7 s 24 …. 14.12.4 s 24(1) …. 14.12.4 s 24(2) …. 14.12.4 s 24(3) …. 14.12.4 s 25 …. 14.12.6 s 28 …. 14.12.6 s 31(1) …. 14.13.6 s 31(2) …. 14.13.6 s 32(1) …. 14.13.6 s 33(1) …. 14.13.6 s 33(2) …. 14.13.6 s 39 …. 14.12.7 s 43 …. 14.16 s 43(1) …. 14.11 s 44 …. 14.16.3 s 44(1) …. 14.16.1 s 44(2) …. 14.16.1 s 44(2)(b) …. 14.16.1 s 45 …. 14.16.3 s 45(1) …. 14.16.2 s 45(1)(b) …. 14.16.2 s 45(1)(c) …. 14.16.2 s 45(4)(c) …. 14.16.2 s 46(1) …. 14.16.3 s 46(2)(b) …. 14.16.3

s 47(1) …. 14.16.4 s 47(2) …. 14.16.4 s 48 …. 14.16.5 s 52 …. 14.16.3, 14.16.6 s 53 …. 14.11 s 55 …. 14.13.1 s 55(2) …. 14.13.1 s 55(3) …. 14.13.1 s 55(4) …. 14.13.1 s 55(5) …. 14.13.1 s 55(6) …. 14.13.1 s 56 …. 14.13.1 s 56(1) …. 14.13.1 s 56(2) …. 14.13.1 s 57 …. 14.12.6, 14.13.3, 14.13.5 s 57(1) …. 14.13.3 s 58 …. 14.13.4 s 62 …. 14.13.5 s 63 …. 14.13.5 s 64 …. 14.13.5 s 71 …. 14.13.5 s 150 …. 14.12.3 s 153 …. 14.12.3, 14.13.5 s 154 …. 14.12.3 s 161 …. 14.12.3 s 163(1) …. 14.12.3 s 164(1) …. 14.12.3 s 164(3) …. 14.12.3

s 165 …. 14.12.3 s 165(b) …. 14.12.3 s 166 …. 14.12.7 s 254 …. 14.3 s 255 …. 14.3 s 300 …. 14.16.5 s 339(4) …. 14.14 s 339(5) …. 14.14 s 340 …. 14.14 s 340(1)(b) …. 14.14 s 340(2) …. 14.14 s 340(3) …. 14.14 s 340(4) …. 14.14 s 340(5) …. 14.14 s 343 …. 14.3 Privacy Act 1988 …. 1.9.3, 6.2 Proceeds of Crime Act 1987 …. 1.10, 1.10.5 s 3(1) …. 1.10 Proceeds of Crime Act 2002 …. 1.10 Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002 …. 1.10, 1.10.5 Reserve Bank Act 1959 …. 1.4.1, 9.3.5 s 7 …. 1.4.1 s 8 …. 1.4.1 s 10B(1) …. 1.4.3 s 10B(3)(a) …. 1.4.3 s 10B(3)(b) …. 1.4.3 s 26 …. 1.4.1 s 44 …. 9.12, 9.7.3

Trade Practices Act 1974 …. 3.2.5, 17.10.5 s 51AA …. 17.10.5 s 52 …. 8.3.2, 15.3.1 Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 …. 11.2 s 23(4)(b) …. 11.2 Uniform Credit Laws Agreement 1993 …. 12.3.4

Australian Capital Territory Associations Incorporation Act 1991 …. 3.8.2 s 24 …. 3.8.2 s 25 …. 3.8.2 ss 42–46 …. 3.8.2 s 47 …. 3.8.2 s 117 …. 3.8.2 Court Procedures Rules 2006 …. 4.12.4 r 2306 …. 4.12.3

New South Wales Associations Incorporation Act 2009 …. 3.8.2 s 20 …. 3.8.2 s 21 …. 3.8.2 s 24 …. 3.8.2 s 27 …. 3.8.2 Bank Issue Act 1893 …. 2.2.1 Civil Procedure Act 2005 …. 4.12.4 s 117 …. 4.12.3 Companies Act 1961 …. 4.11.3 Contracts Review Act 1980 …. 3.5.6, 9.8.1, 15.3, 15.3.1, 15.3.3 s 6(2) …. 15.3.3

s 7(1) …. 15.3.3 s 9(2)(e) …. 15.3.3 s 9(2)(f) …. 15.3.3 s 22 …. 15.3.3 Conveyancing Act 1919 s 12 …. 17.16.5 s 153(4) …. 3.8.5 Current Account Depositors’ Act of 1893 …. 2.2.1 Electronic Conveyancing (Adoption of National Law) Act 2012 App 1 …. 13.2.5 Fair Trading Act 1987 s 30(4) …. 11.2 Hire Purchase Act 1960 …. 14.2.3 Limitation Act 1969 …. 3.7, 3.7.1, 3.7.2, 3.7.3, 3.7.7, 3.9.1 s 63 …. 3.7.7 s 68A …. 3.7.7 Minors (Property and Contracts) Act 1970 …. 12.3.1 s 18 …. 12.3.1 s 19 …. 12.3.1 s 37 …. 12.3.1 s 47 …. 12.3.1, 15.3.2 Partnership Act 1892 …. 3.8.3, 12.3.2 Pt 3 …. 3.8.4 s 1(1) …. 3.8.3 s 1(2)(a) …. 3.8.3 s 2 …. 3.8.3 s 2(3) …. 3.8.3 s 5 …. 3.8.3

s 9 …. 3.8.3 s 9(1) …. 3.8.3 s 18 …. 15.3.2 ss 32–35 …. 3.8.3 s 50A …. 3.8.4, 12.3.2 s 51 …. 12.3.2 s 51(2) …. 3.8.4 s 51(3) …. 3.8.4 s 52 …. 12.3.2 s 52(1) …. 3.8.4 s 52(2) …. 3.8.4 s 52(3) …. 3.8.4 s 52(4) …. 3.8.4 s 53 …. 3.8.4, 12.3.2 s 53A …. 3.8.4 s 53B …. 3.8.4 s 60 …. 3.8.4 s 66A …. 3.8.4 s 73D …. 12.3.2 Property, Stock and Business Agents Act 1941 …. 4.12.6 s 36(2) …. 4.12.6 Sale of Goods Act 1923 …. 9.3.2 s 4(4) …. 13.2.2 s 15 …. 9.14 s 28(2) …. 14.2.3 s 31 …. 9.14 s 50(3) …. 9.14

Northern Territory

Associations Act 2003 …. 3.8.2 Supreme Court Rules r 71.02(b) …. 4.12.4 r 71.03 …. 4.12.3

Queensland Associations Incorporation Act 1981 …. 3.8.2 s 26 …. 3.8.2 s 60(2) …. 3.8.2 Consumer Credit (Queensland) Act 1994 …. 12.3.4

South Australia Associations Incorporation Act 1985 …. 3.8.2 s 27 …. 3.8.2 s 28 …. 3.8.2 Enforcement of Judgments Act 1991 s 6 …. 4.12.3 Minors Contracts (Miscellaneous Provisions) Act 1979 …. 12.3.1 s 4 …. 12.3.1 s 5 …. 12.3.1, 15.3.2 s 6 …. 12.3.1 s 60(3) …. 12.3.1

Tasmania Associations Incorporation Act 1964 …. 3.8.2 Mercantile Law Act 1935 s 11 …. 6.3.4 Minors Contracts Act 1988 …. 12.3.1 s 4 …. 15.3.2

Victoria Associations Incorporation Act 1981 …. 3.8.2

s 17 …. 3.8.2 s 20 …. 3.8.2 s 41 …. 3.8.2 s 42 …. 3.8.2 Instruments Act 1958 s 128 …. 6.3.4 Partnership Act 1958 s 9 …. 3.8.3 Supreme Court Act 1986 s 49 …. 12.3.1 Supreme Court (General Civil Procedure) Rules 2005 r 71.02(b) …. 4.12.4 r 71.03(b) …. 4.12.4

Western Australia Associations Incorporation Act 1987 …. 3.8.2 s 15 …. 3.8.2 Law Reform (Statute of Frauds) Act 1962 …. 6.3.4 Limitation Act 2005 …. 3.7, 3.7.1, 3.7.2, 3.7.3, 3.9.1 s 59 …. 3.7.8 Property Law Act 1969 s 124 …. 10.3.3 s 125(1) …. 10.4.3

New Zealand Bills of Exchange Act 1908 …. 3.9.2 s 45(1) …. 3.9.2 s 47(1)(b) …. 3.9.2 s 50(2)(c)(iv) …. 3.9.2 Chattels Transfer Act 1924 …. 14.15

Cheques Act 1960 s 7B …. 8.4.6 Crossed Cheques Act 1856 …. 8.4.1 Judicature Act 1908 s 94A …. 10.3.3 s 94B …. 10.4.3 Personal Property Securities Act 1999 …. 14.2.4 Unclaimed Money Act 1971 …. 3.9.2, 8.3.3 s 4 …. 3.9.2

Singapore Unfair Contract Terms Act …. 4.9.3

United Kingdom Bills of Sale Act 1878 …. 14.2.2 Bills of Exchange Act 1882 …. 3.3.4, 5.2, 14.2.2 s 81A(1) …. 8.4.6 Commonwealth of Australia Constitution Act 1900 …. 1.1 s 9 …. 1.1 Companies Act 1948 s 54 …. 6.4.1 Irish Central Bank Act 1942 …. 3.10.5 Judicature Act 1873 …. 13.1.2 Land Registration Rules 1925 …. 6.2.2 Moneylenders Act 1900 …. 3.10.5 Partnership Act 1890 …. 3.8.3 Statute of Frauds 1677 …. 15.1.3 Statute of Frauds (Amendment) Act 1828 …. 6.3.4 s 6 …. 6.3.4 Unfair Contract Terms Act 1977 …. 6.3.3

United States of America Uniform Commercial Code Art 9 …. 14.2.4

Contents Preface Table of Cases Table of Statutes 1

The Australian Banking System

1.1

Introduction

1.2

Wallis report

1.3

The financial system inquiry 2014

1.4

Regulatory bodies

1.5

Trading banks and savings banks

1.6

Building societies and credit unions

1.7

Mutual banks

1.8

State banks

1.9

AML/CTF legislation

1.10

Proceeds of crime

2

Regulation

2.1

Introduction

2.2

The background to modern regulation

2.3

Banking Act 1959

2.4

The Basel Accord

2.5

Basel II and III

3

Banker and Customer

3.1

Introduction

3.2

Debtor-creditor

3.3

Who is a customer?

3.4

Terminating the relationship

3.5

Altering the relationship

3.6

Failure of the bank

3.7

Limitation Acts

3.8

Special customers

3.9

Dormant accounts

3.10

The ‘business of banking’

4

Accounts

4.1

Introduction

4.2

Major types of accounts

4.3

Appropriation

4.4

Combining accounts

4.5

Overdraft accounts

4.6

Trust accounts

4.7

Joint accounts

4.8

Protected accounts

4.9

Statements and passbooks

4.10

Internet fraud

4.11

Stopping the account

4.12

Garnishee orders

5

Bills of Exchange

5.1

Introduction

5.2

Legislation

5.3

The concept of negotiation

5.4

Formal requirements

5.5

Transfer/negotiation

5.6

Principles of liability

5.7

The chain of liabilities

5.8

Obligations of the holder

5.9

Termination or alteration of liabilities

6

Duties of the Banker

6.1

Introduction

6.2

The duty of secrecy

6.3

Bankers’ references

6.4

Duty to question a valid mandate

6.5

Duties to third parties

6.6

Safe custody

7

Duties of the Customer

7.1

Introduction

7.2

The Macmillan duty

7.3

The Greenwood duty

7.4

Possible other duties

8

Cheques

8.1

Introduction

8.2

Background

8.3

Types of cheques

8.4

Crossings

8.5

Dealings with cheques

8.6

Liability of parties

8.7

The paying institution

8.8

The collecting institution

8.9

Presentment of cheques

8.10

‘Payment’ by cheque

9

Payment and Payment Systems

9.1

Payment

9.2

Payment obligations arising from contract

9.3

Tender and acceptance

9.4

Payment of another’s debt

9.5

Common payment methods

9.6

Payment by account transfer

9.7

The concept of a payment system

9.8

Elements of a payment system

9.9

Messages in a payment system

9.10

Electronic signatures

9.11

Clearing and settlement

9.12

International payments

9.13

Domestic payments

9.14

Completion of payment

9.15

Credit cards

9.16

Computer money

9.17

The New Payment Platform

10

Payment Under a Mistake

10.1

Introduction

10.2

Basis of recovery

10.3

Elements of the cause of action

10.4

Defences

10.5

Payment orders

10.6

Mistaken Internet payments

11

Consumer Protection

11.1

Introduction

11.2

Unfair contract terms

11.3

Responsible lending

11.4

Consumer warranties

11.5

The Code of Banking Practice

11.6

The ePayments Code

11.7

The Financial Ombudsman Service

12

Lending: General Principles

12.1

Introduction

12.2

Types of lending

12.3

Types of borrowers

13

Secured Lending: Real Property

13.1

Securities

13.2

Securities over real property

14

Secured Lending: Personal Property

14.1

Introduction

14.2

Historical problems of securities over chattels

14.3

Complexity

14.4

Meaning of personal property

14.5

Security interest

14.6

The grantor

14.7

Creating the security: security agreements

14.8

The chattel mortgage under the Personal Property Securities Act 2009

14.9

Leases

14.10

Attachment

14.11

Third parties

14.12

Perfection

14.13

Priority rules

14.14

Fixed/floating charges

14.15

Example: Broadlands Finance Ltd v Shand Miller

14.16

Taking free of security interests

15

Lending: Guarantees

15.1

Nature of a guarantee

15.2

Guarantor’s rights against the other parties

15.3

Avoidance

16

Banker’s Lien and Freezing Orders

16.1

The banker’s lien

16.2

Freezing orders

17

Documentary Credits

17.1

Introduction to international trade problems

17.2

Documentary transactions: CIF contracts

17.3

Banks in international trade

17.4

Documentary credits

17.5

Related instruments

17.6

The credit and payment

17.7

The International Chamber of Commerce standard terms

17.8

Terminology

17.9

When the UCP applies

17.10

Some basic principles

17.11

Form of the credit

17.12

Modes of payment

17.13

Conditions not evidenced by documents

17.14

Participating banks

17.15

Documents

17.16

Some special problems

Bibliography Index

[page 1]

1 The Australian Banking System 1.1

Introduction

On 9 July 1900 the Parliament of the United Kingdom passed the Commonwealth of Australia Constitution Act 1900 (UK). The effect of the Act was that the Commonwealth of Australia came into being on 1 January 1901. The Constitution of Australia is s 9 of the Act. The Constitution defines the legislative powers of the Parliament of Australia, but left the former colonies as self-governing sovereign entities called States. With the exception of state banking, the Commonwealth Parliament has the power and the responsibility to make laws relating to banking: Australian Constitution, s 51(xiii). Until recently, the structure of the sector consisted of a small number of large trading banks, savings banks, building societies and credit unions. Following the Wallis Reforms (1997), any corporation which carries on the ‘business of banking’ must obtain authorisation from the Australian Prudential Regulation Authority (APRA) as an authorised deposittaking institution (ADI). An ADI must obtain an authorisation to describe itself as a bank.

1.2

Wallis report

The Financial System Inquiry (the Wallis Inquiry) was established in 1996 to review the regulation of the Australian financial system and to make recommendations for its improvement. The Wallis Inquiry delivered its final report in early April of 1997. The report contained 115 recommendations on a wide variety of financial system issues — all driven by the observation that there is a ‘convergence’ of financial markets. This leads to the conclusion that regulation should be based on ‘sectors’, rather than on institutions.

[page 2] The Inquiry recommended a single licensing regime for all deposit-taking institutions. This recommendation has been implemented by amendments to the Banking Act 1959: see 2.3. The Inquiry also recommended reallocating regulation of banking according to the role and function of the institution. Recommendations included: the Corporations and Financial Services Commission would be responsible for establishing and enforcing rules of conduct and disclosure — in the event, this role was given to the Australian Securities and Investments Commission (ASIC): see 1.4.4; the Reserve Bank of Australia (‘the Reserve Bank’) was to be responsible for monetary policy, the setting of interest rates and ‘systemic stability’: see 1.4.1; APRA was given responsibility for prudential regulation of the financial sector, a role previously performed by the Reserve Bank: see 1.4.5; and the Payments System Board (PSB) was created as a second board of the Reserve Bank with responsibility for the payments system, ensuring system stability, access to, and control of, the payments system: see 1.4.3.

1.3

The financial system inquiry 2014

An inquiry into wide-ranging aspects of the financial system was established by the Federal Government in 2013. The inquiry released its final report in December 2014. The report dealt with areas such as resilience of the financial system, superannuation, innovation, consumer outcomes and the regulatory system. The Inquiry found that the regulatory system was generally satisfactory, but proposed granting ASIC (see 1.4.4) a proactive product intervention power where there is a significant risk of consumer detriment. The government has accepted most of the recommendations of the report, but some implementation will require Parliamentary approval.

1.4

Regulatory bodies

1.4.1

The Reserve Bank of Australia

The Reserve Bank is the country’s central bank. It was created by statute in 1959 and took over the central banking function from the Commonwealth

Bank, which had exercised that function since the mid-1920s. The Commonwealth Bank also took responsibility for the currency note issue in 1924. The Reserve Bank was established by the Reserve Bank Act 1959 (Cth). Section 7 of the Act provides that the former Commonwealth Bank of Australia has a continued existence as a body corporate under the name of the Reserve Bank of Australia, but the identity of the body corporate shall not be affected. In this [page 3] way, the former Commonwealth Bank of Australia continued without interruption, albeit under a new name: see Inglis v Commonwealth Trading Bank of Australia [1969] HCA 44 for some comments concerning questions of succession. Section 8 of the Reserve Bank Act 1959 sets out the general powers of the Reserve Bank. It has any powers necessary for the purposes of the Act. In addition, s 8 sets out a list of powers that enable the Reserve Bank to carry on various banking functions and to buy and sell securities issued by the Commonwealth and other securities. Section 26 of the Reserve Bank Act 1959 establishes the Reserve Bank as the central bank of Australia and — subject to that Act and to the Banking Act 1959 — the Reserve Bank is prohibited from carrying on any business other than as a central bank. The Reserve Bank was also responsible for prudential supervision until 1998, when the function was transferred to APRA. The Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth) inserted s 8A, which establishes two governing boards: the Reserve Bank Board, responsible for the Reserve Bank’s policy on all matters other than the payments system policy; and the PSB, responsible for the Bank’s payments system policy. In the event that the two boards have conflicting policies, s 10C of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 provides a method to resolve the differences — namely: the Reserve Bank Board prevails; and the PSB’s policy has effect as if it were modified to remove the inconsistency.

Since the responsibilities of the two boards generally do not overlap, it is unlikely that the two should be in conflict.

1.4.2

The Reserve Bank Board

The Reserve Bank Board has power to determine policy in relation to any matter other than the payments system policy. It may take such action as is necessary to ensure that effect is given by the Reserve Bank to the policy so determined: Financial Sector Reform (Amendments and Transitional Provisions) Act 1998, s 10(1). Section 10(2) of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 sets some limits on the way that the Reserve Bank Board is to exercise this power. It must ensure, within the limits of its powers, that the monetary and banking policy of the Reserve Bank is directed to the greatest advantage of the people of Australia. In addition, its powers should be exercised in such manner as, in the opinion of the Board, will best contribute to: the stability of the currency of Australia; [page 4] the maintenance of full employment; and the economic prosperity and welfare of the people of Australia. These general limits are unlikely to have any practical effect.

1.4.3

The Payments System Board

The Bank’s payments system policy is determined by the Reserve Bank Act 1959, s 10B(1), and the PSB has the power to take whatever action is necessary to ensure that the bank gives effect to the policy. The PSB is constrained by s 10B(3)(a) to ensure that its policies is directed to the greatest advantage of the people of Australia — a direction that is probably meaningless in any real sense. Many of the Board’s powers derive from the Payment Systems (Regulation) Act 1998 (Cth) and the Payment Systems and Netting Act 1998 (Cth). The first relates to the regulation of the payment system and purchased payment facilities and the second to the Reserve Bank’s approval of payment systems

and netting arrangements. The PSB is directed by s 10B(3)(b) of the Reserve Bank Act 1959 to exercise these powers in a way that will best contribute to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with the overall stability of the financial system. Again, the limits to the powers of the PSB are so general that they have little practical effect.

1.4.4

Australian Securities and Investment Commission

ASIC was established as part of the Wallis Committee recommendations. Its continuing existence is by virtue of s 8 of the Australian Securities and Investment Commission Act 2001 (Cth). ASIC has broad responsibilities, including: general market integrity; licensing and conduct of corporations; consumer protection; monitoring financial industry codes of practice and the ePayments Code; and supervision and enforcement of financial market products. As part of its consumer protection role, ASIC administers the unconscionable conduct and consumer protection provisions of Div 2 of the Australian Securities [page 5] and Investment Commission Act 2001. This Division applies to the provision of financial services. Financial services are excluded from the corresponding sections of the Competition and Consumer Act 2010 (Cth). Since the functions of ASIC may overlap with those of APRA and the Reserve Bank, ASIC has entered into a Memorandum of Understanding with those bodies. Memoranda of Understanding set out a framework for cooperation between bodies. ASIC also publishes:

Regulatory Guides that provide guidance on ASIC’s approach to issues or policies within its area of responsibility; and Information Sheets that provide more practical advice on particular processes or issues. ASIC may issue infringement notices under the Corporations Act 2001 (Cth), or it may seek ‘enforceable undertakings’ under the Australian Securities and Investment Commission Act 2001. These may be done where ASIC determines that there is a breach of the law. An enforceable undertaking is a promise to ASIC, in writing, that the person or entity giving the undertaking will do or refrain from doing something. Enforceable undertakings may be enforced by court action if the undertaking is violated: see Regulatory Guide RG 100 Enforceable Undertakings for information on the type of undertakings that ASIC may accept.

1.4.5

Australian Prudential Regulation Authority

The Wallis Committee recommended the establishment of a single prudential regulator for all institutions involved in deposit taking, insurance or superannuation. APRA was established for that purpose by the Australian Prudential Regulation Authority Act 1998 (Cth). APRA is funded by levies imposed on the financial services sector that it regulates. Many of APRA’s powers are derived from the Banking Act 1959 and are discussed in Chapter 2. As part of its responsibilities, APRA issues Australian Prudential Standards, which regulate a range of activities undertaken by financial institutions. An Australian Prudential Standard has the force of law: Banking Act 1959, s 11AF. Prudential standards are being amended and revised as APRA moves to implement the Basel III standards. These standards, discussed in Chapter 2, are aimed at improving the capital and liquidity position of banks that are active internationally. There are also special requirements on ‘systemically important financial institutions’ (SIFIs). APRA has also released an information paper on ‘domestic systemically important banks’ (D-SIBs): see ‘domestic systemically important banks in Australia - December 2013’ information paper available from . [page 6]

1.4.6

Council of Financial Regulators

The Wallis Report recommended that the government establish mechanisms to achieve effective coordination and cooperation between ASIC, APRA and the Reserve Bank. This role is now performed by the Council of Financial Regulators (CFR). The CFR is a non-statutory body chaired by the Reserve Bank. According to the CFR itself, members share information, discuss regulatory issues and coordinate responses to potential threats to financial stability. The CFR advises government on the adequacy of financial regulatory arrangements, and information about its operation is contained on the CFR website: .

1.5

Trading banks and savings banks

For most practical purposes, the distinction between trading banks and savings banks has been eradicated. Historically, savings banks provided finance primarily for private housing. This was not entirely a commercial decision, for regulations required that a very substantial portion of savings bank assets must consist of loans secured by property within Australia, or of government loans. Prior to 1989, savings banks were identified separately in a schedule of the Banking Act 1959, but the definition of ‘trading bank’ and ‘savings bank’ was removed from that Act by the Banking Legislation Amendment Act 1989 (Cth). Curiously, the Banking (Savings Banks) Regulations 1960 (Cth) appear to remain in force. These regulations require a savings bank to hold a certain percentage of all deposits in prescribed investments and limit the types of deposits that the bank may accept. Until the function was transferred to APRA, the Reserve Bank was responsible for the prudential supervision of banks.

1.6

Building societies and credit unions

Prior to the 1998 reforms, permanent building societies were incorporated under state legislation. They were concerned primarily with housing finance — lending on mortgage to, and receiving deposits from, members. Building societies ordinarily issued shares to members, and the rules sometimes provided that the members could withdraw their share capital. Credit unions are cooperative societies where each member has a say in the

running of the union. Credit unions loan money to members and accept deposits. Since building societies and credit unions were not ‘banks’, it was necessary to draw a distinction between their functions and those of banks. In Australian Independent Distributors Ltd v Winter [1964] HCA 78, the High Court considered a society that [page 7] accepted deposits from members and used a savings bank-style passbook. Since the society was empowered to lend only to members, the Court held that it did not carry on the business of banking. Building societies and credit unions were regulated by state and territory legislation until the changes made by the Financial Sector Reform (Amendments and Transitional Provisions) Act (No 1) 1999 (Cth). From 1 July 1999, building societies, credit unions and certain other financial institutions were deemed to be registered under the Commonwealth companies legislation. They were then regulated by APRA as ADIs, and by ASIC with respect to corporate regulation.

1.7

Mutual banks

In 2010, the Federal Government announced that it would permit certain building societies and credit unions to become ‘banks’. These entities were already regulated by APRA, so the change was merely to overcome the prohibition of s 66 of the Banking Act 1959. These mutual banks are owned by the account holders and are often referred to as ‘customer-owned banks’. Each member has one vote, irrespective of their account balance or the number of accounts held. Since most building societies and credit unions operated under the mutual structure, conversion to a mutual bank is normally just a change of name.

1.8

State banks

Section 51 of the Australian Constitution provides that: The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to: …. (xiii) Banking, other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks and the issue of paper money.

….

The High Court has held that ‘state banking’ means the business of banking engaged in by a state as a banker. It does not include business between a state as a customer and a bank: see Melbourne Corp v The Commonwealth (1947) 74 CLR 31. Each of the states operated a state bank for many years. Mergers and takeovers — sometimes prompted by financial difficulties — diminished the numbers until, as at the present day, there are no longer any state-owned trading or savings banks. [page 8]

1.9

AML/CTF legislation

1.9.1

Introduction

‘Money laundering’ is the colourful name given to the process of making illegitimate funds appear to be legitimate. The money launderer converts money obtained from illicit activities such as drug or armament sales into funds which appear to come from legitimate business activities. The early concerns were with cash transactions, but more sophisticated methods of money laundering widened the scope of intervention. This can be seen in the names of the legislation intended to control money laundering: the original Act was the Cash Transaction Reports Act 1988 (Cth). Its application was expanded dramatically in 1991 and the name changed to the Financial Transaction Reports Act 1988 (Cth). Money laundering has always been an international activity, and it was clear that international action would be required to deal with it. Australia supported the formation of the Financial Action Task Force (FATF) — an initiative of the Organisation for Economic Co-operation and Development (OECD). The stated purpose of the FATF is to formulate national and international policies to combat money laundering. Terrorist financing presents challenges which are similar to those of money laundering, but there are differences. Terrorist financing may originate with legitimate sources, and, while money laundering occurs after the crime, the intent of detecting terrorist financing is to prevent the activity. Another difference is that laundering will usually be a continuing activity involving a series of transactions, but terrorist financing may be a one-off transaction with few connections between the parties.

The national and international approach to the money laundering/terrorist financing problem is a two-stage procedure: detection through reporting obligations; and deterrence through the confiscation of funds. In Australia, the first of these is implemented in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) — which largely, but not entirely, replaces the Financial Transaction Reports Act 1988 (Cth). The second policy is implemented through the Commonwealth and state proceeds of crime legislation.

1.9.2

International background

The FATF was formed in 1989. It encourages legislative and regulatory reforms to combat money laundering and terrorist financing. To this end, FATF published the ‘forty Recommendations’ in 1990, which were revised in 1996 and again in 2003. [page 9] The Forty Recommendations are principles for the drafting of legislation and the establishment of regulatory structures. Following the attacks on the USA in September 2001, the FATF released Recommendations on Terrorist Financing. These were originally eight recommendations, but in October 2004 a ninth was added. These were known as the ‘nine Recommendations’, and the full set of recommendations were the ‘forty + Nine’. The FATF again revised its recommendations in 2012, incorporating measures previously focused on terrorist financing. The latest 40 recommendations also strengthen the requirements for higher risk situations. The new FATF recommendations — ‘international Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation — the FATF Recommendations’ — may be found at .

1.9.3

Anti-Money Laundering and CounterTerrorism Financing Act 2006

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 includes in its stated objectives that it is to fulfil Australia’s international

obligations: Anti-Money Laundering and Counter-Terrorism Financing Act 2006, s 3. It is often said that the Act is ‘risk based’. This usually means that required procedures must be adjusted to account for the money laundering or terrorist financing risk posed by the provision of the particular service to the particular customer. However, the exact meaning of the phrase can be obscure when used loosely, and it is dangerous to assume that it has a broad content which modifies the precise wording of the Act. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 applies to a wide range of businesses and services. This makes it difficult to apply precise rules, since the businesses involved may range from very large to very small. The approach taken by the legislation is that broad principles are established in the Act, but more detailed requirements are set out in the AntiMoney Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1). The government established a review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which coincided with the evaluation of Australia’s anti-money laundering and counter-terrorism financing regime. The findings of the review are set out in the ‘report on the Statutory Review of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 and Associated Rules and Regulations’, tabled in Parliament on 29 April 2016.

Reporting entities The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 makes certain demands of ‘reporting entities’. A reporting entity is a financial institution or [page 10] other person who provides a ‘designated service’. The tables in s 6 of the AntiMoney Laundering and Counter-Terrorism Financing Act 2006 define the provision of a designated service and the customer to whom the service is provided. There are 54 designated financial services. These cover a very wide range of services which might potentially be used for money laundering or terrorist financing purposes. Importantly for banking law, the provision of an account, allowing a person to be a signatory, allowing a transaction to be conducted on an account and a whole host of other services offered by traditional banks are designated services. Section 6 also contains tables which list designated bullion services and gambling services.

A ‘signatory’ is a person — or one of the persons — on whose instructions (whether required to be in writing or not and whether required to be signed or not) the account provider conducts transactions in relation to the account: Anti-Money Laundering and Counter-Terrorism Financing Act 2006, s 5. This definition is wide enough to include a person who deposits money into the account of another. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 imposes certain obligations on reporting entities: a reporting entity must carry out an identification procedure — this procedure must generally be carried out before applying a designated service, but in some circumstances may be delayed: see Identification section below; certain transactions must be reported, including ‘suspicious’ transactions: see Reporting section below; and each reporting entity must prepare and comply with an anti-money laundering and counter-terrorism financing programme: see Anti-money laundering and counter-terrorism financing programmes section below.

Identification A key aim of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 is proper identification of the customer. Section 32 requires the reporting entity (with some exceptions) to apply an ‘applicable’ customer identification procedure before providing the designated service. There are special provisions for pre-commencement customers and for low-risk customers and services. The ‘applicable’ procedures must meet the requirements of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1). In the case of an individual customer, this means that the reporting entity must use systems and controls that are designed to ensure the reporting entity is reasonably certain that the customer is the individual they claim to be. In the case of a company customer, the identification procedure must ensure that the company exists, and, in certain cases, must include the names and addresses of beneficial owners. [page 11] Similar requirements exist for other types of customers. Chapter 4 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) sets out the details. The Rules specify different requirements for

different kinds of customers: individuals, companies, trustees, partnerships, associations, registered cooperatives and government bodies. The identification procedures must employ identity verification procedures which comply with the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1). Part 4.9 of the Rules relates to document-based verification, and Pt 4.10 relates to verification by electronic data. The Rules provide ‘safe harbour’ procedures for identifying low- or medium-risk individuals. These are procedures which, if followed, are deemed to be satisfaction of the requirements of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006: see Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1), rr 4.2.10ff. It is not sufficient to merely identify the customer. The reporting entity must employ procedures and systems which enable it to know some details of its customer’s affairs. This is broadly known as the ‘know your customer’ (KYC) requirement, and, importantly, it is an ongoing requirement. This obligation to update customer information is a potentially onerous obligation on financial institutions. Division 5A of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 allows the use of credit reporting bodies to facilitate identity verification. Section 35A permits reporting entities to disclose certain information to credit reporting bodies for this purpose, and s 35B allows the credit reporting bodies to use and disclose certain personal information for the same purpose. These uses and disclosures might be contrary to the Privacy Act 1988 without the authorisation of Div 5A. Section 36 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 requires a reporting entity to ‘monitor’ its customers with a view to identifying, mitigating and managing the money laundering/terrorist financing risk. The Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) set out information which is relevant to the KYC obligation. In the case of an individual, this includes income and assets available to the customer, the customer’s business or occupation and the source of any funds: see Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1), r 1.2.1. Banks must also be concerned with the assessment of correspondent banks. ‘banks’ in many parts of the world may be little more than a front for an individual, and the use of such ‘banks’ for money laundering is not unknown. Part 8 of the Anti-Money Laundering and Counter-Terrorism Financing Act

2006 requires a financial institution to carry out a due diligence assessment. Part 8 also prohibits [page 12] the establishment of correspondent banking relationships with shell banks or any financial institution that has a correspondent relationship with a shell bank. Details on carrying out due diligence are contained in the Rules. The KYC requirement changes the bank’s obligations. In Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794, Harman LJ said the banker should clearly be concerned with the occupation of the customer when the account is opened, but that there is no general duty to be informed of changes in employment or in status. That is no longer true under the AntiMoney Laundering and Counter-Terrorism Financing Act 2006.

Reporting Part 3 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 sets out the reporting obligations of the reporting entity. Reports are given to the Australian Transaction Reports and Analysis Centre (AUSTRAC) CEO (see 1.9.5). There are four main obligations: a reporting entity must report ‘suspicious’ matters; ‘threshold’ transactions must be reported; any person who sends or receives an international funds transfer instruction must report it to AUSTRAC; and a reporting entity is required to give compliance reports. Suspicious matters are defined in s 41 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. They cover a wide range of matters involving the identity of the customer and of possible criminal activity. Reporting details of the customer’s affairs is a breach of the duty of confidentiality owed to the customer. Various sections of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 provide that no action will lie against the reporting entity for fulfilling, or purporting to fulfil, its obligations under the Act: see, for example, Anti-Money Laundering and Counter-Terrorism Financing Act 2006, ss 51, 69, 72 and 206. A ‘threshold’ transaction is one involving a transfer of physical currency or ‘e-currency’ where the total transaction is not less than $10,000. The AntiMoney Laundering and Counter-Terrorism Financing Regulations 2008 may

specify other transactions which are to be considered as ‘threshold’ transactions. Foreign currency transactions are to be converted into Australian currency at the prevailing exchange rate. Threshold transactions are called ‘significant’ transactions in the Financial Transaction Reports Act 1988, and the reporting requirement is one of long standing. Section 46 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 defines ‘international funds transfer instruction’. It is limited to electronic [page 13] funds transfer instruction for most reporting entities. Instructions which send funds abroad or which make funds available in Australia are both included. If the instruction is given through a ‘designated remittance arrangement’, then it is reportable whether or not the instruction is in electronic form. Section 45 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 requires a person to report an international funds transfer instruction to AUSTRAC within 10 business days after the day on which the instruction was sent or received. Under the Financial Transaction Reports Act 1988, there was some argument about who the ‘person’ was who sent or received the transfer instruction. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 provides that it is ‘immaterial’ whether the person sent or received the instruction as an ‘interposed institution’ in a ‘funds transfer chain’. The concept of a ‘funds transfer chain’ is defined in s 64(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. It is the ordering institution, the beneficiary institution and each person interposed between those two. Section 47 requires a reporting entity to lodge an annual compliance report with AUSTRAC. The compliance report is a series of questions intended to elicit the reporting entity’s degree of compliance with its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Civil penalties apply in case of failure to lodge the report, and criminal penalties may apply for giving false or misleading information.

Anti-money laundering and counter-terrorism financing programmes

Reporting entities must have and comply with an anti-money laundering and counter-terrorism financing programme. The programme consists of two parts: Part A must identify, mitigate and manage the risk that the provision of its designated services to its customers may facilitate money laundering or terrorism financing; and Part B must set out customer identification procedures. These obligations are set out in Pt 7 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1). Details of the obligations, particularly the identification procedures of Part B, are set out in the Rules. This approach solves a difficult problem of the legislation. Since the AntiMoney Laundering and Counter-Terrorism Financing Act 2006 covers such a wide range of businesses and services, how can general rules be drafted to apply to all? The answer provided by the Act is to require the reporting entity itself to make rules which take into account its own business activities and the nature of its customers. [page 14]

The AML/CTF Rules The Rules are developed by AUSTRAC (see 1.9.5) and are legally binding. The Rules set out the details for meeting the principles and responsibilities of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. So, for example, the Rules provide detailed guidance on the identification requirements of the Act. In addition to the Rules, AUSTRAC has published the AUSTRAC Compliance Guide, released online in 2014. The Compliance Guide contains additional information for reporting entities, providing detailed guidance on the procedures necessary to meet obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Although not legally binding, the Compliance Guide offers valuable information on how AUSTRAC expects the regulations to be applied, and it is updated regularly. Information may be found on AUSTRAC’s website: .

1.9.4

Financial Transaction Reports Act 1988

The Financial Transaction Reports Act 1988 remains in force, but it is restricted, to reduce overlap with the Anti-Money Laundering and Counter-

Terrorism Financing Act 2006. For example, s 7 of the Financial Transaction Reports Act 1988 requires reporting of ‘significant cash transactions’, but the section does not apply if the cash dealer is a reporting entity and the transaction is a ‘designated service transaction’ — a transaction which is part of a designated service provided by a reporting entity. Similar sections apply to other reportable transactions under the Financial Transaction Reports Act 1988. Reporting requirements of the Financial Transaction Reports Act 1988 are similar to those of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. However, there is no requirement for continuous customer monitoring. Cash dealers are not required to establish a compliance programme under the Financial Transaction Reports Act 1988.

1.9.5

AUSTRAC

The Cash Transaction Reports Agency was established by the Cash Transaction Reports Act 1988 (Cth). It commenced operation in January 1989. The name was changed to the Australian Transaction Reports and Analysis Centre (AUSTRAC) in 1991. Its continued existence is now defined in Pt 16 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The former ‘director’ is now the ‘chief Executive Officer’ (CEO). The CEO’s functions include: compiling and analysing eligible collected information; and making Anti-Money Laundering and Counter-Terrorism Financing Rules. [page 15] Strictly speaking, the CEO has obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, and s 210 states that the function of AUSTRAC is to assist the CEO in the performance of their functions. The CEO’s functions are defined in detail in s 212.

1.10

Proceeds of crime

There is a widely held belief that organised criminal activity may best be fought by following the ‘money trail’. One legislative response to this belief is the anti-money laundering legislation: see 1.9.3ff. Another is the Proceeds of Crime Act 1987 (Cth), and there are various state Acts which attempt to confiscate the proceeds of illegal activity.

The Proceeds of Crime Act 1987 has been amended by the Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002 (Cth). The changes will be discussed below. It has been augmented by the Proceeds of Crime Act 2002 (Cth). The Proceeds of Crime Act 1987 states its principal objects in s 3(1) — namely: to deprive persons of the proceeds of, and benefits derived from, the commission of offences; to provide for the forfeiture of property used in, or in connection with, the commission of such offences; and to enable law enforcement authorities effectively to trace such proceeds, benefits and property. In pursuit of these aims, the Proceeds of Crime Act 1987 gave state or territory supreme courts the power to make orders against the property of a person convicted of, or charged with, an indictable offence. The orders may restrict dealing with or disposing of the property subject to the order. A court may also order that the property be taken into custody of, or put under the control of, the Official Trustee in Bankruptcy. The Proceeds of Crime Act 2002 extended the confiscation regime to certain other proceeds, but the most important is ‘to deprive persons of literary proceeds derived from the commercial exploitation of their notoriety from having committed offences’. The Act also extended the confiscation regime to other proceeds of civil activities related to prior criminal activities. The Proceeds of Crime Act 1987 created a number of offences related to ‘money laundering’ and the receiving or possession of property or money reasonably suspected to be the proceeds of crime. These offences have been removed from the Proceeds of Crime Act 1987 by the Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002. The same Act inserted a new Pt 10.2 in the [page 16] Criminal Code Act 1995 (Cth). The new part is entitled ‘money laundering’, but the old offence of money laundering is replaced with sections which create offences of ‘dealing with proceeds of crime’. Since it is obvious that many ‘laundering’ operations will involve the use of bank accounts, it is important for bankers to be aware of their responsibilities under the legislation. The original form of the Proceeds of Crime Act 1987

imposed substantial record-keeping obligations on ADIs. The Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002 moved those provisions to Pt VIA of the Financial Transaction Reports Act 1988: see discussion at 1.10.5.

1.10.1

Definitions

The ‘proceeds of crime’ consist of any money or other property that is derived or realised, directly or indirectly, by any person from the commission of an offence that may be dealt with as an indictable offence: Criminal Code Act 1995 (Cth), s 400.1(1). Money or other property which is stolen is obviously ‘proceeds of crime’, which is obtained directly from the commission of the offence. Articles purchased with the stolen money would be property indirectly ‘derived or realised’ from the offence. ‘Money’ and ‘property’ include references to financial instruments, cards and other objects that represent money or can be exchanged for money — whether or not they have intrinsic value: Criminal Code Act 1995, s 400.1(2). Importantly, this would include casino chips, which are widely used as a medium of exchange for those who wish to avoid currency. There can be difficulties when it is argued that the proceeds are not the result of the crime. For example, in Studman v Commonwealth Director of Public Prosecutions [2007] NSWCA 285, the appellant had opened a bank account in a false name, contrary to the Financial Transaction Reports Act 1988. He argued that the account should not be confiscated, since the funds deposited were legitimate. The New South Wales Court of Appeal held that the ‘property’ in question was the chose in action, which was acquired by the deposit of funds. Since the chose in action was acquired by a criminal act, the funds were the proper subject of confiscation. An ‘instrument of crime’ is any money or property which is used in the commission of an offence — or used to facilitate the commission of an offence — provided that the offence may be dealt with as an indictable one: Criminal Code Act 1995, s 400.1(1). The car used in a getaway, mobile phones used to coordinate a robbery and any weapons used would all be ‘instruments of crime’: see Leighton-Daly (2014) for further discussion. [page 17]

1.10.2

Dealing

The money laundering offences all refer to ‘dealing’ with proceeds of crime. Because of constitutional limitations, the definition of ‘dealing’ is in two parts, but there is a common initial element to both: Criminal Code Act 1995, ss 400.2(1)(a) and 400.2(2)(a). The common element of ‘dealing’ is widely defined to include receiving, possessing, concealing or disposing of money or other property: Criminal Code Act 1995, ss 400.2(1)(a)(i) and 400.2(2)(a)(i). In addition, importing or exporting money or property is dealing with it: Criminal Code Act 1995, ss 400.2(1)(a)(ii) and 400.2(2)(a)(ii). Importantly for ADIs, a person ‘deals’ in money or property if they engage in a banking transaction relating to the money or property: Criminal Code Act 1995, ss 400.2(1)(a)(iii) and 400.2(2) (a)(iii). The ‘constitutional’ part of ‘dealing’ for the purposes of s 400.2(1) is that the money or other property in question must be the proceeds of crime or could become an instrument of crime: Criminal Code Act 1995, s 400.2(1)(b). Section 400.2(2) of the Criminal Code Act 1995 uses a ‘shopping list’ approach. If a person does any of the things mentioned in subs (a), then the additional requirement is that the person does them: in the course of, or for the purposes of, importation of goods into Australia; or in the course of, or for the purposes of, exportation of goods from Australia; or by means of a communication using a postal, telegraphic or telephonic service within the meaning of para 51(v) of the Constitution; or in the course of banking (other than state banking that does not extend beyond the limits of the state concerned). As mentioned above, the additional requirements of ss 400.2(1)(b) and 400.2(2)(b) of the Criminal Code Act 1995 serve only to ensure that the constitutional requirements are fulfilled. It is important for the banker to realise that the Criminal Code Act 1995 does not exempt bankers from the concept of ‘dealing’ in money or property. Indeed, the banker ‘engages in a banking transaction’ when accepting a deposit.

1.10.3

Dealing in proceeds of crime

Division 400 of the Criminal Code Act 1995 creates no fewer than 18 offences of dealing in proceeds of crime. Fortunately, the offences differ only in the value of the money or property and the degree of knowledge of the person dealing. There are three ‘basic’ offences which are then ‘multiplied’ by considering the value of the money or property dealt with. The ‘basic’ offences are described by s 400.8 of the Criminal Code Act 1995. The common basis of each is that the [page 18] person deals with money or other property. The primary difference between the offences is the knowledge of the offender. The most serious offence is created by s 400.8(1) — that is, where a person deals with the money or property and: the money or property is, and the person believes it to be, proceeds of crime; or the person intends the money or property to become an instrument of crime. The second basic offence is where a person deals with money or property which is either the proceeds of crime, or there is a risk that it will become an instrument of crime. The offence is committed if the person is reckless as to either fact: Criminal Code Act 1995, s 400.8(2). The third basic offence is committed if the person is merely negligent as to either fact: Criminal Code Act 1995, s 400.8(3). These ‘basic’ offences do not make any reference to the value of the property. Each of them is adjusted by other sections, in terms of the penalties they attract. Thus, there are three separate offences if the value of the property at the time of dealing is $1,000,000 or more, $100,000 or more, $50,000 or more, $10,000 or more, and $1,000 or more: Criminal Code Act 1995, ss 400.3–400.7. Section 400.10 provides a defence of mistake of fact for these ‘quantified’ offences. There are none of the reasonable defences that one might expect. So, for example, it seems that if the banker accepts money when they should have a suspicion that it is derived from the proceeds of crime, it will be no defence to establish that it was received with an intention that it would be held for the purposes of returning it to the police or to the rightful owner. However, where a ‘cash dealer’ — or any person who is an officer, employee or agent of a cash dealer — provides information as required by the

Financial Transaction Reports Act 1988, that person is deemed not to have been in possession of the information for the purposes of Div 400 of the Criminal Code Act 1995: Financial Transaction Reports Act 1988, s 17. Since the person in question is not ‘in possession of the information’, then they would not be in a position where they ‘ought reasonably to know’ that the funds are tainted. This is a very oblique method of establishing a defence to a serious crime.

1.10.4

Possession of proceeds of crime

Section 400.9 of the Criminal Code Act 1995 describes the offence of possession of property reasonably suspected to be proceeds of crime. The elements of the offence are that the person deals with money or property by receiving, possessing, concealing, disposing, importing or exporting it — provided that it is reasonable to suspect that the money or property is the proceeds of crime. In addition, in order to ensure the offence meets constitutional requirements, the crime must be in relation to a Commonwealth indictable offence, or the person’s [page 19] conduct must take place in certain circumstances, which are enumerated in s 400.9(3) of the Criminal Code Act 1995. They are similar to those mentioned in the section which defines ‘dealing’: see Criminal Code Act 1995, s 400.2, and see 1.10.2. More interestingly, s 400.9(2) of the Criminal Code Act 1995 enumerates circumstances in which it may be assumed that the money or property is the proceeds of crime. These are where: the conduct involves structured transactions (‘smurfing’) designed to avoid the reporting requirements of the Financial Transaction Reports Act 1988; the conduct involves using accounts in false names; the value of the property is grossly out of proportion to the defendant’s income or expenditure; it is a ‘significant’ transaction within the meaning of the Financial Transaction Reports Act 1988, and the defendant has failed to report it or has given false information with respect to it; and the defendant has admitted that the conduct was engaged in on behalf of

another person but refuses to provide information enabling that person to be identified and located. Section 400.9(5) of the Criminal Code Act 1995 provides a defence, but it is clear that the onus is on the defendant to establish the defence once the fact of possession, and so on, is established. It is a defence to the charge if the person satisfies the court that they had no reasonable grounds for suspecting that the property referred to resulted directly or indirectly from some form of unlawful activity. For ‘cash dealers’, their officers, employees and agents, there is also the ‘information defence’: see discussion at 1.10.2, and see Financial Transaction Reports Act 1988, s 17.

1.10.5

Retention of documents

Part VIA of the Financial Transaction Reports Act 1988 was moved from the Proceeds of Crime Act 1987 by the Proceeds of Crime (Consequential Amendments and Transitional Provisions) Act 2002. A financial institution must retain certain documents for a period of seven years. Certain documents not related to the operation of the account must be retained in the original: Financial Transaction Reports Act 1988, s 40F. ‘Customer-generated financial transaction documents’ which relate to the operation of the account may be retained as copies: Financial Transaction Reports Act 1988, s 40H. A ‘customer-generated financial transaction document’ is any document, signed or not, which is given to the institution by the customer concerned and which relates [page 20] to the opening, closing or operation of an account, an electronic funds transfer, an international transfer or an application for a loan: Financial Transaction Reports Act 1988, s 40D. The Financial Transaction Reports Act 1988 provides an exception for documents relating to a single account transaction where the amount does not exceed $200: Financial Transaction Reports Act 1988, s 40H(2)(a).

[page 21]

2 Regulation 2.1

Introduction

Bankers often consider regulation an unwelcome interference by bureaucratic meddlers. However, history teaches us that banking is an inherently dangerous business. Competitive pressures tempt bankers to engage in risky practices, and bank failures cause hardship far beyond the boundaries of the bank itself. More recent history teaches us that competitive pressures may result in near catastrophic conditions. The ‘securitisation’ of ‘sub-prime’ mortgages and trade in other derivatives led to a major financial crisis in 2008. The USA, the UK and European countries spent billions of taxpayer dollars to save banks that had been reckless but were considered ‘too big to fail’. Recent history also teaches us that unscrupulous people may use banks for illegal purposes. These purposes include money laundering, financing of terrorism and other criminal activity. Ordinary banking practice has totally failed to address the use of bank facilities for illegal purposes. Australian governments have also regulated bank ownership. Banks and banking are extremely important to the community. There is a natural desire to ensure that banking services do not fall under the control of a single person or group. It is generally believed that a concentration of ownership or control would be against the best interests of society as a whole. This chapter discusses the forms of regulation that attempt to control these three problems. Prudential regulation attempts to ensure good overall banking practice. Money laundering and anti-terrorist financing legislation attempt to ensure that banking facilities are used for legitimate purposes. Shareholding restrictions attempt to ensure that banking is not controlled by too small a number of parties. [page 22]

2.2

The background to modern regulation

Although it is commonplace in modern economic discussions to speak of ‘deregulation’, there is little likelihood that governments will ever completely ‘deregulate’ the banking industry. It is worth exploring the reasons for this.

2.2.1

Why regulate?

While there are significant pressures for ‘deregulation’ of the financial industries, the demonstrable past failures of pure market forces ensure that governments everywhere will continue to take a close interest in the business of banking. The salient feature of modern banking is that it is ‘fractional reserve’ banking. In simple terms, the bank ‘lends’ its credit, not its money. The banking system as a whole is capable of creating ‘money’ — a point recognised by the Campbell Committee as a feature common to banking in most countries: see Campbell (1981). This ability to create money is most easily understood by a consideration of earlier practice. Prior to 1900, it was common for banks to issue ‘banknotes’. Banknotes were essentially promissory notes issued by a bank: see Chapter 11. Banknotes circulated as cash, and loans were made by the bank through giving the borrower notes issued by the institution. It is clearly possible for a bank in such a position to create ‘money’. One of the most extreme examples of the excess which might occur is mentioned in Galbraith (1995). He describes a Massachusetts bank which failed in the 1830s — it had a note circulation of more than $500,000 supported by reserves in specie of $86.48. It was, as Galbraith observes, ‘a modest backing’. In a system where bank liabilities are used as ‘money’, it is clear that the financial stability of the entire community is closely related to the stability of the banking system. It is also all too clear from the history of western economies that pure ‘market forces’ do not provide the necessary stabilising forces. The most devastating example of disruptive forces in Australian banking history was the collapse of the banking system during the period between 1891 and 1893, when 54 of a total of 64 banks closed their doors — 34 of them never to open again. Many of these ‘banks’ were structures formed solely for the purposes of financing shoddy high-risk real estate deals, which were left

insolvent by the collapse of the Melbourne property market, but even restricting attention to institutions which could properly be called ‘banks’, only 9 out of 28 were able to remain trading throughout the panic: see Sykes (1988). The immediate response to the crash in New South Wales was to enact two pieces of legislation. First was the Bank Issue Act of 1893 (NSW), which proclaimed that certain banknotes were to be legal tender: see Mann (2005). The second was the Current Account Depositors’ Act of 1893 (NSW), which permitted the issue of treasury notes to depositors on the security of their questionable bank deposits. [page 23] The first Commonwealth note issue was in 1910. There was substantial opposition from the banks, particularly since the issue of the notes coincided with a tax on all banknotes issued after that time: Australian Notes Act 1910 (Cth) and Bank Notes Tax Act 1910 (Cth). The replacement of private notes by the new Commonwealth notes was completed in a few years, although banknotes were still issued in Tasmania in the 1930s: see Tomlinson (1963) and Vort-Ronald (1979). The Great Depression led to international interest in the regulation of banks. The Australian Government appointed a Royal Commission in 1935 to inquire into the financial system and make recommendations. The Banking Commission Report of 1937 recommended substantial increases in the powers of the Commonwealth Bank to act as central banker, as well as the maintenance of reserve accounts by each bank which would be a proportion of their total deposits. The banks opposed the Commission’s recommendations. Debate on the recommendations of the Commission continued until the outbreak of World War II. The government imposed exchange control almost immediately and, by 1941, the trading banks agreed to maintain a certain percentage of deposits with the Commonwealth Bank, which had assumed the role and powers of a central bank. Further advances were only to be made in accordance with policies outlined by the Commonwealth. The Labor Government formalised and extended these arrangements in the National Security (Wartime Banking Control) Regulations 1941 (Cth). These regulations gave the Treasurer, the Commonwealth and the Commonwealth Bank (acting in its role as a central banker) substantial powers over the lending and investment policies of the trading banks. The National Security (Wartime Banking Control) Regulations 1941 were

substantially re-enacted as the Banking Act 1945 (Cth) and the Commonwealth Bank Act 1945 (Cth), but the Banking Act 1945 went further in an attempt to control banking operations. Section 48 of the Banking Act 1945 purported to give the Commonwealth the right to prohibit a bank from conducting any banking business for a state or for any authority of a state, including a local government authority. In 1947, s 48 was invoked to order the Melbourne City Council to cease its banking arrangements with a private bank. The Melbourne City Council responded with a court challenge that ultimately succeeded. A majority of the High Court held s 48 of the Banking Act 1945 to be invalid — noting that ‘state banking’ means the business of banking engaged in by a state as banker and does not include transactions between a bank and a state as customer: see Melbourne Corp v Commonwealth (1947) 74 CLR 31. The Commonwealth Government countered with the Banking Act 1947 — an attempt to nationalise the private trading banks. Again the High Court ruled the legislation to be beyond the constitutional powers of the government and, therefore, invalid: see Bank of NSW v Commonwealth (1948) 76 CLR 1 and Commonwealth v Bank of NSW [1950] AC 235. [page 24]

2.2.2

Post-war legislation

Although the more aggressive initiatives of the Labor Government were defeated, the structure of banking regulation never again reverted to the unstructured days which preceded the war. The Commonwealth Bank continued to function as the central bank through the 1950s, until the restructuring effected by the banking legislation in 1959. The Commonwealth Banks Amendment Act 1985 (Cth) further changed the structure of the Commonwealth Bank. The capital structure of the bank was altered, its name changed to the Commonwealth Bank of Australia, and the Commonwealth Savings Bank was made a wholly owned subsidiary. In 1987, the Commonwealth Development Bank was given power to provide finance for all general business purposes: see Commonwealth Banks Amendment Act 1987 (Cth), s 23.

2.3

Banking Act 1959

2.3.1

Overview

According to the preamble, the purpose of the Banking Act 1959 is ‘… to regulate Banking, to make provision for the Protection of the Currency and of the Public Credit of the Commonwealth …’. The scheme of the Act accomplishes these goals in several ways. In particular, it: imposes certain restrictions on entry into the business of banking; provides for the prudential supervision and monitoring of banks by the Australian Prudential Regulation Authority (APRA); gives APRA powers which may be exercised for the protection of depositors; and authorises the Reserve Bank of Australia (‘the Reserve Bank’) — with the approval of the Treasurer — to make regulations for the control of interest rates.

2.3.2

Entry limitations

It is an offence for a person other than a body corporate to carry on any banking business in Australia unless there is an exemption in force: Banking Act 1959, s 7. It is also an offence for a body corporate unless it is either the Reserve Bank, an authorised deposit-taking institution (ADI), or unless there is an exemption in force: Banking Act 1959, s 8. The Banking Act 1959 provides that any corporation which wishes to carry on the business of banking may apply to APRA for the authority to do so: Banking Act 1959, s 9. This continues earlier legislation that restricted the right of entry into the banking business. In fact, there were no new banking ‘licences’ granted between 1945 and 1985. By 1985, four of the major trading banks held, between them, approximately 80 per cent of the total trading bank deposits in Australia. [page 25] In 1979, motivated by business and economic pressures, the government appointed a committee of inquiry, the Campbell Committee, to conduct an inquiry into the Australian financial system. The 1981 report of the Campbell Committee recommended a substantial reduction in regulation of the financial system and a more competitive environment. This led to certain steps being taken towards deregulation, most of which concerned the relaxation of direct

interest rate controls and the announcement that the Treasurer would allow the entry of 10 more banks. Before the new licences were issued, the Labor Party was elected to office. The Martin Commission was appointed to conduct a further inquiry into the financial system. The report of the Martin Commission recommended further deregulation of the industry. In 1985, the government announced the granting of a further 16 banking licences. The ‘new’ banks had little impact in terms of market share, but the liberalisation of the financial system has had a dramatic effect on the way in which banks have conducted business. It was ‘[t]he threat of competition from new banks, rather than the reality of their arrival, [that] stimulated the domestic Australian banks’: see Carew (1998). Being an ADI does not give authorisation to use the word ‘bank’ in the name of the body corporate. Further approval must be obtained from APRA: Banking Act 1959, s 66. The ‘level playing field’ does not extend to the use of the word ‘bank’. The original s 66 dealt only with the word ‘bank’, but APRA has the power to add further restricted words or expressions and has done so: see APRA, ‘guidelines on implementation of Section 66 — Banking Act 1959’ available from . Building societies and credit unions are now registered as companies under the Corporations Act 2001 (Cth). Previously regulated under the financial institutions legislation, these bodies are now ADIs. APRA maintains a list of ADIs on its website: . The Banking Act 1959 also recognises a new form of business entity, the non-operating holding company (NOHC). In the past, the Reserve Bank had required that the ‘parent’ company of a financial group of companies that included a bank should itself be a bank. The Act now authorises APRA to grant an authority to a non-bank NOHC if it considers it ‘appropriate’ to do so: Banking Act 1959, s 11AA.

2.3.3

Limitations on shareholdings

Because of the economic and political sensitivity of the banking sector, it is common for governments to place some limitations on the size of individual banks or to place some limitations on the size of an individual’s holdings in a single bank. The traditional form of regulation in the USA took the first course, limiting size of the individual institution by placing a blanket prohibition on branch banking.

[page 26] Australia, when it finally determined to make regulations of this type, took the second approach. The Banks (Shareholding) Act 1972 (Cth) limited the amount of an individual shareholding (or the shareholding of an association of individuals) to 10 per cent of the aggregate voting shares of any bank: Banks (Shareholding) Act 1972, s 10. There was provision for this to rise to 15 per cent upon application to the Treasurer. The Wallis Committee approved this approach to bank ownership but recommended that it be applied uniformly across the financial sector. The Financial Sector (Shareholdings) Act 1988 (Cth) limits the level of shareholdings in any ‘financial sector company’, defined in the Act to be an ADI, an authorised insurance company or a holding company of either. It is an offence for a person to hold a ‘stake’ of more than 15 per cent, where a stake is an aggregate of direct control interests — defined in terms of voting power — together with those held by associates. It is possible to apply to the Treasurer for an exemption from the 15 per cent rule. The exemption may only be given if the Treasurer is satisfied that it would be in the national interest: Financial Sector (Shareholdings) Act 1988, s 14. There are also special provisions for holding companies. The results of the two extreme forms of this type of regulation are not wholly in keeping with the philosophy of the regulators. There are now more than 14,000 banks in the USA, and, in recent years, there have been over 300 bank failures each year. This is scarcely a desirable situation and has resulted in moves which will permit branching and, as a consequence, the development of larger and more economically stable financial entities. The consequences of the Australian approach have indeed prevented any individual from gaining undue influence through control by shareholding, but it has resulted in the establishment of a powerful ‘management class’ which — by virtue of the widely dispersed shareholdings — is virtually autonomous. As a consequence of this autonomy, the banks (or rather the management of the banks) wield precisely the kinds of political and economic power which the limitations on shareholdings were designed to prevent. There is no obvious solution to this part of the regulatory conundrum. Economic pressures are clearly favouring the creation of larger banking entities. Once the entity becomes large, it also becomes economically and politically powerful, and the only choice which is obviously open to the regulators is to change the balance of power between the shareholders and the

management. The current Australian position clearly favours the management and seems unlikely to change in the near future.

2.3.4

Protection of depositors

One of the characteristics of banking business is that the ratio of debt to equity is extremely high. Since most of the debt is owed to relatively small depositors, it is essential [page 27] that these depositors be protected from mismanagement, and that there is a general level of confidence in the bank. Depositor confidence is for the benefit of the bank and the banking system as much as for the depositors. The Banking Act 1959 gives APRA certain powers which are intended to provide this protection and so maintain depositor confidence: Banking Act 1959, Pt II, Div 2. APRA has the duty to exercise these powers for the protection of depositors: Banking Act 1959, s 12. It is important to note that the duty to protect depositors and the powers of APRA granted by Div 2 do not extend to ‘foreign ADIs’ — that is, those foreign corporations which are authorised to carry on banking business in a foreign country and which have also been granted an authority under s 9: see Banking Act 1959, s 11E(1). A foreign ADI which accepts a deposit from a person in Australia must inform the depositor that the protective provisions of the Act do not apply: Banking Act 1959, s 11E(2). The Bank of China is not a foreign ADI for this purpose: Banking Act 1959, s 11D. An ADI which considers that it is likely to become unable to meet its obligations or which is about to suspend payments must inform APRA: Banking Act 1959, s 13(3). APRA may call for an ADI to supply it with information relating to the ADI’s financial stability. APRA may require the ADI to supply books, accounts or documents: Banking Act 1959, s 13(1). In the event that the information required is not supplied, APRA may investigate the affairs of the ADI: Banking Act 1959, s 13(4). Australian assets must be used to meet Australian deposit liabilities in priority to other liabilities: Banking Act 1959, s 13A(3). Further, unless otherwise authorised by APRA, every ADI (except a ‘foreign ADI’ to which Div 2 does not apply) must hold assets other than goodwill in Australia which are adequate to meet its total Australian deposit liabilities: Banking Act 1959, s 13A(4). A foreign ADI which suspends payment or which becomes unable to

meet its obligations has its Australian assets applied to meet its Australian liabilities in priority to all other liabilities of the ADI: Banking Act 1959, s 11F. The Global Financial Crisis (GFC) which began in 2008 led the Australian Government to introduce a deposit guarantee scheme: see discussion at 3.6. The general requirements are minimal and probably have little real effect, either on the actual protection or on the confidence of depositors. In the event of a bank failure, it seems very unlikely that depositors could claim against APRA for any perceived failure of APRA to carry out its statutory obligations. An attempt by depositors to claim against members of the Isle of Man Finance Board and the Treasurer — both charged with duties toward depositors similar to those imposed on APRA — was dismissed as unreasonable in Davis v Radcliffe [1990] 2 All ER 536: see also Minories Finance v Arthur Young [1989] 2 All ER 105. [page 28] The matter is not settled, however. In Three Rivers DC v Bank of England (No 3) [2001] 2 All ER 513 (HL), the House of Lords refused an application to strike out a claim against the Bank of England for a claim based on misfeasance in office. It was clear that the Bank of England, responsible for prudential supervision, had known as early as April 1990 that the Bank of Credit and Commerce International SA (BCCI) was in imminent danger of collapse. Part of the claim was that the Bank of England knew that there could be no effective and comprehensive rescue. In fact, BCCI collapsed in July 1991, with substantial losses to depositors. The House of Lords held that the case should be tried. The liquidators of BCCI abandoned the claim on 2 November 2005. The Court criticised their actions in pursuing the claim in Three Rivers DC v BCCI [2006] EWHC 816 (Comm).

2.3.5

Payment system regulation

The Wallis Report recognised the importance of the payment system. It recommended that legislation should be passed to regulate it. It also recommended the abolition of the Australian Payment Systems Council. The Council’s functions were divided between the Payment Systems Board and ASIC. Legislation included the Payment Systems and Netting Act 1998 (Cth), which addressed some of the problems with clearing and settlement: see 9.11. The payment system itself was addressed in the Payment Systems (Regulation)

Act 1998, which gives the Reserve Bank the power to ‘designate’ a payment system. Under s 7 of the Act, a payment system is: [a] funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system.

Once a system is ‘designated’, the Reserve Bank has the power to: impose an access regime on the participants in the designated payment system; make standards to be complied with by the participants in the designated payment system; arbitrate disputes relating to the designated payment system; and give directions to the participants in the designated payment system. The MasterCard and Visa credit card systems were ‘designated’ following an investigation by the Australian Competition and Consumer Commission into the fixing of ‘interchange fees’: see 9.15.4. Rulings regarding the size of interchange fees and certain access requirements have been imposed. In September 2004, the Reserve Bank announced that the electronic funds transfer at point of sale (EFTPOS) debit card payment system was designated, and that the automatic teller machine (ATM) system would not, for the time being, be designated. The Visa Debit payment system was designated in February 2004. Failing to reach agreements with the operators, the Reserve Bank designated the ATM system in 2008. [page 29]

Access regimes Section 7 of the Payment Systems (Regulation) Act 1998 (Cth) provides: Access, in relation to a payment system, means the entitlement or eligibility of a person to become participants in the system, as a user of the system, on a commercial basis on terms that are fair and reasonable.

Before imposing an access regime, the Reserve Bank must consult in accordance with the requirements of the Act. Section 11 of the Payment Systems (Regulation) Act 1998 provides that, having undertaken such consultation, the Reserve Bank may impose any access regime on the participants that it considers appropriate, having regard to the following factors: whether imposing the access scheme would be in the public interest;

the interests of the participants in the existing system; and the interests of people who, in the future, may want access to the system; and any other matters the Reserve Bank considers important. The decision to impose the access regime is to be in writing and is to set out the access regime: Payment Systems (Regulation) Act 1998, s 12. Section 29 of the Act provides a method of notification, and the Reserve Bank must provide notification as soon as practicable after imposing the access regime. Access regimes may be varied by the Reserve Bank whenever it considers it appropriate to do so, having regard to factors similar to those considered when imposing the scheme: Payment Systems (Regulation) Act 1998, s 14.

Standards for designated systems Section 18 of the Payment Systems (Regulation) Act 1998 gives the Reserve Bank the power to determine ‘standards’ to be complied with by participants in a designated payment system, provided it considers that the determination of such standards is in the public interest. The Payment Systems (Regulation) Act 1998 does not define the term ‘standards’, and the matter is not addressed by the Explanatory Memorandum. Presumably, the power includes both operational and technical standards. Thus, for example, it might be possible for the Reserve Bank to direct that cheques be presented electronically (an operational standard). At the technical level, the power might be used to impose message standards on an electronic payment system, in an effort to further interoperability. Section 18 of the Payment Systems (Regulation) Act 1998 also gives the Reserve Bank the power to vary or to revoke standards. Although failure to comply with the standard is not an offence in itself, the Reserve Bank may make a direction to a participant in the payment system to undertake or to refrain from specified actions, and it is an offence to fail to comply with a direction. [page 30]

2.3.6

Prudential supervision

One of the functions of APRA is to encourage and promote sound practice in relation to prudential matters: Banking Act 1959, s 11B(b). The Banking Act 1959 instructs APRA to collect and analyse information in respect of prudential matters: Banking Act 1959, s 11B(a). APRA is also required to

evaluate the effectiveness and carrying out of practices related to prudential matters: Banking Act 1959, s 11B(c). ‘Prudential matters’ are those relating to the conduct of any of its affairs by an ADI or a NOHC in such a way as to keep itself in a sound financial position and not to cause or promote instability in the financial system. Note that the ‘affairs’ are not limited to business strictly related to banking. ‘Prudential matters’ also relate to the need to conduct the bank’s affairs ‘with integrity, prudence and professional skill’: see the definition of ‘prudential matters’, Banking Act 1959, s 5(1). Section 11A of the Banking Act 1959 authorises the Banking Regulations 1966 to require ADIs and authorised NOHCs to observe prudential standards specified. More importantly, however, APRA is given power to develop prudential standards: Banking Act 1959, s 11AF. APRA has released prudential standards — the ‘harmonised’ prudential standards — which apply to all ADIs. The most important of these for the present purposes are the standards regulating capital adequacy and risk management. Section 11AF provides that prudential standards have the force of law, and APRA can take action against an ADI if it violates an APS. Before the release of the harmonised standards, the prudential standards developed by the Reserve Bank applied as ‘transitional’ standards. These transitional standards were preserved by reg 12 of the Financial Sector Reform (Amendments and Transitional Provisions) Regulations 1999 (Cth), which cover matters addressed by the harmonised ADI standards. From 1 October 2000, only those standards which are not covered by the harmonised standards remain in force. By early 2011, only a few remaining ‘preserved Transitional Prudential Standards’ were still in operation: see . The APRA website also contains numbered Australian Prudential Standards. Prudential supervision is a moving target, and legislation is regularly introduced to amend relevant Acts such as the Banking Act 1959 (Cth) and the Insurance Act 1973 (Cth).

2.4

The Basel Accord

The Basel Committee on Banking Supervision was formed in 1974 by the central bank governors of the ‘Group of Ten’ countries. Australia is a member of the Committee, which does not possess any supervisory role but is a forum for the establishment of supervisory standards and guidelines. [page 31]

The Committee was formed following international concern at the collapse of the German bank Herstatt. Herstatt Bank was involved in a number of complex foreign exchange transactions. As part of these, foreign banks had agreed to provide German marks in exchange for US dollars. The marks were released, but, due to a difference in the time zones, payment of US dollars was delayed. During that delay, Herstatt failed. Momm v Barclays Bank International [1977] QB 790 provides an example of the litigation which followed. The Basel Committee initially focused on ‘credit risk’, and the first published ‘accord’ of the Committee classified assets of banks into five categories which reflected the credit risk associated with the asset. The accord, known as Basel I, specified capital requirements for each category of risk. Like generals who prepare to fight the last war, central banks and the Basel Committee have found prudential regulation to be a moving target. Perhaps understandably, bankers do not always like the restrictions imposed by prudential standards. New business practices can circumvent capital adequacy standards — either intentionally or accidentally. New business practices may also introduce new risks. The Global Financial Crisis (GFC) resulted in the closure of many banks and taxpayer funded ‘bailouts’ of many more. While the cause of the GFC is still debated by economists, there is no doubt that the widespread use of ‘derivatives’ and ‘securitisation’ of poor lending practices played a major role.

2.5

Basel II and III

Basel II standards focus on risk-sensitive capital requirements: see ‘International Convergence of Capital Measurement and Capital Standards: a Revised Framework’, published by the Committee on June 2004. Basel II formed the basis for APRA’s prudential supervision standard from 1 January 2008 until the current implementation of Basel III. Basel III is not a replacement for Basel II, nor does it supersede the previous guidelines. Basel III is related to risks brought to light by the GFC — risks not foreseen by Basel II. In particular, Basel III is more concerned with liquidity than with capital adequacy — a concern reflected in the title of its January 2013 publication: ‘Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools’. Basel II is often described as resting on three mutually reinforcing pillars — namely:

more sophisticated minimal capital adequacy requirements. This includes specific requirements for operational risk; own assessment of capital adequacy and enhanced supervision of capital management; and transparency through substantially increased disclosure requirements. [page 32] Each country implements the Basel II framework in its own way, and there is no doubt that some implementations are better than others. Australia’s implementation is via the Prudential Standards and Guidance Notes supplemented by the Prudential Practice Guides. These are publicly available from the APRA website: see . Australia’s implementation of the Basel II Framework was reviewed by the Bank for International Settlements and has received a very good report: see International Monetary Fund (2010). Basel III confronted the ‘too big to fail’ problem. It identifies some institutions as being ‘systemically important financial institutions’ (SIFIs). SIFIs are required to have a ‘living will’ that sets out recovery plans where a destabilising event occurs. The ‘living will’ must also set out a resolutions plan that maps out a cost-effective method for dissolving the institution where recovery is not possible. Basel III thus adopts the philosophical viewpoint that no institution is ‘too big to fail’, and that an orderly dismantling is preferable to taxpayer ‘bailouts’. The Basel Committee on Banking Supervision regularly publishes an overview of progress for the implementation of Basel III. The ‘eleventh progress report on adoption of the Basel Regulatory Framework’ showed that Australia was on schedule in its proposed implementation of Basel III. Perhaps too many draft rules are as yet unpublished, but overall, progress is acceptable. The Basel III capital reforms will be discussed in the context of the Basel II framework that follows.

2.5.1

Capital adequacy

Measuring capital adequacy is no easy matter. The Basel II Framework provides ‘standard’ and ‘advanced’ methods for measuring different aspects of capital and risk. Advanced methods permit and require large banks to develop in-house methods for measurement — subject, of course, to APRA oversight.

APRA is engaged in discussions with Australian banks which wish to use the advanced methods. In every case, capital assets of the institution are divided into ‘core’ capital (also called ‘tier 1 capital’) and ‘supplementary’ capital (or ‘tier 2’ capital). Tier 1 capital represents permanent and unrestricted commitment of funds which are available to meet losses. Principal categories of Tier 1 capital include paidup ordinary shares, non-repayable share premium accounts, general reserves, retained earnings, non-cumulative irredeemable preference shares and minority interests in subsidiaries. Certain APRA-approved instruments may also be included in Tier 1 capital. It does not include goodwill, future tax benefits and other items mentioned in Australian Prudential Standard (APS) 111. [page 33] Basel III, when fully implemented, increases the Tier 1 capital requirement from four per cent to six per cent of risk-weighted assets. In addition, there is an increased requirement for common equity within the Tier 1 requirement. The definition of common equity has also been modified to ensure that it is available to absorb losses during a crisis. Tier 2 capital may fall short of meeting the rigid requirements of Tier 1 capital, but it may nonetheless contribute to the overall strength of an ADI as a going concern. Tier 2 capital is subject to a number of restrictions and discounts. It may not be counted for more than 50 per cent of the total capital base of the institution. The ‘capital base’ of the ADI is then the sum of the Tier 1 and Tier 2 capital, less certain deductions itemised in APS 111.

2.5.2

Discount for credit risks

Capital adequacy must be related to the risks faced by the financial institution. The Australian Prudential Standards address several different kinds of risks: credit risk, using both standardised and advanced method: see APS 112 and 113; operational risk: see APS 114 and 115; market risk: see APS 116; and interest rate risk: see APS 117. Credit risks lead to a discount in the way that the asset may be counted toward capital adequacy. For example, note and coins held by the ADI are

essentially risk free and may be counted at their face value. On the other hand, the risk associated with a claim on a foreign bank will depend upon the credit rating of the debtor bank. APS 112 provides for a discount of between 20 and 150 per cent.

2.5.3

Operational risk

The Basel II framework takes into consideration the changing ways that financial institutions have organised business. The Australian implementation is contained in APS 114. This standard introduces the concept of ‘operational risk’, which is, roughly speaking, risk of losses arising from failed internal processes or from external events. The ADI is required to hold a certain amount of capital designated as ‘operational risk regulatory capital’ (ORRC). ORRC is the regulatory capital that the ADI is required to hold against its exposure to operational risk. For the purposes of APS 114, the ADI must consider its activities as three separate businesses: retail banking, commercial banking and all other activity. Different operational capital requirements apply to each of these activities, and the total ORRC is the sum of the three. [page 34]

2.5.4

Liquidity

No matter how much capital an ADI holds in reserve, it is useless unless it may be accessed when necessary. In other words, an ADI must manage its liquidity as well as its capital reserves. APS 210 deals with liquidity management and has been revised to incorporate significant parts of Basel III. Liquidity will always be a problem for ADIs. In economic terms, they ‘borrow short’ and ‘lend long’. Most bank borrowings are in the form of demand or very short-term deposits. Most lending is long term. This fact of life makes ADIs vulnerable to ‘runs’, in which an unusual number of depositors withdraw funds in a short period of time. The GFC showed that Basel II was inadequate to deal with extreme conditions. The Basel Committee introduced a new global liquidity standard — the Liquidity Coverage Ratio (LCR). The LCR aims to ensure that an ADI holds a stock of high quality liquid assets sufficient to survive, in the words of APRA, ‘an acute stress scenario’ lasting for 30 days.

Like the capital adequacy guidelines, the LCR defines two levels of acceptable assets: Level 1 assets: cash, central bank reserves and high quality sovereign marketable instruments; and Level 2 assets: certain other sovereign instruments, certain types of corporate bonds and covered bonds. Level 2 assets may comprise no more than 40 per cent of the total stock. Level 1 assets are those which will remain marketable even during stressed market conditions. The revised APS 210 came into effect on 1 January 2014. It includes the Liquid Coverage Ratio (LCR), which requires high-quality liquid assets to be held in ‘liquidity buffers’ that are available to meet short-term financial stress. The standard expires on 31 December 2017, being replaced with a new standard, also designated APS 210, which implements the Basel III requirements on liquidity. The Basel III requirements for high quality assets posed a problem for Australian banks and regulators, since there are insufficient assets of the required type. APRA and the Reserve Bank have agreed to establish a secured facility with the Reserve Bank to cover the shortfall between an ADI’s highquality holdings and the required LCR. The Reserve Bank accordingly implemented the ‘Committed Liquidity Facility’ as part of the Basel III reforms. The LCR requirement for Australian ADIs started in full on 1 January 2015, and the Reserve Bank’s Committed Liquidity Facility also became active at that time. As noted above, the updated APS 210 standard on liquidity is effective from 1 January 2018. [page 35]

2.5.5

Large exposure

Corporate takeovers and periods of unusual growth will both require substantial amounts of borrowing. From the regulatory point of view, the banking system as a whole may become undesirably dependent on a single sector of industry. Such over-exposure may cause undue economic effects in the event that the fortunes of the industry reverse. A collapse in the price of any particular commodity cannot be permitted to lead to a general collapse of the financial system.

These considerations led to the establishment of ‘exposure limits’ with regard to individual borrowers or groups of related borrowers. Although the exposure limits were originally applied to each bank individually, the current standard is APS 221. In keeping with the other standards, APS 221 is less prescriptive than previous large exposure rules. It requires the board and management to identify and review ‘large’ exposures to an individual or group. A ‘large’ exposure is one which is in excess of 10 per cent of the ADI’s capital base. Large exposures are, of course, not the only credit risks faced by ADIs. APS 220 provides for the board and management of an ADI to put an effective risk management system in place and to adopt a consistent approach to measuring credit risk. APS 220 also requires special treatment for certain ‘impaired’ credit exposures and procedures for estimating and absorbing expected losses.

2.5.6

Association with non-banks

As banking business has expanded beyond the range of traditional banking functions, the main trading banks have formed subsidiary organisations to perform these functions. APRA has established guidelines concerning the relationship of banks to these other organisations. In particular, the overriding principle is that the interest of the depositors of the bank is primary. In order to ‘insulate’ a bank from the fortunes of a non-bank associate, APS 222 establishes procedures for dealing with the risks arising from equity investments made by the ADI and for managing risks arising out of business losses of its subsidiaries and associates. APS 222, ‘Associations with Related Entities’, requires the board and management to prepare policies on risks arising from the above activities. Certain business ventures are considered to be so serious that they require prior notification to APRA before the ADI enters into them. These include: the establishment or acquisitions of subsidiaries (other than entities which are to be used as financing vehicles); taking more than a 10 per cent interest in a non-subsidiary finance entity; and taking more than a certain share of a non-subsidiary entity which is not operating in the finance field. [page 36]

2.5.7

Other prudential regulation

The Australian Prudential Standards, in conformity with the Basel II Accord, cover other aspects of ADI business practices. At the current time, these include: outsourcing: APS 231; managing business continuity: APS 232; risk management of credit card activities: APS 240; rules on governance: APS 510; and requirements for providers of Purchased Payment Facilities: APS 610. There are others, and there will be more as ADIs diversify their activities and modify their methods of doing business.

2.5.8

Lending policies

Section 50 of the Banking Act 1959 gives the Reserve Bank the power to make certain regulations which effectively set interest rates. This power can only be exercised with the approval of the Treasurer. In fact, it seems that the power has never been used. This is not to say that there has been no control of the type authorised in s 50 of the Banking Act 1959. The control has been implemented by ‘agreement’ between the Reserve Bank and the trading banks. Section 36 provides a powerful bargaining chip in any negotiations leading to such an agreement. Direct controls over interest rates have fallen from favour during the last few years. It seems unlikely that s 50 of the Banking Act 1959 will be used, either directly or indirectly, in the near future. The Reserve Bank also has the power to determine policies in relation to advances: Banking Act 1959, s 36. This power specifically includes the power to give directions as to the classes of purposes for which loans may or may not be given by banks: Banking Act 1959, s 36(2). The Reserve Bank might, for example, direct certain policies with respect to housing loans. However, the power of the Reserve Bank does not extend to directing that loans be made, or not made, to any particular person: Banking Act 1959, s 36(3).

2.5.9

Assessment tools

Probability and Impact Rating System APRA uses a system known as the Probability and Impact Rating System (PAIRS) as a risk assessment model. PAIRS incorporates a number of factors to assess the probability of failure of an institution. Other factors are used to assess the impact of [page 37] failure and, in particular, the degree to which failure might ‘infect’ other institutions and the financial system generally. The PAIRS approach would be familiar to statisticians: the probability of an event, multiplied by the cost if the event happens is called the ‘expected loss’. PAIRS allows APRA to use the same model for all regulated industries. According to APRA, PAIRS risk assessments are maintained within a common database that allows the analysis of trends in perceived risks over time. A full explanation of PAIRS may be found on the APRA website: .

Supervisory Oversight and Response System PAIRS will provide a risk assessment, but then the question becomes: What should be the supervisory response to the assessment? APRA uses a tool known as the Supervisory Oversight and Response System (SOARS) to determine how the supervisory concerns should be acted upon. The importance of a formal model such as SOARS is that it ensures supervisory interventions are targeted, timely and consistent. APRA considers consistency as a vital element in prudential supervision, as it allows predictability and certainty — key elements in prudential supervision. Detailed description of the SOARS model may be found on the APRA website: .

2.5.10

Regulation of the payment system

The Wallis Report recognised the importance of an efficient and stable payment system. Elementary economic theory dictates that the payment system must not be run by a cartel. The review resulted in the passage of the Payment Systems (Regulation) Act 1998.

The Act gives the Reserve Bank the power to ‘designate’ a payment system. Once designated, the Bank may: impose an ‘access regime’ on the system; require the system participants to comply with imposed standards; arbitrate disputes relating to the payment system; and give directions to the system participants. ‘Access’ to a payment system means the entitlement or eligibility of a person to become a user of the system on a commercial basis on terms that are fair and reasonable: Payment Systems (Regulation) Act 1998, s 7. The Reserve Bank may impose an access regime dictating the eligibility of persons where it considers it [page 38] appropriate: Payment Systems (Regulation) Act 1998, s 12(1) and 12(2). Section 12(2) sets out factors which must be considered by the Reserve Bank when deciding to impose an access regime, and the Bank is required to consult widely before imposing such a regime: Payment Systems (Regulation) Act 1998, s 12(3). ‘Standards’ are not defined in the Act, but the term appears to refer to operational standards of the designated payment system. Standards have been imposed on credit card systems to regulate the so-called interchange fees and surcharging: see . Payment systems are described in detail in Chapter 9.

[page 39]

3 Banker and Customer 3.1

Introduction

This chapter discusses the fundamental legal relationship between the bank and its customers. It is sometimes important to know if a particular institution is a ‘bank’, or if a particular person is a ‘customer’ of the bank. Since it is often possible to solve apparently complex legal problems by a consideration of this fundamental relationship, banking law students should become very familiar with the contents of this chapter. Most of these details were established long before the financial sector reforms which introduced authorised deposit-taking institutions (ADIs). Although the current chapter refers to ‘banks’, that is merely a convenient shorthand that reflects the language of the cases that established the basic relationships. There is no reason to doubt that the legal principles apply to the relationship between all ADIs and their customers. A modern bank provides many services, and the legal relationship between the banker and customer will reflect this diversity. The basic relationship is contractual, and traditionally the terms of the contract were implied terms. These implied terms still form the background context against which express terms must be interpreted: see Gordon J in Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35. The implied terms have been developed by common law judges. Implied terms may be overridden by express terms, but clear words will be needed to do this. The Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 said that ‘clear and unambiguous provision is needed’ if a bank is to impose terms excluding rights the customer would otherwise have under the implied contract.

3.2

Debtor-creditor

The fundamental relationship between a bank and its customer is the deposit of money into an account. In what capacity does the banker hold the money? [page 40]

3.2.1

Foley v Hill

It wasn’t until the mid-19th century that all doubt was removed about the key implied term of the banker-customer relationship: Illustration: Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 The plaintiff had deposited a sum of money with the defendant banker many years before bringing the suit. The banker had agreed to pay three per cent interest but there had not been any interest paid or credited to the account for well over six years. The problem for the plaintiff was to overcome the Statute of Limitations, for if the money owed by the banker was a mere debt, then an action for its recovery was barred by the statute: see 3.7. However, if the relationship between the parties was one in which the banker owed the plaintiff a fiduciary duty, then the statute did not apply.

Lord Cottenham said (in 2 HL Cas 28 at 36; 9 ER 1002 at 1005): Money, when paid into a bank, ceases altogether to be the money of the principal …; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. Money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit he can, which profit he retains to himself … He has contracted, having received that money, to repay to the principal when demanded a sum equivalent to that paid into his hands.

The case is often cited as the basis for the relationship: see Barwick CJ in Croton v R [1967] HCA 48; R v Parsons (1999) 195 CLR 619; Perrin v Morgan [1943] AC 399. For more recent citations, see Furlong v Wise & Young Pty Ltd [2016] NSWSC 1839; Strategic Finance Limited v Bridgman [2013] NZCA 357. The relationship even applies to so-called ‘hawala banking’: see Mirza (t/a Hamza Travel) v Dayman [2016] EWCA Civ 699 and Tyree (2006) and Jost and Sandhu (2000).

3.2.2

Some consequences

Any other finding would have made modern fractional reserve banking impossible. Had the Court found that the bank was a bailee, a trustee or an agent, the bank would have been saddled with additional obligations that

would inhibit its function as a financial intermediary. For example, if the finding was that the bank was a: bailee — the bank would be obliged to return the exact coins and notes deposited with it: see Chapman Bros v Verco Bros [1933] HCA 23; (1933) 49 CLR 306; [page 41] trustee — any investment by the bank would need to consider as paramount the interests of the customer; agent — the agent must always act in the interests of the principal, again severely restricting the use to which the funds must be used. In both the trustee and the agent relationships, the bank would be required to account for profits, making modern banking impossible. The debtor-creditor relationship also has some unusual consequences. Illustration: Croton v R [1967] HCA 48 A man and woman who were living together opened a joint bank account where each had the authority to draw cheques. Both parties deposited money into the account from time to time. Without the woman’s authority or knowledge, the man withdrew the money from the account and deposited it in a bank account in his own name. When the woman discovered this, she complained to the police, who charged the man with larceny.

A majority of the High Court upheld his appeal on the basis that the correct charge should have been fraudulent misappropriation since what had been ‘stolen’ was her rights to the money in the bank, not the money itself. Barwick CJ said (at 291): Though in a popular sense it may be said that a depositor with a bank has ‘money in the bank’, in law he has but a chose in action, a right to recover from the bank the balance standing to his credit in the account with the bank at the date of his demand or the commencement of action … But the money deposited becomes an asset of the bank which it may use as it pleases. Neither the balance standing to the credit of the joint account in this case nor any part of it, as it constituted no more than a chose in action in contradistinction to a chose in possession, was susceptible of larceny, though it might be the subject of misappropriation.

The important point is that the money belongs to the bank. The customer has a chose in action — namely, the right to demand repayment under certain terms, the most important of which is that the debt is not due until a demand is made: see 3.2.4. Subject to special contractual terms, there is no reason to suppose that the relationship between non-bank ADIs and their customers is any different. Most of the cases which have established the rights and obligations of the parties have not relied upon any special characteristics of banks. It is enough

that the ADI accepts deposits from the customer without restrictions on the way that the ADI may use the sums. One of the consequences of finding the relationship to be debtor-creditor is that a customer will rank merely as an unsecured creditor if the bank becomes insolvent: see, for example, DFC New Zealand Ltd v Goddard [1992] 2 NZLR 445. [page 42]

3.2.3

Some special aspects

The banker-customer relationship differs from the normal debtor-creditor relationship in two ways — namely: the debtor bank is not liable to pay the full sum until a demand is made by the customer; and the bank is under no obligation to seek out the creditor customer to make repayment when the debt is due. See Joachimson v Swiss Bank Corp [1921] 3 KB 110 and the discussion at 3.2.4.

3.2.4

Additional contractual incidents

Although the primary legal relationship is one of debtor and creditor, there are additional contractual terms which must be implied into the contract in order to facilitate the fulfilment of the parties’ expectations. The first comprehensive judicial acknowledgement of the complexity of the banker-customer contract was in Joachimson v Swiss Bank Corp [1921] 3 KB 110. Although the case concerned the question of when the debt owed by the banker is repayable and, in particular, the need for a demand by the customer, the Court went beyond the facts in an attempt to define the nature of the banker-customer relationship. In Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002, Lord Cottenham LC made it quite clear in his speech that the contractual duty to repay is slightly different from the normal debtor-creditor relationship. Ordinarily, it is for the debtor without request to seek out the creditor and to make repayment when due: see Walton v Mascall (1844) 13 M & W 452 at 458; see also Gramophone Co Ltd v Leo Feist Incorporated [1928] HCA 23. It is obviously not contemplated that the banker (the creditor) will seek out the customer (the debtor) and repay the

debt, since that would have the effect of closing the customer’s account — a result not desired by either party. The confusion regarding the need for the customer to make a demand before the debt became due was possibly a result of the fact that the headnote of Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 neglected to mention Lord Cottenham’s qualification to the debtor-creditor relationship. In 1921, Lord Atkin in Joachimson v Swiss Bank Corp [1921] 3 KB 110, undertook a more complete analysis of the banker-customer relationship. In one of the most famous and oft-quoted passages of the law of banking, he said (at 127): I think that there is only one contract made between the bank and its customer. The terms of that contract involve obligations on both sides and require careful statement. They appear upon consideration to include the following provisions. The bank undertakes to receive money and to collect bills for its customer’s account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay

[page 43] at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on his part undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch at which the current account is kept.

Recall that a term will not be implied into a contract unless it is necessary to do so and that in the absence of the implied term the whole transaction would become ‘inefficacious, futile and absurd’ (per Lord Salmon in Liverpool City Council v Irwin [1977] AC 239 at 262). The High Court has held that a term will be implied into a contract only if it is necessary for the reasonable or effective operation of the contract in the circumstances of the case: see BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40; Byrne v Australian Airlines Ltd [1995] HCA 24. When Lord Atkin made his speech in Joachimson v Swiss Bank Corp [1921] 3 KB 110, accounts were maintained by hand in ledger books. There is no doubt that it was necessary to impose a term requiring the customer to make the demand at the branch where the account was maintained. Today, when accounts are maintained by computer and the status of the account is available to even the remotest branch of the bank, the term may no longer be necessary. Since Australian banks now permit withdrawals from any branch, it may be that this term of the contract has been modified by circumstances and practice.

In certain circumstances, it is important to distinguish between implied terms and those which may be inferred from the parties’ conduct. The implied term is a legal conclusion that it is necessary to supplement the express terms of the contract. An inferred term is a factual finding — that the conduct of the parties is such that they have in fact agreed on the term in question: see Thompson & Morgan (United Kingdom) Ltd v Erica Vale Australia Pty Ltd (1995) 31 IPR 335 for a discussion of this distinction; see also the discussion of Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31 at 12.2.2. It is clear that there must be an implied term requiring notice before an account is closed, for otherwise the banker would be entitled to repay the account balance at any time and to then dishonour any outstanding cheques. The requirements of such a notice are discussed at 3.4. The implied contractual terms concerning the collection of bills and the payment against ‘written orders’ are the subject matter of Chapter 8. In modern circumstances, ADIs may make payments against electronic instructions. [page 44] The actual decision in Joachimson v Swiss Bank Corp [1921] 3 KB 110 can be somewhat confusing, for in addition to holding that a demand is necessary for the debt to become due, the Court of Appeal held that the issue of a writ or the service of a garnishee order nisi by the customer for the amount due would be sufficient demand. It seems strange that the service of the writ can form part of the cause of action, but this is undoubtedly the case. The Joachimson principle that the debt is not due until demand has been made has been approved in Australia: see Re ANZ Savings Bank Ltd; Mellas v Evriniadis [1972] VR 690; Bank of New South Wales v Laing [1954] AC 135. In Mackenzie v Albany Finance Ltd [2003] WASC 100, McLure J noted (at 245): … It is now regarded as settled law that, subject to any express term to the contrary, it is an implied term of the contract between a banker and its customer that moneys owed by a banker on a current account do not become due and payable until a demand is made for the money …

An appeal was allowed in Mackenzie v Albany Finance Ltd [2004] WASCA 301, but no doubt was cast on the passage cited: see also Central City Pty Ltd v Monevento Holdings Pty Ltd [2011] WASCA 5. The service of a garnishee order nisi has been held to be sufficient demand in Australia: see Tunstall Brick & Pottery Co v Mercantile Bank of Australia Ltd (1892) 18 VLR 59. Because of some doubts about the matter in garnishee proceedings, there is now statutory confirmation in all jurisdictions: see 4.12ff.

3.2.5

Other obligations

It is sometimes said that the basic relationship between banker and customer is one of debtor and creditor with ‘superadded obligations’. This expression of the relationship does no harm, so long as it is understood that all it means is that there is a single contract between the banker and the customer and that the contract has many terms: see Joachimson v Swiss Bank Corp [1921] 3 KB 110 at 127. Indeed, much of the subject matter of the law of banking is nothing more than the explanation and elaboration of the terms of the contract between the banker and customer. The Privy Council in Bank of New South Wales v Laing [1954] AC 135 referred to some of the ways in which the banker-customer relationship differs from the normal debtor-creditor relationship. The plaintiff alleged that a series of cheques were forged. He drew cheques totalling the amount of the cheques which he claimed were forged and presented them to the defendant bank for payment. They were dishonoured and the plaintiff sued. Unfortunately, New South Wales at the time still retained the forms of pleading and the decision in favour of the bank turns entirely on a technicality. However, during the course of the judgment, Lord Asquith of [page 45] Bishopstone commented upon the ways in which the banker-customer relationship differs from that of the ordinary debtor-creditor relationship. First, the debt does not become due until the customer makes a demand. Second, Lord Asquith stated (at 154): A further ‘peculiar incident’ is that the bank is only indebted to the customer for the amount … standing to his credit as at the time of the demand … If the ‘balance’ falls short of [meeting the ‘demand], even by a penny, he [the customer] fails altogether, another distinction which rails off the creditor-debtor relationship in the case of a customer and banker from that relationship in other cases.

Although directed to the forms of pleading, this statement of the relationship is still relevant when the ‘demand’ is in the form of a cheque drawn on the customer’s account: see 8.7.1. The same considerations apply when the ‘demand’ is in the form of an electronic payment instruction. The fact that the fundamental relationship between banker and customer is one of debtor and creditor created by contract should not obscure the fact that there are other relationships created by the contract. The banker acts as the customer’s agent for the purposes of paying and collecting cheques — a relationship which imposes certain obligations on both parties: see Chapter 8.

The banker will perform services from time to time which may be considered as outside the basic banker-customer contract. Such services include the keeping of valuables and giving investment advice: see 6.5. It will not usually be a matter of great practical significance whether the rights and the obligations of the parties are considered as separate terms of the basic banker-customer contract, or as governed by separate contracts created from time to time. The banker-customer relationship is also altered by codes of practice which are given contractual force. Most importantly, the ePayments Code governs certain aspects of the relationship when electronic funds transfer (EFT) facilities are provided to non-business customers: see 11.6. The Code of Banking Practice alters the relationship with certain ‘consumer’ and small business customers: see 11.5. From time to time it is suggested that there should be comprehensive written contracts governing the banker-customer relationship. While this is certainly possible, there are substantial constraints on the contents of such contracts. Most importantly, the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) and the Australian Investment and Securities Commission Act 2001 (Cth) imposes certain non-excludable warranties as to the quality of services provided to a ‘consumer’. The ePayments Code also imposes serious restraints for electronic banking: see 11.6. See Edwards (1989) for a discussion of the problems of changing basic aspects of the banker-customer relationship. [page 46]

3.3

Who is a customer?

There are a number of circumstances in which it may be important to know if the banker-customer relationship exists between two parties. A banker is only required to honour the cheques of a customer; the banker is entitled to certain privileged statutory defences if collecting a cheque for a customer; and a bank owes certain other duties to a customer but not to non-customers: see Chapter 6. In this section, we consider the time of formation of the banker-customer contract, and we consider the termination of the relationship at 3.4. A word of caution: it may be that a person is a ‘customer’ for one purpose but not for another. For example, a bank collecting cheques for a ‘customer’ is given certain statutory defences against charges of conversion when the person

for whom the collection is being performed has no title, or a defective title, to the cheque: Cheques Act 1986 (Cth), s 95. Illustration: Savory (E B) & Co v Lloyds Bank Ltd [1932] 2 KB 122; aff’d [1933] AC 201 Cheques were collected for a person who had an account with the bank, but not at the branch which performed the collection. Lawrence LJ expressed doubt that the person was a ‘customer’ of the bank for the purposes of the then English equivalent of s 95 of the Cheques Act 1986.

There is, of course, no doubt that the person was a ‘customer’ of the bank for most other purposes, for it is generally considered that the contract is with the bank, not with the branch: see Garnett v M’kewan (1872) LR 8 Ex 10.

3.3.1

Custom not sufficient

There is no statutory definition of the term ‘customer’. For many years, there was a body of opinion which thought that a continuing relationship of some duration was both necessary and sufficient to form the relationship. In other words, in order to be a ‘customer’, there must be some ‘custom’ and, if there was ‘custom’, then the person was a ‘customer’: see, for example, Matthews v Williams, Brown & Co (1894) 10 TLR 386. That view was shown to be incorrect. Even a very regular pattern of transactions does not suffice to make a person a ‘customer’ if the transactions are not sufficient to establish a continuing duty on the part of the banker under the usual rules of contract formation. [page 47] Illustration: Great Western Railway Co Ltd v London & County Banking Co Ltd [1901] AC 414 A man, H, had for some years been in the habit of cashing cheques over the counter at the defendant bank. The cheques were crossed and marked ‘not negotiable’, which meant, inter alia, that it was necessary for them to be presented for payment by a bank: see 8.4 for the meanings of crossings on cheques. H never opened an account at the defendant bank. He obtained a cheque from the plaintiffs by fraud, which he cashed at the defendant bank. The plaintiffs claimed to be entitled to recover the amount of the cheque from the defendant bank; one of the issues was whether H was a customer of the defendant bank. The Court held that he was not a ‘customer’ since there was no account and no intention to open an account.

3.3.2

Custom not necessary

Just as custom was shown to be insufficient to create the banker-customer relationship, it was also shown that it was not necessary.

Illustration: Ladbroke & Co v Todd (1914) 30 TLR 433 A thief stole a cheque and took it to the defendant banker, where it was used for the purpose of opening an account. The Court held that the account was opened when the cheque was collected and that the thief was a ‘customer’, even though there was only one transaction during the entire life of the relationship.

This decision was followed and endorsed by the Privy Council in Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683. Again, the case concerned an account which had been opened with the deposit of a single cheque which had been misappropriated. The decision of the Judicial Committee was delivered by Lord Dunedin, who said (at 687): Their Lordships are of opinion that the word ‘customer’ signifies a relationship in which duration is not of the essence. A person whose money has been accepted by the bank on the footing that they undertake to honour cheques up to the amount standing to his credit is, in the view of their Lordships, a customer of the bank in the sense of the statute, irrespective of whether his connection is one of short or long standing. The contrast is not between a habitue and a newcomer, but between a person for whom the bank performs a casual service, such as, for instance, cashing a cheque for a person introduced by one of their customers, and a person who has an account of his own at the bank.

[page 48] The ‘customer’ test has also been applied in other contexts: see Gloria Jean’s Coffees International Pty Ltd v Chief Commissioner of State Revenue [2008] NSWSC 1327; Flocast Australia Pty Ltd v Purcell (No 3) [2000] FCA 1020.

3.3.3

Relationship possibly begins prior to the opening of the account

The decision in Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683 shows that the existence of an account is ordinarily sufficient to establish the banker-customer relationship, but it is not necessary. There may be circumstances where the relationship is established prior to the opening of an account. Illustration: Woods v Martins Bank Ltd [1959] 1 QB 55 The plaintiff was a director of a company but he had no real business experience. In May 1950, he asked the manager of the Quayside branch of the defendant bank to act as his financial adviser. Subsequently the manager told the plaintiff that he might be able to obtain some preference shares on the plaintiff’s behalf in a private company called Brocks Refrigeration Ltd. This company was a customer of the defendant bank, a fact known to both the plaintiff and the defendant. At all material times, Brocks Refrigeration Ltd had a large overdraft with the defendant bank and was in need of funds. On 9 May, the plaintiff authorised the defendant bank to acquire the shares on his behalf. There was no account opened until 1 June. The Court found that the advice given had been negligently given.

The defendant argued, inter alia, that the plaintiff was not a customer of the bank at the date of the first transaction in May, the time when the advice was given, and that as a consequence they owed the plaintiff no duty of care. Note that this argument would have no chance of success now, since the duty of care may exist independently of contract: see 6.3.3. Salmon J held that the plaintiff had become a customer by 9 May and that the advice given earlier in the month must be considered as being impliedly repeated at that time. But even if the plaintiff had not become a customer until later, the defendant would still have been under a duty for giving advice of the type that is part of the business of the bank. As Salmon J phrased it (at 174): In May, 1950, the plaintiff paid business, not social, calls on [the manager] in his office. The plaintiff made it plain that he was consulting [the manager] as manager of the defendant bank’s Quayside branch. The plaintiff was a potential customer and one whose custom [the manager] was anxious to acquire and soon did acquire … No doubt [the manager] could have refused to advise the plaintiff, but, as he chose to advise him, the law in those circumstances imposes an obligation on him to advise with reasonable care.

[page 49] See also National Westminster Bank v Frankham [2013] EWHC 1199; Crestsign Limited v National Westminster Bank PLC [2014] EWHC 3043. We should note that Woods was decided at a time when it was thought impossible for the defendant bank to be held liable in tort for negligent advice. Since the decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, it is not necessary to find a contractual relationship in order to find liability: see 6.3.3ff for a discussion of the Hedley Byrne liability; see also Swanton and McDonald (1995) for the relationship between liability in tort and contract.

3.3.4

Other bank as customer

It is possible for another bank to be a customer, even when the ‘customer’ bank does not keep an account with the other bank. In Importers Co Ltd v Westminster Bank Ltd [1927] 2 KB 297, a cheque which was crossed ‘account payee only’ was stolen and paid into a foreign bank for collection. The Court held that the foreign bank was a ‘customer’ of the defendant bank for the purposes of the special protective provisions of the Bills of Exchange Act 1882 (UK), but the case should not be taken to imply that a collecting bank is always a customer of a paying or further collecting bank. There were special arrangements between the banks for the collection of foreign cheques.

The importance of this decision is now diminished. When one ‘financial institution’ is collecting a cheque for another, then it is no longer important to establish that the other institution is a customer, since s 95(3) of the Cheques Act 1986 (Cth) provides special defences for the collecting institutions: see 8.8.4.

3.3.5

Fraud and false identity

In certain circumstances, it may be difficult to say precisely who the customer is. Illustration: Stoney Stanton Supplies Ltd v Midland Bank Ltd [1966] 2 Lloyds Rep 373 An account was opened with a bank by a person who represented himself as having the authority of the plaintiff company. The documents presented were forgeries from beginning to end. The Court of Appeal held that there had never been a relationship of banker and customer between the company and the bank.

Similarly, where a rogue opens an account in a false name, it is the rogue rather than the person whose name has been appropriated who is the customer: see Marfani & Co Ltd v Midland Bank Ltd [1968] 1 WLR 968; Robinson v Midland Bank Ltd (1925) 41 TLR 402; Mackenzie v Albany Finance Ltd [2004] WASCA 301. [page 50]

3.3.6

General principle

If there is a general principle to be drawn from the cases concerning the definition of ‘customer’, then it appears to be that the banker-customer relationship does not exist unless the banker is contractually bound to provide at least some of the services normally provided by a banker. In determining the existence of the contract, normal principles of contract formation are used. In Great Western Railway Co Ltd v London & County Banking Co Ltd [1901] AC 414, it is clear that the bank could have refused at any time to collect the cheque for H: see discussion at 3.3.1. It would seem foolish to attach magical powers to the actual opening of the account, so that if a banker had agreed to accept the customer, there is no reason why the relationship should not come into existence at that time — even if the account is not formally opened until later or never opened at all. On the other hand, it would seem impossible to imagine a situation where the banker is contractually bound to provide a full range of banking services to

someone who is not a ‘customer’. There are many situations where a bank may provide some casual service such as changing notes or providing information. In such a situation, although the bank is probably obliged to perform the particular service with care, the relationship of banker and customer does not arise.

3.4

Terminating the relationship

In Joachimson v Swiss Bank Corp [1921] 3 KB 110, Lord Atkin indicated that the banker could not terminate the relationship without notice. This is because the customer has every right to expect that, in the ordinary course of events, cheques will be met which are outstanding, provided that the other preconditions for payment are satisfied. Lord Atkin referred to ‘reasonable notice’ being required before the banker ceases to do business with the customer. A New South Wales Court has found that the same requirement does not exist when ‘freezing’ an account, but the account was a loan facility with a detailed written agreement: see State Bank of New South Wales v Currabubula Holdings Pty Ltd [2001] NSWCA 47 and the discussion at 4.11.

3.4.1

Reasonable notice

What is ‘reasonable notice’? Illustration: Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372 A suit was commenced by the customer for declarations and an injunction against the banker on the ground that the banker had given insufficient notice of the intention to close the customer’s account. The account was, at all material times, in credit. [page 51] A month’s notice was held to be insufficient, but there were very special circumstances, and it was expressly held that the period of notice required must depend upon the particular facts of the case. The special circumstances were that the plaintiffs ran what they called a ‘snowball’ scheme of insurance, whereby a subscriber on payment of £1 15s would receive a book containing 10 application forms valid for a year. Each new subscriber obtained by the first subscriber would fill up one of the forms and go through the same process. The first subscriber would receive a credit of two shillings in respect of each of his ‘descendants’. When sufficient sums had been credited, an insurance policy would be taken out with an associated company in favour of the subscriber. The scheme is, of course, what is now known as a ‘pyramid’ scheme and is now illegal in most jurisdictions. The nature and purpose of the scheme was discussed with the bank before the account was opened. Many circulars had been sent out, and many were outstanding at the time when the bank wished to close the account. Since the rules of subscription called for the subscriber to make the

sum payable to Lloyds Bank, the promoters of the scheme required more than a month to reorganise their business.

Although the bank was in breach of its obligations to continue operation of the account, an injunction was an inappropriate remedy, since it would be functionally equivalent to making an order for specific performance of a contract for the provision of personal services and the borrowing of money by the banker. The appropriate remedy is in damages for the dishonour of any cheques which the customer might rightfully expect to be honoured but which are in fact dishonoured due to the wrongful closure of the account. As will be seen later, these damages can be substantial, so it behoves the banker to exercise some care in closing an account. For a further discussion of the right of a bank to terminate the relationship, see Jamieson (1991) and see 11.5.8. Prosperity was also cited in Impact Traders Pty Ltd v Australia and New Zealand Banking Group Ltd [2003] NSWSC 964, where the Court refused a mandatory injunction ordering the bank to continue providing a ‘merchant facility agreement’, allowing the applicant to process credit card payments: see 9.15 for a discussion of credit card operations. The courts will be very reluctant to require a banker to provide, or continue to provide, banking services.

3.4.2

Overdrafts

Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372 concerned an account which was in credit. McCardie J noted, ‘The right of a bank to close a banking account which was in credit might be quite distinct from the right to close one which was in debit …’ but considered that it was unnecessary for him to discuss the matter [page 52] further. The problem arises because most overdrafts are given on the condition that they are repayable ‘on demand’, so it may be argued that no notice is necessary. Although there seems to be no authority on the question, principle would indicate that reasonable notice must be given before the account is terminated, since the damage to the customer is at least as great as the closure of a credit account. The question of reasonable notice is related to, but distinct from, the question of whether the bank may be obliged to grant or continue an overdraft: see 4.5ff.

3.4.3

Other termination

The contract of banker and customer is a personal one. It therefore terminates when the bank has notice of the customer’s death or bankruptcy, although the Cheques Act 1986 makes certain provisions which permit the bank to pay certain cheques drawn by a deceased. Where the customer is a legal entity other than a natural person, it would seem that the relationship terminates when the entity ceases to exist as, for example, where a partnership or a company is dissolved. The relationship is also terminated if the bank is dissolved: see Re Russian Commercial and Industrial Bank [1955] 1 Ch 148. The English Court of Appeal in National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637 held that the banker-customer relationship ended when the bank made a final and unequivocal demand for the immediate repayment of all loans owed to the bank, but the House of Lords held that this was incorrect. The House of Lords view is clearly the correct one. There may be occasions when the bank must ‘stop’ the account — that is, refuse to allow further deposits or withdrawals, also known as ‘freezing’ the account. This is not the same as terminating the banker-customer relationship. Circumstances under which the bank should stop the account are discussed at 4.11. Certain contractual obligations of the banker-customer relationship may endure beyond the closure of the account and the termination of the relationship. Most important of these is the banker’s duty to treat as confidential certain financial affairs of the customer: see 6.2.

3.5

Altering the relationship

A further consequence of the relationship being a contractual one is that alterations of the relationship may only be done through established contractual principles. There are three common ways of altering the relationship — namely: requesting a court to find new implied terms; alteration by notices; and using express written terms. [page 53] The courts have been reluctant to find new implied terms in the banker-

customer relationship: see 3.5.1. Alteration by notices is discussed at 3.5.2, and the problems of imposing new terms in written contracts are discussed at 3.5.3. Consumer protection statutes and codes add to the contractual relationship in certain circumstances: see 3.5.4. See Edwards (1989) for a general discussion of the rights of a bank to change common law liabilities.

3.5.1

New implied terms

From time to time, it is argued that new terms should be implied in the banker-customer contract. The courts have been reluctant to agree with the argument, whether the suggested terms are for the benefit of the bank or for the customer. The general rule in Australia, established in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council [1977] HCA 40, is that a term will not be implied into a contract unless: it is reasonable and equitable; it is necessary to make the contract work; the term is obvious — so obvious that ‘it goes without saying’; the term is be capable of clear expression; and it does not contradict express terms of the contract. The rule so expressed is somewhat formulaic, a matter criticised by the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, where Lord Hoffman noted (at 21): … in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.

Most of the arguments for terms favourable to the bank are in the context of imposing a duty to discover forgeries or, more broadly, to organise business in such a way as to protect the interests of the bank. These attempts are discussed in more detail later: see 7.4ff. However, the general attitude is summarised by Lord Scarman in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80. In refusing to find an implied term, he said (at 956): The argument for the banks is, when analysed, no more than that the obligations of care placed on banks in the management of a customer’s account which the courts have recognised have become with the development of banking business so burdensome that they should be met by a

reciprocal increase of responsibility imposed on the customer … But it does not follow that because they may need

[page 54] protection as their business expands the necessary incidents of their relationship with their customer must also change. The business of banking is the business not of the customer but of the bank.

Courts are also reluctant to imply new terms favourable to customers. In State Bank of New South Wales v Currabubula Holdings Pty Ltd [2001] NSWCA 47, the bank ‘froze’ an overdraft account upon learning that some of the corporate group members could be insolvent. The Court at first instance found an implied term that the bank was required to give notice before varying any provision of banking service. The Court of Appeal disagreed, finding that the term was not necessary to give business efficacy to the contract. It should be noted, however, that the bank opened a new account at the same time that the original account was ‘frozen’: see the discussion of stopping the account at 4.11.

3.5.2

Unilateral alteration

Banks may attempt to change the terms of the banker-customer contract by using notices of one form or another. The problem in such a practice is to show that the notice was brought to the attention of the customer, and that some action of the customer indicated agreement to the new term. Illustration: Burnett v Westminster Bank Ltd [1966] 1 QB 742 The customer kept accounts at two branches of the defendant bank. After Burnett opened his account, one of the branches adopted computerised accounting methods and issued chequebooks with magnetic ink character recognition (MICR) figures pre-printed on the cheques. The inside cover of the chequebooks of the computerised branch contained a notice to the effect that the cheques could only be used to draw upon the account for which they had been prepared. Burnett used one of the MICR cheque forms to draw a cheque in which he struck out the name of the computerised branch and wrote in the name of the non-computerised branch at which he kept his other account. He subsequently wished to stop payment on the cheque and gave notice to the non-computerised branch, the branch upon which he believed that he had drawn the cheque. The cheque was paid in the ordinary course of the computer processing and the bank claimed the right to debit the (computerised) account.

The Court held that the customer was entitled to succeed on the basis that the purported change in contractual conditions by the bank was not effective to bind the customer and, consequently, he was able to change the form and use it to give instructions to the non-computerised branch. It followed that [page 55]

the stop order was directed to the correct branch and that Burnett was entitled to succeed. Part of the basis of the decision was that the bank was unable to show that the notices in the chequebook had been brought to Burnett’s attention. Consequently, the use of the chequebook could not be construed as an agreement by Burnett to abide by the new terms that the bank wished to insert into the contract. Burnett shows that it is possible that the terms may be changed or overridden by express agreement between the parties, even though the same case shows that the change may not be made unilaterally by the bank. The ePayments Code permits certain contractual alterations to be made without showing that the customer was aware of the notice or agreed to the change: see 3.5.4 and 11.6.

3.5.3

Written agreements

Long and complex written agreements are common in North America, and it is no doubt tempting for bankers in other parts of the common law world to introduce terms into the banker-customer contract which would throw more of the risks on the customer. For example, it will be seen in later chapters that the general rule is that the customer has no duty to examine the periodic statement and that the risk of forgery is prima facie on the banker: see 7.4.1. A common term in overseas contracts is one which requires the customer to read the periodic statement and to report any irregularities within a fixed period of time. In default of so doing, the customer is to be bound by the terms of the periodic statement. Another common term is one which purports to throw the risk of forgeries onto the customer. A decision by the Privy Council indicates that clauses such as these cannot be introduced without making the customer aware of the changed responsibilities. In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, a number of clauses were inserted in written agreements or were incorporated by reference. In one instance, the customer agreed to be bound by the bank’s ‘rules and procedures in force from time to time governing the conduct of the account’. Rule 7 stated: A monthly statement for each account will be sent by the bank to the depositor by post or

messenger and the balance shown therein may be deemed to be correct by the bank if the depositor does not notify the bank in writing of any error therein within ten days after the sending of such statement …

The customer in fact returned a confirmation slip upon receipt of the statements, but failed to notice a number of forgeries. [page 56] In another account operated by the same customer, the terms appeared on the back of a pro forma letter which was signed by the customer. One of the terms read: The bank’s statement of my/our account will be confirmed by me/us without delay. In case of absence of such confirmation within a fortnight, the bank may take the said statement as approved by me/us.

The customer never confirmed any of the accounts sent. A third account was opened by request of the customer, in which request the customer agreed to open the account subject to the bank’s rules and regulations. Rule 13 provided: A statement of the customer’s account will be rendered once a month. Customers are desired: (1) to examine all entries in the statement of account and to report at once to the bank any error found therein, (2) to return the confirmation slip duly signed. In the absence of any objection to the statement within seven days after its receipt by the customer, the account shall be deemed to have been confirmed.

In this case, the bank never sent any confirmation slips to the company and the company never sent the bank any confirmation of the accounts. The Privy Council held that although the terms had contractual effect they did not prevent the customer from challenging the validity of the statements, since their terms did not bring home to the customer either the intended importance of the inspection of the accounts or the fact that they were intended to have conclusive effect against the customer in the event that no timely query should be raised. In the words of the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, per Lord Scarman (at 105): If banks wish to impose upon their customers an express obligation to examine their monthly statements and to make those statements, in the absence of query, unchallengeable by the customer after expiry of a time limit, the burden of the obligation and of the sanction imposed must be brought home to the customer … The test is rigorous because the bankers would have their terms of business so construed as to exclude the rights which the customer would enjoy if they were not excluded by express agreement.

It is clear that the Privy Council considered the implied contractual terms of the ordinary banker-customer relationship to be in the nature of common law rights and that express terms which purport to alter those rights will be

construed strictly against the party attempting to take advantage of them. In such circumstances, the imposition of express terms becomes difficult and the banker must weigh the advantages to be gained from the terms against the possibility of frightening off customers by ‘bringing home’ the burdens sought to be imposed. The Tai Hing case is discussed further at 7.4.3. There are other restraints on the contractual terms that may be imposed on customers. The Australian Securities and Investments Commission Act 2001 (Cth) [page 57] contains non-excludable warranties that apply to financial services: see Tyree (1998a). The Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) places restrictions on ‘unfair terms’ in standard form contracts: see the discussion in Chapter 11.

3.5.4

EFT accounts

Where an account can be operated by a debit card, internet or other electronic means, certain transactions on the account will probably be governed by the ePayments Code: see 11.5.6 for a general discussion. The ePayments Code makes special provision for variations in the Terms and Conditions of Use. The scheme is to require written notification for the most serious changes but to allow ‘mass notification’ for others. There is one important exception to this scheme: no advance notice is required where the variation to the EFT Terms and Conditions of Use are necessary to restore or maintain the security of the system or of individual accounts: ePayments Code, cl 4.16. This is an important exception to the usual principle of unilateral variation of a contract, but it is a justifiable response to a risk not present in older technologies. ‘Important’ changes (not a term used by the Code) can only be made after giving the cardholder written notice of at least 20 days prior to the change: ePayments Code, cl 4.11. These changes include those which impose or increase charges relating solely to the use of EFT facilities, increase customer liability for losses, or vary periodic transaction limits. A nasty practice is implicitly condoned by the ePayments Code. Under cl 4.11, a subscriber may give the holder notice of a change in periodic limits on transactions. It is common for subscribers to raise this limit without any serious consultation with holders. Clause 4.12 condones the practice by requiring only

that the subscriber give the holder a clear notice that the holder’s liability may be increased in the event of unauthorised transactions. A more consumeroriented approach would be to require the holder’s written authorisation to change the limits. Other, less important, variations in the Terms and Conditions of Use must be notified in advance in a manner which is likely to come to the attention of as many account holders as possible: ePayments Code, cl 4.13. Where important changes have been made, or where there are a sufficient number of cumulative changes, the institution should issue a document which provides a consolidation of variations which have been made to the Terms and Conditions: ePayments Code, cl 4.14.

3.5.5

Consumer accounts

Where the Code of Banking Practice (‘the Code’) applies, there are special rules governing the unilateral variation of terms and conditions: see 11.5. The structure of the scheme is similar to that of the ePayments Code — namely that some variations [page 58] are considered to be of such importance that written notice to the customer is required, but others may be notified by advertisement. A bank must provide at least 30 days’ written notice of the change, if it intends to: introduce a new fee or charge (other than a government charge); vary the minimum balance to which an account keeping fee applies; vary the method by which interest is calculated; vary the balance ranges within which interest rates apply to a deposit account; or vary the frequency with which interest is debited or credited. This requirement is waived if it is not reasonably possible to contact the customer: Code of Banking Practice, s 20.1. Government charges may be notified by public advertisements, but the bank is relieved of the obligation if the government advertises the changes: Code of Banking Practice, s 20.2. In relation to all other changes in the terms and conditions governing the

account, the bank may notify affected customers by advertisement in national or local media. This ‘notification’ is to be made no later than the day on which the variation is to be implemented: Code of Banking Practice, s 20.3. Such ‘notification’ is, of course, no notification at all, but it is not the only example of the Code depriving consumer customers of common law rights: see 11.5 for further comments and criticisms of the Code. The notification clauses do not apply to a banking service regulated by the National Credit Code or Chapter 7 of the Corporations Act 2001. These laws have their own notification requirements. The Customer Owned Banking Code of Practice (COBCP) replaces the older Mutual Banking Code of Practice, which in turn replaced the Building Society and Credit Union Codes. The COBCP contains similar clauses regarding changes in the Terms and Conditions of Use, but is vague on the way in which the notification will be delivered: see cl 17.4.

3.5.6

Limitations on contractual freedom

The fact that the banker-customer relationship is contractual means that it may come within the scope of the legislation restricting the freedom of contract in certain consumer contracts — in particular, the Contracts Review Act 1980 (NSW), the unfair contract terms provisions of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) and subdiv BA of Div 2 of Pt 2 of the Australian Securities and Investment Commission Act 2001. The unfair contract provisions of the Australian Consumer Law and the Australian Securities and Investment Commission Act 2001 are discussed at 11.2. The application of the Contracts Review Act is discussed at 24.3.3. [page 59]

3.6

Failure of the bank

The most immediate consequence of the legal nature of the relationship is that, in the absence of legislation, the customer receives no preferential treatment in the event of bank failure. The customer whose account is in credit must prove for the amount of the debt and will rank behind secured creditors of the bank and any debts, such as wages, which receive preferential statutory treatment: see 4.11.3. The banker-customer relationship is terminated and any amount

standing to the credit of the customer becomes immediately due and payable: see Re Russian Commercial and Industrial Bank [1955] 1 Ch 148. The Banking Act 1959 provides some comfort to customers. Under s 13A(3), customers who hold ‘protected accounts’ are treated preferentially if a non-foreign ADI becomes unable to meet its obligations. The Global Financial Crisis of 2008 also led to the Australian Government introducing a depositor guarantee scheme. The details of the scheme are now found in Div 2AA of the Banking Act 1959. The heart of the scheme is s 16AF, which provides that a protected account with a ‘declared’ ADI will be paid by APRA in the event of the failure of the ADI. The guarantee is subject to a limit prescribed by the Banking Regulations, originally set at $1,000,000 and reduced to $250,000 from 1 January 2013: Banking Act 1959, s 16AG and Banking Regulations 1966, reg 5. See 2.3.4 for more discussion on depositor protection.

3.7

Limitation Acts

Since the banker-customer relationship is, inter alia, a debtor-creditor relationship which is founded on contract, the rights of recovery are limited by the time restrictions imposed by the Limitation Acts of the various states. An important feature of the Acts is that they are merely a procedural bar — that is, the debt remains in existence after the expiry of the limitation period, but the help of the courts to recover the debt is no longer available. If there are other procedures for recovery available, they are not affected. The New South Wales Act is an exception to this general rule: see the discussion at 3.7.7. So, for example, if the creditor is in a position to exercise some rights over the property of the debtor, the debt may be recovered from the security even though the right of action for the debt might be barred by the appropriate Limitation Act. This is of particular importance to the banker and customer, for the banker may exercise the banker’s lien over a wide range of documents: see Chapter 25. Time begins to run for the purposes of the Acts from the time at which the debt falls due. However, ‘the clock restarts’ if there is a new promise by the debtor to pay the debt. This may be an express promise, or one which may be inferred from some [page 60] act of acknowledgment of the debt: see Re River Steamer Co; Mitchell’s claim

(1871) LR 6 Ch App 822 at 828; Giacci v Giacci Holdings Pty Ltd [2010] WASCa 233. Accordingly, it may be possible to find an acknowledgement in correspondence between the creditor and debtor: see Bucknell v Commercial Banking Co of Sydney Ltd [1937] HCA 35; National Bank of Tasmania Ltd v McKenzie [1920] VLR 411. A promise may also be inferred from a partial payment made by the debtor. As might be imagined, there is a large body of case law which considers the adequacy of various acts for the purposes of revival of the procedural remedies. It should be noted that it is not necessary to show any fresh consideration for the new promise to pay, for it is not a new contract which is being formed, but a procedural remedy which is being revived: see Sneddon and Ellinghaus (2008). These comments concerning ‘restarting the clock’ do not apply in New South Wales, since the Limitation Act there abolishes the cause of action, not just the remedy: see 3.7.7.

3.7.1

When is a debt due?

In order to apply the Limitation Acts, it is necessary to know when the cause of action arises. The general rule in Australia was established in Ogilvie v Adams [1981] VR 1041: where money is lent on terms that the loan is repayable ‘on demand’, the resulting debt and the associated cause of action arise instantaneously. Thus, in a simple loan, the words ‘on demand’ add nothing. The rule has been affirmed in a number of subsequent cases: see, for example, Haller v Ayre [2005] QCA 224; DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576; VL Finance Pty Ltd v Legudi [2003] VSC 57; Mackenzie v Albany Finance Ltd [2004] WASCA 301. See also the High Court’s apparent approval of the rule in Young v Queensland Trustees Ltd [1956] HCA 51. The rule applies only to a simple loan. Where the contract of loan specifies a particular condition, then the cause of action does not arise until the condition is met. Often the condition is a simple time condition, specifying the term of the loan. In other cases, the term might be implied — the most common situation being the loan of money to a banker on a current account.

3.7.2

Account in credit

One of the consequences of Joachimson v Swiss Bank Corp [1921] 3 KB 110 is that the debt owed by the banker to the customer does not become due until such time as a demand is made by the customer. It follows that when the current account is in credit, time does not begin to run against the customer for the purposes of the Limitation Acts until such time as that demand is made. [page 61] A practical consequence of this is that bankers may have to face claims for repayment of accounts that have been dormant for years, a point noted by Atkin LJ in Joachimson at 130 and 131. Statutory intervention has provided relief for bankers: see 3.9. In the case of a savings or other interest-bearing account there will generally be other conditions precedent to the repayment of the money so that, a fortiori, the time period does not commence until these formal requirements have been met. It has been said that it would be unusual for a bank to plead the statute as a means of resisting repayment of a credit account. Although this may be true, there are several cases where the defendant bank has pleaded the statute: see, for example, Streicher v ES&A Bank Ltd [1945] SASR 207; O’Ferrall v Bank of Australasia (1883) 9 VLR (L) 119; Municipal Council of Sydney v Bank of Australasia (1914) 14 SR(NSW) 363; National Bank of Commerce v National Westminster Bank [1990] 2 Lloyds Rep 514; Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35.

3.7.3

Term loans

When the banker is the creditor who wishes to recover, the problems can be more complex. The question in all cases is to determine the time at which the debt falls due, for that is the time at which ‘the clock begins to run’ for the purposes of the Limitation Acts. In the case of a term loan which is stated to be repayable at a specified date, it is that date at which time begins to run: see Re McHenry [1894] 3 Ch 290. If the repayments are to be made in instalments, then, in the absence of agreement to the contrary, each instalment represents a separate debt for the purposes of the Acts. However, there is frequently an agreement to the contrary, since standard form contracts often provide that a default in a single instalment has the effect of making all subsequent instalments due and payable. In such a case, time begins to run for the entire amount from the time of the default. The making of further instalment payments by the debtor is, of course,

an acknowledgement which has the effect of restarting the clock: see Falzon v Adelaide Development Co Ltd [1936] SASR 93; Netglory Pty Ltd v Caratti [2013] WASC 364.

3.7.4

Unsecured overdraft account: the debtor

Since money in a current account is not due and owing until a demand is made, a banker can seldom rely on the limitation statutes in resisting a claim. This section considers the opposite situation: may the customer rely on the statutes when the bank is attempting to reclaim an overdraft? The answer may also be relevant to any guarantor of the overdraft: see the discussion at 3.7.5. [page 62] The solution depends on a simple question: is the overdraft due at the time when the advance is made, or only when the banker makes a demand? The opinion of the Court in Parr’s Banking Co Ltd v Yates [1898] 2 QB 460 was that time begins to run from the date of each advance. As a consequence, it might be that some parts of the overall debt are time-barred, while others are not: see also the discussion of the rule in Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767 at 4.3.2. Bankers do not like the implications of the view expressed in Parr’s Banking Co Ltd v Yates [1898] 2 QB 460, for if the same logic applies to overdraft accounts, then it means a very substantial increase in the bookkeeping required for such accounts if rights against the customer are not to be accidentally lost. The ‘demand’ theory also received a setback in Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, where Scrutten LJ said (at 848): Generally, a request for the payment of a debt is quite immaterial, unless the parties to the contract have stipulated it should be made. Even if the word ‘demand’ is used in the case of a present debt, it is meaningless, and express demand is not necessary, as in the case of a promissory note payable on demand.

Similarly, Pickford LJ said (at 840): It was argued on behalf of the defendant that the words ‘on demand’ should be neglected because the money was due, and therefore a demand was unnecessary and added nothing to the liability. This proposition is true in the case of what has been called a direct liability, for example, for money lent. There the liability exists as soon as the loan is made, and a promise to pay on demand adds nothing to it, as in the case of a promissory note for the amount payable on demand, and the words ‘on demand’ may be neglected.

A different view was taken by the New Zealand Court in DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576, where it was held that the matter was one of contract, and that a term requiring demand might be imposed

either explicitly or implicitly. Tipping J went on to note that in cases involving the banker-customer relationship, there was an implied term that liability did not arise until a demand had been made. Modern authors suggest that the position may have changed over the years so that the ‘on demand’ aspects of an overdraft have increased their importance, yet they conclude that it would be most unwise for a banker to ignore these old cases: see Weaver et al (2003) at 2.2640; Weerasooria (2000a) at 35.28. The Queensland Court of Appeal has rejected suggestions that the rule on demand payments has been relaxed, holding that the limitation period begins at the time then the advance is made: see Haller v Ayre [2005] QCA 224, following Young v Queensland Trustees Ltd [1956] HCA 51. Campbell J appeared to reject the demand [page 63] theory, citing Parr’s Banking Co Ltd v Yates [1898] 2 QB 460 and Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833. The only safe course is to presume that time begins to run at the date of each advance. See 12.2.2 for a discussion of overdrafts which have been allowed to exceed the agreed limit.

3.7.5

Overdraft account: the guarantor

The comments made so far relate to an action by the bank against the primary debtor — that is, the account holder. When the banker is attempting to recover against a guarantor, the situation is somewhat different. The guarantee usually will be a ‘continuing guarantee’ — that is, one which is expressed to guarantee the balance of the account which is struck from time to time. In Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 itself, the action was of this kind and the Court held that the contract of surety was a collateral one, so the words ‘on demand’ should be given their full meaning. Thus, after making the comments above concerning the lack of meaning of the words ‘on demand’ when used in conjunction with an ordinary debt, Pickford LJ went on to say (at 840): It … has been held … that this doctrine does not apply to what has been called a collateral promise or collateral debt, and I think a promise by a surety to pay the original debt is such a collateral promise, or creates such a collateral debt … The only question, therefore, is whether,

on the construction of the guarantee, the parties meant the words ‘on demand’ to mean what they say. I cannot doubt that they did. Interest is to run from demand.

Consequently, time did not begin to run against the bank, vis-à-vis the guarantor, until such time as a demand was made against the guarantor. The wording of the guarantee is important, for if the guarantee calls for the surety to pay on the default of the principal debtor, the time when the surety’s liability arises might be different: see the discussion of Commercial Bank of Australia Ltd v Colonial Finance, Mortgage, Investment and Guarantee Corp Ltd (1906) 4 CLR 57 below. The matter has been considered by a New Zealand Court. Illustration: Wright v NZ Farmers Co-operative [1936] NZLR 157; [1939] AC 439 This was an action against a guarantor, where it was claimed that the rights of the bank were barred by virtue of the dictum in Parr’s Banking Co Ltd v Yates [1898] 2 QB 460. Wright agreed to guarantee to the plaintiff the payment by a husband and wife ‘of all goods already supplied or hereafter supplied by you to them and of all advances [page 64] already made or hereafter made by you to them together with interest thereon at the current rate charged by you and together with such charges as are usually made by you’. The guarantee was expressed to be a continuing guarantee and the amount claimed on the guarantee was some £12,000; the amount of £3,255, which represented advances made by the respondent prior to 31 July, 1928, being six years prior to the commencement of the action, was disputed as being outside the statute of limitations.

In the New Zealand Court of Appeal, the statement of Vaughan Williams LJ in Parr’s Banking Co Ltd v Yates [1898] 2 QB 460 was doubted, and it was suggested that the real ground of the decision may have been that there had been no advances made to the principal debtor within six years prior to the commencement of the action. It was suggested that an action for the balance arising upon a series of debits and credits extending beyond a period of six years is not barred by the statute if it is brought within six years from the date of the last advance. Since that was the situation here, the Court distinguished the case on that ground. This approach treats the entire debt owed to the bank as a single debt, which becomes due for the purposes of the statute of limitations at the time of the last advance. The reader should note that it does not confirm the banker’s view that the debt becomes due only upon demand. The approach used by the Court of Appeal is out of step with other parts of the law concerning the repayment of overdrawn accounts (for example, the rule in Clayton’s case) and should be viewed as an attempt to circumvent the invidious effects of the statute of limitations.

The case went on appeal to the Privy Council, which chose to distinguish Parr’s Banking Co Ltd v Yates [1898] 2 QB 460 on the basis of the wording in the guarantee which was signed by Wright. Lord Russell of Killowan, in giving the opinion of the Judicial Board, said (at 449): It is difficult to see how effect can be given to [the terms of the guarantee] except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits … The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and sued for had been constituted.

It is important to note that the Privy Council made it quite clear that it was expressing no opinion on the correctness of the decision in Parr’s Banking. The matter was further considered in New Zealand by Perry J in Commercial Union Assurance v Revell [1969] NZLR 106. There was an express written contract which contained the words ‘I hereby undertake … to repay … on demand …’. The document was signed by the plaintiff in 1957. There was no demand made [page 65] until mid-1967 and the sole issue was whether the action was time-barred. Perry J followed Re Brown’s Estate; Brown v Brown [1893] 2 Ch 300 and Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 in holding that the words ‘on demand’, when used in an express contract which does not relate to a present debt, will be given their full effect, so time does not begin to run unless and until a demand is made. So far as the banker is concerned, the matter is still open, for it is still not clear whether an overdraft account is a ‘present debt’. When a demand is made by the bank on the principal debtor, then time may begin to run against the bank in respect of the amounts of the demand made if the principal debtor defaults. Illustration: Commercial Bank of Australia Ltd v Colonial Finance, Mortgage, Investment and Guarantee Corp Ltd (1906) 4 CLR 57 A continuing guarantee called for the guarantor to pay in the event that the debtor defaulted on repayments. The bank demanded payment from the customer on two occasions, one for payment of a portion of an overdraft and one for interest. The Court held that the failure to pay on demand gave the bank a cause of action against the guarantor, but only to the extent of the demand and default. Consequently, the statute of limitations began to run against the bank as to that portion of the indebtedness only, and the guarantee continued as security to the bank for the balance.

In Australia, the matter came before the High Court in Bank of Adelaide v

Lorden (1970) 127 CLR 185. The guarantee in question was ‘to pay the bank on demand all such advances including all debts now owing …’. Although the issue was not discussed in detail, the Court clearly considered that a demand was necessary before the debt became due. Note that there is no inconsistency with Commercial Bank of Australia Ltd v Colonial Finance, Mortgage, Investment and Guarantee Corp Ltd (1906) 4 CLR 57, since, in that case, the guarantee was payable on default of the principal debtor.

3.7.6

Secured overdraft account

Even if time begins to run from the time of each advance when the loan is by way of simple overdraft, it may be that a secured overdraft is in a different position. In Re Brown’s Estate; Brown v Brown [1893] 2 Ch 300, a mortgage was classified as a ‘collateral’ debt or promise. Consequently, the mortgage fell within the class of debts mentioned by Pickford LJ in Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, which do not fall due until a demand is made by the creditor. [page 66] The rule in Brown was expressly approved in Lloyds Bank Ltd v Margolis [1954] 1 All ER 734 at 738. The case concerned a legal charge which was given over a farm; the defendant objected that the claim was statute-barred because there had been no advances made within the limitation period. Chitty J held that on the true construction of the charge a demand was necessary, but that in any case the charge was collateral security and, therefore — even if no demand was necessary to the bringing of an action of a direct present debt payable on demand — in the present case, a demand would be necessary. Since most large overdrafts will be secured by some kind of a charge or mortgage, this line of cases would seem to be adequate to protect the banker from the worst effects of the decision in Parr’s Banking Co Ltd v Yates [1898] 2 QB 460. In summary, the only safe course of action for the banker is to presume that the debt of the customer becomes due at the date of each advance so that advances made more than six years previously may be statute-barred. However, properly worded guarantees may be enforced against guarantors and ‘collateral’ debts owed by the primary debtor do not become due until a demand is made.

3.7.7

Limitation Act 1969 (NSW)

The effect of the Limitation Act 1969 (NSW) is to not merely bar the remedy but extinguish the right: see Limitation Act 1969 (NSW), s 63; Stage Club Ltd v Millers Hotels Pty Ltd (1981) 56 ALJR 113; Maguire v Simpson (1977) 52 ALJR 125; Proctor v Jetway Aviation [1982] 2 NSWLR 264; Ostabridge Pty Ltd (in liq) v Stafford [2001] NSWSC 131. Section 68A of the Limitation Act 1969 prevents an unexpected result. If the right is extinguished, then the defendant has the benefit of that extinction even if they do not want it — that is, even if the defence is not pleaded. Section 68A provides that the benefit is available only if pleaded.

3.7.8

Statutory changes

There has been substantial call to reform the rule in Ogilvie v Adams [1981] VR 1041. Both the Queensland and the New South Wales Law Reform Commissions have reviewed the law and recommended changes. Western Australia has legislated to change the rule. Section 59 of the Limitation Act 2005 (WA) provides for the cause of action to accrue upon failure to comply with a demand for repayment. See Tarrant (2004) for a discussion of the history of the rule and an argument that it leads to unjust results. [page 67]

3.8

Special customers

There are certain classes of customer which call for special attention. While customers in these categories assume the obligations imposed by the bankercustomer contract upon all customers, there are various features which call for more than normal care on the part of the banker.

3.8.1

Unincorporated associations

Unincorporated associations are not, strictly speaking, independent legal entities at all. They are groups of people who are formed for some purpose other than gain. Since there is usually no contemplation of profit, they are not partnerships: see 3.8.3. The membership will usually be fluctuating, and the members are not normally liable to the organisation in any way, save to pay membership subscriptions required by the rules of the association. Such organisations are

normally formed for social or sporting purposes and it is not uncommon for them to keep a current account, with certain of their members authorised to sign cheques. It is not always easy to determine when an ‘association’ has been formed. In Gosnells City v Duncan (1994) 12 WAR 437, it was held that a club that had no written constitution or rules was not an unincorporated association for the purposes of an action in negligence. Similarly, in Kibby v Registrar of Titles [1999] 1 VR 861, it was held that there was no association where there was no constitution, no rules of contract between the members, no consensus as to criteria for determining membership and no office bearers or bank account: see also Fletcher (1998) and Edwards v Legal Services Agency [2002] NZCA 273.

Account in credit There is little problem with operating an account for an unincorporated association, so long as the account is kept in credit. When opening the account, the bank should obtain very clear instructions as to who is entitled to operate the account. It is probably prudent to obtain a copy of the constitution of the association or some other documentation which purports to grant authority to the members who wish to open the account.

Overdraft account The lack of a legal entity means that the association may not sue or be sued in its own name. The banker should therefore normally resist any pressure for the account to go into overdraft. Weaver and Craigie suggest that the authorised signatories might be answerable for the amount, but advise that, as the matter is by no means clear, such arrangements should be avoided: see Weaver et al (2003) at 3.9220. [page 68] The problem of the overdraft is compounded by the fact that any property of the club which is used as security for advances may have uncertain ownership. Property is usually held on behalf of the organisation by trustees who will frequently be the members of the governing body. Even if the members of the governing body have the full authority of each member of the club to enter into security arrangements, they may lack power to contract on behalf of those who become members after the date of the contract. These new members will not be bound unless the conditions are

such that the mere fact of becoming a member may be taken to signify consent. Illustration: Abbatt v Treasury Solicitor [1969] 3 All ER 1175 The club ceased to operate and the question arose concerning ownership of former club property. Lord Denning noted that the individual members had no separate rights while the club was a going concern. When the club ceased to be a going concern, the former members had an equitable joint interest in the property: see also Hanchett-Stamford v Attorney General [2008] EWHC 330

The case does not necessarily mean that a banker could not hold a security interest in the property so that the members of the club own the property subject to the security interest, but it does serve to illustrate that caution is necessary when the ownership is shifting and uncertain. The decision was reversed by the Court of Appeal, but only on the facts, and the principle was not questioned: Abbatt v Treasury Solicitor [1969] 1 WLR 1565 Similarly, in Amey v Fifer [1971] 1 NSWLR 685 (NSW CA), three trustees of a sporting club, claiming to be authorised by the other club members, sued a firm of accountants, claiming damages for breach of contract. The Court held that, since the membership of the association was fluctuating, there was no contract. Sugerman P said (at 685): A contract such as is here alleged with the members for the time being of an unincorporated voluntary association having a fluctuating membership, is in truth no contract at all and imposes no obligation on anyone.

3.8.2

Incorporated associations

In most jurisdictions, an association may become an ‘incorporated association’: see Associations Incorporation Act 1991 (ACT); Associations Incorporation Act 2009 (NSW); Associations Act 2003 (NT); Associations Incorporation Act 1981 (Qld); Associations Incorporation Act 1985 (SA); Associations Incorporation Act 1964 (Tas); Associations Incorporation Act 1981 (Vic); Associations Incorporation Act 1987 (WA). [page 69] In most cases, an incorporated association is treated as a company. However, problems such as ultra vires actions, the doctrine of constructive notice, agency and the treatment of pre-incorporation contracts are not dealt with uniformly by the legislation. The doctrine of ultra vires is abolished in the Australian Capital Territory (ACT) (ss 24 and 25), New South Wales (NSW) (s 20), Queensland (s 26),

South Australia (SA) (s 27), Victoria (s 17) and Western Australia (WA) (s 15). There are no equivalent provisions in the Northern Territory (NT) or Tasmania. The problem of constructive notice is addressed in the (s 117), NSW (s 24), SA (s 28) and Victoria (s 41). Constructive notice is left to the common law in other jurisdictions. Agency and indoor management is addressed in the ACT (s 47), NSW (s 21, s 24), Queensland (s 60(2)) and Victoria (s 42), but is left to the common law in the other jurisdictions. The problem of pre-incorporation contracts is addressed only in the ACT (ss 42–46), NSW (s 27) and Victoria (s 20): see 3.8.7 for a more detailed discussion of each of these problems. The uneven treatment in the various jurisdictions means that bankers must be careful in dealing with incorporated associations. Although it is often assumed that incorporated associations are similar in all respects to companies, the gaps in some of the Associations Incorporation Acts show that caution is needed.

3.8.3

Partnerships

A partnership is not a legal personality. It is a relation which exists between persons engaged in certain activities, but the situation is very much different from that of an unincorporated association due to the fact that the rights and obligations of the partners inter se and their relationship with third parties are specified in considerable detail in the Partnership Acts. Each state and territory has introduced a new kind of ‘partnership’ known as an ‘incorporated limited partnership’. All states have introduced the ‘limited partnership’. These will be discussed in the next section. Each state has a Partnership Act based on the Partnership Act 1890 (UK). This discussion will refer to the Partnership Act 1892 (NSW). A partnership is defined by s 1(1): (1) Partnership is the relation which subsists between persons carrying on a business in common with a view to profit and includes an incorporated limited partnership.

However, the relation between members of any company or association incorporated under the Corporations Act 2001 is not a partnership within the meaning of the Act: Partnership Act 1892 (NSW), s 1(2)(a). [page 70] There are no formal requirements for the creation of a partnership. If the

parties are, in fact, carrying on a business in common with a view to profit, then the partnership relationship may exist, even if the parties never give any conscious thought to the formation of the partnership. The partnership may be formed without any public notice of its existence, and there is generally no need for any public registration. It may be difficult to know if a partnership has been formed. Section 2 of the Partnership Act 1892 (NSW) specifies a number of instances where it is not to be presumed that a partnership exists, but there is only one positive rule — namely, that the receipt by a person of a share of the profits of a business is prima facie evidence that they are a partner in the business: Partnership Act 1892, s 2(3). However, the rule is only prima facie evidence and the section itself goes on to provide exceptions. The essential feature from the banker’s point of view is that each of the partners is an agent of the firm for the purpose of conducting transactions which are within the scope of the business of the firm: Partnership Act 1892, s 5. Section 9(1) provides that each partner is liable jointly with the other partners for all debts and obligations of the firm. At least when the partnership is a trading firm, each partner has the right to open an account in the name of the firm and to operate it by means of their own signature: Backhouse v Charleton (1878) 8 Ch D 444. The authority of the individual partner does not extend to maintaining a firm account in their own name: see Alliance Bank v Kearsley (1871) LR 6 CP 433. There is danger in relying upon the authority of partners. The most common circumstance is where one of the partners misappropriates partnership funds. Illustration: Fried v National Australia Bank Ltd [2001] FCA 907 Four partners in the firm were listed as authorised signatories. A partner without explicit authority drew on the account for purposes not connected with the business. The Federal Court held that the bank could not rely on s 9 of the Partnership Act 1958 (Vic), the equivalent of s 5 of the NSW act, since the drawings were not for business purposes. There was no question of ratification, since nobody had full knowledge of the circumstances. Since the withdrawals were in the absence of authority, the bank was required to reverse the debits to the account.

A partner in a trading firm has authority to borrow on behalf of the firm, but only for purposes that are within the ordinary course of the partnership business. There is, however, no such authority for partners in a non-trading partnership: see Higgins [page 71]

v Beauchamp [1914] 3 KB 1192. A ‘trading partnership’ is one that depends on the buying and selling of goods: see Higgins v Beauchamp [1914] 3 KB 1192 per Lush J at 1195. See also R v Trade Practices Tribunal; Ex parte St George County Council [1974] HCA 7; R v Federal Court of Australia; Ex parte WA National Football League [1979] HCA 6. Since there is no new legal personality, the Partnership Act 1892 spells out the liabilities of the partners. The partners are jointly liable for all of the liabilities of the firm and, following the death of a partner, the estate is also severally liable: Partnership Act 1892, ss 5 and 9. This liability is not limited to the personal contribution that the partner may have made, nor is it limited to their share in the firm’s assets. A partner who is forced to pay the firm’s debts from private assets is entitled to be indemnified by the firm and by the other partners, but that is a matter which is of no interest or concern to outsiders. The rights of the partners to act on behalf of the firm may be limited by the articles of partnership. Because of the wide powers which are prima facie granted to each of the partners, this power of limitation is very common, but such limitations do not bind third parties who are not aware of them. However, the practice of requiring multiple signatures to operate a bank account might be so widespread that it could be that a banker who opens a partnership account to be operated by a single signature might be held to have had constructive notice. It is common and highly recommended practice to take an express mandate as to the terms of the partnership account operation. Similar comments apply to any application for overdraft facilities. An individual partner has the authority which is customary in the type of partnership in question. Thus, a partner of a trading partnership would have the authority to raise credit for the firm’s purposes. A partner of, say, a legal firm would probably not have such authority. For obvious reasons, it is customary for the partnership agreement to restrict these powers of individual partners. Overdraft or other credit facilities should only be provided on the express authority of all partners. The dissolution of a partnership revokes the authority of each of the partners to act on behalf of the firm. Dissolution may occur by any one of the partners giving notice to the other partners of their intention to dissolve the firm; by the completion of the single adventure or undertaking for which it was formed; by the death of any one of them; or by the bankruptcy of any one of them — although the partnership agreement may provide for the continuance of the firm by the survivors or by means of other occurrences which are mentioned in ss 32–35 of the Partnership Act 1892.

In the event of a dissolution, it is important for the banker to note that the only authority which remains is to operate the account for the purpose of winding up the business affairs of the firm. The banker should not knowingly permit the operation of the account for any other purpose. However, the banker is entitled to [page 72] assume, in the absence of knowledge to the contrary, that the surviving partners are acting within their statutory authority: see Re Bourne [1906] 2 Ch 427.

3.8.4

Special forms of partnerships

Limited partnerships and incorporated limited partnerships are special statutory forms of partnerships. The principal difference between the two types of partnership is that the incorporated limited partnership is a separate legal entity — separate from that of the partners in it — and may sue and be sued in its own right: Partnership Act 1892 (NSW), s 53. Section 53A grants an incorporated limited partnership powers similar to that of a company. An incorporated limited partnership must have a written partnership agreement which regulates, subject to the Act, the rights and duties of the partners in relation to the partnership: Partnership Act 1892, s 53B. Both types of partnership are formed by registration under Pt 3 of the Act: Partnership Act 1892, s 50A. Both types have two classes of partner and both types must have at least one of each: the ‘general partner’; and the ‘limited partner’. As the name suggests, a ‘limited partner’ does not have general liability for the liabilities of the partnership. In the case of an incorporated limited partnership, the general rule is that the limited partner has no liability for the liabilities of the partnership or of a general partner: Partnership Act 1892, s 66A. For a limited partnership, the liability of a limited partner is limited to an amount shown on the Register: Partnership Act 1892, s 60. In each case there are exemptions to the rule in the event of certain conduct by the limited partner. Corporations and partnerships may be general partners or limited partners of

other limited or incorporated limited partnerships: Partnership Act 1892, s 51(2) and 51(3). There are some restrictions on the size of these special partnerships. In general, neither form may have more than 20 general partners, although there is a technical exception for certain limited partnerships under s 115(2) of the Corporations Act: Partnership Act 1892, s 52(2) and 52(3). There is no limit to the number of limited partners: Partnership Act 1892, s 52(1). There are special counting rules if one of the general partners is itself a partnership: Partnership Act 1892, s 52(4).

3.8.5

Executors/administrators

When a person dies, the burial must be arranged, outstanding debts paid and collected and the property of the deceased distributed — either as dictated by their will or by the law of intestacy, where there is no will. [page 73] Where the deceased has left a will, it will ordinarily name a person who is to undertake the duties mentioned above. Such a person is known as an executor. The executor has power to deal with the deceased’s estate for the purposes mentioned above and, when those duties are complete, holds the remaining property in trust for the survivors. The executor must apply to the appropriate court and, after complying with certain legal obligations and formalities, a Grant of Representation will be made. These grants authorise a personal representative to administer the estate of the deceased person for the benefit of the beneficiaries. If the person has not left a will, or if the named executor has predeceased the testator or refuses to carry out the duties of an executor, a person will be appointed by the court to carry out those duties. The appointment is by means of letters of administration, which are issued by the court. The person appointed is known as an administrator. From the banker’s point of view, there is little difference between the executor and the administrator, save that the executor derives their title and power from the will itself. Probate is merely the evidence of these powers. The administrator, on the other hand, derives their power from the letters of administration and has no rights until the issue of such. Executors and administrators constitute a single legal entity, so the basic rule is that any one of them is entitled to operate on the executors’ account — this

basic rule is modified for some transactions involving real property: see, for example, Conveyancing Act 1919 (NSW) s 153(4). The death or other departure of one of them is irrelevant to the course of the administration and to the operation of the account, unless the person’s signature is expressly required for the operation of the account.

Power to carry on business of the deceased Executors have the power to carry on the business of the deceased for the purposes of administration — that is, for the purpose of winding up the estate or selling the business as a going concern. This would not be expected to continue for any length of time. The executor has no power to continue the business for the benefit of the beneficiaries, unless authorised by the will or by the court: see Re Kerrigan [1916] VLR 516. However, when the business of the administration is complete, the executors or the administrators are thereupon transformed, perhaps unknowingly, into trustees who hold any remaining property in trust for the beneficiaries of the estate. In such a capacity, there would be no objection to the trustees continuing to operate the business on behalf of the beneficiaries. The distinction between executor and trustee is very important to the banker, for once the executors become the trustees, they are no longer a single legal entity, and the operation of the account must be on quite different terms. [page 74]

Overdrafts Since the executor or the administrator always has the power to conduct the estate business for the purposes of administration, there are bound to be circumstances where the executor wishes to borrow in order to facilitate the winding-up process. The lending banker must recognise that they do not automatically become the creditor of the estate ranking pari passu with other creditors: see Berry v Gibbons (1873) LR 8 Ch App 747. The true position is that the executor is personally liable to the lender but, if the debt was properly contracted — that is, for the purpose of the administration of the estate — the lender may be entitled to the executor’s right to indemnity from the estate.

3.8.6

Minors

At common law, a person under the age of 21 was considered to be an ‘infant’ and in need of special protection. The protection given by the law was to

make most contracts with infants voidable at the option of the infant, with the result that the contract was unenforceable against the infant. Although the age of majority is now 18 in all Australian jurisdictions, the consequences of contracting with an infant must still be of concern to the banker. The banker may safely accept a minor as a customer, provided that the account is not allowed to go into overdraft. Cheques drawn by a minor are valid cheques, even though it may not be possible for the holder of such a cheque to enforce it against the minor: Cheques Act 1986 s 30. However, when the banker pays a cheque drawn by a minor, there is no attempt by the banker to enforce a contract. On the contrary, the banker is fulfilling a contractual obligation owed to the customer: see Chapter 8. Debiting the account is merely a part of fulfilling that contractual obligation. The problem is different if the account is allowed to go into overdraft. The problem of lending to a minor is considered at 12.3.1.

3.8.7

Companies

A company is a separate legal entity, which may sue and be sued in its own name. In Australia, the formation of companies, their powers and their responsibilities are regulated by the Corporations Act 2001 (Cth). The Corporations Act 2001 marks a significant improvement in company regulation. The Australian Constitution, unfortunately, did not give the Commonwealth Parliament clear powers to regulate corporations. Until 1961, corporations were governed by individual state legislation. In that year, cooperation among the states led to the passage of ‘uniform’ legislation. Dissatisfaction with the cooperative scheme led to the passage of the Corporations Act 1989 (Cth). The constitutionality of the Corporations Act 1989 was challenged [page 75] in New South Wales v Commonwealth (1990) 169 CLR 482. Those sections of the Act which purported to confer on the Commonwealth legislative power for the incorporation of trading and financial institutions were found to be ultra vires the power of the federal government and hence invalid. By agreement with the states, the Corporations Legislation Amendment Act 1990 (Cth) converted the Corporations Act 1989 (Cth) into a law for the government of the Australian Capital Territory. It also created the ‘Corporations Law’ out of the existing interpretation and substantive

provisions of the Corporations Act. Each state passed an application statute, which adopted the ‘Corporations Law’ as set out in s 82 of the Corporations Act 1989. Unfortunately, this scheme was also subjected to constitutional doubts: see R v Hughes [2000] HCA 22; (2000) 171 ALR 155. As a result, the states agreed to refer power to the Commonwealth. The result was the Corporations Act 2001 (Cth) and the associated Australian Securities and Investments Commission Act 2001 (Cth). Because company law is intrinsically a complex and frequently changing body of law, there is little point in trying to cover detailed provisions in a general work of this kind. On the other hand, there are certain principles of company law which have not changed in more than a century and are unlikely to be changed in the foreseeable future. The unchanging principles which are of interest to bankers are discussed in this section; references to the Corporations Act 2001 are used where appropriate. By far the largest number of companies are those which are limited by shares — that is, the liability of the shareholders of the company is limited to the nominal value of the shares held. These are the only companies that will be dealt with in this book, but most of what is said concerning the relationship between a banker and a company customer applies to all types of company.

Formation The formation of a company is a matter of some formality which culminates in the registration of the company by the Australian Securities and Investments Commission: Corporations Act 2001, s 118. Perhaps the most fundamental concept is that a company is a legal person, separate and distinct from the shareholders, directors or employees. This fundamental principle was not fully recognised until the end of the 19th century. Illustration: Salomon v Salomon & Co Ltd [1897] AC 22 S owned 20,001 of the total 20,007 shares in the company. The other six were held by close family members. When the company failed, its creditors argued that S should be personally liable for the debts which he had incurred in the company’s name. It was held that S was not liable for the debts of the company, which was a separate individual legal entity in its own right.

[page 76] For a discussion of the importance of the Salomon case, see Ville (1999), McQueen (1999), Sealy (1998) and Spender (1999). These principles are given statutory recognition in the Corporations Act

2001. Section 119 provides that the company comes into existence as a body corporate at the beginning of the day on which it is registered. The general rule is that a company is not bound by contracts made prior to its incorporation, although the company may ratify the contract within the time specified by the contract or within a reasonable time if none is specified: Corporations Act 2001, s 131(1). The person who purported to make the contract may be liable in damages if the company does not ratify the contract: Corporations Act 2001, s 131(2). A court may order the company to pay some or all of the damages and to transfer any property that the company received as a result of the purported contract: Corporations Act 2001, s 131(3). Traditionally, the objects and powers of the company itself were circumscribed by the memorandum and articles of association. These documents also determined the rules for the internal management of the company. Under the Corporations Act 2001 (Cth), there is a basic set of rules for the internal management of the company. Some of these rules are mandatory, but others are ‘replaceable rules’ and may be altered by the company’s constitution. A company does not now need to have a constitution unless it wishes to displace, modify or add to the replaceable rules: see Corporations Act 2001, ss 134–141 and 224B. Although a company is a separate legal entity, it must act through agents. Generally, the shareholders of a company do not have a direct say in the dayto-day running of the affairs of the company, but instead they periodically elect a board of directors. The board of directors may, in turn, delegate many powers to individual directors or managers. The necessity for the company to act through agents causes some difficulties which may appear in the bankercustomer relationship. Historically, there were two problems which caused difficulty for anyone dealing with a company — namely: the ‘ultra vires’ rule — the legal capacity of a company could be arbitrarily and artificially limited by the documentation required for the creation of the company; and the ‘indoor management’ rule — the power of the company’s agents might be similarly limited. Both problems were exacerbated by the doctrine of constructive notice: those dealing with the company were deemed to know the limitations expressed in the registered company documents. [page 77]

The ultra vires rule The old rule was that anyone who dealt with a company had to be certain that the transaction was within the powers of the company. A transaction which exceeded those powers — an ultra vires transaction — was void. The consequences were catastrophic: a loan made to a company which had no power to borrow was irrecoverable by the lender in an action for debt: see Cunliffe, Brooks & Co v Blackburn and District Benefit Building Society (1884) 9 App Cas 857. Even worse, the money was not recoverable in an action for money had and received: see Sinclair v Brougham [1914] AC 398. The ultra vires rule is obviously unfair. It has been abolished under ss 128– 130 of the Corporations Act 2001. A company has the power and legal capacity to do anything that a natural person may do: Corporations Act 2001, s 124. The exercise of a power by a company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution: Corporations Act 2001, s 125(1). A person who is dealing with a company may make certain assumptions, the most important of which is that in any dealings with the company, the constitution of the company has been complied with: Corporations Act 2001, s 129(1). Lodgement of the constitution or of any other information with the Australian Securities and Investment Commission does not give constructive notice of their contents: Corporations Act 2001, s 130(1).

The indoor management rule The indoor management problem was partially solved by the common law. Illustration: Royal British Bank v Turquand (1856) 119 ER 886 A bank sued the company to recover an unpaid loan signed for by two directors of the company. The company pleaded that the action of the directors had not bound the company, since there had been no resolution passed by the company’s board of directors. The Court held that the bank was entitled to assume that the necessary resolution had been passed.

The case is often referred to as the ‘indoor management rule’ and the result paraphrased by saying that it is not necessary for a person dealing with a company to ensure that all of the ‘indoor’ requirements of the company have been complied with. [page 78] In Turquand, the bank was dealing with properly appointed corporate

officers. The ‘indoor management’ rule does not apply where the parties are not agents of the company. Illustration: Northside Developments Pty Ltd v Registrar-General [1990] HCA 32 Without authority, one director and his son purported to execute a mortgage over certain company assets. The son signed as ‘secretary’ — a position which he did not hold. The Court held that the company was not bound by the mortgage. There was no representation by the company that the son was the secretary, and the director had no actual or apparent authority to bind the company with such a representation.

The indoor management rule is now incorporated into the Corporations Act 2001. Under s 129(2), a person is entitled to assume that a person who is named in registered documents as a director or secretary has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director or secretary of a similar company. By s 129(3) of the Corporations Act 2001, a person is entitled to assume that anyone who is held out by the company to be an officer or agent of the company has been properly appointed and has the authority to exercise all powers customarily exercised by that kind of officer or agent of a similar company. A company may also be bound by a person who has ostensible authority: see 12.3.3. Section 129 also permits the person dealing with the company to rely upon the validity of certain documents and that the directors and other officers of the company are performing their duties to the company: Corporations Act 2001, s 129(4). See also, for example, Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722.

Non-agents As noted above, the rule in Royal British Bank v Turquand (1856) 119 ER 886 deals with a person who is actually an agent of the company. Where the person is not an agent, the company might still be bound, if it has somehow represented that the person is an agent. For many years this remained a confused area of law, but a decision of the UK Court of Appeal helped to clarify the matter. Illustration: Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 The defendant company was formed for the purpose of buying a particular property and making a quick resale. The property was purchased, but the resale did not [page 79] eventuate, so the directors of the company were concerned merely to dispose of the property as

advantageously as possible. One Kapoor was a director of the company, who was conducting the business of the company with the knowledge and approval of the other directors. Professing to act on behalf of the company, he instructed the plaintiffs to render certain services — namely the conduct of a planning application and appeal relating to the property. The payment for those services was the subject matter of the suit. The Court found that the plaintiffs had intended to contract with the company, not with Kapoor personally. It was also found that although Kapoor had never been formally appointed as managing director, he had been acting as such, and the Court found that this was known to the board of directors.

In a comprehensive review, Diplock LJ summarised the position by concluding that there were four conditions which must be satisfied in order to entitle a contractor to enforce the contract against the company when it was entered into on behalf of the company by an agent who lacked actual authority to do so. In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, he said (at 505–506) that it must be shown that: a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates; [the contractor] was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent. Since the implementation of the Corporations Act 2001 the fourth paragraph is no longer relevant, since the doctrine of ultra vires no longer applies. The case has been followed many times in Australian cases. The rules are not always easy to apply: see, for example, Essington Investments Pty Ltd v Regency Property Ltd [2004] NSWCA 375, where the New South Wales Court of Appeal was split on the question of ostensible authority. The High Court has stressed that the representation must come from the company, not merely from an officer: see Pacific Carriers Ltd v BNP Paribas [2004] HCA 35.

Application of assumptions A person may rely upon the statutory assumptions, even if an officer or agent of the company acts fraudulently or forges a document in relation to the dealings in [page 80] question: Corporations Act 2001, s 128(3). However, a person dealing with the company cannot rely upon the statutory assumptions if they know or suspect that the assumption is incorrect: Corporations Act 2001, s 128(4). The degree of suspicion required is not entirely clear. It may be sufficient that the party is aware of facts, even though not fully appreciating that these lead to the conclusion that the assumed matter is incorrect. Similarly, the party may be taken to ‘know’, if they deliberately close their eyes to circumstances which should alert them to the fact that the assumptions are false.

Consequences for the banker Although the changes in the ultra vires rule and the assumptions of s 129 of the Corporations Act 2001 may save the banker from the worst consequences of dealing with an agent of a company in circumstances where the agent exceeds their authority, it is better to prevent these problems from arising rather than dealing with them after the fact: see, for example, Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48 and Dharmananda (1997). The best way of preventing problems from arising is to ensure the customer: only takes mandates from the company which are dated after the date of the issue of the certificate of incorporation; inspects the relevant clauses of the company constitution, making copies — at least of the relevant clauses; notes the borrowing powers of the company, the right to sign cheques and other negotiable instruments; inspects copies of the minutes of the directors’ meeting which authorises the opening of an account and the names of the personnel who are authorised to operate the account. There are a number of other issues which the banker must consider when dealing with a company customer. These include: forming contracts with directors who may have an interest in the transaction; transactions which involve a company dealing in its own shares; the winding up of a company;

and certain investigations which give inspectors the right to examine company accounts and override the duty of secrecy owed by a banker to the customer. Each of these will be discussed in later chapters.

3.9

Dormant accounts

‘Dormant’ accounts can cause considerable inconvenience for the banker and represent a generally unproductive relationship. In order to relieve the banker of this burden and to clarify the position with regard to such accounts, many jurisdictions have legislation which provides that dormant accounts are transferred to the Crown. [page 81] However, such legislation usually provides a method for the customer — or someone legitimately claiming through the customer — to reclaim the money.

3.9.1

Section 69 of the Banking Act 1959

In Australia, this method is provided through legislation found in s 69 of the Banking Act 1959. The legislation applies to all ADIs licensed under the Act. Dormant accounts in state banks are governed by various state legislation. Section 69(1) defines ‘unclaimed moneys’ as: [A]ll principal, interest, dividends, bonuses, profits and sums of money legally payable by an ADI but in respect of which the time within which proceedings may be taken for the recovery thereof has expired, and includes moneys to the credit of an account that has not been operated on either by deposit or withdrawal for a period of not less than 7 years … beginning: at the most recent time when the account was operated on either by deposit or withdrawal.

The section provides that the dormancy period and the time from which it is calculated may be altered by regulation. The regulations may also alter the definition by class of account or by type of deposit. The section is confusing since it ‘includes’ dormant accounts. Recovery of money in a current account which has not been operated upon for any period of time is not barred by the Limitation Acts, since time does not begin to run until a demand is made by the customer: see, for example, Mackenzie v Albany Finance Ltd [2004] WASCA 301. Section 69(1) is subject to subsections 1A, 1B, 1C, 1D and 1E. Subsection

1A specifies three classes of money that are not unclaimed money: money in an account denominated in a foreign currency accounts; money in a child’s account; and farm management accounts (within the meaning of the Income Tax Assessment Act 1997). The remaining named subsections provide, essentially, that the regulations may nominate additional moneys to be unclaimed moneys or to not be unclaimed moneys. Regulations 20, 20A and 21 modify the basic operation of s 69(1) and must be consulted carefully when determining if any particular sum is ‘unclaimed moneys’. [page 82] The ADI must make a report to the Treasurer each year. The report to the Treasurer must contain information concerning the customer which will allow the customer or the representative of the customer to claim the money: Banking Act 1959, s 69(4). The money itself is paid to the Commonwealth at the time when the report is made: Banking Act 1959, s 69(5). This payment discharges the ADI’s liability to the customer, subject to a claim being made under s 69(7). A person who would have been entitled to the money may claim it from the Treasurer and, upon the Treasurer being satisfied that the person claiming is entitled, the funds are paid to the ADI for the credit of the claimant: Banking Act 1959, s 69(7). Details of unclaimed money are to be published in the Gazette or made available to the public in some other manner: Banking Act 1959, s 69(9). There is also state legislation governing the disposition of unclaimed money, but it is provided that these Acts have no effect in so far as ADIs are concerned: Banking Act 1959, s 69(11A). Unfortunately, there is no requirement that an ADI make an effort to contact account owners.

3.9.2

‘Legally payable’

Section 69 of the Banking Act 1959 applies to all money ‘legally payable’ by the ADI. What seems like a simple requirement may be uncertain. In Commissioner of Inland Revenue v Thomas Cook (NZ) Ltd [2002] NZAR 625, the question was whether certain bank drafts were ‘unclaimed money’ — money unpaid for six years after becoming ‘payable’: Unclaimed Money Act

1971 (NZ), s 4. The Court found that the instruments in question were bills of exchange which had not been presented for payment. The defendant treated instruments more than 12 months old as ‘stale’, meaning that they would not be paid on presentment. The Commissioner asked that some NZ$400,000 held by the defendant for the purposes of paying the instruments be declared as ‘unclaimed money’. The Court noted that s 45(1) of the Bills of Exchange Act 1908 (NZ) required that the bills be presented for payment before any amount was due. Therefore, the amounts were not ‘legally payable’ until such time as the bills were presented for payment, and the money was not ‘unclaimed money’ for the purposes of the Unclaimed Money Act 1971 (NZ): see 5.4 for an introduction to bills of exchange, and see 5.6.3 for the requirement of presentment. The New Zealand Court of Appeal overturned the decision, holding that s 47(1)(b) and s 50(2)(c)(iv) of the New Zealand Bills of Exchange Act 1908 meant that the bills were notionally presented and that the money was therefore ‘legally payable’: see Commissioner of Inland Revenue v Thomas Cook (NZ) Ltd [2003] 2 NZLR 296. [page 83] The case was appealed to the Privy Council, which held in favour of the Commissioner, but on the grounds that ‘legally payable’ simply means that there is a debt owed to the claimant — not that the debt has become due and payable. The Privy Council noted that it would be absurd to call it ‘unclaimed money’ only after it had been claimed. In that interpretation, the sums were ‘legally payable’ to the cheque holders from the moment of issue: Thomas Cook (New Zealand) Ltd v Inland Revenue (New Zealand) [2004] UKPC 53. Rather remarkably, the issue was later re-opened in the New Zealand courts. In Westpac v Commissioner of Inland Revenue [2008] NZHC 1695, Mackenzie J was asked to reconsider the question on the assumption that the Privy Council case was not binding. Although holding that it was binding, the Court went on to consider the question, coming to the same conclusion as the Privy Council, but relying upon the peculiar provisions of the New Zealand Bills of Exchange Act 1908. The Court of Appeal considered only the arguments that the Privy Council decision should not be binding. It rejected all such arguments: see Westpac Banking Corp v Commissioner of Inland Revenue [2009] NZCA 376. The New Zealand Supreme Court came to the same conclusion in Westpac, BNZ and ANZ National v CIR [2011] NZSC 36.

3.9.3

Other dormant accounts

The Banking Act 1959 solves the ‘dormant account’ problem, if the banker follows the appropriate procedure. If there is a failure to do so, then the bank may be guilty of a criminal offence, but the Act does not provide any further guidance as to the disposition of the money. Where there is a dispute about the state of the account, it is for the customer to show that deposits have been made, and it is for the bank to show that they have been repaid: see Mackenzie v Albany Finance Ltd [2004] WASCA 301; Young v Queensland Trustees Ltd [1956] HCA 51. A passbook or statement will generally be evidence of deposits. Proof of repayment will be done by reference to statements or to other direct evidence of repayment. In at least one extreme case, a court has been willing to consider general evidence to find that an account had been properly repaid and closed by the banker. Illustration: Douglass v Lloyds Bank (1929) 34 Com Cas 263 The account had not been operated for over 20 years. One Fenwicke had deposited some £6,000 with a branch of the defendant in 1868. The account was never operated after 1868. In 1927, some of Fenwicke’s survivors found a deposit receipt which showed a balance of £3,500. They claimed that amount from the bank with interest. Evidence was given to show that Fenwicke was a man who was careful with [page 84] his financial matters and that there was reason to believe that the £6,000 represented the proceeds from some shares which he sold during the financial crash of the 1860s. The plaintiff had no evidence of the debt other than the deposit book but claimed that to be conclusive, in the absence of any better evidence. The bank produced evidence to the effect that the books of the particular year in question had been destroyed, but that there was no evidence of any accounts which were still in credit from the period.

In the course of the judgment, Roche J said (at 273): I recognise to the full the strength of the fact that the plaintiff produces this deposit receipt, but I cannot ignore what experience tells me, and the evidence in this case shows, that people lose or mislay their deposit receipts at the time when they want to get their money back, and that money is paid over, if they are respectable persons and are willing to give the necessary indemnity.

Roche J was unable to accept that Fenwicke either intentionally left the money there or forgot about it. There was some evidence that the defendant bank had treated the deposit as repaid at least from about 1873. The bank also argued that the action was time-barred. However, Roche J

held that time did not begin to run for the purposes of the statute of limitations until such time as an appropriate demand was made. The case is sometimes said to rest on a presumption that a debt has been repaid after a long period of time, but there is no need to invent a presumption to understand the case. The plaintiffs had a strong case on the basis of the passbook, but there was other evidence to support the bank’s defence. It certainly should not be thought that the bank could have won the case without the production of any evidence whatsoever. The period of limitations is also relevant when a customer claims that there has been a wrongful debit to the account. In National Bank of Commerce v National Westminster Bank [1990] 2 Lloyds Rep 514, the Court held that time begins to run from the demand by the customer. The Court’s reasoning was that a claim of wrongful debit is, in essence, a claim for a payment of a debt that becomes due at the time of the demand. In fact, the state of the account is, as a matter of law, unaffected by an unauthorised transaction: see Roberts v State of Western Australia [2005] WASCA 37 and the discussion in Chapter 4.

3.10

The ‘business of banking’

Surprisingly, there is no precise or comprehensive definition of either ‘banker’ or ‘the business of banking’. This might be no cause for concern, except that banks and bankers are given special privileges by some statutes and are subject to special duties as a result of others. [page 85] Although the Banking Act 1959 requires a corporation to be licensed if it carries on ‘the business of banking’, it seems that failure to obtain an authorisation does not invalidate contracts entered into with customers. Illustration: Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd [1978] HCA 42 The appellants claimed that the respondents were carrying on an unauthorised banking business, and that this illegality prevented the respondents from recovering moneys lent against a mortgage given by the appellants. The High Court held that the Banking Act 1959 (Cth) itself provided detailed penalties for the offence. Any mortgage or guarantee given to secure a loan was not void or unenforceable merely because the company was carrying on an unauthorised banking business.

3.10.1

Difficulty of definition

There is a historical reason for the difficulty in defining ‘bank’ and ‘the

business of banking’. Banking during the Middle Ages was largely the use of private fortunes in the lending and financing of trade projects. It was not until comparatively recent times that the deposit of funds by the wider community with a banker — who was then expected to use the funds at their discretion for commercial lending — was established. The modern form of banking is said to have begun during the mid-17th century when citizens began to deposit money and valuables with goldsmiths. The practice changed slightly when the goldsmiths’ receipts began to circulate as a kind of informal currency. That development — combined with the trend to return only a certain amount of gold, not necessarily the same goods which were deposited in the first instance — led directly to the development of ‘fractional reserve’ lending. The goldsmiths learned that it was most unlikely that more than a relatively small number of demands for return of valuables would be made at any one time. By lending through the issue of receipts, it was possible for the goldsmith, now called a banker, to lend more than the total amount which was actually held in reserve. These ‘banks’ were owned by individuals or by partnerships which often engaged in banking as a sideline to some other business. For this reason, the early habit was to refer to ‘bankers’ and to the ‘business of banking’ rather than to ‘banks’. In Australia and New Zealand, the current banking system consists of relatively few large banking corporations, which carry on business through many branches. In these circumstances, it might be thought that the search for a definition is merely an academic exercise, but that would be a mistake, for there are still a significant number of circumstances where the outcome of a dispute will be decided on the basis of whether or not one of the parties carries on the ‘business of banking’ [page 86] As more and more financial institutions seek their customers’ deposits, often in the form of payments in favour of the customer, the matter becomes of increasing importance. The difficulty of giving ‘banking business’ a fixed and immutable definition has been recognised judicially. The Privy Council has noted that the meaning may change with time and in different cultures: see Bank of Chettinad v Commissioner of Income Tax, Colombo [1948] AC 378. Similar comments were made by Dixon J in Bank of New South Wales v Commonwealth [1948] HCA 7. Recent business developments have caused further difficulties, as Australian

banks have begun closing branch offices in less profitable areas. Agency arrangements have been used to partially fill the gap. In an industrial relations case, the High Court has held that a pharmacist who became an agent for a bank was carrying on the business of a banking agent, not the ‘business of banking’: see PP Consultants Pty Ltd v Finance Sector Union [2000] HCA 59.

3.10.2

The Banking Act 1959

The most precise definition of ‘the business of banking’ is found in s 5(1) of the Banking Act 1959: [B]anking business means: a)

a business that consists of banking within the meaning of paragraph 51(xiii) of the Constitution; or

b)

a business that is carried on by a corporation to which paragraph 51(xx) of the Constitution applies and that consists, to any extent, of: (i)

both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money; or

(ii) other financial activities prescribed by the regulations for the purposes of this definition.

It is immediately clear from part (a) of the definition that the criteria of part (b) are not meant to be exhaustive. Part (b)(i) is a straightforward adaptation of the definition proposed by the High Court in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83. This was affirmed in R v Jost [2002] VSCA 198, where the Victorian Court of Appeal held that the Banking Act 1959 merely restated the definition previously developed by the courts. The definition in part (b)(i) is deficient, in that it fails to recognise the close relationship between ‘banking business’ and the payment system. The ability to make convenient payments to third parties is an essential feature of the modern current account. The omission of any reference to payment mechanisms is a serious flaw in the Permewan Wright definition of ‘banking business’. [page 87] The omission becomes more serious because of the division of responsibilities between the APRA and the Payment Systems Board. Certain kinds of payment facilities — called ‘purchased payment facilities’ (PPF) in the Payment Systems (Regulation) Act 1998 (Cth) — are regulated by the Reserve Bank of Australia (‘the Reserve Bank’) acting through the Payment Systems Board. However, where the ‘issuer’ of the PPF is an ADI, it is regulated by APRA.

This anomaly led to the first of the regulations extending the definition of ‘banking business’. Under s 3 of the Banking Regulations 1966, the provider of a PPF is deemed to be carrying on ‘banking business’ if APRA determines that the PPF is one with the following characteristics: the purchaser may demand payment from the holder of stored value (HSV), in Australian currency of all or part of the balance held by the HSV; and the facility permits a relatively wide class of payments to be made by a relatively large number of payers. The important point here is that the principal definition of ‘banking business’ is flawed, because it does not recognise the close relationship between ‘banking business’ and the provision of third party payment facilities — a relationship that was clearly recognised by Lord Denning in United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431: see 3.10.5. Further evidence of this flaw is provided by s 4 of the Banking Regulations 1996 (Cth), which prescribes the issuing and ‘acquiring’ of credit cards by participants in designated credit card schemes. These regulations ensure, inter alia, that ‘specialist credit card institutions’ clearly fall within the definition of ‘banking business’: see 9.15 for a general discussion of credit cards. Section 7(1) of the Banking Act 1959 (Cth) provides that a person is guilty of an offence if: the person carries on ‘any banking business in Australia’; the person is not a body corporate; and there is no exemption for the person. The word ‘any’ in the section is ambiguous. Does it mean that the person is carrying on some part of the business of banking? Or does it mean that the person is carrying on banking business, perhaps on a limited scale? The difference is obvious: if the first meaning is correct, then making loans is sufficient to establish the offence. If the second meaning is correct, then the offender must both accept deposits and make loans. The Court in Australian Prudential Regulation Authority v Siminton (No 6) [2007] FCA 1608 did not address the issue explicitly, but implicit in the judgment is that the second meaning is the correct one. The defendant had clearly accepted deposits but may not have made any loans. The Court considered advertising by the plaintiff as an indication that it intended to make loans, and this was sufficient to support the

[page 88] injunction sought by APRA. On appeal, it was noted that the defendant had, in fact, made at least one loan: see Siminton v Australian Prudential Regulation Authority [2007] FCA 2098. Leave to appeal to the High Court was refused: see also R v Jost [2002] VSCA 198

3.10.3

Part II, Division 1AA of the Banking Act 1959

Following the recommendations of the Wallis Report (see 1.2), banking business became more integrated with other aspects of financial businesses, including insurance and superannuation. The changing business landscape was both recognised and facilitated by changes in the Banking Act 1959, particularly the addition of Div 1AA of Pt II. Those sections provide for granting an authority to carry on banking business to the non-operating holding company (NOHC) of an ADI. Section 11AA(i) provides: A body corporate may apply in writing to APRA for an authority under this section. The authority operates as an authority in relation to the body corporate and any ADIs that are subsidiaries of the body corporate from time to time.

Section 11AA goes on to grant APRA the power to impose conditions on the body corporate. The conditions must be related to prudential matters.

3.10.4

Other statutory definitions

There are other statutes that refer to ‘banker’, ‘banking’ and the ‘business of banking’, but none of them provide much insight. The Bills of Exchange Act 1909 (Cth) contains a number of provisions which are of immense importance to bankers. Unfortunately, for the immediate purposes, the definition in s 2 is most unhelpful: ‘Banker’ includes a body of persons, whether incorporated or not, who carry on the business of banking.

The Cheques Act 1986 requires that the drawee of a cheque must be a ‘financial institution’ — a term defined in s 3(1) which includes the Reserve Bank of Australia, any institution which is an ADI within the meaning of the Banking Act and the various state banks which are recognised by the Constitution. These should cause no difficulty, but the Cheques Act 1986 goes

on to include a fourth class within the definition: ‘a person … who carries on the business of banking outside Australia’.

3.10.5

Judicial definition

Because the Banking Act 1959 definition of ‘banking business’ is not exhaustive, it may become necessary for a court to consider the matter. It seems likely that any court would be guided by previous judicial decisions on the meaning of the term. This section discusses some of the cases where the question has been considered. [page 89] The High Court of Australia considered the question in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83, where a majority held that the Commissioners of the State Savings Bank of Victoria were ‘bankers’ for the purposes of the Bills of Exchange Act 1909. This was in spite of the fact that the repayment of deposits was permitted only on the production of the depositor’s passbook with the order for payment. The ‘bank’ neither collected nor paid its customers’ cheques. During the course of his judgment, Isaacs J said (at 470): The fundamental meaning of the term is not, and never has been, different in Australia from that obtaining in England … The essential characteristics of the business of banking are, however, all that are necessary to bring the appellants within the scope of the enactments; and these may be described as the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilisation of the money so collected by lending it again in such sums as are required. These are the essential functions of a bank as an instrument of society. It is in effect a financial reservoir receiving streams of currency in every direction, and from which there issue outflowing streams where and as required to sustain and fructify or assist commercial, industrial or other enterprises or adventures. If that be the real and substantial business of a body of persons, and not merely an ancillary or incidental branch of another business, they do carry on the business of banking.

The passages cited above were quoted with approval by the High Court of Australia in Australian Independent Distributors Ltd v Winter [1964] HCA 78. One of the issues was whether the Adelaide Cooperative Society had carried on the ‘business of banking’. The Court held that it had not, since although the society accepted deposits from their members and the deposits were recorded in a passbook, the society lacked one of the ‘essential characteristics’ — namely the power to lend money. This was interpreted to mean a general power to lend. Since the society was limited to the making of loans to its

members rather than to the world at large, it could not be a ‘bank’: see also Re Adelaide Cooperative Society Ltd [1964] SASR 266. In Commercial Banking Co of Sydney Ltd v Federal Commissioner of Taxation (1950) 81 CLR 263, the High Court noted that a bank’s principal business was the lending of money. The decision was in the context of a taxation case under the Commonwealth Debt Conversion Act 1931 (Cth) and the Income Tax Act 1930 (Cth). The English Court of Appeal has also considered the meaning of the ‘business of banking’. In United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431, Lord Denning referred to the Permewan Wright definition of banker and said of it and some other old cases (at 446): If that were still the law, it would mean that the building societies were all bankers. The march of time has taken us beyond those cases of fifty years ago. Money is now paid and received by cheque to such an extent that no person can be considered a

[page 90] banker unless he handles cheques as freely as cash … Whereas in the old days it was a characteristic of a banker that he should receive money for deposit, it is nowadays a characteristic that he should receive cheques for collection on behalf of his customer. How otherwise is the customer to pay his money into the bank? It is the only practicable means, particularly in the case of crossed cheques … Whereas in the old days he might withdraw [money] on production of a passbook and no cheque, it is nowadays a characteristic of a bank that the customer should be able to withdraw it by cheque, draft or order.

Lord Denning thus identified three characteristics as usual characteristics of the business of banking. These characteristics had been proposed as a test in Paget on Banking as early as the 6th edition: see Megrah (1961), p 8. The characteristics are that a banker must: (1) conduct current accounts; (2) pay cheques drawn on the banker; and (3) collect cheques for the banker’s customers. While Denning MR thought that these were the usual characteristics, Diplock LJ indicated that the three characteristics were essential characteristics: (at 465). The difference between finding the characteristics to be usual as opposed to essential is important when evidence is given as to reputation. Lord Denning found that United Dominion Trust (UDT) was a banker, on the basis of its reputation in the City of London as well as by the application of this threepronged test. He noted that the usual characteristics were not necessarily the sole characteristics, so the evidence that UDT was considered by the financial community as a banker was, of itself, sufficient to establish it as such. Under

Lord Diplock’s view, the only relevant evidence would be that which established the essential three characteristics. The difference might be important in the future as the ‘business of banking’ in the commercial sense changes. For example, many consumer accounts do not offer a cheque facility — third party payments may only be made electronically. It would be most unfortunate if the ‘business of banking’ in the legal sense was unable to keep pace with such changes. The test based on commercial reputation is a valuable addition to a purely mechanical test which may soon be outdated. The ‘reputation test’ is actually very old. In Stafford v Henry (1850) 12 Ir Eq R 400, it was said that in order to be a banker, a person must ‘hold himself out as a banker and the public take him as such’. May an entity be a ‘bank’ even if banking business is a very small part of its overall business? Illustration: Re Roe’s Legal Charge; Park Street Securities Ltd v Albert William Roe [1982] 2 Lloyds Rep 370 The plaintiff lent the defendant £11,000 for the purposes of purchasing a leasehold. The defendant argued that the plaintiff was an unregistered moneylender within the [page 91] terms of the Moneylenders Act 1900 (UK). The plaintiff claimed to be exempt as a ‘banker’ within the meaning of that Act. The evidence showed that the plaintiff operated current accounts, paid cheques drawn on themselves and collected cheques for customers. The problem was that this type of business was a very small part of their total business and, indeed, was a very small business in terms of the major banking corporations, in that the plaintiff operated only 157 current accounts and 53 deposit accounts. The Court held that the plaintiff was engaged in the business of banking.

A similar result was reached in London and Harrogate Securities Ltd v Pitts [1976] 2 All ER 184. On the other hand, in Re Shields’ Estate (1901) IR Ch 172 (at 199), it was said that if a man carries on other businesses besides that of banking, and if the banking is only subsidiary to the other businesses, he cannot be regarded as a banker: quoted by Latham J in Bank of NSW v Commonwealth [1948] HCA 7 (at [179]). Whether the characteristics are considered as usual or as essential, there seems little doubt that an institution authorised to carry on the business of banking under the Banking Act 1959 would be considered a bank for all purposes. In Commercial Banking Co v Hartigan (1952) 86 ILT 109, the organisation failed the test in United Dominions Trust Ltd v Kirkwood [1966] 2

QB 431, but was held to be a bank because of compliance with the Irish Central Bank Act 1942 and was licensed under that Act. As noted above, the High Court has found that a pharmacist acting as an ‘agency’ bank was not carrying on the business of banking: see PP Consultants Pty Ltd v Finance Sector Union [2000] HCA 59.

3.10.6

Range of possible tests

The Supreme Court of Canada has provided a valuable discussion of the various tests which might be applied to determine if a person or an organisation is carrying on ‘the business of banking’. The issue before the Court in Canadian Pioneer Management v Labour Relations Board (1980) 107 DLR (3d) 1 was whether a company fell under legislation concerning labour relations — part of the determination of that issue involved the question of whether the company was a bank. Laskin CJC and Dickson J considered the question to be whether, functionally, the business of such a trust company was that of a bank. Their use of the word ‘functionally’ apparently meant that the company was or was not treated like a bank by the regulatory authorities, for they observed that although a trust company such as the one being considered carried on many activities also carried on by banks, it had not been brought within the federal regulating authority in relation to banking. Throughout the case, the meaning of the socalled ‘functional’ test seems to vary. [page 92] The other members of the Court — Beetz, Martland, Ritchie, Pigeon, Estey and Mcintyre JJ — disagreed. They considered that the functional test was, in the circumstances, inappropriate. They preferred what they referred to as the formal, or institutional, test. Under this test it is relevant to consider whether an institution holds itself out as a banker, and its reputation as such, a test very similar to that proposed by Lord Denning in United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431. Beetz J provides a valuable survey of the possible means of defining the business of banking. They are by a consideration of: the nature of the relationship between the institution and its customers. This is the test which is implicit in the Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 and Joachimson v Swiss Bank Corp [1921] 3 KB 110 line of cases, which decide the formal legal relationship between the parties.

the function of the institution. This approach in turn breaks into two parts: the economic point of view, that banks create credit; and the legal point of view, that banks operate current accounts and pay and collect cheques. The legal functional test is represented by the formal definition of banking given by Lord Denning in United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431. the way in which the institution views itself and is viewed by other institutions. Beetz J refers to this as the formal or institutional test — ‘holding oneself out as a banker’, or ‘having a reputation as a banker’.

[page 93]

4 Accounts 4.1

Introduction

Modern banking has a range of different accounts, but most are current accounts, savings accounts or term deposits. The main legal distinction is between the current account and others. The current account is repayable on demand. Savings accounts and term deposits generally require notice. Early withdrawal, if allowed, will usually incur a penalty. Electronic banking has blurred the distinction between a current account and a savings account. The bank will commonly pay interest on both, and both may be used to make third party payments. Savings accounts are more likely to be governed by written terms and to have restrictions on withdrawals, but this is not a hard and fast rule. Throughout this chapter, it should be kept in mind that, for accounts in credit, the banker is loaned funds by the customer: see Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 and see 3.2ff. The ‘account’, no matter what type, is a means of ‘keeping score’ — that is, of identifying transactions in way that shows the amount currently owed by the banker to the customer. Government guarantees may apply to some accounts: see 3.6.

4.2

Major types of accounts

4.2.1

Current accounts

There is no precise definition of a current account, even though the vast majority of banking transactions — both by number and by value — are conducted through what is undeniably a current account. The salient feature of the current account is that it may be used for third

party payments: see Chorley (1974). However, most savings accounts in Australia also allow third party payments through the electronic funds transfer (EFT) system or through the internet banking ‘pay anyone’ facility. [page 94] Third party payments were originally by cheque, but in more recent times the current account will usually be accessed by electronic means. Common methods are: withdrawals of cash from automatic teller machines (ATMs); EFT payment to merchants by means of debit card and personal identification number (PIN); payment directly to a third party bank account through internet banking; and recurrent payments by means of the direct debit or direct credit system, where the payment is initiated by the payee rather than the account holder. Traditionally the current account has been non-interest-bearing, but this is not now the usual case. However, although the current account may be interest-bearing, it will normally be at a rate which is less than that which may be obtained from other investments. Were it not for the convenience of the third party cheque or electronic payment system, few customers would maintain a current account in credit. The current account is a widely used form of granting credit to customers, although there are indications that this method of lending is decreasing in importance. When lending through a current account (called an ‘overdraft’), the basic relationship of the banker and customer is reversed — the banker becoming the creditor and the customer the debtor. In most cases, an overdraft account continues to be operated in the usual way.

4.2.2

Savings accounts

Savings accounts differ from current accounts in that they ordinarily earn interest and they cannot usually be drawn upon by cheque. As noted above, most savings accounts now permit third party payments through the electronic payment systems. Savings accounts often require that notice be given before withdrawal or before withdrawal of amounts over a certain sum. In the past, it was customary to require presentation of a passbook for withdrawals. While this may still be

the case for some accounts, it is common practice today to permit withdrawal through ATMs and in EFT transactions. Savings accounts also differ from current accounts in that they are ordinarily more likely to be governed by a written contract. This document may not contain all of the terms which govern the banker-customer relationship, but will usually describe conditions under which money may be deposited and withdrawn from the account, interest rates to be paid and any other special account conditions. These differences reflect the differences in function which are served by the two types of account. The primary function of the current account is to provide the customer with access to third party payment mechanisms and immediate access to funds. The primary function of the savings account is to provide investment facilities and to provide the bank with funds which it may safely invest over longer periods of time. [page 95] In spite of these differences in function, a savings or deposit account is, in law, a loan to the banker: see Pearce v Creswick (1843) 2 Hare 286; 12 LJ Ch 251; Dixon v Bank of New South Wales (1896) 12 WN (NSW) 101; Akbar Khan v Attar Singh [1936] 2 All ER 545. There is probably no right to draw cheques against a savings account, even when the account is expressed to be repayable without notice. The matter is unlikely to ever be raised in Australia, where it is common practice for the contract to spell out explicitly the preconditions for withdrawal of money from the account. In modern practice, the contract will call for the production of a passbook or, more likely, an EFT card and PIN at an authorised terminal. The savings account is also similar to a current account in that a savings account is one continuing contract, not a fresh contract made with each deposit by the customer: see Hart v Sangster [1957] 1 Ch 329. Mocatta J has expressed the opinion that there is no such thing in law as an overdrawn deposit account: see Barclays Bank Ltd v Okenarhe [1966] 2 Lloyds Rep 87.

Passbook accounts Savings accounts may be accompanied by a passbook in which deposits and withdrawals are recorded. The passbook is essentially a copy of the customer’s account in the bank’s ledger. It is also usual for the passbook to contain the basic terms of the agreement between the banker and customer. These terms

are a part of the terms of the contract between the bank and its customer: see Re ANZ Ltd; Mellas v Evriniadis [1972] VR 690. Although passbook accounts are becoming less common, they are still being offered by some banks. There are also quite a few ‘legacy’ passbook accounts — opened some years ago and still maintained. Some customers will find these accounts convenient methods of saving, but passbook accounts do not offer third party payment facilities.

Term deposits Some savings accounts, usually called ‘term deposits’, require a specified period of notice before general withdrawals may be made, and some are for a fixed period of time. In the latter type, the customer has no right to call for repayment before the expiry of that period — though it is not uncommon for a banker to permit such a withdrawal, perhaps with some loss of interest. Term deposit accounts do not offer third party payment facilities.

4.3

Appropriation

The fluctuating nature of accounts — particularly the current account — gives rise to some legal problems. For most purposes, it is sufficient to determine a net balance at some point in time. However, there are disputes which arise requiring a more [page 96] detailed approach to the account. As an example, a security is taken by the bank on a certain date to secure an overdrawn account. If the customer continues to operate the account, does the security cover the full net balance? Or are the payments in to be treated in some way differently from the drawings out? The word ‘appropriation’ refers to two different practical situations. First, it describes the situation in which a particular entry in an account is set against or matched with a transaction on the other side of the same account: this meaning is discussed at 4.3.2. Second, when there are several different accounts, ‘appropriation’ describes the process whereby the transaction is ascribed to one account or the other. Each raises different problems. It is convenient to consider the second meaning of the word first.

4.3.1

Appropriation between accounts

The law as to the appropriation of payments to different accounts is described in the following passage from Deeley v Lloyds Bank Ltd [1912] AC 756 (at 783): According to the law of England, the person paying the money has the primary right to say to what account it shall be appropriated; the creditor, if the debtor makes no appropriation, has the right to appropriate; and if neither exercises the right of appropriation, one can look on the matter as a matter of account and see how the creditor has dealt with the payment in order to ascertain how in fact he did appropriate it. And if there is nothing more than a current account kept by the creditor, or a particular account kept by the creditor and he carries the money to that particular account, then the court concludes that the appropriation has been made; and having been made, it is made once for all, and it does not lie in the mouth of the creditor afterwards to seek to vary that appropriation.

Similarly, in Healey v Commonwealth Bank [1998] NSWSC 678, Giles JA said: When a debtor who owes distinct debts to a creditor makes a payment to the creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly; if the debtor does not direct an appropriation at the time he makes the payment, the right of application devolves on the creditor.

Although the passages assume that it is the debtor who is making the payment, it is clear that it is the paying person who has the primary right of appropriation. Even when the customer’s accounts are all in credit — so that it is the customer who is the creditor and the banker who is the debtor — it is the customer who has the right to appropriate the payments of money in.

Particular purpose deposits The act of appropriation need not indicate that the payment in is to be credited to a separate account. The payer of the money may indicate that it is to be used only for a particular purpose. As an example, it may be that the customer wishes to be certain [page 97] that a particularly important cheque will be met. They may deposit a sum of money with the instructions that it be used only for the purposes of meeting the cheque: see W P Greenhalgh & Sons v Union Bank of Manchester [1924] 2 KB 153; Huenerbein v Federal Bank of Australia (1892) 9 WN (NSW) 65. The banker need not accept a deposit which is subject to special conditions: see Huenerbein v Federal Bank of Australia (1892) 9 WN (NSW) 65. If the banker does accept the deposit on the conditions imposed, then they must see that the money is applied to the appropriate purpose. In Huenerbein, the plaintiff had an overdrawn account with the defendant. He paid in a sum of

money with instructions that it was to be applied to meet a certain cheque which would be presented. The cheque was dishonoured, although the manager had been informed of the appropriation. The Court held that the plaintiff could recover damages for wrongful dishonour. However, the customer must indicate the desired appropriation with some certainty. Illustration: Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 The Australian Elizabethan Theatre Trust had reached an agreement with the Tax Commissioner whereby gifts made to it could still be tax deductible even though the donor expressed a ‘preference’ that the donation go to one of three other organisations. Before the appointment of a provisional liquidator for the Trust, money received from donors stipulating a preference had been deposited to the Trust’s account with the Commonwealth Bank, but there had been no express appropriation of the money so deposited.

Gummow J held that the money was not held in trust by the Trust on behalf of the nominated organisations. He held that a trust could not come into existence unless the person creating it can be taken to have so intended. In the absence of an express declaration of trust, the Court must determine if it is appropriate to impute such an intention. In the Elizabethan Theatre case, the language used by the parties, the nature of the transaction and the circumstances attending the relationship between them did not lead to the relevant intention. A significant factor was that the Trust did not ‘earmark’ the donations or segregate them in a separate bank account. There was no express trust or other equitable obligation, since the ‘preference’ expressed by donors represented only a statement of motive or expectation — importing no legal or equitable obligation on the part of the Trust. See also Commercial Banking Co of Sydney Ltd v Jalsard Pty Ltd [1973] AC 279; Colonial Bank of Australasia v Kerr (1889) 15 VLR 314; Coolbrew Pty Ltd v Westpac Banking Corporation [2015] NSWCA 135. [page 98]

Appropriation by banker As indicated in the quotation from Deeley v Lloyds Bank Ltd [1912] AC 756, if the customer does not appropriate the payment either to a special purpose or to a particular account, then the bank may appropriate the payment. Under current banking practice, this is seldom an issue, since deposits are accompanied by pre-printed deposit slips identifying the account to be

credited. Further, electronic and telephone payments to the customer will usually be subject to a contract identifying the account to be credited. If, however, the amount received by the banker is not identified for a special purpose or account, the banker may appropriate the payment as they see fit. The controversial cases will usually be where the amount is used to reduce an overdraft or other liability owed by the customer. A specific appropriation by the banker is binding: see Deeley v Lloyds Bank Ltd [1912] AC 756. The liability of the customer may be a guarantee on a separate overdraft account. Illustration: Healey v Commonwealth Bank of Australia [1998] NSWSC 678 The bank received the proceeds of a sale of a property. The property had been given as a security for an overdraft account operated by H and his partner. The two were also guarantors of an overdraft account in the name of H and his wife. The bank applied the proceeds of the sale to the reduction of the overdraft of Mr and Mrs H. The Court held that this was a legitimate appropriation, since H and his partner were liable as guarantors of the overdraft account.

On the other hand, the customer in Karam v ANZ Banking Group Ltd [2003] NSWSC 866 operated five accounts with the defendant bank. He deposited money into current accounts, which were subsequently transferred into loan accounts. The Court held that by depositing the money into the current account, the customer had made an appropriation. The right of appropriation need not be exercised immediately. It has been said that the payee has the right to make an election ‘up to the very last moment’: see Lord Macnaghten in The Mecca [1897] AC 286 at 293–294. The ‘very last moment’ would appear to be at the time when payment is made: see Healey v Commonwealth Bank of Australia [1998] NSWSC 678. It can sometimes be an issue as to whether the right was, in fact, exercised and communicated: see Sydney Concrete and Contracting Pty Ltd v BNP Paribas Equities (Australia) Ltd [2005] NSWSC 408.

4.3.2

The rule in Clayton’s case

Most payments into bank accounts will appropriate the payment to a specific account, but not to a specific purpose. By its very nature, the current account will [page 99]

be regularly debited with payments to third parties. It is sometimes necessary to determine which of several competing claims will have priority when the account is not sufficient to satisfy all. In other words, it is necessary to determine how payments in should be appropriated in cases where there has been no express appropriation by either banker or customer. Illustration: Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767; [1816] EngR 677 Clayton maintained a current account with a firm of bankers in which the accounts were kept in the ordinary way — transactions were recorded chronologically on a debit and credit ledger. One of the bankers died and the bank soon afterward failed. At the time of the partner’s death, Clayton’s account was in credit some £1,700 — that is, the firm of bankers owed him that amount of money. Between the time of the banker’s death and the failure of the firm, Clayton had continued to operate the account, drawing out more than the sum which had stood to his credit, but paying in an even larger sum than that withdrawn. The issue was whether or not Clayton could recover anything from the estate of the deceased partner. If the drawings and deposits which occurred after the death could be treated separately, then the debt of £1,700 was owed to Clayton jointly and severally by all of the partners and he could recover. If, however, the withdrawals (that is, the payments by the banker) had the effect of extinguishing by repayment the earlier debt, then Clayton could only prove in bankruptcy. The Court held that each payment out went to pay off the earliest payment in.

During the course of the judgment, Sir William Grant MR said (1 Mer 529 at 608; 35 ER 767 at 783): … this is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. Neither banker nor customer ever think of saying, ‘this draft is to be placed to the account of the £500 paid in on Monday, and this other to the account of the £500 paid in on Tuesday’. There is a fund of £1000 to draw upon, and that is enough. In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle, all accounts current are settled, and particularly cash accounts.

In short, the amount first paid into a current account is treated as the amount which is first paid out. The rule in Clayton’s case was applied in Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd [1940] [page 100] VLR 201 and approved by the High Court in Australia and New Zealand Banking Group Ltd v Westpac Banking Corp [1988] HCA 17.

4.3.3

Limits to the rule in Clayton’s case

Clayton’s case has been described as a presumption rather than a rule of law. In

ReDiplock [1948] Ch 465, 554, it was said that the rule in Clayton’s case is a ‘rule of convenience based upon so-called intention’. In the same case, Lord Greene MR said that the rule does not extend beyond the case of a bank account, but that proposition should be considered with caution, since there must be some rule of appropriation when there are running accounts kept between the parties: see Australia and New Zealand Banking Group Ltd v Westpac Banking Corp [1988] HCA 17. The rule only applies when there is a current account between the parties. It does not apply when the accounts rendered make it clear that the payer intended to reserve the right to appropriate the payment to a different account. Finally, it is said that the rule does not apply to transactions which are effected on the same day, for in that case, the order of the transactions in the books is wholly accidental: per Lord Halsbury LC in The Mecca [1897] AC 286. Illustration: Re Laughton [1962] Tas SR 300 A solicitor had become a bankrupt and the issue in the case concerned the trust account, which contained money belonging to clients. The rule in Clayton’s case was applied in order to determine the order in which the money belonging to various clients had been withdrawn, but concerning entries on any one day, the order of the entries was said not to be relevant. Consequently, if the balance was insufficient to meet the claims of these clients, their claims were met on a basis of proportionality.

Even though Re Laughton followed the ‘same day’ exception to the rule in Clayton’s case, it is not necessarily a general exception. After all, it may still be necessary to appropriate payments made within a single day to the discharge of some obligation in preference to others, and the rule in Clayton’s case is not illogical if the parties have expressed no actual or implied intention as to appropriation. The division of assets in Re Laughton seems fair enough, but it can scarcely be said to be any more logical than the rule in Clayton’s case. The departure from the rule could have been justified by an appeal to the presumed intention of the parties, rather than elevating to a general principle that some other rule of appropriation necessarily applies when the transactions are same day. The rule does not affect the rights of third parties who have a beneficial interest in the account. The classic example is a trustee who has mixed their own money [page 101] with that held on trust. The presumption then is that any money withdrawn by the trustee is the money of the trustee, not that of the beneficial owner: see Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696.

Campbell J held that the rule in Clayton’s case was not applicable to the distribution of trust money when the funds of beneficiaries are mixed: see Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361. In arriving at his conclusion, his Honour provides an excellent overview of the application of the rule in Clayton’s case to situations where trust funds are to be distributed. The rule can be displaced by agreement between the parties. In modern banking practice, it is customary for banks to include a clause in a loan contract which has as its object the partial exclusion of the rule in Clayton’s case: see 13.2.6.

4.4

Combining accounts

Customers often keep more than one account with a bank. The reason for this may be one of convenience — for example, the separation of business and household accounts — or it may be that the customer is required to keep a separate account for particular purposes such as, for example, solicitors’ trust accounts.

4.4.1

Accounts not a single entity

The customer has no right to expect the bank to treat separate accounts as a single entity. The problem usually arises when the banker dishonours cheques which would leave an account overdrawn. The customer may argue that all accounts, considered as a single entity, contain sufficient funds to meet the outstanding cheques. The bank has no obligation to combine accounts in order to meet outstanding cheques. The principle was first established when the accounts were kept at separate branches: see Garnett v M’kewan (1872) LR 8 Ex 10; Arab Bank v Barclays Bank (DCO) [1954] AC 495. It also applies when the accounts are maintained at the same branch: see Direct Acceptance Corp v Bank of New South Wales (1968) 88 WN (Pt 1) NSW 498. The customer may, however, call for the bank to combine two separate accounts. This is merely a matter of transferring funds when the bankercustomer relationship still exists, but it seems that, in certain circumstances, the customer has this right even after the termination of the relationship: see Mutton v Peat [1900] 2 Ch 79.

4.4.2

Banker’s right to combination

The right to treat all of the customer’s accounts as a single sum for some purposes is known variously as the right of combination, the right of set-off, the right of consolidation and, erroneously, as the exercise of the banker’s lien. [page 102] Illustration: Garnett v M’kewan (1872) LR 8 Ex 10 The plaintiff banked with the London and County Banking Company where he kept accounts at two different branches. One of the accounts was overdrawn by £42.15.11, the other was in credit some £42.18.10. The plaintiff drew three cheques on the account which was in credit, the cheques totalling slightly more than £23. The cheques were dishonoured and the plaintiff received a letter informing him that the account in credit had been debited with the amount necessary to pay the overdraft at the branch which was overdrawn. The plaintiff sued for wrongful dishonour. The Court held that the bank was entitled to combine the accounts without notice to the customer.

The Court also noted: there was no special agreement to keep the accounts separate; there was no course of business upon which could show an implied agreement, even though the overdrawn account had been ‘closed’ — that is, inoperative — for some four months before the bank took action. The accounts in Garnett v M’kewan were combined without any notice being given to the customer. In the course of the judgment, Kelly CB said (at 13): In general it might be proper or considerate to give notice to that effect, but there is no legal obligation on the bankers to do so, arising either from express contract or the course of dealing between the parties. The customer must be taken to know the state of each account and if the balance on the whole is against him or does not equal the cheques he draws, he has no right to expect more cheques to be cashed.

Garnett v M’kewan was approved by the Privy Council in Prince v Oriental Bank Corp (1878) 3 App Cas 325. It was cited with approval by the High Court in Re Shaw; Ex parte Andrew v Australia and New Zealand Banking Group Ltd [1977] FCA 18 and Vicars v Commissioner of Stamp Duties (NSW) [1945] HCA 24. See also Barclays Bank Ltd v Okenarhe [1966] 2 Lloyds Rep 87; National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785. It is probably not necessary for the bank to ‘physically’ combine the accounts. The accounts are, after all, a convenience and there is only one liability of the bank to the customer: see National Bank of New Zealand v Grace

(1890) 8 NZLR 709; Official Assignee in Bankruptcy v Westpac Banking Corporation [1989] NZHC 908. In cases where the account is governed by the Code of Banking Practice (CBP), the bank is obliged to give the customer notice as soon as practicable after exercising any right of combination: Code of Banking Practice, cl 19.1; and see 11.5 for a discussion of the Code. In addition, the Code forbids combination in certain cases of hardship when the credit facility is regulated under the National Credit Code (Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth)). [page 103] The right of combination is not a ‘charge’ on a company’s assets requiring registration under the Corporations Act 2001 (Cth): see Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195.

4.4.3

Limits on the right of combination

Although Garnett v M’kewan (1872) LR 8 Ex 10 affirms the right of the banker to combine accounts, the judgments in the case make it clear that the decision would have been different had there been an agreement to keep the accounts separate, but the form and content of the required agreement was unclear.

Special agreement needed The mere fact of opening a second account does not show an agreement to keep accounts separate. Illustration: Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1971] 1 QB 1; National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785. The company maintained an account with the bank which became overdrawn. In February 1968, this account, referred to as the No 1 account, was overdrawn by more than £11,000, and the bank had discussions with officers of the company concerning the state of this account. In April 1968, it was agreed that the bank should ‘freeze’ the No 1 account, with the result that it was to all intents and purposes a fixed loan, and should open a new account — the No 2 account — which would be maintained strictly in credit. It was agreed that the arrangement would remain in force for at least four months ‘in the absence of materially changed circumstances’. Unfortunately, the following month the company gave notice to the bank that a meeting of creditors would be held to consider a winding-up petition. The bank did not immediately terminate the two account arrangement and the No 2 account was allowed to operate normally. On the morning of 12 June, a cheque for more than £8,000 was paid into the No 2 account. That afternoon, it was resolved at the creditors’ meeting that the company should be wound up and the company liquidator claimed the balance in the No 2 account. The bank argued that it was entitled to set off the credit balance in the No 2 account against the overdrawn No 1 account.

The claim of the bank was upheld at first instance by Roskill J, reversed by a majority in the Court of Appeal, and restored by the House of Lords. In the House of Lords, it was held that the true meaning of the agreement was that it had been [page 104] intended to be operative while the relationship of banker and customer existed and the company was a going concern. Accordingly, it had come to an end when the winding-up resolution had been passed, and the bank was entitled to combine the accounts immediately. Throughout the course of the case, there was agreement that the mere opening of two accounts could not suffice to imply an agreement. Lord Denning MR put it most succinctly (at 35): ‘You have to find an agreement to keep them separate. The mere opening of the two accounts does not do it.’ See also Direct Acceptance Corp v Bank of New South Wales (1968) 88 WN (Pt 1) NSW 498.

Accounts of a ‘different nature’ Accounts of a sufficiently different nature cannot be combined. The most common example is when one account is a current account and the second is a loan account which has been opened with a view toward longer term finance. The designation of the second account is a clear indication that the parties intended the accounts to be treated separately: see Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833; see also Magill v National Australia Bank Limited [2001] NSWCA 221. An account may have a designation which shows that it should remain separate. The bank was unable to exercise the right of combination when one of the accounts was designated as a ‘wages’ account and the agreement of the customer with the bank was that the account should be reserved for payment of wages to the customer’s employees: see Re Morel (E J)(1934) Ltd [1962] Ch 21. In Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195, it was held that a bank could not combine a current account and a loan account unless there was an express contractual right to do so. The contractual right to combine different types of accounts does not amount to a security interest, but does justify the combination of the accounts in accordance with the contract. These cases clearly may be explained on the basis of an implied agreement

to keep the accounts separate, since combination of accounts would destroy the basis for opening the accounts in the first place. However, three of the four judgments in Garnett v M’kewan (1872) LR 8 Ex 10 also suggested that the bank would have no right of combination if the customer’s debt to the bank had been incurred through some business other than banking. As there are an increasing number of activities carried on by bankers, this last point could be significant: see Weaver et al (2003) at 3.7110.

Trust accounts may not be combined A bank may not combine a customer’s personal account with an account which is known to be a trust account. [page 105] Illustration: Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4 The Rolls Razor Co was in serious financial difficulties. It had a large overdraft with Barclays Bank. In an attempt to trade out of difficulty, Rolls was attempting to borrow a sum of approximately £1,000,000. The proposed source of this loan suggested that, if Rolls could obtain independent financing to pay a declared dividend of some £200,000, the financing arrangements could go ahead. This smaller sum was obtained from Quistclose on the agreed condition that it would be used only for the purposes of paying the dividend. The amount was paid into a special account with Barclays, which knew of the loan and the purpose thereof. Unfortunately, Rolls went into liquidation before the dividend could be paid. The Court held that the arrangement made Rolls a trustee of the money for the benefit of the creditors to whom the dividend was payable. When the purpose of that trust failed, there was a resulting trust in favour of Quistclose.

The consequences were that Quistclose was entitled to complete recovery of the money which Barclays had claimed was to be combined with the overdraft account. If money is advanced with the intention that it become part of the general assets of the borrower, then the Quistclose principle will not apply: see, for example, Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liq) [1978] HCA 45. The bank in Quistclose knew that the account was a trust account. Suppose the bank does not know. Illustration: Union Bank of Australia Ltd v Murray-Aynsley [1898] AC 693 The trust account was called No 3 Account, and there was no evidence that the banker knew that it was held in trust. The Court held that the banker was justified in exercising the right of set-off.

The correctness of this decision is open to question, for there is no reason to

permit the bank to benefit at the expense of the cestui que trust when it is still possible to unravel the transaction: see also T & H Greenwood Teale v William Williams Brown & Co (1894) 11 TLR 56; Pertamina Energy Trading Limited v Credit Suisse [2006] SGCA 27; and Ellinger et al (2006) at 205. The converse situation came before the English Court of Appeal. The bank mistakenly thought that an account was a trust account. [page 106] Illustration: Bhogal v Punjab National Bank; Basna v Punjab National Bank [1988] 2 All ER 296 The bank was convinced that an account held by a third party was in fact a nominee account of the customer. ASB was the proprietor of a travel agency and had opened an account with the bank. S was another customer of the bank whose account was heavily overdrawn. Discussions had taken place between S and the bank regarding opening the account. All statements were sent to S, but all withdrawals were made by cheques signed by ASB. YB was another customer. Much of the money paid into YB’s account came from S’s travel agency. YB had signed withdrawal forms in blank and left them with S. The bank formed the view that ASB’s and YB’s accounts were nominee accounts beneficially owned by S. They combined accounts and dishonoured cheques. In separate actions, ASB and YB sued the bank and obtained summary judgment for the amount of their deposits. The Court held that a banker is required to pay cheques drawn by a customer if the banker has funds belonging to the customer. The bank is not entitled without warning to refuse to honour a cheque when there is money in the account to cover it, merely on the basis of a suspicion that the account was held by the customer as a nominee for a third party who was indebted to the bank. Instead, clear and identifiable evidence is required before the bank could set off the credit in one account against the other.

Implicit in the judgment is that the bank would have had the right of combination if it had been able to prove that the other accounts were held on S’s behalf: see also Saudi Arabian Monetary Agency v Dresdner Bank AG [2004] EWCA Civ 1074, where the Bhogal principle is discussed extensively.

4.4.4

The matter of terminology

In Garnett v M’kewan (1872) LR 8 Ex 10, the right of the banker should be referred to as the ‘right of combination’ or the ‘right of set-off’. Throughout the judgment of Roskill J in Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1971] 1 QB 1, he referred to the banker’s lien and the exercise of that lien over a credit balance. In so doing, he was employing the terminology which had been used in many of the old cases. However, both the Court of Appeal and the House of Lords said that this use of the word ‘lien’ is incorrect. Lord Denning MR said ([1971] 1 QB 1 at 33):

… the use of the word ‘lien’ in this context is misleading … when a banker has a lien over a cheque belonging to a customer or its proceeds, it means that the banker can retain the cheque or its proceeds until the customer has paid the banker the amount of his overdraft; and the banker can realise the cheque and apply the proceeds in discharge

[page 107] pro tanto of the overdraft … Seeing that the banker’s lien is no true lien, in order to avoid confusion, I think we should discard the use of the word ‘lien’ in this context and speak simply of a banker’s ‘right to combine accounts’; or a right to ‘set-off’ one account against the other.

The banker’s lien, an important right of the banker to hold documents in certain circumstances, is discussed at Chapter 16.

4.4.5

Section 86 of the Bankruptcy Act 1966

Section 86 of the Bankruptcy Act 1966 makes it clear that the right of set-off extends beyond the customer’s bankruptcy, provided only that the person claiming the right of set-off is not entitled to do so if they — at the time of giving credit to the bankrupt — had notice of an available act of bankruptcy committed by that person: Bankruptcy Act 1966, s 86(2) and see 4.11.3. Section 553C of the Corporations Act 2001 is to the same effect when the customer is an insolvent company that is being wound up. The right of set-off might be a saving factor for the banker. If there has been an agreement to keep the accounts separate, then there is no longer an inherent right of combination. However, the best view appears to be that it is not possible to contract out of the effects of s 86 of the Bankruptcy Act 1966, so that the right to set off will arise upon the bankruptcy of the customer by virtue of that section, even if there has been an agreement to keep the accounts separate: see National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785; Gye v McIntyre [1991] HCA 60; Rennie v Remath Investment No 6 Pty [2002] NSWSC 672. On the other hand, if one of the accounts is money which is paid in for a special purpose, then there is no mutuality within the meaning of s 86 and the accounts may not be combined: Rolls Razor Ltd v Cox [1967] 1 QB 552; National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785. The High Court has said that the object of the set-off sections was to do substantial justice between the parties and that the provisions should be given the widest possible scope in order to achieve that object: see Gye v McIntyre [1991] HCA 60; Hall v Poolman [2007] NSWSC 1330.

4.5

Overdraft accounts

A current account may have a negative balance — a so-called ‘overdraft’. It is one of the most common methods of bank lending to meet short-term business credit needs. The bank may take a security interest from the customer, particularly if the overdraft is intended to be longer term. The use of overdrafts for lending and the taking of securities are discussed in Chapter 12. [page 108] An informal overdraft may not be secured and may not even be arranged ahead of time. Although the banker is not bound to pay a cheque if there are insufficient funds in the account, they may choose to do so. The drawing of a cheque by the customer when there are insufficient funds to meet it is a request to the banker to grant overdraft facilities: see Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226.

4.5.1

Interest on overdrafts

The banker is entitled to charge interest on overdrafts, even if no formal arrangements have been made. The right is based on the usage and uniform custom of bankers: see National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637. The right to charge simple interest has long been recognised: see Deutsche Bank v Banque des Marchands de Moscou (1931) 4 LDAB 293. National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637 confirmed that the bank also had the right to add periodically the amount of the interest to the overdraft — that is, to compound interest. The right does not terminate when the bank demands payment of the overdraft but can extend right up to the day of judgment: see National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637; see also Bos International (Australia) Limited v Strategic Nominees Limited (in receivership) [2013] NZCA 643. The right to capitalise interest may be displaced by the nature of the loan contract. In Magill v National Australia Bank Ltd [2001] NSWCA 221, the New South Wales Court of Appeal found that the purpose of the contract was to assist in the long term financing of primary production. Finance was provided in part under terms regulated by the Primary Industry Bank of Australia and was not subject to ordinary market considerations. The Court found that in these circumstances, there was no room for the implied term permitting the bank to charge compound interest.

The general rule, however, is that a loan contract with a bank will contain an implied term which allows compounding interest: see Yourell v Hibernian Bank Ltd [1918] AC 372; Bank of New South Wales v Brown [1983] HCA 1; Habib Bank Ltd v Central Bank of Sudan [2006] EWHC 1767. The question is always one of contractual interpretation. A New Zealand Court has said that the question should be approached without reference to any predisposition the courts may have shown in favour of simple as against compound interest. Any presumption in favour of simple interest is misplaced: see Alington Group Architects Ltd v Attorney-General [1998] 2 NZLR 183. Although it is convenient to refer to interest being ‘capitalised’, it does not lose its character as interest for all purposes. For example, in Bank of NSW v Brown [1983] HCA 1, s 112 of the Bankruptcy Act 1966 limited the recovery of ‘interest’. The High Court held that, although compounding of interest by the bank was legitimate, the amount was still ‘interest’ even though ‘capitalised’. The contractual arrangements between banker and customer could not adversely affect the rights of third parties. [page 109] It is not just banks that may capitalise interest. The courts have held that compound interest clauses are not penalties: see David Securities Pty Ltd v Commonwealth Bank of Australia [1990] FCA 148 (not mentioned in the High Court); Meadow Springs Fairway Resort Ltd (in Liq) (ACN 084 358 592) v Balanced Securities Limites (No 2) [2008] FCA 471.

4.5.2

Exception fees

Bank fees are an important source of revenue for banks, and customers often complain about various account fees. Many of these complaints are directed at ‘penalty fees’ and, in particular, the often hefty fees charged for an unauthorised overdraft: see, for example, the report by the Consumer Law Centre of Victoria: Rich (2004). Fees may sometimes be attacked as an unenforceable contractual penalty. Illustration: Beil v Pacific View (Qld) Pty Ltd [2006] QSC 199 A mortgage provided for interest was payable at 16 per cent. Clause 5 of the terms and conditions stated that if it was not repaid by 31 December 2000, the rate would increase to 25 per cent. The defendants argued that Clause 5 was unenforceable as a penalty. The Court held that the default rate must not be out of all proportion to the genuine pre-estimate of damages.

The judgment in Beil was a rephrasing of the High Court’s decision in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, where it was said (at 32): … the propounded penalty must be judged ‘extravagant and unconscionable in amount’. It is not enough that it should be lacking in proportion. It must be ‘out of all proportion’.

The penalty doctrine is not restricted to breaches of contract. The High Court in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 extended the doctrine to provisions punishing a party for non-observations of any contractual stipulation. The Court in Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35 considered five fee categories: late payment fees on credit card accounts; overlimit fees on credit card accounts; honour fees on a savings or current accounts; non-payment fees on a savings or current accounts; and dishonour fees on savings and current accounts. [page 110] Gordon J found, on the particular wording of the Terms and Conditions, that late payment fees on credit card accounts were penalties, but that the other four categories of fees were not. This was overturned by the High Court in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, which found that the late payment fee was not a penalty. The key points in the finding were: the predominant purpose of a penalty is to punish for breach and therefore encourage performance; a test is whether the sum stipulated is extravagant or unconscionable in comparison with the maximum amount of damage that might flow from the breach; ‘damage’ extends beyond that recoverable on breach; analysis is to be made at the time the contract is made; mere disproportion is not enough — it must be so large that it is unconscionable for the lender to rely on the stipulation. Financial institutions do not like the phrase ‘penalty fees’, for obvious

reasons. They prefer ‘exception fees’. The Final Report of the Review of Banking Code of Conduct has made some recommendations concerning disclosure of various ‘exception fees’: see 11.5. The Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) has introduced a nationwide regime for ‘unfair’ contract terms. The effect of these on ‘exception fees’ will be discussed in Chapter 11.

4.6

Trust accounts

A trust account is an account which is held by one party who is bound by law to exercise their rights over the account for the benefit of some other person or persons. The person who holds the account is known as the trustee and the person for whose benefit it is held is the beneficiary or cestui que trust. In certain circumstances, the person holding the account is not, strictly speaking, a trustee, but there is nevertheless a duty similar to that owed by a trustee arising in favour of some other person. Such a duty is known as a fiduciary duty and may arise in a variety of circumstances. An example of a trustee-like relationship is an agency relationship. The situation was described by Lord Cottenham in Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 (at 35): Partaking of the character of a trustee, the [agent] — as the trustee for the particular matter in which he is employed as [agent] — sells the principal’s goods, and accounts to him for the money. The goods, however, remain the goods of the owner or principal until the sale takes place, and the moment that money is received the money remains the property of the principal. So it is with regard to an agent dealing with any property; he obtains no interest himself in the subject-matter beyond his

[page 111] remuneration; he is dealing throughout for another, and though he is not a trustee according to the strict technical meaning of the word, he is quasi a trustee for that particular transaction for which he is engaged.

Trust accounts are important to the banker, since the banker owes a duty of care to the beneficiary. A breach of the duty may result in the banker being held liable to the beneficiary. As regards the relationship between the account holder, the banker and the third party, there is no reason to distinguish between trustees properly so called and those who owe a fiduciary duty similar to that of a trustee. All cases will be referred to as trust accounts. One common case that bankers must be aware of is that of executors and administrators of deceased estates. Such people are not initially trustees, but they become so after the completion of their administrative duties, if they are

still holding property to be distributed to survivors of the deceased. This conversion from executor or administrator may happen by force of events, so that not even the parties are aware of the transformation: see Attenborough v Solomon [1913] AC 76; Re Donkin (dec’d); Riechelmann v Donkin [1966] Qd R 96. Weaver and Craigie suggest that bankers should treat all such accounts as trust accounts, since the banker has no way of knowing when an executor or administrator has been surreptitiously converted into a trustee: see Weaver et al (2003) at 3.9980.

4.6.1

Knowledge that account is a trust account

A bank cannot be held liable to the beneficiaries unless it knows that the account is a trust account: see Thomson v Clydesdale Bank Ltd [1893] AC 282; Bank of New South Wales v Goulburn Valley Butter Co Pty Ltd [1902] AC 543. The bank may only be held liable for payment of funds which are known to be a misapplication made in violation of the customer’s obligations to the third party: see Starke J in New South Wales v Commonwealth (No 3) [1932] HCA 12. When an account is headed ‘trust account’, there is little difficulty in fixing the banker with knowledge that the account is indeed a trust account. The banker may also be liable when the account is not described as a trust account, but where the banker knows, or should know, that the customer holds some or all of the money in the account on trust. The question is always whether the facts are such that the banker should have been aware that the funds were held in trust. Illustration: Re Gross; Ex parte Kingston (1871) 6 Ch App 632 A county treasurer had two accounts at the bank, one of which was headed ‘Police Account’. The treasurer absconded and the bank wished to combine his personal account, which was in debit, with the ‘Police Account’, which was in credit. [page 112] The Court held that the heading on the account, together with the knowledge that the treasurer was a public official, was sufficient to make it clear to the bank that the account was a trust account. The bank could not combine it with the official’s private account.

On the other hand, the fact that the customer is a stockbroker known to handle other people’s money does not oblige the banker to treat the account as a trust account: see Thomson v Clydesdale Bank Ltd [1893] AC 282. The same rule would apply to other professions such as real estate agent, solicitor or

auctioneer, although in these cases the governing legislation usually requires that the accounts be identified as ‘trust account’.

4.6.2

Responsibilities to the beneficiary

When the banker knows that the account is a trust account, several conflicting duties make the banker’s lot an unhappy one. On the one hand, it is beyond question that there is a duty owed to the beneficiary. On the other hand, it is equally beyond question that the banker owes the customer/trustee the usual duty to honour payment orders. Undue zeal in pursuing one of these duties will lead inexorably to a breach of the other. The precise scope of the duty owed to the beneficiary is far from clear. It is said that the banker does not have a duty to supervise the account, but the cases are not always easy to reconcile. In particular, the banker should always be concerned if the trustee draws a cheque on the trust account for the credit of their personal account with the same bank. The bank must show that the payment was proper, and failure to do so will result in liability to the beneficiaries: see Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798. Where a bank pays money from a trust account pursuant to an invalid mandate, the beneficiary may bring a claim against the bank if the trustee is unwilling or unable to do so: Fried v National Australia Bank Ltd [2001] FCA 907. Where a bank knows or should know that there is a breach of trust, then it will be liable to the beneficiaries for any funds which have been diverted by the trustee. This is irrespective of whether or not the bank obtains a benefit from the breach: see Stephens Travel Service International Pty Ltd (recs & mgrs appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331. If the banker obtains a benefit from the transaction, it is a very strong indication that the banker knows or should have known of the breach of trust: see Gray v Johnston (1868) LR 3 HL 1. See also National Australia Bank Ltd v Nemur Varity Pty Ltd [2002] VSCA 18. Apart from knowing that there is a breach of trust, there are, broadly speaking, two other situations in which the banker may be liable to the beneficial owner of the [page 113] account. The first is when the banker receives a benefit from the trust account

— usually a payment or a reduction in an overdraft of the customer — with the knowledge that the benefit is trust property. The second is when the banker knowingly assists in the misappropriation of the trust property, whether or not the banker receives any direct benefit as a result. The first is often referred to as ‘knowing receipt’ and the second as ‘knowing assistance’ or, more recently, ‘accessory liability’. The legal mechanism through which the banker is held liable is known as a ‘constructive trust’. The banker in these circumstances has the same responsibilities as a trustee, which entitles the beneficiary to trace the assets into the banker’s hands. The basic principles were established in Barnes v Addy (1874) 9 Ch App 244, where the plaintiff attempted to shift losses to solicitors who advised trustees. Lord Selborne, LC said (at 251–252): … strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

The reason, as explained by Lord Selborne LC (at 252), is that no one could ‘safely discharge the office of solicitor, of banker, or of agent of any sort to trustees’ if the principles were disregarded.

4.6.3

Knowing receipt

If the banker receives a benefit from a payment which the banker knows, or should know, is trust property, then the banker will be liable to the beneficiary. But mere receipt is not enough — there must be ‘knowledge’ that it is trust property. Illustration: Thomson v Clydesdale Bank Ltd [1893] AC 282 A stockbroker deposited into his own account a cheque payable to himself, which represented the proceeds of sale of shares sold on behalf of clients. The clients had instructed the broker to pay the proceeds into certain other banks, so the action by the stockbroker was a breach of his fiduciary duty to his customers. At the time of the deposit, the broker’s account was overdrawn. The broker became insolvent, and his clients claimed to be entitled to have the amount of the cheque repaid to them by the bank. The bank was aware that the cheque represented the proceeds of the sale of shares but did not know whether the money was in the broker’s hands as agent or otherwise.

Lord Herschell LC said (at 288): No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is

[page 114] handing over in discharge of his debt money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon.

There was no evidence in the case that the banker had reason to believe that the money was being improperly dealt with. The mere fact that the customer was a stockbroker and that the cheque represented proceeds from the sale of shares was not sufficient to fix the bank with liability, for it is well known that a broker may make advances to their clients in anticipation of the amounts that will be received from the sale of shares. In such a case, it would be perfectly legitimate for the broker to pay the cheque into their own account. It is not usually necessary for the banker to make inquiries as to the title of the money being paid into the account. Lord Herschell also said (at 287): It cannot, I think, be questioned that under ordinary circumstances a person, be he banker or other, who takes money from his debtor in discharge of a debt is not bound to inquire into the manner in which the person so paying the debt acquired the money with which he pays it. However that money may have been acquired by the person making the payment, the person taking that payment is entitled to retain it in discharge of the debt which is due to him.

The case would have had a different outcome if the stockbroker had first deposited the cheque into the ‘client account’ and later drawn a cheque on that account for the credit of his personal account. In that circumstance, the principle in Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798 would fix the banker with knowledge that the payment was suspect. The banker does not receive a ‘benefit’ by merely applying ordinary banking charges to a transaction which is in breach of trust. In Nimmo v Westpac Banking Corp [1993] 3 NZLR 218, a director misappropriated an amount deposited in a trust account of the company. He transferred most of the amount into foreign currency and travellers cheques with the defendant bank, which charged the normal fees for such purpose but otherwise received none of the proceeds for its own benefit. The Court held that the case was not of the ‘knowing receipt’ type.

4.6.4

Type of knowledge required: ‘knowing receipt’

A detailed consideration of the type of knowledge which is required to fix liability in the ‘knowing receipt’ type of case may be found in Westpac Banking Corp v Savin [1985] 2 NZLR 41. A company called Aqua Marine carried on a business of selling boats. It was found as a fact that three out of four boats sold

were sold by Aqua Marine acting as agents on behalf of individual noncommercial boat owners. One of the boats sold belonged to Savin. Proceeds from the sale of the boat were paid by Aqua Marine into its trading account with Westpac at a time when the company was in difficulties and its account was heavily overdrawn. Savin claimed to be entitled to [page 115] recover the amount from Westpac, arguing that Westpac knew that the money was held by Aqua Marine on trust for the owner of the boat. Note that there were actually two facts which were required to be shown in order for the plaintiff to win — namely that: the bank ‘knew’ that the money it received was the property of the plaintiff; and the payment of the money into the overdrawn account of Aqua Marine was in fact a breach of fiduciary duty on that company’s part. It was not necessary to show that the bank ‘knew’ that the facts had the legal consequence of being a breach of trust. The Court cited with approval Baden, Delvaux and Lecuit v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France SA [1983] BCLC 325; [1992] 4 All ER 161; on appeal [1992] 4 All ER 700. Peter Gibson J itemised five separate types of knowledge: actual knowledge; knowledge that is obtainable but for shutting one’s eyes to the obvious; knowledge that is obtainable but for wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; knowledge of circumstances which would indicate the facts to an honest and reasonable person; and knowledge that is obtainable from inquiries which an honest and reasonable person would feel obliged to make, being put on inquiry as a result of their knowledge of suspicious circumstances. Recent English cases have abandoned this taxonomy, but it is useful and continues to be referenced in Australian cases: see, for example, New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781. Applying this taxonomy to the facts of Westpac Banking Corp v Savin [1985]

2 NZLR 41, Richardson J said (at 54): While the bank would or might not have known in respect of a particular banking whether it was in respect of a boat sold ex stock or as agent for a principal, it knew throughout that 3 out of 4 sales were in the latter category. That actual knowledge of the bank was such that in receiving those cheques and applying them in reduction of the overdraft it must be concluded that it wilfully shut its eyes to the obvious (type 2 knowledge) or, at least, that it wilfully and recklessly failed to ascertain and satisfy itself that the receipts were not in respect of ‘on behalf’ sales (type 3 knowledge). The only reasonable conclusion is that it had constructive notice of the breach of fiduciary duty on the part of Aqua Marine and must account to the plaintiffs for their property.

Richardson J, although noting that it was not strictly necessary in the present case, expressed the view that ‘knowledge’ of any of the five types would serve to fix the bank with liability in the case where the bank has received money that is subject to a [page 116] fiduciary duty. Under this approach, the payment of a cheque from a trust account to a personal account would clearly result in ‘knowledge’ of type 5 and so fix the bank with liability if it received a benefit from the payment. In the common case where the payment is made to reduce an overdraft in the customer’s personal account, the bank receives the benefit of the payment: see also Stephens Travel Service International Pty Ltd (recs & mgrs appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331. In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, the Court noted that the ‘orthodox’ view was that knowing receipt could be founded on any of the five categories, but the Court expressed reservations (at 267) about category 5 knowledge: see also Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22.

Actual vs claimed trust The knowledge required must be knowledge of an actual trust, not a claimed one. Illustration: Carl Zeiss Stiftung v Herbert Smith (No 2) [1969] 2 Ch 276 An organisation referred to as the ‘East German foundation’ commenced an action against a group known as the ‘West German foundation’, claiming that property in England which belonged to the West German foundation was held on trust for them. The claim was by no means clear, but depended upon many hotly disputed issues of both fact and law. The defendants — solicitors for the West German foundation — had received payments for costs and disbursements. These payments were made from the funds that the East German foundation claimed to be trust funds. The solicitors were, of course, fully aware of the allegations concerning the fund.

The East German foundation then brought the current action against the solicitors, claiming that they were constructive trustees of the amounts which they had received from the fund. The Court held that the action failed, since the knowledge was of an alleged trust only. It was said that notice of a ‘doubtful equity’ could not be equated with notice of a trust.

It is sufficient that there is knowledge of the facts that are relevant. It is not necessary to show knowledge of the law: see Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132. Further, if there are circumstances which indicate that the banker should have known of a breach of trust, then it might be possible to infer actual knowledge if no explanation is offered: see Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484. [page 117]

‘Receipt-based’ liability There have been a few decisions which suggested that liability for ‘knowing receipt’ is ‘receipt-based’ and that there is no need to show any fault or any actual knowledge of the breach of trust. This places liability for knowing receipt on the same basis as other cases of restitution: see the comments of Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164 at 45. This has received some support in Australia: see Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16. The Court of Appeal favoured it in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309, but it was firmly rejected by the High Court holding that the Court of Appeal’s reasoning was completely inconsistent with the binding authority of Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22. See also Larsen (2002).

4.6.5

Knowing assistance

The ‘knowing assistance’ or ‘accessory liability’ class of cases is more difficult for the banker, partly because of the uncertainty of what must be ‘known’ and partly because the result is more serious. In the knowing receipt class, the banker must return some benefit received, but in the knowing assistance category, the banker may have to account for funds which went to the benefit of some third party. Perhaps the clearest statement of the difference between the two classes of case is that of Jacobs P in the New South Wales Court of Appeal in DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd [1974] 1 NSWLR 443 (at 459):

The point of difference between the person receiving trust property and the person who is made liable, even though he is not actually a recipient of trust property, is that in the first place knowledge, actual or constructive, of the trust is sufficient, but in the second place [‘knowing assistance’] something more is required, and that something more appears to me to be the actual knowledge of the fraudulent or dishonest design, so that the person concerned can truly be described as a participant in that fraudulent dishonest activity.

The decision of the Court of Appeal in the case was overturned by the High Court of Australia in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8, on the grounds that the plaintiff had not established that the defendant had actual, as opposed to constructive, knowledge. The question of ‘knowing assistance’ has been considered by the Privy Council. Illustration: Royal Brunei Airlines v Tan [1995] 2 AC 378 The defendant was a director and shareholder in a travel agency. He redirected money held on trust by the company. The company became insolvent and the plaintiff/ [page 118] beneficiary sought recovery on the grounds of ‘knowing assistance’. The facts were unusual in that there was no allegation of dishonesty on the part of the trustee. The Privy Council reviewed the cases on ‘knowing assistance’, noting that the cases are concerned with the liability of an accessory to a breach of trust. The Privy Council held that liability of an accessory is based on the accessory’s own dishonesty. Consequently, there may be ‘knowing assistance’ by the accessory even where the trustee’s breach is entirely innocent.

This approach may or may not be followed in Australia. The High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 noted that there has always been a line of cases which concern a person who induces a breach of trust. In Australian law, these are different from the cases where the person knowingly assists the trustee who has a dishonest or fraudulent design. The High Court left open the possibility of considering the issues in later cases (at 164). The Court also cautioned that Australian courts should continue to apply the formulation in the second limb of Barnes v Addy (1874) 9 Ch App 244.

4.6.6

Type of knowledge required: ‘knowing assistance’

The degree of knowledge required to establish a knowing assistance may be different in Australia from that in England. There are several cases in Australia which establish that type 4 knowledge — where a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust — is sufficient to establish liability: see 4.6.4. See also the High Court

decisions in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3VR 133, 170; Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025. In NCR Australia v Credit Connections [2004] NSWSC 1, a credit collection company was required to hold its collections in trust for the plaintiff company. The funds were diverted from the trust into the general company accounts. It was held that the managing director, Mr N, was liable as a constructive trustee. Of interest here is that Mrs N was also held liable on the basis that, even though she was a trained accountant, she willingly closed her eyes to the misappropriation. Austin J found that this knowledge was sufficient to hold her liable as a constructive trustee. After a brief review of the authorities, Austin J observed that liability arises where the defendant has assisted in the trustee’s fraudulent design and has: actual knowledge of the dishonest and fraudulent design; or deliberately shut their eyes to such a design; or [page 119] abstained in a calculated way from making such inquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of the dishonest and fraudulent design; or actual knowledge of facts which to a reasonable person would suggest a dishonest and fraudulent design. He went on to say (at 169) that: … there is no liability if the defendant merely knows facts that would have been investigated by a reasonable person acting diligently, thereby discovering the truth, where the defendant has innocently but carelessly failed to make the appropriate investigations.

This case should be compared to the case of a ‘sleeping director’ who negligently fails to pay proper attention to company affairs: see Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332. The position in England is now probably ruled by the Royal Brunei Airlines v Tan [1995] 2 AC 378. The Privy Council attempted to clarify the state of mind necessary to incur liability as an accessory. In keeping with the view that liability of the accessory is based on dishonesty, it was held that nothing short of dishonesty would suffice. In particular, the categorisation of degrees of knowledge is irrelevant in the ‘knowing assistance’ cases. What is ‘dishonesty’? According to the Privy Council, there is a strong

subjective element, since the actual knowledge of the defendant at the time is relevant. However, the standard must be objective — the question being to determine the behaviour of an honest person in the circumstances of the defendant. According to the Privy Council (at 390): Acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee of the third party proceeding otherwise, and the seriousness of the adverse consequences to the beneficiaries.

There was a slight suggestion in Twinsectra Ltd v Yardley [2002] 2 AC 164 that a subjective test should be used — that is, that the defendant could not be held liable unless they consciously knew that the behaviour was dishonest. That notion was rejected by the Privy Council in Barlow Clowes International Ltd v Eurotrust International [2005] UKPC 37. See also Abou-Rahmah v Abacha [2006] EWCA Civ 1492. As noted above, the case is not law in Australia.

4.6.7

Agents of trustees

There have been some doubts as to the position of agents of trustees, the suggestion being that they may be in some way specially privileged when compared with those [page 120] who deal as strangers with trustees. Sir Clifford Richmond suggested in Westpac Banking Corp v Savin [1985] 2 NZLR 41 that this might be so in cases where agents act in relation to trust property purely in their capacity as agents. He said (at 69): So it can be argued that an agent who receives trust funds from the trustee will be within the first category [‘knowing receipt’] only if he is setting up a title of his own to the funds which he has received and is not acting as a mere depository or merely as a channel through which money is passed to other persons.

This would, of course, be relevant to the banker who is collecting a cheque for his customer when the customer is acting in breach of trust, but it can be of no assistance to the banker who receives trust funds in reduction of an overdraft, or to the banker who knowingly assists in the misappropriation of the account funds. See Thomas (1999) and Thomas (1997) for a discussion of the state of the law at the time regarding knowing receipt and knowing assistance. For more recent developments, see Larsen (2002).

4.6.8

Tracing orders

There are circumstances where there is no question of the banker being directly liable as constructive trustee, but there is a claim by a third party that the money in the account actually belongs to them and not to the customer of the bank. There are procedures which, in certain circumstances, may be followed by the claimant to ‘trace’ the money into the account. These procedures are of only marginal interest to the banker in the ordinary course of things, since the dispute is really between the customer and the third party. In such a case, the usual course for the banker is to avoid the dispute entirely by interpleading — that is, paying the money into court and leaving the customer and third party to fight it out. If, for some reason, the banker chooses to become involved in the dispute, the conflict mentioned above is faced in its starkest form. On the one hand, there is the contractual duty to the customer to obey mandates, and on the other hand, there is the danger that by so doing the banker will become liable to the third party under the principles discussed above.

Mixed funds Often the major question is whether or not the money which is claimed is actually in the account. Assuming that it can be traced into the account and that it then becomes mixed with the customer’s own money, under what conditions can it be said that the money has not been withdrawn by the customer and dispersed elsewhere? The outlines of the law on tracing may be summarised by consideration of two cases. [page 121] Illustration: Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696 Hallett was a solicitor who had mixed money which he held in a fiduciary capacity in an account with his own money. He had operated the account as a personal account for some time after depositing the ‘trust’ money. The Court held that he must be treated as having made all of his drawings on the account from his own money, since it would be contrary to his duty as a fiduciary to draw on the other funds.

Thus, the rule in Clayton’s case is displaced when the account consists partly of private funds and partly of funds held in a fiduciary capacity. However, when there is more than one beneficiary — as indeed there was in Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696 — then, as between the beneficiaries, in the event that the account is not sufficient to

cover all claims, the rule in Clayton’s case is applied to determine which of them is entitled to the ‘trust’ funds: see also Re Laughton [1962] Tas SR 300. It is possible to follow misappropriated funds through several transactions. Illustration: Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 An employee of a customer of the bank obtained sums of money by fraud from his employer’s bank account. He then paid them into his own account with another bank. Later, he withdrew sums of money from that account and made gifts of the amount to a friend. She, in turn, paid the money into an account with the London City and Midland Bank. The Banque Belge had been obliged to restore its customer’s account to its original condition and now claimed to be entitled to the sums in the London City account. The London City bank interpleaded. The Court held that the money could be followed through each of the transactions. The money was recoverable from the friend, since she had given no consideration for it.

The law was clarified and summarised in Re Diplock [1948] Ch 465. In that case, it was said that money could be equitably traced into a mixed fund if three conditions were satisfied — namely: there must be a fiduciary relationship between the claimant and the person who received the money in the first instance; the money must be identifiable; and the making of the tracing order must not work an injustice. [page 122] It may be that the first condition stated is too stringent. In Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] 1 Ch 105, the Court indicated that a tracing order would be available where the claimant had paid money by mistake. See also Bankers Trust Co v Shapira [1980] 3 All ER 353; [1980] 2 WLR 1274, where the funds were obtained fraudulently.

Tracing and agents When the money is in the hands of an agent, the tracing order may be obtained against both the person who has received the money and the agent, but the order against the agent may only be obtained so long as the agent has not paid the money to the principal or to the principal’s order. Thus, if the bank in Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321 had paid the money to the friend or paid a cheque drawn by her, then there would no longer be the possibility of obtaining the tracing order as against the bank. The bank would not have been liable to the plaintiff unless it was privy to the

breach of trust — that is, unless it was a ‘knowing assistance’ type of case: see Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766. In Evans v European Bank Ltd [2004] NSWCA 82, directors of B Ltd had been involved in a credit card fraud. As a result, the company had deposited more than US$7 million with the respondent bank. Without notice of the fraud, the respondent bank had deposited the funds in its own name with Citibank Ltd in Sydney. The appellant was the receiver of the company who was trying to recover the funds. The New South Wales Court of Appeal held that the company had originally held the funds on a presumed or resulting trust for the benefit of the defrauded card holders. However, the bank did not ‘knowingly receive’ the funds. The receiver could not ‘trace’ the funds, since there had been no transfer of assets. The original debt — the deposit with the respondent — was still available to the receiver as a legal right.

4.6.9

Banker as trustee

In the cases we have been considering, there has been a breach of trust. There is no protection for the beneficiary when there is not a breach of trust but the beneficiary nevertheless loses their money. Illustration: Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 3 All ER 75 The bank itself was a trustee of funds with powers, indeed duties, of investment. The bank had trust power to deposit with itself as banker and did so in good faith. The bank then unfortunately went into liquidation and the beneficiaries of the [page 123] trust claimed priority over the general creditors of the bank, arguing that this was a ‘knowing receipt’ case. The Court held that when the bank went into liquidation, the beneficiaries were entitled to obtain the appointment of a new trustee, but on the insolvency of the bank which lawfully appropriated trust money to itself and credited the moneys to a trust deposit account, the new trustee could only rank as an unsecured creditor on behalf of the trust.

On the other hand, it has been said that a banker must exercise a high standard of care when acting as a trustee — a standard which is higher than that of an ordinary trustee: see Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515.

4.7

Joint accounts

A joint account is one which is opened in the name of two or more customers. There are several problems which may arise from the operation of a joint account — namely: which signatures will be required to operate the account; what happens when one of the owners dies; and what happens if the bank pays a cheque on which one or more of the required signatures is forged or missing?

4.7.1

Signatures required

In the absence of any agreement, the debt owed by the banker to the customers is owed to them jointly and severally. As a consequence, cheques should bear the signatures of all the account holders: see Jackson v White and Midland Bank Ltd [1967] 2 Lloyds Rep 68. It is common, and highly desirable, for the banker to take an express mandate from the account owners which expresses, inter alia, which signatures are required on cheques. It is not uncommon for a joint account to be operable by a single signature, particularly when the owners are husband and wife. It is now common for Australian banks to take a mandate which authorises the operation of the account on a single signature: see DCT (NSW) v Westpac Savings Bank (1987) 72 ALR 634.

4.7.2

Presumption of survivorship

When one of the joint account holders dies, the general rule is that the surviving account holders are entitled to the balance of the account. This is sometimes called ‘the presumption of survivorship’. [page 124] It is not entirely clear whether this rule is part of the general law of devolution between joint owners or is due to an implied term in the bankercustomer contract but, in either case, it is based on an implied intention of the parties which may be rebutted by evidence of a contrary intention, and equitable doctrines may override the general rule: see Thorpe v Jackson (1837) 2 Y & C Ex 553; 160 ER 515. The question of survivorship is separate from the question of the operation of the account, so that it is not decisive that the mandate taken calls for all

signatures on cheques or that it allows the account to be operated on the signature of any one of the account holders. Although the question of contrary intention has arisen most often in cases where the joint account is held by husband and wife and the husband dies, it arises in all cases where the funds for the account have been supplied solely or primarily by one of the account holders, for in such a case, there is a presumption that the other party (or parties) holds the sum in trust for the party who provided the funds. The resulting conflict between the two legal presumptions — that of survivorship and that of trust — has resulted in a confused body of case law. The matter is the subject of an Australian High Court decision. Illustration: Russell v Scott (1936) 55 CLR 440 A joint account was opened by an aunt and her nephew by means of the transfer of a sum of money from her private account into the new joint account. The nephew assisted his aunt in all business matters, but did not himself contribute to the account directly. Indeed, all funds which went into the account were from the aunt’s investments. Withdrawals from the account were used solely for the needs of the aunt, although the mandate taken by the bank called for the signature of both before withdrawals could be made. It was found as a fact from statements made by the aunt that she intended that the nephew should take beneficially any balance in the account in the event of her death. The Court held that the nephew was entitled to the balance of the account, and that the evidence of intention was sufficient to override any presumption of a resulting trust in favour of the aunt and her estate.

During the course of their judgment, Dixon and Evatt JJ said (at 451): The right at law to the balance standing at the credit of the account on the death of the aunt was thus vested in the nephew. The claim that it forms part of her estate must depend upon equity. It must depend upon the existence of an equitable obligation making him a trustee for the estate … As a legal right exists in the nephew to this sum of money, what equity is there defeating the aunt’s intention that he should enjoy the legal right beneficially? Both upon principle and upon English authority we answer, none. English authority is confined, so far as we can discover, to cases of

[page 125] husband and wife. But there is much authority to the effect that where a joint bank account is opened by husband and wife with the intention that the survivor shall take beneficially the balance at credit on the death of one of them that intention prevails, and, on the death of the husband, the wife takes the balance beneficially, although the deceased husband supplied all the money paid in and during his life the account was used exclusively for his own purposes.

On the other hand, in Brophy v Brophy (1974) 3 ACTR 57, the Court held that where a joint bank account was operated by husband and wife but all the deposits were made from the wife’s earnings and there was no evidence of an intention to make a gift of the money to the husband, the balance was held by

him in trust for the wife: see also Haythorpe v Rae [1972] VR 633; Coolbrew Pty Ltd v Westpac Banking Corporation [2014] NSWSC 1108. The matter has been before a New Zealand Court. Illustration: Taylor v National Bank of New Zealand [1985] BCL 895 About a week before his death, W asked his wife to obtain forms for him to sign to change his trading and savings account to joint accounts. At first W did not sign the forms for the savings accounts because, it was said, he thought there was not much in them. The bank advised Mrs W that there was a substantial balance and that they should be converted to joint accounts if that was her husband’s intention. Upon being informed of the true value of the accounts, W signed the forms. The executors claimed the sums in the accounts but the bank refused to pay them out, claiming that they belonged to Mrs W by survivorship. The Court held that the forms did have the effect of converting the accounts to joint accounts, that W had the capacity to make the changes and that he intended the wife to be a joint account holder

See also Edgar v Commissioner of Inland Revenue [1978] 1 NZLR 590; National Westminster Bank v Morgan [1985] 1 All ER 821 and the discussion of undue influence at 15.3.1ff. These disputes have all been between the surviving account owner and the estate of the deceased or heirs of the deceased. It seems that the bank may honour the survivor’s cheques, since the survivor is the legal owner of the account. Although it is common for the bank to obtain express authorisation at the time of opening a joint account, it probably may honour the cheques even in the absence of such an authorisation: Weaver et al (2003) at 3.10420.

4.7.3

When one signature forged

When more than one of the account owners is required to sign cheques, there may be problems if the bank honours cheques on which the signature of one of the [page 126] parties is forged or missing. There has been some confusion concerning the right of one party to recover from the bank in such a circumstance. Illustration: Brewer v Westminster Bank [1952] 2 All ER 650 A joint account was operated by two co-executors. One of the parties drew over 450 cheques totalling some £3,000, which he signed himself and on which he forged the signature of the plaintiff. The plaintiff claimed that the money had been wrongly debited to the account. McNair J found in favour of the bank on the basis that no action could be maintained by the joint account holders unless each of them was in a position to sue. Since it was clear that the fraudulent party could not have sued, the action failed.

The decision was much criticised and only a few years later the Supreme Court of Victoria refused to follow Brewer in Ardern v Bank of New South Wales [1956] VLR 569. The joint account holders were partners, but in other respects the facts appear to be identical to those of Brewer. Martin J held in favour of the innocent account owner — apparently agreeing that when the bank contracts to honour joint drawings, it is also agreeing with each party severally that it will not honour drawings which are signed by a single party. The Ardern case also noted that the appropriate measure of damages is half the amount of the forged cheques, since the partners in that case were entitled to equal shares in the account. When the account is a trust account, or where it can be established that all of the funds in the account were the property of the defrauded customer, such reasoning would not apply: see also Simos v National Bank of Australasia Ltd (1976) 45 FLR 97 and Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505. It now seems very unlikely that Brewer v Westminster Bank [1952] 2 All ER 650 will be followed, even in England. Illustration: Catlin v Cyprus Finance Corp (London) Ltd [1983] 1 All ER 809 A joint account was held by a husband and wife where the signatures of both parties were required to operate the account. The husband made representations to the bank to the effect that he had his wife’s authority to operate the account on his own, and the bank then paid out funds on the strength of the husband’s signature alone. The wife sued the bank. Contrary to most of the cases of this type, the husband was not joined as a party to the action. The Court noted that, when opening the account, the parties had clearly expected that the bank would honour the obligation to require both signatures. The only way in which that obligation could be given legal effect is if the duty to refrain from paying on one signature was owed to both parties severally and it could therefore be enforced at the suit of the innocent account holder alone.

[page 127] The Court refused to follow Brewer v Westminster Bank [1952] 2 All ER 650, and it now seems unlikely that case retains any authority at all. See also Jackson v White and Midland Bank Ltd [1967] 2 Lloyds Rep 68; Visini v Cadman [2012] NZCA 122; DAR International FEF Co v AON Ltd [2004] EWCA Civ 921.

4.8

Protected accounts

As one response to the Global Financial Crisis, the government of the day implemented a depositor protection scheme, effectively guaranteeing depositors against the risk of ADI failure. Although thought to be a temporary measure, it has become a permanent part of the Australian financial structure.

Division 2AA of Pt II the Banking Act 1959 sets out rules for the Financial Claims scheme for account holders with insolvent ADIs. The Division allows the Finance Minister to make declarations about an ADI where APRA has sought to have the ADI wound up for insolvency. Certain accounts are declared to be ‘protected accounts’. Where a person holds a protected account, the person may be paid certain amounts to maintain their liquidity before they would ordinarily receive payment in the winding up of the ADI. This may be important for individuals, since it effectively gives them access to part of their account during the winding-up process. Perhaps more importantly in the longer term, the Banking Act 1959 substitutes APRA as a creditor for those who hold protected accounts. The Scheme is, in effect, a government insurance scheme for depositor protection. The amount guaranteed is not unlimited. From 1 February 2012, there is a limit of $250,000 for each depositor at each ADI, down from the original cap of $1,000,000. APRA requires that each ADI must develop and implement a ‘Single Customer View’ that identifies the balance of all protected accounts held by a customer. Section 5 of the Banking Act 1959 defines ‘protected account’, but the main definition is found in the Regulations. Certain accounts are not protected — most importantly, foreign currency accounts and others prescribed by the Regulations. Most common forms of accounts are ‘protected accounts’ when held by individuals.

4.9

Statements and passbooks

At one time, current account customers were furnished with a ‘passbook’, which was a written copy of the customer’s account in the bank’s ledger. At certain intervals, the passbook would be updated by the bank’s clerks and handed to the customer for perusal. The intention was that the customer should examine the book for accuracy and inconsistencies and then return it to the banker — along with any complaint if the book showed what the customer believed to be an error. [page 128] Passbooks have been supplanted by bank statements. In modern form, these are computer-produced documents which are printed by the bank’s high speed printers. They are sent to the customer at intervals but, unlike the passbook, it

is not expected that they will be returned to the bank. There is, consequently, no means of systematically detecting statements which may have gone astray, since there is no evidence in the hands of the banker to show that the customer ever received the statement. There is some old authority that the passbook is the property of the customer, not of the banker. If this is correct, then a fortiori the same must be true of the statement: see Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465 at 470. Note, however, that Australian practice is that the passbook contains clauses reserving property to the bank. Australian banks now offer customers the option of viewing statements online. Customers may also choose not to receive printed statements. This may have legal consequences, since the bank is able to keep records which show access to the account statement: see 4.9.4.

4.9.1

Legal effect of the statement

The courts have refused to impose a duty on the customer to read the account and to discover and report forgeries: see 7.4.1. The major textbook writers have been very critical of this, noting that there are early authorities which appear to recognise the existence of the duty — at least to the extent that the passing to and fro of the passbook should be evidence of a stated and settled account: see Chorley (1974). However, it now seems that only legislative action could impose such a duty on the customer: see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7; National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 198. A recent case has reaffirmed that there is no general duty to read the statement or to discover unauthorised transactions. It also showed that any attempt to change this rule must be ‘brought home’ to the customer to be effective: see the discussion of National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242 at 7.4.1. Another way of expressing the same conclusion is to say that the account statement is not an ‘account stated’ — that is, one where the parties have mutually agreed that a certain sum is due. Passive acceptance of the account statement does not amount to an implied agreement. To hold that the statement is an account stated is just another way of imposing a duty on the customer to inspect it — a duty which has been regularly rejected by the courts: see Bailey (1997) for a fuller discussion of ‘account stated’. See also

Simonovski v Bendigo Bank Ltd [2005] VSCA 125; British and North European Bank Ltd v Zalzstein [1927] 2 KB 92. [page 129] It has been held that a passbook is sufficient evidence of title to the account so as to support a valid donatio mortis causa, at least if the passbook must be presented to operate the account: see Birch v Treasury Solicitor [1951] Ch 298; Watts v Public Trustee (1949) 50 SR (NSW) 130. A bank statement, however, is not: see Tawil v Public Trustee of NSW [2009] NSWSC 256. That is not to say, however, that the account statement is wholly without legal effect, for there are circumstances where it may be used as evidence in disputes between banker and customer.

4.9.2

Evidence against the bank

The bank has a duty to its customer to keep accurate accounts. If the customer relies on the statement honestly, then the bank may on occasion be bound by the entries made by it. Illustration: Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161 Due to an error of the bank, dividends payable to her brother were wrongly credited to the defendant’s account. It was found as a fact that the money had been paid under a mistake of fact and that the defendant was not aware that she was receiving additional money to which she was not entitled. Her defence was that the bank was estopped from reclaiming the money by virtue of representations made to her through the periodic statement of account sent by the bank. If she had known that she was not entitled to the money, then there could be no effective estoppel, for she would not have been relying on the representation. The Court held that the bank had a duty to the customer to keep accurate accounts. The inaccurate statements led her to draw money from her account and to spend more than she would otherwise have done. The additional spending was a change in circumstance sufficient to support an estoppel

Brooks was approved in Avon County Council v Howlett [1983] 1 WLR 605. Not every entry in an account will bind the bank, for it is implicit in the Brooks judgment that the bank could have recovered if it had discovered the error before the defendant had changed circumstances by overspending. Illustration: British and North European Bank Ltd v Zalzstein [1927] 2 KB 92 A fraudulent bank manager attempted to deceive auditors by manipulating some accounts. One of the accounts belonged to the defendant and was overdrawn. The manager credited the account with £2,000 which was debited to another account and then later debited the defendant’s account

with the same amount, restoring the accounts to their original position. The customer knew nothing about [page 130] these entries until after the accounts had been restored to their original position — however, he claimed to be entitled to claim the £2,000 credit but to disclaim the corresponding debit. The Court held that the customer did not rely on the accounts and could not claim the credits.

In the course of the judgment, Sankey J said (at 97): … it can [not] be … asserted that an entry made in a passbook is in all cases conclusive and binding on the bank … but each case must be judged on its own particular facts, although the customer starts with the advantage that prima facie it is an admission by the bank in his favour, which cannot in some cases be refuted.

The bank is not precluded from reversing the error where the customer knows or should have known that it was an error. In United Overseas Bank v Jiwani [1976] 1 WLR 964; [1977] 1 All ER 733, the account was erroneously credited twice. The Court permitted the bank to recover the money on the grounds that the customer should have known that there was an error. Unlike Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161, in Jiwani there was a single error of a considerable sum. The Court also held that the customer had not changed his position on the basis of the error. See also the discussion of money paid under a mistake of fact at Chapter 10.

4.9.3

Verification clauses

Although it was for some time hoped that the courts would impose a duty to examine the statement, it now seems that hope is dead: see the discussion at 7.4.1. It is hard to imagine circumstances in which the customer will be bound or, indeed, even seriously prejudiced by the entries in the statement or by failure to read the statement. The Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 expressly accepted that banks may, in principle, impose additional duties on the customer through contractual terms. In some countries, it is common for written contracts to be used when opening accounts. The contract will often contain a term such as the following: The bank’s statement of my/our current account will be confirmed by me/us without delay. In case of absence of such confirmation within a fortnight, the bank may take the said statement as approved by me/us.

These clauses are commonly called ‘verification clauses’ or ‘conclusive evidence clauses’. In essence, these clauses impose a duty on the customer to verify their bank statements and to notify the bank of a discrepancy within a

certain period of time. The customer is precluded from asserting that the statement is incorrect if the account is not ‘verified’. [page 131] Canadian cases have accepted the validity of verification clauses. In Columbia Graphophone Co v Union Bank of Canada (1916) 38 OLR 326; 34 DLR 743, Middleton J held (at 332) that the clauses were ‘intended to be real agreements, and to define the relation between the parties, and relieved the bank from all liability …’. The Supreme Court of Canada held that the clauses provide the bank with a complete defence when paying against a forged drawer’s signature: see Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81. The Singapore Court of Appeal considered verification clauses in Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27, holding that they were valid in a commercial context. However, the Court explicitly reserved its opinion (at 61) on whether the clauses would be effective against a noncommercial customer. As against a non-commercial customer, the terms might offend the Unfair Contract Terms Act (Singapore) (the equivalent of the Unfair Contract Terms sections of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010)). The High Court has held that conclusive evidence clauses in the commercial context are not void as offending against public policy: see Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643. However, in light of the Privy Council decision in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, such a clause will not be effective unless it is clearly included in the contractual terms: see 3.5.3. A verification clause was at the heart of National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242. It was not necessary for the Court to rule on the legitimacy of the clause, since it was held, under the circumstances, that it had not been incorporated into the banker-customer contract: see discussion at 7.4.1. Verification clauses would also need to be tested against the Unfair Contract Terms provisions of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010). A verification clause can only be effective if the statements are received by the customer. The burden of proof will be on the bank to show this: see Rajah J in Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27.

4.9.4

Electronic statements

Some customers do not receive printed bank statements, relying instead on the online statement provided by the bank under internet banking arrangements. Although the courts have not considered the effect of these statements, their legal effect should be the same as printed statements. There is, however, a very important evidential difference. While the bank cannot know whether the customer has read the printed statement, the bank’s computer system will retain information about access to the online statement. [page 132] These records could be decisive in some cases. For example, in cases such as Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161, the customer must plead reliance on the statement. The bank might be able to mount a defence if its records showed that the account had not been accessed. Similarly, although there is no duty on the customer to read and verify the statement, the bank might be in a stronger position if it could show that the statement had been accessed. The record would, of course, only show the internet address of the accessing computer, not the person who used the computer. It is probably not possible to state any rules concerning these issues, only to note that they may introduce a new element into disputes concerning the customer’s rights and obligations regarding the statement.

4.10

Internet fraud

The Internet can be a dangerous place. ‘Spam’ email is continually inviting us to gain large amounts of money for little or no effort. ‘Trojans’ may infect our computers, sending keystrokes to those who wish us harm. ‘Phishing’ rogues set up fake websites that look and feel like real ones, but the main purpose is to capture log-in names and passwords. When these evil elements combine with internet banking, the results can be very unpleasant. Illustration: R v Johnson [2006] QCA 362 This was an appeal against conviction for fraud with a circumstance of aggravation. Mr and Mrs S were directors of a company, R D Constructions Pty Ltd (‘RDC’). On 11 November, $9,715 was transferred by an internet payment from RDC’s account into the account

of the defendant. Mr and Mrs S gave evidence, accepted by the Court, that they had not disclosed internet banking passwords. Evidence given by a bank investigator showed that a person using a Chinese internet provider had logged into the RDC account. The person made a few balance inquiries and then transferred the sum to the defendant’s account. A couple of hours later, the defendant logged into his account with the bank. The balance, which had previously been $32.25, was $9,747.25. The defendant withdrew most of the funds over the next week. Evidence showed that there had been a similar large movement of funds through the defendant’s account in October of the same year. Evidence also showed that the defendant had received emails from a person identifying themselves as ‘Lee Chusu’. The contents advised the defendant that a sum was being transferred to his account, and asked him to take a percentage and transfer the remainder to an account in the name of ‘David Rau’ in St Petersburg. Evidence from the bank investigator was to the effect that these emails from Russia were common. [page 133] The investigator also explained how the funds could have been transferred from RDC’s account. There was a ‘Trojan’ program on RDC’s computer, sending information back to the originator of the program. The investigator believed that the people responsible were related to the Russian mafia. The jury in the Court below convicted the defendant on the charge of dishonestly applying to his own use a sum of money belonging to the bank.

Before the Queensland Court of Appeal, it was argued that the defendant was entitled to draw on the account when the statement showed that it was in credit. This was rejected, since the defendant knew that the credit entry had been obtained fraudulently. The Court of Appeal explained (at 31): Fraud gives a right of action to the victim, not the perpetrator. Forged entries in bank documents, whether done by hand or through the Internet, create nothing more than the opportunity to defraud. The bank’s right to correct the forgeries by reversal entries, and the bank’s right to sue for the recovery of money mistakenly paid out when relying on its own records as genuine, do not mean that before such reversal rights against the bank were created by the fraud.

The Court went on to note that RDC was not only entitled to recover the entire sum taken from its account, but was entitled to interest on the sum during the period the bank had incorrectly recorded the withdrawal. It is a sad state of affairs that the company had more rights under the general law than it would have under the ‘consumer protection’ regime of the EFT Code of Conduct: see 11.6 for a discussion of the Code; see also the discussion of accounts and the effect of a bank statement in Chapter 4.

4.11

Stopping the account

Under certain circumstances, the banker should refuse to allow any withdrawals from the account. In some cases, the banker should even refuse to

permit any further deposits into the account. Terminology is not standard, but ‘stopping the account’ and ‘freezing the account’ are common terms. Freezing the account causes severe problems for the customer. Any outstanding cheques will be dishonoured — one of the reasons given in Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372 for requiring notice before terminating the relationship. However, the New South Wales Court of Appeal, in State Bank of New South Wales v Currabubula Holdings Pty Ltd [2001] NSWCA 47, held that there was no implied term requiring notice to be given before freezing the accounts. Giles JA said that not only was the term not necessary to give business efficacy to the contract, but it would not be reasonable to prevent the bank from acting in a manner designed to protect it from the insolvency or possible insolvency of the customer. Leave to [page 134] appeal to the High Court was refused: see Currabubula Holdings Pty Limited & Anor v State Bank of New South Wales Limited S74/2001 [2002] HCATrans 117. The remainder of this section examines some common circumstances where the account will be frozen.

4.11.1

Mental incapacity

Section 90(1)(b) of the Cheques Act 1986 (Cth) provides that the duty and authority to pay a cheque is terminated by notice of the drawer’s mental incapacity. In so stating, the Act is probably restating the rules of the general law of contract. There is no general rule for determining if a person has become mentally incompetent. It seems that the degree of disability must be that the person cannot understand the nature of the contract involved. In Gibbons v Wright [1954] HCA 17, the High Court held that each party must be capable of understanding the general nature of what they are doing and the capacity to understand the transaction when it is explained: see also Daily Telegraph Newspaper Co v McLaughlin [1904] AC 776 and Guthrie v Spence [2009] NSWCA 369. How can the banker determine if the customer is mentally incapacitated? There is no problem if the customer is certified as mentally incompetent by an appropriate authority, but there will be considerable uncertainty if the banker is advised of the incompetency before any official steps have been taken. If, on

the one hand, the person is mentally incompetent, then cheques must not be paid. If it turns out that the person is not incompetent, then failure to pay cheques will be a breach of contract, as well as exposing the banker to an action in defamation. It seems likely that a banker who pays cheques drawn for the customer’s legitimate obligations could debit the account under the principle in Liggett (B) Liverpool Ltd v Barclays Bank Ltd [1928] 1 KB 48: see the discussion at 8.7.3. However, that outcome is by no means certain.

4.11.2

Death

The duty and authority to pay the customer’s cheques are terminated by notice of the customer’s death: Cheques Act 1986 s 90(1)(c). While death does not have the uncertainty associated with mental incapacity, it is subject to some exceptions in s 90(2) — namely that the termination of authority does not apply to cheques which are presented for payment within 10 days of the receipt of notice of the customer’s death. Previously, payees of outstanding cheques were required to prove in the deceased estate, a process which could take a long time. The estate is protected, since the cheque may be countermanded by a person who claims that they are, or will be, entitled to administer the estate or a beneficiary of the estate: Cheques Act 1986, s 90(2) (b). [page 135] The result is that the bank is obliged to pay some cheques after receiving notice of the customer’s death. Failure to pay could result in an action for breach of contract by the executor. The section is a significant exception to the general rules of agency. This rule has no bearing on the situation where the deceased is not a customer but only a signatory to an account — for example, a company director. However, it would be very prudent for the banker to consider taking new authorities from the customer. Further, the obligation is only to pay cheques. It has no application to other instruments which the customer might have issued. The death of one of the parties to a joint account was dealt with at 4.7, except in one respect. If the account is overdrawn, then the banker should not permit further operation by the survivors, since the operation of the rule in Clayton’s case would mean that cheques paid after the date of the death would be fresh advances, for which the estate of the deceased would not be liable. In

addition, any deposits would go to paying off the earlier advances, thereby having the effect of reducing the liability of the estate. The same caveat applies also to an overdrawn partnership account when one of the partners dies. The only person who is entitled to demand payment of the account balance of the deceased customer is the executor of the estate or the administrator, as the case may be. In theory, the executor is entitled to the balance immediately, since the powers of an executor, unlike those of an administrator, arise immediately on the death of the testator: see 3.8.5. But a banker cannot safely part with the balance of an account merely because someone comes forward claiming to be the executor or the administrator. As long ago as Tarn v Commercial Banking Co of Sydney (1884) 12 QBD 294, it was said, ‘Bankers are in a peculiar position and when asked to hand over large sums of money to persons claiming as executors of deceased customers, they are justified in requiring to be made safe by production of probate’. There is some relief from this in s 69B of the Banking Act 1959 (Cth). Where a depositor dies, the authorised deposit-taking institution (ADI) may apply an amount not exceeding $15,000 — in payment of the funeral expenses — in payment to the executor or to anyone else who is, in the ADI’s opinion, entitled to the amount. There is no need for the ADI to view probate, the will or letters of administration. Although s 69B(2) provides that no action lies against the ADI for acting or failing to act under ss 69AA(1), it would obviously be prudent to be cautious in forming an ‘opinion’ to disburse funds without clear legal authority.

4.11.3

Bankruptcy and winding up

The law of bankruptcy is that part of the law which provides for the orderly division of assets among the creditors of individuals under certain circumstances. The law of bankruptcy is wholly a creation of statute, the current governing statute in Australia being the Bankruptcy Act 1966. [page 136] The early law of bankruptcy was directed at the punishment and imprisonment of defaulting debtors. Contrary to popular opinion, imprisonment was not one of the early methods for dealing with debtors, but rather was originally a means to ‘encourage’ the debtor to use assets which were not available to the creditor by means of the existing legal processes. Once introduced, imprisonment for debtors who would not pay their debts

was quickly extended to imprisonment of those who could not pay their debts. There is no doubt that severe injustices occurred. Even where there were legal processes available to the creditor to attach the assets of the debtor, there was no means for ensuring that the creditors were treated fairly inter se. A single creditor who was better informed or simply quicker off the mark could attach all available assets of the debtor, thereby satisfying their own debt and leaving nothing for the other creditors. Modern bankruptcy law attempts to balance the requirements of several competing policies — namely: the desire to see that the creditors are treated equally among themselves; the public interest in relieving the debtor from a hopeless financial position and returning that person to a productive life; and the policy that fraudulent or dishonest debtors should be punished. ‘Bankruptcy’ is a term which is often used carelessly. A person may only be made a bankrupt by the completion of the strict process of law. It is a very serious matter to declare that a person is a bankrupt and the banker should take care not to claim that a person is such unless very sure that the process has been completed. Failure to exercise care may result in quite large damages for defamation: see 8.7.2. ‘Insolvency’, on the other hand, describes a state of affairs in which the debtor is unable to pay their debts as they fall due, from their own money. There has been a gloss on the language, for it has been said that ‘own money’ in this context does not limit consideration to the resources immediately available but extends to those funds which the debtor might realise if given a reasonable opportunity to liquidate some assets: see Sandell v Porter (1966) 115 CLR 666; Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266; Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321. The corporate equivalent of bankruptcy is ‘winding up’. Winding up is more dramatic, since it involves the destruction of the company at the end of the process — more like bankruptcy followed by execution. We discuss winding up only briefly, at 4.11.3.

Bankruptcy petitions Although there are other methods of proceeding, most bankruptcy proceedings begin with the presentation of a bankruptcy petition. A bankruptcy petition may be presented by the debtor personally (a debtor’s

petition), or it may be presented by a creditor or several creditors acting jointly (a creditor’s petition). Because [page 137] of the severe consequences of a bankruptcy, the right of a creditor to present a petition is limited by a requirement that certain conditions be fulfilled prior to the presentation. Section 44 of the Bankruptcy Act 1966 defines the conditions which are prerequisite to the filing of a creditor’s petition — namely: the debt owing to the petitioning creditor, or the aggregate debt owing to the petitioners, must be at least $5,000 in liquidated sums. This amount must be owing both at the time when the petition is filed and at the time of the act of bankruptcy on which the petition relies; the debtor must have committed an act of bankruptcy (as defined by s 40 of the Bankruptcy Act 1966) within a period of six months immediately before the petition is filed; and the debtor must have had some connection with Australia at the time of the commission of the act of bankruptcy. The necessary connections are of a residential and/or business nature: see Bankruptcy Act 1966, s 43. The first of these conditions is intended to prevent the filing of nuisance petitions by small creditors. Although the amount has been increased to take account of inflation, it is still relatively small. The result is that the filing or threat of filing of a bankruptcy petition is often used, improperly, as a powerful device for the collection of debts. A secured creditor (see 12.2.1) is deemed to be a creditor only to the extend by which the amount of the debt exceeds the value of the security: Bankruptcy Act 1966, s 44(2). As an alternative, the secured creditor may file along with a statement that the security is available for the benefit of creditors generally: Bankruptcy Act 1966, s 44(3). The acts of bankruptcy are defined in s 40 of the Bankruptcy Act 1966. These are intended to be acts whereby it may be objectively determined that the debtor is in fact insolvent, or to indicate certain acts or transactions which evidence a desire to prejudice some or all of the debtor’s creditors. So, for example, departing or attempting to depart from Australia with an intention to defeat or delay creditors is an act of bankruptcy, as is any disposition of property which would, if the debtor became bankrupt, be void against the trustee: Bankruptcy Act 1966, s 40(1)(b)(i) and 40(1)(c)(i). These acts of bankruptcy might be very difficult to prove without full access

to the debtor’s private records. However, there is one act of bankruptcy which is very easy to prove — namely, failure to comply with a bankruptcy notice: Bankruptcy Act 1966, s 40(1)(g) of the Bankruptcy Act 1966 (Cth). The bankruptcy notice is a formal document which demands that the debtor pay a judgment debt, or as much of it as remains unpaid. The notice must be in the prescribed form and must state the consequences of non-compliance: Bankruptcy Act 1966, s 41. The vast majority of creditor’s petitions are based on this act of bankruptcy. [page 138] Following the presentation of a creditor’s petition, a date is set for the hearing of the petition and, provided the court is satisfied that the basic conditions which entitle the creditor to petition are satisfied, will declare the debtor bankrupt. It is at this point, and not before, that the debtor becomes a bankrupt. It is important for the petition to conform strictly to the statutory requirements. A misstatement of the amount due, even by a small amount, will invalidate the petition. An overdraft must be demanded before the amount is ‘liquidated’: see Re Donovan; Ex parte ANZ Banking Group Ltd (1972) 20 FLR 50. Any defect other than a merely formal or clerical one will invalidate the notice: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71. See Tyree and Weaver (2006) at 38.17ff for a fuller discussion of the validity of bankruptcy notices. A debtor’s petition is made by the debtor to the Official Receiver: Bankruptcy Act 1966, s 55(1). It must be supported by a statement of affairs. If the petition and statement are in order, the Official Receiver will accept them whereupon the debtor is bankrupt: Bankruptcy Act 1966, s 55(4) and 55(4A).

Effect of bankruptcy Upon being adjudicated a bankrupt, the consequences for the debtor and all creditors is dramatic. Subject to a few minor exceptions, all of the debtor’s property vests immediately in another person who has agreed to act as the registered trustee or, if there is no such person, in the person known as the Official Trustee. Further, this includes not only the property which is owned at the time of the adjudication, but any property acquired by the debtor on or after the date of the bankruptcy and before discharge: Bankruptcy Act 1966, s 58(1). The trustee also acquires all rights and powers to take proceedings with

regard to any of the bankrupt’s property, again dating from the ‘commencement’ of the bankruptcy.

Doctrine of relation back The ‘commencement’ of the bankruptcy is a time which precedes the time of adjudication. It may even precede the act of bankruptcy that gave the creditor the right to file a creditor’s petition. The concept of the ‘commencement’ effectively gives a retrospective effect to the bankruptcy. Since such a retrospective effect is unusual in legal proceedings, it is worthwhile to pause for a moment to consider the reasons for its necessity in bankruptcy proceedings. Long before a debtor becomes bankrupt, they will be aware that their financial position is difficult, at best and hopeless, at worst. If the trustee could only take the property which was available at the time of the adjudication, then the debtor would have the opportunity to plan for the event and take steps to safeguard some or all of their assets. This might be done, for example, by transferring assets to relatives or to [page 139] trusted friends. But even if there is no attempt to alienate property, the natural course of business is for the debtor to pay the most pressing of the creditors. The result would be that some creditors would receive full satisfaction while others would receive nothing — a situation that modern bankruptcy law was intended to prevent. In order to facilitate the intent of the legislation, the basic principle is that all property vests in the trustee from the time of the earliest act of bankruptcy within a period of time. Consequently, any dealing by the debtor after that time is prima facie invalid, for the property does not belong to the debtor, but rather to the trustee. Similarly, any money which is paid to the debtor does not discharge the obligation for which it is paid, for it is paid to the wrong person — it should be paid to the trustee. The problem with this scheme is that no one knows that the position has changed. Indeed, if no creditor takes advantage of the act of bankruptcy by filing a creditor’s petition within the specified period, then the act of bankruptcy ‘lapses’, and all dealings with the debtor are perfectly valid. Because of this ‘conditional’ effect, there must be some provisions which save some of the normal transactions even when the debtor is later adjudicated a bankrupt.

In summary, the prima facie position is that transactions with the debtor which occurred after the commencement of the bankruptcy are void. Some — indeed, many — may be shown to be valid, but it is on the person wishing to show that the transaction is valid to establish that the transaction falls within one of the protected categories. As we shall see, bankers are given some special consideration by the legislation. The retrospective effect of the adjudication is called the doctrine of relation back. It is found in ss 115 and 116 of the Bankruptcy Act 1966. The commencement of the bankruptcy is calculated as follows: if the debtor has committed only one act of bankruptcy, then that must be the one which formed the basis for the creditor’s petition. The bankruptcy commences at the time of that act; or if the debtor has committed more than one act of bankruptcy, then the bankruptcy commences at the time of the first act which occurred within a period of six months prior to the filing of the creditor’s petition. Even though most creditors’ petitions are based on the failure to comply with a bankruptcy notice, the other acts of bankruptcy mentioned in s 40 of the Bankruptcy Act 1966 are very important, for they allow the commencement to be pushed back in time, possibly allowing the trustee to increase substantially the amount which is available for distribution to creditors generally.

Exceptions During the six-month period which precedes the filing of a creditor’s petition, all transactions with the bankrupt are potentially void. A banker is in the same position as anyone else who has had dealings with the debtor during this period, but [page 140] the nature of the banker-customer contract makes the banker even more exposed. All cheques written by the debtor which have been paid by the banker might have been paid improperly. It is clearly intolerable that all such transactions should be overturned and the Bankruptcy Act 1966 makes provisions for saving transactions. Section 123 deals with transactions which are concluded before the date of the bankruptcy. It is expressly made subject to the sections which deal with the giving of preferences. However, as long as the transaction does not fall into one of the preference categories, it will be safe from the trustee — provided that the

transaction took place before the date of the sequestration order; the person dealing with the debtor had no notice of the presentation of a petition against the debtor; and the transaction was in good faith and in the ordinary course of business: s 123(1) and 123(2). Merely having notice of an act of bankruptcy does not preclude reliance on the saving provisions: Bankruptcy Act 1966, s 123(3). Transactions which fall within the scope of s 123 are payments made by the debtor to any creditor, conveyances, transfers or assignments for valuable consideration, contracts or other transactions for valuable consideration and, importantly for the banker, any transaction to the extent of a concurrent advance made by an existing creditor. Certain transactions made under or in pursuance of a maintenance agreement or maintenance order are also protected, but these are of relatively little interest to the banker. Section 123 of the Bankruptcy Act 1966 may be very valuable to the banker. Illustration: Re Keever (A Bankrupt); Ex parte Trustee of Property of Bankrupt v Midland Bank Ltd [1967] Ch 182 K had an account with the defendant bank which was overdrawn. After she had committed an act of bankruptcy, she received a cheque for an amount which was in excess of the overdraft. She paid the cheque into her account for collection. The cheque cleared on the day when K was adjudicated a bankrupt. The trustee in bankruptcy claimed the proceeds. The bank argued that it had a lien on the cheque on the day when it was paid in and that at that time the bank had no notice of the act of bankruptcy. The Court held that the bank was entitled to succeed on the basis of the equivalent of s 123 of the Bankruptcy Act 1966.

See 16.1 for a discussion of the banker’s lien. Section 124 of the Bankruptcy Act 1966 is even more important to the banker. A payment of money or a delivery of property prior to the date of bankruptcy to, or in accordance with the order or direction of, the debtor is a good discharge to [page 141] the person paying the money or delivering the property provided the payment or delivery was in good faith and in the ordinary course of business. If the payment or delivery is after the date of bankruptcy, then there is an additional requirement that the payment or delivery be made without negligence. The section is of the utmost importance to bankers, for in its absence, a

banker who paid a cheque of a person who became bankrupt would be unable to debit the account if the payment was made after the commencement of the bankruptcy. An example of this is Re Hasler (1974) 23 FLR 139. After the date of becoming bankrupt, the debtor wrote two cheques, which were paid upon presentation by the bank. The Official Receiver applied for an order that the bank pay the sum of the cheques to the Receiver. The bank pleaded that the transaction was saved by s 124 of the Bankruptcy Act 1966. The main issue in the case was whether the bank had paid without negligence. The evidence showed that branch managers were instructed to read bankruptcy information in a number of publications and, in particular, the bank supplied branch managers with a particular publication which contained information that a Mr Hasler had a creditor’s petition presented and later was adjudicated a bankrupt. The address given in the publication was different from the address which had been given to the bank. The Court held that the bank was liable for the amount. Of particular interest for bankers is the approach taken by the Court — that s 124 is analogous to the protective provisions of the Cheques Act 1986: see 8.8.4. In order to show that a payment is ‘without negligence’, it must be shown that due regard was given to the interests of the general body of creditors. Section 125 of the Bankruptcy Act 1966 imposes a duty on bankers. Where a bank finds that one of its customers is an undischarged bankrupt, it must inform the trustee in writing. There must be no further payments out of the account except under the written instructions of the trustee or a court order: Bankruptcy Act 1966, s 125(1). The prohibition on payments only applies if the bank has received an instruction from the trustee or a court order within one month. After that time the banker is entitled to act without regard to any claim or right the trustee may have in respect of the account: Bankruptcy Act 1966, s 125(2).

After-acquired property It is not only the property held by the debtor at the commencement of the bankruptcy which vests in the trustee, but also — subject to certain exceptions — any property which is acquired by the bankrupt before discharge: Bankruptcy Act 1966, s 58(1)(b). One of the consequences of this is that dealings by the debtor with the property are prima facie invalid. However, it is clearly necessary for the debtor to continue living and working and the Bankruptcy Act 1966 makes provisions for saving certain transactions provided that they are completed prior to an active intervention by the trustee.

[page 142] These provisions are found in s 126 of the Bankruptcy Act 1966. A transaction by a bankrupt with a person dealing with them in good faith and for valuable consideration, which relates to after-acquired property, will be protected, provided that it is completed before any intervention by the trustee. Perhaps because it is expected that the bankrupt will continue a fruitful relationship with a banker, the banker is given special treatment in s 126(2) of the Bankruptcy Act 1966. The section deems certain transactions to be for value, namely, the receipt of any money, security, or negotiable instrument from, or in accordance with the order or direction of, a bankrupt by their banker, and any payment or delivery of a security or negotiable instrument made to, or in accordance with the order or direction of, a bankrupt by their banker. It must be emphasised that there is nothing necessarily improper in an undischarged bankrupt carrying on a current account. One of the exceptions to the rule that the property vests in the trustee is that bankrupts are entitled to use personal earnings for their own benefit.

Voidable preferences The trustee has a right to recover assets which were used by the debtor to give a preference to one or more creditors. This is in keeping with the policy of bankruptcy law to treat all creditors fairly inter se. Section 122 of the Bankruptcy Act 1966 applies to all transactions which occurred within six months before presentation of the petition which led to the debtor being adjudicated a bankrupt, as well as to all transactions which occurred between the presentation of the petition and the date of bankruptcy. Note that the rules relating to preferences are different for companies: see 4.11.3. If, at the time of the transaction, the debtor was insolvent and the effect of the transaction is to have the effect of giving the creditor a preference, priority or advantage over other creditors, then the trustee may recover the payment or the property from the creditor who has received a preference: Bankruptcy Act 1966, s 122(1). However, the preferred creditor has a defence if it can be shown that the transaction was in good faith, for valuable consideration and in the ordinary course of business: Bankruptcy Act 1966, s 122(2). Transactions include a conveyance or transfer of property, the creation of a charge on property, a payment or an incurring of an obligation in favour of a creditor: Bankruptcy Act 1966, s 122(1). Since the payment, etc, must be in

favour of a creditor, there is no scope for the trustee to attack the giving of mortgages or other securities in exchange for a new loan. The transaction need only have the effect of giving a preference. It is quite immaterial what was in the mind of either the debtor or the creditor: see Re Stevens (1929) 1 ABC 90. Further, it does not matter if the effect of the payment might be to forestall bankruptcy and hence possibly be of benefit to all creditors. [page 143] The transaction cannot have the effect of giving a preference, priority or advantage over other creditors unless the creditor’s net position is improved. Thus, where a creditor already had an equitable mortgage, the execution of a legal mortgage did not amount to a preference: see Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] ALR 654. The result would be different if the new security gave the creditor greater rights, for example, when a new bill of sale replaces one which would be void for want of registration: see Re Simpson (1935) 8 ABC 234. Similarly, if a mortgage or other security is given partially in respect of existing indebtedness and partly to secure new loans, then it can only be avoided in so far as it relates to the existing indebtedness: see Burns v Stapleton (1959) 102 CLR 97. There is a problem of determining whether the payment amounts to a preference when there is a running account between the parties. The High Court has indicated that if a payment forms only a part of some wider ongoing set of transactions, then the trustee may recover only the amount by which the debit balance is reduced during the relevant period: see Richardson v Commercial Banking Co of Sydney (1952) 85 CLR 110. It may be difficult in practice to know whether a particular payment is to be isolated or treated as part of a larger group: see, for example, Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266. The High Court has considered and extended the ‘running account’ defence. Illustration: Airservices Australia v Ferrier [1996] HCA 54 Airservices Australia had been ordered by the Full Court of the Federal Court to repay some $10 million to the liquidator of Compass Airlines as voidable preferences. It came to this conclusion on the basis that the payments were each specifically appropriated to pay a specific overdue debt owed by Compass. The High Court took a broader view, holding that, although the issue of preference is to be decided objectively for each payment, that does not mean that the purpose of the debtor when making the payment is insignificant. Where the payment is part of a ‘wider transaction’, the payment will probably not be a preference, but where the sole purpose is to discharge permanently

an existing debt, the payment will be a preference. The approach is to examine the business purpose and context of the payment under challenge.

In this approach, the ‘running account’ is merely bookkeeping evidence of the business purpose and context of the payments. If the relationship between the parties contemplates further debits and credits, then the way in which particular payments are appropriated by either the creditor or the debtor is not relevant. The point is illustrated by the High Court’s decision that the final payment was a preference, since the demand by Airservices was ‘looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services’. [page 144] Note that the recovery of such payments in the event of a company winding up is now governed by s 588FA of the Corporations Act 2001: see 4.11.3. Section 122 of the Bankruptcy Act 1966 combines with the rule in Clayton’s case to place bankers in a very privileged position: see 4.3.2. A security taken by a banker on day one will, of course, only secure advances made on or after that day. But if the debt is by way of overdraft, then, by virtue of the rule in Clayton’s case, the continued operation of the account will have the effect of reducing the prior debt — with the result that the debt is gradually converted from an unsecured to a secured debt. That this is indeed the effect was confirmed in Re Yeovil Glove Co Ltd [1965] Ch 148, but see 13.1.3. Even if the transaction is prima facie voidable under s 122(1) of the Bankruptcy Act 1966 (Cth), the creditor may still have a defence if they received the payment or property in good faith, for valuable consideration and in the ordinary course of business: Bankruptcy Act 1966, s 122(2). ‘Good faith’ must be proved by the creditor, but s 122(4)(c) provides that the creditor is deemed not to have acted in good faith if it can be concluded that they knew, or had reason to suspect, that the debtor was insolvent and that the effect of the transaction was to give the creditor a preference. Although the section is framed as one which establishes when the creditor is not in good faith, a creditor who shows that the circumstances do not lead to these conclusions will ordinarily succeed: see Re Beatty [1965] ALR 291. Mere knowledge that the debtor has had cheques dishonoured is not a circumstance that necessarily disentitles the creditor from succeeding: see Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266. The Court in Queensland Bacon also observed, rather confusingly (at 303),

that suspicion that the debtor might be insolvent is not the same as suspicion that the debtor is insolvent. It is probably more difficult for a bank to prove ‘good faith’ when the debtor is a customer, since usually the banker has considerable knowledge of the customer’s financial affairs. Illustration: Rees v Bank of New South Wales (1964) 111 CLR 210 The customer agreed that all of its business takings should be deposited to its overdrawn account. The bank knew that the customer was extended and that it could only meet cheques drawn in favour of trade creditors from the business takings and that, even then, the cheques were not always met. It was not conclusive that the bank believed that the stocks of the company exceeded its liabilities, for that was only one of the relevant criteria. The Court held that the bank was not in ‘good faith’ within the meaning of s 122 of the Bankruptcy Act 1966.

A banker is not receiving a payment when a cheque is deposited for collection. [page 145] Illustration: National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65 A cheque for approximately $102,000 was deposited by KDS Construction Services for collection for its No 1 account on 3 September. At the time, the account of the company was in overdraft in the sum of around $62,000, although withdrawals during the day left the approximate net credit at only $33,000. The next day, a cheque for $40,000 was drawn on the account in favour of two of the directors of the company, and the proceeds of this cheque were deposited in the ‘suspense account’ of the manager. Nearly the entire amount was then withdrawn on the same day and credited to a variety of the company’s accounts. The liquidator of the company claimed the amount of $102,000 was a payment to the bank, which was a preference. The Court held that the deposit of the cheque in those circumstances was not a payment — the bank being merely an agent for collection. It was further held that the bank had a lien on the cheque. When the bank received payment for the cheque, the sum was in discharge of an existing security and so could not be a preference.

The effect of the KDS Construction decision is artificial. There is no doubt that, had the company presented the cheque directly to the paying bank and then handed the proceeds to the appellant bank, there would have been a preference within the meaning of s 122 of the Bankruptcy Act 1966. Why should the result be different merely because the appellant acted as the agent for collection? Further, if the reasoning of the High Court is correct, then why is the deposit of the cheque which creates the lien not a charge on property or an obligation incurred within the meaning of s 122?

Fraudulent dispositions

There is one category of transaction which is voidable no matter when it occurs. Section 121(1) of the Bankruptcy Act 1966 provides that every transfer of property is ‘void’ against the trustee if: the transferred property would probably have become part of the transferor’s estate or would probably have been available to creditors; and the transferor’s main purpose in making the transfer was to prevent, hinder or delay the transferred property from becoming available to creditors. Although the wording of the section is that the transfer is ‘void’, it is clear from decisions that the transaction is only voidable: see Burton (1991a) at 50– 865. The transferor’s main purpose is taken to be that of s 121(1) if it can reasonably be [page 146] inferred from all the circumstances that, at the time of the transfer, the transferor was or was about to become insolvent: Bankruptcy Act 1966, s 121(2). Once again, the potential harshness of the section is tempered by s 121(4), which provides the transfer is not void if: the consideration by the transferee was at least the market value of the property; and the transferee did not know that the main purpose of the transfer was that of s 121(1); and the transferee did not know of the insolvency or impending insolvency of the transferor. The section does not require that the interest be acquired from the debtor — so that if the debtor gives the goods to X who then sells them to Y,Y’s title may not be impeached, provided that Y took them in good faith. If the transaction is avoided, the trustee must refund the consideration given for the property: Bankruptcy Act 1966, s 121(5).

Set-off The other section of special importance to bankers is s 86 of the Bankruptcy Act 1966, which provides for a right of set-off similar to the right to combine accounts. The s 86 right is available when: there have been credits, debts or other dealings between the parties which

amount to a monetary claim; the dealings were ‘mutual’; and the dealings took place prior to the date of bankruptcy. To be ‘mutual’, the dealings must have been between the same parties acting in the same capacity. So, for example, if A is acting as trustee for B in some of the dealings, those dealings will not be ‘mutual’ as between A and the bankrupt. Although not entirely certain, it seems that s 86 is mandatory in the sense that it is not possible to ‘contract out’ of the provision: see Gye v McIntyre [1991] HCA 60 and National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785.

Winding up The winding up of a company is similar to the bankruptcy of an individual, but there are some differences which are of concern to a banker. First, the property of the company does not automatically vest in a trustee as in the case of an individual. The winding up of the company begins at the time of the presentation of a winding-up petition, and the disposition of the property of the company is governed by the Corporations Act 2001. [page 147] In most respects, the disposition of property is under restrictions similar to those suffered by an individual upon the commencement of bankruptcy. In particular, Pt 5.7B, Div 2 of the Corporations Act 2001 makes certain transactions voidable on the application of the liquidator if that application is made to the court within the times specified in s 588FE. Section 588FF empowers the court to make a variety of orders related to voidable transactions, and s 588FG provides the creditor with a number of defences which may save, or partly save, a transaction which would otherwise be impugned. Upon the commencement of a winding up, any disposition of the property of the company, other than one exempted by the Corporations Act 2001, is void unless the court makes an order to the contrary, usually known as a validating order: Bankruptcy Act 1966, s 468(1). Note that this section says ‘void’ and not ‘voidable’. The position of the banker who allows the operation of a company’s bank account after the commencement of the winding up has received attention in several cases.

The equivalent section of the Companies Act 1961 (NSW) was considered in Re Mal Bower’s Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254. The bank had paid cheques drawn by the company in favour of third parties, and the issue was whether the bank could sustain a debit to the account for the amount of the cheques. Street CJ said (at 258): There is, in my view, great force in the bank’s argument that the paying by a bank of a company’s cheque, presented by a stranger, does not involve the bank in a disposition of the property of the company so as to disentitle the bank to debit the amount of the cheque to the company’s account. The word ‘disposition’ connotes in my view both a disponor and a disponee. The section operates to render the disposition void so far as concerns the disponee. It does not operate to affect the agencies interposing between the company, as disponor, and the recipient of the property, as disponee … The intermediary functions fulfilled by the bank in respect of paying cheques drawn by a company in favour of and presented on behalf of a third party do not implicate the bank in the consequences of the statutory avoidance prescribed by s 227.

Re Mal Bower’s was followed in Re Loteka Pty Ltd [1990] 1 Qd R 322. At first, English courts held the opposite. The Court in Hollicourt (Contracts) Ltd v Bank of Ireland [2000] 2 WLR 290 at first instance refused to follow, but the Court of Appeal reversed this finding. The matter is now settled by s 468(2) of the Corporations Act 2001, which provides that s 468(1) does not apply to ‘exempt dispositions’ — a category which includes a payment of money by an ADI out of an account maintained by the company, so long as the payment is made on or before the date of the winding-up order, and the payment is made in good faith and in the ordinary course of its banking business. In Re Mal Bower’s Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254 and Re Loteka Pty Ltd [1990] 1 Qd R 322, the accounts were in credit. It is uncertain [page 148] if the same result applies to the payment of a cheque drawn on an account in overdraft. The English Court of Appeal said that the result would be the same, but McPherson JA was careful in to limit the result to accounts in credit. He has also expressed doubts about the dicta in a non-judicial setting: see McPherson (2001). See also Re Maran Distributors Pty Ltd [1994] 2 Qld R 45, where it was held that a payment into an overdrawn account was a voidable preference, since it had the effect of reducing the indebtedness of the customer to the bank. Winding up of a company differs from the bankruptcy of an individual in one final respect. At the termination of the winding up, the company ceases to exist.

Winding up of a company is not the only way that financial difficulties may be dealt with. Alternatives include the appointment of a receiver or controller, arrangements and reconstructions, or voluntary administration. Winding up, like bankruptcy, is a highly specialised area of law which is impossible to cover in a general text such as this one. The reader is referred to a specialist text on corporations law, such as Austin and Ramsay (2010).

4.11.4

Receivers

A receiver is a person appointed either by the court or by a debenture-holder out of court. The second is by far the most common and is the only kind which will be considered in this section. Such a person derives their powers almost exclusively from the terms of the debenture. Receivers may be appointed by equity courts for a wide variety of purposes. We will be concerned here only with the appointment of company receivers, but many of the considerations are relevant in the broader context. It is possible to appoint a receiver with responsibilities for only a single item of property, but by far the most common form is appointment as receiver and manager who is responsible for all assets and the undertaking of the business of the company. Such a receiver is a ‘controller’ in terms of Pt 5.2 of the Corporations Act 2001. This section is concerned solely with receivers who are controllers. The function of a receiver who is appointed by a debenture-holder is to exercise the powers given by the debenture to realise assets over which they have control, in order to satisfy the debts owed to the secured creditors who were responsible for the appointment. The powers given may range from the mere power to sell the property over which the charge is given, to (more commonly) wide powers of management of the business of the mortgagor company. In the older cases, it is only the first type which is known as a receiver, the other type being referred to as a receiver and manager or sometimes simply as a manager. In more modern cases, the term ‘receiver’ covers the field. The appointment of a receiver is not a winding up: see Moss Steamship Co Ltd v Whinney [1912] AC 254. The structure of the company remains intact and the [page 149] directors remain in office with full powers and duties save that the disposition of the assets covered by the debenture and within the powers granted to the

receiver is within the control of the receiver. In a modern debenture, the actual assets available to the directors following the appointment of a receiver will be virtually nil. The debenture commonly contains a clause which provides that in performing their duties, the receiver shall be the agent of the company and the company-mortgagor alone shall be responsible for all acts and defaults. Since the company has absolutely no say in the appointment of a receiver or of the acts performed by the receiver once appointed, the situation seems strange, but the effect of the clauses has been upheld, with the result that there is no liability on the appointing mortgagee for acts or defaults of the receiver: see Gosling v Gaskell [1897] AC 575. Further, as agent for the company, the receiver may dispose of assets of the company in the name of the company. Failure to include an express clause in the debenture will result in the receiver being deemed the agent of the appointing mortgagee: see Albert Del Fabbro Pty Ltd v Wilckens and Burnside Pty Ltd [1971] SASR 121. A company receiver is liable for debts incurred in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased, used or occupied: Corporations Act 2001, s 419. This liability exists, notwithstanding any agreement to the contrary (s 419(1)) and is without prejudice to any claim which the receiver may have to be indemnified by the company: Corporations Act 2001, s 419(1). Section 420 describes the powers of a receiver, and s 424 permits the receiver to apply to the court for directions in relation to any matter arising in connection with the performance of their functions. A winding-up order has consequences for the receiver. If the receiver is the agent of the company, the agency will cease, with the consequence that the receiver will no longer be able to make contracts or convey property in the name of the company: see Gosling v Gaskell [1897] AC 575. In such a circumstance, it appears that the receiver does not automatically revert to being an agent of the mortgagee but instead becomes and assumes the responsibilities of a principal: see Gosling v Gaskell [1897] AC 575 at 581, 592. As a result, a receiver who purports to be making a contract without personal liability following a winding-up order will have no principal and cannot be held liable on the contract, but would be liable in damages for breach of warranty of authority. If, on the other hand, the receiver does not disclaim personal liability, then they will be personally liable on the contract. Since the damages in either case are likely to be the same, it is clear that a receiver would be well advised to cease activities on the winding up or, alternatively, to obtain an indemnity from the mortgagee on whose behalf appointment was made.

Again, the law relating to receivers is far too complex to be given full coverage in a general banking law text. A specialist text should be consulted: see, for example, Picarda (1990). [page 150]

4.12

Garnishee orders

A owes B money but cannot or will not pay. B sues A and becomes a judgment creditor. C owes A money. Can B look directly to C to obtain payment of the money owed by A? Garnishee orders allow a creditor to attach a debt which is owed to a judgment debtor by a third party. Since every customer of a bank who has an account in credit is a creditor of the bank, it will be clear that bankers must be familiar with the consequences of garnishment proceedings. The usual form of garnishment proceedings is in two stages. A garnishee order nisi will be addressed to the third party debtor, C in our example above — the banker, in the case we are concerned with — ordering the debtor to show cause why the amount owing by the debtor to the judgment debtor should not be made available for the purposes of satisfaction of the judgment debt. The order nisi is granted on the affidavit of the judgment creditor that they believe that there are moneys owing by the garnishee — the bank, in our case — to the judgment debtor. Provided that the garnishee does not show cause, the court will issue an order absolute which directs the garnishee to pay the judgment creditor directly, rather than paying the original debtor. A garnishee order does not transfer the debt. It gives the garnisher the right to be paid by the garnishee. Payment by the garnishee to the garnisher is a valid discharge for the money owed to the judgment debtor. However, the garnishee order gives the judgment creditor no rights to any security for the debt: see Re Combined Weighing and Advertising Machine Co (1889) 43 Ch D 99; and Chatterton v Watney (1881) 17 Ch D 259.

4.12.1

Debt due and owing

A garnishee order nisi is expressed to attach debts owing or accruing due to the judgment debtor. The usual test for whether a debt is one which is owing is whether it is one for which the creditor could have immediately sued, whereas an accruing debt is a debt which is not yet actually payable but is

represented by an existing obligation. A debt accruing due is one which is payable in the future, but which is represented by an existing obligation: see Webb v Stanton (1883) 11 QBD 518. When the order is phrased in these terms, it may not be easy to know if the entire account should be frozen or only the amount of the judgment debt. Illustration: Rogers v Whiteley [1892] AC 118 Whiteley ran a banking business and Rogers had an account there which was in credit some £6,800. Rogers lost an action and became a judgment debtor for some £6,000. The judgment creditor obtained a garnishee order nisi ordering that ‘all [page 151] debts owing or accruing due’ to Rogers should be attached, and the order was served on Whiteley. Meanwhile, Rogers had drawn a number of small cheques which totalled less than £800. The cheques were dishonoured and Rogers sued Whiteley for wrongful dishonour. The sole issue in the case was whether the order nisi attached the whole of the account, or only enough to cover the judgment debt. The Court held that the entire balance was attached.

See also Catalano v Managing Australian Destinations Pty Limited (No 3) [2013] FCA 1194; Dugh v Dugh HC Napier [2011] NZHC 132. When the order nisi states the precise sum which is to be attached, the position is thought to be different: see Weaver et al (2003) at 2.2820. Lord Denning explained the effect of an order nisi in Choice Investments Ltd v Jeromnimon [1981] QB 149 (at 155): [Service of the order nisi] prevents the bank from paying the money to its customer until the garnishee order is made absolute, or is discharged … The money at the bank is then said to be ‘attached’ … But the ‘attachment’ is not an order to pay. It only freezes the sum in the hands of the bank until the order is made absolute or is discharged. It is only when the order is made absolute that the bank is liable to pay.

When the order is made absolute, it gives the judgment creditor a right to recover payment from the garnishee: see Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] UKHL 30

4.12.2

The need for a demand

Rogers v Whiteley [1892] AC 118 clearly assumed that the relationship between the banker and customer was the ordinary debtor and creditor relationship. Following the decision of the English Court of Appeal in Joachimson v Swiss Bank Corp [1921] 3 KB 110, doubts were cast upon the availability of garnishment procedures against current accounts. Lord Atkin had made it clear

beyond argument that the debt owing from a banker to the customer was not ‘due and owing’, but required a demand in order to become so. The Joachimson case was not a garnishee case, but the Court addressed the matter, arguing that a garnishee order nisi would itself amount to a demand sufficient to allow attachment. While that is a very practical solution, it is one which is singularly lacking in logic, a point observed by Atkin LJ (at 131). Most authors consider that current accounts have been the subject matter of garnishee proceedings for so long that it is extremely unlikely that the view of the [page 152] majority in would not be followed. However, in Re ANZ Savings Bank Ltd; Mellas v Evriniadis [1972] VR 690, the Victorian Full Court doubted that the proposition is correct. They observed that the dicta in which held that the order nisi itself could be the demand necessary to make the debt ‘due and owing’ were, at the most, obiter, because in that case their Lordships were not dealing with garnishee proceedings. However, the Court expressly left the question open, since it was not necessary to decide it then. It would seem that regardless of the logic of the position, the better view is that current accounts are subject to garnishee proceedings.

4.12.3

Savings accounts

Although the garnishee order nisi might serve as a substitute for the customer’s demand when there is an attempt to garnish a current account, there has not been the same acceptance that the order can substitute for other conditions precedent which there might be on an account. The matter has been considered on several occasions with regard to savings accounts. Savings accounts ordinarily require that a passbook must be presented, together with a signed withdrawal slip, before the customer is entitled to withdraw money from the account. In addition, some accounts have a requirement that a period of notice be given before withdrawal or before withdrawal of sums in excess of a certain amount. The question is whether the service of a garnishee order nisi may be treated as a substitute for these requirements. After a series of false starts, it now seems clear that unless the terms and conditions of the savings account are complied with concurrently and together with the service of the garnishee order nisi, then the balance in the account

cannot be attached. It has been so held by the Full Courts of three Australian states and also represents the position in England prior to legislative intervention: see Bank of New South Wales Savings Bank Ltd v Fremantle Auto Centre Pty Ltd [1973] WAR 161; Music Masters Pty Ltd v Minelle and the Bank of New South Wales Savings Bank Ltd [1968] Qd R 326; Re ANZ Savings Bank Ltd; Mellas v Evriniadis [1972] VR 690; Bagley v Winsome and National Provincial Bank Ltd [1952] 2 QB 236. The position is now different in the Australian Capital Territory, New South Wales, the Northern Territory, Queensland and Victoria. In the Australian Capital Territory and New South Wales, any amount standing to the credit of a judgment debtor is taken to be a debt owed to the judgment debtor: see Court Procedures Rules 2006 (ACT), r 2306 and Civil Procedure Act 2005 (NSW), s 117. Although the legislation differs slightly in each of the other jurisdictions, the thrust of each is that certain conditions are to be disregarded when determining whether an amount standing to the credit of the customer is attachable as being [page 153] a debt ‘due and owing’: see, for example, Supreme Court Rules, r 71.03 (NT). Matters to be disregarded include any condition: that a demand or notice is required before money is withdrawn; that a personal application must be made before money is withdrawn; that a deposit book must be produced before money is withdrawn; or that a receipt for money deposited in the account must be produced before money is withdrawn. South Australia provides that money owing or accruing to a judgment debtor from a third person or money in the hands of a third person is liable to attachment. This would seem to include bank accounts of all types: Enforcement of Judgments Act 1991 (SA), s 6. Weaver and Craigie suggest that technological advances may also render the old passbook cases inapplicable. The argument is that passbook accounts are now accessible by electronic means, and the passbook no longer is necessary to identify the balance standing to the account: see Weaver et al (2003) at 2.2850.

4.12.4

Money credited after service

Money deposited by the judgment debtor following the service of the order nisi increases the debt owed by the banker to the customer, but can it be said that such moneys were ‘owing or accruing due’? Illustration: Heppenstall v Jackson [1939] 1 KB 585 The bank was served with a garnishee order nisi in respect of a customer’s account. Money had been deposited into the account following this service and the issue in the case was whether these later deposits were attached by the order. The Court held that a garnishee order attaches only those debts which exist at the time that the order is made and served.

Consequently, the general rule is that money deposited into the account after the service of the order is not attached. The general rule has been changed by legislation in some jurisdictions: see, for example, Federal Court Rules (Cth), O 37, r 7(2); Supreme Court Rules (NT), r 71.02(b); Supreme Court (General Civil Procedure) Rules 2005 (Vic), rr 71.02(b) and 71.03(b). On the other hand, the Civil Procedure Act 2005 (NSW) and the Court Procedures Rules 2006 (ACT) seem to preserve the general rule. Unfortunately, Heppenstall v Jackson [1939] 1 KB 585 does not make clear the fate of money which might be deposited after the order is made but before it is served, or the status of money which might be paid out by the bank between the time of making and service of the order. [page 154] Perhaps some guidance may be taken from Bank of New South Wales v Barlex Investments Pty Ltd (1964) 64 SR (NSW) 274. The issue concerned the fate of a cheque for some £400, which had been deposited prior to the making of the garnishee order nisi, but which had remained uncleared at that time. There was a credit for the amount in the customer’s account, but the deposit had been accepted with the customary condition that uncleared effects could not be drawn upon. The Court held that the sum, being uncleared funds, was not part of the debt owed by the bank at the time when the order was made and so was not attached by it: but cf Jones & Co v Coventry [1909] 2 KB 1029; Universal Guarantee Pty Ltd v Derefink [1958] VR 51.

4.12.5

Multiple accounts

When there is an overdraft account and a current account in credit, it appears to be ordinary banking practice for the banker to combine the accounts and to treat as attached only the surplus balance, if any. It appears that this practice is followed irrespective of any agreement with the customer concerning notice.

This is probably acceptable, but the banker would be advised to apply for a discharge or variation of the order nisi before taking such a course of action. Weaver and Craigie consider the position where one of the accounts is a term deposit: see Weaver et al (2003) at 2.2820. While there appears to be no definitive authority on the matter, they suggest that the matter is probably governed by the terms of the deposit agreement, which related to the banker’s right to combine. Since most lending agreements give the bank a right to combine accounts when an order nisi is served, the situation is similar to that of an overdrawn current account. Again, the safe course is to apply to the court for a discharge or variation of the order nisi.

4.12.6

Accounts in which third parties have an interest

The money in the account must belong to the judgment debtor in order to be attachable. Since the judgment creditor takes subject to all equitable interests, it is not sufficient that the account be in the name of the judgment debtor. So, for example, if the money is held in trust — or if there has been a valid assignment of the account to some other party, even if the assignment is equitable only — then the account is not attachable by the garnishment procedure. Illustration: Harrods Ltd v Tester [1937] 2 All ER 236 The account of a married woman was garnished. Her husband brought evidence to the effect that he had supplied all of the money in the account and that the wife only signed cheques with her husband’s consent. The Court held that there was a resulting trust in the husband’s favour, and the account could not be attached by the wife’s creditors even though it stood in her name.

[page 155] A joint account cannot be attached in respect of a debt owed by one only of the account holders. In Hirschorn v Evans; Barclays Bank Ltd, Garnishee [1938] 2 KB 801; [1938] 3 All ER 491, the Court of Appeal held that the joint account of a husband and wife was prima facie the property of both and, as a consequence, it was not available for attachment in respect of the husband’s debt. Deputy Commissioner of Taxation (NSW) v Westpac Savings Bank Ltd (1987) 72 ALR 634 concerned a special statutory procedure. The account in question was a savings account in the joint names of three people. The Court held that the account could not be attached.

On the same principle, the order nisi will be discharged when the account is a partnership account and the debt is that of one only of the partners: see Hoon v Maloff (Jarvis Construction Co Ltd, Garnishee) (1964) 42 DLR (2d) 770. Certain occupations and professions are obliged by statute to maintain trust accounts for clients. Generally, these accounts should not be attached by the garnishee order, since third parties have interests in them. In some cases, the statute itself provides that the account should not be attached for the debts of the legal account holder. For example, in Aktas v Westpac Banking Corp Ltd [2007] NSWSC 1261, the second plaintiff conducted a property management business. As such, it was required by the Property, Stock and Business Agents Act 1941 (NSW) to maintain a trust account to hold rents collected on behalf of clients. Section 36(2) provides that the account should not be attached for satisfaction of debts of the account holder. In spite of this, the defendant bank dishonoured cheques drawn on the trust account. Damages were awarded for breach of contract: see 8.7.2. A factual situation which is, in a sense, the opposite of the case occurs when the account is in the name of one or several, but not all, joint debtors. Illustration: Colburt (D J) & Sons Pty Ltd v Ansen; Commercial Banking Co of Sydney Ltd (Garnishee) [1966] 2 NSWR 289 A judgment was obtained against four debtors by C. The debtors were trading under the name CCS. C then obtained a garnishee order and served it on the bank where an account was kept under the name CCS, but the customers of the bank under that name were only two of the four judgment debtors. The bank objected to the garnishee order on the basis that it did not attach funds held by it. The Court held that in the case of joint and several judgment debtors, the full amount of the debt is recoverable against any one or more of them, and so the garnishee order operated to attach a fund held on behalf of only two of them.

[page 156] The restrictions applying to garnishee orders do not necessarily apply to socalled ‘freezing orders’: see Deputy Commissioner of Taxation v Ghaly [2016] FCA 707 and the discussion of Mareva orders at 16.2.

4.12.7

Foreign accounts

A garnishee order cannot be granted to attach a debt if the payment of the debt to the judgment creditor will not discharge the debt. The problem most often arises in the context of a foreign debt.

A debt is governed by the ‘proper law of the debt’. The proper law may be chosen by the parties or, if no law is chosen, it is the law of the place where the debt is recoverable. In the case of a bank account, this will be the place where the branch that holds the account is located: see Arab Bank v Barclays Bank (DCO) [1954] AC 495. Illustration: Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2003] UKHL 30 The applicants had obtained a judgment in a French court. The judgment debtors held an account with a bank in Hong Kong that had a branch in the UK. The applicant sought a garnishee order against the bank. The Court held that the order was refused on the grounds that payment by the bank in the UK would not discharge the debt owed by the bank in Hong Kong.

See also Taurus Petroleum Limited v State Oil Company of the Ministry of Oil, Republic of Iraq [2013] EWHC 3494 and Hua Wang Bank Berhad v Commissioner of Taxation [2013] FCAFC 28.

[page 157]

5 Bills of Exchange 5.1

Introduction

Suppose that A writes a note to B in the terms: ‘To B. Pay C $500’. A then signs the note. What is the value of a note like this? Why would A write it and why would B take the slightest notice of it? How does C fit into the story? A might write the note for several reasons: B owes A money and A owes C $500. A is suggesting that B pays his debt to C; or B has agreed to lend A money. A uses that credit to pay C $500. A hands the note to C and advises C to present the note to B for payment. B would honour the note because of a contractual obligation, usually a contract between A and B. Common situations include: A is the seller of goods to B and $500 is the price. C is a person to whom A owes money, and is perhaps a person or bank that advanced A funds to acquire the goods originally; or B is a bank that has agreed to lend funds to A. C is A. The second situation here needs some explanation. Why does A write a note to B ordering that B pay A? The answer is that B wants to ‘lend its credit’ rather than advancing funds. The value to A is that the note may be ‘discounted’ — that is, sold to another party D. D will not, of course, pay $500 for the note, but will pay some lower price. The difference between $500 and the lower price — the ‘discount’ price — will be the cost of the loan. B will, of course, also charge a fee for ‘lending its credit’. The use of a note like this to extend credit will be enhanced if the note requires payment at some future date. So, A might draw the note as: ‘To B. Pay A $500 in 180 days’.

The value of the note will be enhanced if D can tell by looking at it that B will actually pay. The best way to do this is by having B write on the note itself; this is called an ‘acceptance’. [page 158] Suppose that D wants to on-sell the note to E. How does E know that D is entitled to the note? Again, the best way to achieve this is for A to write on the note itself something like ‘Pay this note to D’ and sign it. D then writes ‘Pay this note to E’ and signs it. These notes of transfer are called ‘indorsements’. The word is an older form of ‘endorsement’ that is still used in the legislation and in practice. Of course, the note is just a piece of paper. Its value will lie in laws that govern it. What rights and obligations should A, B, C, D and E have under the law?

5.2

Legislation

The final question above would be difficult to answer in the abstract. Historically, it was answered by the customs of merchants and the decisions of commercial courts over many years; legislation was a latecomer. For historical reasons, the ‘note’ discussed in the preceding section is called a ‘bill of exchange’, and it is a species of ‘negotiable instrument’. In 1878, Mackenzie Chalmers published a digest of the law relating to bills of exchange. The digest summarised and discussed more than 2,500 cases and 17 statutes. The digest was so impressive that Chalmers was asked to codify the law relating to bills. The result was the Bills of Exchange Act 1882 (UK), which has been referred to as ‘the best drafted Act of Parliament ever passed’: see Bank Polski v KJ Mulder & Co [1942] 1 KB 497 per MacKinnon LJ at 500. The Act was subsequently copied in most English-speaking jurisdictions, including Australia. A bill of exchange is a negotiable instrument and is one of three important negotiable instruments in Australia: bills of exchange, promissory notes and cheques. Until 1987, all three were governed by the Bills of Exchange Act 1909 (Cth). The Cheques and Payment Orders Act 1986 (Cth) came into operation on 1 July 1987, and in 1998, that Act was renamed the Cheques Act 1986 (Cth). Cheques drawn on or after 1 July, 1987 are governed by the Cheques Act 1986. Although cheques are now subject to the Cheques Act 1986, the Bills of

Exchange Act 1909 still contains ‘Part III — Cheques on a banker’ and still contains the definition of a cheque. The definition in the Cheques Act 1986, although similar, is not quite the same as that of the Bills of Exchange Act 1909. It is possible that an instrument may be a ‘cheque’ within the definition of the Bills of Exchange Act 1909 but not the Cheques Act 1986: see 8.2.3 for an example. Section 6(2) of the Bills of Exchange Act 1909 provides that the Bills of Exchange Act 1909 does not apply to any instrument to which the Cheques Act 1986 applies. Thus, any instrument which satisfies the definition of a ‘cheque’ in s 10 of the [page 159] Cheques Act 1986 is governed by the Cheques Act 1986, provided only that it was drawn on or after 1 July 1987. Although there are many differences between the two Acts, there are also many similarities. In some cases, the Cheques Act 1986 sections are identical to those of the Bills of Exchange Act 1909, except for using the word ‘cheque’ instead of the word ‘bill’. This is particularly so in the parts of the Acts dealing with negotiation.

5.3

The concept of negotiation

The essence of a negotiable instrument is that the debt which it represents should be easily, cheaply and freely transferable. Negotiable instruments were originally developed for the purposes of extending credit and obtaining payment in international sales transactions. In the form of bills of exchange and promissory notes, they now play a significant role in the mobilisation of shortterm capital. In order to facilitate easy transferability, the usual rules about the transfer of property do not apply to negotiable instruments. The rule nemo dat quod non habet (a person cannot give a better title than they hold) — which is so fundamental to the common law of property — is the exception rather than the rule in negotiable instruments law. The fundamental position in the latter is that a bona fide purchaser for value with no notice of defect of title will get good title, even if the transferor has a defective title or, in some instances, no title at all.

5.3.1

Essential features of negotiability

The word ‘negotiable’ must be treated with care, for the complete meaning of the word is not always clear. Even the Bills of Exchange Act 1909 uses the word in several different senses. There is no ‘correct’ usage, but there are three characteristics that seem to be essential: see Crouch v Credit Foncier Co (1873) LR 8 QB 374 and London and River Plate Bank v Bank of Liverpool [1896] 1 QB 7. These are: the instrument must be transferable by delivery or by delivery and indorsement; the person entitled to the instrument may sue in their own name without adding any other party to the action; and a person who takes for value and in good faith takes ‘free of equities’. Note that each characteristic is unusual when compared with the transfer of chattels or the transfer of debts by assignment. Each is discussed in the following paragraphs.

Transfer by indorsement/delivery The first characteristic is that the rights embodied in a negotiable instrument are transferred by delivery and, in some cases, indorsement. ‘Indorsement’ signifies the [page 160] signature on the instrument, usually on the back, of the person who is transferor. The addition of the indorsement will usually make the indorser a surety for payment, as well as transferring the right to the payment. The process of transfer by indorsement and delivery is called ‘negotiation’.

Transferee able to sue in own name The second characteristic of a negotiable instrument is that the person who is entitled to the instrument, called the holder, may sue in their own name. This is an important exception to the common law doctrine of privity of contract, for it is not necessary to sue the person from whom the holder took the instrument. The holder may choose to sue any one or all of the parties who are liable on the instrument. The procedure for suing on a bill is particularly simple. The plaintiff need only produce the bill which will show on its face and back that the plaintiff is the presumed holder. Defences are very limited and the plaintiff holder will

usually be entitled to summary judgment: see Weaver et al (2003) at 7.10ff for more detail.

Transfer free of equities Finally, the holder who takes an instrument which is in a proper form, who takes for value and without any notice of defects in the transferee’s title may take ‘free of equities’ — that is, it is possible in the ordinary course of transferring rights in a negotiable instrument to pass a better title to the transferee than is held by the transferor. This is in stark contrast to the usual property law rule of nemo dat quod non habet. The rule which applies to chattels and most other forms of property is designed to protect the interests of the original owner. The rule of negotiable instruments is designed to protect the integrity of the transaction.

5.3.2

Comparison with transfer of a debt by assignment

One way of viewing a bill of exchange is that it represents a debt which may be transferred from person to person by negotiation. Each person who indorses a bill is liable to the holder: see 5.7ff. The negotiable instrument is not the only method known to our law for the transfer of debts. Both legal and equitable assignments may be used for the same purpose. It is instructive to compare the two methods — negotiable instrument and assignment — to see why the assignment is wholly inappropriate both as a payment mechanism and as a financial device. The holder of a bill may sue in their own name: see Bills of Exchange Act 1909, s 43(1)(a). This is also true of a legal assignee of a debt, but it is not possible to make a legal assignment of a part only of a debt: see Re Steel Wing Co Ltd [1921] 1 Ch 349; [page 161] Norman v Federal Commissioner of Taxation [1963] HCA 21. This makes the legal assignment useless as a payment device. A part of a debt may be the subject of an equitable assignment, but in that case, the assignee of the debt must join the original debtor in an action to recover: Durham Bros v Robertson [1898] 1 QB 765. Section 58 of the Bills of

Exchange Act 1909 provides that the drawing of a bill is not, of itself, an assignment of funds: see 8.10 for more detail. The consideration for a bill is presumed: see Bills of Exchange Act 1909, s 35. Thus it is not ordinarily necessary to plead and to prove that consideration has been given. This is, of course, in contrast to the usual rules of pleading and of debt recovery. It is one of the features that allows for simple summary procedures to be used by the holder of a negotiable instrument. There are also certain extensions to the concept of consideration, which give the holder of an instrument an advantage in certain cases. It is not necessary for the holder to give notice to the original debtor, either for the purpose of making that debtor liable on the instrument or for establishing the priority of the holder over other claimants. By contrast, notice to the debtor is an essential component of a legal assignment and is necessary in order to establish priority in an equitable one: see Dearle v Hall (1828) 3 Russ 1; 38 ER 475. Finally, the assignee of a debt, whether legal or equitable, takes subject to all equities and rights of set-off. So, for example, if the original debt was tainted by fraud, then the debtor may plead that fraud against the assignee, even though the assignee of the debt was not party to the fraud and had no knowledge of it. Again, if the original debt represented the price paid for goods, it may be that the assignee can be met by a partial defence that the goods failed to meet contract specifications, even though the assignee was not part of the original transaction and had no knowledge of the goods or of the breach. By contrast, the holder of a bill of exchange will, under certain circumstances, take the instrument free of equities. There have even been cases where the holder of the instrument has been successful, even though the holder is the supplier of the goods which are alleged to be defective: see Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713. The assignee of a debt must sue for breach of contract if the debt is not paid. All of the defences mentioned above may be raised by the defendant. By contrast, the holder of a bill of exchange must only plead that they are a holder and that the signature of the defendant is on the bill in a position which makes the defendant liable. The plaintiff is then entitled to summary judgment for the face value of the instrument, unless the defendant can obtain the leave of the court to defend. This will not be granted lightly, for the rule is that negotiable instruments are to be treated as cash unless there are exceptional circumstances. As one Court has said, ‘[the] rule of practice is thus, in effect, pay up on the

bill of exchange first and pursue claims later’: see Cebora SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyds Rep 271 at 279. [page 162] This approach has been confirmed by a decision of the New Zealand Court of Appeal. Illustration: International Ore & Fertilizer Corp v East Coast Fertiliser Co Ltd [1987] 1 NZLR 9 East Coast Fertiliser had contracted to purchase goods on C & F terms (cost and freight included in the contract price) from the appellant. As part of this contract, they had accepted a bill of exchange. On arrival, the cargo was contaminated and there was deficiency in the documents. The buyer rejected the goods and sought leave to defend on an action on the bill of exchange on the basis of a total failure of consideration. The Court referred approvingly to UK principles on bills — in particular: bills are to be treated as cash even between immediate parties; except for a total or liquidated partial failure of consideration, a breach by the plaintiff of the underlying contract does not afford a defence, even between immediate parties; and a counterclaim for unliquidated damages cannot be put forward as a set-off. The Court held that it was arguable that the buyers were entitled to reject the goods. The case is then one of total failure of consideration, so leave to defend was granted.

See also K D Morris & Sons Pty Ltd (In Liq) v Bank of Queensland Ltd [1980] HCA 20.

5.3.3

Other negotiable instruments

Bills of exchange, promissory notes and cheques are not the only financial instruments which are negotiable. The Bills of Exchange Act 1909 and the Cheques Act 1986 both consider dividend warrants — that is, a warrant issued by a company to enable a shareholder to obtain dividends from the company’s bank: Bills of Exchange Act 1909, s 101 and Cheques Act 1986, s 118. Other instruments which have been held to be negotiable include short-term bearer securities issued by foreign or domestic governments, bearer debentures issued by corporations, some government and corporate bonds, warehouse certificates, and negotiable certificates of deposit: see Burton (1991b). Although it is not certain, it seems likely that travellers cheques are also negotiable instruments. In Thomas Cook v Kumari [2002] NSWCA 141 Handley JA commented (at 7): It seems however that they [travellers cheques] are neither bills of exchange nor promissory notes but are probably negotiable instruments having acquired this status by the mercantile usage.

[page 163] Admittedly, the nature of the instruments was not in issue in the case: see also Frohlich (1980); Ellinger (1969); and El Awadi v Bank of Credit and Commerce International SA Ltd [1990] 1 QB 606. See the discussion of travellers cheques at 8.3.3 and see Bilinsky (1990) for a contrary view. Certain instruments are known to lack some essential feature of negotiability even though they are easily transferable. These include share certificates, bills of lading, storage receipts and money or postal orders: see Burton (1991b). It should also be noted that receipts, IOUs and debentures which either create or acknowledge an indebtedness are not negotiable, even though there may be a significant market for them: see Thomas v Hollier [1984] HCA 35; Gillard v Game [1954] VLR 525.

5.4

Formal requirements

5.4.1

Definition

Although bills developed from the custom of merchants, the definition of a bill of exchange is now governed by statute. Section 8(1) of the Bills of Exchange Act 1909 provides that: 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.

It will be observed that a bill of exchange involves three parties: a person who makes an order, called the drawer; the person to whom the order is addressed, called the drawee; and a person who is to receive the sum specified, called the payee. One person may be both the drawer and payee. That is, a bill may be drawn ‘To X, Pay Y the sum of $100, (signed) Y’. In some circumstances, it may be beneficial to draw a bill in this way: see discussion at 5.7.4. Newcomers to bills of exchange are sometimes puzzled as to why the drawee would pay the amount ordered. The answer is that they are normally under a contractual obligation to do so. If the drawee does not ‘accept’ the bill, then they may not be sued ‘on the bill’. Each requirement of the definition must be fulfilled for the document to be a bill of exchange. Since a document which is ‘almost’ a bill of exchange has

none of the benefits of the Bills of Exchange Act 1909, the formal requirements are extremely important in practice. [page 164]

5.4.2

Unconditional order

An instrument which does not contain an ‘unconditional order’ is not a bill of exchange. It has been said that the inclusion of words of courtesy will not invalidate an expression which is in all other respects an order to pay, but the cases are by no means easy to reconcile. In Little v Slackford (1828) 1 Mood & M 171; 173 ER 1120, an instrument bearing the words: ‘Mr Little please to let the bearer have £7 and place it to my account and you will oblige’ was held not to be an order, whereas one drawn ‘[The drawee] will much oblige [the drawer] by paying to the order of [the payee]’ was acceptable: see Ruff v Webb (1794) 1 Esp 129; 170 ER 301. Casino ‘house cheques’ signed by the defendant containing the words ‘payable to:’ were held to be an unconditional order in Newham v Diamond Leisure Pty Ltd [1994] NTSC 83. The majority of the Court of Appeal held that the words constituted more than a mere authorisation or request to pay. The reasons that the order must be ‘unconditional’ were explained in Carlos v Fancourt (1794) 5 TR 482; 101 ER 272 (at 485): It would perplex the commercial transactions of mankind, if paper securities of this kind were issued out into the world encumbered with conditions and contingencies, and if the persons to whom they were offered in negotiation were obliged to enquire when these uncertain events would probably be reduced to certainty.

An instrument which orders any act to be done in addition to the payment of money, is not a bill of exchange: Bills of Exchange Act 1909, s 8(2). Further, an instrument expressed to be payable on a contingency is not a bill, and the happening of the event does not cure the defect: Bills of Exchange Act 1909, s 16. So, for example, a document which orders payment ‘on the event of my son being married’ is not a bill of exchange, and it matters not that the son does in fact marry. Instruments which allow payment before the due date have caused problems. Illustration: Emu Brewery Mezzanine Ltd (in liq) v ASIC [2006] WASCA 105 The appellant issued instruments in the form of promissory notes. There was a right of early repayment contained in the contract between the appellant and each individual investor, but the right was not mentioned in the notes themselves.

The Court of Appeal considered a number of conflicting cases, holding that the right to repay early does not alter the fact that the maker of the note has promised to pay at a fixed future time. Payment of the instrument before the fixed time is not ‘payment in due course’ — the instrument is purchased, not discharged.

[page 165] See 5.9.1 for the effect of payment in due course. In Re York Street Mezzanine Pty Ltd (in liq) [2007] FCA 922, the note was payable ‘on 30 November 2005 or earlier’. The Court followed Emu Brewery in holding that the instrument was a valid promissory note. Both cases declined to follow an earlier Queensland case Gore v Octahim Wise Ltd [1995] 2 Qd R 242. In that case, Williams J considered an instrument in the following terms: The Promisor may repay the Principal Sum in whole or part at any time without premium or penalty, together with interest (if any) on the amount prepaid accrued to the date of prepayment.

His Honour held that the term created uncertainty, since the rights and obligations extend beyond the contractual rights and obligations of the parties: see also Williamson v Rider [1963] 1 QB 89. In Club Securities Ltd v Hurley [2007] NZHC 1166, the document contained the words ‘… by the 1st of July 2002’. It was argued that the use of the word ‘by’ instead of ‘on’ created a contingency. After a thorough review of the authorities, Harrison J concluded that the document was a valid promissory note. Section 8(3) of the Bills of Exchange Act 1909 provides that an order to pay out of a particular fund is not unconditional. The reason is that the fund may be inadequate to meet the payment or may cease to exist at the time when the bill is to be paid. This is logical enough, but can cause problems, since it has always been common to name an account from which the funds may or should be paid. The Bills of Exchange Act 1909 attempts to deal with this in s 8(3)(a), where it is said that an unconditional order to pay coupled with an indication of a particular fund to be debited is unconditional. This can lead to some difficult problems. Illustration: Peacocke & Co v Williams (1909) 28 NZLR 354 The document read ‘Please pay to [the appellant] 150 pounds and deduct same from moneys coming due to me on account of contract for Mrs Williams’ residence’. The Court held that the document was a bill of exchange, since there was merely an indication of

the fund from which the drawee was to obtain reimbursement.

5.4.3

Sum certain

Since the drawee must be prepared to pay on demand, it is clear that the amount to be paid should be stated accurately and clearly. This is summarised by requiring that the amount be a ‘sum certain in money’. [page 166] Section 14 of the Bills of Exchange Act 1909 provides an expanded meaning of what most people would consider to be a sum certain. Section 14(1) says that the amount is a sum certain even though the bill specifies that the amount is to be paid: with interest or bank charges; in stated instalments; in instalments with a provision that then entire sum becomes due if there is a default; or at an indicated rate of currency exchange or a specified means of ascertaining a rate of exchange. This expanded definition of ‘sum certain’ was inserted by the 1986 amendments and effectively overrules earlier decisions that a document which required payment ‘plus bank charges’ was not a bill of exchange: see Dalgety Ltd v Hilton [1981] 2 NSWLR 169; Standard Bank of Canada v Wildey (1919) 19 SR (NSW) 384. The 1986 amendments also dealt with the situation where a written amount on the bill is different from an amount in figures. The amount payable was traditionally held to be the amount in writing. The Bills of Exchange Act 1909 now specifies that the amount is to be taken as the smaller of the two amounts or, if there are more than two amounts stated on the bill, the least of these: Bills of Exchange Act 1909, s 14(2).

5.4.4

Time payable

A bill is payable on demand if it is expressed to be so payable or if it has no indication of when payment is to be made: Bills of Exchange Act 1909, s 15(1). A bill is payable at a determinable future time if it is expressed to be payable:

at a fixed period after date or sight: Bills of Exchange Act 1909, s 16(a); or on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening may be uncertain: Bills of Exchange Act 1909, s 16(b). Recall that an instrument expressed to be payable on a contingency is not a bill. It is therefore crucial that, if a specified event is mentioned, it must be a certainty. ‘Sight’ refers to the presentment of the bill to the drawee for ‘acceptance’. A bill is ‘accepted’ when the drawee signs in a way that signifies that they accept their liability to pay the bill at the indicated time. If the drawee refuses to do this, the bill is said to be ‘dishonoured by non-acceptance’: see 5.5.7. The fact that a drawee may fail to ‘accept’ is important. In Korea Exchange Bank v Debenhams (Central Buying) Ltd [1979] 1 Lloyds Rep 548, the English Court of Appeal held that a document which was expressed as payable a fixed time after acceptance was not a bill, since the time for payment was based on a contingency. [page 167] The result would have been different if it had been payable a certain time ‘after sight’, since ‘sight’ includes either acceptance or failure to accept.

5.4.5

Promissory notes

A bill of exchange requires at least three parties: the drawer, the payee and the drawee. The promissory note requires only two. Section 89(1) of the Bills of Exchange Act 1909 provides: 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.

As there must be an ‘order’ in the case of a cheque and a bill of exchange, so must there be a ‘promise’ in order for an instrument to be a promissory note. The words used must indicate an undertaking to pay, not merely an acknowledgement of a debt. Thus, an IOU is not a promissory note: see Akbar Khan v Attar Singh [1936] 2 All ER 545; Thomas v Hollier [1984] HCA 35. The distinction is important since the holder of a promissory note may sue in their own name without proof of antecedent liability. An IOU is merely evidence of a debt owing, but it does not give rise to any new cause of action. Promissory notes have an interesting history as negotiable instruments.

Although they were apparently widely used and treated as negotiable instruments by the commercial interests of the day, Lord Holt held that they were not negotiable at common law: see Buller v Crips (1703) 6 Mod 29. This was evidently intolerable, for an Act was passed in 1704 that overcame the difficulty: 3 & 4 Anne, c 8.

5.4.6

Bearer and order bills

Bills and notes may be either bearer bills or order bills. A bill payable to bearer is one which is expressed to be so payable or on which the only or last indorsement is an indorsement in blank — that is, one that does not specify a named indorsee: Bills of Exchange Act 1909, s 13(3). A bill is payable to order if it is expressed to be payable to a person’s order, or if it is expressed to be payable to a person and does not contain any words prohibiting transfer: Bills of Exchange Act 1909, s 13(4). A bill which is expressed to be payable to a person’s order is payable to that person or that person’s order: Bills of Exchange Act 1909, s 13(5). ‘Person’ includes a body of persons, whether incorporated or not: Bills of Exchange Act 1909, s 4. The way in which a holder ‘orders’ payment to another is by means of indorsement. Indorsements will be discussed in greater detail below: see 5.5.8. For present purposes, the person X who is entitled to payment orders payment to another, Y, by writing: [page 168] ‘Pay Y or order’ on the back of the bill and signing beneath. This is an indorsement from X to Y. X is the indorser, Y the indorsee. The indorsee becomes, for practical purposes, the new payee of the bill. If the named payee is ‘fictitious or non-existing’, then the bill may be treated as payable to bearer: Bills of Exchange Act 1909, s 12(3). See Geva (2016) for a discussion of fictitious payees. An instrument which is: ‘Pay cash or order’ cannot be a valid bill of exchange, since it does not order payment to a person or to order or to bearer: see Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794. The situation is different for an instrument governed by the Cheques Act 1986: see 8.2.4.

5.4.7

Converting bearer bills to order bills

Because the bearer bill is so easily negotiated, a holder of a bearer bill may wish to convert it into an order bill. When that is done, it may not be negotiated without their signature — a valuable safeguard. Although the Bills of Exchange Act 1909 provides an express method of converting an order bill to a bearer bill by means of an indorsement in blank, there is no express provision which allows the conversion of a bearer bill to an order bill. What is the effect of indorsing a bearer bill in a way that orders payment to or to the order of a particular person? In Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506, Sheppard J suggested that it is not possible by indorsement to change the character of a bearer bill and that a bill drawn payable to bearer always remains so payable. The view was based on the wording of s 13(3) of the Bills of Exchange Act 1909 — that a bill is payable to bearer ‘which is expressed to be so payable, or …’. Sheppard J accepted the view expressed in Holden (1991) that this section means that any bill originally expressed to be ‘so payable’ remains a bearer bill, no matter what indorsements it may carry. This view is certainly questionable. Section 39(4) of the Bills of Exchange Act 1909 permits the holder to convert an indorsement in blank into a special indorsement by writing above the indorser’s signature a direction to pay the bill to or to the order of himself, herself or some other person. Although the section only applies when the bill is a bearer bill by virtue of a blank indorsement, it shows that there is nothing in the policy of the Bills of Exchange Act 1909 which prevents the conversion of a bearer bill to an order one. Further, s 13(5) of the Bills of Exchange Act 1909 provides that: ‘[where a bill, either originally or by indorsement, is expressed to be payable to the order of a specified person, and not to the person or their order, it is nevertheless payable to the person or their order at their option]’. There is no assumption here that a bill which [page 169] is originally drawn payable to bearer is immutable. The better view seems to be that conversion to an order bill is possible. This may be done by the payee striking out the ‘or bearer’ and ensuring that the last indorsement is a special indorsement. In Foods Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201 (29 August 2007), the Court accepted Miller Associates (Australia) Pty Ltd v

Bennington Pty Ltd [1975] 2 NSWLR 506 without any review of the arguments.

5.5

Transfer/negotiation

Because of the rights enjoyed by a holder in due course and because of the limited number of defences open to an indorser or a drawer, resisting a claim on a bill often involves arguments over technicalities. In this section we discuss a number of issues which may arise when a bill is transferred by negotiation — issues which, although technical in nature, can have a decisive outcome in an action on a bill.

5.5.1

Holders

The ‘holder’ of a negotiable instrument is given certain rights by the Bills of Exchange Act 1909. A holder is the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. Beginners may be misled by the last part of the phrase since a ‘bearer’ is the person in possession of a bill or note which is payable to bearer. A person in possession of an order bill is not a ‘bearer’. The holder of a bill has one very valuable right, namely, they may sue on the bill in their own name: Bills of Exchange Act 1909, s 43(1)(a). This gives the holder of a negotiable bill substantial advantages over an equitable assignee of a debt. This is not to say that the holder will necessarily succeed, for the other parties to the bill may have defences. However, the holder of a bill is given further procedural and substantive rights in the form of estoppels. These estoppels are discussed at 5.7. The holder also has certain obligations which must be met if they are to retain rights on the bill. These are discussed at 5.8. A ‘holder in due course’ (s 34 of the Bills of Exchange Act 1909) is a holder who has taken the bill, complete and regular on the face of it, where: the bill was not overdue; the holder had no notice that the bill had been dishonoured (if such was the fact); the holder took in good faith and for value; and the holder had no notice of any defect of title of the person who negotiated it.

These requirements are discussed in more detail at 5.5.5. The requirement that the person has ‘taken’ the bill has been interpreted to mean that it has been negotiated to them. As a consequence, the payee of a bill — who [page 170] may be a holder — cannot be a holder in due course, since the bill is not negotiated to a payee: see Jones (R E) Ltd v Waring & Gillow Ltd [1926] AC 670; Inflatable Toy Co Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243; and the discussion at 5.5.4. Although the Bills of Exchange Act 1909 does not explicitly state it, the ‘defect’ in the title may be that the transferor had no title at all.

5.5.2

Consideration

The holder’s right to sue in their own name is not quite as expansive as it sounds. Section 43(1)(a) of the Bills of Exchange Act 1909 does not create a right to sue, but to sue in their own name as plaintiff. The holder must still show that consideration has been given: Stock Motor Ploughs Ltd v Forsyth [1932] HCA 40. In other words, a bill may only be enforced by a holder for value. Valuable consideration for a bill may be constituted by any consideration which is sufficient to support a simple contract: Bills of Exchange Act 1909, s 32(1)(a). In the ordinary case where the bill is given as payment of a debt, the consideration for the bill is the agreement to accept the bill in payment in lieu of the cash that the creditor has the right to demand: see Spencer v Crowther [1986] BCL 422; Belo Nominees Pty Ltd v Barellan Nominees Pty Ltd (1986) 3 SR(WA) 140. There is an extension to the normal rule of consideration. The Bills of Exchange Act 1909 provides that an antecedent debt or liability may also provide good consideration for a bill: Bills of Exchange Act 1909, s 32(1)(b). This is so whether the bill is payable on demand or at a future time: Bills of Exchange Act 1909, s 32(1)(b). The antecedent debt or liability must have been one owed by the payee; third party debts or liabilities are not within the scope of the section unless the discharge of this liability may be taken to imply some obligation on the part of the payee. Phrased another way, an antecedent debt or a liability can constitute valuable consideration for a bill if, and only if, there is some relationship

between the receipt of the bill and the antecedent debt or liability: see Oliver v Davis [1949] 2 KB 727. Illustration: Walsh, Spriggs, Nolan and Finney v Hoag & Bosch Pty Ltd [1977] VR 178 A vendor of land owed a sum to a real estate agent for commission on the sale. A cheque was drawn by the solicitors of the vendor for the amount of the commission and made payable to the plaintiff. There was a dispute concerning the sale and the solicitors stopped payment of the cheque at the instruction of the vendor. In an action on the cheque, the defendant solicitors pleaded lack of consideration. The Full Court of the Supreme Court of Victoria held that an antecedent third party debt could constitute adequate consideration for a cheque provided only that there is a relationship between the receipt of the cheque and the antecedent debt. [page 171] Because both the drawers and the payee of the cheque intended the cheque to be a conditional payment of the antecedent debt, there was sufficient relationship with the antecedent debt so as to constitute consideration for the cheque

See also Oliver v Davis [1949] 2 KB 727; Belo Nominees Pty Ltd v Barellan Nominees Pty Ltd (1986) 3 SR(WA) 140. Cheques and bills of exchange will sometimes be drawn in favour of an agent such as an auctioneer or solicitor. Generally speaking, the agent/payee may enforce the instrument if the principal has given consideration. Illustration: Wragge v Sims Cooper & Co (Australia) Pty Ltd [1933] HCA 59 The respondent acted as a business agent for vendors of land. The appellant gave the respondent two promissory notes made payable to the respondent. The notes were for payment of interest due to the vendors in respect of the sale of land to be paid for in instalments. The respondent/payee attempted to enforce the notes, and the appellant argued that the payee had given no consideration for the notes. The Court held that the debt owed by the appellant to the vendors constituted consideration, since the respondent/payee was under an obligation to account to the vendors. The reasoning was simple: had the note been made payable to the vendors, the antecedent debt would have been consideration. Since the actual payee/agent was under an obligation to account to the vendors, the payee could take advantage of this consideration.

A holder who has a lien on a bill is conclusively presumed to have taken the bill for value: Bills of Exchange Act 1909, s 32(3). These sections are most valuable for a bank which is collecting a bill for its customer, for if the customer’s account is in overdraft, then the bank has a lien on the bill to the extent of the overdraft: see Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622; Bank of New South Wales v Ross, Stuckey and Morowa [1974] 2 Lloyds Rep 110; Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527 and the discussion at Chapter 16. The Bills of Exchange Act 1909 makes a further extension to the concept of

consideration for a bill of exchange. In effect, once a holder gives consideration for a bill, then every later holder is to be considered as having given consideration as against the drawer, the acceptor and any indorser who became an indorser before the time of consideration being given: Bills of Exchange Act 1909, s 32(2). Thus, if A draws a cheque in favour of B and gives it to B as a gift, and if B indorses the cheque to C as a gift and C indorses the cheque to D for value, then D and every later holder of the cheque is deemed to have given value for the cheque as against A, B, and C. [page 172]

5.5.3

Benefit of being a holder in due course

Section 43(1)(b) of the Bills of Exchange Act 1909 provides that the holder in due course holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill. As an example of the kinds of defence which do not concern the holder in due course, a bill may be enforced against an acceptor who accepted the bill under the mistaken belief that an attached bill of lading was genuine: see Guaranty Trust Co of New York v Hannay & Co [1918] 2 KB 623.

5.5.4

The method of negotiation

How does a person become a holder of a bill or note? The person must either be a payee or have the bill ‘negotiated’ to them. The Bills of Exchange Act 1909 specifies the way in which an instrument is transferred by negotiation. An instrument is ‘negotiated’ when it is transferred from one person to another in such a way as to make the transferee a holder of the instrument: Bills of Exchange Act 1909, s 36(1). The method of negotiation depends upon whether a bill is a bearer bill or an order bill.

Bearer instruments A bearer bill is negotiated by delivery: Bills of Exchange Act 1909, s 36(2). As a result of these definitions, bearer instruments may circulate like cash. There is no requirement that the transferor be a person who is entitled to the instrument. A person in possession of a bearer instrument is the holder: Bills of Exchange Act 1909, s 4.

Bearer bills are very insecure. If a bearer bill comes into the possession of a thief, the thief is a holder of the instrument. If the thief delivers the bill to some third party, that party becomes a holder and — if the requirements of s 34 of the Bills of Exchange Act 1909 are satisfied — may become a holder in due course, who is entitled to enforce the bill against all parties liable on it. Bearer instruments may circulate like cash.

Order instruments Order bills are much safer than bearer bills. An order bill may only be negotiated by indorsement of the holder and delivery: Bills of Exchange Act 1909, s 40(3). It is important to note that the indorsement must be made by the holder. The holder of an order bill is the payee or an indorsee who is in possession of the bill: Bills of Exchange Act 1909, s 4. [page 173] To understand the effect of this arrangement, consider again the case of a bill which falls into the hands of a thief — only now suppose that it is an order bill. The thief is not the holder, being neither the payee nor an indorsee. If the thief delivers the bill to some third party, that party does not become a holder; this is so even if the thief forges the name of the true owner of the bill, for the bill has been indorsed by the thief, not by the holder. An important point is that indorsement of a bill serves two very distinct purposes: an indorsement is part of the negotiation process of an order bill; and indorsement is essential to make the indorser liable on the bill. It is for this second reason that a bearer bill will often be indorsed, even though the indorsement is not necessary for the bill to be transferred by negotiation.

5.5.5

Becoming a holder in due course

The Bills of Exchange Act 1909 provides a rebuttable presumption that every holder of a bill is a holder in due course: Bills of Exchange Act 1909, s 35(2). Section 35(2) goes on to provide that if in an action or proceeding on a bill it is admitted or proved, the drawing, acceptance, issue or transfer of the bill is affected by fraud, duress or illegality, then the holder is not entitled to this presumption unless and until they prove that value was given in good faith for the bill at a time after the alleged fraud, duress or illegality.

These sections are slightly misleading, for it is possible for a holder to prove affirmatively that they are a holder in due course by showing that value in good faith was given before the alleged fraud, duress or illegality. In other words, it is not necessary for the holder to rely on the presumption if they have the means of proving that the requirements of the definition of holder in due course are satisfied: see Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527. If the holder must prove the status of holder in due course, then it is of course necessary to prove each part of the definition of holder in due course: Bills of Exchange Act 1909, s 34(1).

Good faith A holder in due course must take the bill in good faith. An act or thing is done in good faith if the act or thing is done honestly, whether or not it is done negligently: Bills of Exchange Act 1909, s 96. Blundering and carelessness are not in themselves a lack of good faith, but the facts could be so bizarre that a court could infer a lack of honesty. As described by Lord Blackburn in Jones v Gordon (1877) 2 App Cas 616 at 629: [A person who was] … honestly blundering and careless, and so took a bill of exchange or a bank-note when he ought not to have taken it, still he would be

[page 174] entitled to recover. But if the facts and circumstances are such that a jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind ‘I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover’, I think that is dishonesty.

For value A holder in due course must have taken the bill ‘for value’. ‘Value’ means valuable consideration as defined in the Act: Bills of Exchange Act 1909, ss 4 and 32(1). The Act makes certain other presumptions as to consideration. The drawer and each indorser of a bill are presumed to have received value for the bill unless the contrary is proved; the presumption includes the acceptor: Bills of Exchange Act 1909, s 35(1). There is doubt as to whether the presumption of these sections is relevant if the holder is required to establish that they are a holder in due course. The

Explanatory Memorandum for the Cheques Act 1986 states that it is not, but the argument seems directed at the presumptions that every holder is presumed to be a holder in due course. There seems no reason to suppose that the presumption of value does not apply when the holder is attempting to establish that they are a holder in due course, but it must be admitted that the matter is not entirely clear.

Complete and regular In order to become a holder in due course, the holder must have taken a bill that is ‘complete and regular on the face of it’. A bill is complete if it is not lacking in any material particular. A bill is not regular if there is something on it which puts the taker on notice that something may be amiss. ‘On the face of it’ includes the back, with the consequence that the indorsements must be ‘regular’: see Arab Bank v Ross [1952] 2 QB 216. A bill is not regular if an indorsement is irregular. Regularity of indorsements is solely a matter of form. It is possible for an indorsement to be regular, yet be completely invalid for the purposes of making the transferee a holder. Such would be the case if an indorsement was forged. On the other hand, it is possible that the indorsement is valid for the purposes of transferring the bill by negotiation, yet be irregular because it is not in the appropriate form: see Arab Bank v Ross [1952] 2 QB 216, especially per Lord Denning at 226–7. [page 175] Illustration: Arab Bank v Ross [1952] 2 QB 216 The defendant made two promissory notes payable to ‘Fathi and Faysal Nabulsy Company’ as a part-payment for some shares. The notes were indorsed in favour of the plaintiff bank. The defendant later learned that the bank had a charge over the shares which ranked prior to his claim. He alleged fraud, partly on the basis that the payees of the notes were also directors of the bank. Fraud could only be raised against the plaintiff bank if it was not a holder in due course of the notes. The indorsement to the bank was in the form ‘Fathi and Faysal Nabulsy’, with the word ‘Company’ omitted. The Court held that the indorsement was valid in the sense that it was effective to transfer the notes by negotiation and thereby constitute the bank as holder. The Court further held that the indorsement was irregular, since the omission of the word ‘Company’ was sufficient to give rise to reasonable doubt whether the payees and the indorsers were one and the same entity. Since the indorsements were irregular, the bank could not be a holder in due course, and the defence of fraud could be raised by the defendant. On the facts, the defence failed.

The question of ‘complete and regular’ was also considered in Heller Factors

Pty Ltd v Toy Corp Pty Ltd [1984] 1 NSWLR 121, where it was said that the test is whether the type of indorsement, or error in the date of making the bill, would reasonably give rise to a doubt over its regularity. In applying that test, a court should take into account the extrinsic circumstances surrounding the indorsement. The custom of bankers may be considered, but it is a guide only and not determinative: see also Yeoman Credit Ltd v Latter [1961] 1 WLR 828.

Notice of defect in title By s 34(2) of the Bills of Exchange Act 1909, the title of the transferor is ‘defective’ if they obtained the bill or the acceptance of the bill by fraud, duress, force and fear, or other unlawful means, or for an illegal consideration, or when it is negotiated in breach of faith, or under such circumstances as amount to a fraud. The English Court of Appeal has held that ‘fraud’ means common law fraud. In Osterreichische Landerbank v S’elite Ltd [1980] 3 WLR 356, the drawers of a bill of exchange were insolvent at the time of drawing the bill. They later negotiated the bill to the plaintiff bank, which knew of their insolvency. In the circumstances, the negotiation was a ‘fraudulent preference’ within the meaning of the UK equivalent of the Bankruptcy Act 1966 (Cth). However, the Court found that there was no defect of title and that the acceptor had no defence to an action on the bill. [page 176]

5.5.6

Deriving title from a holder in due course

The rights of a holder in due course would be sharply diminished if they were unable to negotiate the bill to a person who would acquire similar rights, yet if it becomes known that the bill is affected by fraud or some other defect, it is clear that the person who takes the bill cannot themselves become a holder in due course. The Bills of Exchange Act 1909 deals with this problem by declaring that a holder who derives title through a holder in due course and who is not a party to any fraud, duress or illegality affecting the bill has all of the rights of a holder in due course against the drawer, the acceptor and all indorsers prior to the holder in due course: Bills of Exchange Act 1909, s 34(3). There is no requirement that the holder be a holder for value.

Illustration: Jade International Steel Stahl und Eisen GmbH & Co KG v Robert Nicholas (Steels) Ltd [1978] 3 All ER 104 The holder of a bill of exchange was the named payee and so could not be a holder in due course. However, the holder was also an indorsee of the bill, having taken it from a holder in due course. The Court held that the acceptor of the bill could not raise personal defences against the holder, since the holder had all of the rights of the holder in due course from whom the bill had been taken.

5.5.7

Requisites of valid acceptances

Acceptance of a bill is the signification by the drawee of their assent to the order of the drawer: Bills of Exchange Act 1909, s 22(1). Acceptance must be written on the bill itself and signed by the drawee. The Act provides that a simple signature written on the bill by the drawee is a valid acceptance: Bills of Exchange Act 1909, s 22(2)(a). In order to be a valid acceptance, it must not express that the drawee will perform their promise by any other means than the payment of money: Bills of Exchange Act 1909, s 22(2)(b). A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete: Bills of Exchange Act 1909, s 23(1)(a). It may also be accepted when it is overdue, or after it has been dishonoured by a previous refusal to accept, or by non-payment: Bills of Exchange Act 1909, s 23(1)(b). A ‘general acceptance’ is one which contains no qualifications to the order of the drawer. A holder who presents the bill for acceptance is entitled to a general acceptance and may treat the bill as dishonoured if the acceptor wishes to add qualifications: Bills of Exchange Act 1909, s 49(1). [page 177] It is common for an acceptor to write ‘payable at X’ where X names a bank or branch of a bank. This is unobjectionable unless the bill indicates that it will be paid at X and nowhere else. A bill accepted as ‘payable only at X’ is known as a ‘local acceptance’ and is not a general acceptance: Bills of Exchange Act 1909, s 24(3)(c).

5.5.8

Requisites of valid indorsements

In order to transfer a bill by negotiation, the indorsement must be written or placed on the bill itself and it must be an indorsement of the entire bill: Bills of Exchange Act 1909, s 37(b). Thus, it is impossible to ‘split’ the sum of the bill

into parts, some of which are transferred and some of which are not. Similarly, it is not permissible to indorse the bill to two or more indorsees severally, although there is no prohibition against joint indorsees: Bills of Exchange Act 1909, s 37(b). Joint indorsees who are not partners must each indorse the bill in order to transfer the bill by negotiation. The exception to this is when one or more of the indorsees has the authority to sign for the others: Bills of Exchange Act 1909, s 37(c). The Bills of Exchange Act 1909 permits ‘extending’ the bill in the event that there is no longer any room for further indorsements. The extension is known as an ‘allonge’, and an indorsement which is written or placed on an allonge is taken to be written on the bill itself: Bills of Exchange Act 1909, s 37(a). The use of an allonge is very unusual in Australia. In some foreign legal systems, the first indorsement on an allonge must begin on the bill itself and continue on the allonge. This is an obvious precaution against fraud and is to be highly recommended, although the Bills of Exchange Act 1909 does not impose such requirement. No particular form of signature or formula is required in order to make a valid indorsement. A simple signature is sufficient, provided only that it is written on the bill itself: Bills of Exchange Act 1909, s 37(a).

Payee misdescribed Recall that the requirements of regularity of indorsements are strict: see 5.5.8. Yet it often happens that the payee or indorsee of a cheque is described incorrectly. For example, the person’s first name may be spelled incorrectly, or their initials may be incorrect. If the person indorses with their usual signature, then the indorsement may well be irregular within the Arab Bank v Ross [1952] 2 QB 216 test. The Bills of Exchange Act 1909 provides for a procedure in such a case. The person who is misdescribed may indorse the bill by indorsing in accordance with the designation or spelling in the bill, and may, if they think fit, add their proper signature: Bills of Exchange Act 1909, s 37(d). Any person taking a bill from a payee or an indorsee who is misdescribed should insist upon this procedure being followed, for otherwise the taker will not be a holder in due course, due to an irregularity in the indorsement. [page 178]

Conditional indorsements Indorsements are sometimes made where the transferor wishes the transfer to occur if and only if some condition is fulfilled. Some examples might be ‘Pay to the Order of Jane Doe on the condition that she studies law at an Australian university’, or ‘Pay to the Order of John Smith on the condition that he is not yet insolvent’. The Bills of Exchange Act 1909 permits these so-called conditional indorsements, but severely restricts the operation of the condition. The condition may be disregarded by the payer, and the payment to the indorsee is valid whether the condition is fulfilled or not: s 38. This does not mean that the condition is without any effect whatsoever, but the extent of its operation is by no means clear. The immediate indorsee is probably bound by the condition: see Laney v Gates (1935) 35 SR (NSW) 372. It is thought that the indorsee under a conditional indorsement holds any proceeds in trust for the indorser if payment is obtained while the condition is not satisfied: see Weaver et al (2003) at 7.310. The Explanatory Memorandum for the Cheques Act 1986 observes that the same arguments should apply as between the conditional indorsee and the person who takes from the conditional indorsee and so on, so that any holder may be responsible to the previous one if the condition is not fulfilled.

Other kinds of indorsements The Bills of Exchange Act 1909 recognises several other kinds of indorsements. By s 37(f), an indorsement ‘may be made in blank or special. It may also contain terms making it restrictive.’ An ‘indorsement in blank’ is one which specifies no indorsee: Bills of Exchange Act 1909, s 39(1). Section 39(1) provides that the bill then becomes payable to bearer. The new holder of the bill may either negotiate it by delivery or may exercise the right to insert their own or any other name as the new indorsee, thereby converting the bill back to an order bill. A ‘special’ indorsement specifies the person to whom, or to whose order, the bill is payable: Bills of Exchange Act 1909, s 39(2). All of the provisions of the Act relating to a payee apply — with the necessary modifications — to an indorsee under a special indorsement: s 39(3). A blank indorsement may be converted to a special indorsement by writing above the indorser’s signature a direction to pay the bill to the order of the holder or to some other person: Bills of Exchange Act 1909, s 39(4).

A restrictive indorsement prohibits the further negotiation of the bill, or expresses that it is a mere authority to deal with the bill as thereby directed and not a transfer of the ownership thereof: Bills of Exchange Act 1909, s 40(1). Section 40(1) gives several examples of the latter type of restrictive indorsement: ‘Pay D only’, ‘Pay D for the account of X’ and ‘Pay D or order for collection’. [page 179] A restrictive indorsement gives the indorsee the right to receive payment or to sue any party that the indorser could have sued, but no power to transfer their rights as indorsee unless expressly authorised by the indorsement: Bills of Exchange Act 1909, s 40(2). If the indorsement does authorise further transfer, then later indorsees take subject to the same rights and liabilities as the indorsee under the restrictive indorsement: Bills of Exchange Act 1909, s 40(3).

5.5.9

Transfer of order bill without indorsement

Sometimes the holder of a bill will transfer it to a second party while withholding the indorsement until such time as some further condition is fulfilled. If the bill is an order bill, then the transferee is not a holder, since they are neither the payee nor the indorsee. The transferee becomes a holder only when there is a transfer by negotiation, and that occurs when the indorsement is added to the bill: see Day v Longhurst (1893) 62 LJ Ch 334. Until the time of negotiation, the transferee is merely in the position of an assignee of a chose in action and will be affected by any notice of fraud, duress or illegality which comes to their notice prior to obtaining the indorsement. Illustration: Whistler v Forster (1863) 14 CBNS 248; 143 ER 441 The defendant drew a cheque in favour of G. G transferred the cheque to the plaintiff, but did not indorse it at that time. It was found as a fact that G had obtained the cheque by fraud and that the indorsement was not added to the cheque until such time as the plaintiff had notice of the fraud. The Court held that the plaintiff could not be a holder in due course.

The Bills of Exchange Act 1909 deals with the rights of the transferee in s 36(4), which provides that when a holder of an order bill transfers it for value without indorsement: the transfer gives the transferee such title as the transferor had; and the transferee acquires the right to demand indorsement of the transferor.

The right to demand indorsement may be enforced by applying for an order from the appropriate court. The section does not apply unless the transferor intended to transfer the whole of their rights in the bill: see Good v Walker (1892) 61 LJQB 736.

5.5.10

Transferor by delivery

A bill which is payable to bearer does not require an indorsement in order to be transferred by negotiation. If there is no indorsement, then the transferor is, [page 180] of course, not liable on the bill either to the immediate transferee or to any later holder: Bills of Exchange Act 1909, s 28. This does not mean that the transferor has no obligations at all to the transferee, for just as the law relating to the sale of goods has imposed some responsibility on the seller for the quality of the goods, the Bills of Exchange Act 1909 makes the transferor of a bearer bill responsible for certain deficiencies. A holder of a bill payable to bearer who transfers it by negotiation without indorsement is known as a transferor by delivery: Bills of Exchange Act 1909, s 63(1). The transferor by delivery is not liable on the bill since they have not indorsed it: Bills of Exchange Act 1909, s 63(2). However, the transferor by delivery warrants to the transferee for value that: the bill is what it purports to be; the transferor has the right to transfer the bill by negotiation; and the transferor is not, at the time of the transfer, aware of any fact that renders the bill valueless: Bills of Exchange Act 1909, s 63(3). The warranties given by a transferor by delivery — although valuable to the transferee in some circumstances — are by no means a substitute for an indorsement, since an indorsement is in effect a warranty of payment. It is important to notice the limited scope of the warranty: the transferor is not, at the time of the transfer, aware of any fact which renders the bill valueless. Presumably, it would be a good defence for the transferor to show that the transferor was ignorant of any defect in the bill, even if that ignorance is the result of negligence. There are circumstances, however, where there may be liability on the warranties even though there is no liability on the indorsement.

Illustration: Commercial Bank of Australia Ltd v Barnett [1924] VLR 254 The defendant presented a ‘not negotiable’ cheque to the plaintiff bank for collection. At the request of the bank, the defendant signed his name on the back of the cheque. The plaintiff bank gave cash to the defendant, and the drawee bank later paid the cheque. The cheque had been obtained by fraud. The plaintiff bank repaid the drawee bank and sought to recover the funds from the defendant. The defendant could not be liable on his indorsement, since the cheques were not dishonoured, and there was no liability under s 63 of the Bills of Exchange Act 1909, because the defendant was not a transferor by delivery. Cussen ACJ considered that the defendant was liable on a common law warranty that the ‘cheques were what they purported to be’ and that, even though he was also an indorser, he had a right to transfer them.

[page 181]

5.5.11

Overdue and/or dishonoured bills

When a bill has been in circulation for too long or if it has been dishonoured, then the Bills of Exchange Act 1909 in effect makes the assumption that there is something wrong. The consequence is that a person taking such a bill cannot become a holder in due course. It may be a complex exercise to determine when a bill has been in circulation for too long. Part of the reason for this is that bills serve widely differing economic functions. The Bills of Exchange Act 1909 provides that a demand bill is overdue when it appears on the face of it to have been in circulation for an unreasonable length of time: Bills of Exchange Act 1909, s 41(3). Unnecessarily and unhelpfully, the section goes on to say: ‘what is an unreasonable length of time … is a question of fact’. The section does not appear to have caused any problems, probably because it is unusual to have a demand bill which is not a cheque. For bills which are not payable on demand, s 19 of the Bills of Exchange Act 1909 provides rules for determining the time of payment. The basic time for payment is the last day of the time of payment fixed by the bill: Bills of Exchange Act 1909, s 19(1). If the bill is payable at a fixed period after date, sight or the happening of some event, the day of payment is found by excluding the day of the event and including the day of payment: Bills of Exchange Act 1909, s 19(2)(b). Of course, it is possible that a bill payable a fixed time after sight might be dishonoured by non-acceptance. In that case, time begins to run from the date of noting or protesting for non-acceptance: Bills of Exchange Act 1909, s 19(2)(c). In all cases, a ‘month’ means a calendar month: Bills of Exchange Act 1909, s 19(2)(d). Non-business days are given

special treatment by s 98. The old notion of ‘days of grace’ was abolished by the Law and Justice Legislation Amendment Act 1991 (Cth). If an overdue bill is negotiated, it can only be negotiated subject to any defect of title affecting it at its maturity and no person who takes it can acquire or give a better title than that of the transferor: Bills of Exchange Act 1909, s 41(2).

5.6

Principles of liability

Liabilities of the parties to a bill are arranged so as to facilitate the fundamental objects of negotiable bills. As far as possible, a person should be able to assess the worth of the bill by inspection. The value of the bill should depend upon the creditworthiness of the names contained therein, and the taker should be able to rely upon the credit of any person who became an earlier party to the bill. Of course, all parties expect that the bill will be paid on due presentment for payment. To give effect to this expectation and to allocate the risks of it not happening, the Bills of Exchange Act 1909 provides that becoming a party to a [page 182] bill entails certain promises to later parties and specifies the consequences of these promises being broken. Before looking at the detailed implementation of this scheme, we shall discuss several fundamental principles of liability on the bill.

5.6.1

No liability without signature

A person cannot be held liable as an indorser, drawer or acceptor unless the person has signed the bill in the appropriate capacity: Bills of Exchange Act 1909, s 28. The principle is subject to several exceptions, none of which need concern us here. Problems occasionally arise when an agent signs a cheque on behalf of a principal, for it is not always clear in what capacity the signature is being placed on the cheque.

5.6.2

Person signing as agent

The Bills of Exchange Act 1909 attempts to define the liabilities of a person who signs as agent or in a representative capacity. Provided the person signing a bill is in fact signing on behalf of a principal and adds words to the signature

which indicate that fact, and provided the principal is named or otherwise indicated on the bill itself, then the person signing is not personally liable on the bill: Bills of Exchange Act 1909, s 31(1). The complementary problem is when the signature is accompanied by words which indicate that the person signing is doing so in the capacity of an agent, but there is some defect in the agency arrangements. Section 34(1) of the Bills of Exchange Act 1909 provides that the mere addition to the signature of words which describe the signer as an agent or as filling a representative character does not exempt the signer from liability. The Act also requires a construction which is most favourable to the validity of the bill when attempting to determine if the signature is that of the principal or that of the agent by whose hand it is written: Bills of Exchange Act 1909, s 31(2). The safest course for the principal is to require the agent to sign ‘per pro’. This abbreviation indicates that the signature is affixed by procuration — that is, with the authority of the principal whose name actually appears. Thus, if the agent A signs on behalf of the principal P, then the appropriate form is ‘P per pro A’. The reason that this is safe is that the signature operates as notice that the agent has limited authority to sign for the principal, and the principal is not bound by the signature unless the agent is acting within their authority: see Slingsby v District Bank Ltd [1932] 1 KB 544. [page 183] Illustration: Muirhead v Commonwealth Bank of Australia (1996) 139 ALR 561 Documents in the form of bills of exchange forms were signed by Mrs M only, under printed words ‘For and behalf of GAR & SS Muirhead’. It was not disputed that Mrs M had actual authority to sign for both, but it was argued that the signature did not bind the husband since s 97(1) of the Bills of Exchange Act 1909 required his signature to be ‘written thereon by some other person’. The Court noted that the section did not actually require that the signature be written — only that it was ‘sufficient’ if it was. In Australia, ‘signature’ does not preclude signature by agent, whether written in the name of the agent or the principal. In signing her name, Mrs M clearly confirmed the words: ‘For and on behalf of GAR & SS Muirhead’. She was adopting and authenticating those words by adding her own signature. In so doing, she ‘signed’ not only her own name but also that of her husband.

See also Rigg v Commonwealth Bank of Australia [2001] FCA 1340. A company bill must necessarily be signed by an agent of the company, usually a director. The problems which arise concern the nature of the director’s signature and the situations under which the person who signs may be held personally liable on the bill.

Illustration: Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564 The plaintiffs were payees of several cheques which had been dishonoured. The cheque was drawn on a company account and used a printed form which contained the company’s name and account information. It was, as the Court noted, of a form which would be taken by any ordinary person to be the cheque of the company and of no one else. The company was in liquidation and the plaintiff sought to contend that the defendant was personally liable on the cheque, arguing that although the defendant had signed the cheque, he had merely added ‘words to the signature describing the signer as an agent’ and so could be personally liable on the cheque under the English equivalent of s 31 of the Bills of Exchange Act 1909. The argument was rejected — the Court holding that the director adopts all of the printing and writing on the cheque, not merely the name of the payee and the amount. Consequently, the cheque was deemed to be drawn on the company’s account and the director was not personally liable on it merely because he placed his signature on it.

Bondina seems general enough to cover any case where an agent signs and where the bill clearly indicates the name of the principal. [page 184] Compliance with s 31(1) of the Bills of Exchange Act 1909 is sufficient for the agent to avoid liability, but it is not necessary. Illustration: Valamios v Demarco [2005] NSWCA 98 The appellant signed a number of cheques drawn in favour of the respondent. The cheques were, as is common, pre-printed forms. The name printed on the cheques was ‘E&C Valamiou t/as V&P Produce’, and the account was held by the bank in that name. The signature of the appellant appeared on the printed line provided for the signature of the authorised signatory of the account. The appellant was a partner in the firm and was authorised to draw the cheques in question. The cheques were drawn in favour of a trade creditor for the purpose of paying for produce. Some 16 cheques with a total value of over $200,000 were dishonoured on presentment. Although the requirements of s 31(1) of the Bills of Exchange Act 1909 were not met, the Court held — following Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564 — that each cheque, taken as a whole, showed that it was meant to be a partnership cheque. The case fell within the proviso to s 75 — that is, it was clear from the cheque itself that the signatory did not intend to be held personally liable.

The name and Australian Company Number (ACN) of a company must appear whenever the company is made party to a negotiable bill or letter of credit, whether or not the company is carrying on business under a different business name: Corporations Act 2001 (Cth), s 153. This is not necessary if the ACN is part of the name of the company. Further, if the last nine digits of the ACN are identical to the last nine of the Australian Business Number (ABN), then the ABN may appear instead of the ACN. What is the legal status of a ‘signature’ affixed by a stamp or automatic signature machine? An English Court held that a private person could sign a

document by impressing a rubber stamp with their own facsimile signature: see Goodman v J Eban Ltd [1954] 1 QB 550. Denning LJ expressed some reservations about a stamp with no additional verification, and in particular, noted that it had not been decided that a company could sign by its printed name affixed with a rubber stamp: see Lazarus Estates Ltd v Beasley [1956] 1 QB 702. In Meyappan v Manchanayake (1961) 62 NLR 529, the Supreme Court of Ceylon considered a partnership cheque which carried the printed name of the firm on the reverse side. The name had been impressed with a stamp. The Court held that the stamped name was not validly signed, in the absence of some indication that it was placed there with the authority of the firm. [page 185] Meyappan was followed in the Federal Court in World of Technologies (Aust) Pty Ltd v Tempo (Aust) Pty Ltd [2007] FCA 114, a design case, where the document bore a stamp but with no other verification. Jessup J held that the document had not been signed.

5.6.3

No liability without presentment for payment

The second basic principle of liability is that the promises and the liabilities are conditional. In the ordinary course of events, s 60 of the Bills of Exchange Act 1909 provides that a drawer or indorser has no liability until the bill has been duly presented for payment. If the bill is one which requires acceptance, then the bill must be presented for acceptance before the liability of the drawer or indorser arises, unless presentment for acceptance is excused. There is no liability unless the requisite proceedings are taken on dishonour: Bills of Exchange Act 1909, s 60. See also 5.8.1. Section 51(2) of the Bills of Exchange Act 1909 lists a number of circumstances where presentment is excused entirely. These include a section which excuses presentment where, after the exercise of reasonable diligence, presentment cannot be effected: Bills of Exchange Act 1909, s 51(2)(a). It is not entirely clear if presentment is excused when it is obvious that no amount of diligence would suffice. Presentment of bills is also excused in several other circumstances. Presentment is excused if the drawee is fictitious: Bills of Exchange Act 1909, s 51(2)(b). Presentment is not required to hold the drawer liable when the

drawee or acceptor is not bound to accept or pay, and the drawer has no reason to believe that the bill would be paid if presented: Bills of Exchange Act 1909, s 51(2)(c). An indorser cannot rely on failure to present where the bill was accepted or made for the accommodation of that indorser, and they have no reason to expect that the bill would be paid if presented: Bills of Exchange Act 1909, s 51(2)(d). See also 12.2.4 for a discussion of accommodation bills. Bills are usually expected to be presented at the time specified in the bill. Section 51(1) of the Bills of Exchange Act 1909 provides a general rule which excuses delay in making a presentment for payment. Delay is excused when it is caused by circumstances beyond the control of the holder, and not imputable to their default, misconduct or negligence. When the cause of the delay ceases to operate, presentment must be made with reasonable diligence. The drawer of a bill is liable in the absence of due presentment if the drawer has waived the right to presentment. The waiver may be either express or implied: Bills of Exchange Act 1909, s 51(2)(e). An indorser of a bill will be liable in the absence of due presentment where the indorser has expressly or by implication waived the right to presentment: Bills of Exchange Act 1909, s 52(2)(e). [page 186]

5.6.4

Inchoate bills

What should be the effect of a person signing a blank form which is then either delivered to another person for completion, or which is placed in a desk drawer or safe with explicit instructions that it should be used only for a particular purpose? If the form is not completed, then it is not a bill. Problems arise when an agent who is intended to fill out the bill for a particular purpose uses the form for a different purpose — or for the specified purpose but for an unauthorised amount. It may also happen that the signed form is stolen and filled in by a thief who, of course, has no authority at all. We are concerned here with the rights of the payee, or of a person who takes such a bill by negotiation. It is clear that a form signed by a drawer is a dangerous bill, and it seems reasonable that a person who lets such a dangerous bill loose on the world should be responsible for their actions. The Bills of Exchange Act 1909 does not adopt such a harsh approach, with the result that

it is possible that a person who would otherwise be a holder in due course may be met with a valid defence. The distinction drawn by the Bills of Exchange Act 1909 is between a drawer who ‘delivers’ the bill and one who does not. If the bill is signed by the drawer and delivered to another person in order that the bill may be completed, then any person who is in possession of the bill is prima facie deemed to have the authority to complete the bill in any way the person sees fit: Bills of Exchange Act 1909, s 25(1) and 25(2). If the holder is not a holder in due course, then the completed bill is not enforceable against the drawer or any indorser who became a party to the bill prior to its completion, unless the bill is completed within a reasonable time and strictly in accordance with the authority given: Bills of Exchange Act 1909, s 25(3). Reasonable time is, of course, a question of fact: Bills of Exchange Act 1909, s 25(3). Illustration: Mond v Lipshut [1999] VSC 103 A cheque drawn sometime in 1991 was undated. The cheque was given to a friend as ‘security’ for a debt. The friend had taken no action on it, but conveyed the debt to his daughter on his death. The daughter had sought payment of the outstanding debt, but the drawer had not responded to her demands. The cheque was date-stamped by the respondent’s husband, in her presence, in March 1997. The Court held that, in these circumstances, the Magistrate was entitled to find that the cheque had been dated within a reasonable time for the purposes of s 18 of the Cheques Act 1986. To hold otherwise would be to penalise the kind and humane treatment extended to the drawer by the friend and later by the daughter.

[page 187] When the holder of the completed bill is a holder in due course, there is a conclusive presumption that it has been completed within a reasonable time and in accordance with the authority given: Bills of Exchange Act 1909, s 25(3).

5.6.5

No liability without delivery

These sections might be thought to solve the problem of the signed but incomplete bill, but they must be read with the sections of the Acts which are concerned with delivery of the bill. Any contract arising out of the drawing or an indorsement of a bill is incomplete and revocable until the delivery of the bill: Bills of Exchange Act 1909, s 26(1). In order to make a drawer, indorser or acceptor liable on the bill, it must be shown that it was delivered by that person and that the delivery

was for the purpose of giving effect to the drawing, indorsement or acceptance of the bill: Bills of Exchange Act 1909, s 26(1). There is an exception that an acceptance is complete when the drawee gives notice to the person entitled to the bill: Bills of Exchange Act 1909, s 26(1). There are conclusive presumptions in favour of a holder in due course that delivery was made for the purposes of completing the contract and rebuttable presumptions in favour of other holders: Bills of Exchange Act 1909, s 26(2).

5.6.6

‘Delivery’ and inchoate bills

There are two circumstances which must be differentiated: an incomplete bill is delivered to an agent for the purposes of the agent completing the bill in a specified way; and the bill is left in an incomplete form with an agent for safekeeping, but the agent has no actual authority to complete the bill until instructions are received. In each case, the liability of the drawer or the indorser will be questioned when the agent exceeds their authority. The point of the distinction is that the presumptions of s 26 of the Bills of Exchange Act 1909 — in favour of the holder or the holder in due course — are only that the purpose of the delivery was to give effect to the drawing or the indorsement. There is no presumption in these sections that a delivery was made to an agent for the purpose of completing the bill for the purpose of s 25. Illustration: Smith v Prosser [1907] 2 KB 735 The defendant left South Africa on overseas business. He left two of his agents a power of attorney and two documents which were lithographed forms of promissory notes. These documents were not filled in, except for the defendant’s signature in the [page 188] place for the maker of the notes. The arrangement was that the documents should be in the custody of the agents until such time as the defendant should issue instructions for the documents to be issued as notes for the purposes of raising funds. No such instructions were ever issued, but one of the agents apparently misappropriated the documents, which were purchased by the plaintiff under conditions which would have made him a holder for value of the notes. The Court held that the defendant was not liable, since the notes had not been ‘issued’.

5.7

The chain of liabilities

The scheme of the Bills of Exchange Act 1909 is to set up a ‘chain’ of liabilities. Each person who becomes a party to a bill by drawing, accepting or indorsing becomes responsible not only to any holder but also to any person who is further down the ‘chain’. If the drawee/acceptor fails to pay the bill, the holder may have redress against any of the previous parties who have signed the bill. If one of these parties is forced to pay the holder, that party may in turn have recourse against any person who indorsed the bill prior to their own indorsement. The process ends only when the drawer is forced to pay, for the drawer is the person who is ultimately liable on the bill. This scheme is implemented through the estoppels and obligations of drawers, indorsers, and acceptors. These estoppels and promises are examined in the following sections.

5.7.1

The acceptor

The acceptor of a bill is the person who is primarily liable on the bill. By accepting, the acceptor: promises that they will pay the bill ‘according to the tenor of his acceptance’: Bills of Exchange Act 1909, s 59(a); and is estopped from denying to a holder in due course that the front of the bill is what it appears to be: Bills of Exchange Act 1909, s 59(b). The second item requires some elaboration. The Bills of Exchange Act 1909 does not use the term ‘front of the bill’. Instead, it specifically enumerates the facts which the acceptor may not deny. These are: the existence of the drawer, the genuineness of their signature, and their capacity and authority to draw the bill; if payable to the drawers order, the then capacity of the drawer to indorse; and if payable to the order of a third person, the existence of the payee and their then capacity to indorse. [page 189] Although the acceptor may not argue that the payee has no authority to indorse, the acceptor may challenge the authenticity of the actual indorsement. The policy of this section is that the acceptor is only concerned with the

drawer and the payee of the bill. In many cases, these will be the only parties appearing on the bill when the drawee is asked to accept. By accepting, the acceptor takes responsibility that these parties are what they appear to be, but this responsibility extends only to a holder in due course.

5.7.2

The drawer

The drawer of a bill: promises that on due presentment the bill will be accepted (if acceptance is required): Bills of Exchange Act 1909, s 60(1)(a); promises that on due presentment for payment the bill will be paid according to its tenor as drawn: Bills of Exchange Act 1909, s 60(1)(a); promises that if the bill is dishonoured, they will compensate the holder or any indorser who is compelled to pay; and is precluded from denying to a holder in due course the existence of the payee and the capacity of the payee to indorse at the time when the bill was drawn: Bills of Exchange Act 1909, s 60(1)(b). The drawer’s promise to compensate the holder or indorser is subject to proper proceedings being taken on dishonour. Section 46 of the Bills of Exchange Act 1909 sets out the requirements which must be met in order that the bill be duly presented. Due presentment of a bill for payment is governed by ss 50 and 51. Proceedings on dishonour are set out in ss 53–57. See Weaver et al (2003) at 7.10ff for details of due presentment and proceedings on dishonour. Notice again that this implements the basic policy that anyone who signs a bill accepts responsibility for what is on the bill at the time of signing. The drawer has named the drawee and the payee, so cannot deny that these people exist and have capacity. By signing as drawer, the drawer also takes responsibility for acceptance and payment.

5.7.3

The indorser/indorsee

By indorsing a bill, an indorser: promises that on due presentment the bill will be paid according to its tenor at the time of indorsement: Bills of Exchange Act 1909, s 60(2)(a); promises that on due presentment the bill will be accepted (if it requires

acceptance); [page 190] promises to ‘compensate’ the holder, as well as any subsequent indorser who has been compelled to pay; is estopped from denying to any subsequent indorser or to the holder that the bill was a valid and undischarged bill at the time of indorsement and that the indorser had a good title at that time: Bills of Exchange Act 1909, s 60(2) (c); and is estopped from denying to a holder in due course the genuineness and regularity, in all respects, of the drawer’s signature and all previous indorsements: Bills of Exchange Act 1909, s 60(2)(b). The indorser’s promises are subject to the requirement that the requisite proceedings on dishonour are duly taken: Bills of Exchange Act 1909, s 60(2) (a). Note that the indorser promises to pay the bill according to the ‘tenor’ as it was when they indorsed it. In the event of a material alteration, this may be different from the promise of the drawer. No person undertakes to pay on terms different from those appearing on the bill at the time when the person signs the bill: see 5.9.4 for the effects of alteration on a bill. Further, the promise of the indorser differs from that of the drawer, in that the indorser promises only to compensate subsequent indorsers who have been compelled to pay. Thus, an indorser who is compelled to pay may have recourse to previous indorsers and/or the drawer of the bill.

5.7.4

Stranger signing the bill

There are times when a person signs a bill but they are clearly neither the drawer, an indorser, nor — if the bill is a time bill — are they the acceptor. The reason for such a signature is to ‘back’ the bill — that is, to lend the credit of the person signing so that the bill becomes more valuable. The person so signing is said to be a stranger to the bill. Unfortunately, it is not always apparent from the bill itself why the stranger signed the bill or to whom the stranger intended to be liable. Section 61 of the Bills of Exchange Act 1909 provides that where a person signs a bill otherwise than as drawer or acceptor, they thereby incur the liabilities of an indorser to a holder in due course. Arguments that the benefit

of the section should extend to holders other than a holder in due course were rejected in H Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159. There are reasons why a person might sign a bill but not intend to become liable. Illustration: Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 A person who made the highest bid at an auction offered the selling agent a bearer cheque by way of payment. The cheque was drawn by a company in favour of the purchaser. The cheque was crossed: ‘Not negotiable’. [page 191] The purchaser wrote on the back of the cheque: ‘Pay [the agent]’, and signed his name. The company stopped payment on the cheque and the agent sued the purchaser as indorser of the cheque. Sheppard J held that the cheque remained a bearer cheque in spite of the form of the indorsement and, on the facts, the signature was not an indorsement but an authority to the agent’s bank to collect the cheque and pay the proceeds into the agent’s account. The purchaser was not, therefore, liable on the cheque.

There is no objection to such a result as between immediate parties, but the intention of the person signing should not be relevant so far as later holders are concerned. It seemed that the Court considered that the fact that the cheque was a bearer cheque was itself sufficient to make clear that the person signing did not intend to become liable. If that is the argument in the case, then it must be questioned, for the most obvious reason to ask the payee of a bearer bill to ‘indorse’ the bill is to add the credit of the payee to that of the drawer. Illustration: H Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159 The plaintiff had supplied goods to a company of which the defendant was a director. The company accepted a bill of exchange drawn by the plaintiff and made payable to the plaintiff, which read: ‘To: C & S Electric Pay: H Rowe & Co (Signed) H Rowe & Co’. The bill was accepted by C & S Electric. The plaintiff also wished to have the credit of the defendant. This was achieved by requesting the defendant to indorse the bill. The bill was then indorsed by the plaintiff to another holder. When the bill was dishonoured, the plaintiff reimbursed the holder and sought to recover from the defendant. The plaintiff was not a holder in due course, since it took the bill following notice of the dishonour. The plaintiff was thus not entitled to the benefits of s 61 of the Bills of Exchange Act 1909. The technical problem was that the plaintiff, as drawer, would ordinarily be liable to any indorser who was required to pay. The plaintiff was thus faced with the problem of circular action: if the defendant was held liable to pay as indorser, then the defendant could in turn claim from the plaintiff. The Court held that it was the intention of the parties that the defendant should be liable as an indorser without recourse to the drawer.

While the outcome of Rowe v Pitts is clearly correct, it shows the importance of drawing bills in a form which, if possible, will avoid any later litigation. In that case, the litigation could have been avoided by requiring a bill to be drawn on the [page 192] company by the defendant payable to its own order, accepted by the company and then indorsed by the defendant to the plaintiff. In such a situation, the plaintiff would have been a holder in due course and the defendant would have been a genuine indorser. Even when the defendant re-took the bill after dishonour by the company, it would have been an indorser forced to pay and so able to recover from Pitts as a previous indorser and drawer. This would have achieved the obvious intention of the parties — to make the company primarily liable and the defendant a guarantor (in effect) of the company’s liability. The problems of Rowe v Pitts would be overcome by the European concept of the ‘aval’. An aval is, in effect, a guarantor of the acceptor of a bill and becomes liable to all parties to the bill equally with the acceptor. It does not matter whether the party claiming compensation from the aval became a party before or after the name of the aval was added to the bill. The concept of an aval in English law was rejected in Steele v M’kinlay (1880) 5 App Cas 754. In the absence of some concept similar to an aval, the next best solution is that extrinsic evidence may be used to establish the liability of a backer of a bill to prior parties and to subsequent parties who do not qualify as holders in due course: see Durack v West Australian Trustee Executors and Agency Co (1946) 72 CLR 189 at 208 per Starke J; Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 at 510 per Sheppard J; Heller Factors Pty Ltd v Toy Corp Pty Ltd [1984] 1 NSWLR 121 per Yeldham J. It might be possible to argue that the ‘backer’ is an actual guarantor. The action in such a case is not on the bill, but rather a direct action on a guarantee.

5.8

Obligations of the holder

Division 5 of the Bills of Exchange Act 1909 is headed: ‘General Duties of the Holder’, and although it is common to speak of the obligations of a holder, the term is not strictly correct. The holder of a bill may destroy it or frame it for public display without thereby being in breach of any obligation owed to any

other party. The term is merely a convenient shorthand to describe the actions which must be performed by the holder if they wish to receive payment or to enforce the bill against other parties. There are two basic obligations which must be met if the holder is to claim payment. These are: presentment for acceptance if the bill requires acceptance; and presentment for payment at the required time. In the event of dishonour, the holder must take certain steps to claim reimbursement from previous parties to the bill. In most cases, the holder must give notice of dishonour to other parties to the bill. Notice must be given in accordance with [page 193] the detailed rules of s 54 of the Bills of Exchange Act 1909: see Weaver et al (2003) at 7.1040 for a complete discussion of the rules. In certain cases, the holder must also ‘protest’ the bill: see discussion at 5.8.2.

5.8.1

Presentment for acceptance

A bill may be payable either on demand or at a determinable future time: Bills of Exchange Act 1909, s 8(1). According to s 15, the bill is payable on demand if it is: expressed to be payable on demand; payable at sight; payable on presentation; or no time for payment is expressed in the bill. By s 16 of the Bills of Exchange Act 1909, a bill is payable at a determinable future time: if it is expressed to be payable at a fixed period after date or after sight; or on a fixed period after the occurrence of a specified event which is certain to happen, even though the time of happening may be uncertain. The time allowed for payment of the bill is commonly called its ‘usance’. ‘Sight’ here means either acceptance or protest for non-acceptance, for it is

not just the physical act of showing the bill to the drawee, but some legal indication that the bill has been presented to the drawee. Three forms of bill must be presented for acceptance. If a bill is payable some fixed period after sight, then it is important that the bill be presented for acceptance. Section 44 of the Bills of Exchange Act 1909 provides that such bills must be presented for acceptance in order to fix their maturity. A bill must also be presented for acceptance if the bill specifically requires that it be so presented: Bills of Exchange Act 1909, s 44(2). Finally, a bill must be presented for acceptance if it is drawn payable at some place other than the residence or place of business of the drawee: Bills of Exchange Act 1909, s 44(2). It is only these three types of bill which must be presented for acceptance, although it will often be to the advantage of the holder of the bill to obtain the acceptance of the drawee in order to increase the value of the bill: Bills of Exchange Act 1909, s 44(3). This brings us to the obligation of the holder. If the bill is one payable after sight, then the holder must either present the bill for acceptance or negotiate it within a reasonable time: Bills of Exchange Act 1909, s 45(1). Failure to do so has drastic results: the drawer and all indorsers prior to the holder are discharged, unless the circumstances are such that the holder has some excuse under the Act: Bills of Exchange Act 1909, s 45(2). The rules for presentment and excuses for [page 194] non-presentment for acceptance are given in s 46: see Weaver et al (2003) at 7.970 for a discussion of these rules.

5.8.2

Protest

If the bill is not accepted when properly presented, then the holder must treat it as dishonoured by non-acceptance — that is, notice must be given to the drawer and each indorser. Again, failure to comply with the requirement has catastrophic results for the holder: the holder ‘shall lose his right of recourse against the drawer and indorsers’: Bills of Exchange Act 1909, s 47. Where a foreign bill is dishonoured by non-acceptance, the holder may also be required to ‘protest the bill’. A foreign bill is any bill other than an ‘inland bill’. An inland bill is defined as one which is or, on the face of it purports to be:

both drawn and payable in Australia; or drawn in Australia on some person resident therein. Noting and protesting are formal procedures involving a notary public. The procedure is purely for evidentiary purposes: see Weaver et al (2003) at 7.990 for a discussion of the details.

5.8.3

Presentment for payment

Unless otherwise excused, a bill must be presented for payment. If not duly presented for payment, once again, the drawer and indorsers will be discharged: Bills of Exchange Act 1909, s 50(1). The only way in which a bill may be presented for payment is by physically presenting the bill to the drawee. Section 50(2) sets out the time and place where various types of bills must be presented. Delay in presentment is excused if the delay is due to circumstances beyond the control of the holder, provided the circumstances relied upon are not due to the holder’s default, conduct or negligence: Bills of Exchange Act 1909, s 51(1). In certain circumstances, presentment for payment is not required. These include: where reasonable diligence fails to result in presentment; where the drawee is fictitious; as regards the drawer — if the drawer had no reason to suppose that the drawee would pay the bill; as regards indorsers — if the bill was accepted for the accommodation of the indorser and the indorser had no reason to suppose that it would be paid; and waiver, express or implied, of the obligation to present for payment. If the bill is not paid after being duly presented for payment, then the holder is obliged to treat the bill as dishonoured. This means giving notice to the drawer and each indorser. It should come as no surprise to learn that the penalty for failing to [page 195] give timely notice to any party is that the party is discharged: Bills of Exchange Act 1909, s 53. The rules as to notice of dishonour are given in s 54. These rules will not be discussed here in detail, except to note that the time allowed for notice is very short and that it often happens that parties are unfairly

excused from liability merely because notice fails to reach them within the stringent time constraints imposed by the Bills of Exchange Act 1909.

5.8.4

Duties to drawee/acceptor

The position of the holder with respect to the drawee or, after the bill has been accepted, the acceptor is regulated by s 57 of the Bills of Exchange Act 1909. Section 57(1) provides that, where there is a ‘general’ acceptance, the acceptor remains liable to the holder even if the bill is not presented for payment. This, it is said, reflects the general principle that a debtor has an obligation to seek out its creditor and make payment on the due date: see Weaver et al (2003) at 7.1070. Normally, of course, the holder will want to preserve rights of recourse against the drawer and any previous indorser. Preservation of those rights requires presentment for payment. Failure of the holder to give notice of dishonour or to protest a bill does not excuse the acceptor: Bills of Exchange Act 1909, s 57(3). Again, a holder will want to do these things to retain rights against the drawer and indorsers. Finally, where a bill is presented for payment, the holder must ‘exhibit’ the bill and, upon receiving payment, give the bill to the party paying: Bills of Exchange Act 1909, s 57(4).

5.9

Termination or alteration of liabilities

The actual or potential liability of the parties may be altered or terminated by different events. The most dramatic event is the discharge of the bill itself, which terminates all rights and obligations on the bill — but it is also possible that individual parties are discharged from all further liability or from liability to certain parties.

5.9.1

Discharge by payment in due course

A bill is discharged when it is paid in due course by the drawee. Payment in due course means that the bill is paid to the holder in good faith and without notice of any defect in the holder’s title, and payment must be made at or after the maturity of the bill: Bills of Exchange Act 1909, s 64(1). ‘Defect in title’ includes a complete absence of title by the holder — a situation which may

occur, for example, when the bill is one which is payable to bearer and the holder is a finder or a thief. [page 196] However, payment must be made to a ‘holder’. As discussed previously, a person in possession of an order bill following a forged indorsement is not a ‘holder’, and payment to that person is not payment in due course.

5.9.2

Renunciation and cancellation

There are other less common ways in which a bill may be discharged. The holder of the bill is the only person who may maintain an action on the bill, so if the holder wishes to renounce their rights, then why should anyone object? The Bills of Exchange Act 1909 provides that the bill is discharged if the holder absolutely and unconditionally renounces their rights against the acceptor. The renunciation must be after the maturity of the bill: Bills of Exchange Act 1909, s 67(1). The holder may also renounce rights against any particular party to the bill, but that does not discharge the bill: Bills of Exchange Act 1909, s 67(3). It is obviously dangerous to leave a renounced bill in the hands of the holder. The Bills of Exchange Act 1909 requires that the renunciation be in writing or that the bill be delivered up to the acceptor: Bills of Exchange Act 1909, s 67(2). In the event that the bill finds its way into further circulation, the rights of a holder in due course who has no notice of the renunciation are not affected: Bills of Exchange Act 1909, s 67(3).

5.9.3

Intentional cancellation

Another way that the holder may indicate their intention to abandon any rights on the bill is to cancel the bill. Provided the cancellation is not made by mistake, an intentional cancellation of the entire bill will discharge the bill if the cancellation is apparent from the bill itself: Bills of Exchange Act 1909, s 68(1). Some care must be taken in cancelling a bill. Illustration: Ingham v Primrose (1859) 7 CB(NS) 82; 141 ER 145 An acceptor of a bill of exchange handed it back to the drawer for the purposes of having the bill discounted and the proceeds handed over. The drawer failed to have the bill discounted and returned it to the acceptor, who tore the bill in half and threw the two pieces into the street. The drawer then retrieved the pieces, pasted them together and negotiated the bill. It was held

that the acceptor was liable on the bill to a holder in due course. It is difficult to know how important the case is, since at the time it was common to tear bills in half and mail each half separately as a security precaution. The Court mentioned that the appearance of the bill was consistent with its having been divided for the purpose of safe transmission by post.

[page 197]

5.9.4

Alteration

Since negotiable bills are paper and ink, they are subject to alteration by parties who have access to the bill. Alterations may be trivial and innocent, such as a holder writing in a correction to the way in which their name has been spelled, or they may be major and fraudulent, such as an alteration in the amount payable. The common law differentiated between minor alterations and ones which were ‘material’. Minor alterations had no effect, but the effect of a ‘material’ alteration was that the alteration provided a complete defence for any party liable on the bill, except the party who made or assented to the alteration: see Scholfield v The Earl of Londesborough [1895] 1 QB 536. This was so even if no party was actually disadvantaged by the alteration. When is an alteration to a bill so serious that the rights of the parties should be affected? There seem to be only two general approaches to answering the question. In the first, we could attempt to enumerate all of the changes that might be made to a bill and then to identify which of those is ‘material’. In the second, we could identify some general principle which could be applied to determine if any particular alteration is significant. The Bills of Exchange Act 1909 effectively chooses the first approach. Section 69(2) provides a non-exhaustive list of alterations which are ‘material’. Any alteration of the date, the sum payable, the time of payment, the place of payment, and — where the bill has been accepted generally — the addition of a place of payment without the acceptor’s assent is deemed to be material. This ‘shopping list’ approach may cause hardship. In Heller Factors Pty Ltd v Toy Corp Pty Ltd [1984] 1 NSWLR 121, a date was changed in a form which was actually beneficial to the defendant, but it was held that the alteration was, under the clear terms of the a material alteration which ‘avoided’ the bill: see 5.9.6 for further discussion of the effects of a material alteration. Under the Bills of Exchange Act 1909, a materially altered bill is avoided, but there are savings in favour of a holder in due course. Once again, savings

are made for innocent holders: see 5.9.6 for further discussion of the effects of a material alteration.

5.9.5

Other forms of discharge

The Bills of Exchange Act 1909 also provides that a bill is discharged if the acceptor of the bill is or becomes the holder of the bill in their own right at or after its maturity: s 66. This would be an unusual occurrence, so it is not surprising that there seems to be little authority on the matter: see Nash v De Freville [1900] 2 QB 72, where the section was argued as a defence but rejected on the facts. [page 198] Wrongful payment by a banker of the bill may also have the effect of discharging the bill provided certain preconditions may be established by the banker: Bills of Exchange Act 1909, s 65. See also 8.7.3. Certain bills, known as ‘accommodation bills’, may be discharged when payment is made by ‘the party accommodated’: Bills of Exchange Act 1909, s 64(3). See also 12.2.4.

5.9.6

Effect of discharge

Discharge of the bill will generally extinguish all rights on the bill. It is as though the bill is ‘born’ when it is issued and ‘dies’ when discharged. There are, however, some exceptions to protect innocent parties who might be unaware of the discharge. The simplest case is discharge by payment in due course. In such a case, there are no parties who require safeguarding, and all rights on the bill are simply and finally extinguished. Although this is not stated explicitly in the Bills of Exchange Act 1909, the result has been established by case law: see, for example, Harmer v Steele (1849) 4 Exch 1; 154 ER 100. The Cheques Act 1986 has remedied this statutory oversight, in s 82. When the bill is discharged by renunciation of the holder’s rights against the person who is primarily liable on the bill (see 5.7), then there is at least the possibility that the bill might be placed in circulation again. Of course, a person who takes the bill cannot be a holder, since the bill has been discharged, but it is clear that such a person should be protected in certain circumstances.

The Bills of Exchange Act 1909 deals with the situation by providing that if the bill comes into the hands of a person who would, but for the discharge, be a holder in due course then that person may enforce payment of the bill as if the bill had not been discharged: s 67(3). Innocent parties are much more likely to require protection when the bill is discharged by material alteration, since the reason for making the alteration will often be fraudulent. If the alteration is not ‘apparent’, then a holder in due course of the discharged bill may enforce payment of the bill according to the original tenor of the bill as though the bill had never been discharged: Bills of Exchange Act 1909, s 69(1). Although there is no express protection in the Bills of Exchange Act 1909 for the holder who is not a holder in due course of a bill, the same result is achieved by the estoppels against the indorsers: see 5.7.3. Section 69 of the Bills of Exchange Act 1909 has caused difficulty because of the concept of an ‘apparent’ alteration. [page 199] Illustration: Automobile Finance Co of Australia Ltd v Law [1933] HCA 52 A promissory note was made on a printed form and signed by the maker of the note. The handwriting on the rest of the note was not that of the maker and, at the time of making the note, nothing was written after the printed words: ‘Payable at’. The payee of the note, without authority, filled in the place of payment in handwriting which was clearly distinguishable from that on the remainder of the note and using ink which was a different colour. The note was then negotiated to the appellant who was a holder in due course. The Court held that the alteration was not apparent.

According to the High Court, an alteration is ‘apparent’ only if it is obvious that some revision of the text has taken place and its appearance is consistent with the revision having occurred after the completion of the bill. It must be obvious that the text was put there as an addition or a substitution. In the words of Starke J (at 12), the alteration must: … be visible or apparent, as an alteration or change in the very words or figures originally written or printed in the document … It is not enough to say that a prudent businessman would be put upon inquiry, or that his suspicions would be aroused by the form of the document. The alteration may be by addition, interlineation, or otherwise, but it must be visible as an alteration, upon inspection.

The English courts have developed a slightly different test. In Woollatt v Stanley (1928) 138 LT 620, it was said (at 620): An alteration in a bill is apparent within [s 69] if it is of such a kind that it would be observed and noticed by an intending holder scrutinising the document, which he contemplated taking, with reasonable care.

Under either formulation of the test for an ‘apparent alteration’, it is difficult to see how the taker could satisfy the requirements to become a holder in due course: see 5.5.1.

5.9.7

Discharge of an indorser

It is possible that only certain indorsers of the bill are released, while the bill itself remains undischarged. However, it is clear that if an indorser is discharged, then all subsequent indorsers must also be discharged, for they became parties to the bill on the basis that the credit of the first-mentioned indorser would be available to them. This scheme is implemented in ss 67 and 68 of the Bills of Exchange Act 1909. [page 200]

When an indorser is discharged An indorser is discharged in three different circumstances: if the holder of the bill absolutely and unconditionally renounces their rights against the indorser in writing and signed by the holder: Bills of Exchange Act 1909, s 67(3); if the holder intentionally cancels the indorser’s signature, the cancellation is apparent from the bill itself and the cancellation was not made under a mistake of fact: Bills of Exchange Act 1909, s 68(2) and 68(3); if the indorser would have had a right of recourse against any indorser discharged by either of the two previous means: Bills of Exchange Act 1909, s 68(2). There is a presumption that any cancellation was made intentionally and not under a mistake of fact: Bills of Exchange Act 1909, s 68(3).

Effect of discharge of indorser The basic effect of the discharge of an indorser is that all rights on the bill against the indorser are extinguished. However, just as in the case of the discharge of the entire bill, it is necessary to add some protection for innocent parties who later become holders in the belief that the discharged indorsers are still liable. It is not necessary to provide any protection when the indorser is discharged by cancellation of signature, since in that case the bill itself notifies the holder of the release.

When the indorser is discharged by a renunciation of rights by the holder, or when a subsequent indorser is discharged by a renunciation of rights against a previous indorser, then a person who takes the cheque without notice of the renunciation may enforce the payment as if the discharge had never occurred: Bills of Exchange Act 1909, s 67(3).

5.9.8

Transfer to drawer or indorser

It sometimes happens that a bill will be transferred by negotiation to a person who is already liable on the bill. Unless some special provision is made, the possibility of circular actions arises. Thus, suppose that A is either a drawer or an indorser and B is a person who has indorsed the bill after A has become a party, and the bill is then transferred by negotiation back to A. If A attempts to enforce the bill against B and succeeds, then B will in turn be entitled to enforce the bill against A. In order to avoid such circumstances, the Bills of Exchange Act 1909 provides that when the bill is negotiated back to a person who is already liable as drawer or as indorser, then the person may further transfer the bill, but is not entitled to enforce payment against any person to whom the first mentioned person was previously liable: Bills of Exchange Act 1909, s 42. Notice that the bar against enforcement is [page 201] not against all intermediate indorsers — only those indorsers to whom the person was previously liable.

5.9.9

Payment by drawer or indorser

There are various circumstances where one of the parties to a bill might wish to ‘pay’ the holder. An example of this might be when it is known that the bill would be dishonoured upon presentment, but it is in the interests of one or more parties to the bill to limit the damage to credit which results from dishonour. This is not really ‘payment’ of the bill at all, for only the drawee may pay the bill, but the use of the term does not seem to cause undue difficulties. If a bill is ‘paid’ in this way, then it is desirable that the person paying should be subrogated to the rights of the holder of the bill. If the drawer of an order bill which is made payable to a third party pays the bill, then the drawer may enforce the bill against the acceptor, but may not re-

issue the bill: Bills of Exchange Act 1909, s 64(2)(a). If a bill payable to the drawer’s order is paid by the drawer, or if any bill is paid by an indorser, then the party paying is remitted to their former rights as regards the acceptor or antecedent parties, and they may strike out their own indorsement and again negotiate the bill: Bills of Exchange Act 1909, s 64(2)(b).

5.9.10

The order of indorsements

Perhaps surprisingly, there are a number of cases in which the basic dispute has been the result of indorsements being placed on the bill in an incorrect order. This may happen most easily when one party is indorsing as a ‘backer’ of a bill: see 5.7.4. The Bills of Exchange Act 1909 provides that indorsements are presumed to be in the order in which they appear, but the presumption is rebuttable: Bills of Exchange Act 1909, s 37c. See also Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159.

5.9.11

Other stipulations

It is possible for an indorser to limit or to negative their liability by an express written stipulation on the bill or cheque: Bills of Exchange Act 1909, s 21; and Cheques Act 1986, s 17(2). The most common form of such a limitation is the indorsement ‘sans recourse’. This permits the indorser to transfer the cheque by negotiation but without attracting any liability to later holders of the cheque. The Bills of Exchange Act 1909 extends the right of limiting liability to the drawer of a bill.

[page 203]

6 Duties of the Banker 6.1

Introduction

The contract between the banker and the customer imposes a number of duties upon the banker — the most important of which are the duty to pay cheques (see 8.7.1) and the duty of secrecy. In addition, the law imposes certain duties on the banker when the banker undertakes to provide additional services which, strictly speaking, are not required of the banker.

6.2

The duty of secrecy

The banker is under a contractual duty of secrecy, at least in respect of the transactions which go through the account and any of the securities taken by the banker. Illustration: Tournier v National Provincial & Union Bank of England [1924] 1 KB 461 The plaintiff had banked with the defendant for some time. His account became overdrawn and he agreed with the branch manager to repay the overdraft by weekly instalments of £1. His address was given as that of a firm with which he was about to enter employment. Unfortunately, he failed to maintain the weekly payments. The manager telephoned the employer, ostensibly to obtain the home address of the plaintiff, but in the course of the conversation the manager informed the employer of the reason for attempting to contact the plaintiff. Just for good measure, he added that the bank suspected the plaintiff of gambling, since several cheques had named a bookmaker as payee. It was alleged that as a result of this information, the employer refused to continue to employ the plaintiff. The plaintiff claimed damages from the bank for breach of contract. The Court held that the plaintiff should succeed, since there was a contractual duty of confidentiality.

[page 204] Several members of the Court suggested a duty extending beyond the operation of the account. For example, Lord Atkin said (at 485):

I further think that the obligation extends to information obtained from other sources than the customer’s actual account, if the occasion upon which the information was obtained arose out of the banking relations of the bank and its customers - for example, with a view to assisting the bank in conducting the customer’s business, or in coming to decisions as to its treatment of its customers.

The duty of secrecy is not, of course, absolute. Bankes LJ attempted to define the major exceptions in Tournier. He said (at 473): There appears to be no authority on the point. On principle I think that the qualifications can be classified under four heads: (a) where disclosure is under compulsion by law; (b) where there is a duty to the public to disclose; (c) where the interests of the bank require disclosure; (d) where the disclosure is made by the express or implied consent of the customer.

The ‘qualifications’ to the duty of secrecy are not as clear-cut as they may first appear. Some situations place the banker in the invidious position of being forced to choose between the contractual duty of secrecy which is owed to the customer and some other legal or moral duty which requires disclosure of the customer’s affairs. The following discussion outlines the general principles. Also note that the Privacy Act 1988 (Cth) applies to the handling of ‘personal information’. The duties imposed by the Act are independent of the Tournier duty, in the sense that any disclosure of information must be justifiable both under the Tournier law and the Privacy Act 1988.

6.2.1

Application to non-banks

Although Tournier v National Provincial & Union Bank of England [1924] 1 KB 461 was concerned with a bank, there is nothing in the judgments to justify restricting the duty imposed to only banks. The logic of the judgments clearly extends to most, if not all, financial institutions: see Tyree (1995). In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, the Federal Court indicated that the duty of confidentiality should extend to a merchant bank. The Supreme Court of Tasmania has held that the duty applies to credit unions: see Bodnar v Townsend [2003] TASSC 148. Disclosure to a company which is part of a group to which the bank belongs is probably a breach of the duty of confidentiality: see Bank of Tokyo Ltd v Karoon [1987] AC 45; Bhogal v Punjab National Bank; Basna v Punjab National Bank [1988] 2 All ER 296. [page 205]

6.2.2

Information covered

The duty of confidentiality extends at the very least to all information derived from account transactions. However, the better view is that it extends to information gathered from any aspect of the banker-customer relationship. The duty extends to unusual or extraordinary banking transactions: see Royal Bank of Canada v IRC [1972] 1 Ch 665. It also extends to information gathered before the establishment of the banker-customer relationship and continues after the termination of the relationship. Certain public information is not subject to the duty of confidentiality. Illustration: Christofi v Barclays Bank plc [1999] EWCA Civ 1695 The plaintiff’s husband had become bankrupt. His trustee in bankruptcy lodged a ‘caution’ on the title of property belonging to the plaintiff. The effect of the caution was that no dealing with the property could be registered without notifying the trustee. The plaintiff applied to have the caution removed. Under the Land Registration Rules 1925, this could not be done without notice to the trustee. The caution was removed, and at some later time the bank advised the trustee that this was the case. The Court held that the bank did not breach any duty of confidentiality owed to the plaintiff. It had every reason to believe that this was information already known by the trustee. The Court emphasised that it was impossible for the information to be kept from the trustee, since the statutory scheme required notification to the trustee in order for the ‘caution’ to be lifted.

6.2.3

Disclosure under compulsion of law

The contractual duty of confidentiality is overridden by the duty of both parties to submit to other legal requirements. There is little authority on the matter, but Lord Diplock made the point clearly and forcefully in Parry-Jones v Law Society [1969] 1 Ch 1, when he said (at 9): … [the] duty of confidence is subject to, and overridden by, the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contract, whether at common law or under statute, to disclose in defined circumstances confidential information, then he must do so, and any express contract to the contrary would be illegal and void. For example, in the case of banker and customer, the duty of confidence is subject to the overriding duty of the banker at common law to disclose and answer questions as to his customer’s affairs when he is asked to give evidence on them in the witness box in a court of law.

[page 206] Stephen J made the same point in Smorgon v Australia and New Zealand Banking Group Ltd [1976] HCA 53.

Notice to the customer Where a court order relates to a criminal prosecution, the bank has no duty to

inform the customer that the order obliges the bank to disclose account information. Even less is there a general duty on the bank to resist the making of such an order: see Barclays Bank plc (trading as Barclaycard) v Taylor [1989] 3 All ER 563 and Citibank Ltd v FCT (1988) 83 ALR 144 at 156. The Court in Taylor indicated that there might be an exception to these rules if the bank knew something relevant which was not apparent on the face of the application. It was thought that the same rules applied to civil cases, but a decision of the Privy Council cast doubts on the rule. Illustration: Robertson v Canadian Imperial Bank [1995] 1 All ER 824 Robertson was sued in an action for debt. The bank provided photocopies of Robertson’s statement in response to a subpoena. The bank attempted to contact Robertson but was unsuccessful. The Privy Council held that the bank had a duty to use its best endeavours to inform the customer of the receipt of the subpoena. The Court held that the bank had complied with its obligation.

The Privy Council also suggested that there might be a duty to object to disclosure of ‘irrelevant’ parts of the document requested. Lord Nolan suggested that there might be such an obligation, but he noted that the matter was not in dispute in Robertson. The bank is in no position to evaluate what might or might not be ‘relevant’ to the purpose for which the documents are subpoenaed. This aspect of the case should not be followed in Australia.

Compulsion required There must be compulsion in order to rely upon the exception. Not every demand which comes from a government department falls within the exception. There can be no doubt that the power to compel disclosures is more widely granted by various Acts than was previously the case, and a complete list of the circumstances in which there is a compulsion by law would soon fall out of date: see Chaikin (2011).

6.2.4

Duty to the public to disclose

The ‘public duty’ is the most poorly defined of any of the four categories identified in Tournier v National Provincial & Union Bank of England [1924] 1 KB 461. Chorley [page 207]

has suggested that one example might be where the customer’s dealings indicated trading with the enemy in time of war: see: Chorley (1974) at p 23. Bankes LJ referred to a suggestion by Lord Finlay that, ‘danger to the state or public duty may supersede the duty of the agent to the principal’. See WeldBlundell v Stephens [1920] AC 956 at 965. Lord Denning took a broader view of the exception in Initial Services Ltd v Putterill [1967] 3 All ER 145. He said (at 148): The exception should extend to crimes, frauds and misdeeds, both those actually committed as well as those in contemplation, provided always - and this is essential - that the disclosure is justified in the public interest.

The ‘public duty’ category of disclosure was successful in an unusual case. Illustration: Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 The US President issued decrees which had the effect of freezing bank accounts owned by Libyan interests. The defendant bank informed the Federal Reserve Bank of New York that, ‘[I]t looked like the Libyans were taking their funds out of the various accounts’. In considering an action for breach of the duty of secrecy, Staughton J refused to accept that the disclosure was in the defendant’s own interest or that there was implied consent. However, Staughton J did accept the ‘public duty’ exception to the duty in Tournier. On the assumption that the New York Federal Reserve Bank had a duty similar to that of the Bank of England in obtaining information from banks, he was prepared to reach a tentative conclusion that the exception applied in the case before him (at pp 770–771). However, it was not necessary for him to reach a final conclusion on the point.

The banker should exercise extreme restraint before disclosing information pursuant to any supposed duty to the public.

6.2.5

Interests of the bank

There are several circumstances in which the bank’s own interest will justify disclosure of the customer’s account information. Weaver and Craigie note that the issue of a writ whereby the bank initiates legal action against the customer will necessarily contain confidential information: see Weaver et al (2003) at 2.4300. Another common instance is a guarantor seeking information concerning the account of the primary debtor. The bank need not, and should not, volunteer information concerning the account, but if the guarantor asks questions, they are entitled to frank and honest answers, even though the guarantor is not generally [page 208]

entitled to see the whole detail of the account. The precise limits of disclosure are not entirely clear. See the discussion at 15.3.2. The first reported case which expressly mentions this exception to the Tournier rule is very unsatisfactory. Illustration: Sunderland v Barclays Bank (1938) 5 LDAB 163 The defendant bank dishonoured the plaintiff’s cheques due to insufficient funds in the account. The bank manager thought it unwise to grant her an overdraft, since he was aware that she was losing large sums of money gambling. She complained to her husband. He encouraged her to telephone the bank to demand an explanation. She did so and during the course of the conversation handed the telephone to her husband. He was told that most of the cheques drawn on the wife’s account were in favour of bookmakers. She sued the bank claiming breach of the duty of secrecy. The Court held that the manager had impliedly or expressly received a demand to explain and that by handing the telephone to her husband the plaintiff had impliedly authorised the disclosure to him. However, even if there was no implied authorisation, the fact that a demand for explanation had been made meant that it was in the bank’s own interest to explain to Dr Sunderland.

The reasoning and the decision are far from satisfactory, for it is perfectly clear that Mrs Sunderland would not have expressly authorised such a disclosure. The explanation given to the husband disclosed more information than was necessary to protect the bank’s interest. It is also difficult to see how the bank’s interest in maintaining the goodwill of one customer — that is, Dr Sunderland — can authorise a breach of contract with another. A more reasonable example of disclosure in the bank’s interest is Christofi v Barclays Bank plc [1999] EWCA Civ 1695: see the discussion at 6.2.2. The Court at first instance clearly indicated that it would have preferred to decide the case on the ‘bank’s interest’ basis, but the arguments before it had been on the issues discussed above. The Court of Appeal took the same course, indicating that disclosure was in the bank’s interest but declining to decide the case on those grounds, because of the way the arguments had been presented. In X AG v A Bank [1983] 2 All ER 464, the Court held that a bank could not use the ‘own interest’ exception to disclose information which was required by a foreign subpoena. However, it was accepted in that case that the bank could raise the Tournier obligation as a defence to a charge of contempt in the foreign Court. The ‘own interest’ defence was also rejected in Bank of Tokyo Ltd v Karoon [1987] AC 45, where information was passed from a wholly owned subsidiary. [page 209]

6.2.6

Express or implied consent by the customer

The fourth exception to Tournier is where the customer has given express or implied consent. When the customer gives express consent to the release of information, there can be no complaint provided that the banker discloses only information which is correct and within the confines of the customer’s consent. The only issue then is whether the ‘consent’ was real and covered the information actually disclosed. There can be no consent to disclosing information unless it can be shown that the customer is aware of the banking practice which gives rise to the disclosure: see Turner v Royal Bank of Scotland plc [1998] EWCA Civ 529. Most discussion of the ‘consent’ exception to the Tournier duty has been in the context of bankers’ references. These will be discussed in 6.3. It should also be noted that implied consent does not always work in the bank’s favour. Illustration: Lee Gleeson Pty Ltd v Sterling Estates Pty Ltd (1991) 23 NSWLR 571 The bank notified a builder that it had authority from its customer to make payments to the builder. The notification was with the consent of the customer. Later the customer withdrew the payment authorisation, but the bank did not notify the builder of this, pleading that it was precluded from doing so by its Tournier duty. The Court held that the customer had impliedly authorised the bank to notify the builder of the revocation of authority.

6.2.7

Damages as a remedy

The final point of Sunderland v Barclays Bank (1938) 5 LDAB 163 is Du Parcq LJ’s statement that, even if there had been a breach of contract by the bank, he would award only nominal damages, since the plaintiff had suffered little if any damage as a result of the breach. This point is important, even if debatable in the context, for there are often breaches of the duty of secrecy when account information, often the balance, is given by telephone in order to verify that there are funds in the account which are sufficient to cover a cheque which is about to be written by the customer. If not expressly or impliedly authorised by the customer, there is no doubt that there is a breach of the duty of secrecy, but, provided the information is

correct, there will seldom — if ever — be any damage to the customer as a result of the breach. If the funds are adequate to cover the cheque, then the transaction will go ahead; if the funds are inadequate, then the customer is attempting to write a cheque for which there are inadequate funds. It can scarcely be imagined that [page 210] the ‘damage’ suffered in the latter circumstance is such as to be attributable to the breach by the bank. There is also an unfortunate tendency for the courts to speculate on consequences of a breach, such as in Tsolakkis Nominees Pty Ltd v National Australia Bank Ltd, unreported, Vic SCt CA No 8125 of 1992, 4 June 1998. Two officers of the defendant bank were visiting the advisor of a potential lender. They are reported to have made comments along the lines of, ‘Why is your client throwing good money after bad?’ As a result, various investors withdrew. The Court held that the incident was a breach of the Tournier duty, as it clearly was. However, it went on to hold that the appellant had suffered no damage. The claimed damage was that as a result of the investors withdrawing, the appellant had defaulted on a loan and, as a result, was forced out of business. The Court held that the appellant would have defaulted even if the investors had gone ahead. This may be justified on the evidence of the particular case, but it is obviously dangerous to play ‘what if’ when there has been a breach of contract: see also Australian and New Zealand Banking Group Ltd v Aldrick Family Company Pty Ltd [2010] NSWSC 1000. In Jackson v Royal Bank of Scotland [2005] UKHL 3, the bank inadvertently sent an invoice to a customer of the plaintiff. The invoice showed the source of goods supplied by the plaintiff to the customer. As a result, the customer went directly to the supplier and the plaintiff suffered a loss of business. The Court at first instance awarded substantial damages for breach of the duty of confidence. These were reduced by the Court of Appeal, but reinstated by the House of Lords: see Weerasooria (2000b) for a full discussion of this case.

6.3

Bankers’ references

Bankers’ references are memoranda from one bank to another detailing certain financial information about a customer of the advising bank. Bankers’

references are usually given in response to a request from the reference-seeking bank — such a request is, itself, ordinarily a response to a request for information from one of its own customers. The characteristic feature of the bankers’ reference is that it is given by one bank to another but with the clear understanding that the information will be passed on to a customer of the receiving bank. Further, it is often given without the knowledge of the customer whose affairs are being reported. This is clearly a violation of the usual duty of confidentiality, and the question arises as to the legal grounds which justify giving the reference. [page 211]

6.3.1

Implied consent

The most persuasive argument is that by opening an account, particularly a business account, the customer impliedly authorises the bank to provide a banker’s opinion when requested by another bank. The Court in Tournier considered the question of bankers’ references and their legal foundation, clearly favouring consent as the basis. Bankes LJ seemed to have contemplated express consent in this circumstance when he said (at 473) that the common instance of the exception is ‘where the customer authorises a reference to his banker’. However, Lord Atkin clearly contemplated implied consent when he said (at 486): I do not desire to express any final opinion on the practice of bankers to give information as to the affairs of their respective customers, except to say that if it is justified it must be upon the basis of an implied consent of the customer.

If the customer has given the name of their banker in the course of business dealings, then it is relatively easy to find an implied consent to the disclosure of what would ordinarily be confidential information. The customer must clearly appreciate that the name of the banker is required precisely because the other party expects to make inquiries. However, the position is not so clear when the customer has not provided such information and does not know of the inquiry into their affairs. The common opinion among bankers is that they are entitled to give a banker’s reference — a reference which almost necessarily must disclose some of the confidential account information — without the express authorisation of the customer. The only way to justify the practice is on the basis of implied consent, and there can scarcely be any implied consent if the practice is unknown to the customer.

This latter point was the basis of the decision in Turner v Royal Bank of Scotland plc [1998] EWCA Civ 529. The evidence showed that the bank deliberately kept secret from customers the practice of giving references. The Court of Appeal held that there could be no implied consent where the practice was unknown to the customer: for a more complete discussion, see Tyree (2000). This in turn raises the question of whether the practice of bankers giving references is known to customers. It seems likely that a commercial customer would be aware of the practice. Further, it may be that although the practice was not well known earlier, it is now becoming so. In Mutual Life and Citizens’ Assurance Co v Evatt [1968] HCA 74, Kitto J noted (at 589), ‘[T]he multitudinous inquiries of this kind that everyone knows are constantly made of bankers’. Similarly, in Commercial Banking Co of Sydney Ltd v R H Brown & Co [1972] HCA 24, the High Court expressed its view that it is banking practice in Australia to supply bankers’ opinions. However, there is still room to doubt that the facts known to a High Court judge and to lawyers generally are necessarily known to ‘everyone’. [page 212] Clearly, the best advice is to obtain an express consent from the customer, where practicable, before giving confidential information, whether to another banker or to a commercial firm.

6.3.2

Duty to the customer

Whether express or implied, consent would only be granted for the bank to give a fair and accurate report of the customer’s financial position. If the report is favourable, it hardly seems possible that the customer could sustain any damage, regardless of the accuracy, although the ultimate recipient of the advice might suffer losses: see 6.3.3. If the report is unfavourable but accurate, then any damage suffered by the customer would most likely not be recoverable, for the customer would be forced to argue that but for the (accurate) report, a more favourable (inaccurate) impression of the customer’s financial position would have been given to the inquirer. In the words of Weaver et al, ‘[I]t seems unlikely that a plaintiff in this position would attract a great deal of sympathy from a court’, since the damage suffered by the customer is caused not by the accurate report but by the customer’s own — possibly misleading — actions: Weaver et al (2003) at 2.4760.

There is undoubtedly a duty on the bank to exercise reasonable care and skill in the giving of the reference. If the customer suffers damages as a direct result of inaccurate information carelessly supplied by the advising bank, then there seems no reason why these should not be recoverable in an action for breach of contract. The customer may also have an action in defamation if the report is unfavourable. In such a circumstance, the banker would need to plead justification, if the report is accurate, and qualified privilege if it is not. The defence of qualified privilege — although ordinarily available when there is a contractual duty — may not be available, since strictly speaking, there is no contractual duty for the bank to supply a banker’s reference: see Tyree (1980), Gatley (1981); and the discussion of Aktas v Westpac Banking Corp Ltd [2009] NSWCA 9; [2010] HCA 25 at 8.7.2.

6.3.3

Duty to the ultimate inquirer

The banker who is giving a reference concerning the financial affairs of a customer also owes a duty to the ultimate inquirer. Except in those cases where the inquirer is also a customer of the same bank, or possibly the same branch, the relationship between the banker providing the opinion and the inquirer will not be one of contract. This is important because in the usual case the banker may refuse to give an opinion — there being no general duty for the banker to give advice when asked. If, on the other hand, the banker does comply with the request for an opinion concerning one of the bank’s customers, the bank is under a duty to the inquirer. The scope and range of that duty are still not clearly defined in law. [page 213] Illustration: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 A written opinion was sent by Heller & Partners to the National Provincial Bank in response to a request from that bank — which was, itself, a response to a request from Hedley Byrne & Co concerning the financial standing of one of Heller’s customers. The reference was headed ‘For your private use’ and also contained an express disclaimer of liability. The Court held that the relationship between the ultimate inquirer and the banker providing the information was such as to raise a duty on the banker to exercise care in providing the requested information. The Court further held that the disclaimer of liability was effective, so the plaintiff’s action failed.

See 6.3.3 for a discussion of disclaimers. The words ‘For your private use’ were also considered by the High Court

of Australia in Commercial Banking Co of Sydney Ltd v R H Brown & Co [1972] HCA 24. The Court rejected an argument from the bank that these words meant that no duty on the bank in favour of the ultimate inquirer could arise. This was because banking practice is such that the information was obviously sought for a customer of the inquiring bank, who would rely upon the terms of the reference.

The scope of the duty The duty in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 is to be careful — that is, to give an answer which is accurate and honest based on the facts which are available to the bank at the time. In the absence of special contractual terms, there is no duty to go outside the information which is in the possession of the bank through its operation of its customer’s account and financial affairs. Lord Diplock summarised the position in the Privy Council in MLC v Evatt [1971] AC 793 as follows (at 803–4): … A banker giving a gratuitous reference is not required to do his best by, for instance, making inquiries from outside sources which are available to him, though this would make his reference more reliable. All that he is required to do is to conform to that standard of skill and competence and diligence which is generally shown by persons who carry on the business of providing references of that kind … The reason why the law requires him to conform to this standard of skill and competence and diligence is that by carrying on a business which includes the giving of references of this kind he has let it be known to the recipient of the reference that he claims to possess that degree of skill and competence and is willing to apply that degree of diligence to the provision of any reference which he supplied in the course of that business … If he supplies the reference the law requires him to make good his claim.

[page 214] Although there have been some developments which cast doubt on the basis of the liability of parties making careless statements, it would appear that by any of the tests of liability, a banker giving a gratuitous reference is under the duty of care expressed by Lord Diplock.

Disclaimer of liability The House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 found that, although the defendant had been negligent, there was nevertheless no liability because of the disclaimer contained in the reference. It is doubtful that a disclaimer will always be sufficient to allow the banker to escape completely. Barwick CJ in the High Court of Australia in Mutual Life and Citizens’ Assurance Co v Evatt [1968] HCA 74 treated the matter as one

which was still open in Australian law. Further, on the matter of disclaimers, he expressly said (at 570): The duty of care, in my opinion, is imposed by law in the circumstances. Because it is so imposed, I doubt whether the speaker may always except himself from the performance of the duty by some express reservation at the time of his utterance. But the fact of such a reservation, particularly if acknowledged by the recipient, will in many instances be one of the circumstances to be taken into consideration in deciding whether or not a duty of care has arisen and it may be sufficiently potent in some cases to prevent the creation of the necessary relationship. Whether it is so or not must … depend upon all the circumstances.

This view of the basis of the duty contrasts sharply with that of Lord Devlin in the same case, where he said (at 529): I do not understand any of your Lordships to hold that it is a responsibility imposed by law upon certain types of persons or in certain sorts of situations. It is a responsibility that is voluntarily accepted or undertaken, either generally where a general relationship, such as that of solicitor and client or banker and customer, is created, or specifically in relation to a particular transaction.

It is thought that the view of the Chief Justice is to be preferred. It seems contradictory to say that the duty arises because it is assumed by the advicegiver who, after giving advice, then declares that there is no responsibility. It would be better to view the disclaimer as only one component of the overall situation and to ask if, in all of the circumstances, it was reasonable for the inquirer to rely upon the advice given. The parties clearly intend that a bankers’ reference be given seriously and carefully and all parties treat the disclaimer of liability as a formality, in the sense that both the giver and the receiver of the advice would be surprised at any suggestion that it justified any carelessness of the advising banker. Of course, no disclaimer will be effective to avoid liability for advice which is given fraudulently or recklessly: see Commercial Banking Co of Sydney Ltd v R H Brown & Co [1972] HCA 24; Compafina Bank v ANZ Banking Group (1984) Aust Torts Rep 80–546. See also 6.3.4. [page 215] The House of Lords set aside a disclaimer clause as being contrary to the provisions of the Unfair Contract Terms Act 1977 (UK): see Smith v Bush [1990] 1 AC 831. It may be that the unfair contract terms provisions of the Australian Consumer Law (Schedule 2 of the Competition & Consumer Act 2010) (Pts 2–3) could be used to mount a similar attack in Australia. See Jackson (1991) for an argument to the contrary and Purcell (1989) for a discussion of the contents of a properly worded disclaimer. Weaver and Craigie also suggest that s 18 of the Australian Consumer Law might be used to mount a challenge to disclaimer terms: see Weaver et al (2003) at 2.5620.

When does the duty arise? Not every instance of gratuitous advice will place the adviser under a duty of care. As indicated above, the important feature is that in all of the circumstances it is reasonable to find that the adviser assumed responsibility for their advice. In MLC v Evatt [1971] AC 793, an insurance company gave information concerning the financial status of a fellow subsidiary company. The plaintiff — who was a policy holder with the defendant company — sought advice concerning the financial stability of the subsidiary, believing that the defendant had greater information and/or better facilities for obtaining that information than had the plaintiff himself. As a result of negligently given information, the plaintiff invested in the subsidiary and lost the amount claimed in the action. At one point in the judgment, it seemed that Lord Diplock was severely restricting the scope of the duty. He indicated (at 807) that the principle laid down should ‘be understood as restricted to advisers who carry on the business or profession of giving advice of the kind sought and to advice given by them in the course of that business’. However, he later made it clear that there was no such precise confinement of the duty (at 809): … their Lordships would emphasise that the missing characteristic of the relationship which they consider to be essential to give rise to a duty of care in a situation of the kind in which Mr Evatt and the company found themselves when he sought their advice is not necessarily essential in other situations — such as, perhaps, where the adviser has a financial interest in the transaction upon which he gives his advice.

It is certain now that the Australian courts will not permit the severe narrowing of the duty as suggested by the first passage of Lord Diplock quoted above. In recent times, the High Court has held that there is a duty of care in circumstances where the person making the statement was not in the business of advice giving. In so doing, the Court preferred the reasoning of its own decision in Evatt over that of the Privy Council. [page 216] Illustration: Shaddock & Associates Pty Ltd v Parramatta City Council [1981] HCA 59 The plaintiff, through its solicitor, sought information from the defendant by telephone and by a standard form. The solicitor spoke by telephone to an unidentified officer of the defendant and was assured that there were no road-widening plans which might affect the property in which the plaintiff was interested. The standard form was an application for a particular certificate which also asked for the same information. Although the practice of the Council was to note road-widening proposals at the foot of the form, no such notation was made in this case. The plaintiff purchased the property on the strength of this information. It transpired that there were road-widening plans which concerned the property.

The Court held that the Council was under a duty to the plaintiff to take care in the provision of information, even though the defendant was not in the business of providing such information nor were they under any statutory duty to do so. The Court further held that there was no breach of the duty where the information was supplied by an unidentified officer and was not subsequently confirmed, but there was a breach of the duty with respect to the request in writing.

An important point is that the High Court held there was no significant difference between providing advice and providing information. The duty of care arises when the adviser knows or ought to know that the inquirer is relying on the answer and that the reliance is reasonable in all the circumstances. New Zealand courts have also made it clear that the test is one of reasonable reliance. Illustration: Meates v Attorney-General [1983] NZLR 308 The plaintiff shareholders of Matai Industries claimed, inter alia, that they had been induced by the negligent statements of the Prime Minister and other ministers of the Crown to establish the company to assist with the then government’s regional development plans. Further, it appeared that, when the company was in financial difficulties, the Minister of Trade and Industry had assured the plaintiffs that if they acquiesced in the appointment of a receiver with a view towards avoiding retrenchments, then their interests would be safeguarded and they would be indemnified against losses. As a result of these representations, the plaintiffs failed to take normal commercial precautions to safeguard their own interests. The Court held that there was a sufficient proximity to establish a duty of care, even though the ministers were not in the business or profession of giving advice of the type which was given. They held themselves out as having special knowledge in the areas of their own portfolios and, in the case of the Prime Minister, of government policy. They knew when they undertook to give advice that the advice would be relied upon.

[page 217] Woodhouse P and Ongley J specifically noted the second part of Lord Diplock’s speech quoted above and concluded (at 334): Thus the presence or absence of a ‘business or professional’ element should be regarded as but a single instance of a test in those particular situations where it has actual relevance.

In Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) [1997] HCA 8, the High Court held that auditors owed a duty of care to financiers who had relied upon advice given to a third party. The case contains a valuable discussion of general principles. See also San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 [1986] HCA 68. In summary, it would seem that the duty of care will arise at any time when it is reasonable to assume that the banker is assuming responsibility for the

advice given. That will always be the case when the advice is of the sort that is within the usual advice given by a banker, but the duty may arise when there are other factors which place the parties in a relationship that is close enough that the banker ought to know that their advice is being relied upon. See also Geju Pty Ltd v Central Highlands Regional Council (No 2) [2016] QSC 279 and LM Investment Management Limited v BMT & Assoc Pty Limited [2015] NSWSC 1902. It is not generally a defence for the bank to argue that its employee has exceeded authority. Illustration: Compafina Bank v ANZ Banking Group [1982] 1 NSWLR 409 A bank manager gave an unauthorised and unduly favourable letter of introduction and credit report. As a result of these reports, the plaintiff bank lent the customer some $5.5 million. On the facts, it was held that the manager was liable for fraudulent misrepresentation. The Court held that the defendant bank was liable for negligent misrepresentation since, even though the manager acted beyond his actual authority, he was acting within his ostensible authority when giving the credit reference.

On the other hand, a bank may escape liability if it is in effect merely passing on a reference given by another bank. Illustration: Cunningham v National Australia Bank (1987) 15 FCR 495 The plaintiff was a customer of the defendant bank. He asked the bank to seek a reference from W Bank concerning customers of that bank. W Bank produced a reference which indicated that the customers in question were satisfactory on all accounts. [page 218] The defendant bank passed this on to the plaintiff with a note that the report was ‘as good a report as you will get’. However, the report was incorrect, as the customers of W Bank were insolvent at the time when the report was made. The Court held that the defendant bank was not liable, as it had merely acted as a conduit of the information. The note which the defendant added was merely a comment on the reference, not a comment on the creditworthiness of W Bank’s customer.

6.3.4

The duty to be honest

Even before Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, a duty to be honest was acknowledged. A failure to observe the duty leaves the person making the statement open to an action in deceit. In order to maintain an action in deceit, it must be shown that: the representation was false as a matter of fact; the representation was made knowingly or recklessly — that is, with

complete disregard as to its truth or falsity; the representation was made with an intention that it should be relied upon by the recipient; and the recipient did in fact rely upon it and suffer damage thereby. See Derry v Peek (1889) 14 App Cas 337. Thankfully, there are few cases where an action in deceit has been brought against a banker. Nevertheless, it is clear that such an action may be sustained against a banker who has given a fraudulent banker’s reference. In Commercial Banking Co of Sydney Ltd v R H Brown & Co [1972] HCA 24, the plaintiffs had for some years conducted business with a company known as Wool Exporters Pty Ltd. In late 1976, they entered into a contract with Wool Exporters to sell the clip on the sheep’s back. Shortly before they were to deliver the wool, they were informed by their banker that there were rumours to the effect that Wool Exporters was in financial difficulties. This naturally caused the plaintiffs much concern and, at the request of the plaintiffs, their banker wrote to Wool Exporters’ banker, the Perth branch of the Commercial Banking Co of Sydney, seeking a report on the financial position of Wool Exporters. The request was in the following terms (at 340): Confidential. Kindly favour us with your opinion as to the financial position, character, standing and occupation of Wool Exporters Ltd and say whether you consider them quite safe in the way of business for £ generally …

[page 219] The request was signed by the manager of the plaintiffs’ bankers. In due course, the Commercial Banking Co of Sydney branch manager returned a banker’s reference in the following terms (at 341): The Company is capably managed by Directors well experienced in the wool trade. The Company has always met its engagements, is trading satisfactorily and we consider that it would be safe for its trade engagements generally. This opinion is confidential and for your private use and without responsibility on the part of this bank or its officers.

The document was not signed, but it was conceded that the reply was that of the branch manager of the Commercial Banking Co of Sydney. The plaintiffs delivered the wool to Wool Exporters on the faith of the opinion. Shortly thereafter, Wool Exporters failed and the plaintiffs brought action against both their own banker and the Commercial Banking Co of Sydney.

Negligence As against their own bankers, the plaintiffs alleged negligence in failing to

mention that the qualifying clause was a part of the report received from the Commercial Banking Co of Sydney. It was claimed that in the absence of knowledge of the qualifications, they were in no position to assess the true value of the opinion for the purposes of making their decision as to whether or not to deliver the wool to Wool Exporters. In the Supreme Court of Western Australia, it was found as a fact that the qualifications had been communicated to the plaintiffs and so the plaintiffs’ own banker had not been negligent. There is some reason to believe that if the finding of fact had been different, then the outcome might also have been different.

Fraud As against the Commercial Banking Co of Sydney, the plaintiffs alleged not only negligence, but also that the opinion was fraudulently given. The Supreme Court found that this was the case: that the manager knew, or ought to have known, that the request was for one of the requesting banker’s customers; that the customer was likely to enter into business arrangements with Wool Exporters; and that the report was likely to be relied upon by the ultimate inquirer. The Court further held that the report was made with intent to deceive and with intent that it should be acted upon, both by the receiving banker and the customer who had requested the information.

Appeal to High Court The Commercial Banking Co of Sydney appealed to the High Court, arguing that the effect of the disclaimer was to relieve it from liability and the damages awarded were inappropriate. [page 220] As to the first, the High Court made it clear that Australian banking practice was such that, when a bank requested information concerning the credit of a customer from another bank, it is understood that the inquiring bank will communicate that information to its own customer. It was considered impossible to construe the disclaimer to mean that the information is to be used by only the inquiring bank for the purpose of giving advice to its own customer, without communicating the actual reply. The Court also made it clear that even if a type of disclaimer is adequate for shielding the bank against negligence when making a banker’s reference, there is no disclaimer which will protect the giver of an opinion which is tainted by deceit. As to the question of damages, the bank had argued that a failure of the plaintiff to deliver the wool to Wool Exporters would have been a breach of

contract, and the damages awarded against the bank should reflect that fact. The Court held that such a fact (if indeed it was a fact) would not avail the bank, since the losses suffered were a direct and foreseeable consequence of the fraudulent representation.

Lord Tenterden’s Act Lord Tenterden’s Act affects the right of the inquirer to bring an action in deceit: Statute of Frauds (Amendment) Act 1828, s 6. The Act, which is still in force in some Australian jurisdictions, is one of the peculiarities which were implemented in the English Statute of Frauds series of legislation. The Act is in force in Tasmania (Mercantile Law Act 1935, s 11), Victoria (Instruments Act 1958, s 128) and Western Australia (Law Reform (Statute of Frauds) Act 1962). The Statute of Frauds (Amendment) Act 1828 is very badly drafted (see the comments of Salmon J in Diamanti v Martelli [1923] NZLR 663), but the essence of it is that no action may be brought against a person who makes a fraudulent representation concerning another person’s credit, unless such a representation is made in writing and signed by the person making the representation. Although the Statute of Frauds (Amendment) Act 1828 itself merely refers to ‘any representation or assurance’, the restriction to fraudulent representations is a judicial interpretation of long standing: see Banbury v Bank of Montreal [1918] AC 626. Further, however, the Act only applies to those representations which are for a particular purpose — namely for the purpose of including the plaintiff to give credit to a third person: see also LBI HF v Stanford [2014] EWHC 3921. Further, since the Statute of Frauds (Amendment) Act 1828 requires that the representation be signed by the person to be charged, it is not possible to fix the bank with liability for a fraudulent statement which has been signed by the manager, since, in making the fraudulent representation, the manager is acting outside the scope of their authority. The manager who signs, of course, is liable. It is interesting to note that the reference given in the case was unsigned, but the defendant bank elected not to rely upon the defence which would undoubtedly have been available to it under the Statute of Frauds (Amendment) Act 1828. It should be recalled that [page 221] the bank may be liable for negligent misrepresentation even where the manager is acting outside the scope of their actual authority: see Compafina Bank v ANZ Banking Group [1982] 1 NSWLR 409. See also 6.3.3.

The Statute of Frauds (Amendment) Act 1828 was considered in Diamanti v Martelli [1923] NZLR 663 (at 670), where it was said: [The] Act applies only when the defendant’s representations have been made for the purpose of inducing the plaintiff to give credit to the third person — that is to say, to trust the third person with the performance of some obligation towards the plaintiff as, for example, the repayment of money lent, or payment for goods sold and delivered.

Therefore, the Statute of Frauds (Amendment) Act 1828 did not apply when the plaintiff made fraudulent representations which induced the plaintiff to apply and pay for shares in a company, since, in that case, they did not give credit to the company. The Statute of Frauds (Amendment) Act 1828 has now been repealed by statute in all Australian jurisdictions except Tasmania, Victoria and Western Australia.

6.3.5

Financial advice

The banker owes the customer a duty to be careful in giving advice where: it is advice which is of the type which bankers would give in the ordinary course of the business of banking; or the bank has advertised or otherwise held itself out as giving the advice in question. There has been conflicting opinion over the years as to whether the giving of financial advice is a part of the general ‘business of banking’. Earlier cases thought not: see Banbury v Bank of Montreal [1918] AC 626 and Barrow v Bank of New South Wales [1931] VLR 323. However, later cases have treated the question as one of fact to be decided in each case, and the fact that the bank assumes the task will usually be sufficient to give rise to a duty of care: see Woods v Martins Bank Ltd [1959] 1 QB 55 and Shaddock & Associates Pty Ltd v Parramatta City Council [1981] HCA 59. The bank is not relieved of this duty merely because it has issued secret instructions to staff that they should not give financial advice: see Woods v Martins Bank Ltd [1959] 1 QB 55. The fact that the recipient of advice is not a customer will not, of itself, relieve the bank of liability under the principle in Mutual Life and Citizens’ Assurance Co v Evatt [1968] HCA 74.

Knowledge of customer’s affairs Although the banker must exercise care and skill in giving financial advice, the

liability for negligent advice will be limited by the knowledge which the banker has of the financial affairs of the customer. [page 222] Illustration: Box v Midland Bank [1979] 2 Lloyds Rep 391; [1981] 1 Lloyds Rep 434 The plaintiff was an engineer who was hoping to contract with a nationalised concern in Manitoba. In order to gain the contract, he sought finance from the Midland Bank, where he already had an overdraft of some £20,000. At a meeting with the branch manager he was assured that the finance would be forthcoming, subject only to insurance from the Export Credit Guarantee Department and approval from the Head Office, but the manager also advised that there would be no difficulty concerning either of these. On the faith of these assurances, the plaintiff proceeded to extend his overdraft and mortgaged his own house to the bank as security. The loan failed to materialise, because the Export Credit Guarantee Department would not give approval. The plaintiff argued that the advice given had been negligent and that as a result, not only had he borrowed more money, but he had also lost the large profit which would have accrued from the Canadian contract. The plaintiff claimed damages from the Midland Bank for more than a quarter of a million pounds. Lloyd J found that the advice had been negligent and that, as a result, the plaintiff had overdrawn an additional £5,000 — an amount for which the bank was liable, since it was an obvious consequence of the negligent advice. However, the other damages claimed by the plaintiff — in particular the benefits of the Manitoba contract — were too remote to be recoverable, unless it could be shown that the banker knew or should have known of the details of the business arrangements:

See also Royal Bank of Canada v Pampellonne [1987] 1 Lloyds Rep 218; Rust v Abbey Life Assurance Co [1978] 2 Lloyds Rep 385; JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm); Re Smith v Commmonwealth Bank of Australia [1991] FCA 73. In Kenny & Good Pty Ltd v MGICA (1992) 77 FCR 307, the plaintiff was able to show that, but for the negligent advice, there would have been no investment at all. The market value had fallen, and the trial judge held that the plaintiff was entitled to recover damages equal to the drop in market price. The decision was upheld by the Full Court of the Federal Court.

Taxation effects In the absence of special knowledge, the banker has no duty to consider the taxation aspects of transactions. [page 223] Illustration: Schioler v Westminster Bank Ltd [1970] 2 QB 719

The plaintiff was a foreigner who was resident in England. Under the taxation laws in force at the time, she was not liable for income tax on any foreign dividends, provided only that they were not received in the United Kingdom. In order to prevent this from happening, she opened an account with the defendant bank at the Guernsey branch. As a shareholder in a Malaysian company, she instructed that company to send her dividends to the Guernsey branch. For several years, this arrangement proved satisfactory because the company remitted dividends in sterling. However, in mid-1968, the company began sending dividend warrants expressed in Malaysian dollars. There were no facilities in Guernsey for negotiating foreign currency drafts, and the defendant bank sent the draft to the branch office in England in accordance with the normal practice. The sum was subjected to a deduction of UK income tax and the Guernsey account credited only with the net sum. The plaintiff claimed the bank to be liable for performing the contract negligently. The Court dismissed the claim.

In the course of the judgment, Mocatta J said (at 728): Unless special arrangements were made with a customer or special instructions given by him, bankers could not, in discharge of their contractual duties in crediting an account with a dividend, be obliged to consider the tax implications to the customer or consult him before acting in accordance with their ordinary practice. To hold a bank obliged to do this would come near to holding that a bank must gratuitously give its customers tax advice. To take such a view would be to place an impossible and unreasonable burden on the banks generally.

Foreign currency loans High interest rates in Australia during the early 1980s led financial institutions, including banks, to suggest that larger borrowers consider foreign currency loans. The floating and consequential devaluation of the Australian dollar in December 1983 had the effect of making these foreign currency loans extremely unprofitable for the borrower. Litigation inevitably ensued. Illustration: Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286 The plaintiff was offered a foreign currency loan of $2.5 million, which was drawn in Swiss francs. He lost between $500,000 and $700,000 when the value of the Australian dollar against the Swiss franc fell. The loan was not ‘hedged’, and the plaintiff claimed that the defendant was negligent in failing to advise that the loan should be hedged and in failing to monitor the loan. [page 224] Rogers J found that a duty of care was owed, and the standard of care was that which a reasonably careful and competent foreign exchange adviser would exercise, having regard to the market and the commercial and financial background of the borrower. On the rather unsatisfactory evidence of the case, the defendant had met this standard of care.

See also McEvoy v ANZ Banking Group Ltd [1988] Aust Torts Rep 80–151; Cunningham v National Australia Bank (1987) 15 FCR 495; James v ANZ Banking Group (1986) 64 ALR 347; Kabwand Pty Ltd v National Australia Bank [1989] FCA 131; Adour Holdings Pty Ltd v Commonwealth Bank (1991) ATPR 41–147.

If — as seems likely because of widespread advertising of advisory services — the giving of financial advice is a part of the modern business of banking, then the individual branch managers must be considered as having the (ostensible) authority to give such advice. Apart from being ordinary common sense, this view was recognised even in the Banbury case: see the comments of Lord Wrenbury in Banbury v Bank of Montreal [1918] AC 626 at 715.

Introductory offers Banks frequently offer attractive facilities to new customers and are continually introducing new products. Where the new products are more attractive than old ones, existing customers sometimes feel aggrieved. Illustration: Suriya and Douglas (a firm) v Midland Bank Plc [1999] EWCA Civ 851 The plaintiff claimed as damages the interest lost as a result of the bank not transferring funds to the new type of account. It was argued that the banker-customer contract required the bank to notify the customer of any new type of banking facility which was applicable to the customer’s business and banking requirements. The Court rejected the plaintiff’s argument on several grounds, but all related to the fact that the plaintiff and the defendant had an ordinary banker-customer relationship. There was no additional payment for advisory services.

6.4

Duty to question a valid mandate

Some circumstances should alert the banker that a transaction may damage the customer’s interest. The duty of the banker in these circumstances is, at the minimum, to make inquiries to clarify the customer’s wishes. The duty may extend to questioning a properly drawn mandate from the customer. Two cases illustrate the scope of the duty, both involving the account of a company customer. [page 225]

6.4.1

Selangor United Rubber Estates Ltd v Cradock

In Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, a company bank account was used to facilitate a fraudulent purchase of the company by means of using the company’s own funds. In the 1960s, there were a number of companies which found themselves with no business to conduct, following the withdrawal of England from her former colonies. In such a situation, the company could be wound up and the assets distributed

among the shareholders, but it was found that it was often slightly more profitable to sell the company as a ‘shell’. Unfortunately, such a practice permitted the kind of fraud which was practised in the Selangor case.

The takeover scheme Cradock had made a ‘takeover bid’ for the company and had obtained control of 79 per cent of the stock by making a bid of some £195,000. Cradock did not have the money to pay, but had devised a scheme whereby his agents would be elected chairman of the board of the company and, following that, the chairman could draw cheques on the company account. In order to become chairman of the board, however, it was necessary to pay for the 79 per cent interest. As part of the takeover deal, Selangor’s banker, National, drew two bank drafts totalling some £232,000 in favour of the District Bank, which was Cradock’s banker. The funds were to be placed in a new account in the name of the company. Directors of the plaintiff company, who were working in concert with Cradock, drew a cheque for almost the entire sum in favour of Woodstock Trust (with which Cradock was closely related) by way of loan. Woodstock then loaned the required sum to Cradock, who paid for the shares with it. Cradock thus gained control of the company and its assets by means of using the company’s assets, in contravention of s 54 of the Companies Act 1948 (UK) and in breach of the duty which a director owes to the company and its shareholders.

Bank’s obligation The fraud could not have occurred but for District Bank honouring the cheque drawn in favour of Woodstock — a cheque which was obviously drawn by Cradock for purposes which were not in the best interests of the company. The Court held that the bank should have known that the transaction was not in the customer’s — that is, Selangor’s — best interest, and the bank should have queried the transaction. Note that this is so even though the cheque in question was properly signed by directors of the company who were authorised to sign cheques — although the authority to sign cheques was, of course, restricted to those cheques which were appropriate company business. [page 226] On almost identical facts, Brightman J found the defendant bank to be liable both for breach of contract and as constructive trustee in Karak Rubber Co Ltd

v Burden (No 2) [1972] 1 WLR 602: see 4.6.5 for a discussion of the trust aspects of the two cases. In both cases, the Court emphasised that although the bank was obliged to pay a cheque which was in proper form and backed by adequate funds, it did not follow that the duty was an unqualified duty to pay without inquiry. The bank is under a contractual duty to exercise such care and skill as would be exercised by a reasonable banker, which included a duty to make inquiries in appropriate circumstances. In both cases, the Court indicated that the circumstances surrounding the drawing of the cheque were so out of the ordinary course of business that a reasonable banker would have been placed on notice. Brightman J noted that it was open to the banker to show that such inquiries would have yielded no useful information, nor would they have produced answers which would have been acceptable to the reasonable banker. This is undoubtedly correct, since, if the answers would have been acceptable, then the losses suffered by the customers would not have flowed from the breach of contract. Note that this is an entirely different question from that of the ‘useless inquiry’ when the bank is seeking a defence to an action in conversion, for, in that situation, the bank is attempting to bring itself within the ambit of a statutory defence: see 8.8.4 for a discussion of the ‘useless inquiry’ when attempting to establish a defence under s 95 of the Cheques Act 1986 (Cth). In both Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 and Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602, the bank was held liable not only for breach of duty but also as constructive trustee. See the discussion of constructive trustees at 4.6.5.

6.4.2

Criticisms

The general rule is probably that a banker should question a mandate when a reasonable and honest banker with knowledge of the relevant facts would consider that there was a serious possibility that the customer was being defrauded or that the funds were being misappropriated: see Lipkin Gorman v Karpanale Ltd [1988] UKHL 12. Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 and Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602, themselves, have been criticised as placing too great a burden on the banker — a matter which will be discussed below: see 7.4.3 and Barclays Bank v Quincecare Ltd [1992] 4

All ER 363. This criticism was also made in Lipkin Gorman v Karpanale Ltd [1988] UKHL 12, but the principle of the existence of the duty was reaffirmed: see also Barclays Bank v Quincecare Ltd [1992] 4 All ER 363. [page 227] The existence of a duty to question a valid mandate in certain circumstances has also been affirmed in Australian cases: see Varker v Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967 (where the mandate had been altered but was treated as a valid mandate under the principle of London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777). See also 7.2.3; Ryan v Bank of New South Wales [1978] VR 555 and National Australia Bank Ltd v Meeke [2007] WASC 11. While approving the existence of the duty, Saville J, in Redmond v Allied Irish Banks Plc [1987] FLR 307, held that it did not extend to warning a customer about the dangers of dealing with cheques crossed ‘not negotiable’. Whatever the scope of the duty, it is a difficult one for the banker, since it creates a situation in which the banker is subjected to the pressures of two conflicting duties. On the one hand, there is an obligation to pay on demand a cheque which is properly drawn and for which there are adequate funds. On the other, there is a duty to delay payment and to make inquiries if the circumstances are such as to raise doubts in the mind of a reasonable banker. It should be noted, however, that the circumstances in both Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 and Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602 were very unusual, and the sums involved were quite large. In the Selangor case, Ungoed-Thomas J also expressed the view that if there was a duty to question the mandate, then failure to do so is not excused by a conviction that the inquiry would be fruitless: see Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 at 1607.

6.5

Duties to third parties

There are a number of circumstances where a banker owes a duty to parties who are not customers. For example, a banker has a duty to certain third parties who are beneficiaries of trust accounts: see 4.6.2. A banker also has a duty to strangers to be careful when giving bankers’ references: see 6.3.3. The duty which a banker owes to the holder of a cheque is imposed by statute: see Cheques Act 1986, s 67. In Chapter 10, it will be suggested that a banker may owe a duty to third parties when those parties are payees in a direct debit or a

direct credit transfer: see Dimond (HH) (Rotorua 1966) Ltd v ANZ Banking Group Ltd [1979] 2 NZLR 739. In most cases, the duty owed to third parties appears to be governed by ordinary tort principles. Illustration: Johns Period Furniture v Commonwealth Savings Bank of Australia (1980) 24 SASR 224 Blank bank cheque forms were stolen during a burglary of the North Adelaide post office in early February 1979. The defendant bank did not learn of the loss until [page 228] about a month later. The bank took no steps to give any public warning about the cheque forms. In early May, one of the cheque forms with a forged signature was given to the plaintiff to pay for goods. The bank refused to pay the cheque, and the plaintiff brought an action in negligence, claiming that the bank owed a duty to traders in the area to warn of the stolen cheques. The Court rejected the claim on the basis that the plaintiff was not a member of any clearly ascertained class, as required by the decision of the High Court in Caltex Oil (Aust) Pty Ltd v The Dredge ‘Willemstad’ [1976] HCA 65.

The Court in Johns Period Furniture v Commonwealth Savings Bank of Australia (1980) 24 SASR 224 particularly relied upon a quote from Gibbs J (at 555): In my opinion it is still right to say that as a general rule damages are not recoverable for economic loss which is not consequential upon injury to the plaintiff’s person or property. The fact that the loss was foreseeable is not enough to make it recoverable. However, there are exceptional cases in which the defendant has knowledge or means of knowledge that the plaintiff individually and not merely as a member of an unascertained class, will be likely to suffer economic loss as a consequence of his negligence, and owes the plaintiff duty to take care not to cause him such loss by his negligent act.

See also Capri Jewellers Pty Ltd v Commonwealth Trading Bank of Australia [1973] ACLD 152, where a cleaner stole blank bank cheque forms. Macfarlan J held that, presuming a duty of care to the plaintiff, the defendant bank had not been shown to breach the duty. On the other hand, there is not a general duty to oversee the affairs of the customer. In Perpetual Trustee Company Limited v Bowie [2015] NSWSC 328, Ball J stated (at [50]): First, I do not accept that the Bank owed Ms Bowie a duty of care prudently to assess whether or not to grant a loan and enter into a mortgage with Ms Bowie: see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 107-108; Tomlin v Ford Credit Australia Ltd [2005] NSWSC 540.

See also Westpac Banking Corporation v Diagne [2014] NSWSC 822, where it was said that there is no duty of care to investigate the customer’s financial circumstances to determine whether a loan is appropriate. These cases may not apply if the ‘responsible lending’ provisions of the

National Credit Code apply to the loan: see the discussion at 11.3. [page 229]

6.6

Safe custody

Taking goods and documents for safekeeping is a banking service which is at least as old as the modern business of banking itself. It is the original ancillary service offered by bankers to their customers, and it offers the oldest examples of the problems of defining the duty of a banker to the customer. When valuable chattels are deposited for safekeeping, it is customary for the customer to deposit them with the banker in a locked box and for the customer to retain the key. Documents will ordinarily be placed in a sealed envelope by the customer. In smaller branches, the goods deposited will be kept in the bank’s general safe. The law which defines the duty of the banker to the customer in such circumstances is a part of the law of bailment. The banker is the bailee of the goods or documents and the bailor is the customer. The essence of bailment is that the goods are deposited by the bailor with the bailee on the condition that they will be returned to the bailor in due course. The problems that might arise with a bailment fall substantially into two categories. First, the goods might be damaged or lost while in the custody of the bailee. Second, the bailee might deliver the goods to the wrong person, either inadvertently or as the result of the fraudulent conduct of an employee or agent. In the first case — that of damage or loss — the bailee is liable to the bailor only if there has been some negligence in the keeping of the goods. However, from a very early time the law recognised that there is a wide range of circumstances in which a bailment might arise and that the standard of care required of the bailor should vary accordingly. For example, a neighbour who, as a favour, agrees to store a household item while the bailor is on holiday is as much a bailee as the banker who agrees to receive very valuable items and keep them in the bank’s strongroom. Yet the average person would expect very different standards of care of these two bailees. The distinction which was drawn by the law was between a bailee who charged for the service provided, called a ‘bailment for reward’, and the bailee who performed the service without reward, called a ‘gratuitous bailment’. Much of the discussion to be found in some case law and texts concerns the

question of whether a banker who takes goods or documents for safe custody is a bailee for reward, even when there is no direct charge made for the service. For reasons which will become apparent, it is thought that the distinction is no longer relevant for a banker, since the standard of care required is special to the situation of the banker. [page 230]

6.6.1

Standard of care

Early cases held that the banker was a gratuitous bailee. Illustration: Giblin v McMullen (1868) LR 2 PC 317 A customer left a box containing debentures with the bank for safe custody. The box was stored in the strongroom of the bank together with boxes belonging to other customers and other securities belonging to the bank. Customers had access to the room during banking hours but were at all times accompanied by a bank clerk. The room had two iron doors which were opened by separate keys. These keys were in the charge of the cashier by day and, at night, one key was left with the cashier and the other with another officer of the bank. The cashier of the bank took the debentures from the box and used them for his own purposes. The Court held that the bank had not been negligent, since the bank was a gratuitous bailee and was not bound to exercise more than ordinary care.

Giblin v McMullen doubted Giblin v McMullen (1868) LR 2 PC 317 has been extensively criticised. There appeared to be no serious consideration of the vicarious liability of the bank, as bailee, for its employee’s action, nor as a principal for the fraud of the agent acting within the scope of employment: see Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580; Morris v Martin & Sons Ltd [1966] 1 QB 716 at 735; Lloyd v Grace, Smith & Co [1912] AC 716. Further, although the Court held that there was no actionable negligence, the jury found expressly that the bank had been grossly negligent. In his discussion of the case, Chorley notes that ‘… it may be doubted whether the decision would be the same at the present time’: Chorley (1974) at p 246. See also 6.6.6 for a discussion of the vicarious liability point. Giblin v McMullen (1868) LR 2 PC 317 was distinguished in Re United Service Co (Johnston’s Claim) (1870) LR 6 Ch App 212. Johnston owned railway shares which he deposited with a banker for safekeeping. They were stolen by the manager, who obtained a transfer of the shares to his own name by means of several forgeries of Johnston’s signature. When Johnston learned of the transfer, he brought suit against the railway company and succeeded in

having the shares re-transferred to him, but he did not receive any costs in the action. The banker went into liquidation and Johnston sought to prove for the amount of his costs in the action. The Court held that the banker was a bailee for reward, distinguishing on the basis that the banker here had received a small commission for the safekeeping of the shares. The Court also found that the banker had been negligent, but the loss claimed by Johnston was, of course, too remote. [page 231] In Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580, Salmon J indicated (at 589), ‘Their Lordships however gravely doubt whether that case [Giblin] was correctly decided’.

Banker is bailee for reward If the distinction between a gratuitous bailment and a bailment for reward is still relevant, then there can be little doubt that the modern banker will be a bailee for reward, since a fee is invariably charged for the safe custody service: see Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580. Even if the bank does not charge a fee for the specific service, it seems that the bank is expecting to obtain some benefit from the service. In the case of a customer, it is at least arguable that the service is provided under the general banker-customer contract. If the bank provides the service to a non-customer, then it seems likely that it is expecting that the person will at least consider becoming a customer: see also Smorgon v Australia and New Zealand Banking Group Ltd [1976] HCA 53, where Stephen J indicated that the fact that safe custody is a part of banking business supported the argument that banks are bailees for reward.

Distinction may not be relevant It seems more likely that the distinction between a bailee for reward and a gratuitous bailee is not relevant. The distinction was originally made for the purpose of defining different levels of care which the bailee must exercise. A more useful approach is to adopt the modern practice of defining the standard of care required as that which is reasonable in all the circumstances. This approach was followed by the English Court of Appeal in Houghland v R R Low (Luxury Coaches) Ltd [1962] 1 QB 694; by Gibbs CJ in Pitt Son & Badgery Ltd v Proulefco SA [1984] HCA 6 at 646; and by the Privy Council in Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580.

If that represents the law — and it is suggested that it does — then the standard of care required is that of a reasonable banker in view of all the surrounding circumstances. The receipt of consideration and the amount of that consideration would merely be a factor which was to be considered in determining the appropriate standard of care. Exemption clauses are discussed at 6.6.4 and 6.6.5.

6.6.2

Wrongful delivery to a third person

The standard of care required of the bailee in the second circumstance — that of delivering the goods to the wrong person — is on a very different footing. Although the standard of care to be exercised in taking care of the goods might vary with the circumstances of the bailment, the very minimum required of any bailee is that the goods be returned to the correct person. [page 232] Consequently, there is a very strict duty on the bailee to return the goods to the correct person. Delivery to the wrong person will result in liability in an action for conversion. In such an action, it does not matter that the wrongful delivery was made honestly and without negligence. This principle is very old: see, for example, Stephenson v Hart (1828) 4 Bing 476; 130 ER 851; Hiort v London and North Western Railway Co (1879) 4 Ex D 188; and the important case of Langtry v Union Bank of London (1896) 1 LDAB 229. This problem of delivery to the wrong person is not as rare as might be thought, for when the goods are deposited in joint names or in the name of a company or a partnership, it might be difficult for the banker to establish the right of some particular person to claim redelivery. When goods are being deposited in such circumstances, it is of the utmost importance for the banker to obtain express instructions concerning the identity of those who are authorised to collect the goods. The banker may retain the goods for a reasonable period of time in order to make inquiries: see Clayton v Le Roy [1911] 2 KB 1031. If the banker is unable to determine unequivocally which of the competing claims are valid, then the only safe course of action is to interplead. This, in effect, is asking the parties to determine their dispute before a court.

6.6.3

Burden of proof

The best view is that, where goods are damaged, the onus is on the bailee to

show that the loss was not caused by the negligence or misconduct of employees or agents with whom the goods were entrusted for safekeeping: see, for example, Port Swettenham Authority v T W Wu & Co (M) Sdn Bhd [1979] AC 580 and Pitt Son & Badgery Ltd v Proulefco SA [1984] HCA 6. However, a different view is that expressed by Zelling J in WGH Nominees Pty Ltd v Tomblin (1985) 39 SASR 117 — namely that the onus is on the plaintiff to prove negligence. However, when goods are lost, there is an evidential onus on the bailee to point to circumstances negativing negligence on their part. In light of the fact that the bailee is almost always the party who has access to information concerning the circumstances of the loss, the former view seems preferable. The burden of proof can often be decisive, since it will often be difficult to know what has happened to missing goods. Illustration: Westpac Banking Corp v Royal Tongan Airlines [1996] NSWSC 409 The plaintiff purchased foreign currency from the Bank of Tonga. The currency was entrusted to Royal Tongan Airlines, Air New Zealand and Qantas. While in the possession of Qantas, the currency was lost. Qantas was unable to give any explanation for the loss. The Court held that Qantas was liable to the plaintiff for the full amount.

[page 233]

6.6.4

Exemption clauses

Giles J also considered exclusion terms in sub-bailments in Westpac Banking Corp v Royal Tongan Airlines [1996] NSWSC 409. There is a well-established principle that the bailee may sometimes take advantage of an exclusion clause in a sub-bailment, even though the original bailor knows nothing of the exclusion clause. There seems little logical basis for the principle, but it is well established. There must be consent by the original bailor to sub-bailment containing the conditions relied upon: see Morris v Martin & Sons Ltd [1966] 1 QB 716; Singer Co (UK) v Tees & Hartlepool Port Authority (1988) 2 Lloyds Rep 164.

6.6.5

Australian Consumer Law statutory guarantees

Sections 60, 61 and 64 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) may overcome the exclusion clause problem when the bailor is a ‘consumer’ as per its own definition. Sections 60

and 61 import certain guarantees into a contract for services. ‘Services’ include ‘a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking’. Section 64 renders ineffective any clause, whether express or incorporated by reference, which purports to limit the guarantees. Since accepting goods has long been a part of the ‘business of banking’, it would seem that the exclusion clause exceptions mentioned in the case would have no effect in a case where the Australian Consumer Law applied.

6.6.6

Vicarious liability

In Giblin v McMullen (1868) LR 2 PC 317, the Court also addressed the question of vicarious liability. Its view was that the bank could not be vicariously liable for the act of the cashier, since the theft was, obviously, outside the course of the cashier’s employment. There was a duty to ensure that the employees were reasonably competent and honest, and the bank is bound to exercise reasonable supervision and guidance. This is clearly a narrow view of vicarious liability, and it did not survive for long. In Lloyd v Grace, Smith & Co [1912] AC 716, the House of Lords held that an employer is liable for the wrongful acts of employees where the acts are committed in the course of employment, even though the employer obtains no benefit. It seems that the bank would not be liable for an employee whose duties have nothing at all to do with the safekeeping, but who has the opportunity to misappropriate the goods or documents merely by virtue of working at the bank. Put another way, it must be shown that each element of the tort necessary to ‘sheet home’ liability to the employee must have occurred in the course of employment: see Credit Lyonnais Bank Nederland v Export Credits Guarantee Dept [2000] 1 AC 486. [page 234]

6.6.7

Financial Transaction Reports Act 1988

Both the Financial Transaction Reports Act 1988 (Cth) and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) contain special definitions of ‘account’. Section 5 of the latter provides that ‘account’ includes: a credit card account;

a loan account; units held in a cash management account; and units held in trusts prescribed by the rules. Section 3(1) of the Financial Transaction Reports Act 1988 (Cth) defines an ‘account’ to include ‘any facility or arrangement for a safety deposit box or for any other form of safe deposit’. The identification requirements of the Act must be met when a safe deposit facility is established and any ‘signatory’ to the arrangement — that is, a person who is authorised to give the bank instructions — must also be identified. See the discussion of the Financial Transaction Reports Act 1988 at 1.9.4.

[page 235]

7 Duties of the Customer 7.1

Introduction

There are two fundamental contractual obligations owed by the customer. These are known as the Macmillan duty and the Greenwood duty, after the landmark cases in which the existence and the extent of the duties were clarified. Although both cases involved cheques, the duty articulated applies to more general situations. The operation of these two duties was discussed in Fried v National Australia Bank Ltd [2001] FCA 907. Gray J said (at 147): These duties, sometimes styled duties of care, operate in a restricted way. A breach of such a duty does not give rise to any right of action for damages on the part of the bank. Rather, a breach of the duty gives rise to an estoppel, which the bank is able to set up as a defence to a claim by the customer for wrongful debiting of the account.

Whether phrased as an estoppel or merely a breach of contract, the wrongful behaviour of the customer allows the bank to debit the account in circumstances where that would not otherwise be possible. There is no question that the duties arise from the contract between banker and customer. Although it is common to explain their operation in terms of estoppel, it may be that simple contract principles would yield the same result: see the discussion at 7.3.3.

7.2

The Macmillan duty

The customer has a duty to exercise reasonable care in giving payment instructions so that the banker is not misled. This contractual duty has long been recognised, but the definition of its precise scope is surprisingly recent.

7.2.1

Origins of the duty

In Joachimson v Swiss Bank Corp [1921] 3 KB 110, Lord Atkin referred to the duty of the customer to exercise care in framing the order to the bank (see 3.2.4ff). [page 236] However, it was not until 1981 that the existence of the duty was placed beyond doubt in Australia by the decision of the High Court in Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43. In that case, the High Court overruled older Australian authority (Colonial Bank of Australasia Ltd v Marshall [1904] HCA 31) and approved of the UK decision in London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777, which was itself based on the older case of Young v Grote (1827) 4 Bing 253; 130 ER 764. The Sydney Wide case brought Australian law back into conformity with the law in other parts of the Commonwealth. This duty to exercise care in the drawing of cheques is known as the Macmillan duty. Illustration: London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777 A clerk was employed by the plaintiff firm of stockbrokers. As part of his duties, the clerk prepared cheques for the firm. The cheques required the signature of at least one of the partners. The clerk prepared a cheque which was made payable to the firm ‘or bearer’. The amount of the cheque was not entered in the place for words, but in the place for figures was entered as £2:0:0, leaving a space between the sterling symbol and the first 2 and between the 2 and 0. He took the cheque to one of the partners, who signed it and returned it to the clerk. The clerk then added the words ‘one hundred and twenty pounds’ in the space for writing and altered the amount in figures by filling in the spaces accordingly. The cheque was presented to the defendant bank, which paid it over the counter at the branch where the account was kept. The firm sued the bank for breach of contract, alleging that the firm had ordered the payment of £2, but the bank had paid £120. The firm was successful at the first instance and in the Court of Appeal, but the House of Lords took the opportunity to clarify the contract between the parties. In one of the most important of all banking law decisions, the House of Lords held that the customer owed the bank a duty to exercise care in the drawing of cheques and the alteration of the cheque was, in the circumstances, a direct result of the breach of that duty.

7.2.2

Extent of the duty

The extent of the duty is to exercise those precautions which are ordinarily taken by prudent customers. It is possible that the precautions which must be taken vary from time to time and from place to place, as business practices change. [page 237] Illustration: Slingsby v District Bank Ltd [1932] 1 KB 544

A cheque was drawn which left space between the name of the payee and the printed words ‘or order’. A fraudulent solicitor added words after the name of the payee which allowed him to obtain payment of the cheque. The Court held that there was no breach of the duty, since it was not a usual precaution to draw lines after the payee’s name.

In Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43, the drawer of the cheque carried on business with a company called Computer Accounting Services (CAS). A fraudulent clerk of the drawer company made a cheque payable to CAS and obtained an authorised signature of the drawer. He then added an ‘H’ to the end of the writing and obtained payment of the cheque. The plaintiff drawer sued the bank, claiming that there had been a breach of contract in that the wrong person had been paid. As mentioned above, Australian law at the time did not recognise a duty to exercise care when drawing a cheque. Nevertheless, the bank pleaded such lack of care as a defence and the case went to the High Court on the question of law. It is important to realise that the Court was not concerned with the particular cheque — only the existence of the duty. The Court approved but specifically refrained from deciding whether there had been a breach of the duty in the particular circumstances.

7.2.3

Effect of warnings

The bank may increase the level of care required of a customer by giving explicit instructions concerning the drawing of cheques. For example, in Varker v Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967, the bank manager had personally given the customer warnings about the way in which the cheques should be drawn. In addition, the inner cover of the chequebook issued by the bank carried the warning: Commence figures, and the words of the amount with a CAPITAL letter, as near the left-hand edge as possible, leaving no blank spaces between the words.

The Court held that these factors imposed a contractual duty on the customer to draw cheques carefully at a time when there was no such duty under the general law of Australia. Using the Varker reasoning, it seems that it is possible to raise the standard required by means of explicit warnings. However, it is not easy for the bank to impose a higher duty. Merely printing warnings in chequebooks will not alter the contractual relationship,

unless it can be shown by the bank that the warnings were actually brought to the attention of the [page 238] customer and the customer fully understood the consequences of failing to heed the warnings: see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; Burnett v Westminster Bank Ltd [1966] 1 QB 742; National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242. See also 3.5.

7.2.4

Subsequent negligence by the bank

Subsequent negligence by the bank might override the customer’s negligence. Illustration: Varker v Commercial Banking Co of Sydney Ltd [1972] 2 NSWLR 967 The plaintiff had been injured in a road accident and could write cheques only with difficulty. At the time when Varker opened the account with the defendant bank, the assistant accountant emphasised the importance of drawing cheques carefully and warned that if he trusted any other person to fill in cheques, he should take care to see that the cheque was properly drafted by the other party. Varker drew several cheques on the account which were made payable to ‘cash or bearer’, none of which exceeded $200. The assistant accountant telephoned Varker to warn that cheques should not be drawn payable to ‘cash or bearer’, if they were in fact intended for a specific payee. About two months after the opening of the account, a cheque was filled in by Varker’s brother-inlaw and signed by Varker. The cheque as drawn had the words ‘one hundred and fourty’ [sic] in the space where the amount was to be written in words. There was a space between the printed words ‘the sum of’ and the beginning of the written words. In the space for figures, the amount appeared as 140.00, but there was a space between the printed dollar sign and the handwritten figure ‘1’. The cheque was made payable to ‘cash or bearer’. After Varker had signed the cheque, the brother-in-law inserted the word ‘sixty’ in the space for words and the figure ‘6’ in the place for figures, making the cheque for the amount of $6,140.00. He deposited the cheque for collection with his own bank and the defendant bank paid the cheque though the clearing house. The cheque was negligently drawn and was a breach of Varker’s contractual duty to the bank. However, the Court also held that the payment was negligently made. This was because the cheque was in an unusual form, Varker had been warned about drawing cheques in favour of ‘cash or bearer’, the bank knew that Varker was a person who could be easily defrauded and the bank could have telephoned Varker about the cheque — as it had done occasionally in the past — but it did not. This negligent payment was a breach of the bank’s contractual duty, for it is an implied term in every contract that the obligation be performed with appropriate care. The Court held that, due to its subsequent negligence, the bank was unable to maintain the debit to the account.

[page 239]

It has been said that Varker penalised the bank for taking special steps to warn Varker and to treat him as a special customer, since it was precisely that evidence which contributed to the finding that payment had been negligent. However, a better view is that once the bank knew of Varker’s disability, there was an obligation to see that his interests were protected — an obligation which was not discharged merely by one interview and a telephone call. If the bank had chosen to do nothing in such circumstances, it would have been even more negligent: see also Territory Sheet Metal Pty Ltd v ANZ Banking Group Ltd [2009] NTSC 31.

7.3

The Greenwood duty

The customer is obliged to notify the bank of any unauthorised account irregularities known to the customer. Since the bank bears the risk of unauthorised payments, it would clearly be inappropriate to allow the customer to remain silent in those circumstances where the customer’s knowledge may prevent further losses to the bank. The duty is only to notify known unauthorised payments and other account irregularities. There appears to be no duty to discover unauthorised payments or other irregularities, even if this might be done easily by the customer: see 7.4.1 and National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242.

7.3.1

Origins of the duty

The duty to report unauthorised payments is called the Greenwood duty, after the leading case. It was, of course, a case concerning cheques and, in particular, forgery of the drawer’s signature. Illustration: Greenwood v Martins Bank Ltd [1933] AC 51 The plaintiff’s wife forged a series of cheques on his account. When he discovered the forgeries, he threatened to notify the bank immediately, but she begged him not to, explaining that she had used the money to assist her sister in a legal action. The plaintiff did not inform the defendant bank of the forgeries. Later, he found that the explanation was false and his wife had continued to forge cheques on his account. He again threatened to notify the bank, whereupon she committed suicide. The plaintiff brought the action to prevent the bank from maintaining the debit to the account for the amount of the forged cheques. The Court held that there had been a breach of duty by the husband in failing to notify the bank of the forgeries. [page 240]

Under legislation in force at the time, the plaintiff’s liability for the torts of his wife came to an end upon her death, so the bank lost any right of recovery as a result of the plaintiff’s breach. The bank was held to be entitled to maintain the debit for the amounts of cheques forged both before and after the plaintiff learned of the forgeries.

7.3.2

Extent of the duty

The duty extends to notifying the bank of any unauthorised transaction on the account which is known to the customer: see West v Commercial Bank of Australia [1935] HCA 14. In Fried v National Australia Bank Ltd [2001] FCA 907, Gray J was asked to extend the duty. A firm was aware that one of the partners had given instructions to make withdrawals from a trust account. The partner was not authorised to do so. The bank argued that there was a duty on the firm to notify the bank of the unauthorised withdrawal. Gray J followed Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 and National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 198, in holding that there was no duty on the customer to notify, but that, in any case, the bank was not misled by the silence of the account holder.

7.3.3

Basis of the duty

The duty to notify is usually phrased in terms of estoppel rather than in terms of contract. The language of estoppel was used in Greenwood v Martins Bank Ltd [1933] AC 51, where it was said that silence could raise an estoppel when there is an obligation on the party to speak. On this analysis, failure to notify of known forgeries estops the customer from denying the validity of the signature. From a logical point of view, the analysis is superfluous. The estoppel arises only if there is a duty to disclose, but such a duty can only arise as a result of an implied term of the banker-customer contract. If there is such a duty, then a breach of it may be relied upon directly and there is no need to consider an estoppel. The analysis in terms of estoppel has caused practical difficulties. Illustration: Brown v Westminster Bank Ltd [1964] 2 Lloyds Rep 187 The bank manager had visited an elderly woman customer in order to ascertain the validity of signatures on a series of cheques. The cheques were drawn in favour of Mr Carless, a servant who lived with her. She assured the manager that the cheques were genuine. In fact, they were forged. The Court held that the elderly woman customer was estopped from denying the validity of the

signatures.

[page 241] The result in Brown is clearly correct as to the cheques which had been written after the visit of the manager, but the Court held that the estoppel also extended to those cheques which were drawn before the visit. As to the argument that there could not have been any reliance by the bank on the representation prior to the representation being made, the Court said (at 203): What were the facts which then existed and in relation to which the representation is then made? The facts were that cheques which in truth were forged were represented as genuine … the plaintiff is thereafter debarred from setting up the true facts … by reason of the fact that the bank paid the future cheques, the bank has suffered detriment.

The case was followed in Tina Motors Pty Ltd v Australian and New Zealand Banking Group Ltd [1977] VR 205, where a total of 54 forged cheques had been paid by the defendant bank. On two occasions, the bank had questioned the signatures on the cheques before paying but had been informed by the plaintiff’s manager that the signatures were genuine. Only one of the cheques had been paid before the representation. Crockett J held that the bank was entitled to succeed with regard to this cheque, citing the passage quoted above, from Brown v Westminster Bank Ltd [1964] 2 Lloyds Rep 187. A better analysis of these cases would be to rely upon the customer’s contractual obligation to give careful consideration to the bank’s request for information. The off-hand assurance that the signatures are genuine would be a clear breach of this contractual obligation, and the damages could be assessed on usual contractual grounds. In Greenwood v Martins Bank Ltd [1933] AC 51, this would lead to the same result, but in Brown v Westminster Bank Ltd [1964] 2 Lloyds Rep 187 and Tina Motors Pty Ltd v Australian and New Zealand Banking Group Ltd [1977] VR 205, the customer would succeed with regard to those cheques which were drawn prior to the request for information. For views favouring the estoppel analysis, see Damian (1996) and Gray J in Fried v National Australia Bank Ltd [2001] FCA 907. See also Edwards (2002). More recent cases on estoppel may provide an approach that gives the same results. In National Westminster Bank Plc v Somer International (UK) Ltd [2001] EWCA Civ 970, Potter LJ held (at 43) that a person relying upon the defence of estoppel by representation may rely upon it only to the extent of any detriment suffered in reliance upon the representation. Other members of the Court of Appeal expressed similar sentiments: see also Scottish Equitable plc v Derby [2001] 3 All ER 818. So, for example, in Tina Motors Pty Ltd v Australian and New Zealand Banking

Group Ltd [1977] VR 205, the bank would not automatically succeed in respect of the cheque paid prior to the representation. [page 242]

7.3.4

Bank must show detriment

The bank must show that it has suffered some loss from the customer’s breach of duty. For example, in Fung Kai Sun v Chan Fui Hing [1951] AC 489, the plaintiff discovered that some mortgage documents were forged. The defendant was not notified for some three weeks. The Privy Council dismissed the defendant’s claim that they were prejudiced by being deprived of the opportunity to obtain restitution from the forger, there being no evidence to substantiate such a claim. The bank suffers no detriment when the customer’s silence is at the request of the bank. Illustration: Ogilvie v West Australian Mortgage and Agency Corp [1896] AC 257 The plaintiff discovered forgeries and communicated this to the bank. The cheques had been forged by an employee of the bank, and the bank officer to whom Ogilvie had complained asked that the matter be kept confidential until they were able to pursue remedies against the forger. The Court held that there could be no estoppel when the silence was at the request of the bank.

7.4

Possible other duties

From time to time there are suggestions that the customer is required by the banker-customer contract to exercise some further duty for the purpose of protecting the bank’s interests. Generally speaking, these additional duties fall into three categories: a duty to exercise a reasonable effort to discover forgeries; a limited duty (beyond that of exercising care in the drawing of cheques) to prevent forgeries — most notably by the exercise of care in the keeping of the chequebook; and a broader duty on the customer to organise business so that the bank’s interest is safeguarded. Each of these alleged duties has been the subject of case law.

7.4.1

Duty to discover forgeries

If there is a duty to discover forgeries, then at the very least that duty would require the customer to read the periodic statement which is sent by the bank and to notify the bank of any entries there which the customer believes to represent unauthorised debits. [page 243] Illustration: Kepitigalla Rubber Estates Ltd v National Bank of India Ltd [1909] 2 KB 1010 The secretary of a company forged the signatures of two directors on a number of cheques over a period of time. At that time, the method of banking called for the customer to come to the bank from time to time to collect the passbook. The passbook contained a statement of accounts, as well as the cancelled cheques which had been paid by the bank since the last time that the customer collected the passbook. It was expected that the customer would reconcile the account stated in the passbook with their own accounts and return the passbook to the bank when so satisfied. Neither the company’s own books nor the bank passbook had been examined by the directors of the company for a period of more than two months, during which time the series of forgeries had occurred. The Court held that the customer had breached no duty owed to the bank, and the bank was not entitled to debit the amount of the forged cheques.

The Kepitigalla case was followed a few years later in Walker v Manchester and Liverpool District Banking Co Ltd (1913) 108 LT 728; 29 TLR 492, where it was held that the fact that the customer did not examine the passbook did not entitle the bank to maintain the debit of the account for payment of forged cheques. The passbook has been replaced by the bank statement, which is sent at intervals to the customer. The current practice would seem to favour the customer even more than the older practice, since there is no way of knowing that the customer has even received the statement. Kepitigalla was approved by the New Zealand Court of Appeal in National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7 and by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80. The principle would seem to be firmly established that the customer has no duty to read the statement with a view to discovering forgeries. It should, however, be noted that there is no legal obstacle to imposing by contract a duty of discovery on the customer. Indeed, that is precisely what the bank attempted to do in the Tai Hing case: see 7.4.3. Such agreements are often called ‘verification agreements’ and are phrased in terms which attempt to place upon the customer a duty to ‘verify’ the entries in the statement: see 4.9.3 for a discussion of verification agreements. The Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd

[1986] AC 80 held that the agreements were not brought sufficiently to the attention of the customer. Similar agreements have been held to be binding by Canadian courts: see, for example, Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81 and Columbia Graphophone Co v Union Bank of Canada (1916) 38 OLR; 34 DLR 743. However, Canada follows the common law in holding that there is no [page 244] duty in the absence of an express contractual clause: Canadian Pacific Hotels Ltd v Bank of Montreal [1987] 1 SCR 711. See the discussion of verification agreements at 4.9.3. Duncan v American Express Services Europe Ltd [2009] ScotCS CSIH 1 applied the reasoning to a credit card account, holding that the clause in question was not sufficient to impose a duty. These clauses may also offend the Unfair Contract Terms provisions of the Australian Consumer Law (Schedule 2 of the Competition & Consumer Act 2010), when the customer is a consumer: see Pertamina Energy Trading Ltd v Credit Suisse [2006] SGCA 27 and the discussion at 4.9.3. The bank in National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242 put a clause in the printed booklet entitled ‘NAB Business Products Terms and Conditions of Use’, which was in the following terms: You must check your statements Without limiting any part of these terms and conditions for your account, you must promptly review your statement of account to check for and tell NAB of any transaction recorded on your statement that you suspect for any reason that you did not authorise or for which the information recorded is incorrect. If you do not, then subject to any applicable law, you do not have any right to make a claim against NAB in respect of such a matter (for example, a forged cheque).

The respondent claimed that funds had been transferred from the account in unauthorised transactions. The Bank relied on the above clause, claiming that the respondent had not reviewed the statement of account, so could not then complain about the unauthorised transfers. The problem for the bank was to show that the clause was part of the banker-customer contract. The clause was only a small part of a 73-page booklet which was handed to the customer after the banker-customer contract was formed. It could not be a unilateral change of the terms of the contract, since it was never brought to the customer’s attention, nor could the bank show that the customer had been aware of the clause.

Although the Court did not address the question as to whether Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 was law in Australia, Sackville AJA quoted approvingly the observation in Tai Hing, where it was said (at 110): If banks wish to impose upon their customers an express obligation to examine their monthly statements and to make those statements, in the absence of query, unchallengeable by the customer after expiry of a time limit, the burden of the objection and of the sanction imposed must be brought home to the customer.

National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242 shows once again the tension between the bank wishing to impose conditions on the customer, yet not alarm the customer as to the risks faced in operating an account. It also shows the continuing reluctance of the courts to impose additional duties on the customer. [page 245]

7.4.2

Duty to take care of the chequebook

If there is no duty to discover forgeries, there might at least be a duty to prevent them. London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777 set the standard at exercising care in giving the payment order. In Westpac Banking Corp v Metlej (1987) Aust Torts Reports 80–102, the bank attempted to lower the bar and require that the customer take care of the printed chequebook supplied by the bank. Illustration: Westpac Banking Corp v Metlej (1987) Aust Torts Reports 80–102 A partnership account required two signatures on cheques. One of the signatories adopted a practice of signing partnership cheques in blank and leaving them with Metlej for the addition of his signature, as and when the cheques were needed. Metlej took the chequebook containing cheques with a single signature with him to a building site. When not actually using the chequebook, he would leave it in his lunch box in his car. Three cheque forms containing the single signature were taken from the chequebook. The fact that these forms were missing was noticed on 6 December, and the bank was notified on the morning of 7 December. The cheque forms were completed by some person unknown and the plaintiff’s signature forged. The cheques were cashed over the counter on 7, 12 and 23 December for amounts which totalled $62,000. The Court held that it was not necessary to decide the general principle of the existence of a duty. If there was such a duty, the customer had not been in breach on the facts of the case before the Court.

The Metlej case suggests that the standard required of the customer would be very low, even if a duty is found to exist. The Court in Metlej also noted that Australian courts are not bound by the

decision of the Privy Council in the Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80, but expressed little sympathy for the judicial imposition of duties on bankers’ customers which the banks themselves could impose by contract if they so wished. It is clearly correct that Australian courts are not bound by the Tai Hing decision: see Cook v Cook [1986] HCA 73. On the other hand, there is much to be said for maintaining uniformity in commercial law generally, and in banking law in particular, so a decision such as Tai Hing should be considered as very persuasive. Cases such as National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242 show that the courts are sympathetic at least to the ‘sheet home to the customer’ aspect of the Tai Hing decision. [page 246]

Causation Even if there is a duty to take care of the chequebook, it may be difficult to show that the breach of the duty is the cause of the loss. In several older cases, the court seemed to be of the opinion that leaving a chequebook with an unsupervised agent — who then has the opportunity not only for committing the forgeries but also for concealing them — was behaviour which was too remote from the resulting loss to allow the bank to maintain the debit: see Bank of England v Vagliano Bros [1891] AC 107; Farquharson Bros & Co v King & Co [1902] AC 325; National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654. In Westpac Banking Corp v Metlej (1987) Aust Torts Reports 80–102 itself, two members of the Court of Appeal adopted this view, holding that it had not been shown that the breach by the plaintiff — if it was a breach — was the cause of the defendant’s loss. In the view of Priestley and Hope JJA, the cause of the loss was the defendant’s failure to detect the forged signature on the cheques. Similar arguments attempting to impose a duty on the keeping of the company seal have been rejected. In Bank of Ireland v Evans Charities Trustees in Ireland [1855] 5 HL Cas 389, the bank was held unable to debit the account of a forged cheque where it was alleged that the loss was caused by the negligence of the customer in keeping the company seal: see also Northside Developments Pty Ltd v Registrar-General [1990] HCA 32 and Day v Bank of New South Wales (1978) 19 ALR 32.

7.4.3

Duty to organise business

As the reader may have guessed, the attempts to impose a more general duty to organise business have all failed.

Employee a convicted forger Illustration: Lewes Sanitary Steam Laundry Co Ltd v Barclay & Co Ltd [1906] 95 LT 444; 11 Com Cas 255 The company’s cheques required signature by the secretary and one other director. The secretary forged the name of one of the directors on several cheques and obtained payment. The secretary had been convicted of forgery some years previously — a fact which was known to the chairman of the board of directors. The bank claimed that entrusting the chequebook to such a person was a breach of the customer’s duty, which was such as to allow the bank to maintain the debit. The Court held that the defence failed, on the grounds that the harm complained of was not caused by the conduct of the officers of the company but by the fraud of the secretary.

[page 247] Note that on the Lewes analysis, it is theoretically possible that some ‘negligence’ on the part of the customer could be a defence for the bank, but, given the facts, it is difficult to imagine what conduct of the customer would, in fact, have that result. The same decision was reached on similar facts in Les Edwards & Son Pty Ltd v Commonwealth Bank (unreported, SC NSW Giles J, No 50456/89 4 Sept 1990).

General organisation of business The existence of a general organisational duty was considered by the New Zealand Court of Appeal. Illustration: National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7 A clerk had forged cheques over a period of six years and received payment from a branch of the defendant bank. At no time during the six years did any other responsible member of the plaintiff company examine the statements or accounts. It was alleged that the company had adopted a course of business which facilitated the commission of fraud. The Court held that the customer is under no duty to exercise reasonable care in the organisation of the general course of business to prevent forgeries by employees. The Court added that the only type of negligence by the customer which will exonerate the banker is negligence in, or immediately connected with, the drawing of the cheque itself — that is, a breach of the Macmillan duty.

The Privy Council considered the question in some detail.

Illustration: Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 The plaintiff company was a customer of each of the three defendant banks. The banks honoured a total of some 300 cheques, having a total value of approximately HK$5.5 million. The cheques, which appeared to be signed by the company’s managing director, were forgeries. The forger was an accounts clerk employed by the company who was given total responsibility for the books of account of two of the five divisions of the company. He began to steal from the company almost immediately, stealing over HK$300,000 in the first year of his employment. The trial judge found that the clerk was trusted, and that the accounting system in use by the company had ineffective means of internal control. There was no division of function which might have made the clerk’s task more difficult. The company failed to check or to supervise the reconciliation of the monthly bank statement with the cash books. The Court noted (at 99) that the company uncovered the frauds after more than five years only when a newly [page 248] appointed accountant entered upon the simple, though tedious, task which had not previously been undertaken, of reconciling bank statements with the company’s account books.’ The Court held that: there was no breach of any contractual terms of the banker-customer contract; there was no breach of any duty owed in tort; and there was no estoppel against the customer.

The decision is not, of course, strictly binding on Australian courts, but any decision to the contrary would be counter to decisions which have stood over a long period of time and through many changes in banking practice: see also National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242. The New South Wales Court of Appeal in Westpac Banking Corp v Metlej (1987) Aust Torts Reports 80–102 declined to decide if the Tai Hing decision represents the current Australian law. See also Canadian Pacific Hotels Ltd v Bank of Montreal [1987] 1 SCR 711 where the Canadian Supreme Court, by a majority, came to the same conclusion as the Court in Tai Hing.

Tort and contract In finding that there was no breach of any duty owed in tort, the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 adopted a principle that, where there is a contract which sets out the obligations owed by the parties to each other, the contract should govern, and it is not appropriate to search for other, broader, duties in tort. That broad statement of principle may not represent the current state of Australian law. In Hawkins v Clayton [1988] HCA 15, Deane J argued that the duty of care owed by a solicitor to a client in respect of professional work

transcends the duty imposed by express or implied terms of the contract between them. However, in Astley v Austrust Ltd [1999] HCA 6, the Court seemed to reassert the role of contract. At least where the contract addresses the issue in dispute, ‘… there is no justification in recognising the tortious duty to the exclusion of the contractual duty’ (at 48). The defendant owed a duty of care to the plaintiff both in tort and under the terms of the contract. The issue was whether damages should be reduced as a result of the contributory negligence of the plaintiff. The majority of the Court held that contributory negligence had no place in defending a contractual claim. In this sense, the contract was the determinant. See also Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 and Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30. [page 249]

Changing attitude? From time to time, there are suggestions that the attitude of the courts is changing with regard to the imposition of broader duties. For example, in Mercedes Benz (NSW) Pty Ltd v ANZ and National Mutual Royal Savings Bank Ltd Supreme Court, NSW, Palmer J No 50549/1990 Comm Div, 5 May 1992, unreported, Mrs R was appointed as pay-mistress of the plaintiff company. Due to a wholly inadequate method of supervision and audit, she was able to continue accounts for employees who had left the company and also to establish accounts for non-existent employees, diverting deposits into these accounts for her own purposes. In the course of his judgment, Palmer AJ indicated that ‘an important consideration of justice’ was that he should never lose sight of the fact that the ‘fons et origo’ of the losses was the abuse of the position as between employer and fraudulent employee. In such a circumstance, Palmer AJ stated (at 2): If the employer has been lax in protecting his own interests from the fraud of his employee, can he reasonably require that third parties, with their own legitimate commercial pressures and concerns to attend to, be more vigilant in his interest than he himself?

But does this ask the correct question? Surely the ‘requirement’ is that the bank be vigilant in pursuing the business of banking. The ‘lax’ employer is not requiring the bank to look after their own interests, but rather to adhere to those standards which are required of banks paying and/or collecting cheques. The reader should also note that the comments were made in the context of

a case against the collecting bank, not the paying bank. For a more complete discussion of the case, see Tyree (1992a) and Tyree (1992c). For a discussion of the duties of a collecting bank, see 8.8. An appeal to the Court of Appeal was unanimously dismissed: see Mercedes Benz (NSW) Pty Ltd v National Mutual Royal Savings Bank Ltd [1996] NSWSC 70.

Duty to organise revisited The comments in Mercedes Benz (NSW) Pty Ltd v National Mutual Royal Savings Bank Ltd [1996] NSWSC 70 may have encouraged bankers to have another try in their attempt to get the courts to impose additional duties on the customer. The argument was raised again in National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 198. More than 530 cheques totalling more than $675,000 were forged by a bookkeeper, Mrs B, over a four-year period. The mandate called for cheques to be signed by a director of the company. Some of the cheques were signed in the director’s name by Mrs B, but these signatures were authorised and the company did not claim for the amount of these cheques. [page 250] The Court held that there was no breach of the duty in failing to notify the bank of these ‘forgeries’, since the bank did not suffer any detriment from not being notified. Indeed, notification would have served no purpose, since the signature — although technically a forgery — was authorised by the director. Although the bank claimed that it would have taken steps to avoid the risk of loss flowing from Mrs B’s other forgeries, it offered no proof of such an assertion and so the claim for a Greenwood estoppel failed. The bank also argued that the customer owed a duty to the bank to prevent forged cheques from being presented for payment; to establish business practices that would allow forgeries to be discovered within a reasonable time; and to carry out regular audits by directors or, if necessary, by experts. These arguments were rejected both at first instance and in the Court of Appeal. The source of the duties could only be found in estoppel, in contract or in tort, and the result was that: estoppel foundered on the lack of evidence that the customer’s action had caused the bank to act to its detriment;

the implied term argument failed for the same reasons as in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; and the argument for broader tort duties failed, since the bank was unable to establish the conditions for liability for economic loss. In particular, there was no assumption of responsibility by the customer, nor was there any reliance by the bank. Clarke JA also considered policy matters to be important. He referred to the importance of certainty in commercial transactions, commercial practice and, most importantly, that Parliament had recently had the opportunity to change the banker-customer relationship when it passed the Cheques Act 1986 (Cth) and had not done so. He also referred to the international nature of banking law and the undesirability of putting Australian law out of step with those of its neighbours.

Vicarious liability? A New Zealand Court in National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7 made an interesting suggestion that has never been seriously argued. Although the point was not pleaded, Richmond J suggested that a customer might be held liable vicariously for the fraud of the employee. It is not an answer that the fraud is against the employer: see Lloyd v Grace, Smith & Co [1912] AC 716. The real issue is whether the fraud was committed in the employee’s course of employment. In cases such as National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 198, Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 and National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7, there is at least a strong argument that the employee was acting in the course of employment.

[page 251]

8 Cheques 8.1

Introduction

The structure of the Australian payments system has changed rapidly in the last few years. In the first edition of this text, it was reported that the cheque was responsible for almost 65 per cent of all debits to bank accounts in terms of numbers of transactions. The cheque was the main way that people used their bank account to make payments. Various forms of electronic and card access methods have largely replaced the cheque as the consumer method of accessing bank accounts. The decline in the use of the cheque is shown in figures published by the Australian Payment Clearing Association (APCA). In 1994, there were 110 million cheques written per month, and by 2015 that figure had dropped to about 24 million per month — a figure which has remained steady since 2013: see information collected by APCA at . Although cheques have declined as a percentage of the total volume of noncash payments, that does not mean the cheque is unimportant. Australians still write 800,000 cheques each business day, and cheques account for a disproportionate number of legal problems with payment.

8.2

Background

8.2.1

The Cheques Act 1986

Until 1986, cheques were merely a species of bills of exchange. The report of the Manning Committee in 1964 recommended that cheques be governed by a separate Act. After a very long delay, the recommendations were incorporated into the Cheques and Payment Orders Act 1986 (Cth): see

Chapter 5 for a discussion of the background. The name of the Act was later changed to the Cheques Act 1986. [page 252] The main changes from the Bills of Exchange Act 1909 (Cth) are: a ‘cheque’ may be drawn on a financial institution which is not necessarily a ‘bank’: s 10; it is not possible to make a cheque non-transferable: s 39; indorsements are not required in certain circumstances; financial institutions receive protection against actions by holders or customers when losses are suffered due to lack of indorsements; and presentment for payment may be made ‘by particulars’ — that is, without the physical presentment of the paper itself. Many sections of the Cheques Act 1986 mirror sections of the Bills of Exchange Act 1909.

8.2.2

Cheques and the Bills of Exchange Act 1909

Rather curiously, the cheques sections of the Bills of Exchange Act 1909 remain in place, but s 6(2) now provides that the Act does not apply to any instrument to which the Cheques Act 1986 applies. This structure may have practical importance, for there are circumstances where an instrument may fail the definition of ‘cheque’ in the Cheques Act 1986, yet it may still be a bill of exchange drawn on a banker and payable on demand. As a simple example, consider an instrument which specifies that a certain sum is to be paid ‘with bank charges’. In Standard Bank of Canada v Wildey (1919) 19 SR (NSW) 384, the Full Court held that such an instrument was not a bill of exchange, since it did not specify a ‘sum certain’. Section 14 of the Bills of Exchange Act 1909 was amended in 1986 to overturn the decision, but the Cheques Act 1986 does not contain a comparable provision. Consequently, ‘pay $X with bank charges’ may be a ‘cheque’ within the meaning of the Bills of Exchange Act 1909, but not under the Cheques Act 1986. It will be governed by the old regime rather than the new one.

8.2.3

Definition

The Bills of Exchange Act 1909 defines a cheque as a ‘bill of exchange, drawn on a banker, payable on demand’: Bills of Exchange Act 1909, s 78. Recall that a bill of exchange must be payable to a specified person or to bearer: Bills of Exchange Act 1909, s 8(1). Section 10 of the Cheques Act 1986 changes that slightly: (1) A cheque is an unconditional order in writing that: a.

is addressed by a person to another person, being a financial institution; and

b.

is signed by the person giving it; and

c.

requires the financial institution to pay on demand a sum certain in money.

[page 253] Note: In this Act, ‘financial institution’ has a restricted meaning–see the definition in subsection 3(1). (2) An instrument that does not comply with subsection (1), or that orders any act to be done in addition to the payment of money, is not a cheque.

There are two notable differences in the two definitions —namely: a cheque must be drawn on a ‘financial institution’ (not necessarily a ‘bank’); and no payee needs to be specified. The first extends the institutions which may ‘issue’ cheques — that is, those institutions on which cheques may draw. Prior to 1998, only ‘banks’ could issue cheques, a privilege which gave them a substantial competitive advantage over other financial institutions. The second difference overcomes decisions such as Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794, which held that an instrument made payable to ‘cash or order’ was not a cheque. Under the Cheques Act 1986, the instrument would now be a cheque payable to bearer: Cheques Act 1986, ss 21 and 22; and see 8.2.4. As a practical matter, there is one further very important difference from bills of exchange: cheques are not accepted by the drawee. This means that the drawee institution is not liable on the cheque. The drawee institution will generally be contractually liable to the drawer to pay the cheque, provided it is in order and funds are available. It has no contractual or statutory duty to the holder to pay as it would if it had accepted a bill of exchange.

8.2.4

Order and bearer cheques

The Cheques Act 1986 changed the definition of bearer and order instruments. Section 21 determines when a cheque is payable to order, then s 22 declares that any other cheque is a bearer cheque. A cheque is payable to order (s 21): if the cheque is expressed, whether originally or by indorsement, to require the drawee institution to pay the sum ordered to be paid by the cheque to or to the order of: (a)

a person specified in the cheque as payee or indorsee; or

(b) 2 or more persons specified in the cheque, jointly or in the alternative, as payee or indorsee.

Note that this definition undermines the basic argument advanced in Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506 and lends extra support to the argument that a cheque originally made payable to bearer may be converted to an order cheque. This section clearly indicates that a cheque made payable to bearer may be an order cheque if the last indorsement is an ‘order indorsement’: see 5.4.7 for a discussion of the Miller case. [page 254] Foods Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201 (29 August 2007) purported to follow Miller Associates (Australia) Pty Ltd v Bennington Pty Ltd [1975] 2 NSWLR 506, but, at the time, s 23(1) (since repealed) provided a procedure for converting a bearer cheque to an order cheque — a procedure that required crossing out the words ‘or bearer’. In the absence of s 23(1), the plain words of s 21 should be given their full import. Section 23(2) of the Cheques Act 1986 deals with the situation where the last indorsement requires the drawee institution to pay the bearer. This would include the ‘indorsement in blank’ — a plain signature. Using the signature of the indorser, the holder may convert the indorsement to an order one by writing in the name of an indorsee. This provides the holder of the cheque with a valuable protection when in possession of cheque which is a bearer cheque by virtue of a ‘blank’ indorsement.

8.2.5

Post-dated cheques

Most pre-printed cheque forms have a space provided for the drawer to enter the date. When the cheque is dated, there is a rebuttable presumption that the cheque was drawn on that day: Cheques Act 1986, s 16(1). On the other

hand, a cheque need not be dated at all to be a valid cheque: Cheques Act 1986, s 16(2)(a). Not only is the post-dated cheque a ‘cheque’, but an attempt to obtain payment prior to the date on the cheque is not a ‘presentment’ of the cheque for payment: Cheques Act 1986, s 61(2). This has important ramifications for the parties to a post-dated cheque, since, subject to a few exceptions, the drawer and others are not liable on the cheque if it has not been presented for payment: Cheques Act 1986, s 58. Section 16 of the Cheques Act 1986 makes an important clarification to the law of cheques by recognising the validity of post-dated cheques. There had been problems with post-dated cheques, since it is obviously difficult to say that such an instrument is payable ‘on demand’. Indeed, even before the Cheques Act 1986, it was common ground that the bank should refuse payment of a post-dated cheque which is presented before the date on the cheque: see Brien v Dwyer (1978) 141 CLR 378; Hodgson & Lee Pty Ltd v Mardonius Pty Ltd (1986) 5 NSWLR 496. Although post-dated cheques are ‘cheques’ for the purposes of the Cheques Act 1986, there is no obligation for a creditor to accept a post-dated cheque. In Ma v Adams [2015] NSWSC 1452, clause 1 of the contract excluded postdated cheques from the definition of ‘cheque’. The drawer/buyer inadvertently put the wrong date on the cheque, making it post-dated. The error was not discovered by the seller until after the date on the cheque. The Court held that the required payment had not been made according to the contract and that the passage of time had not cured the breach. [page 255]

8.3

Types of cheques

8.3.1

Customer

Until recently, all current accounts could be accessed by the customer drawing a cheque on the bank. With the rise of electronic payment systems, that is no longer the case. Some current accounts may only be drawn on via the electronic method specified in the banker-customer contract. While this is a practical change in the operation of current accounts, there is no reason to believe that there is any fundamental change in the law. Where a customer is entitled to access the account by cheque, the drawee institution has a contractual obligation to pay the cheque, provided:

the cheque is a proper mandate — that is, it is drawn in a proper form and signed by a person who is authorised to draw on the account; there are funds available to meet the cheque; there are no legal impediments to the bank’s honouring the cheque; and the cheque is properly presented for payment. Examples of legal impediments include garnishee orders and Mareva ‘freezing’ orders: see 4.12, 16.2 and Tyree (1983b). The drawee institution may refuse payment if any one of the conditions is not fulfilled. There are some other special conditions in which payment may or must be refused on an otherwise valid cheque. These include: the death or mental incapacity of the customer: Cheques Act 1986, s 90(1)(b) and (c); where the cheque is stale: Cheques Act 1986, s 3; or when the cheque has been countermanded by the customer: Cheques Act 1986, s 90.

8.3.2

Bank cheques

It is not usually wise to accept a personal cheque from a stranger, since the cheque is commercially no more valuable than the credit of the parties who have signed it. There is, however, a need for an instrument for making large value payments which is safer than cash. In Australia, that instrument has been, and in many cases remains, the ‘bank cheque’ or ‘bank draft’.

Form and legal characterisation A bank cheque will be issued by a financial institution at the request of its customer. The institution will normally debit its customer’s account for the amount of the bank cheque plus any fees involved. The bank cheque will have the payee named by the customer and will be delivered to the customer. [page 256] The form of a bank cheque is that the financial institution is both the drawer and the drawee. The institution orders itself to pay a sum certain to a particular person or bearer. Although these are known as bank cheques, under the bills of exchange legislation there was some uncertainty as to their legal status, since the Bills of

Exchange Act 1909 required that a ‘cheque’ be ‘addressed by one person to another’: see Fabre v Ley (1973) 127 CLR 665. The position of bank cheques has been clarified by s 5 of the Cheques Act 1986. Since the operation of bank cheques is, to some extent, different from the operation of ordinary cheques, the section does not take the simple approach of declaring bank cheques to be cheques for all purposes. Generally speaking, the requirements as to form and certain requirements of presentment do not apply to bank cheques. All other sections of the Cheques Act 1986 apply ‘unless a contrary intention appears’. On the other hand, s 5(2) provides that nothing in the Cheques Act 1986, apart from the statutory defences available to banks, shall be taken to affect any liability that a bank would, but for the Act, have in relation to a bank cheque or bank draft drawn by it.

Dishonour of bank cheques The commercial community generally treats bank cheques as having the same commercial status as cash. Consequently, it sometimes comes as a surprise to find that bank cheques may be dishonoured, and that the drawer of a bank cheque may raise defences in exactly the same way as the drawer of an ordinary cheque. This is of considerable practical importance, because bank cheques in Australia are usually crossed not negotiable by the drawing bank. Illustration: Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia [1975] 2 NSWLR 227 Mr and Mrs J came from the USA with an American dollar ‘cashier’s check’ — an instrument that is equivalent to the Australian bank cheque. It was deposited with the defendant bank, which established a US dollar account on behalf of Mr and Mrs J. Although the deposit slip indicated that the amount could not be drawn upon until the cashier’s check was cleared, the defendant bank issued a bank cheque for an amount of £29,500, crossed ‘not negotiable’ in favour of the plaintiff or bearer, and debited the US dollar account of Mr and Mrs J for an equivalent amount of US dollars. The bank cheque was given to the plaintiff, who deposited it in their own trust account to the credit of Mr J. When it was presented to the defendant bank, it was dishonoured, because the original American cashier’s check had been dishonoured, and the defendant bank claimed a total failure of consideration. [page 257] The Court held that the consideration given for the bank cheque had wholly failed, that the plaintiff had given no fresh consideration and that the ordinary rules of the Bills of Exchange Act 1909 applied to bank cheques. As a result, the plaintiff could have no better title than that of the bank’s customers, and the action must fail.

Sidney Raper was considered in Justin Seward Pty Ltd v Commissioners of Rural and Industries Bank (1980) 60 FLR 51, where the plaintiff was a payee of a

bank cheque drawn by the defendant on itself. The drawee bank was seeking leave to defend on the basis of a failure of consideration and payment under a mistake of fact. The cheque had been drawn on the instructions of a customer of the bank. The amount of the cheque represented the balance of a deposit on a house which the customer was purchasing. The customer rang the bank and cancelled the instructions for the issue of the cheque, but the cheque was issued by mistake. In granting leave to defend, the Court affirmed the rule in Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia [1975] 2 NSWLR 227 — that the principles which apply to a bank cheque are no different from those applying to an ordinary cheque. However, the Court noted that the bank knew: that its cheques were used for the discharge of debts as if with cash; and the practice of estate agents accepting them. The Court suggested that this might establish a relationship between the acceptance of the cheque and the liability of the purchaser, which resulted in the estate agent giving consideration for the cheque. See Chapter 10 for a discussion of payment under a mistake of fact. A New Zealand Court has held that the bank may be liable where the cheque is made in the form ‘pay X or order’: see Yan v Post Office Bank Ltd [1994] 1 NZLR 150. The situation was similar to that in Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia [1975] 2 NSWLR 227, since the customer who arranged for the cheque gave consideration that failed. The bank claimed to dishonour the cheque on the basis of the Sidney Raper principle. The Court of Appeal argued that the ‘or order’ part of the cheque indicated that there was a separate contract between the payee and the issuing bank. The holder of the cheque had given consideration to a person entitled to deliver the cheque, so the bank was held liable: see Edwards (1994) for a more complete discussion of the case. See also Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505. While the suggestion in Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia [1975] 2 NSWLR 227 and the solution in Yan v Post Office Bank Ltd [1994] 1 NZLR 150 are ingenious, the uncertainty was clearly intolerable if bank cheques were to continue to be used to settle debts in lieu of cash. As a result of consultations between the banks and the Law Societies, the Australian Bankers’ Association formally announced in May 1985 that it would dishonour bank cheques

[page 258] only in very restricted circumstances. Four of the circumstances cause no difficulty: where the ‘cheque’ is a forgery; where the cheque has been materially altered; where the cheque has been reported stolen or lost; and where there is a court restraining order which prevents the bank from honouring the cheque. The fifth ground for dishonour concerns the situation where the bank has not received consideration for the cheque. The announcement states that a bank cheque will not be dishonoured unless the holder has not given value, or unless the holder was aware at the time of giving value that the funds against which the cheque was drawn would not clear. This means that if the bank wishes to issue a bank cheque before the funds have cleared, then it is at its own risk, not at the risk of the unfortunate holder of the cheque. For the complete text of the Association’s statement, see Mainwaring (1985). See also Lane (1984). The statement has since been incorporated into the Procedures of the Australian Paper Clearing System. Because of these cases which show that a bank cheque can be dishonoured, it is ‘misleading and deceptive’ to claim that bank cheques are as good as cash. Illustration: Lyritzis v Westpac Banking Corp [1994] FCA 1458 The branch advised the plaintiff: ‘bank cheques are guaranteed, they are as good as cash, you can cash them at any bank … that is no problem’. In reliance on this statement, the plaintiffs accepted four bank cheques. One of the cheques was dishonoured on the grounds that it was a forgery on a stolen blank bank cheque form. The Court held that the bank was liable for breach of s 52 of the Trade Practices Act 1974 (Cth).

The increasing use of electronic payments should see the gradual demise of the bank cheque.

8.3.3

Travellers cheques

Travellers cheques are probably neither bills of exchange or cheques. The problem is that the order to pay usually requires a counter-signature of the person to whom the cheques were issued. Ellinger (1969) argues that the order is conditional and that travellers cheques probably form a new species of negotiable instrument established by a general mercantile usage. The NSW Court of Appeal has come, obiter, to the same conclusion: Thomas Cook v Kumari [2002] NSWCA 141, per Handley JA at [7], with whom Seller JA and Pearlman JA agreed.

The issuer of travellers cheques usually provides some degree of ‘insurance’ against loss. Although it is commonly believed that the issuer will replace travellers cheques which are lost, recent cases show that the obligation to replace lost or stolen cheques is not absolute. [page 259] Illustration: Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 3 WLR 212 The customer purchased some 400 travellers cheques, worth £50,000. The contract of purchase contained a clause which provided that the issuer would replace any traveller’s cheques which were lost or stolen, provided that ‘[the purchaser has] properly safeguarded each cheque against loss or theft’. The plaintiff was carrying the travellers cheques in a brown envelope, which was in a plastic bag together with cigarettes he had purchased. Upon arrival in London he spent the evening socialising with friends, then travelled on the Underground, resting the bag on his lap and concealing it with a newspaper. He fell asleep and, upon waking, realised that he no longer had the bag. His claim for replacement was rejected by the defendant issuers. The Court held that the onus was on the plaintiff to show that he had satisfied a condition precedent to a right of refund. Applying an objective test of the ‘ordinary member of the travelling public’, Schiemann J found that the plaintiff had not properly safeguarded the travellers cheques.

The right to replacement will depend on the precise wording of the terms and conditions under which the travellers cheques were issued. Illustration: El Awadi v Bank of Credit and Commerce International SA Ltd [1990] 1 QB 606 The facts were remarkably similar to Braithwaite v Thomas Cook Travellers Cheques Ltd [1989] 3 WLR 212, except that the contract of purchase provided that ‘any claim for a refund of a lost or stolen cheque shall be subject to approval by the issuer and to presentation to the issuer of the purchaser’s copy of this agreement’. There was no express provision requiring the purchaser to safeguard the travellers cheques, nor any provision entitling the issuer to refuse a refund in case of carelessness on the part of the purchaser. The issuer argued that there must be an implied term to that effect, but the Court held that there was no such implied term.

For a complete discussion of the El Awadi case, see Bilinsky (1990). Illustration: Thomas Cook Ltd v Kumari [2002] NSWCA 141 The respondent purchased traveller’s cheques from the appellant with a face value of $50,000. The contract for the purchase of the cheques contained a clause guaranteeing replacement, provided that the purchaser complied with some conditions. The [page 260] relevant condition was that the purchaser ‘safeguarded each cheque against loss or theft as you would a similar amount of your own cash’. The respondent carried the cheques in an outer compartment of her handbag, which was secured only by a press stud. The cheques were stolen from her purse while she was shopping in the markets of Singapore. The respondent freely admitted that she would not carry $50,000 in cash in the outside pocket.

The Court held that this, without more, could not be a breach of the term since it was well known that one of the principal reasons for purchasing travellers cheques was to guard against the risk of loss. To interpret the term in such a strict way would defeat the whole purpose of travellers cheques. To test the term, it was necessary to assume, contrary to fact, that she would have been carrying $50,000 in cash in the unsecured pocket. It is to be assumed that she was carrying the cash in a form which had the same bulk and value as the travellers cheques. The only evidence given was that the respondent had carried the notes in the outside pocket because they did not fit comfortably anywhere else in her handbag. She said that she thought the cheques would be safe there, and there was no evidence given that she would have carried cash in any other way. The Court held that there was no evidence that she had breached the condition and the appeal was denied.

Travellers cheques may be held for some time and, in the nature of things, may be forgotten by the holder. The Privy Council held that unpresented travellers cheques were ‘unclaimed money’ for the purposes of the Unclaimed Money Act 1971 (NZ). The reasoning was that they represented money ‘legally payable’, even if the debt was not presently due: see Thomas Cook (New Zealand) Ltd v Inland Revenue (New Zealand) [2004] UKPC 53, Westpac v Commissioner of Inland Revenue [2008] NZHC 1695; Westpac, BNZ and ANZ National v CIR [2011] NZSC 36. The widespread use of credit cards and the availability of debit cards that may be used in foreign countries have led to a decline in the use of travellers cheques.

8.4

Crossings

8.4.1

Origins

A crossing on a cheque has the effect of restricting the effects of transfer and the method of payment. Crossings were originally placed on cheques by bankers in the process of clearing. In the original clearing houses, each banker had a box with their name marked upon it. The clerks from the collecting bank would leave cheques drawn on the [page 261] banker in the box so marked, but, in order to indicate the bank to which payment was to be made, the clerk would ‘cross’ the cheque — that is, write the name of the collecting bank between two transverse lines on the cheque. As the practice became known to the general commercial community, it

was recognised as a significant safeguard against fraud. If the name of the payee’s bank was known to the drawer of the cheque, the cheque could be ‘crossed’ at the time of drawing. Since the collecting bank was likely to be small and to know most of its customers, it would be nearly impossible for anyone other than the named payee to have the cheque collected by the bank named in the crossing. Because of the practice of bankers, it would be impossible for the cheque to be collected by any other bank: see Holden (1955) at Chapter VII. When the name of the collecting bank was not known, it became customary to merely mark the cheque with two parallel lines, omitting the name of a particular bank. Sometimes the words ‘Bank’ or ‘& Company’ were written between the lines. In all cases, the ‘general crossing’ (as this form became known) was interpreted as an instruction that the cheque was only to be paid to another banker — that is, the cheque was to be collected by a bank and not to be paid over the counter: see Bellamy v Marjoribanks (1852) 7 Exch 389. Crossings were given statutory status by a series of Acts commencing with the Crossed Cheques Act 1856 (UK). This tradition was continued in the Bills of Exchange Act 1909 and is now found in Pt III, Div 3 of the Cheques Act 1986.

8.4.2

The effect of a crossing

A crossing acts as a direction by the drawer to the drawee institution not to pay the cheque otherwise than to a financial institution: Cheques Act 1986, s 54. The crossing is part of the mandate to the drawee. Consequently, if the banker pays contrary to the crossing — that is, if the bank pays the cheque over the counter — then the customer may resist the debit to the account. The consequences may be illustrated by Bobbett v Pinkett (1875-1876) LR 1 Ex D 368. A banker erroneously and (it was found) negligently paid a cheque to a banker other than the one named in the special crossing. In the course of the judgment, Bramwell B said (at 372): ‘It is certain that the present plaintiff [the drawer] might have refused to allow [the drawee bank] to debit his account with the amount of the cheque …’. Amphlett B said (at 374): It cannot be denied that the crossing operated as a mandate to the drawee to pay the cheque to

the bankers named and to no one else, and that the plaintiff might … have declined to allow his account to be debited with the amount so paid contrary to his orders …

[page 262] The end result is somewhat strange, for the drawer is not the only person who is given authority to cross a cheque: Cheques Act 1986, s 56. It is a fiction to deem that a crossing added by someone other than the drawer is an instruction by the drawer.

8.4.3

The general crossing

The Cheques Act 1986 authorises only the ‘general’ crossing — that is, the later development which was construed as an instruction to pay another banker. According to s 53(1), this is where a cheque clearly bears across the front the addition of two parallel transverse lines with or without the words ‘not negotiable’ between, or substantially between, the lines. Nothing other than this is effective as a crossing of the cheque: Cheques Act 1986, s 53(2). Several cases have considered marks on cheques which were claimed to be crossings. In Mather v Bank of New Zealand (1918) 18 SR (NSW) 49, it was said (at 52): Nobody would argue that the lines must be geometrically parallel. Neither would anybody argue that they must run across the full width of the cheque, nor that they should be at some particular distance apart. The question in every case must be for the jury to say whether that which the drawer of the cheque has done can fairly be said to be a crossing within the meaning of the Act, and to indicate to the banker that the cheque is intended to be crossed. Illustration: Hunter BNZ Finance Ltd v Maloney Pty Ltd (1988) 18 NSWLR 420 The cheque in question had two parallel transverse lines running for only approximately onequarter of the distance between the top and the bottom of the cheque. The Court held that the cheque was crossed, since the lines were plainly seen as parallel transverse lines and clearly revealed their status as performing the function of crossing.

8.4.4

Not negotiable

Section 53 of the Cheques Act 1986 also authorises a crossing consisting of two parallel transverse lines with the words ‘not negotiable’ between them. The effect of a not negotiable crossing is given by s 55 of the Cheques Act 1986: Where a cheque that bears a crossing of the kind referred to in paragraph 53(1)(b) is transferred by negotiation to a person, the person does not receive, and is not capable of giving, a better title to the cheque than the title that the person from whom the first-mentioned person took the cheque had.

A crossing with the words ‘not negotiable’ does not make the cheque nontransferable. This is an unfortunate but widespread misconception — one that is [page 263] clearly incorrect in view of s 39 of the Cheques Act 1986, which specifically states that nothing written on the cheque can have the effect of making it nontransferable. The addition of the words other than between parallel transverse lines is not a crossing of the cheque: Cheques Act 1986, s 53(3). This is puzzling, since a crossing is an instruction to a bank. The words ‘not negotiable’ do not direct the paying banker to do anything, nor does the Cheques Act 1986 place any special duty on the paying banker when the words appear. What are we to make of an instrument which has the words ‘not negotiable’ on it but not appearing between lines? The words ‘not negotiable’ written on a bill of exchange which was not a cheque have been held to make the instrument non-transferable: see Hibernian Bank Ltd v Gysin and Hanson [1939] 1 KB 483. The decision is doubtful since the bill was written in the form, ‘pay X only’. However, if the Cheques Act 1986 applies to the instrument, then that interpretation is no longer open, for nothing written on a cheque can have the effect of making it non-transferable: Cheques Act 1986, s 39. However, the case shows that we should try to give some meaning to the words, much as the courts have always done with the unauthorised ‘account payee only’ addition to a cheque: see 8.4.6. The best approach appears to be to give the words the effect which is given to them when they are a part of a crossing, namely the meaning of s 55 of the Cheques Act 1986. A second possible effect of the words may be to make it more difficult for the collecting bank to establish its statutory defence in an action for conversion: see Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83.

8.4.5

Who may cross

Section 56 of the Cheques Act 1986 authorises the drawer or any other person in possession of the cheque to add a crossing. A person in possession may add a crossing to a cheque even if it already contains a crossing and may add the words ‘not negotiable’ to an existing crossing: Cheques Act 1986 s 57.

Since only the simple crossing and the ‘not negotiable’ crossing are authorised by the Cheques Act 1986, the right for a person to add a second general crossing is somewhat puzzling. It would have no further effect, but, on the other hand, there is no harm done. It seems unlikely that there will be large numbers of cheques in circulation each with large numbers of parallel transverse lines.

8.4.6

Account payee only

Only the notations authorised by s 53(1) of the Cheques Act 1986 are crossings, but that does not mean that other notations are meaningless. The most common notation is the phrase ‘account payee only’, or some equivalent. [page 264] The phrase is interesting because it is clearly directed at the collecting bank, since that is the only person who is in a position to know for whom the cheque is being collected. As such, it is a curious order, for it is given by the drawer of the cheque, who will ordinarily have no contractual relationship whatsoever with the collecting bank. Why should the collecting bank be bound by such an order? The courts and the banks themselves have shaped a curious answer to the question. The collecting institution is not contractually bound by the order, but the order has the effect of putting the collecting institution on notice that the parties intended that only the named payee is entitled to collect it: see National Bank v Silke [1891] 1 QB 435; Foods Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201 (29 August 2007); Wayfoong Credit Ltd v Remoco (HK) Ltd [1983] HKCFI 117. The statutory defence and the effect of the ‘account payee only’ notation are discussed at 8.8.4. The words ‘account payee only’ do not impair the negotiability of the cheque, at least in the sense that it may be transferred: Cheques Act 1986, s 39. The same result was reached before the Act: see Universal Guarantee Pty Ltd v National Bank of Australasia Ltd [1965] NSWR 342. This position has been changed in the UK and in New Zealand. In both jurisdictions, a crossed cheque which bears the words ‘not transferable’, ‘non-transferable’, ‘account payee’, ‘a/c payee’ (or either of the latter two with the addition of the word ‘only’) is not transferable. It is valid only as between the drawer, drawee and named payee: see Bills of Exchange Act 1882 (UK), s 81A(1) and Cheques Act 1960 (NZ), s 7B. The words have no effect on the bank paying the cheque. In particular,

there is no obligation on the paying banker to ensure that the cheque is being collected for the account of the named payee: see Universal Guarantee Pty Ltd v National Bank of Australasia Ltd [1965] NSWR 342. See also Honourable Society of the Middle Temple v Lloyds Bank plc [1999] 1 All ER(Comm) 193. There is no reason to doubt that these principles hold for any financial institution collecting or paying the cheque.

8.5

Dealings with cheques

8.5.1

Negotiation

Although it might be desirable to have a non-transferable instrument for making payments, the Cheques Act 1986 takes a different view. Section 39 provides that every cheque is transferable by negotiation until it is discharged. Negotiation is the transfer of a cheque in such a way that the transferee is made a holder of the cheque: Cheques Act 1986, s 40(1). The definition is important since a holder may sue on the cheque in the holder’s own name: Cheques Act 1986, s 49(1). Further, if the holder is a holder in due course, then they hold the cheque free from [page 265] any defect in the title of prior parties as well as from mere personal defences available to prior parties: Cheques Act 1986, s 49(2)(a). Like bills of exchange, the law relating to cheques protects transactions rather than ownership. The method of negotiation is similar to that of bills of exchange. A cheque payable to order is negotiated when indorsed by the holder and delivered so as to complete the contract arising out of the indorsement: Cheques Act 1986, s 40(2). A bearer cheque is negotiated by delivery, whether or not it is also indorsed by the holder: Cheques Act 1986, s 40(3). The definitions mean that a person who takes under a forged indorsement cannot become a holder, since the indorsement is not made by the holder. The forgery ‘breaks the chain’ of liabilities, but later takers may rely on any indorsement that occurs before they have taken the cheque but after the forgery. There is, in effect, a new ‘chain of liabilities’.

8.5.2

Indorsement

Section 41(1) of the Cheques Act 1986 sets out some requirements of a valid

indorsement, expressed in a negative way: (1) An indorsement of a cheque is not effective to transfer the cheque by negotiation unless: a)

the indorsement is written or placed on the cheque and signed by the indorser; and

b)

the indorsement is an indorsement of the entire cheque.

The rest of s 41 elaborates: the indorsement may be written on an allonge — that is, a slip of paper attached to the cheque to give room for further indorsements; a mere signature on the cheque is an indorsement: Cheques Act 1986, s 41(3) (the resulting cheque is, of course, a bearer cheque: Cheques Act 1986, ss 21 and 22); and an indorsement that purports to transfer only a part of the sum payable is ineffective to transfer the cheque by negotiation: Cheques Act 1986, s 41(4). Indorsers sometimes attempt to impose conditions on the indorsement. Section 45 provides that the indorsement is an effective negotiation and that the condition may be disregarded by the person paying the cheque. The condition is also ignored for determining if the holder is a holder in due course. Indorsements are presumed to have been made in the order in which they appear on the cheque: Cheques Act 1986, s 48. The presumption is rebuttable: see, for example, Rowe & Co Pty Ltd v Pitts [1973] 2 NSWLR 159. It may often happen that the indorsee is incorrectly described or the name is misspelt. Section 44 grants such an indorsee the right to further indorse the cheque [page 266] using the incorrect designation or spelling, but they may also choose to add their proper signature. Problems arise when a person signs as agent. The problems are similar to those encountered in bills of exchange: see the discussion at 5.6.2.

8.5.3

Payment/discharge

Discharge of a cheque generally extinguishes all rights on the cheque, subject to a few protections for innocent parties: Cheques Act 1986, s 82. As with bills of exchange, it is as though a cheque is ‘born’ when it is drawn and delivered, and it ‘dies’ when it is discharged.

The events causing discharge are similar to those causing the discharge of a bill of exchange, but there are a couple of very important differences. Perhaps the most common method of discharge is payment in due course by the drawee institution: Cheques Act 1986, s 78(1)(a). Indeed, if this were not common, then the cheque could never have survived as a payment instrument. ‘Payment in due course’ means the cheque is paid to the holder in good faith and without notice of any defect in the holder’s title, or that the holder has no title to the cheque: Cheques Act 1986, s 79. A cheque is discharged if the holder absolutely and unconditionally renounces the holder’s rights against the drawer or all persons liable on the cheque: Cheques Act 1986, s 78(1)(b). However, in order to be an effective renunciation, the holder must deliver the cheque to the drawer: Cheques Act 1986, s 80. This is a simple precaution to prevent an innocent party coming into possession of a ‘renounced’, and therefore dead, cheque. Instead of renouncing the rights, the holder may choose to cancel the cheque or the drawer’s signature. To be effective, the cancellation must be intentional and apparent: Cheques Act 1986, s 78(1)(c). Section 81 elaborates on the cancellation procedure, providing that the cancellation is not effective if made under a mistake of fact: Cheques Act 1986, s 81(1). Where a cheque appears to have been cancelled, it is presumed to have been done intentionally and with full knowledge of the facts: Cheques Act 1986, s 81. Finally, a cheque may be discharged if it is fraudulently and materially altered by the holder: Cheques Act 1986, s 78(2). This looks similar to the discharge of a bill of exchange by alteration, but it is quite different. First, the alteration must be done fraudulently. Second, the meaning of ‘materially altered’ is different in the Cheques Act 1986 than it is in the Bills of Exchange Act 1909. Section 5(8) of the Cheques Act 1986 provides: An alteration of a cheque is a material alteration if it alters, in any respect, a right, duty or liability of the drawer, an indorser or the drawee institution.

[page 267] This is quite different from the ‘shopping list’ approach of the Bills of Exchange Act 1909: see 5.9.4 for a discussion of material alteration of bills.

8.6

Liability of parties

8.6.1

Signature essential

Subject to a few exceptions, a person is not liable as a drawer or indorser unless the person signs the cheque as a drawer or indorser: Cheques Act 1986, s 31(2). The exceptions have to do with persons signing in a representative capacity. A person may sign not in their own name, but in a business or trade name. Section 31(2) of the Cheques Act 1986 provides that the person is liable on the cheque as if the person had signed in their own name. Partnerships also pose a special case. The signature of the name of a firm is deemed to be the signature, by the person signing, of all persons liable as partners of the firm: Cheques Act 1986, s 31(3). A company or business cheque is necessarily signed by an officer of the company. The holder may try to hold the officer personally liable: see Bondina Ltd v Rollaway Shower Blinds Ltd [1986] 1 All ER 564; Valamios v Demarco [2005] NSWCA 98. See also 5.6.2.

8.6.2

Drawer

The drawer of a cheque makes certain promises and takes on certain responsibilities. Section 71 of the Cheques Act 1986 sets out the liability of the drawer. Subject to certain exceptions, the drawer promises that: the cheque will be paid on due presentment for payment; and if the cheque is dishonoured or if presentment is not necessary (see 8.9) and the cheque is unpaid after its date has arrived, the drawer will compensate the holder or any indorser who is forced to pay the cheque. Section 71 was applied by the District Court of Western Australia in Commonwealth Bank of Australia v Dale [2016] WADC 25. The defendants had deposited cheques they had drawn themselves. The Court granted summary judgment. Unfortunately, the report does not discuss the form of the cheques in question, but presumably the form made it clear that the plaintiff bank was a holder. Further, by the very act of issuing the cheque, the drawer is estopped from denying to a holder in due course that the cheque was, at the time of issuance, a valid cheque: Cheques Act 1986, s 72. Note that the estoppel is in favour only of a holder is due course, not a ‘mere’ holder. Attempts to hold the drawer responsible to the drawee institution have generally failed: see the discussion at 7.4.

[page 268]

8.6.3

Indorser

Indorsing a cheque places certain responsibilities on the indorser. By the act of indorsing the indorser promises that the cheque will be paid on due presentment: Cheques Act 1986, s 73(a). The indorser further undertakes that if the cheque is not properly paid, then the indorser will compensate the holder or any subsequent indorser who is compelled to pay: Cheques Act 1986, s 73(b). The indorser is also subject to certain estoppels. In particular, the indorser may not: deny to a holder in due course the genuineness and regularity of the drawer’s and all previous indorsements; and deny to subsequent indorsees or a holder that the cheque is valid and that the indorser had a good title to it. This establishes the ‘chain of liabilities’ for cheques: each indorser may rely on previous parties to the cheque and is responsible to subsequent parties.

8.7

The paying institution

8.7.1

The duty to pay cheques

The paying institution acts as agent of its customer, the drawer of the cheque, when paying the cheque. As such, it must deal promptly with the cheque, either paying or dishonouring it as soon as reasonably practicable. This common law duty is backed up by the Cheques Act 1986. Section 67(1) requires the drawee institution to pay or dishonour the cheque as soon as reasonably practicable. If it fails to do so, the drawee institution may not dishonour the cheque and is liable to pay the cheque to the holder. Strangely, there is no requirement that the cheque be drawn by a customer of the drawee institution. Section 67(2) of the Cheques Act 1986 provides a list of factors to be considered when determining if the drawee institution has acted in accordance with s 67(1). The duty to pay cheques is not an absolute duty; it only arises when certain preconditions are met. In general, the duty to pay arises when:

the cheque is a proper mandate — that is, it is drawn in a proper form, is unambiguous and signed by a person who is authorised to draw on the account: see London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777; there are funds available to meet the cheque: see Bank of New South Wales v Laing [1954] AC 135; there are no legal impediments to the bank’s honouring the cheque. Examples would be garnishee orders against the customer, a Mareva order, or that the cheque has been countermanded; the cheque is properly presented for payment: see 8.9. [page 269] The bank may refuse payment if any one of the conditions is not fulfilled. Although the institution may refuse to pay if there are insufficient funds, the cheque is considered to be a request for an overdraft: see Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226. ‘Funds available’ include any overdraft arrangements: see Fleming v Bank of New Zealand [1900] AC 577.

8.7.2

Wrongful dishonour

A bank may breach its duty to pay cheques in two separate ways — it may: fail to pay a cheque when the preconditions for payment exist; or pay a cheque in circumstances when it should not. The first is called wrongful dishonour, the second wrongful payment. Wrongful payment is discussed at 8.7.3. Wrongful dishonour often occurs when the bank has failed to credit deposits made by the customer. This may happen because there are customers with similar names, or because the amount of a deposit is understated by a misplacement of the decimal point or an accidental transposition of figures. Another common cause is that the bank overlooks overdraft arrangements which have been made by the customer. Whatever the cause, the usual problem is that the customer has funds which are available to meet the cheque, but the bank mistakenly believes that the account is inadequate. It does not matter that the mistake made by the bank is innocent or reasonable. The action is for breach of contract, and the contract calls for the bank to pay in certain circumstances, not merely to exercise care.

Damages are assessed in accordance with well-established principles of contract law and the principle of Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145. It is common practice to write the reason for dishonour on the face of the cheque. Expressions such as ‘insufficient funds’ or ‘present again’ are common. The cheque is then returned to the collecting institution. The courts have held that the return amounts to ‘publishing’, and the paying institution may find itself sued for defamation: see, for example, Baker v ANZ Bank Ltd [1958] NZLR 907; Hill v National Bank of New Zealand Ltd [1985] 1 NZLR 736; Aktas v Westpac Banking Corp Ltd [2010] HCA 25. See also Weaver et al (2003) at 9.1970ff for a detailed discussion of defamation in this context.

8.7.3

Wrongful payment

The duty to pay cheques requires that the bank pays the proper amount to the proper person. [page 270]

Paying the wrong amount If the words and figures on the cheque differ as to the amount to be paid, the proper amount is the smaller of the two: Cheques Act 1986, s 15(4), although the banker would probably be justified in refusing to honour an ambiguous instruction. The bank may also pay the wrong amount when the cheque has been fraudulently altered. By s 78(2) of the Cheques Act 1986, a cheque is discharged when fraudulently and materially altered by the holder. A common fraudulent alteration is to ‘raise’ the cheque — that is, to increase the amount payable. If the alteration is skilfully done, it might be paid by the drawee bank. Section 91 of the Cheques Act 1986 provides that where the cheque has been raised, the alteration is the only material alteration of the cheque and the drawee institution pays the cheque to the holder in good faith and without negligence, then the drawee may debit the drawer’s account with the amount of the cheque as drawn. This is of very limited use to the bank, since a fraudulent alteration will often raise the amount of the cheque by a substantial sum.

Paying the wrong person If a cheque is not payable to order, then it is payable to bearer and the duty of

the bank is simply to pay whoever might be in possession of the cheque: Cheques Act 1986, s 22. This is important for the paying bank, since it is virtually impossible for the bank to pay a bearer cheque to the wrong person. It is for this reason that most pre-printed cheques are in terms ‘pay … or bearer’. An order cheque must require the drawee institution to pay to, or to the order of, a person ‘specified’ in the cheque as payee or indorsee, or to two or more people so specified: Cheques Act 1986, s 21. A person can only be ‘specified’ if the person is named or indicated with reasonable certainty and is not a fictitious or non-existing person: Cheques Act 1986, s 19. In this rather roundabout way, a cheque drawn in favour of a fictitious or non-existent person is payable to bearer: see Weaver et al (2003) 8.2580ff for a discussion of the meaning of ‘fictitious person’, and see Geva (2016). See also Bank of England v Vagliano Bros [1891] AC 107, Vinden v Hughes [1905] 1 KB 795; Papandony v Citibank Ltd [2002] NSWSC 388; affirmed Citibank Ltd v Papandony [2002] NSWCA 375. Since it is common to order that cheques be paid to some office bearer — for example, ‘commissioner of taxation’ — the Cheques Act 1986 provides that the person who is the holder for the time being of the office shall be taken to be named in the cheque as payee: Cheques Act 1986, s 19(2). [page 271]

Paying institution defences Even if the paying institution pays the wrong person, the wrong amount or both, it may have a statutory defence. The relevant defences relate to: payments that discharge a debt owed by the customer: see Liggett (B) Liverpool Ltd v Barclays Bank Ltd [1928] 1 KB 48 and the discussion in Weaver et al (2003) at 10.2800ff; payment ‘in good faith and without negligence’ of a crossed cheque to a financial institution: see Cheques Act 1986, s 92 and the discussion in Weaver et al (2003) at 9.1460ff; payment of a cheque where the indorsement is missing or forged: see Cheques Act 1986, s 94 and the discussion in Weaver et al (2003) at 9.1310ff. The sections of the Cheques Act 1986 which grant the statutory defences to the bank are all stated to be subject to s 32(1). That section makes inoperative

a forged drawer’s signature unless there is an estoppel against the person whose signature it purports to be, or unless the person has adopted or ratified the signature. Thus, nothing in the protective provisions alters the risks associated with cheques bearing a forged drawer’s signature.

8.8

The collecting institution

8.8.1

The duty to collect cheques

When presenting the cheque for payment, the collecting institution acts as agent for the holder of the cheque. As agent, the common law requires the institution to act in the interests of the principal, in this case, the holder of the cheque. The collecting institution therefore has an obligation to present the cheque for payment and collect the proceeds for the account of its customer. This common law duty is reinforced by s 66 of the Cheques Act 1986. Subject to a couple of exceptions, s 66(1) proides that the deposit institution must ensure that the cheque is duly presented for payment as soon as is reasonably practicable. If it fails to do so, it is liable to the holder for any loss suffered. Section 66(3) sets out factors to be considered when determining that the presentment is timely. Case law has held that the bank, as agent, must use its rights under the clearing house rules to advance the interests of the customer: Riedell v Commercial Bank of Australia Ltd [1931] VLR 382.

8.8.2

Tortious liabilities

Conversion is a tort primarily concerned with improper dealing with chattels. In the words of Sir Owen Dixon, it is ‘dealing with a chattel in a manner repugnant [page 272] to the immediate right of possession of the person who has the property or special property in the chattel’: Penfolds Wines Pty Ltd v Elliott (1946) CLR 204 at 229. The ‘intention’ required is merely the intention to deal with the chattel. It is not necessary that there be an intention to interfere with the right of another’s control. Thus, an entirely innocent person who takes a chattel from a thief is just as liable to the owner of the chattel as the thief: see Penfolds Wines Pty Ltd v Elliott (1946) CLR 204 for a discussion by the High Court.

It usually does not matter that the intermeddler is acting on behalf of a principal. An agent who deals with a stolen chattel will be liable to the owner of the chattel. Finally, a bailee of a chattel — that is, someone other than the owner of the chattel who is in rightful possession of the chattel — becomes liable in conversion upon forming the intention to deal with the chattel in a way which is inconsistent with the rights of the owner.

8.8.3

Relevance to negotiable instruments

Although conversion is primarily concerned with rights over chattels, a series of 19th century decisions extended the remedy to rights over cheques and other negotiable instruments. Scrutton J traced the evolution of the remedy in Lloyds Bank Ltd v Chartered Bank of India, Australia & China [1929] 1 KB 40. He explained (at 55–6) that the tort applies to such instruments ‘by treating the conversion as of the chattel, the piece of paper, the cheque under which the money was collected, and the value of the chattel converted as the money received under it’. A forged instrument probably cannot be the subject of an action in conversion: see Koster’s Premier Pottery v Bank of Adelaide (1981) 28 SASR 355; Arrow Transfer Co Ltd v Royal Bank of Canada (1972) 27 DLR (3d) 81; Smith v Lloyds TSB Bank plc [2001] 1 All ER 424. The instrument in Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794 was not a cheque, but the action in conversion was permitted, so the question might still be open. The statutory defence of the collecting bank might not be available if the instrument is not a cheque: see Slingsby v Westminster Bank Ltd (No 2) [1931] 2 KB 583; and see 8.8.4. Misappropriating money from a bank account is not conversion, since there is no chattel involved: see Croton v R [1967] HCA 48; and see 3.2.2. As cheques are replaced by electronic forms of payment, conversion and the extraordinary defences afforded to the financial institutions will gradually become of little importance. It seems likely that a paying institution may also be sued in conversion. The matter has been the subject of some debate: see the full discussion by Chesterman JA in Westpac Banking Corporation v Hughes [2011] QCA 42, where he concluded that it may be. However, if the paying institution has a defence under the Cheques

[page 273] Act 1968, then it is deemed to have paid ‘in due course’ and, as a consequence is entitled to possession of the cheque: see Cheques Act 1986, s 68; and see 8.7.

8.8.4

Collecting institution: statutory defence

Collecting institutions are given statutory defences not available to anyone else. Although sometimes mistakenly portrayed as a ‘duty’ imposed on the institutions, as provided in s 95(1) of the Cheques Act 1986, the principal defence provision is actually a privilege granted to them as a means of shifting the cost of doing business onto customers: Savory (E B) & Co v Lloyds Bank Ltd [1932] 2 KB 122; aff’d [1933] AC 201. The collecting bank’s main defence against an action in conversion or money had and received is found in s 95(1) of the Cheques Act 1986: (2) Where: a)

a financial institution (the collecting institution), in good faith and without negligence: (i)

receives payment of a cheque for a customer; or

(ii) receives payment of a cheque and, before or after receiving payment, credits a customer’s account with the sum ordered to be paid by the cheque; and b)

the customer has no title, or has a defective title, to the cheque;

the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque.

There are several important features of s 95(1): the burden of proof to invoke the defence is on the collecting institutions: Commercial Bank of Australia Ltd v Flannagan (1932) 47 CLR 461 and Hunter BNZ Finance Ltd v Maloney Pty Ltd (1988) 18 NSWLR 420; ‘good faith’ merely means acting honestly: Cheques Act 1986, s 3(2); the ‘negligence’ mentioned in the section has nothing to do with the tort of negligence; and each cheque must be considered separately so that the collecting institution must make out the defence for each one: State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83. The classic test of ‘without negligence’ was given by Lord Dunedin in the Privy Council in Commissioners of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683 at 688. He quoted Isaacs J in Commissioners of State

Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83; (1914) 19 CLR 457, and then indicated that the interpolated words should be added: … the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary

[page 274] course that it ought to have aroused doubts in the bankers’ mind, and caused them to make inquiry.

In general, the collecting institution is required to make inquiries when the circumstances demand. The problem is to know when the circumstances demand and what inquiries should be made. There is no definitive answer. A court will usually consider a number of factors when determining if an institution has collected ‘without negligence’. There is seldom a single one that is definitive, but there are three general categories considered by the courts when determining if a cheque has been collected ‘without negligence’ for the purposes of s 95(1) of the Cheques Act 1986 — namely: factors connected with the opening of the account; details on the face of the cheque which, in the circumstances, should arouse suspicion; and facts known by the collecting bank about its customer. In opening the account, the collecting institution may fail to establish the identity of the customer: see London Bank of Australia Ltd v Kendall (1920) 28 CLR 401; Ladbroke & Co v Todd (1914) 30 TLR 433. The problem may arise even with modern identification requirements. Illustration: Voss v Suncorp-Metway Ltd (No 2) [2003] QCA 252 An accountant persuaded a couple to invest $600,000 in ‘Southern Pacific Equities Unit Trust’. On the day following the receipt of the cheque, the accountant obtained a trust deed and, on the same day, opened an account with the defendant bank in the same name. He deposited the cheque in the newly formed account and, the same day, withdrew the proceeds for his own benefit. The Queensland Court of Appeal held that the bank should have been put on inquiry. Failure to inquire meant that the cheque had not been collected without negligence. This was in spite of the fact that the bank showed that the procedures followed were consistent with banking practice and with its own procedure manuals.

Inquiries should be made when a new account is opened with a ‘not negotiable’ or an ‘account payee’ cheque, since an account is required to deal with such cheques: Savings Bank of South Australia v Wallman (1935) 52 CLR 688.

Inquiries should also be in circumstances where the customer has a special relationship to the drawer of the cheque. Examples include: collecting for an employee of the drawer: Bennett & Fisher Ltd v Commercial Bank of Australia Ltd [1930] SASR 26; [page 275] where the customer is a public official: Commissioner of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83; where the cheque is payable to a partnership but is collected for the private account of a partner: Baker v Barclays Bank Ltd [1955] 1 WLR 822. Unusual account activity, such as the deposit of unusually large amounts, may require the collecting institution to make inquiries: Lumsden v London Trustee Savings Bank [1971] 1 Lloyds Rep 114; Crumplin v London Joint Stock Bank Ltd (1913) 109 LT 856; Nu-Stilo Footwear Ltd v Lloyds Bank Ltd (1956) 7 LDAB 121. Other factors which may be relevant in the particular circumstance include: the practice of bankers, although relevant, is not decisive: see Savory (E B) & Co v Lloyds Bank Ltd [1932] 2 KB 122; aff’d [1933] AC 201; Voss v SuncorpMetway Ltd (No 2) [2003] QCA 252; internal rules related to collection — failure to follow the rules is not necessarily fatal to the defence: Motor Traders Guarantee Corp Ltd v Midland Bank Ltd [1937] 4 All ER 90; National Commercial Banking Co of Australia Ltd v Robert Bushby Ltd [1984] 1 NSWLR 559. Although the collecting institution must be vigilant, it is not required to be overly suspicious or to act as an ‘amateur detective’: Lloyds Bank Ltd v Chartered Bank of India, Australia & China [1929] 1 KB 40. The availability of the statutory defence is a complex subject: see Weaver et al (2003) at 9.6420ff for a full discussion.

8.9

Presentment of cheques

Subject to the limited exceptions of s 59 of the Cheques Act 1986, a drawer or indorser of a cheque is not liable on the cheque unless the cheque is duly presented for payment: Cheques Act 1986, s 58. Further, the indorser is not liable on the cheque unless the presentment is within a reasonable time after indorsement: Cheques Act 1986, s 60(2).

‘Due presentment’ means making a demand for payment in accordance with the Cheques Act 1986: Cheques Act 1986, s 161(1). The rules for individuals are different from the rules for financial institutions, but, in any case, a demand made before the date of the cheque is ineffective to render the cheque ‘duly presented’: Cheques Act 1986, s 61(2).

8.9.1

Presentment by individuals

Due presentment by a person other than a financial institution means, according to s 63 of the Cheques Act 1986, the person must: ‘exhibit’ the cheque; [page 276] in person; at the ‘proper place in relation to the cheque’; at a reasonable hour; on a day when the drawee institution is open for business at the place where the cheque is exhibited. ‘Exhibit’ apparently means to physically display the cheque itself. The ‘proper place’ depends on the face of the cheque itself. If the cheque specifies a place of business of the drawee institution, then that is the ‘proper place’. Otherwise, the ‘proper place’ is the place of business of the branch of the drawee institution where the account on which the cheque is drawn is maintained: Cheques Act 1986, s 64. Strangely enough, s 63 does not require the person presenting the cheque to be the holder, yet the drawee institution should not pay the cheque to anyone except the holder or an agent of the holder. Further, the section does not distinguish between crossed and uncrossed cheques, yet the drawee institution should not pay a crossed cheque except to another financial institution: see 8.4.

8.9.2

Presentment by financial institutions

Because the cheque was historically a species of bills of exchange, it was thought necessary to physically present the cheque for payment at the drawee institution. Yet, in most cases, the drawee institution only needs the information on the cheque, not the cheque itself. As computers became used more and more often in banking, the banks sought methods of ‘presentment by

particulars’ — that is, allowing ‘due presentment for payment’ by transmitting the information on the cheque rather than the cheque itself. The UK banks ran a test case to determine their responsibilities in the presentment of cheques. In Barclays Bank plc v Bank of England [1985] 1 All ER 385, Bingham J, acting as judge-arbitrator, held that the collecting bank’s responsibility to its customer in respect of collection is discharged only when the cheque is physically delivered to the branch of the drawee bank on which the cheque is drawn. One of the aims of the Cheques Act 1986 was to permit presentment of cheques by particulars. The first attempt was not particularly successful, and the Act was amended in 1994. The Cheques Act 1986 distinguishes ‘external presentment’ from ‘internal presentment’. An external presentment is made when the drawee institution is different from the collecting institution. When the drawee institution is the same institution as the collecting one, the presentment is internal. Both routines are similar, and we will consider only external presentment here. [page 277] External presentment may be done by exhibiting the cheque at the proper place or at a ‘designated exhibition place’. The ‘designated exhibition place’ is, in effect, the clearing house for exchanging cheques. However, a financial institution may also duly present the cheque otherwise than by exhibiting the cheque. Section 62 sets out the requirements. The demand must be made: at a place that is a designated place in relation to the cheque; at a time that is a designated time for the drawee institution at that place; and using a means of communication that is a designated means of communication for the drawee institution at that place. The notions of ‘designated exhibition place’, ‘designated time’ and ‘designated means of communication are defined in s 65 of the Cheques Act 1986. Section 62 of the Cheques Act 1986 then goes on to outline further requirements in general terms so as not to unduly limit the technology used for presentment by particulars. It sets out the requirement that the cheque be identified with reasonable certainty, and the details of the cheque that must be provided. The drawee institution may request further particulars or that the

cheque, or a copy, be exhibited. The requirements of s 62 of the Act are detailed, but contain no surprises. These reforms have permitted continued operation of the cheque system — some would say beyond its natural life as other, more efficient, forms of payment have been developed: see the discussion of payment systems at Chapter 9.

8.10

‘Payment’ by cheque

The parties may agree to payment by cheque, but even if the contract does not call for payment by cheque, the debtor may offer a cheque as payment. The creditor is not obliged to accept, but if the tender is rejected, it must be on the grounds that a cheque is not acceptable. Any other reason given for rejection may bind the creditor to accepting a cheque at a later date: see Tyree (2010b) for a full discussion.

8.10.1

Conditional payment

Payment by cheque is conditional payment. The condition to which the payment is subject is a condition subsequent — namely that the cheque will be met upon proper presentment for payment. If the cheque is presented and paid, then the contractual time of payment as between the creditor/payee and the debtor/drawer is generally taken to be the time at which the cheque was delivered: see Tilley v Official Receiver (1960) 103 CLR 529; Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1947–1948) 76 CLR 584; National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65. [page 278] If the cheque is dishonoured, the payee will usually have two causes of action against the drawer: on the cheque itself; and for the original debt which gave rise to the drawing of the cheque. The action on the cheque will nearly always be the most advantageous. The obligations on the cheque are autonomous and separate from the underlying contract, and the courts have shown themselves reluctant to do anything which would interfere with that autonomy. It will be rare that a counterclaim for unliquidated damages may be set up by way of defence to an action on the cheque itself: see, for example, Nova (Jersey) Knit Ltd v Kammgarn Spinnerei

GmbH [1977] 1 WLR 713; Mobil Oil Australia Ltd v Caulfield Tyre Service Pty Ltd [1984] VR 440. Similar results may follow from the cancellation of a direct debit: see Esso Petroleum Co Ltd v Milton [1997] 2 All ER 593. See Tyree (2010b) for an extended discussion of payment by cheque.

8.10.2

Not an assignment of funds

The cheque is not an assignment of funds held by the banker on behalf of the drawer: Cheques Act 1986, s 88. The debt owed by the banker remains owed to the drawer of the cheque, not to the payee. An important consequence is that the payee has no right against the bank on the cheque itself. The only obligation owed by the bank to the payee is to deal with the cheque promptly: see Cheques Act 1986, s 67; and see Dimond (HH) (Rotorua 1966) Ltd v ANZ Banking Group Ltd [1979] 2 NZLR 739. Another consequence is that the bank may not obtain a discharge of the debt owed to its customer unless the order in the cheque is strictly followed. The cheque is merely a mandate, not a transfer of rights: see Parsons v The Queen [1999] HCA 1. From the payee’s point of view, the fact that a cheque is not an assignment of funds means that they have no remedy against the bank if the bank dishonours the cheque. The only remedy in such a case is to proceed against the drawer of the cheque: see 5.7.2.

8.10.3

Paid cheques as evidence

An advantage of paying by cheque is that the cheque itself may be retrieved as evidence of payment. In the days when all cheques required indorsement, evidence of payment was thought to be a consequence of the indorsement itself. In 1971, the Bills of Exchange Act Amendments were introduced, which dispensed with the need for indorsements when a cheque was being deposited by the payee. At the same time, a section was introduced which extended the evidence rule to all order cheques. [page 279] Section 113 of the Cheques Act 1986 continues this, providing that an order cheque which has not been indorsed by the payee and which appears to have been paid by the drawee bank is evidence of the receipt by the payee of the sum ordered to be paid by the cheque. Why the section applies only to unindorsed cheques is a mystery.

8.10.4

Contractual terms implied by writing a cheque

The obligations undertaken by the drawer of a cheque are partly those defined by the Cheques Act 1986 and partly those which are a part of the underlying contract which gave rise to the drawing. According to Phillmore LJ, in R v Page [1971] 2 QB 330, the contract contains implied terms relating to the drawing of a cheque, namely that: the drawer of the cheque has an account with the drawee bank; the drawer has authority to draw on the account for the amount of the cheque; and the cheque, as drawn, is a valid order to that amount. There is no implied term that the drawer currently has sufficient funds in the account. The drawer may have an overdraft arrangement or may be anticipating the deposit of money to the account before the cheque could be presented for payment. These implied terms should not be read as a checklist. The essential content is that the drawer has authority to draw the cheque and that the cheque will be met on presentment. Thus, if A has authority to draw cheques on the account of B, it is no breach of the implied terms if A gives such a cheque to C in payment.

[page 281]

9 Payment and Payment Systems 9.1

Payment

9.1.1

Definition

‘Payment’ is the tender and acceptance of some act which discharges a monetary obligation. A monetary obligation will usually arise from contract, and the contract may specify the ‘act’ which discharges the obligation.

9.1.2

‘Money’

‘Money’ is itself a difficult legal concept. The legal concept of ‘money’ is much narrower than the economist’s definition. Mann (2005) defines it as follows: … the quality of money is to be attributed to all chattels which, issued by the authority of the law and denominated with reference to a unit of account, are meant to serve as universal means of exchange in the State of issue.

Mann’s definition requires ‘money’ to be issued under the authority of law, but not necessarily issued by the state. Notes issued by private banks were used in Australia as ‘money’ until the first Commonwealth notes were issued in 1910. The Commonwealth issue was accompanied by a new tax on banknotes which led to their quick demise. Privately issued notes are unlikely to be used again, since s 44 of the Reserve Bank Act 1959 provides: (1) A person shall not issue a bill or note for the payment of money payable to bearer on demand and intended for circulation. Penalty: 50 penalty units. (2) A State shall not issue a bill or note for the payment of money payable to bearer on demand and intended for circulation.

Stored value cards and various forms of ‘digital cash’ and ‘cryptocurrencies’, such as Bitcoin, are not money even though they are often promoted as ‘just

like cash’. Although money and ‘legal tender’ are often considered the same, there are some differences: see 9.3.5. See also the Australian Tax Office rulings on Bitcoin: . [page 282]

9.2

Payment obligations arising from contract

9.2.1

Contract may specify payment method

Most payment obligations arise from contract. The contract need not be a formal one, so that the purchase of a newspaper at a newsagent is, in law, a contract for the sale of goods. The contract may define the method by which payment is to be made, but does not necessarily do so. A high value contract, such as a the charterparty of a ship, probably will define the method of payment, but a small value contract, such as the purchase of the newspaper mentioned above, probably will not. Even when the contract specifies a method of payment, the debtor may tender a different method of payment. The creditor may refuse, but the nature of the refusal has consequences: see 9.3.

9.2.2

When contract silent

When the contract is silent on the method of payment, it is presumed that legal tender is the method: see 9.3.5 below. However, the presumption is easily displaced so that, for example, an EFTPOS machine at the merchant’s premises suggests that an EFTPOS transaction would be a suitable method of payment. If the creditor refuses tender of some method of payment other than legal tender, then the reason given for refusal has legal consequences: see 9.3.4.

9.2.3

Absolute vs conditional payments

A payment may be absolute or conditional. An absolute payment discharges the payment obligation. It cannot be revived by subsequent events. A conditional payment may be revived in some circumstances. For example, when payment is by cheque, the creditor must present the cheque for payment. If the cheque is dishonoured, then the payment obligation revives.

Any form of payment may be an absolute payment, but for non-cash payments, strong evidence will be required to establish this. It seems likely that any form of non-cash payment will be presumed to be conditional, and the presumption is a strong one. Thus, each of the following payments have been held to be conditional in the absence of strong evidence to the contrary: payment by negotiable instrument: see 8.10 payment by documentary letter of credit: see 17.4. payment by ‘trade currencies’ such as ‘credex dollars’: see, for example, Foxman v Mitzev [2006] NSWSC 1404; Aronis v Hallett Brick Industries Ltd [1999] SASC 92. [page 283] Payment by credit card is controversial. A UK case has held that the payment was absolute, but there were very special conditions in the case which are not satisfied by normal third party credit cards: see Re Charge Card Services Ltd [1987] Ch 150. See also the discussion at 9.15 and Tyree (2004). It seems likely that any form of payment which, even theoretically, admits failure or subsequent discretionary reversal will be considered as conditional.

9.3

Tender and acceptance

9.3.1

Definition

Tender is an offer by the debtor to perform some act which will discharge the payment obligation. The act may be one specified by the contract (a conforming tender), but need not be (a non-conforming tender). The creditor may accept or reject the tender. The legal consequences of acceptance or rejection will depend on whether the tender is conforming — that is, whether it complies with the obligation imposed by the contract.

9.3.2

Refusal of valid tender

Payment is incomplete unless it is done with the agreement of the parties. A creditor may refuse a conforming tender. In so doing, the creditor may be in breach of contract, but the rejection still prevents payment from being made. The consequences for this breach will depend on the particular contract. A valid tender has legal consequences even if it is not accepted. There are at

least three: the debtor may not be sued for a breach of the payment obligation; if sued for payment, the debtor may pay the sum into court and plead a defence of tender and payment into court; and where the payment is due under a sale of goods, the seller is no longer an ‘unpaid seller’ for the purposes of the Sale of Goods Act 1923 (NSW). The remedies provided to the seller by the Act no longer apply. It may not be obvious whether a tender has been accepted. A tender may be made to an agent of the creditor — often a bank. If the agent has no authority to accept the payment, then there has been no valid tender or payment: see, for example, Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47 as explained in Momm v Barclays Bank International [1977] QB 790. Further, the agent may have limited authority to accept a tender. In Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850, the contract called for payment to be made to the creditor’s banker. A payment order was delivered to the banker who accepted it even though it was late. The House of Lords [page 284] held that the creditor was entitled to reject it, since the banker was only authorised to receive the tender and obtain instructions. The banker was not authorised to accept a tender so as to affect the legal relations, and this was particularly so when the tender was non-conforming.

9.3.3

Acceptance of a non-conforming tender

A contract may call for one method of payment, but the debtor may offer a different one. A common example is that the contract calls for ‘cash’ or for ‘legal tender’, but the debtor offers to pay by cheque, electronic transfer or other method. If the creditor accepts the tender of a cheque or negotiable instrument, then payment is complete and the debt is discharged at the time the cheque is delivered: National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65. The debt will revive if the cheque is dishonoured on presentation: see 9.2.3. If the acceptance is of another method of payment, then payment is

complete at the time that method of payment is made: see the discussion at 9.14. If, however, the creditor refuses the tender, then the debt remains. The debtor may make a fresh tender at any time. There is no legal consequence for either party when the creditor rejects a non-conforming tender, but the reason given for the refusal may have consequences: see the discussion in 9.3.4.

9.3.4

Reasons given for refusal

The reason given for refusal of any tender may have serious consequences for the creditor. The courts have adopted the view that the debtor may rely on the reason given to correct the tender and discharge the obligation. Thus, in Paynter v Willems [1983] 2 VR 377, the debtor tendered a cheque which was refused on the grounds that the amount of the cheque was inadequate. The cheque was a non-conforming tender, but the debtor again tendered a cheque in payment for the revised amount. The Court held that the tender was good. The rule is very old: in Polglass v Oliver (1831) 2 Crompton & Jervis 15; 149 ER 7, a tender was made in country bank notes which the creditor was not bound to accept. However, the creditor objected only to the amount tendered, not the quality. The Court held that a new tender in country bank notes was good. Bayley B noted that there was good reason for the rule (at 18): … for, if you objected expressly on the ground of the quality of the tender, it would have given the party the opportunity of getting other money and making a good and valid tender; but, by not doing so, and claiming a larger sum, you delude him.

This passage suggests that the action of the creditor must be such as to mislead the debtor as to the quality of the tender. This view has been supported by the Hong Kong [page 285] Court of Appeal in Pacific South (Asia) Holdings Ltd v Million Unity International Ltd [1997] HKCA 641 where Godfrey JA said: So the question here becomes: was the conduct of the vendor’s solicitors such as to ‘delude’ the purchaser’s solicitors into believing that the vendor’s ground of objection was, not as to the quality of the tender, but some other ground of objection?

Other members of the Court seemed to agree, although there was

disagreement on the facts as to whether the debtor had been misled by the actions of the creditor.

9.3.5

Legal tender

Legal tender denotes coins and notes which are sufficient tender to discharge an obligation to pay in money. Australian legal tender is defined in the Reserve Bank Act 1959 (Cth) and the Currency Act 1965 (Cth). Australian notes are legal tender throughout Australia, but coins are legal tender only up to certain amounts, depending on the denominations of the coins. This is to forestall the mischievous debtor who attempts to pay a very large sum with a multitude of very small coins. The contract between the parties may prohibit payment by means of a combination of notes and coins that amount to legal tender. This is often seen, for example, in road toll booths that prohibit the use of certain smaller coins even though the combination would amount to legal tender. This is just another example of the principle that the means of payment is a matter of contract. When a contract calls for payment in legal tender, either expressly or impliedly, the tender must be for the exact amount. In other words, there is no obligation on the creditor to give change. This rule is very old: In Betterbee v Davis (1811) 3 Camp 70; 170 ER 1309, a five-pound note was tendered for a debt of 3l.10s. Le Blanc J held that it was not a good tender (at 70 and 71): The case in Lord Coke [Wade’s case] refers to monies numbered. If I tender a man twenty guineas in the current coin of the realm, this may be a very good tender of fifteen for he has only to select so much, and restore me the residue. But a tender in bank-notes is quite different. In that case the tender may be made in such a way that it is physically impossible for the creditor to take what is due, and return the difference. If 3l.10s could be tendered by a note for 5£, so it might by a note for 50,000l.

Of course, if the creditor rejects the tender for any reason other than that change is required, then a new tender of a larger amount will be a good tender: see Black v Smith Peake’s NPC 121. A tender of a larger amount will be good if no change is requested: Wade’s Case (1601) 5 Co Rep 114a; 77 ER 232; Dean v James (1833) 4 B & Ad 546; 110 ER 561. [page 286]

9.3.6

Interpretation of the payment obligation

In commercial contracts, the court will often find an intention that payment be by some means other than legal tender. This is particularly so when the sums involved are large and/or where the parties are at a distance. Illustration: Tenax Steamship v Brimnes (Owners of) [1975] QB 929 The contract called for payment ‘in cash’. The amount due was more than US$51,000 for the periodic payment of a ship charterparty. The charterers requested Hambros bank to make a telex transfer to Morgan Guarantee Trust, the New York bank where payment was due. The owners purported to revoke the charterparty on several grounds, but one of the issues was whether payment had been made. The owners contended that the telex transfer could not be ‘payment’ since the contract called for a particular form of payment — namely, ‘in cash’. The Court held that the parties did not really contemplate payment in currency, but rather in some form ‘equivalent to cash’.

See also Tankexpress v Compagnie Financiere Belge SA [1949] AC 76. The payment method must, however, be ‘equivalent’ to cash. In particular, payment is not complete until the creditor has received the right to use the funds unconditionally: see, for example, the discussion of A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314 at 9.14.3.

9.4

Payment of another’s debt

9.4.1

The problem

One person cannot discharge a debt owed to another in the absence of special circumstances. The principle is important for payment systems, since the bank is making a payment on behalf of its customer. In order to discharge the debt, some ‘special circumstance’ must exist.

9.4.2

The general rule

In Simpson v Eggington (1855) 10 Exch 845, the treasurer of the corporation of Lichfield paid Mr Eggington a year’s salary in the mistaken belief that he had the corporation’s authority to do so. The corporation repudiated the payment and sacked Mr Eggington. The issue in the case was whether the payment by the treasurer had discharged a debt owed to Mr Eggington. Parke B gave judgment, stating: The general rule as to payment or satisfaction by a third person, not himself liable as a co-

contractor or otherwise, has been fully considered in the cases of Jones v Broadhurst (9 C B 193), Belshaw v Bush (11 C B 191), and James v Isaacs (22 L J C P 73); and the

[page 287] result appears to be, that it is not sufficient to discharge a debtor unless it is made by the third person, as agent, for and on account of the debtor and with his prior authority or subsequent ratification.

The question of when a person is ‘liable as a co-contractor or otherwise’ was considered in Ibrahim v Barclays Bank Plc [2012] EWCA Civ 640. Lewison LJ reviewed the authorities and considered that they justified two propositions (at [49]): i)

Payment by a third party to a creditor under legal compulsion on account of a debt owed by a debtor will automatically discharge the debtor’s debt;

ii)

That is the case even if the legal compulsion arises out of a contractual obligation voluntarily assumed by the third party.

In a payment system, the bank is under a contractual obligation only to its customer, not to the creditor/payee. Consequently, the only way that payment by the bank may discharge the debt is for the bank to be an agent of the customer. This well-established principle of law goes far to determine the relationship between the parties in a payment system.

9.5

Common payment methods

Goode (1983) describes four of the most common methods of payment: transfer of coins or notes; transfer to creditor’s account; offset of items on a running account; and set-off. Payment by cheque is discussed at 8.10, and payment by credit card at 9.15. Payment by offset and set-off is outside the scope of this book. Payment in an international sale of goods or services is often done by means of a documentary letter of credit. Documentary letters of credit are discussed in Chapter 17. Although the transfer of notes and coins is probably the most common form of payment in terms of numbers, the method is efficient only in small face-to-

face transactions. What amounts to a ‘small’ transaction may change as other methods of payment are developed. The transfer of value to the creditor’s account is the most common noncash method of payment. In Australia, this means payment by: cheque; direct credits or debits; BPAY; EFTPOS; or the ‘pay anyone’ facility offered through internet banking. [page 288] Regular payments such as utility bills, insurance payments and salaries are often paid by direct credit or direct debit arrangements — called ‘standing orders’ in times gone by. Payment by direct credit or debit is discussed at 9.6. There is a long-term trend to substitute account transfers for all but the smallest amounts. Account transfers may be initiated by debit cards at EFTPOS terminals and/or by ‘pay anyone’ features of internet banking. EFTPOS transactions have been made even more convenient and efficient by the issue of cards with embedded RFID chips: see Tyree (2010a) for a discussion of these cards. Direct person-to-person account transfers may become practical in the near future. Since almost everyone now carries a pocket computer in the form of a ‘smartphone’, it is technically possible to make phone-to-phone connections. As the ‘New Payment Platform’ becomes operational, the possibility of a true ‘cashless society’ comes a step closer: see 9.17 for a discussion of the NPP.

9.6

Payment by account transfer

Most payments are based on ‘account transfers’: an amount from the payer’s bank account is ‘transferred’ to the payee’s bank account. ‘Transfer’ is used in an informal sense, as there is no legal transfer of liabilities. It simply means that the payer’s account is debited and the payee’s account credited. It is convenient to call the payer’s financial institution the ‘paying financial institution’ (PFI), and the payee’s financial institution the ‘receiving institution’ (RFI). Common payments that are account transfers are direct credit and direct

debit arrangements, EFTPOS, direct ‘pay anyone’ payment via internet banking, BPAY payments and, of course, a payment made by cheque. Each results in a debit to the payer’s account with the PFI and a credit to the payee’s account with the RFI. Recall that an account is a debt owed by the bank to the customer: see Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002. Therefore, any payment or payment system which involves the ‘transfer’ of funds in an account must have its legal underpinnings based on some method of transferring debts. Common terminology refers to this as a ‘funds transfer’. It is important to realise that there are no ‘funds’ transferred, merely an adjustment of the ledgers kept by the banks. This principle has been acknowledged in a number of cases. For example, in Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728, Staughton J said: An account transfer means the process by which some other person or institution comes to owe money to the [payee] or their nominee, and the obligation of [the payer] is extinguished or reduced pro tanto. ‘Transfer’ may be a somewhat misleading word, since the original obligation is not assigned (notwithstanding dicta in one American case which speak of assignment): a new obligation by a new debtor is created.

[page 289] See also Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194; Dovey v Bank of New Zealand [2000] 3 NZLR 641; European Bank Ltd v Citibank Ltd [2004] NSWCA 76. All account transfers are initiated by a payment order instructing a financial institution to debit the account of the payer and credit the account of the payee. The accounts may or may not be with the same financial institution. The payment instruction may originate with either the debtor or the creditor. A payment instruction is called a ‘credit order’ when the instruction is delivered directly to the PFI. It is a ‘debit order’ when it is delivered directly to the RFI. It is often said that a credit order ‘pushes’ the funds and a debit instruction ‘pulls’ the funds. The cheque is the classic example of a debit payment order. Although the cheque is addressed to the payer’s financial institution, it is delivered first to the payee and by the payee to the deposit financial institution. There is an important practical difference between debit orders and credit orders. When a debit order is presented to the RFI, its value cannot be ascertained until it is transmitted to the PFI. There is a period of time when the debit order poses a ‘credit risk’ since the instruction may be ‘dishonoured’,

that is, the PFI may rightfully refuse to act on it. A credit order, on the other hand, is simply not executed if there are legal reasons that the PFI may refuse to act on it: an example in the cheque system is described at 8.7.1. Although the above has been speaking of ‘accounts’, it is perfectly possible to have a ‘one-off’ payment. In this case the payer hands over cash to the PFI (or makes some other arrangement to reimburse the PFI). Similarly, the RFI may simply hold cash for collection by the payee (or implement some other arrangement to get funds to the payee).

9.7

The concept of a payment system

9.7.1

Funds transfer systems

A payment system is any commercial and legal structure that facilitates payments by a large number of payers to a large number of payees. The obvious ambiguity of this definition is probably unavoidable. Some systems allow any bank account holder to make a payment to any other account holder. Other systems restrict payees to ‘merchants’. Section 7 of the Payment Systems (Regulation) Act 1998 (Cth) contains a definition. A payment system is: … a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system.

[page 290] Since ‘funds transfer’ is not defined in the Payment Systems (Regulation) Act 1998, the definition is of little direct use. Similarly, the notion that the system ‘facilitates the circulation of money’ is of little help since, as we shall see, no funds or money is transferred. However, implicit in the notion of funds transfer is a transmitter and receiver of funds. In most modern payment systems, these are financial intuitions that hold accounts of payers and payees. A ‘funds transfer’ in such a system is a process that results in a credit to the payee’s account and a debit to the payer’s account. As noted above, in all practical systems the ‘transfer’ is initiated by a payment order. The precise form of the order will depend upon the system. Requirements of the message structure used to issue and deliver payment orders are discussed at 9.9. In economic terms, a funds transfer system facilitates the circulation of

institutional liabilities. An account in credit is a liability of the financial institution owed to its customer: see Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002. A payment method which results in a credit to the creditor’s account and a debit to the debtor’s involves the transfer of liabilities. More precisely, it involves a reduction in the liability of the payer’s institution to the payer, and an increase in the liability of the payee’s institution to the payee.

9.7.2

Substitution systems

In some systems, the primary payment obligation is taken over by a third party, with the authority of the person primarily obligated to make the payment. The most important of these ‘substitution systems’ are: documentary credits used in international trade — documentary credits are discussed in detail in Chapter 17; credit cards used in domestic commerce and in internet payments — credit cards are discussed at 9.15; and payment intermediaries primarily used for internet payments. Payment intermediaries (PIs) are interposed between the credit card holder and the merchant, providing security for both in the dangerous world of the Internet. There are a number of different systems but all share the following features: the PI obtains details from the payer, who usually ‘subscribes’ to the PI’s service. The information will typically include credit card or other banking details; certain internet merchants subscribe to the PI’s services, agreeing to receive payment via the PI — the PI will, of course, receive a fee from the merchant for this service; the PI is in a position to make a payment on the payer’s behalf, usually through some secure payment channel; [page 291] the PI has a (relatively) secure method of receiving online payment instructions from the payer; and the PI then makes the payment on behalf of the payer, debiting an account of the payer or invoicing the payer at a later time. The advantage to the payer is that their details, particularly credit card

details, need be obtained only once, either online or in person. The payer may be assured that the communication with the PI is more secure than with the relatively unknown merchant. PIs also fulfil an international money transfer function, being able to buy and sell currencies more cheaply than individuals. They may then offer international transfers at costs which undercut the local banking system. Notice that the ‘substitution systems’, including the payment intermediary, eventually rely on a funds transfer system to finalise payment obligations. Funds transfer systems form the basis of all payment systems save the new cryptocurrencies.

9.7.3

Token systems

Tokens, either metallic tokens or paper ones, have been issued by private organisations with the intention that they circulate as currency. Conceptually, and perhaps legally, the tokens represent a liability of the issuer to the holder of the token. The original token systems were banknotes issued by private banks. Bank of England notes were held to be negotiable at least by 1758 and possibly earlier: see Miller v Race (1758) 1 Burr 452. Holden suggests that Lord Mansfield may have come to the same conclusion as early as 1699: Holden (1955). The Bank of New South Wales began issuing banknotes in 1816 and continued to do so until 1910, when the first Commonwealth notes were issued. The Commonwealth issue was accompanied by a new tax on banknotes which resulted in their quick demise. Section 44 of the Reserve Bank Act 1959 now prohibits the issue of a bill or note for the payment of money payable to bearer on demand and intended for circulation, whether by a person or a state. Section 23 of the Currency Act 1965 forbids the issue of ‘a piece of gold, silver, copper, nickel, bronze or any other material whether metal or otherwise’ as a token for money: see the discussion in Tyree and Beatty (2000).

9.7.4

Cryptocurrencies

Bitcoin and other ‘cryptocurrencies’ are exceptions to the circulation of institutional liabilities. Bitcoin has no ‘issuer’ and does not represent the liability of any financial institution. There is no ‘account’, but a public ledger records Bitcoin transactions and ownership: see the discussion at 9.16.

[page 292]

9.8

Elements of a payment system

9.8.1

Essential features

As noted above, funds transfer systems form the basis of most existing payment systems. The basic elements of a funds transfer system are: participating financial institutions; the customers of those institutions authorised to initiate payment orders in the system; the customers who are authorised to receive payments through the system (often restricted to merchants); a message system for initiating payment orders; a clearing system that serves to interchange payment orders between participating institutions; and an agreed method of settlement. There must be a series of contracts to ensure that the participants all meet their obligations in the system. These consist of: Scheme Rules — a multilateral contract between the financial institutions setting out the operating rules and obligations (in the cheque system, Scheme Rules were called ‘clearing house rules’); Terms and Conditions of Use — the standard form contract between the financial institution and its customer; Merchant Agreements — if the scheme is restricted to merchant payees, the standard form contract that governs the relationship between the financial institution and its merchant customer. The Scheme Rules will contain detailed requirements on the form of payment orders, the method of their communication and the time limits on their honour or dishonour. Of course, if the system allows payments from any customer to any other customer, such as the ‘pay anyone’ feature of online banking, then there is no need for the merchant agreement. The parties do not have unlimited freedom to draft the terms of these

contracts. The Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)), various state laws such as the Contracts Review Act 1980 (NSW), and the common law all impose restraints on the freedom of contract.

9.8.2

Default rules

Payment systems have changed dramatically and will continue to evolve due to technological change. It is common to hear technologists claim that technology has [page 293] outstripped the law, and that there is either a ‘vacuum’ or a ‘clean slate’ where systems can develop that behave ‘just like money’. Not only is this incorrect, but failure to recognise existing rules and laws governing payment systems may lead to invalid contractual terms and invite unwanted government regulation. It is useful to consider a payment system with no written contracts other than the multi-lateral Scheme Rules which, in earlier times, were referred to as the ‘clearing house rules’. The common law courts established a rigid set of contractual terms regulating the relationship between the financial institution and the individual customer. Borrowing from the language of computer technology, these may be called ‘default rules’ — the rules that apply when there is no express contractual term overriding them. The following formulation of the default rules is taken from Tyree and Beatty (2000). When making a payment, the PFI pays away its own money, not that of its customer: Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002. When making a payment, the PFI acts as agent for its customer: see 9.6; and see Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002; Joachimson v Swiss Bank Corp [1921] 3 KB 110. As a consequence, the PFI is entitled to reimbursement from its customer if and only if: –

it follows its customers instructions strictly; or

–

if the error has been caused by its customer’s breach of duty: London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777; Greenwood v Martins Bank Ltd [1933] AC 51; [1932] All ER Rep 318; or

–

there is some statutory or common law defence which permits reimbursement: see 8.8.4.

As a further consequence, the customer is obliged to take care in the formation and expression of the payment instructions: London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777; Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43; 148 CLR 304. If the customer is aware that their account has been misused or that unauthorised instructions have been acted upon by the PFI, the customer has an obligation to inform the institution of the unauthorised activity: Greenwood v Martins Bank Ltd [1933] AC 51; [1932] All ER Rep 318. However, the customer has no general duty to organise business so as to protect the interests of the financial institution: Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; Westpac Banking Corp v Metlej (1987) Aust Torts Rep 80–102; National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 196. [page 294] As agent for the customer, the PFI is obliged to use its best efforts to obtain for the customer any benefit available under the scheme rules of the payment system: Riedell v Commercial Bank of Australia Ltd [1931] VLR 382. The customer is not bound by payment system scheme which deprive the customer of common law rights unless the customer is made fully aware of the rules and consequences of the rules: Riedell v Commercial Bank of Australia Ltd [1931] VLR 382; Barclays Bank plc v Bank of England [1985] 1 All ER 385. On the other hand, by using the payment system the customer agrees to be bound by any normal delays or inconveniences which flow from using the system: Dimond (HH) (Rotorua 1966) v Australia and New Zealand Banking Group Ltd [1979] 2 NZLR 739. The payment system scheme may also determine the time at which the PFI is committed to the RFI; it is probably at this point that the payer’s right of countermand is lost. Where a PFI acts on an unauthorised payment instruction, the payment is made under a mistake of fact and is prima facie recoverable: Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677; Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444; Bank of New South Wales v

Murphett [1983] 1 VR 489; Southland Savings Bank v Anderson [1974] 1 NZLR 118; and see Chapter 10. However, the payment is not recoverable if the RFI has accounted to the payee/receiver, but merely crediting the account of the payee/receiver does not prevent recovery: Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766; ANZ Banking Group Ltd v Westpac Banking Corporation Ltd (1988) 78 ALR 157. The RFI (called the ‘collecting bank’ in the cheque system) receives payment for the account of its customer, and is acting as the customer’s agent for the purpose of receiving the payment: Joachimson v Swiss Bank Corp [1921] 3 KB 110; Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194. However, the RFI acts as principal with respect to the PFI; there may be difficulties in determining its capacity at any particular time: Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyd’s Rep 194. In international transactions, there may be correspondent institutions which do not deal directly with either the payer or the payee. General agency principles apply, but the role of the correspondent at any one time may be difficult to determine. Although these propositions derive, in many cases, from the cheque system, a reading of them will show that they are based on general principles. There is little question that the principles are applicable to any payment system. [page 295]

9.9

Messages in a payment system

9.9.1

Importance of message system

The payer must have some way to inform the PFI that a payment is to be made. The message must include the amount to be paid, the intended recipient and some form of ‘routing’ that indicates how the recipient is to receive the funds. The PFI must have some way of knowing that the message was sent by its customer, and must be sure that the message has not been altered between being sent by the customer and received by the PFI. The first problem is known as ‘authentication’. It serves both to identify the

customer and as a means of the customer conferring authority on the PFI to make the payment. The second problem, to know that the message has not been altered, is known as ‘message integrity’. In modern payment systems, message integrity is largely a computer systems problem. In the cheque system, message integrity may be compromised by ‘cheque washing’: see 9.10.1.

9.9.2

Authentication and authorisation

Authentication is some procedure which verifies that the user is authorised to use the payment system. In most systems, the use of the authentication procedure also provides the evidence that the user authorises the subsequent payment. The oldest authentication method is the signature. In the cheque payment system, the drawer’s signature identifies the drawer and also provides the authorisation for the drawee institution to make the payment and debit the account. The authentication role of the signature is secondary. Its principal purpose is authorisation rather than identification. This is reflected in law by the fact that a forgery on a negotiable instrument, no matter how skilful, is a nullity. This role is explained by Kerr J in National Westminster Bank Ltd v Barclays Bank International Ltd [1975] 1 QB 654: The common aphorism that a banker is under a duty to know his customer’s signature is in fact incorrect even as between the banker and his customer. The principle is simply that a banker cannot debit his customer’s account on the basis of a forged signature, since he has in that event no mandate from the customer for doing so.

The signature may be used in conjunction with another device or procedure to provide authentication and/or authorisation. Until 2014, the credit card system used a combination of the signature along with the physical presentation of the card. Since 2014, authentication of in-person credit card payment is achieved by: presenting the card which is ‘read’ by a computer terminal; and entering a personal identification number (PIN) known only to the customer. [page 296] There are exceptions where a signature is permissible: where the card does not contain the required embedded microchip; cards issued outside Australia; and

a ‘signature preferred’ card. The EFTPOS system also relies on a card and password combination for authentication. A typical EFTPOS transaction requires the customer to swipe a card and then enter a ‘Personal Identification Number’ (PIN). The card/PIN authentication method is very weak. When cards had only a magnetic stripe holding account information, it was easy to copy the card. PINs could be ‘shouldered’: observed by a rogue by looking over the customer’s shoulder as the PIN was entered. Modern cards with a computer chip embedded are more difficult to copy, but the PIN remains a weak aspect of EFTPOS authentication. Biometric methods may be used for authentication and/or authorisation. These are colourfully referred to as ‘warm body’ methods and rely upon unique personal characteristics such as fingerprints. There is, as yet, no widespread use of these methods in Australian payment systems. Most Australian banks now offer ‘two-factor authentication’ for internet banking. This usually takes the form of a normal password to enter the facility, but any payment order entered in to the system triggers a SMS text message containing a one-time code to the user’s mobile telephone. This code must then be entered to complete authentication of the payment order. It is obvious that some authentication methods are more reliable than others. The consumer/user of the payment system seldom has an input into the choice of authentication methods, and financial institutions which operate the systems will consider the cost as a significant factor in choosing an authentication method. There is nothing inherently wrong with that, so long as regulators include the reliability (or non-reliability) as a factor in determining the allocation of loses when the system fails: see, for example, the ePayments Code, discussed at 11.6.

9.10

Electronic signatures

As noted above, signatures serve both as a means of identification and a means of authentication. The identification function works because each signature is different. The legal problems that arise are usually a result of forgery — that is, where a rogue signs another person’s name, usually attempting to make the forgery appear similar to the genuine signature. There is no obvious electronic analogue for a signature, yet electronic commerce requires some form of identification and authentication mechanism

similar to the signature. The sophistication of the ‘electronic signature’ will depend upon the demands of the underlying transactions. [page 297] The problem of electronic signatures has been addressed by the various Electronic Transactions Acts. Only the Commonwealth statute will be considered here: Electronic Transactions Act 1999 (Cth). The general aim of the Act is to permit the use of electronic communications in their dealings with government and to facilitate the use of electronic transactions generally: Electronic Transactions Act 1999, s 3. The Act adopts a general approach, declaring that a transaction is not invalid merely because it is in electronic form: Electronic Transactions Act 1999, s 8. Requirements of writing, signature, and document production and retention are all addressed by the Act. Section 10 of the Electronic Transactions Act 1999 deals with electronic signatures. It requires that a ‘method’ is used to identify the person whose signature is required and to indicate the person’s approval of the information contained in the electronic document. The method must be as reliable as is appropriate, given the purposes for which the information was communicated. Most importantly, the recipient of the message must consent to the particular method. The Electronic Transactions Act 1999 does not specify any particular ‘method’. This leaves it open to the participants to agree on a suitable method. This may be as complex as public-key cryptography or as simple as ‘signed’ emails: see Tyree (1997) for a discussion of cryptography as a solution to the digital signature problem. ‘Signatures’ on emails have been considered by the UK courts. Illustration: Mehta v J Pereira Fernandes SA [2006] EWHC 813 (Ch) An attempt to enforce a guarantee was met with the defence that the requirements of the Statute of Frauds had not been met. An email from M to JPF’s solicitors promised a personal guarantee in exchange for certain forbearance. The email was unsigned, but the email headers indicated that its source was ‘[email protected]’. The Court held that since the headers were inserted automatically in the email messages, they could not amount to a ‘signature’ sufficient to satisfy the requirements of the Statute of Frauds. The judgment makes it clear that a simple typed name at the end of the message would suffice.

Mehta was approved in Lindsay v O’loughnane [2010] EWHC 529 (QB), where it was said that a ‘signed’ email would be sufficient to satisfy the requirements of the Statute of Frauds. ‘Signed’ in this context meant including

an electronic signature or concluding words such as ‘Regards’, accompanied by the typed name of the sender: see also Orton v Collins [2007] EWHC 803 (Ch); Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2011] EWHC 56; and Freedman and Hardy (2007). [page 298]

9.10.1

Integrity of messages

It is obviously important that the message received is the same as the message sent. In technical terms, this is known as the ‘integrity’ of the message. An encrypted electronic message may be intercepted and changed by a ‘man in the middle’. Unless there is some special information attached to the message, the receiver may never know that it has been changed. The problem is not restricted to electronic messages. A written message may be subtly changed so that the receiver is deceived about the original message. It is a major problem in the cheque payment system where the message, the cheque, may be ‘raised’ or the name of the payee changed: see, for example, London Joint Stock Bank Ltd v Macmillan and Arthur [1918] AC 777; Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43; 148 CLR 304. An altered payment message means that, if honoured, the payment is made either to the wrong person or for the wrong amount. The legal issue is to consider how these losses should be allocated. As an example, there is an ongoing problem with ‘cheque washing’: parts of a cheque are obliterated with chemicals and then rewritten, usually with a new payee or amount. If done skilfully, the ‘washed’ cheque appears on its face to be a valid cheque: see Tyree (2002a) and Tyree (2002c). The problem of altered or otherwise unauthorised payment orders arises in every payment system — which party should bear the loss when a payment order is ‘forged’ so that the order does not originate with the apparent sender, or when the message is intercepted and altered in some way. Although people worry more about the security of electronic messages, the reality is that they are generally more difficult to alter than paper messages. Payment systems using electronic messages usually use proprietary terminals to originate the message, so that the only problem with establishing the sender is the aforementioned weakness of the card/PIN authentication procedure. Where the payment system permits messages to be originated through

ordinary personal computers or ‘smart phones’, authentication usually falls back on passwords and, sometimes, the physical possession of the device. Since passwords are chosen by customers, the authentication method is notoriously weak. Strong encryption generally eliminates the problem of the message being altered in transit. For a more detailed but elementary description of the encryption process, see Tyree (1997). [page 299]

9.11

Clearing and settlement

9.11.1

Background

At one time, Australians wrote nearly 4 million cheques per day. In 2010, the number had dropped to some 1.3 million and, in 2013, to 800,000. Cheques now account for less than five per cent of all non-cash payments. In spite of this decline both in numbers and in value of transactions, cheques are still an important payment instrument by any measure, and they remain convenient, since the only information necessary to make the payment is the name of the payee. In 2015, the number of cheques written in Australia dropped to 600,000 per day, with a total value of $4.9 billion. There will be a day when the cheque system is closed down, and there are good reasons to do so. The cheque system is expensive in comparison with other methods of payment, and the routing of a cheque when making a payment allows more opportunity for fraud. (Cheque payment transaction statistics are from the Australian Payments Clearing Association website: ). Still, it is worth considering the cheque system as a means of understanding the problem of clearing and settlement.

9.11.2

The concept of a clearing system

The cheque could not have achieved importance as a payment device without the existence of a sophisticated clearing system. A cheque is delivered to the payee, who deposits it with the collecting bank. The collecting bank will have cheques drawn on many different banks. The cheques must be sorted according to the identity of the paying bank and then presented to each bank for payment.

In the early days of the cheque, this process was done by hand. Clerks from each bank would sort the cheques which had been lodged for collection with their bank into groups, according to the bank on which they were drawn. Each of these bundles would then be taken to the appropriate drawee bank for payment. It is said that it was the clerks themselves who first recognised the futility of this procedure and began to meet in some central location to exchange their bundles of cheques. At first, these meetings took place on street corners, but they soon chose a more salubrious venue at a local public house. In 1773, the London bankers rented a central location to serve as the clearing centre.

9.11.3

Payments other than cheques

It is easy to see the need for clearing when the payment order is a cheque since, in the past, the cheque needed to be physically presented to the paying bank. In this case, it is easy to think of clearing as a physical process, but all payment instructions need clearing when there is more than one bank involved. [page 300] Financial institution A receives many payment orders, some directed to customers of financial institution B, some to C, etc. These payment orders must be sorted and the information sent to the different receiving institution. Each of the receiving institutions will also be paying institutions for their own customers, and must perform similar sorting and sending.

9.11.4

Clearing as an accounting and sorting procedure

Clearing is thus a sorting and accounting procedure. Information in the many payment orders must be sorted and conveyed to another institution. Since each payment order sent to another institution is an amount that must be paid to that institution, the sender must maintain a record of the total amount owed to each receiving institution. It must also maintain a record of the amounts owed to it by the various institutions that send it payment orders payable to its own customers. In a perfect world, A would have payment orders in favour of B’s customers which would precisely equal in value the orders held by B in favour of A’s

customers. In an imperfect world, the sums differ, but it is still sensible for the debtor institutions to pay only the difference to the creditor institutions. Payment orders will be ‘cleared’ periodically and the resulting debits and credits between banks established. Clearing must be distinguished from settlement. While clearing is essentially a sorting and accounting process, settlement refers both to the method of payment of the resulting sums and to the payment itself. In Australia, settlement has been effected historically by cheques drawn on special accounts kept by each bank with the Reserve Bank of Australia. Settlement is now done by electronic transfers between the accounts, but the Reserve Bank is still a central player in the process. Settlement in the funds transfer system is thus done by a funds transfer. The process described above is called ‘deferred net settlement’. Payment orders are ‘batched’ and after the accounting is done, each bank either pays or receives the determined net amount. Note that it is theoretically possible to clear and settle payment orders one at a time rather than collect them and clear them periodically. When this is done, it is called Real Time Gross Settlement (RTGS). The Reserve Bank runs such a system for ‘large’ payments. In the past, RTGS was restricted to those ‘large’ payments due to practical restrictions. Computer and networking technology has now progressed to the point where even small payments may be cleared and settled almost instantaneously. The ‘New Payment Platform’ will do just that. It is due to become operational in 2017: see below at 9.17. [page 301]

9.11.5

‘Exposure’ and deferred net settlement

Deferred net settlement raises the problem of ‘exposure’. This term refers to the amounts owed by an institution to the totality of other institutions in the clearing system. The larger the ‘exposure’, the greater the problems should the institution fail to meet its payment obligations. The failure of an institution in a deferred net settlement system is a catastrophic event. The institution will owe many other institutions as a result of the payment orders received from its customers, obligations it cannot meet. It, in turn, will be owed by the other institutions, but they will not want to hand over funds to a failed institution.

The payment system must have means of managing the resulting chaos. Should there be some form of ‘unwinding’ of payments? Is it better that the payments should stand with the losses shared by the institutions? Or should the payments stand with the losses falling on the receiving institution alone? To illustrate the operation of the system, suppose that institution A orders institution X to make a payment to B via B’s financial institution Y. This could be a direct credit order or it could be a cheque drawn by A on X, payable to B and deposited with Y. In the clearing process, X has an obligation to Y. Suppose that X fails before settlement. In the ‘unwinding’ model, the obligation of X to Y is cancelled, any obligation or payment by Y to B is cancelled, and the liability of A to make payment to B is revived (if, indeed, it was ever extinguished). Payment from A to B cannot be considered to be absolute or complete until the settlement process is completed. In the ‘absolute payment’ model, the payment by A to B stands and the loss caused by X’s failure is borne by Y, in the first instance. Payment from A to B is considered to be complete at the time when the order is accepted: see 9.14. The problem with this model is that the total obligations incurred by institution X to Y (and, of course, to all other institutions in the clearing system) may be very large, for it is not just the payment from A to B which is in question, but all of the payments ordered by customers of X to customers of Y. The losses suffered by Y may be so large as to prevent Y from meeting its obligations in the payment system. Further issues flow on from there. These are not idle questions, for as the number of participants in the clearing and settlement system grows, we can expect there to be failures from time to time. The Reserve Bank has a duty to depositors, but there is no duty — and probably no power — to ensure that any individual institution survives bad management. The method of allocating losses of a financial failure should not expose other participants to risks so large or, more importantly, so unexpected, as to cause a domino effect resulting in the destruction of the financial system. RTGS effectively eliminates the exposure problem, but other measures have been introduced to reduce the risks in the net deferred settlement system. [page 302]

9.11.6

Australian settlement structure

Settlement may be by ‘deferred net settlement’ (netting) or by RTGS. In the deferred net settlement system, payment instructions are ‘exchanged’ during the day and settled the following morning by calculating the net amounts due from or to each of the parties. Settlement is achieved by adjusting accounts held with the Reserve Bank. While net deferred settlement is efficient, it exposes the system to extreme dislocation should one of the parties fail overnight. The risk that an institution might fail before settlement of outstanding claims is known as ‘settlement risk’. RTGS permits significant reduction of settlement risk. Each payment is settled during the day as it is made. The clearing rules provide that a payment is not final until such time as settlement occurs. Both netting and RTGS reduce certain risks inherent in the payments system. Netting the gross obligations between parties substantially reduces the exposure should one of the parties default. However, until recently there were some reasons to doubt that netting could withstand a challenge from the liquidator of a failed financial institution. Netting agreements effectively give participants preferential treatment over other non-secured creditors. This is precisely what bankruptcy and insolvency legislation was designed to prevent. The Court in British Eagle & International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 held that a netting agreement was void as against public policy: see Tyree (1996). The High Court of Australia took a more technical view in International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3. On facts similar to those of British Eagle & International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390, the High Court found that the netting arrangement was effective. A slightly changed wording was held to mean that there was no preferential treatment. Should a financial institution fail, its obligations under a deferred net settlement scheme may also be subordinated to s 13A of the Banking Act 1959 (Cth). This section provides that the Australian assets of the institution must be applied in a certain order, including meeting the liabilities of the ADI to protected accounts: see the discussion at 2.3.4. The so-called ‘zero hour rule’ of winding up (commencement of winding up occurs at the beginning of the day when it actually occurs) also causes problems for a deferred net settlement system: see the discussion in Tyree (1996). These problems were addressed in the Wallis reform legislation: see Recommendation 59 Wallis (1991). Netting has been made effective by the

Payment Systems and Netting Act 1998 (Cth) and the zero-hour rule abolished for approved systems. [page 303] Until recently, it was not feasible to eliminate the deferred net settlement system. Where the payment system is concerned with large numbers of relatively small payments, RTGS was beyond the capabilities of the technology. That will change with the implementation of the New Payments Platform expected to become operational in the second half of 2017: see 9.17.

9.12

International payments

There is no global payment system. For the most part, each international payment must be processed individually, identifying the RFI and the method of settlement. The previous legal theory shows that the PFI must be the agent of the payer for the purposes of making the payment, but how does the payment order arrive at the RFI? The international banking community has established a sophisticated message system known as SWIFT — the Society for Worldwide Interbank Financial Transactions. SWIFT, established in 1973, is a non-profit cooperative society organised under Belgian law with headquarters in Brussels. It is wholly owned by its member banks. SWIFT is purely a computer message service and does not itself afford settlement arrangements. The legal relationships between the parties to an international funds transfer were considered by Webster J in 1981. Illustration: Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyds Rep 194 The plaintiffs instructed the defendant bank to transfer funds to one of their own accounts with the Bank of Industry, Commerce and Agriculture (BICAL) in Malta. It was their intention to later transfer the funds on to the National Bank. The initial transfer to BICAL was to avoid certain charges which would have resulted from a direct transfer to National. The plaintiffs did not give instructions about how the transfer was to be made. Midland chose a method that involved the National Bank. National was a correspondent bank of Midland. Midland instructed National by telex to credit the account of BICAL, which was held with the National. National then sent BICAL a credit note to the effect that they had credited BICAL’s account for the account of the plaintiffs. The result of this was that the plaintiffs’ account with Midland was reduced and their account with BICAL was increased by equal amounts (ignoring bank charges). A controller was appointed to BICAL soon afterward and it ceased all banking operations.

If these debits and credits were properly made, then the plaintiff could only prove in the BICAL liquidation. They sought recovery from Midland.

[page 304] Were the debits and credits properly made? To determine the question, Webster J considered the legal relationships between the participating banks.

9.12.1

The transferring bank

In Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyds Rep 194, Webster J held that the transferring bank, Midland, was acting as the payer’s agent, and the correspondent bank, National, was acting as Midlands’s agent. He rejected an argument that National was also acting as the payer’s agent, but accepted that Midland would have vicarious liability for National’s negligence. The distinction is important since, as is well known, an agent has a fiduciary responsibility to the principal. More importantly for present purposes, the agent’s duty is to act strictly within the terms of their authority. In Midland Bank Ltd v Seymour [1955] 2 Lloyds Rep 147, Devlin J said (at 168): It is a hard law sometimes which deprives an agent of the right to reimbursement if he has exceeded his authority, even though the excess does not damage his principal’s interests.

As an agent, the transferring bank (what we have called the PFI), must act within its authority and perform its obligations with appropriate care and skill. Acting within its authority means: paying the right person; paying the right amount; paying in a timely fashion; and observing any other special instructions of the principal. Performing its obligations with due care and skill would include choosing a reliable correspondent bank. Failure to perform its obligations properly would mean that it could not obtain reimbursement from the payer for the funds transfer. Webster J held that Midland had fulfilled all of these requirements in making the transfer.

9.12.2

The receiving bank

The RFI acts as the agent of the payee for the purpose of receiving payment. This was indicated in Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyds Rep 194, but has been reaffirmed in other cases. For example, in ANZ Banking Group Ltd v Westpac Banking Corp [1988] HCA 17, a mistaken payment was sent by the PFI for the account of a customer at the RFI. The High Court considered the case on the basis that the receiving bank acts as agent for its customer. This analysis of the PFI as agent of the payer and the RFI as agent of the payee is fundamental. It conclusively rejects early suggestions that a funds transfer might [page 305] be an assignment (see Chorley (1974)), or that a funds transfer instruction might be analogous to a negotiable instrument — a view rejected by the UK Court of Appeal in Tenax Steamship Co Ltd v Reinante Transocianica Navegacion SA (The Brimnes) [1975] QB 929, and by the House of Lords in Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850. As we have also seen, it also deals with the problem of a third party discharging a debt: see 9.4.

9.12.3

Duty to follow instructions

The agency view was stated clearly by Webster J in Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyds Rep 194. He said (at 198): [Credit transfers] are to be regarded simply as an authority and instruction, from a customer to its bank, to transfer an amount standing to the credit of that customer with that bank to the credit of its account with another bank, that other bank being impliedly authorised by the customer to accept that credit by virtue of the fact that the customer has a current account with it, no consent to the receipt of the credit being expected from or required of that other bank, by virtue of the same fact. It is, in other words, a banking operation, of a kind which is often carried out internally, that is to say, within the same bank or between two branches of the same bank and which, at least from the point of view of the customer, is no different in nature or quality when, as in the present case, it is carried out between different banks.

Note that in Royal Products the payer and the payee were the same party. Generally, the RFI must have to receive the payment on behalf of the payee — an authority which is easily inferred in most situations: see the discussion at 9.12 and 9.13.2. The agent must follow the principal’s instructions, but it is sometimes difficult to determine the precise scope of the authority given to a paying bank. Royal Products rejected the notion that instructions given to the transferring bank are to be subject to the doctrine of ‘strict compliance’ — that

is, that every part of the instruction must be given a ‘legal implication’: Royal Products Ltd v Midland Bank Ltd [1981] 2 Lloyds Rep 194 per Webster J at 199. The problem is nicely illustrated by a New Zealand case. Illustration: Dovey v Bank of New Zealand [1999] NZCA 328 The plaintiff instructed an officer at BNZ to transfer his funds to ‘his account’ at BCCI (Luxembourg). At the time of the instruction, Mr Dovey did not have an account number, but had completed arrangements to open an account. The transfer instruction called for transfer by ‘tested telex’. Instead of tested telex, the BNZ used the SWIFT message system to instruct the Midland Bank to act on its behalf. BNZ held a nostro account with Midland and instructed that this account be debited as a means of settlement. Midland paid the [page 306] amount to the National Westminster Bank for the account of BCCI (Luxembourg) shortly after 1am on 5 July 1991 London time, and BNZ debited Mr Dovey’s account. At 1pm London time, liquidators were appointed for the BCCI Group. Three days before accepting the transfer instruction, BNZ had suspended its dealing limits with BCCI. This was based both on public information and on information from its London offices. BNZ did not suspend actual dealing with BCCI, since BCCI maintained a vostro account with BNZ, which was described (at 12) as being in credit for ‘a very substantial sum in excess of the dealing limit’. BNZ did not maintain a nostro account with BCCI. BNZ was thus protected from any consequences of a BCCI collapse by virtue of its rights of set-off. None of this was conveyed to the plaintiff.

The action alleged breach of contract in three respects: BNZ had failed to carry out the transfer, and therefore Mr Dovey was entitled to have his account re-credited; BNZ breached its instructions by using a SWIFT transfer instead of the instructed ‘tested telex’; and BNZ should have warned Mr Dovey that BCCI was in difficulty. The argument that BNZ had failed to effect the transfer was misguided. BCCI had been credited with the funds. It clearly did not receive them on its own behalf, but rather for the account of the plaintiff. The ‘tested telex’ issue is more interesting. The evidence was that the plaintiff did not know anything about international transfers and that he had only used the phrase because a banker at BCCI had suggested it. The Court found, as a matter of interpretation, that it did not form an essential part of the instructions. It is clear that the plaintiff could have insisted on transfer by tested telex. If he had done so, and if the bank had accepted the instruction, the bank would

have been in breach of its authority. Since the evidence was that the SWIFT system was used in all cases of international transfers, the bank would most likely have refused to act as agent if the plaintiff had insisted on the other form of transfer. The question of whether the plaintiff should have been warned is discussed at 11.5.3. There is little scope for unclear instructions in the domestic system. Most instructions are given through dedicated EFTPOS machines or by filling in forms on a computer screen. There is obviously opportunity for mistake in the latter case, but no room for ambiguity.

9.12.4

Nature of international payments

International payments are usually credit transfers. The PFI receives its instructions from the payer/customer. The instructions will always provide for a destination, [page 307] usually something like ‘Account xyz with the ABC Bank in City, Country’. In some cases, the instructions may only name the intended payee, as in, ‘For the account of John Doe at ABC Bank’. The problem is that the PFI must find some way of ensuring that the RFI is paid. As usual, ‘paid’ means some arrangement acceptable to both parties, but will usually mean either: a credit to an account held by the RFI with the PFI (the ‘vostro’ account of RFI at PFI) or with another financial institution; or a debit to an account held by the PFI with the RFI (the ‘nostro’ account held by PFI with RFI). The payment is called ‘settlement’ in international payment transactions, since it reimburses the RFI for incurring a liability to its customer. The various methods for achieving settlement are discussed in the following section.

9.12.5

Mechanics of an international payment

The actual mechanism of the payment will depend upon the relationship between the PFI and the RFI. If PFI and RFI are in a ‘senior’ correspondent

relationship, then the transfer may be a simple matter. The two banks may maintain ‘nostro’ and ‘vostro’ accounts with each other. The meaning of ‘nostro’ and ‘vostro’ depends upon the point of view. If the PFI maintains an account with the RFI, then the account will be a nostro account from the PFI’s point of view and a vostro account from the RFI’s. Nostro and vostro accounts may be used to settle the transaction, either with a credit to the vostro account held with the PFI or a debit to the nostro account held with the RFI. Obviously, it is not necessary that both nostro and vostro accounts be maintained in order to effect a settlement. So, in this simple arrangement, the PFI advises the RFI to credit the account of the payee. The RFI does so and obtains reimbursement, either by the credit of its account held with the PFI or by debiting the account which the PFI maintains with the RFI. Where the financial institutions do not maintain a ‘senior’ correspondent relationship, then another means of settlement must be found. This will involve one or more intermediary correspondents. In the simplest case, the PFI will contact a correspondent financial institution, (CFI), with which both PFI and RFI maintain a ‘senior’ relationship — that is, they both maintain accounts with the CFI. The CFI will credit the account of the RFI and debit the account of the PFI in order to complete the transaction. More complex scenarios are, of course, possible — and sometimes necessary — but even the most complex arrangement is reduced to a series of transactions of the type described. [page 308] Virtually all international payments are now made using the SWIFT system. Although this is ‘electronic’, since the messages are passed via computer systems, it is nothing more (or less) than a messaging system. Messages must strictly conform to SWIFT rules and format requirements. The rigid message content requirements of SWIFT messages have helped to reduce errors in international payments.

9.12.6

Funds transfer cannot be taken literally

As mentioned above, a ‘funds transfer’ is a shorthand way of describing the change in institutional liabilities. As such, it is convenient. When it is taken literally, it can cause confusion even among experienced bankers and lawyers.

Illustration: European Bank Ltd v Citibank Ltd [2004] NSWCA 76 The appellant was a bank in Vanuatu. It maintained a deposit of some US$7.5 million with an American bank, Citibank NA. It wished to open a US dollar account with the respondent, an Australian bank. This was accomplished by Citibank NA simply transferring the sum to an account in the name of Citibank. Citibank in Sydney then opened an account in the name of the appellant, credited with the relevant amount. Evidence showed that banking practice (at least at Citibank) required US dollar accounts to be ‘backed’ by transactions with US banks. While this may be business practice, it is not a legal requirement. There is nothing improper about an Australian bank (Citibank) incurring a debt to a customer (European Bank) denominated in US dollars. The problem arose because a US government agency believed the funds to be the proceeds of a fraud. The agency obtained a warrant attaching the account of Citibank held with Citibank NA. Citibank claimed that this prevented it from honouring the Sydney deposit held by European Bank. This argument may have had some validity if deposits really represented ‘money in the bank’, or if ‘funds transfers’ really involved the movement of funds. The Court held that there was a debt owed by Citibank to the European Bank. There was a wholly separate debt owed by Citibank NA to Citibank. The freezing of the second account could have no effect at all on the first account. The debt owed by Citibank to European Bank was located in Sydney and was governed by the law of New South Wales. The US warrant was simply irrelevant to this account.

In the course of judgment, Handley JA noted that it was important to keep in mind the fundamental principles of banking law. He quoted from Foskett v McKeown [2001] 1 AC 102, where Lord Millett said (at 127–8): We speak of money at the bank, and as money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank

[page 309] account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There are simply a series of debits and credits which are causally and transactionally linked.

Lord Millett’s reference to the ‘clearing system (where the money flows may be in the opposite direction)’ is a reference to settlement. Citibank argued that the US warrant prevented it from meeting its obligation, since they would normally have met that obligation by transferring the account held by Citibank NA. Handley JA dealt with that argument in the same way (at 64):

Citibank would not be excused from performance because its account with Citibank NA was overdrawn and it had no available line of credit (although this is unthinkable). Nor would Citibank be excused because Citibank NA stopped payment (also unthinkable). European Bank is not affected by the state of accounts between Citibank and Citibank NA in New York. The source of the funds used by Citibank to make the repayment is of no concern to European Bank. Regardless of what Citibank did with the funds European Bank caused to be transferred to it, in the words of Lord Cottenham LC in Foley v Hill, Citibank ‘is of course answerable for the amount, because [it] has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands’ [para 60]. The state of some account held by Citibank in New York with Citibank NA could not excuse non-performance by Citibank of its obligation to European Bank in Sydney.

The lesson is clear. When considering problems arising from ‘fund transfers’, it is wise to return to first principles in analysing the problem.

9.13

Domestic payments

9.13.1

Difference from International payments

Domestic payments differ from international payments in two significant ways — namely that: the average payment is much smaller than the average international payment; there are many more domestic payments each day; and the procedures for clearing and settlement are established. The first difference means that payments have traditionally been ‘batched’. In the past, it has not been cost-effective to settle each payment individually. Advances in [page 310] computer technology mean that this is no longer true: see the discussion of the ‘New Payment Platform’ at 9.17. The second difference dictates that there must be an automatic way of handling payments, since it is impossible to customise the details of each payment. The third difference is a consequence of the other two. Domestic payments are more ‘production line’ products whereas international payments are more tailormade. The ‘automatic’ handling of payments is governed by inter-bank agreements known as ‘clearing rules’ and by the rules established by the Australian Payments and Clearing Association (APCA).

What is not different is the legal relationship between the parties. The legal relationships are discussed at 9.8.

9.13.2

Bulk payments: direct credits and debits

Bulk payments may be either direct credits or direct debits. An organisation which must make many similar payments will use direct credits. The organisation will prepare computer files in an agreed format. The file contains multiple payment instructions, each of which must indicate the account details of the individual payee. This computer file is sent by an agreed method to the paying bank. The paying bank must then split the file into separate files according to the identity of the receiving bank. Each of these individual files is sent to the appropriate receiving bank in order that the individual accounts may be credited. A direct debit system works much the same way, except that the file is prepared by an organisation which is owed payment from a number of debtors. The file is sent to the receiving bank, which must then sort it according to the identity of the paying bank. Individual files are sent to the appropriate paying bank. Until recently, the Australian direct entry system was a series of bilateral exchanges. Each pair of banks would periodically calculate the state of accounts between them and ‘settle’ by means of an adjustment of the Exchange Settlement Accounts held by each bank with the Reserve Bank of Australia. The bilateral exchange system has been replaced by a central system which handles the clearing. Each bank forwards payment information to the central system which performs the reconciliations. The central system is more efficient, but there is no significant legal difference. Settlement is still via Exchange Settlement Accounts. The payee must authorise the recipient bank to receive payment on their behalf. This does not need to be an explicit authorisation directed to the recipient bank. Generally, an authorisation may be inferred from the fact that the payee gives account details to the payer: see, for example, the implied authorisation in Dovey v Bank of New Zealand [1999] NZCA 328. In practice, direct credit participants will require a written authorisation from the payees. [page 311] Direct debit operations pose more of a threat. The individual payer is giving

another party authorisation to operate on the payer’s account. Originally, these authorisations were required to be given to the payer’s bank. In March 2000, a streamlined method was implemented, which required the payer to authorise the payee organisation directly. There is nothing wrong with the new procedure, but difficulties arose when the payer wished to cancel the direct debit arrangement. Some banks refused to act on their customer’s wishes, claiming that the customer needed to approach the organisation directly. This was, of course, wrong in law. The Banking and Financial Services Ombudsman (now the Financial Ombudsman Service (FOS)) indicated that it would take a dim view of this attitude. The problem should now be settled, since the Code of Banking Practice requires banks to act on their customers’ instructions: see 11.5.5.

9.13.3

Individual payments

Individual bank customers may order electronic payments in three separate ways. The first is the common EFTPOS purchase using the debit card and PIN. The second is via internet banking facilities, which allow payment to a known account number. The third way is the BPAY facility, which allows payments to selected merchants via the internet or telephone.

EFTPOS payments The payment instruction in an EFTPOS payment is routed via the merchant’s financial institution — called the ‘merchant acquirer’ in EFTPOS-speak. Since the instruction is sent via the receiving financial institution, it is a debit payment. The receiving bank sorts instructions according to the payer bank and, periodically, files are exchanged. The debit card and PIN serve as authentication and authorisation, much as a signature operates on a cheque: see 8.6.1 for a discussion of the role of the signature. Just as a signature may be forged, the card/PIN combination may be ‘forged’ or, more likely, used in an unauthorised manner. Unauthorised use of the card/PIN combination is more difficult to determine than a forged signature, and the matter is now dealt with by the EFT Code of Conduct: see 11.6.8.

Internet payments Individual payments made using the internet banking facility are a more recent

development. The customer must have the account number of the payee, and the browser form used has fields for the payee’s name, account number and the amount of the payment. Filling in this form and using appropriate access codes, passwords and, optionally, SMS codes, gives the paying bank authority to transfer funds to the receiving bank for the account of the payee. [page 312] Unfortunately, the internet payment facilities use the direct entry batch system. The bank receiving instruction on the internet form collects them and periodically sends them to receiving banks. The direct entry system operates entirely with account numbers. This is suitable for commercial operations but has caused some trouble with consumer payments. Consumer problems were the subject of a discussion paper by the Banking and Financial Services Ombudsman. The most difficult problem is that customers may make an error when entering the account number of the payee. This results in a discrepancy between the name of the payee and the destination account. The early response of the banks to this problem was to point to the operating rules of the direct entry system. These rules forbid reversals, and so it was argued that it was up to the customer to attempt to reclaim money from the actual (as opposed to the intended) payee. This was, of course, impossible, since the customer did not know who owned the account to which the payment was directed. Any attempt to obtain the identity from the receiving bank was met with a claim of customer confidentiality. Part of the problem was caused by the method of implementation of the internet payment facility. The order is, of course, a direct credit order, but it is one which the banks processed in the commercial bulk entry system. While it might be appropriate in a commercial bank/bank payment system to operate solely with account numbers and to have strict non-reversal rules, it is hardly appropriate for a consumer payment system. There are two things wrong with the banks’ original response: The rules governing bulk entry are binding as between institutional participants, but they cannot bind customers who are not parties to the rules. From the customer’s point of view, the payment was a mistake, with the result that recovery is governed by the laws relating to the recovery of mistaken payments: see Chapter 10.

One of the results of these observations is that the customer is probably entitled, in most cases, to recovery from the receiving bank. Further, since the payment instruction is ambiguous because of the conflict between the name of the payee and the account number, the paying bank may have made an unauthorised payment. The ePayments Code now deals with mistaken internet payments, but the treatment is entirely unsatisfactory, depriving the customer of benefits under the common law. In the author’s opinion, it amount to an officially sponsored unfair contract: see 11.6.10. For a full discussion of this problem, see Tyree (2003) and the discussion papers on the FOS website: . Recovery of mistaken payments is discussed at Chapter 10. [page 313]

BPAY BPAY is a bill payment system. It is owned by a consortium of banks and operates through a centralised agency on the basis of agreed rules. It is not connected to APCA. BPAY offers customers the ability to make payment instructions using the telephone or the Internet for a fee. BPAY is a direct credit funds transfer system, but it only permits transfers to be made to selected merchants. For available payments, it is a significant advance over the ‘pay anyone’ feature of internet banking since it identifies the payee by name, making it significantly more unlikely that a mistaken payment will be made.

9.14

Completion of payment

The time at which payment is completed is sometimes important, but not always. Unless the contract explicitly calls for it, time is not of the essence in sale of goods contracts: Sale of Goods Act 1923, s 15. The probable reason is that payment and delivery are normally concurrent conditions in a sale of goods contract, so the seller’s obligation to deliver simply does not arise if the buyer does not tender payment: Sale of Goods Act 1923, s 31. The unpaid seller may give notice to the buyer that payment is required within a reasonable time and, if payment is not tendered within that time, may resell the goods: Sale of Goods Act 1923, s 50(3). No notice is required if the goods are perishable.

Giving the notice is often referred to as ‘making time of the essence’: see Tyree (1998b). Time of payment is often of the essence in charterparties, so that the ship owner may withdraw the ship if payment is late: see, for example, Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850. Time of payment is also important in bankruptcy, since recovery of sums by the trustee or administrator may depend upon whether the payment is complete at the time of insolvency: see, for example, Momm v Barclays Bank International [1977] QB 790; A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314. The precise time of payment may depend upon the particular form of payment and the actual or ostensible authority of the receiving financial institution. Payment is complete when a negotiable instrument is delivered to the payee or to the agent of the payee who has authority to receive it: see Tilley v Official Receiver [1960] HCA 86 National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65. See also discussion at 8.10; and see Tyree (2010b). A telex transfer order is not a negotiable instrument, and delivery of it is not equivalent to payment: see Tenax Steamship Co Ltd v Reinante Transocianica Navegacion SA (The Brimnes) [1975] QB 929. ‘Payment orders’ used in interbank payments [page 314] have also been held not to be negotiable instruments: see Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850. The reasoning in these cases would extend to other message delivery systems. The reported cases have dealt primarily with credit transfers, but it is thought that the general principles which apply to any payment system are that: payment to the customer will normally be complete when the receiving bank makes a decision to accept the funds for the account of the creditor/payee; the ‘decision’ need not be a conscious decision by a human — if the payment order is not rejected by the close of business (or some other time specified by bank rules) then the payment is considered to be accepted; payment will not be complete unless the creditor/payee has an unconditional

right to the funds; and payment may not be complete if the payer purports to act outside the terms of the payer/payee contract.

9.14.1

Decision to credit

In Momm v Barclays Bank International [1977] QB 790, Kerr J found that an ‘inhouse’ transfer was complete when the bank decided to credit the payee’s account and initiated the computer process for so doing. It seems likely that the decision to credit is sufficient and that the initiation of the computer process is but one form of objective evidence that might be used to establish that the decision was actually made. There is no reason in principle why some other form of objective evidence might not establish the same fact. However, the decision to credit must be a decision to credit the account unconditionally. In some cases, the receiving bank may decide to make a provisional credit to the payee’s account as an alternative to keeping the funds in a ‘suspense account’. Such a provisional credit would not, it is submitted, be sufficient to establish completion of payment as between the payer and payee. Payment was held to be complete even though there was no actual credit made to the account in Momm v Barclays Bank International [1977] QB 790. The UK Court of Appeal came to a similar decision in Tenax Steamship Co Ltd v Reinante Transocianica Navegacion SA (The Brimnes) [1975] QB 929. It was held that a payment was complete when the bank — acting as both a paying and receiving bank — decided to debit the account of the payer and credit the account of the payee. In both Tenax Steamship Co Ltd v Reinante Transocianica Navegacion SA (The Brimnes) [1975] QB 929 and Momm v Barclays Bank International [1977] QB 790, payment was held to be complete without actual notice being given to the payee. This contradicts a suggestion in Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47 that notice to the payee is the concluding act of payment. [page 315] The Momm approach is obviously correct. The payee will often not receive notice of a payment, particularly a consumer payment, until receiving their periodic statement. It cannot be right that the payment is incomplete until that time.

9.14.2

Effect of system rules

The rules of the electronic system may also be relevant in deciding whether the bank has accepted payment on behalf of its customer. Illustration: Tayeb v HSBC Bank Plc [2004] EWHC 1529 (Comm) A transfer was ordered through the London Clearing House Automated Payment System (CHAPS). The receiving bank was concerned that the transfer was part of a money laundering operation. According to CHAPS rules, the receiving bank could either decline the transfer or send a ‘logical acknowledgement’ (LAK). Once the bank sent the LAK, the funds transfer was irreversible, according to CHAPS rules. HSBC sent the LAK, but then put a ‘marker’ on the account that had the effect of preventing the customer from drawing on the account. Later, the bank made a CHAPS transfer back to the original transferring bank. The customer sued HSBC, claiming that it owed him the amount of the transferred funds. The Court held that the transfer was complete when HSBC sent the LAK and that sending the LAK was an acceptance of the funds on behalf of its customer. At that time, HSBC became indebted to its customer for the amount of the transfer, and it could not disclaim that debt by returning the funds to the sender.

See also Tidal Energy Ltd v Bank of Scotland plc [2014] EWCA Civ 1107, where the Court of Appeal held that banking practice and the scheme rules, unknown and probably unknowable to the customer, were binding on the customer: see Tyree (2015).

9.14.3

Unconditional use of funds

The time of payment may depend upon the terms of the contract giving rise to the debt. This will be important when the express or implied terms of the contract require that payment be the equivalent of cash. Illustration: A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314 The contract called for payment ‘in cash in United States currency monthly in advance’. [page 316] Payment was due on 22 January. On 21 January, the payers instructed the transferring bank to make the payment. A telex message was sent on the due date and funds were remitted to the recipient Italian bank, but for some reason the ‘value date’ was shown as 26 January. Under Italian law the transfer was irrevocable, and it was even possible for the payees to draw on the money on 22 January, but the importance of the value date was that no interest could accrue to the payees until the 26th — indeed, if they had exercised their right to draw on the fund, they would have been required to pay the recipient bank interest. The Court held that payment was not complete on the 22nd. Although payment by credit transfer

was permissible, even though the charterparty appeared to call for cash, the transfer had to be such that the payee had the equivalent of cash. A transfer which prohibited the payee from using the funds for investment purposes could hardly be said to be the equivalent of cash.

For further discussion, see Tyree (1978) and Tyree (1982). The fact that the amount of interest involved was very small was irrelevant: see also Rick Dees Limited v Larsen [2006] NZCA 25. The same result would probably have been reached had the transfer been governed entirely by Australian law, for the transfer would be revocable by the transferring bank until the ‘value date’ and so could not be the equivalent of cash. Further, the recipient bank may well lack the authority to receive the payment as a discharge of the contractual obligation when the ‘value date’ is later than the date on which payment is due: see Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850. Of course, the ‘payee’ may ratify the bank’s action even if it does not have authority to receive the payment: see, for example, TSB Bank of Scotland plc v Welwyn Hatfield District Council and Council of the London Borough of Brent [1993] 2 Bank LR 267.

9.14.4

Authority of receiving bank

Payment cannot be complete if the receiving bank has no authority to receive the payment: see Eyles v Ellis (1827) 4 Bing 11; Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47. An extension of this principle is that payment is not complete if the particular payment received is outside the general authority of the financial institution to receive payments for the payee: see Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] AC 850. Little evidence is required to conclude that a bank has authority to receive payments for a customer. In Australia and New Zealand Banking Group Ltd v Westpac Banking Corp [1988] HCA 17, the plaintiff bank attempted to argue that the [page 317] receiving defendant bank had no authority to receive a payment for its customer. The High Court held (at 13) that the argument should fail, since: … [there was nothing in] the evidence, in banking practice or in common sense to suggest that Westpac’s authority as between [the customer] and itself, to receive payment to the credit of [the customer’s] account was limited to the amounts which it could somehow ascertain in advance were in fact due and owing to [the customer].

In Dovey v Bank of New Zealand [1999] NZCA 328, it was held that the receiving bank had authority by virtue of being named by the plaintiff as the destination for the funds, even though the plaintiff had not yet opened an account with the receiving bank. If the receiving bank does not have the authority to receive the funds on behalf of a customer, then it holds them as agent for the transferring bank until authority is received from the customer or until the transaction is reversed: see Dovey v Bank of New Zealand [1999] NZCA 328 — this is probably the correct explanation for the decision in Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1 KB 47.

9.14.5

Damages

It is useful to consider briefly the types of loss which may occur when a funds transfer fails to proceed as expected by all of the parties. The United Nations Commission on International Trade Law (UNCITRAL) has classified the nature of the losses which may occur into four categories: loss of principal; loss of interest; losses due to exchange rate fluctuations in international transfers; and consequential losses. See UNCITRAL, Electronic Funds Transfers, A/CN.9/22 1, 1982. Any system of funds transfer must adopt rules which allocate losses of the first three types among the participating institutions. While these rules might be important for an individual institution, the actual liability rule merely shifts losses around within the system and so may not be particularly important in the long run. Consequential damage is in a class all of its own. Much of the litigation has concerned late payment made under contracts in which time of payment is of the essence — that is, where time of payment is a condition of the contract, and breach is an excuse to terminate the contract. When time is of the essence, a late payment may result in substantial contractual disadvantages to the party who was required to make the payment. In charterparties (leases of ships), these losses may be very high and liability of the financial system for such losses is important. [page 318]

As an example, consider Evra Corp v Swiss Banking Corp 522 F Supp 820; 673 F 2d 951 (1981). The Court at first instance allowed the plaintiff damages of approximately $2 million when the defendant bank negligently failed to make a $27,000 payment on the value date. The action was in negligence, since the plaintiff was not in a contractual relationship with the defendant bank. The decision was reversed by the Court of Appeal on the grounds that the loss was not ‘foreseeable’. A reading of the Evra case shows that the issues might be resolved differently in Australia. The basis of the Court’s reasoning was twofold: strict interpretation of the requirements of the second limb of Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145; and acceptance that the standard of foreseeability in tort is the same as that required in contract. In the current state of law, both limbs of the argument could fail in an Australian court. The strict interpretation of the requirements of foreseeability in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 is probably precluded by the House of Lords decision in Koufos v Czarnikow Ltd (The Heron II) [1969] 1 AC 350, which imposed a test of ‘not unlikely’ — having regard to the knowledge of the parties at the time the contract was made as the measure of foreseeability required to impose liability. It is instructive to consider the facts of The Heron II. A shipowner breached a contract of carriage by delivering a cargo of sugar nine days late to the port of Basrah. The shipowner knew that the other party was a sugar merchant but did not know that it intended to sell the cargo immediately. The market dropped and the shipowner was held liable for the amount of the loss. Were the losses suffered in Evra Corp v Swiss Banking Corp 522 F Supp 820; 673 F 2d 951 (1981) less foreseeable than the losses in The Heron II? See also Baltic Shipping Co v Dillon [1993] HCA 4. The second limb of the Evra argument would have little chance in Australia, where it is generally accepted that whatever the tort test is for foreseeability, it is undoubtedly less demanding than the contractual test: see Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388; Shirt v Wyong Shire Council [1978] 1 NSWLR 631; Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383. Further, there is no problem which arises from the loss being purely economic, since it is clear that the problem fits comfortably within the Caltex test: see Caltex Oil (Aust) Pty Ltd v The Dredge ‘Willemstad’ [1976] HCA 65.

If this is correct, then it is not a very desirable outcome. Although it is right that there should be a duty on banks to use all care and skill in making the transfer, it is not obvious that the transfer system should bear all costs of mistakes, even when the mistake is caused by carelessness. If the payer chooses to become a party to a contract where such a minor default can have such major consequences, there is no obvious reason why that risk should then be transferred to a banker who has no real relationship with the payer. [page 319]

9.15

Credit cards

9.15.1

Nature of credit cards

Credit cards allow cardholders access to credit funds. The modern credit card represents a complex commercial arrangement between the card-issuer, a significant number of merchants and a significant number of customers who are issued with the card. Credit cards are usually issued by a financial institution. Most credit cards issued in Australia are MasterCard or Visa — both international cards which originated in the USA. Between 1974 and 2006, the BankCard credit card was issued by Australian and New Zealand banks. BankCard never gained international acceptance and was withdrawn in 2006. Travel and entertainment cards are similar in all respects to credit cards, save that they ordinarily require payment in full at the end of each billing period. American Express and Diners Club are the two major travel and entertainment cards in use in Australia. Credit cards are not an efficient payment mechanism, due to very high transaction costs. However, active promotion by ADIs and other businesses in the form of ‘reward’ schemes has led to a substantial increase in credit card use. For example, in 1990 there were around 18 million credit card transactions each month. By 2007, that figure had risen to 118 million per month, rising to more than 162 million per month in 2013. Credit cards have also become popular because they represent the only convenient method of making payment for telephone or internet purchases. There is a high level of fraudulent and unauthorised usage of cards in these circumstances. When used in this way, credit card transactions are subject to the operation of the ePayments Code: see 11.6.

Credit card accounts for consumers fall within the operation of the National Credit Code as a continuing credit contract: see 12.3.4. The credit card system (Bankcard, Mastercard and Visa) has now been ‘designated’ by the Payment Systems Board. Standards have been imposed, with some since revoked: see .

9.15.2

Basic operation of credit cards

There are usually four parties involved in a credit card payment. A financial institution (‘the issuer’), will provide a credit card to its customer (‘the cardholder’). A person authorised to receive payment by credit card is known as a ‘merchant’. The merchant’s financial institution is known as the ‘merchant acquirer’. In face-to-face payment, authentication and authorisation were by presentation of the card and a signature on the ‘voucher’. Since August 2014, authentication and authorisation has been by electronic terminal reading an embedded microchip together with a personal identification number. [page 320] When the credit card transaction is at a distance — via telephone, fax or the Internet — it is impossible to use standard authentication methods. The cardholder provides the card number and other details such as the security number (CVV - ‘Card Verification Value’) on the back of the card and the expiry date. The risk of fraud or unauthorised transaction is ultimately borne by the merchant, through the operation of the ‘chargeback’ mechanism. A chargeback is a reversal of the payment initiated by the card-issuer, usually at the instigation of the cardholder. The cardholder’s account will be credited and the merchant’s account debited for the amount of the disputed payment. A chargeback may be initiated when there is a dispute between the merchant and the cardholder over the quality of goods, but, more commonly, when the transaction has been conducted at a distance and the cardholder maintains that the use is unauthorised. The existence of the chargeback mechanism may have ramifications for the legal nature of credit card payments: see 9.15.4. Each merchant is given an ‘authorisation level’. Sales above this level must be ‘authorised’ by the merchant contacting the credit card scheme to receive authorisation before proceeding with the transaction. Authorisation helps to

reduce the risk of the cardholder incurring very large debts. The legal effect of authorisation is discussed at 9.15.3.

9.15.3

The legal framework

A credit card is not a legal instrument in any way comparable to a bill of exchange — it does not carry with it any legal rights or obligations. In order to use a credit card for the purchase of goods, there must be three basic contractual relationships established: a contract between the issuer and the cardholder which authorises the cardholder to use the card at authorised merchants in the way described above; a contract between the merchant acquirer and the merchant which obliges the merchant to accept the card as payment for goods or services and obliges the merchant acquirer to reimburse the merchant when the card is so accepted; and a contract for the sale of goods or services between the merchant and the cardholder by which the merchant accepts the card as a form of payment in lieu of legal tender. Each of these is discussed in the following sections.

The contract between the merchant and the merchant acquirer Although the precise terms varied, it used to be common for contracts to contain terms which obliged the merchant to accept valid credit cards and to sell goods or services at the same price as when accepting payment by cash. These terms were abolished by a Reserve Bank Standard allowing merchant ‘surcharges’, but, due to [page 321] abuse by some large organisations, the Standard was later revised to limit the amount of the surcharges: see for details on the ups and downs of the Reserve Bank’s attempts to regulate credit cards. There is ordinarily an obligation for the merchant to obtain express authorisation from the issuer before accepting the card for payment in excess of some agreed amount.

The merchant is credited with the face value of the transaction, less an agreed discount. This discount will vary with the type and size of the merchant’s business, but the range appears to be between 1.25 per cent and 6 per cent. The merchant further agrees to accept certain debits to the account. This may happen in circumstances initiated by the merchant — for example, when the merchant gives a credit for goods returned — but the issuer usually reserves the right to make a debit (chargeback) to the account when there is a dispute between the cardholder and the merchant which relates to the specific transaction. The issuer also reserves the right to debit the account when the card is on a ‘hot list’ of cards which have been stolen, when the card is counterfeit or when the signature has been forged. Illustration: Cosmedia Productions Pty Ltd v Australia and New Zealand Banking Group Ltd [1996] 434 FCA 1 The merchant agreement provided that the merchant must obtain authorisation for any sale in excess of a specified ‘floor limit’. The procedure required the merchant to telephone a number provided by the issuer and give details of the proposed transaction. The merchant was then issued with an ‘authorisation number’ to be entered on the sales voucher. The Court held that the purpose of authorisation is to ‘facilitate the transaction’, but the issuer does not guarantee that the merchant will necessarily be paid or, if paid, that the merchant will be able to retain the payment. A chargeback was permitted.

Contrary to the belief of many merchants, authorisation provides them no protection against chargebacks.

The contract between the issuer and cardholder The contract between the issuer and the cardholder is a standard form contract usually headed ‘conditions of use’, which is unlikely to be sighted by the customer prior to receiving the card. It is thought, however, that the first use of the card represents the cardholder’s assent to the conditions of use. The conditions of use typically contain undertakings by the customer: to reimburse the issuer for payments made by the issuer to merchants on behalf of the cardholder’s use of the card; [page 322] to notify the issuer in the event that the card is lost or stolen; and not to raise against the issuer any defence or counterclaim which might have been raised against the merchant in respect of the transaction. There is ordinarily also a clause which places liability for all transactions initiated with the card on the cardholder, whether or not the transaction was

authorised by the cardholder — provided that the cardholder has not given actual notice to the issuer that the card has been lost or stolen. Current practice, however, is to couple that with a ‘ceiling’ on liability. There is also a clause which permits the issuer to vary the conditions of use without notice to the cardholder. It may be that the efficacy of this clause will need to be reassessed following the decision in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80: see 3.5.2. Such clauses may also be challenged under the unfair contract terms sections of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010): see the discussion at 11.2. Where the transaction is at a distance using fax, telephone or the Internet, the ePayments Code will apply. This gives the cardholder certain rights which may be different from those in the Terms and Conditions: see 11.6. The ePayments Code will also apply when the transaction is authenticated by a PIN, which, again, will be the requirement for transactions after August 2014.

The contract between the merchant and the cardholder There seems little change in the usual contract between the merchant and the cardholder. It remains a normal contract for the sale of goods, save that the merchant looks to the card-issuer for payment of the price. The possibility of the issuer failing to meet that obligation is discussed at 9.15.4.

9.15.4

Legal problems

There are few reported cases dealing with legal problems arising from the credit card system — probably because the system works well. When there is a dispute, the amounts are relatively small and may be resolved without litigation, or the claim may simply be dropped. Since the use of the card has traditionally involved a signature, the evidence problem that bedevils electronic funds transfer systems did not arise. The only reported case in UK law concerns a failure of the card-issuer — although the individual sums were small, the total sum involved justified litigation: see Re Charge Card Services Ltd [1987] Ch 150. As previously noted, Australian credit card transactions from August 2014 are not signature based but require the use of a PIN. [page 323] The legal resolution of problems which do arise depends to some extent on

the fundamental legal nature of the credit card transaction. There seem to be only two candidates. The transaction may be in the nature of an assignment, or it may be similar to a letter of credit transaction. These models are merely convenient ways to fit the credit card into a familiar legal structure. It could be that credit cards are sui generis, and that it is more fruitful to address problems as they arise rather than by reference to a predetermined model. It may also be that the models are not appropriate for Australian-issued credit cards: see 9.15.4.

The assignment model In the assignment model, the theory is that the effect of the contractual relationships results in a debt assigned by the merchant to the card-issuer. The debt is the one owed by the cardholder that arises from the transaction in question. The argument in favour of the assignment model is that the issuer pays the merchant a discounted value, as would be expected. The contract between the card-issuer and the cardholder provides that the cardholder will not raise any of the defences against the issuer that they might raise against the merchant — a clause which would scarcely be necessary unless there were an assignment of the debt owed to the merchant by the cardholder.

The letter of credit model The second model of the transaction is that it is similar to a letter of credit transaction: see Chapter 17 for a discussion of letters of credit. Indeed, the plastic card does seem to have many similarities with the letter of credit. It is clear when the merchant accepts the credit card in lieu of payment that it is the credit of the card-issuer which is being relied upon. There is a clear analogy of payment against documents when the invoice is presented by the merchant. If it is the ‘beneficiary’ who pays the bank charges rather than the cardholder, that is no reason to change the legal analysis, but is only a reflection of the difference between consumer and commercial practice. Similarly, it is argued that the clause which prevents the cardholder from raising contractual defences is merely a recitation of the fundamental position. In particular, it is not evidence that the true legal transaction is an assignment.

Failure of the card-issuer

The nature of the legal transaction takes on importance when the card-issuer does not pay. [page 324] Illustration: Re Charge Card Services Ltd [1987] Ch 150 The card-issuing company, Charge Card Services Ltd, issued cards which were available for use at garages which had entered into an agreement with the issuing company. Because Charge Card Services Ltd normally paid the participating garages well before they were themselves paid by cardholders, Charge Card services entered into an arrangement with Commercial Credit Services Ltd, whereby debts owing or to become owing from cardholders to Charge Card Services were assigned to Commercial Credit. At the time of liquidation, some £3 million was due to the company from cardholders. The liquidator was directed to collect all sums due and at the time of the litigation had collected more than £2 million, after allowing for the costs of collection. The issue in the case was whether the entire sum collected was to go to Commercial Credit, or whether the garage owners who had not been paid at the time of the liquidation were entitled to claim the sums due them. Counsel for the garage owners argued that when cardholders filled their tanks with petrol, they contracted to pay the price displayed on the pump. If they chose to pay by card, it was conditional payment only, much as if they chose to pay by cheque. Counsel for Commercial Credit argued that the cardholder never became liable to the garage to pay for the petrol. If the garage chose to accept the garage owner’s standing offer to accept the card in lieu of cash, then the only obligation on the customer was to pay Charge Card. The garage owner must look to Charge Card to recover payment. The Court held that there were no grounds for the conditional payment argument. The essence of the agreement was that the supplier and the customer had, for their mutual convenience, each arranged to open an account with the same company, Charge Card, and agreed that any account between themselves might — if the customer wished — be settled by crediting the supplier’s account and debiting the customer’s account with the company. The Court further held that the customer’s liability to the garage owner was discharged at the latest when the owner’s account was credited, not when they were paid.

The particular features of the card scheme in Re Charge Card were enough to displace any presumption that payment by the card was conditional. Further, since Charge Card had undertaken to guarantee its obligation to reimburse the garage, it was clear that the garage owner was giving credit to the company, not to the customer. Re Charge Card was followed in Customs and Excise Commissioners v Diners Club Ltd [1989] 2 All ER 385; [1989] 1 WLR 1196. In Australia, Re Charge Card has been approved obiter, in American Express International Inc v Commissioner of State Revenue [page 325] [2003] VSC 32 and in Visa International Service Association v Reserve Bank of

Australia [2003] FCA 977.

Re Charge Card in Australia In spite of the obiter approval given to Re Charge Card Services Ltd [1987] Ch 150, there are strong reasons to confine it to its facts and adopt a different analysis. The arrangements in Re Charge Card did not allow for any concept of chargeback. Chargeback is a feature of all Australian credit cards. What happens in the event of a chargeback? Is the merchant entitled to claim against the cardholder? Re Charge Card would say ‘no’, yet this is contrary to common sense. It means that the cardholder could keep the goods or services, but the merchant is never paid. This silly outcome may be avoided if we analyse credit card payments as we do any other payment system that effects payment by the circulation of ADI liabilities. That means: the issuer makes payment to the merchant as the agent of the cardholder; payment instructions are made through use of the credit card by the cardholder; and the merchant acquirer receives payment from the issuer as agent for the merchant. Under this model, payment is complete at the time when the credit card is accepted, but the payment is conditional. The condition is a condition subsequent — that the voucher is honoured and no chargeback is initiated in the time available for chargebacks. In the event that a chargeback is initiated, then the debt owed by the cardholder revives and the merchant may seek payment directly from the cardholder. This analysis flows from the decision of the High Court in National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65. In the event of insolvency of the card-issuer or the merchant acquirer, the result would be the same as in Re Charge Card Services Ltd [1987] Ch 150. This is because the ‘payment’ has been received by the merchant in the form of a credit to the account with an ADI. Re Charge Card was badly argued, since payment in cash to the payee is never a feature of modern payment systems. For a full discussion of this, see Crawford (2002) and Tyree (2004).

Unauthorised card use As noted above, the contract between the card-issuer and the cardholder will

most likely make the cardholder liable for all unauthorised use of the card, until such time as the cardholder notifies the issuer that the card has been lost or stolen. This is usually subject to a ceiling on cardholder liability. Since the conditions of use currently place a relatively low ceiling on the liability, there is unlikely to be much scope for cases to arise. [page 326]

Chargebacks Credit card-issuers retain the right to chargeback transactions. For example, in Cosmedia Productions Pty Ltd v Australia and New Zealand Banking Group Ltd [1996] 434 FCA 1, a clause in the Merchant Agreement provided that the bank might chargeback any invalid sales transaction, any transaction where the cardholder disputed liability for any reason or where the cardholder asserted a claim for a set-off or a counterclaim. The Agreement further identified unauthorised transactions as a particular form of ‘invalid sales transaction’: see Cosmedia Productions Pty Ltd v Australia and New Zealand Banking Group Ltd [1996] 434 FCA 1. The right to chargeback a transaction is clearly a valuable method of preventing the card-issuer from becoming involved in merchant-cardholder disputes over faulty goods or services. When used in that context, it is a valuable consumer remedy and is unexceptional in its operation. However, the chargeback mechanism has also been used in circumstances where the merchant has become insolvent. For example, newspaper reports indicated that ticket holders of the failed Compass Airline received full refunds if they had paid by credit card. Ticket holders who paid by cash were, of course, in the position of unsecured creditors of the airline. The card-issuer could withhold payment from the trustee under the merchant contract since there is a ‘counterclaim’. However, for those payments already made to the merchant, the issuer’s right to reclaim the money paid would be merely a contractual right. There is no obvious reason why the issuer should obtain any priority over the general unsecured creditors. Does the cardholder have a right to require the issuer to exercise its right of chargeback? The answer depends upon whether the issuer is the agent of the cardholder for the purposes of making the payment. If the issuer is the agent, then the agent is obliged to use its rights in the interests of the principal. This is similar to the principle established in Riedell v Commercial Bank of Australia Ltd [1931] VLR 382, where it was held that the customer may obtain certain of the benefits of the clearing house agreement.

The FOS considers that the exercise of chargeback rights on receipt of a proper request from the cardholder is ‘good banking practice’: see Banking and Finance Bulletins (issued by the Banking and Financial Services Ombudsman), Bulletin 26. The FOS view is that if an account holder disputes a transaction and chargeback rights exist under the credit card scheme operating rules, then the card-issuer is obliged to exercise any existing chargeback rights, to do so carefully and to ensure that any response from the merchant acquirer is a proper one. The Code of Banking Practice has implemented this view. Clause 22 requires a bank to claim a chargeback right where one exists, provided the cardholder has disputed the transaction within the required time. The ADI must claim the [page 327] chargeback for the most appropriate reason and not accept a refusal by the merchant acquirer unless consistent with the relevant card scheme rules. For a discussion of the Code, see 11.5. See the FOS website for recent case studies on chargebacks: .

9.15.5

Criminal liability

There may be criminal liability for improper use of both credit and debit cards. Sections 134 and 135 of the Criminal Code 1995 (Cth) prohibit a range of dishonest or fraudulent behaviour which results in losses to a Commonwealth entity. The predecessor of these sections — s 29B of the Crimes Act 1914 (Cth) — was used to convict cardholders of Commonwealth Bank cards who used cards fraudulently: see R v Evenett [1987] 2 Qd R 753; R v Baxter [1988] 1 Qd R 537; (1987) 84 ALR 537. These cases have been extended to obtain convictions when a debit cardholder improperly obtains money from an ATM. In Kennison v Daire (1986) 160 CLR 129, the defendant had closed his account with the Savings Bank of South Australia but had retained his card. He approached an ATM which was ‘offline’ and was able to obtain a withdrawal of $200, since in the offline state the ATM was not in communication with the main bank computers and so was unable to determine if the defendant maintained an

account. The ATM was programmed to allow the withdrawal of up to $200 provided that the PIN keyed in matched the PIN encoded on the card. The defendant was convicted of larceny, but he appealed on the basis that the bank must be taken to have consented to the withdrawal, by programming the ATM in the way it did. That argument failed, since it was clear that the bank did not consent to the withdrawal of money by a former customer whose account was closed. More interestingly, it was argued that had the appellant approached a human teller in the bank and obtained the money either by writing a cheque or by presenting the card or by any other lawful means, then the bank must be considered to have consented by virtue of the authority of the teller to pay out the money of the bank. So, it was argued, an ATM must be taken to have similar authority to make decisions on the basis of its programming. The High Court rejected the ‘authority’ argument, holding that a machine could not be taken to have the same authority as a human teller. The Court said (at 132): ‘the machine could not give the bank’s consent in fact and there is no principle of law that requires it to be treated as though it were a person with authority to decide and consent’. If this statement is restricted to the facts of Kennison v Daire (1986) 160 CLR 129, then it is unobjectionable. However, it cannot be taken out of that context, for it is clear that there are certain ‘decisions’ which are within the scope of the machine’s [page 328] ‘authority’. Thus, if a person with an account presents a card to an ATM and requests a withdrawal which would place the account in overdraft, then there seems every reason to suppose that if the machine is so programmed as to allow an overdraft, then the overdraft is properly granted. This should be so even if the conditions of use of the debit card specify that the card should not be used to obtain overdrafts. Even in a normal transaction, if the machine cannot make decisions to allow withdrawal, then how does the bank claim the right to debit the account? The distinguishing feature of Kennison v Daire (1986) 160 CLR 129 is that there was no account and it is clear that neither a machine, nor, probably, a human teller, has authority to permit the withdrawal.

9.16

Computer money

Technical advances in computers and microchips have led to new forms of payment instruments. These are referred to generically as ‘computer money’. There are three main forms: digital cash, smart cards and cryptographic currency (‘cryptocurrency’). Digital cash and smart cards have not lived up to their early promise, probably because credit card transactions have proved to be reliable as internet payment systems. The recent rise of cryptocurrency, primarily in the form of Bitcoin, has raised other issues: see 9.16.4.

9.16.1

Digital signatures

Computer money — and internet commerce, generally — depends upon the concept of a ‘digital signature’. The problem is that electronic messages pass through an unknown number of computers. They may be intercepted, redirected and easily changed. Commerce on the Internet requires strong message integrity and authentication: see 9.9. Digital signatures are a method of applying the mathematics of cryptography to achieve both message integrity and message authentication for electronic messages. A message that has been digitally signed by the sender may not be altered without the alteration being apparent. The identity of the sender is established by comparing the digital signature with a ‘public key’ that is kept in a central register. For a detailed but elementary description of digital signatures, see Tyree (1997). In order for the digital signature system to be workable on a wide scale, the appropriate signature registers must be established. The Wallis Report recommended the establishment of ‘certification authorities’ that would be responsible for identifying individuals and certifying their digital signatures: see Recommendation 91 of Wallis (1991). Although there was some early enthusiasm for the idea, it seems to have been dropped. There are a number of private companies that provide certification services. [page 329]

9.16.2

Digital cash

The form of digital cash described in this section must be ‘issued’ by a central authority, usually a financial institution. It should be contrasted with cryptocurrency — as exemplified by Bitcoin, where there is no central authority: see 9.16.4.

Digital cash is designed to be used to make payments over the Internet. Because it is seen as primarily a low-value payment mechanism, it is common to refer to a payment unit as a ‘digital coin’. Note that although most payments will be small, there is nothing in the technology that restricts the value of a digital cash unit. A digital coin is very similar to a banknote. It is a message digitally signed by the issuer. In its simplest form, the message specifies: the issuer; the value of the coin; the expiry date (if any); the serial number of the coin; and the internet address of the issuer. Since an electronic message may be freely copied even if it is digitally signed, there must be some method of preventing ‘double spending’ of the coin, and that is the reason for the serial number. The basic system operates simply. The would-be purchaser, P, contacts the coin-issuer, CI, requesting the issue of coins of a certain value. CI sends P the coins and debits P’s account. P sends the coins to the web merchant, M, in exchange for the goods or information to be purchased. M contacts CI to ensure that the coin has not previously been spent. If it has not, then CI adds the serial number of the coin to the ‘previously spent’ database and credits M’s account. There are disadvantages to the basic system. As described here, the merchant and the customer must have accounts with the same issuer. It is obviously a simple matter to extend this model with a ‘clearing’ system to include more financial institutions. There are also more complex implementations of the digital cash system that will allow the buyer to remain anonymous. In particular, the digital cash issuer will not be able to develop spending profiles of its customers: see Tyree (1997). The legal status of digital cash is uncertain, but the simplest analysis is that it represents a debt owed by the financial institution to the customer. In other words, it is an account and the payment system built around it is an account transfer system: see Tyree (1999). There are other views: see, for example, Kreltszheim (2003).

9.16.3

Smart cards

Smart cards are similar to credit cards in appearance, but they have a microprocessor built in. This permits the card to act as a sophisticated ‘electronic purse’, maintaining [page 330] its own account system. Smart cards may be used for many purposes, but when used in the manner described here, they are often referred to as stored value cards (SVC). An SVC may be either disposable or rechargeable. Disposable cards are not much different from the special purpose magnetic stripe cards that serve as bus tickets and telephone cards. The main advantage of the SVC over these less sophisticated cousins is that the SVC has better security. It is difficult to alter the records on the card and difficult to duplicate it. The rechargeable card is linked to an ordinary account. The card is ‘charged’ by transferring funds from the account through an ATM-like device. The funds are spent with a merchant by inserting the card into a special terminal that, in effect, transfers the funds from the card to the merchant terminal. Because there is no need for an online check for adequacy of funds, the procedure is quick and inexpensive. Law enforcement agencies are concerned that computer money may be used in money transfer and laundering schemes. It is unclear to what extent the Financial Transaction Reports Act 1988 (Cth) applies to various forms of computer money, but it is clear that some amendment will be required: see Tyree (1997). The potential for making offshore payments also concerns the Australian Tax Office. It is often thought that SVCs and digital cash are outside the usual ambit of banking law. However, it helps to perform a ‘thought experiment’. We could build a card that has the same functionality as an SVC by using laser technology. A laser would write an encrypted message on the card each time it was used. Described this way, the card is just a high-tech passbook. It would be absurd if it and the electronic SVC had different legal characteristics, since they are indistinguishable in practice. This leads to the conclusion that digital coins and SVCs are account-keeping mechanisms. They represent a debt owed to the customer — that is, an

account. Such an analysis has the advantage of bringing digital money within the ambit of the normal law of banking: see Tyree (1999) and Tyree and Beatty (2000) for a full discussion.

9.16.4

Cryptocurrencies

In late 2008, the Cryptography Mailing List contained a posting by a person or persons under the name Satoshi Nakamoto. The email announced a research paper entitled ‘Bitcoin: a Peer-to-Peer Electronic Cash System’: see . According to Nakamoto, the essential characteristics of the new system are: double spending is prevented using a peer-to-peer network; there is no ‘mint’ or other trusted parties; participants may be anonymous; new coins are ‘mined’ through a cryptographic process; and the same cryptographic process is used to prevent double spending. [page 331] Nakamoto was active on the Cryptography Mailing List and in developing software to implement the ideas explained in his paper. The software and Bitcoin itself went public on 3 January 2009. The software is open source and is available for all major computer operating systems. Nakamoto disappeared in April 2011, after sending a note to one of the Bitcoin developers saying that he had ‘moved on to other things’. Their identity is still unknown. Bitcoin is said to have the following advantages: transfers are cheap in comparison with transfers through the banking system; transfers are almost instantaneous — transfers through the banking system may take several business days; no account is required by either the payer or the payee; payments may not be boycotted by traditional institutions — the system is free from the arbitrary exercise of government or private power; the algorithm used to generate, or ‘mine’, new Bitcoins ensures that the number of Bitcoins will expand at an orderly, gradually decelerating, rate until there are a total of 21 million Bitcoins.

As noted above, one of the significant developments was the control of double spending without the need for a central register. Bitcoins are true ‘digital cash’ and do not require a central issuer. Traditional digital cash, like SVCs, really represents institutional liabilities. In this sense, they are merely a different form of account. As such, they yield to traditional banking law concepts: see the discussion at 9.16.2; and see Tyree (1999). Bitcoin is different, as are other cryptocurrencies derived from it. Bitcoin does not represent an institutional liability. There is no ‘issuer’ and there is no ‘liability’. This has led some to say that Bitcoin can have no value, but a better analysis is that it is a commodity. Paying by Bitcoin is similar in concept to paying with gold or other precious metal. For further discussion of Bitcoin and similar cryptocurrencies, see Tyree (2012) and Bollen (2013).

9.17

The New Payment Platform

The New Payment Platform (NPP) began life in 2012 when the Reserve Bank published the results of a study into innovation in the payments system. The report set out objectives for a new payment system to replace the existing consumer payment system. The objectives included that: users should be able to make real-time payments; [page 332] messages should contain more information about the purpose of the payment; payment orders should be easily addressable in a form that minimises mistakes; and the system should operate around the clock. The Reserve Bank later expanded on these objectives in cooperation with an industry committee and APRA. The new infrastructure was formally proposed in February 2013. Funding was committed by a group of twelve ADIs, which became the founding members of NPP Australia Limited. NPP Australia contracted with SWIFT to design and implement the infrastructure. BPAY agreed in 2015 to become a user of the NPP once the

system is operational. The system is expected to become operational in the second half of 2017. The APRA website contains more information concerning the development and progress of the NPP: see . The NPP is expected to provide ‘near real-time’ clearing and settlement. Current indications are that this will result in clearing and settlement times of about six seconds for individual payments. The resulting elimination of all net deferred settlement for electronic payments will substantially reduce the exposure risk for the Australian Payment System.

[page 333]

10 Payment Under a Mistake 10.1

Introduction

Payments are made by mistake surprisingly often. Common examples are where: a bank pays a cheque, mistakenly overlooking a stop payment order; a bank pays a cheque in the mistaken belief that funds are available to meet the cheque; a person mistakenly pays an invoice a second time; or a person making an internet payment mistakenly enters the incorrect account number of the intended payee. These are but a few examples of a wide variety of situations where one person pays another a sum which would not have been paid had the payer known the complete facts. These situations and the legal framework which deals with them were addressed in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, where Lord Wright said (at 61): It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generally different from remedies in contract or in tort and are now recognised to fall within a third category of the common law which has been called quasicontract or restitution … Payment under a mistake of fact is only one head of this category of the law … the gist of the action is a debt or obligation implied or, more accurately, imposed by law.

10.2

Basis of recovery

Lord Wright’s dictum raises the obvious question: when is it ‘against conscience’ that a payee should keep a sum mistakenly paid? If the holder of a

valid cheque obtains payment of it before the drawer stops payment, then it is clear that they may keep the sum paid. [page 334] Is it ‘against conscience’ for the payee to keep the sum, even though the sum was obtained after the customer has withdrawn authority, or because the bank, through its own mistake, paid the cheque without realising that funds were insufficient? Is it relevant that the payee has knowledge of the payer’s mistake, such as when, for example, the payee of a cheque presents the cheque knowing that it has been countermanded? Illustration: David Securities v Commonwealth Bank of Australia [1992] HCA 48 David Securities (DS) entered into an agreement with the Commonwealth Bank of Australia (CBA) which included an option of foreign currency loans. There was a clause in the agreement which provided that DS was to pay the bank with respect to certain tax liabilities. Unbeknownst to either party at the time, this clause was avoided by s 261 of the Income Tax Assessment Act 1936 (Cth). The bank commenced proceedings against DS, claiming default under the agreement. DS counterclaimed for recovery of money paid to the CBA under the mistaken belief that the clause was valid.

Note that the mistake was the interpretation of a contractual clause. Such a mistake is one of law, as opposed to one of fact. The distinction is important, since it was long thought that there was a fundamental difference between mistakes of fact and mistakes of law. Under the law as understood, there was a potential right to recover money paid under a mistake of fact, but no such right if the mistake was one of law: see Bilbie v Lumley (1802) 2 East 469; 102 ER 448; South Australia Cold Stores Ltd v Electricity Trust of South Australia [1957] HCA 69. This distinction was based on some vague notion that the payer must be taken to know the law. Thus, in Kelly v Solari (1841) 9 M & W 54; 152 ER 24, Lord Abinger said (at 58): The safest rule … is that if the party makes the payment with full knowledge of the facts, although in ignorance of the law, there being no fraud on the other side, he cannot recover it back again …

The rule was never satisfactory. Apart from the occasional difficulty of distinguishing a mistake of law from one of fact, the rule simply makes no sense. The circumstances are, ex hypothesi, those in which the payee has no right to receive the money: see, for example, Kiriri Cotton Co Ltd v Dewani [1960] AC 192. David Securities v Commonwealth Bank of Australia [1992] HCA 48 held that there is no such difference, and that the rule precluding recovery of money

paid under a mistake of law is no part of the law of Australia. The general principle is that a person will be prima facie entitled to recover money paid in the mistaken belief that: they are under a legal obligation to make the payment; or the payee is legally entitled to receive the payment. [page 335] In David Securities v Commonwealth Bank of Australia [1992] HCA 48, it was said that the right of recovery is based on the concept of unjust enrichment. ‘Unjust enrichment’ is not a subjective concept of what is unfair or unconscionable. There must be some concrete factor such as mistake, duress or illegality. Where there is a mistake, be it of fact or law, there is no requirement that the person seeking recovery of the payment prove any ‘unjustness’ over and above mistake. The mistake itself is sufficient to give rise to a prima facie obligation to make restitution. The High Court has since backed away from the concept of unjust enrichment as a unifying concept. In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14, the majority of the Court preferred the formulation that the retention of the payment may be considered inequitable or unconscionable.

10.3

Elements of the cause of action

The essential feature of the action is that the payment would not have been made, save for the mistake. Some of the UK cases have suggested that in addition to being the cause of payment, the mistake must be ‘fundamental’: see, for example, Aiken v Short (1856) 1 H & N 210; 25 LJ Ex 321; Morgan v Ashcroft [1938] 1 KB 49; Norwich Union Fire Insurance Society Ltd v Price Ltd (1934) AC 455. This requirement usually meant that the mistake was such that, if true, the fact would have made the payer legally liable to have made the payment. There seems little sense in such a requirement, and the High Court so held in David Securities v Commonwealth Bank of Australia [1992] HCA 48, adding (at 74): The notion of fundamentality is, however, extremely vague and would seem to add little, if anything, to the requirement that the mistake cause the payment.

‘Mistake’ includes those cases — like David Securities itself — where the parties are simply ignorant of the law, as well as those cases where there is a positive but incorrect belief.

10.3.1

Negligence of payer

Although it is essential that the mistake caused the payment, it is not relevant that the mistake was caused by the negligence of the payer. Thus, in the landmark case of Kelly v Solari (1841) 9 M & W 54; 152 ER 24, an executrix received the proceeds of a life assurance policy from the plaintiff company. The company had negligently overlooked the fact that the life policy had been allowed to lapse by reason of a failure to maintain premium payments. The Court of Exchequer allowed the recovery of the money, dismissing arguments that the company should not be allowed to recover since it alone had the means of discovering the full facts but had carelessly neglected to do so. However, the Court did indicate that the position would have been different, had the company made an [page 336] intentional decision to decline to investigate the currency of the policy. In that case, it would have appeared that the company intended to make the payment no matter what the true state of the facts might be: see also Tamer v Official Trustee in Bankruptcy [2016] NSWSC 680; Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14. In some earlier cases it was argued that the mistake must be ‘between the payer and payee’: see, for example, National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654. There are obvious difficulties with interpreting the meaning of the concept, but in any case, the notion has been abandoned in both the UK and Australia: see Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677; Porter v Latec Finance (Qld) Pty Ltd [1964] HCA 49.

10.3.2

Voluntary payments

It has sometimes been said that a ‘voluntary’ payment cannot be recovered. Part of the problem is in assigning a sensible meaning to the word ‘voluntary’. If ‘voluntary’ merely means that the payer would have paid the money even knowing the full facts, then it adds nothing to the analysis. In that case, the mistake was not the operative cause of the payment, and there are no grounds for the action. In some of the earlier cases, ‘voluntary’ appeared to mean that, assuming the mistaken facts to be true, the payer is under no legal obligation to make the

payment. The cases are confusing and inconsistent, mainly because it has never been clear to whom the obligation must be owed: see, for example, Aiken v Short (1856) 1 H & N 210; 25 LJ Ex 321; Morgan v Ashcroft [1938] 1 KB 49. The question is important to the paying banker, because the payment of a cheque is ‘voluntary’ if the requirement is that a legal duty be owed to the payee of the cheque. If, however, the duty may be owed to some third party, then the payment is not ‘voluntary’, for the banker owes a contractual duty to the drawer of the cheque. The meaning and effect of ‘voluntary payment’ was considered in David Securities v Commonwealth Bank of Australia [1992] HCA 48, and it was said (at 70–1): The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law of contractual provision requiring the payment is, or may be invalid, or is not concerned to query whether the payment is legally required; he or she is prepared to assume the validity of the obligation, or is prepared to make the payment irrespective of the validity or invalidity of the obligation, rather than contest the claim or payment. We use the term ‘voluntary’ therefore to refer to a payment made in satisfaction of an honest claim rather than a payment not made under any form of compulsion or undue influence.

The majority indicated that ‘voluntary’ payments would not be recoverable, on the policy grounds that the law should uphold bargains and enforce compromises freely entered into. [page 337] Brennan J in dissent criticised this approach, arguing that it would include payments which were obtained under compulsion or duress. He argued that ‘voluntary’ must relate to the mind of the payer. Honest compromises would be protected under Brennan’s argument by a rule that payment may not be recovered where the defendant payee ‘honestly believed, when he learnt of the payment or transfer, that he was entitled to receive and retain the money or property’ (at 92). Prior to David Securities v Commonwealth Bank of Australia [1992] HCA 48, it had been argued that the meaning of ‘voluntary’ adds nothing to the basic requirement that the mistake must be the cause of the payment. In Porter v Latec Finance (Qld) Pty Ltd [1964] HCA 49, Barwick CJ said (at 27): There is some possibility of confusion when dealing with the subject matter of the recovery of payments said to have been made under mistake in speaking, as some of the cases do, of the payments being ‘voluntary’, as if a voluntary payment made to the wrong person could never be recovered. It is preferable in my opinion to test the matter by determining whether the mistake is fundamental to the transaction, properly identifying the transaction and the relationship of the

mistake to it. Such a course is, I think, universally valid although as yet the subject of money paid under mistake is not fully exhausted by decision.

Note that Barwick here is using the word ‘fundamental’ merely in the sense of identifying the cause of the payment. His comments were followed in Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444. The Victorian Court of Appeal addressed the ‘voluntary’ question in Hookway v Racing Victoria Ltd [2005] VSCA 310 where Ormiston J said (at [21]): … a payment may relevantly be involuntary if the will of the payer is affected by a mistake, so long as the mistake (relating to facts or law) causes that person to make the payment upon a false assumption which, if the truth were known, would have resulted in no payment being made, nor any desire to pay.

It seems very unlikely that we have heard the last word on ‘voluntary’ payments. Whatever the meaning of the word, it is doubtful that rules of recovery may be based on whether the plaintiff did or did not ‘want’ to make the payment: for a good discussion of the issue, see Birks (1993).

10.3.3

Mistake of fact/law

As noted above, prior to David Securities v Commonwealth Bank of Australia [1992] HCA 48, a mistake of law was not grounds for recovery. In both New Zealand and Western Australia, legislation placed mistake of law on an equal footing with mistake of fact: Judicature Act 1908 (NZ) s 94A and Property Law Act 1969 (WA) s 124. [page 338]

10.3.4

Whose mistake?

The mistake must be on the part of the payer. It is not relevant that the payee was or was not mistaken: see, for example, Westminster Bank Ltd v Arlington Overseas Trading Co [1952] 1 Lloyds Rep 211. This does not mean that the knowledge of the payee is irrelevant, for if the knowledge of the payee is such as to make the receipt of the money fraudulent, then they will not be able to retain the money — no matter what defence might be otherwise available. In many cases, perhaps most, payment will be made by an agent. This is so, for example, when a teller makes a mistaken payment of a cheque which has been stopped by the drawer. Is the mistake of the agent sufficient to ground recovery by the bank? The rule is expressed succinctly by Lynskey J in Lloyds Bank Ltd v Brooks (1950) 6 LDAB 161 (at 164): ‘if the hand that pays the

money, even though it is only that of an agent, is acting under a mistake of fact, that payment is a payment made under a mistake of fact’. This will be true even if some other agent of the bank had full knowledge of the facts, provided only that the agent with full knowledge is not aware of the payment being made on erroneous facts. In other words, the principal does not have the knowledge of all of its agents for these purposes: see Turvey v Dentons (1923) Ltd [1953] 1 QB 218 at 224; Secretary of State for Employment v Wellworthy (No 2) [1976] ICR 13.

10.4

Defences

A complete review of cases concerning the recovery of payment under a mistake of fact was undertaken by Robert Goff J in Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677. He summarised his findings as follows: (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 (i)

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;

(ii) 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; (iii) the payee has changed his position in good faith, or is deemed in law to have done so.

This statement was quoted with approval by the High Court in David Securities v Commonwealth Bank of Australia [1992] HCA 48 (at 48) and must now be taken to cover payment under mistake of law as well. [page 339] Certain circumstances in which the payment was made to an agent must be added to this list. These circumstances will be of the utmost importance to a bank carrying out a payment order, since the payment will very often be made not to the intended payee but to the agent of the payee — the receiving bank: see 10.4.1. There are also circumstances where a good defence might ordinarily be made, but there is some additional fault on the part of the defendant which will permit the plaintiff to recover: see 10.4.4. Finally, there are some special rules which are thought to apply to payment on a negotiable instrument: see 10.5.4. We have already discussed the meaning of the first defence — that the payer

intended the payee to receive the money at all events: see 10.3.

10.4.1

Payment to an agent

When money is paid by mistake not to the principal in the transaction but to an agent, the agent will not be obliged to refund the money if it has been paid over to the principal or if the agent has, in reliance on the payment, done something which has otherwise altered the relationship between the agent and the principal. But this rule applies only if the agent receives the money purely as a ‘conduit’ to the principal. It has no application if the money is received by the agent payee as principal in their own right, nor if the receipt is in consequence of some wrongdoing to which the agent was a party. In these latter cases, liability to the payer will remain even if the agent has already accounted to the principal. Illustration: Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766 The plaintiffs were agents of the Crown charged with, inter alia, payment of pensions to retired officers of the British colonial civil service. To collect the sums due, a pensioner would fill in forms, including a witnessed certificate to the effect that the pensioner was still alive. The forms were provided by the plaintiffs, but in most cases the pensioner would present the completed forms for payment through the pensioner’s own bank. The defendant bank acted as an agent for the collection of the pension of a customer named Gibson. For more than five years, forged forms and certificates had been forwarded through the defendant bank and paid by the plaintiffs. Neither the plaintiff nor the defendant bank was aware that Gibson had been dead for at least that amount of time. The plaintiffs sought recovery of the sums as money paid under a mistake of fact. Although the plaintiffs were prima facie entitled to recover, the Court of Appeal held that they must fail, since the defendant bank was innocently acting for a principal to whom they had passed on the money. Note that the actual principal was the rogue, rather than Gibson (with whom the bank thought it was dealing), but that did not alter the application of the general principle.

[page 340] Gowers was approved by the High Court of Australia in Australia and New Zealand Banking Group Ltd v Westpac Banking Corp [1988] HCA 17. Acting under instructions from a customer, the plaintiff bank was to transfer around $14,000 for the credit of a customer of the defendant bank. Due to a clerical error, the sum transferred was around $114,000. The higher sum was credited to the account of the customer of the Westpac bank, and the customer was allowed to draw all but $17,000 against the account before the error was discovered. The customer of Westpac agreed to repay, but was wound up after repaying only $2,500.

Most of the litigation concerned the amount which Westpac was obliged to repay. In the Supreme Court, Clarke J found that the plaintiff was entitled to the whole $100,000 less the $2,500 which the customer had already repaid. The Court of Appeal reduced that sum to about $39,000. The High Court reduced the sum even further to $17,000 on the principle outlined in Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766. The different amounts awarded by the Court of Appeal and the High Court are attributable to different evidence concerning the amount actually paid over to the customer by Westpac. The High Court in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 appeared to treat the Gowers principle as a change of position defence: see comments by French CJ at [7]. Finally, to establish the Gowers defence, the money must be paid to the real principal. In Citigroup Pty Ltd v National Australia Bank Ltd [2012] NSWCA 381, the money was paid to a fraudster rather than to the real principal. Barratt JA noted that the Gowers defence failed for that reason.

10.4.2

Payment made for good consideration

When a payment is made for good consideration — in particular, when the receipt by the payee discharges a debt — then it can hardly be ‘against good conscience’ for the payee to retain the payment. Illustration: National Mutual Life Association of Australasia Ltd v Walsh (1987) 8 NSWLR 585 Because of the fraud of a third party, the defendant was paid substantial commissions by the plaintiff over a period of more than a year. Although the payments were made under a mistake of fact, Clarke J held that they were not recoverable. The defendant established that he had spent some 18 to 24 hours each week on work which was associated with the fraudulent claims. As a result of that, he was unable to seek other business. Further, but for the mistaken payments, he would have sought other employment and other opportunities. Clarke J found that this constituted consideration moving from the defendant.

[page 341] Walsh is not entirely satisfactory, since the ‘consideration’ provided by the defendant was nothing that was the result of a bargain between the parties. At the time of the Walsh case, the defence of ‘change of position’ was not fully recognised. There is little doubt that the defendant suffered a ‘change of position’ in reliance on the payments: see discussion of the ‘change of position’ defence at 10.4.3. Other problems with this defence of ‘consideration’ arise when the payment

is made by a third party, typically a bank. A payment by a third party is effective to discharge a debt only if: the person who makes the payment has a personal obligation to make the payment; the payer had actual or ostensible authority to do so; or the debtor later ratifies the payment expressly or by implication. The principles are quite old. Illustration: Aiken v Short (1856) 1 H & N 210; 25 LJ Ex 321 The plaintiff bankers had taken an assignment of an interest in an estate as security for advances made to one Carter. It was later learned that Carter had given a previous assignment of the same interest to the defendants and that the first assignment had priority. The plaintiffs then made arrangements to pay off the debt owed by Carter to the defendants and so gain a first interest in the estate. It was then learned that Carter had no interest to assign. In an action to recover the payment as money paid under a mistake of fact, the plaintiffs failed — in part because the payment had been made for good consideration. Carter owed the money to the defendant and the plaintiff was authorised by Carter to make the payment, and so the debt was discharged. Although the payment was made under a mistake of fact, it could not be recovered.

The High Court in David Securities v Commonwealth Bank of Australia [1992] HCA 48 affirmed that consideration may provide a defence to the action for money paid under a mistake and also clarified certain aspects of the defence. Where consideration may be ‘apportioned’, the defence may be partial, allowing the plaintiff to recover some, but not all, of the moneys paid. For these purposes, there is a total failure of consideration when the plaintiff has not received any part of that which was bargained for, and it is not directly relevant that they may have received some other benefit: see David Securities v Commonwealth Bank of Australia [1992] HCA 48 (at 55 and 56).

10.4.3

Change of position

Although Robert Goff J listed ‘change of position’ as a defence, the scope of the defence was unclear. It has long been thought that ‘change of position’ is different from the defence of estoppel. Section 125(1) of the Property Law Act 1969 (WA) and [page 342] s 94B of the Judicature Act 1908 (NZ) are two examples of statutes which introduced ‘change of position’ as a defence. The New Zealand section has been repealed, because the defence was held to be available at common law:

see National Bank of New Zealand Ltd v Waitaki International Processing (NI) Ltd [1999] 2 NZLR 211. In considering the New Zealand provision, in Thomas v Houston Corbett & Co [1969] NZLR 151, the Court of Appeal noted (at 164): ‘the only available defences to [an action for recovery of money paid under a mistake of fact] are true estoppel and s 94B of the Judicature Act …’. On this view, ‘change of position’ is different from the general principle of estoppel. The High Court in David Securities v Commonwealth Bank of Australia [1992] HCA 48 made it clear that change of position is a defence. In the words of the Court (at 59): … a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.

When has the defendant ‘acted to their detriment on the faith of the receipt’? The High Court offered only a negative answer, noting that it is not a change of position where the defendant has simply spent the money received on ordinary living expenses. A change of position defence cannot be maintained against a payer unless the change was induced ‘on the faith of the receipt’ — that is, in honest reliance that the receipt was justified. In State Bank of New South Wales Ltd v Swiss Bank Corp (1995) 39 NSWLR 350, the State Bank received a payment through the New York-based Clearing House Interbank Payment System (CHIPS). Relying in part on the fraudulent information supplied by its customer, it paid the funds to the customer. The Court of Appeal held that the change of position defence was not available since the bank had relied not on the receipt, but on the fraudulent representation of its customer. At the time, it was thought that the information relied upon must come from the payer in some form other than the mere receipt of the money. Illustration: Orix Australia Corp Ltd v M Wright Hotel Refrigeration Pty Ltd [2000] SASC 57 T obtained a cheque from Orix, made payable to the first respondent. T delivered the cheque in an envelope which contained on its face the name of a business run by T and which owed money to the respondent. The director of the first respondent, [page 343] B, believed that the cheque represented payment of the money owed. T, however, later explained

that the cheque was for the supply of a machine which was no longer available. Upon hearing that, B wrote a cheque in favour of T repaying the money. The Court held that this amounted to a change of position. In response to the argument from State Bank of New South Wales Ltd v Swiss Bank Corp (1995) 39 NSWLR 350, the Court noted that B’s belief was induced by the circumstances of the payment. Orix itself had created the circumstances in which B’s belief was formed.

Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 tested and probably extended the change of position defence. The respondents, Hills Industries and Bosch, received payments from Australian Financial Services and Leasing (AFSL). The payments were induced by the fraud of S, who presented false invoices to AFSL. S then represented to the respondents that the payments from AFSL were to discharge certain debts owed to the respondents. AFSL sought recovery of the payments as money paid under a mistake of fact. The respondents relied on the change of position defence. In particular, it was argued that they: treated the debts as discharged; continued to trade with S and companies associated with him; gave up opportunities to pursue legal remedies against the companies and their directors; and gave up opportunities to take other steps to improve their position, such as seeking securities from third parties. The problem for the respondents was that they could not quantify this change of position. In the language of the appellants, they could not show the extent to which they were ‘disenriched’. The respondents argued that the change of position defence did not require quantification of the detriment suffered. The ‘disenrichment’ analysis argues that the change of position defence operates only to the extent to which the defendant remains enriched following a change of position. Following this train of thought, the appellant argued that the debts discharged were largely worthless — that the respondents would never have successfully recovered more than a nominal amount. The High Court rejected such a ‘disenrichment’ analysis, and held that the defendant should be protected whenever it is ‘inequitable’ for the plaintiff to recover wholly or in part. When is it ‘inequitable’? The High Court embarked on a careful study of the history of the defence, holding that it applied

whenever the defendant suffered a substantial detriment. In particular, the detriment: does not require ‘a mathematical assessment of enduring economic benefit’ (at 84); [page 344] need not consist of expenditure of money or other quantifiable financial detriment (at 88); and was ‘irreversible detriment’ at the time when the demand for repayment was made (per French CJ at 27–30 and at 95 and 96). In a separate judgment, Gageler J analysed the change of defence position as a special case of estoppel. This analysis was applied by the Victorian Court of Appeal in Southage Pty Ltd v Vescovi [2015] VSCA 117.

10.4.4

Fault of the defendant

It is well established that the defence of estoppel will fail if there is some ‘fault’ on the part of the defendant. Although the exact scope of ‘fault’ is unclear, it is certain that any fact which indicates that the defendant had notice that the representation was incorrect — or knew of some material facts which would have made the payer recognise their mistake — will disentitle the defendant from relying on the mistake. The position was stated precisely by Lord Brampton in George Whitechurch Ltd v Cavanagh [1902] AC 117 (at 145): … no representations can be relied on as estoppels if they have been induced by the concealment of any material fact on the part of those who seek to use them as such; and if the person to whom they are made knows something which, if revealed, would have been calculated to influence the other to hesitate or seek for further information before speaking positively, and that something has been withheld, the representation ought not to be treated as an estoppel.

Although there does not appear to be any direct authority, the same analysis should apply when the defence is based on a change of position.

10.4.5

Payee knowledge

Special considerations arise when the payee knows that the payment is a mistaken one. In Westpac Banking Corp v Ollis [2007] NSWSC 956, there was a computer ‘glitch’, which allowed the defendant to draw cheques against an account that the bank thought was frozen. The Court found that the

defendant discovered the ‘glitch’ and deliberately took advantage of it to draw cheques to an amount of some $11 million — much of it transferred to the second defendant. Einstein J noted that ‘without more’, the recipient of funds paid under a mistake of fact obtains good title to the funds. However, where the payee knowingly received funds and exploited the mistake, the money received was held on trust for the payer. Since the second defendant had knowledge of the source of the funds, she was held liable under the principles of Barnes v Addy (1874) 9 Ch App 244. The NSW Court of Appeal dismissed an appeal: Shields v Westpac Banking Corp [2008] NSWCA 268; see also Evans v European Bank Ltd [2004] NSWCA 82; MBF Australia Ltd v Malouf [2008] NSWCA 214. [page 345] It seems that an innocent payee may become a constructive trustee of the funds upon becoming aware of the mistaken payment: see Wambo Coal; Heperu Pty Ltd v Belle [2009] NSWCA 252; Fistor v Riverwood Legioin and Community Club Ltd [2016] NSWCA 81; Focus Metals Pty Ltd v Babicci [2014] VSC 380.

10.5

Payment orders

A bank that pays a third party under a mistake may wish to recover the money from the payee, either because the bank is unable to debit the customer’s account or because, although the debit is able to be maintained, the right is worthless due to the customer’s insolvency or for some other reason. There seem to be three different circumstances — namely where the bank: follows a payment order mistakenly believing that the account of the customer is adequate to cover the cheque; follows a payment order mistakenly believing that there is authorisation to do so, when in fact the authority has been validly withdrawn; and follows a payment order believing it to be a valid mandate from the customer, when in fact it is an unauthorised order. Most of the earlier cases concerned a bank paying out on a cheque. In these cases, the bank’s right to recovery has been complicated by the cheque’s other function as a negotiable instrument. The law concerning the recovery of money paid by mistake on a negotiable instrument has been influenced by the need for certainty when dealing with such instruments. A view emerged which favoured finality of payment in those circumstances where there was some possibility of detriment to the person receiving payment.

The modern trend is to bring the law concerning payment on a negotiable instrument more into line with the general law of recovery. As will be seen at 10.5.4, it is likely that the Cheques Act 1986 (Cth) has completed this trend in the case of cheques by removing the requirement of notice upon dishonour. If that is correct, then problems of mistaken payments of cheques may be solved by the application of the general principles, although even here there remains some disagreement as to how those principles apply.

10.5.1

Insufficient funds

When the bank pays a customer’s order in the mistaken belief that there are sufficient funds, the payment is not recoverable from the payee. The bank has the authority from its customer to pay the amount and to debit the account — the writing of the cheque has long been treated in law as a request for an overdraft and the same reasoning applies to other forms of payment: see Cuthbert v Robarts, Lubbock & Co [page 346] [1909] 2 Ch 226; National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust [2016] NSWCA 242. This factual situation thus falls squarely within the second category mentioned by Robert Goff J: see 10.4. The bank has followed a valid mandate and the debt owed by the drawer to the payee is thus discharged. The bank is no longer entitled to recover, according to Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677: see 10.5.2. Recovery by the bank may also be justified by the fact that the payee has given consideration, namely, the discharge of the debt. This analysis does not fit well with the High Court’s view that consideration as a defence should focus on the payer. What consideration has the bank received for the payment? Perhaps it could be argued that it has ‘received’ the right to claim the payment from the drawer of the cheque and that this is what it bargained for. Alternatively, and perhaps more transparently, it could be argued that the payee has, as a result of the payment, changed their position. Since the cheque has been paid, the payee no longer has a right of action on the original debt against the drawer of the cheque. Unfortunately, this argument has been rejected when applied to the ‘cheque stopped’ category of cases.

10.5.2

Cheque stopped

When payment is made on a cheque or payment order after the authority has been validly withdrawn, it now seems clear that the bank is prima facie entitled to recover, although the logic of the position is not satisfactory. There have been several Australian and New Zealand cases of mistakenly paid stopped cheques which have allowed recovery: see Commercial Bank of Australia Ltd v Younis [1979] 1 NSWLR 444; Bank of New South Wales v Murphett [1983] 1 VR 489; Southland Savings Bank v Anderson [1974] 1 NZLR 118; KJ Davies (1976) Ltd v Bank of New South Wales [1981] 1 NZLR 262. The most thorough analysis has been made by Robert Goff J in Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677. The facts were not extraordinary. A housing association drew a cheque on its account with the plaintiff bank in favour of a building company. There were, at the time, adequate funds available to meet the cheque. However, the following day, a receiver was appointed to the payee company and the association gave immediate instructions to stop payment of the cheque. Due to an oversight, payment of the cheque was made by the plaintiff bank, which then sought recovery from the receiver. There is clearly a prima facie case for recovery, for, if the facts had been known, the bank would not have made the payment. As to the possible defences, the Court held that there was no discharge of the debt, stating (at 542): … since the drawer had in fact countermanded payment, the bank was acting without mandate and so the payment was not effective to discharge the drawer’s obligation on

[page 347] the cheque; from this it follows that the payee gave no consideration for the payment, and the claim cannot be defeated on [the second] ground.

As to the defence of change of position, in Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677, the Court stated (at 542): … there is no evidence of any actual change of position on the part of either of the defendants or on the part of the [collecting bank]; and, since notice of dishonour is not required in a case such as this, the payee is not deemed to have changed his position by reason of lapse of time in notifying them of Barclays’ error and claiming repayment.

Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677 has been criticised on several points. In particular, it has been said that since the cheque has been paid, it is discharged, and the payee no longer has any rights on the cheque. If that is correct, then the payee has only the action on

the original debt — an action which is not nearly so advantageous as the action on the cheque: see Goode (1981). This would seem to be a clear ‘change of position’, which should entitle the payee to retain payment. The argument was raised in Bank of New South Wales v Murphett [1983] 1 VR 489, but was rejected by all members of the Victorian Full Court. The attitude of the Court was expressed bluntly by Starke J, who said (at 493) that if ‘… this claim succeeds [the cheque] will in fact not have been paid’. That is a most curious comment, for the Cheques Act 1986 clearly defines payment in due course of a cheque and the consequences which flow from it: Cheques Act 1986, ss 78 and 79. It is difficult to see how success in an action for the return of money has the effect of payment never having been made. The effect is to create a doctrine of revival of a discharged cheque — a doctrine that certainly receives no support from the Act itself. It is a doctrine which certainly requires more consideration than the short statement in Murphett. A second criticism of Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677 is that although the bank lacked actual authority to pay the debt of its customer, it had apparent authority to do so. Since that is sufficient to discharge the debt, there is good consideration given by the payee and, as argued above, the payee has changed position. This argument was accepted in Majesty Restaurant Pty Ltd (in liq) v Commonwealth Bank of Australia (1998) 47 NSWLR 593, but was rejected in Lloyds Bank plc v Independent Insurance Co Ltd [2000] QB 110. In the Independent Insurance case, the Court noted that apparent authority is a form of estoppel and that there is no representation made by the bank upon which the payee relies. That reasoning is supplemented in Australia by the nonexcludable statutory right of countermand given by s 90 of the Cheques Act 1986. Majesty Restaurant was not a case of a stopped cheque, but one in which there was only one signature where two were required. [page 348] When the mistaken payment is of a payment order other than a cheque, then the ‘change of position’ argument is much weaker. The debt is not discharged, but the payee is in the same position after recovery as before.

10.5.3

Simms in Australia

Under Australian law, the argument in Barclays Bank Ltd v W J Simms, Son &

Cooke (Southern) Ltd [1980] QB 677 is flawed at the very first step. When the housing association handed the cheque to the creditor, the debt was conditionally discharged. The condition was that the cheque would be paid when presented. This was done, and the debt was therefore discharged: see National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65 and the discussion of payment by cheque at 8.10. This does not appear to have been argued in any of the cases on recovery of mistaken payment by the bank. In summary, the cases seem to establish that the bank has a right to recover money which it has paid when overlooking a stop payment order on a cheque and, presumably, when authority is withdrawn from other forms of payment orders. However, the Simms argument depends upon the debt not having been paid by the cheque. Simms assumes that the debt is only paid at the time when the cheque is paid by the paying bank. This is not the law in Australia. If that argument be accepted, then it gives rise to an anomaly: mistaken payment is not recoverable when it is on a stopped cheque, but would be recoverable when the mistaken payment is made on a payment order where authority has been withdrawn. See Scott (2006) for a discussion of Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677 and a different view of its deficiencies. See also Tyree (2005) and Tyree (2010b) for a discussion of payment by cheque.

10.5.4

Forgery: the rule in Price v Neal

When one or more of the signatures on a cheque is forged, then the bank would not pay the cheque if it knew the full facts. Because of the statutory defence given to the bank when the forged signatures appear as indorsements, the bank will ordinarily attempt to recover from the payee only when it is the drawer’s signature that is forged. At one time, it was thought that the person making the payment might be taken to be making a representation that the signatures were genuine, but the modern trend is to assimilate the rules of such payments to those of the general payment under a mistake. Illustration: Price v Neal (1762) 3 Burr 1354; 97 ER 871 The plaintiff was the drawee of two bills of exchange, of which the defendant was holder. The first bill was presented to Price for payment and it was paid promptly. [page 349] The second bill was accepted by him and subsequently paid. It turned out that the drawer’s signature on the bills had been forged, although the defendant had acted throughout in good faith and without any knowledge of the forgeries. Price sought to recover the amounts paid as money paid under a mistake of fact.

The Court held that the action must fail.

Unfortunately for later applications, the Court gave a multiplicity of reasons. Lord Mansfield said that: it would not be unconscionable to retain money received as an innocent holder for value of a bill; there was a duty on the drawee to make sure that the bills were valid before paying or accepting; and if there was any fault or negligence on the part of either of the parties to the transaction, it was that of the plaintiff, not that of the defendant. Price v Neal (1762) 3 Burr 1354; 97 ER 871 was considered in Cocks v Masterman (1829) 9 B & C 902; 109 ER 335, and again in London and River Plate Bank v Bank of Liverpool [1896] 1 QB 7 — where it was explained that the importance of certainty in dealing with negotiable instruments required a harsh rule as to finality of payment. It is not necessary that there be any actual prejudice or damage to the payee if the amount of time which has elapsed is such that the holder’s position may be affected — not necessarily that it is affected. Recall that lapse of time may be a defence in all cases of mistaken payment, but the time factor may be critical when dealing with bills. One of the reasons that this is of the utmost importance when dealing with bills of exchange is that the holder must give notice of dishonour in order to hold the drawer and previous indorsers liable: Bills of Exchange Act 1909, s 53. Further, the time allowed for giving notice is short: Bills of Exchange Act 1909, s 54. The rule in Price v Neal (1762) 3 Burr 1354; 97 ER 871 was first explained by the Privy Council in terms of the need to give notice in Imperial Bank of Canada v Bank of Hamilton [1903] AC 49. Although the drawer’s signature was not forged, the cheque in question had been altered in such a way as to make it appear to be a cheque for $500 instead of the $5 for which it was drawn. The cheque so altered was void and the plaintiff bank sought recovery of the raised amount of the cheque which had been paid. The Privy Council allowed recovery, saying (at 58): There were no indorsers to whom notice of dishonour had to be given … The rule laid down in Cocks v Masterman … has reference to negotiable instruments, on the dishonour of which notice has to be given to some one [sic] … who would be discharged from liability unless such notice were given in proper time.

Even under the Bills of Exchange Act 1909, it is not generally necessary to

give the drawer notice of dishonour in order to establish liability: s 55(2)(c). Under the [page 350] Cheques Act 1986, it is not necessary to give notice to either the drawer or an indorser in order to establish liability: Cheques Act 1986, s 70. Consequently, it would seem that the rule in Price v Neal (1762) 3 Burr 1354; 97 ER 871 has no application to forgeries on cheques which are governed by the new Act — at least that part of the ratio of Price v Neal which presumes detriment by virtue of the need to give notice. However, that still leaves open the possibility that payment is a representation that the signature is genuine. Illustration: National Westminster Bank Ltd v Barclays Bank International Ltd [1975] QB 654 A customer of the plaintiff bank lived in Nigeria. In late 1971, while he was away, his house was broken into and various items taken. It was not noticed at the time that a cheque from the middle of a spare chequebook was one of the items taken. This came to his attention when he received a statement of account containing a debit item of £5,000. He immediately notified the plaintiff bank of the forgery. The cheque had been collected by the defendant bank, which continued to hold the proceeds. The plaintiff sought recovery of the funds as money paid under a mistake of fact.

As to Lord Mansfield’s suggestion that there is a duty on the drawee bank to know the signature of the drawer, Kerr J said (at 674): It seems to me … that [the payee] can in the present case only succeed in raising an estoppel against the plaintiffs if the mere fact of a banker honouring a cheque on which his customer’s signature has been undetectable forged carries with it an implied representation that the signature is genuine. I cannot see any logical basis for this. At most … the paying banker is thereby representing no more than that he believes the signature to be genuine.

In Barclays Bank Ltd v W J Simms, Son & Cooke (Southern) Ltd [1980] QB 677, Robert Goff J also considered the rule in Price v Neal (1762) 3 Burr 1354; 97 ER 871 — coming to the conclusion that it applied only when there was some need to give notice of dishonour. If these cases are correct, then s 70 of the Cheques Act 1986 has the effect that the rule in Price v Neal may be disregarded so far as it affects the right of the bank to recover money which is paid on a forged drawer’s signature or a forged indorsement. Under the rule in David Securities v Commonwealth Bank of Australia [1992] HCA 48, the bank would have a prima facie right to recover the money from the payee. [page 351]

10.6

Mistaken Internet payments

This section deals with payments that are not covered by the ePayments Code. See 11.6 for a discussion of the ePayments Code and the sad plight of a customer who makes a mistaken payment that is covered by the Code. Recall that mistaken internet payments occur because of a discrepancy between the name and the account number entered on the browser form. Applying the law of mistaken payments, it is clear that a payment has been made under a mistake of fact to a person who would not have been paid but for the mistake. As a consequence, the payer has a prima facie right of recovery. The onus is then on the defendant to show why the payment should not be returned. But who is the defendant? The response of the banks assumes that it is the ultimate payee — the person who holds the account to which mistaken payment was directed. However, the payment was initially made to the receiving bank via the electronic payment system. Therefore, the receiving bank is a legitimate defendant. What reasons may the bank give to resist the inference that it has been unjustly enriched? The usual answer is the ‘agency defence’ — an agent who has been mistakenly paid may resist repayment if it has ‘accounted’ to its principal before recovery is demanded: see Australia and New Zealand Banking Group Ltd v Westpac Banking Corp [1988] HCA 17; Gowers v Lloyds & National Provincial Foreign Bank Ltd [1938] 1 All ER 766. See also the discussion at 10.4.1. The argument, then, is that the receiving bank has received payment on behalf of its customer and has accounted for the funds. But, as defendant, the receiving bank must produce evidence to show this. How does the bank show that it has ‘accounted’ to its customer? Only two things are completely clear: it is not sufficient to show that the account has been credited; and it is sufficient to show that the customer has withdrawn all funds. The first proposition merely accords with common sense and with banking practice. Accounts are often credited as a matter of banking convenience, even though the customer is not permitted to draw on the funds so credited. The credit is reversed if certain conditions are not met. There is nothing improper in this, since the account is merely evidence of the liability of the parties. It is not an account stated: see, for example, Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; National Bank of New Zealand Ltd v Walpole and

Patterson Ltd [1975] 2 NZLR 7; National Australia Bank Ltd v Hokit Pty Ltd [1996] NSWSC 198; and see the discussion at 4.9.1. The second proposition is equally obvious. If the customer has withdrawn funds, then there can be no doubt that the receiving bank has ‘accounted’ to the customer, since there is no longer a debt owed by the receiving bank to the customer. [page 352] There are several points in the process which might be considered the point at which the receiving bank ‘accounts’ to its customer and the customer receives the payment: when the account is credited; when the customer has notice that the account is credited; when the customer withdraws the funds so credited, having regard to the rule in Clayton’s case (see 4.3.2); when the liability of the bank to the customer falls below the amount of the credited payment; and when the account is closed. There is much to be said for holding that the third or fourth point in the above list is the time at which the receiving bank ‘accounts’. Until the third point, the funds are still notionally ‘in the account’ of the customer. It can hardly be argued that return of the funds by the receiving bank would leave it in a worse position than it was before the payment, since it may reverse the customer account entry on the grounds that it was made by mistake. The same argument may be made, perhaps less forcefully, for the fourth point in the above list. Where the transaction is covered by the ePayments Code, the rights of the payer are so reduced as to be almost meaningless. Recovery is essentially at the whim of the banks involved: see 11.6.10.

[page 353]

11 Consumer Protection 11.1

Introduction

In the early days of banking, it was only the elite and affluent or those in business who had current accounts. That has all changed and, with the change, banks have had to face the problems associated with mass marketing of their products. Banks now recognise that ‘consumer banking’ has different problems from those found in traditional banking. ‘Consumer protection’ generally refers to laws, codes and procedures designed to overcome three major handicaps faced by ‘consumers’ — namely: inequality of bargaining power; lack of knowledge and/or information; and lack of affordable remedies. This chapter will discuss six major consumer protection initiatives designed to ameliorate one or more of these handicaps: unfair contract terms, introduced in the Competition and Consumer Act 2010 (Cth); ‘responsible lending’ requirements contained in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth); consumer warranties concerning services contained in s 60 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010); the Code of Banking Practice (the Code), issued by the Australian Bankers’ Association; the Electronic Funds Transfer (EFT) Code of Conduct; and the Financial Ombudsman Service (FOS), formerly the Banking and

Financial Services Ombudsman. There are, of course, other consumer protection statutes and organisations which are relevant to the banker-customer relationship. The National Credit Code, formerly the Uniform Consumer Credit Code (UCCC), is considered in Chapter 12. [page 354]

11.2

Unfair contract terms

Part 2-3 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) voids certain ‘unfair terms’ of a standard form consumer contract. The Australian Securities and Investments Commission Act 2001 (Cth) contains a similar provision relating to a contract for a ‘financial product’ or for the supply of ‘financial services’. Neither of these statutes define ‘standard form’ contracts, but s 27 of the Australian Consumer Law and s 12BK of Australian Securities and Investments Commission Act 2001 set out factors which must be taken into account. They are the usual common sense factors that would generally be considered in determining if a contract is a ‘standard form’ contract. A ‘consumer contract’ is a contract with an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption: Australian Consumer Law, s 23(3); Australian Securities and Investments Commission Act 2001, s 12BF(3). The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 extended the unfair contract provisions to ‘small business’ contracts. A ‘small business’ is one that employs fewer than 20 persons: Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, s 23(4)(b). The application of the unfair contract provisions to small business contracts is limited to contracts where the price payable does not exceed $300,000 or, if the contract has a duration of greater than 12 months, $1,000,000. A term is ‘unfair’, according to s 24 of the Australian Consumer Law and s 12BG(1) of Australian Securities and Investments Commission Act 2001, if: it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. Although the Australian Securities and Investments Commission Act 2001 applies to ‘financial services’, the phrase is not as wide as might be thought. Section 2 of the Australian Consumer Law specifically provides that ‘services’ include: a contract between a banker and a customer of the banker entered into in the course of the banker carrying on the business of banking; and any contract for or in relation to the lending of money. These two clauses will ensure that many — perhaps most — banking consumer disputes may be brought under the Australian Consumer Law. It is an important point, since some of the state and territory implementations of the Australian Consumer [page 355] Law provide access to small claims courts or consumer tribunals for challenging unfair contract terms: see, for example, s 30(4) of the Fair Trading Act 1987 (NSW) which gives the Consumer, Trader and Tenancy Tribunal jurisdiction to determine if contract terms are unfair. Further, the Australian Consumer Law, but not the Australian Securities and Investments Commission Act 2001, provides that the extent to which a term is ‘transparent’ is relevant in determining whether the term is unfair. According to s 24(3) of the Australian Consumer Law, a term is ‘transparent’ if it is: expressed in reasonably plain language; legible; presented clearly; and readily available to any party affected by the term. The original bill contained a list of terms declared to be unfair, but the Australian Consumer Law provides only a list of examples of terms that may be unfair: Australian Consumer Law, s 25. Certain terms are exempted by s 26(1) and entire contracts are exempted by s 28. The status of terms that comply with codes of practice or with other legislation is not clear. Section 26(1)(c) of the Australian Consumer Law exempts terms that are required, or expressly permitted, by a law of the Commonwealth, a state or a territory, but that would not include codes of

practice, nor would it necessarily include a contractual term where that term complied with the National Credit Code.

11.3

Responsible lending

The National Consumer Credit Protection Act 2009 (Cth) requires licensing of all who engage in ‘credit activity’: National Consumer Credit Protection Act 2009, s 29. Section 6 provides a very comprehensive definition of credit activity, but we are concerned here with credit providers and those who provide ‘credit assistance’. A person provides credit assistance if they advise or arrange for a consumer to obtain credit: see the extended definition in s 8 of the National Consumer Credit Protection Act 2009. Chapter 3 of the National Consumer Credit Protection Act 2009 introduces the notion of ‘responsible lending conduct’ and sets out rules to be followed by credit assistance providers and credit providers. The rules are aimed at providing better information for consumers and preventing them from entering unsuitable credit contracts: see National Consumer Credit Protection Act 2009, ss 111 and 125. There are slightly different requirements for the two categories, but the main requirements include: providing the consumer with a credit guide containing information about the licensee and the licensee’s obligations under the National Consumer Credit Protection Act 2009 (ss 113 and 126); [page 356] requiring the licensee to make preliminary assessments as to the suitability of the credit contract (ss 116 and 129); requiring the licensee to make inquiries and verify about the consumer’s requirements, objectives and financial situation (ss 117 and 130); and prohibiting the licensee from entering into a contract that is unsuitable for the consumer (ss 123 and 133). Credit assistance providers must give the consumer a quote before providing assistance, and the quote must set out the maximum amount that the consumer will be required to pay: National Consumer Credit Protection Act 2009, s 114. The licensee must also disclose other information to the consumer, including any commissions the licensee is likely to receive: National Consumer Credit Protection Act 2009, s 121.

Both credit assistance providers and credit providers have special obligations in relation to consumer leases: see Parts 3-3 and 3-4 of the National Consumer Credit Protection Act 2009.

11.4

Consumer warranties

Section 60 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) provides that if a person supplies, in trade or commerce, services to a consumer, there is a guarantee that the services will be rendered with due care and skill. As noted at 11.2, ‘services’ includes any rights, benefits, privileges or facilities provided under a contract between a banker and customer entered into in the course of carrying on the business of banking, or any contract for or in relation to the lending of money: Australian Consumer Law, s 2. A person acquires services as a consumer if, and only if, the amount paid does not exceed a prescribed sum, or if the services were of a kind ordinarily acquired for personal, domestic or household use or consumption: Australian Consumer Law, s 3(3). The amount currently prescribed is $40,000. Sections 3(4) through 3(9) provide methods for determining the price paid.

11.5

The Code of Banking Practice

The Australian Government established a taskforce in 1992 to prepare a code of banking practice. The taskforce included representatives of the Treasury, the Reserve Bank of Australia, the Trade Practices Commission and the AttorneyGeneral’s department. The taskforce released the first draft of a code of practice to interest groups for comment in November of 1992. The 1992 draft was revised in the light of those comments and a second draft was released in June 1993. It is not entirely clear what happened after this draft [page 357] was released, but the Code of Banking Practice, as adopted by the Treasurer and the Minister for Consumer Affairs on 3 November 1993, was written not by the taskforce but by the Australian Bankers’ Association (ABA). Consumer interests claimed that the process had been ‘hijacked’ by the ABA: see comments in the Sydney Morning Herald, 4 November 1993. There is little doubt that the resulting Code was less favourable to consumer interests

than the preceding drafts, but it might have been expected that there would be greater adherence both to the spirit and the letter of the Code, since it originated with the banks. That, unfortunately, was not the case. A consultant, R T Viney, undertook a comprehensive review of the Code in 2000. He concluded that: the Code had not been seriously supported by the industry; there had been no sense of the industry wanting to enhance the Code or use it as a means of dealing with new issues; the Code had not succeeded in improving bank/customer relationships; and the Code had been largely irrelevant to both banks and customers. See Viney (2001) for a full discussion. After a series of consultations and negotiation, the review produced a new draft Code. The revised Code was adopted on 1 August 2003. The revised Code was itself modified in May 2004, to make certain changes in disclosure requirements for prospective guarantors. From a consumer protection point of view, the revised Code was a substantial improvement on the 1993 Code. In keeping with the requirements of the Code, a second independent review was commissioned in 2007. The review, conducted by Jan McClelland, was completed in December 2008. As a result of McClelland’s work, a new Code was issued in 2013, which commenced operation on 1 February 2014. The new Code builds on the structure and requirements of the previous Codes. It has been adopted by the major banks. The Code itself provides for regular review, and a new review was commenced in July 2016. It is expected that the results of the review will be available by mid-2017.

11.5.1

Structure of the Code

The Code of Banking Practice is a voluntary code of conduct which sets standards of good banking practice to be followed when dealing with people who are, or who may become, individual or small business customers or guarantors of such people. A ‘small business’ is one which has fewer than 20 equivalent full-time

people or, if the business includes the manufacture of goods, 100 equivalent full-time people: Code of Banking Practice, s 42. [page 358] Certain parts of the Code seem to be directed to all customers (including small business customers in the above sense), while other parts are only applicable when there is a ‘banking service’ supplied. For example, s 3.1 of the Code promises that the bank will ‘continuously work towards improving the standards of practice and service in the banking industry’. While this is a worthy aim, it is hard to see how any individual customer might attempt to enforce it. Other parts of the Code are more analogous to contractual terms which will apply to the supply of services. These terms are of direct use to individual customers and may be relevant in any dispute with the bank. The Code is divided into eight parts: (1) Introduction (2) Application (3) Key commitments and general obligations (4) Disclosure (5) Services and practices (6) Dispute resolution (7) Transitional provisions (8) Definition. The introduction contains only a single section, which explains that the Code is voluntary and sets standards of good banking practice. Because the Code is sponsored by the ABA, its terms may be relevant even to those banks that do not subscribe. In any case, where good banking practice is an issue, the Code might provide evidence of that standard. The legal status of the Code is somewhat ambivalent. Sam Management Services (Australia) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320 involved securities given by a small business customer to the bank covering the totality of advances under facilities that expired at different times. The customer claimed that the bank should release some of the securities as individual facilities were repaid. The bank refused to do so. The customer argued that the bank was in breach of s 2.2 of the 2003

version of the Code (see now s 3.2): We will act fairly and reasonably towards you in a consistent and ethical manner. In so doing we will consider your conduct, our conduct and the contract before us.

Young JA said (at 74): The clause in a legal document is so fraught with ambiguity. Its exact meaning was not canvassed before us so that it would be unwise to attempt to be definitive in its construction. Assuming it must be given some meaning in a commercial document, it probably does not operate to beyond requiring the bank to act in good faith towards the customer.

[page 359] Sackville AJA only thought that it was ‘arguable’ that the clause would have obliged the bank to give good faith consideration to a detailed proposal. The case reinforces that some of the clauses of the Code are unlikely to be enforceable by individual customers.

11.5.2

Application of the Code

Section 42.1(a) provides that the bank will be bound by the Code whenever it provides a ‘banking service’ to ‘you’. Section 42.1(b) similarly binds the bank when it obtains a ‘guarantee’ from ‘you’. Each of the quoted terms has a special meaning in the Code. Generally speaking, ‘you’ includes any individual or small business that is a customer or, where the Code specifically applies, a potential customer. The term ‘you’ also extends to any person from whom the bank has obtained, or proposes to obtain, a ‘guarantee’. However, ‘you’ has a completely different meaning if the ‘banking service’ being supplied is also classed as a ‘financial product’ or ‘financial service’ for the purposes of Chapter 7 of the Corporations Act 2001 (Cth). In this case, as defined in the Corporations Act 2001, ‘you’ means a ‘retail client’ who enquires about, is, or may be, supplied with that banking service. In particular, the Code does not apply when a ‘wholesale client’ enquires about, or is provided with, a banking service that is also a ‘financial service’. ‘Banking service’ is defined broadly as a financial service or product provided to a customer in Australia. It specifically includes products supplied through an intermediary. When the bank itself is the intermediary, the definition extends only to the distribution or supply of the product, not the product itself. ‘Guarantee’ is given a limited meaning by s 31 of the Code: see 11.5.6.

Section 41 of the Code sets out certain transitional provisions. To the extent of any inconsistency, the ePayments Code takes precedence: Code of Banking Practice, s 41.7.

11.5.3

General obligations

Part C of the Code sets out some general obligations. These include a periodic review of the Code, compliance with relevant laws and an assurance that no rights will be lost under the Code: Code of Banking Practice, ss 4, 5 and 6 respectively. Section 3.1 of the Code makes a general commitment to: improve standards of practice and service; promote better informed decisions about banking services; [page 360] provide general information about the rights and obligations that arise out of the banker/customer relationship; provide plain language information; and monitor developments relating to banking codes of practice, legislative changes and related issues. Section 7 of the Code commits the bank to take ‘reasonable’ measures to enhance access to transaction services for the elderly and customers with a disability. Section 9 provides that the bank will ensure staff and authorised representatives are properly trained and have an adequate knowledge of the provisions of the Code. Section 10 promises that the bank will require the ABA to promote the Code and to make public which banks subscribe to the Code. Section 11 promises to display the Code at branches, to make the Code available on request, to display it on the bank’s website and to send it to customers by electronic communication or mail on request. None of these general commitments are likely to be relevant to any particular dispute with a bank, and it is difficult to see how any individual customer could challenge the actions of a bank on the basis of these commitments: see Sam Management Services (Australia) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320 and the discussion at 11.5.1. Section 8 of the Code applies to customers in remote indigenous communities. It recognises the special problems of obtaining information

about banking services, accounts and availability of special government programmes.

11.5.4

Disclosure under the Code

Part D of the Code deals with the obligation to provide information about services. The bank is obliged to provide to any person, on request, Terms and Conditions of ongoing banking services, information about fees and charges, and interest rates. In certain circumstances, the bank must provide: copies of documents; information about the cost of credit; information about the operation of accounts; and special information for low income earners or other disadvantaged persons. Each of these obligations is discussed in more detail below.

Bank must supply Terms and Conditions Section 12 of the Code sets out quite detailed requirements as to both the availability and the contents of the Terms and Conditions, which govern the provision of any banking service. The section is the result of a long history in which Terms and Conditions were difficult or impossible for customers to obtain. In particular, [page 361] when EFT systems were first introduced, customers could not obtain Terms and Conditions regulating the service until after committing to the service. This was clearly intolerable for consumer products, and it was addressed first in the original EFT Code of Practice and later in the Code of Banking Practice. The current s 12 is an improvement on the earlier Codes, which did not require the bank to supply the Terms and Conditions until such time as the service was provided. Section 12.1(a) of the Code commits the bank to providing to any person on request the Terms and Conditions of any ongoing banking service which is currently offered. In addition, the bank will supply full particulars of standard fees and charges for any banking service and particulars of interest rates applicable to any banking service: Code of Banking Practice, s 12.1(b) and (c).

The original Code did not require the provision of Terms and Conditions to customers before the acquisition of the service. Sections 12.2–12.5 set out detailed requirements as to the form and content of the Terms and Conditions. It has been argued that the level of detail is unnecessary, but in the Viney review of the original Code, it was found that banks were not following the spirit of the Code: see Viney (2001). The Terms and Conditions must be: distinguishable from marketing materials; in English and other languages if the bank deems appropriate; consistent with the Code; and provided at the time of or before the provision of an ongoing banking service, unless it is impracticable to do so. Where it is impracticable, they must be provided as soon as practicable afterwards. The Terms and Conditions must also draw attention to the availability of general descriptive information which is required by s 15: Code of Banking Practice, s 12.2(e). Every copy of the Terms and Conditions of any banking service must include a statement to the effect that the Code applies: Code of Banking Practice, s 12.3. Section 12.4 of the Code provides detailed requirements for the contents of the Terms and Conditions. Where relevant, they must contain: standard fees and charges which apply to the service; the method by which interest is calculated and how it is credited or debited; and how changes will be notified. The customer must be informed of the fact that more than one interest rate may apply if such be the case: Code of Banking Practice, s 12.4(e). The Terms and Conditions must indicate if there is any minimum balance requirement and any other restriction on the deposit or withdrawal of funds: Code of Banking Practice, s 12.4(e). If the service is a term deposit, then the details of interest calculation and payment must be stated, as well as how the funds will be [page 362] dealt with at maturity and any penalties for withdrawal in advance of maturity: Code of Banking Practice, s 12.4(f).

If the provided service is a loan which is not regulated by the National Credit Code, then the Terms and Conditions must contain the repayment details: Code of Banking Practice, s 12.4(g). Section 12 contains a few other requirements for content, the most important of which is a statement of how cancellation of direct debits will be processed: Code of Banking Practice, s 12.4(j). The actual requirements are contained in s 21 of the Code. The problem arises because of the change in implementation of direct debit requests and the subsequent actions of banks refusing to cancel direct debit arrangements: see the discussion at 9.13.2. Finally, where the provided banking service is a credit card arrangement, the Terms and Conditions must provide information on the handling of chargeback rights: Code of Banking Practice, s 12.5. This is discussed further at 9.15.

Copies of documents Section 13 of the Code regulates the provision of document copies. Section 13.1 observes that the National Credit Code, or Chapter 7 of the Corporations Act 2001, may provide greater rights to document copies than exist under the Code of Banking Practice. In such a case, the bank will comply with the statutory requirements. Otherwise, the provision of copies is governed by the remainder of s 13. Section 13.2 of the Code requires the bank to provide copies of documents relating to a banking service if the service is: a contract; a mortgage or other security document; a statement of account; or any notice previously given to the customer relative to the bank exercising its own rights. Even these requirements are subject to certain exemptions in ss 13.4 and 13.5 of the Code. The bank may charge a ‘reasonable’ fee for providing a document copy: Code of Banking Practice, s 13.7. That copy may be in electronic form, containing the same information as the original: Code of Banking Practice, s 13.6.

Cost of credit Section 14 requires the bank to make available to a prospective customer, or

an appropriate external agency, the interest rates and standard fees and charges applicable to any credit service for use in the preparation of a comparison rate. This is weaker than the requirement that the cost of credit be made available to ‘any person’. There is no indication of what an ‘appropriate’ external agency might be. [page 363]

Account operations disclosures Certain account information must be provided both to customers and to prospective customers upon request. Section 15.1 of the Code provides that, where appropriate, the bank must provide information about: account-opening procedures; complaint-handling procedures; the bank’s right to combine accounts; bank cheques; the advisability of a customer informing the bank promptly when the customer is in financial difficulty; and the advisability of a customer reading the Terms and Conditions applying to the banking service in question. The bank must also provide information concerning the bank’s obligations regarding confidentiality of information: see 6.2. With regard to cheque accounts, a bank must provide general descriptive information on: the time generally taken for clearing a cheque; how a cheque may be specially cleared; how and when a cheque may be stopped; and how a cheque may be made out so as to reduce the risk of unauthorised alteration. Information must also be provided as to the effect of crossing a cheque, the meaning of ‘not negotiable’ and ‘account payee only’ and the significance of deleting ‘or bearer’ when any of these expressions appear on a cheque. Finally, the bank should provide information on the dishonour of cheques, including post-dated and stale cheques: Code of Banking Practice, s 15.2.

Account suitability Banks will advise low income or disadvantaged individuals about accounts that have low fees and charges. Section 16.2 of the Code of Banking Practice obliges the bank to do this on request. The bank will also provide similar information if it becomes aware that the individual customer may be the holder of: a Commonwealth Seniors Health Card; a Health Care Card; or a Pensioner Concession Card. Section 16 does not apply to small business customers. [page 364]

11.5.5

General principles of conduct

Part E of the Code of Banking Practice is concerned with ‘banking services practices’. These ‘practices’ cover a wide range of banker-customer interactions, from the pre-contractual stage to the closing of accounts.

Pre-contractual The bank must disclose any application fee or charge before the customer becomes liable to pay the fee: Code of Banking Practice, s 18.1. This information must include whether the fee is refundable if the application is rejected or otherwise not pursued. Fees for special payment services may be substantial. The Code recognises this in s 18.2, which requires the disclosure of fees before the provision of a bank cheque, an inter-bank funds transfer or any like service. The disclosure must be made at the time when the service is provided, or at any other time on request. An exception is where the relevant banking service is regulated by Chapter 7 of the Corporations Act 2001. The ‘principle’ which is applicable when opening an account is merely that the bank must provide upon request general descriptive information concerning the identification requirements of the Financial Transaction Reports Act 1988 (Cth) and the options available under the tax file legislation: Code of Banking Practice, s 18.2. This is not an onerous requirement for the

bank, since the section specifically indicates that the provided information may be material made available by a government. Where the customer has an existing account and wishes to open a new account, the bank must disclose any rights of combination and the consequences of combination: Code of Banking Practice, s 18.3. The Code requires a bank to notify a customer promptly after exercising any right to combine accounts of the customer: Code of Banking Practice, s 19.1. This is an improvement on the customer’s position at common law where no notice of combination was required: Garnett v M’kewan (1872) LR 8 Ex 10; and see 4.4.2. Section 19.2 of the Code limits the right of combination when the bank is actively considering, or the customer is complying with an agreed arrangement resulting from, a hardship application under the National Credit Code.

Variation of Terms and Conditions The bank must notify its customers where there is a new or changed government charge which is payable either directly or indirectly by a customer, unless the change is publicised directly by the government: Code of Banking Practice, s 20.2. Notification may be either directly or by advertisement in the national or local media. Presumably the word ‘indirectly’ in the section refers to the banking practice of passing on certain taxes. [page 365] Where the bank itself wishes to make a change in any terms or conditions, the notification requirements vary in accordance with the importance of the change. Section 20.1 of the Code requires advance written notice of 30 days where there is an intention to: introduce a fee or charge (other than a government charge, as above); vary the minimum balance to which an account-keeping fee applies; vary the balance ranges within which interest rates apply to a deposit account; or vary the frequency with which interest is debited or credited. Notice is not required where the customer cannot reasonably be located, or if the services have been acquired anonymously. Other account variations or charges may be notified by advertisement in

national or local media no later than the day on which they take effect: Code of Banking Practice, s 20.3. These notice requirements are not applicable to a banking service which is regulated by the National Credit Code or Chapter 7 of the Corporations Act 2001. Both of these regimes have notice requirements which override the Code of Banking Practice. It is hard to say if these provisions make any change to the general law. On one hand, the bank may not implement a unilateral change in contractual terms: see Burnett v Westminster Bank Ltd [1966] 1 QB 742; and see 3.5. However, it seems likely that the bank’s right to make some variation in fees without notice or by public notice is probably a term of the relationship at general law.

Direct debits Section 21.1 of the Code of Banking Practice obliges the bank to cancel a direct debit request and to process any complaint that a direct debit was unauthorised or otherwise irregular. In addition, the bank undertakes not to direct or suggest that the customer should first raise the request or complaint directly with the debit user. This would seem unremarkable were it not for the fact that banks routinely advised their customers that it was not the bank’s responsibility to cancel the debit orders, and that it was necessary to approach the debit user. This was a result of the change in the way that direct debits were authorised — the ‘new’ method being a form to the debit user. There are questions about whether the method is effective, but s 21.1 of the Code should remove the worst abuses of the process. See the discussion of direct debits at 9.13.2. Section 21.2 of the Code provides that s 21.1 does not apply to a payment service which relates to a credit card account. In credit card cases, cancellation is governed by the credit card scheme rules and s 22 of the Code. It may be difficult for a customer to cancel a credit card authorisation, and users should avoid them if at all possible. [page 366]

Chargebacks A ‘chargeback’ is a reversal of a credit card payment. Each of the credit card schemes has rules which permit the issuing bank to initiate a reversal of the

payment on various grounds. Chargebacks are discussed in more detail at 9.15.4. The banks and credit card schemes maintained that the right of chargeback was that of the issuing bank alone, and that the cardholder customer had no rights in the process. That may have been incorrect, but fortunately the new Code of Banking Practice addresses the problem: see Tyree (2002b) for an argument that the customer had such rights at law. Section 22 of the Code confirms that the bank must claim a chargeback right if one exists and the customer requests it. The bank will claim the chargeback for the most appropriate reason (presumably with reference to the card scheme rules) and will not accept a refusal by the merchant acquirer unless required to do so by the scheme rules. The bank further undertakes to provide general information about chargebacks on a yearly basis.

Foreign exchange services A bank which supplies a foreign exchange service to a customer — other than one supplied by credit or debit card or by traveller’s cheque — must provide the customer details of the exchange rate and commission charges if known at the time, or details of the basis of the transaction otherwise: Code of Banking Practice, s 23.1(i). The bank must also give the customer an indication of when money sent overseas on the customer’s behalf would normally arrive at its destination: Code of Banking Practice, s 23.1(ii). When making a foreign currency loan in Australia, a bank must give the customer a special warning in writing of the risks arising from exchange rate movements and must tell the customer of any available mechanisms for limiting such risks: Code of Banking Practice, s 23.2.

Privacy and confidentiality Because of the private sector privacy provisions of the Privacy Act 1988 (Cth), the Code of Banking Practice is able to deal with privacy and confidentiality in a more abbreviated form than the original Code. Section 24 of the Code essentially acknowledges the bank’s obligations under the Privacy Act 1988, acknowledges that there is a general duty of confidentiality to the customer, and then repeats the general exceptions in Tournier v National Provincial & Union Bank of England [1924] 1 KB 461. There is no elaboration on the Tournier exceptions, and it seems likely that

the general law applies subject to the Privacy Act 1988: see the discussion of the Tournier duties at 6.2. [page 367]

Payment instruments A bank must inform a customer of the advisability of safeguarding payment instruments such as credit cards, debit cards, cheques and passbooks: Code of Banking Practice, s 25.1. It may require a customer to notify the bank as soon as possible of the loss, theft or misuse of any payment instrument: Code of Banking Practice, s 25.2. This last section seems to be a restatement, and possibly an extension, of the duty in Greenwood v Martins Bank Ltd [1933] AC 51: see 7.3. It is noteworthy that banks impose a standard on customers that they choose not to meet themselves: see Johns Period Furniture v Commonwealth Savings Bank of Australia (1980) 24 SASR 224; and see the discussion at 6.5. A bank must inform the customer of the consequences arising from a failure to comply with any requirement in s 25.2 of the Code. The bank must also identify the means whereby the customer can notify the bank of any loss, theft or misuse of the relevant payment instrument: Code of Banking Practice, s 25.3.

Statements of account Section 26.1 of the Code of Banking Practice requires that statements of accounts be provided at least every six months for a deposit account, unless: the account is operated by a passbook or similar document; there has been agreement on some other method of reporting transactions, or that a statement need not be provided; there has been no customer initiated transaction during the six-month period; or the customer cannot be located after reasonable steps have been taken to do so. The term ‘deposit account’ is not defined in the Code. If it is used in the usual sense of a non-current account, then the exclusion is peculiar. The customer has the right to ask for more frequent statements of account:

Code of Banking Practice, s 26.2. It is, presumably, implicit in this that there is an obligation on the bank to provide them. Section 26.3 of the Code is a very peculiar section. It obliges the bank to give a statement on a loan account if it is practicable to do so, even if the customer is in default. The section gives an example of when it may not be practicable — automatic statement generation is not available on defaulted accounts. The presence of this example suggests that it may be a common problem. If so, it is one which is easily fixed with software modification. The fact that this section was also in the previous version of the Code suggests that there is no interest in fixing the problem. When it is not practicable to give a statement on the default account — whether because of defective software or for some other reason — the bank is obliged [page 368] to inform the customer about the availability of statements and the method of requesting them. The bank will then provide the customer with a statement on request and do so in a timely manner. Section 26.4 of the Code extends some of the benefits of the National Credit Code to small business customers and to other customers to whom the National Credit Code may not apply. The bank will provide a statement of transactions on a loan or other credit account that conforms to the requirements of the National Credit Code, except where it is impractical to do so. Given the antipathy some bankers hold for the National Credit Code, it might often be found that it is ‘impractical’ to apply the National Credit Code provisions.

Provision of credit Before offering, supplying or increasing a credit facility, the bank must exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods and in forming its opinion about the customer’s ability to repay: Code of Banking Practice, s 27.1. The only possible point of contention here is the use of credit scoring methods, which are sometimes disliked by consumer organisations. There is,

however, evidence that they are more reliable and probably ‘fairer’ than judgments made by other means. The bank undertakes to work with the customer to overcome any financial difficulties with a provided credit facility: Code of Banking Practice, s 28.2. This cooperation may be initiated either by the customer or by the bank: Code of Banking Practice, ss 28.3–28.6. The bank also undertakes to advise the customer of the hardship provisions of the National Credit Code, should those provisions apply in the circumstances: Code of Banking Practice, s 28.7. Section 28.9 of the Code of Banking Practice prevents the bank from demanding that the customer apply for early release of superannuation funds, but it may recommend that the customer seek independent advice for doing so.

Joint debtors A bank will often seek to make a spouse or other close relative of a customer a guarantor when arranging a loan. During the 1980s and 1990s, a significant number of these guarantees were held by the courts to be unenforceable: see the discussion of guarantees at 11.5.6. One way to circumvent the dangers of guarantees is to require the spouse or the close relative to become, in form, a joint debtor. This clearly leaves open the same possibility of abuse, and the Code of Banking Practice deals with the problem in s 29. [page 369] The bank will not accept a person as a co-debtor under a credit facility if it is clear, on the facts known to the bank, that the person will not receive any direct benefit under the facility: Code of Banking Practice, s 29.1. Where a person is accepted as a co-debtor, the bank has an obligation to take all reasonable steps to ensure that the person understands the liability being undertaken: Code of Banking Practice, s 29.2. Finally, the co-debtor is permitted to terminate liability in respect of future advances, but only if the bank can terminate any obligation to provide further advances to the other debtor: Code of Banking Practice, s 29.3.

Joint accounts A bank is required to give general descriptive information to customers

opening a joint account: Code of Banking Practice, s 30.1. This must include information on: the method of withdrawing funds from the account, having regard to the instructions given by the customers; the procedures available for varying those instructions; and the nature of liability for indebtedness on joint accounts. When accepting a customer’s instructions to issue a subsidiary credit or debit card, a bank must provide general descriptive information to the primary cardholder about their liability for debts on the account. The bank must also inform the primary cardholder of the means by which a subsidiary card may be cancelled or stopped, as well as the fact that this may not be effective until the subsidiary card is surrendered: Code of Banking Practice, s 30.2. This last piece of information is extremely important, since it appears that customers do not appreciate that the subsidiary card may not be easy to cancel if it is in the possession of another party. However, the customer needs the information before applying for the card, not when the bank accepts instructions to issue. As a result of some of the abuses of the process, s 30.3 of the Code provides that the primary cardholder will not be liable for continuing use of a subsidiary card from the date when the cardholder requests the cancellation of the subsidiary card, or from the date when the cardholder has taken all reasonable steps to have the card returned to the bank — whichever is later. The second requirement may be very difficult for the cardholder to establish.

11.5.6

Guarantees

There is probably no area of lending which causes more misunderstanding and dispute than guarantees. The reason is clear — the guarantor in a consumer loan is usually acting as a favour to the borrower and derives no direct benefit from the arrangement. The guarantor will often have little understanding of the potential [page 370] liability, and when the guarantee is called upon by the bank, the guarantor is faced with real financial stress, on top of the psychological stress of having been ‘betrayed’ by a friend or relative.

Application of the Code of Banking Practice The Code applies (with a few exceptions to be noted later) to all guarantees given by an individual for the purpose of securing any financial accommodation or facility provided to another individual or a small business: Code of Banking Practice, s 31.1. This is a substantial improvement over the old Code, which attempted to exclude guarantees for ‘commercial’ loans. That approach was bound to fail, since it is the nature of the guarantor — not the nature of the loan — that is the cause of so many problems. So, for example, many of the problems in recent years have been wives guaranteeing loans made to the family corporation where she is an officer of that corporation: see 15.3.1. The old Code did not apply to such a case but the new Code does. There are limited exceptions to this general rule. Certain clauses of the Code do not apply if the guarantor is a ‘commercial asset financing guarantor’, a ‘sole director guarantor’ or a ‘director guarantor’: Code of Banking Practice, ss 31.15 and 31.16. These exceptions are discussed at 11.5.6. Where the Code applies, the guarantee must include a statement to that effect: Code of Banking Practice, s 31.3.

Unlimited guarantees prohibited If the Code does apply, the bank is restricted to taking guarantees which limit the amount of the guarantor’s liability to a specific amount, plus other liabilities (such as interest and recovery costs) that are described in the guarantee or limited to the amount of a specific security at the time of recovery: Code of Banking Practice, s 31.2. This is a welcome change from guarantees which exposed the guarantor to liability for any amount owing by the primary debtor, the so-called ‘all moneys guarantee’.

Pre-contractual information Section 31.4 of the Code of Banking Practice provides a comprehensive listing of information which the lender must supply to the potential guarantor. The guarantor clearly has an interest in knowing the financial details of the arrangement between the lender and the principal debtor, yet the common law rules provided little comfort to the guarantor: see Chapter 15 for a discussion of general guarantees.

Before taking a guarantee, the lender must provide: certain general information about guarantees; information about certain previous financial irregularities with respect to the principal debtor; [page 371] copies of certain documents; and certain requested information about the facility to be provided to the principal debtor. The remainder of this section will discuss each of these in more detail. The bank must give a prominent notice that the prospective guarantor should obtain independent legal advice: Code of Banking Practice, s 31.4(a)(i). This, of course, is one of the factors which has always been of great importance in the ‘guarantee’ cases: see, for example, Commercial Bank of Australia v Amadio [l983] HCA 14; and see the discussion in Chapter 15. The notice must also provide that the prospective guarantor may refuse to enter into the guarantee, and that there are financial risks involved: Code of Banking Practice, s 31.4(a)(ii) and 31.4(a)(iii). The prospective guarantor must also be advised by prominent notice that there is a right to limit liability under the Code, and that they have the right to request information about the facility being guaranteed: Code of Banking Practice, s 31.4(a)(iv) and 31.4(a)(v). As to the rights to limit liability, see 11.5.6. It is obviously important for the prospective guarantor to know about any previous problems the principal debtor has experienced. Under the general law, the prospective guarantor may ask, but the ordinary ‘consumer’ guarantor may not know to seek such information. The Code provides that the lender must advise of any previous demand made on the debtor and any dishonour on any facility which the principal debtor has or has had within the previous two years: Code of Banking Practice, s 31.4(b)(i). The lender must also notify the prospective guarantor of any excess or overdrawing of $100 or more, if it has occurred within the previous six months. The lender must provide a list showing the extent of each of these excesses or overdrawings: Code of Banking Practice, s 31.4(b)(ii). The lender must also advise the guarantor of the consequences of failing to provide the guarantee — in particular, if any existing facility will be cancelled

or if some new facility will not be granted: Code of Banking Practice, s 31.4(c). Copies of certain documents must be provided to the prospective guarantor — namely: any related credit contracts and a list of related security contracts — these must include descriptions of the security contract and any property subject to the securities: Code of Banking Practice, s 31.4(d)(i); the final letter of offer to the principal debtor, together with details of any conditions in earlier versions: Code of Banking Practice, s 31.4(d)(ii); any related credit report from a credit reporting agency: Code of Banking Practice, s 31.4(d)(iii); credit-related insurance contracts in the possession of the lender: Code of Banking Practice, s 31.4(d)(iv); [page 372] a statement of financial position given by the principal debtor for the purposes of the facility within the previous two years: Code of Banking Practice, s 31.4(d)(v); certain statements of account relating to the facility if there has been a demand or a default: Code of Banking Practice, s 31.4(d)(vi); and any unsatisfied notice of demand made within the last two years: Code of Banking Practice, s 31.4(d)(vii). The lender must also supply any information about the facility which is ‘reasonably’ requested by the prospective guarantor. The exception is a very important one — the lender is not obliged to provide its own internal opinions: Code of Banking Practice, s 31.4(e).

Procedural safeguards The Code prohibits the lender from asking the prospective guarantor to sign unless it has provided the information prescribed in s 31.4: Code of Banking Practice, s 31.5(a). In addition, the lender must allow a ‘cooling-off’ period of one day, unless the prospective guarantor has obtained independent legal advice after having received the information: Code of Banking Practice, s 31.5(b). A common complaint in the past was that the guarantor was asked to sign the guarantee in the presence of the debtor or the debtor’s advisors. There is

obvious concern that such a practice puts emotional pressure on a possibly vulnerable guarantor. Section 31.6 of the Code deals with this practice, but only partially. The bank may not give the guarantee to the debtor or anyone acting on the debtor’s behalf, except where the person is a legal practitioner or a financial advisor: Code of Banking Practice s 31.6(a). Since a legal practitioner or financial advisor may have an interest in seeing that the guarantee is signed, s 31.6(a) of the Code is hardly a satisfactory solution to the problem. Finally, the Code provides that the lender will ensure that a warning notice appears directly above the place where the prospective guarantor must sign. The notice must be substantially in the form required by the National Credit Code: Code of Banking Practice, s 31.8; and see 12.3.4.

Limitation of liability Under certain circumstances, the guarantor is given the right to limit future liability. The basic rule, stated in s 31.9 of the Code of Banking Practice, is that the guarantor may, by written notice, limit the amount or the nature of the liabilities guaranteed. The limitation is not effective if it is below the existing liability of the principal debtor (including possible interest, fees and charges), or if the lender is obliged to make further advances. [page 373] Section 31.10 of the Code provides that the guarantor may extinguish liability either by paying the amounts outstanding (including future or contingent liabilities) or by making other arrangements which are satisfactory to the lender for the release of the guarantee. This section obviously gives no real rights to the guarantor. The guarantor may withdraw from the guarantee entirely if they do so before the lender actually advances credit under the relevant credit contract: Code of Banking Practice, s 31.11(a). The right of withdrawal may also be exercised after advances have been made if the final credit contract is materially different from the one provided to the guarantor under the disclosure requirements discussed above: Code of Banking Practice, s 31.11(b). Also see 11.5.6 for the discussion of disclosure requirements.

Enforcement limitations A third party mortgage is a mortgage which is provided by a person who does not have personal liability under either the loan or a guarantee. In the past, it

was common for the lender to accept a third party mortgage to secure a debt. The mortgagor would often be a relative of the principal debtor and would often give the mortgage with little understanding of the potential ramifications. In particular, the mortgagor would not understand that the mortgage would secure advances under future agreements. Section 31.12 of the Code of Banking Practice limits the enforcement of third party mortgages where the mortgage is given to secure financial accommodation provided to an individual or a small business. A third party mortgage will be unenforceable with respect to future credit contracts or guarantees unless the lender has given the mortgagor a copy of the contract document and has subsequently obtained the mortgagor’s written acceptance of the extension of the third party mortgage. Section 31.13 of the Code provides a similar limitation on the enforcement of guarantees, but makes exceptions where the future credit contract is within a limit previously agreed. When a guarantor is forced to make a payment, they have the right of recovery against the principal debtor by the doctrine of subrogation. In a commercial context, there is nothing improper in the creditor seeking repayment from the guarantor when the principal debtor defaults, even if the creditor has taken no legal action to recover from the principal debtor. However, in a consumer context, moving directly against the guarantor may cause injustice. The guarantor will often be a relative or close friend of the principal debtor and will be reluctant to take legal action. For this reason, s 31.14 of the Code limits the right of the lender to take direct action against the guarantor. [page 374] Provided the principal debtor is an individual, the lender may not enforce the guarantee unless it has first obtained judgment against the principal debtor and the judgment has been unsatisfied for 30 days. The guarantee may also be enforced if the principal debtor has disappeared and the lender has made a reasonable attempt to locate them, or if the principal debtor is insolvent.

Exceptions There are several exceptions to the requirements regarding guarantees. In each case, the prospective guarantor has a position which justifies treating them more as a commercial guarantor than a consumer one. A ‘commercial asset financing facility’ is a lease, rental, hire purchase, bill of

sale, chattel mortgage facility or a related insurance premium funding facility provided to a company: Code of Banking Practice, s 42. A ‘commercial asset financing guarantor’ is a guarantor of such a facility who is also a director of the company, who has not given security to support the guarantee or — if security has been given previously — who has been notified that it may extend to liabilities under the guarantee, and the only other security is the asset financed under the facility. A ‘sole director guarantor’ is a prospective guarantor who is the sole director of a company which is to be the principal debtor. In either case, s 31(4)(b) through 31(4)(e) of the Code (provision of information and copies of certain documents) do not apply. Nor do s 31.5 (cooling-off period), s 31.6 (signing in absence of principal debtor) or s 31.7 (additional copies of certain documents/information). In the case of a sole director guarantor, the requirements are all superfluous, since the guarantor is the sole director of the principal debtor. Where the prospective guarantor is a director of the company which will be the principal debtor, s 31.4(d) (provision of copies of certain documents) and 31.5 (cooling-off period) of the Code apply in a modified form. The guarantor may waive the right to receive the documents referred to in s 31.4(d) since, in many cases, they will already have the information in their capacity as director. The lender must, however, provide any s 31.4(d) document requested. The prospective guarantor may also waive their right to the cooling-off period provided by s 31.5 of the Code.

11.5.7

Debt collection

Banks agree to comply with the ‘Debt Collection Guideline: for Collectors and Creditors’ issued by the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission. Banks must take reasonable steps to ensure that their representatives also comply with the Guidelines: Code of [page 375] Banking Practice, s 32.1. Debts will only be sold to third parties that comply with the Guidelines: Code of Banking Practice, s 32.2. The 2013 Code adds some protection for debtors in financial difficulty. Section 32.3 prevents the bank from assigning a debt to a third party when: the bank is considering a hardship application, either under s 28 of the Code

or the hardship variation provisions of the National Credit Code; or the customer is complying with an agreed arrangement. Section 32.3 of the Code does not prevent a bank from assigning a debt as part of a funding arrangement. The section gives securitisation, or the issue of covered bonds, as examples of funding arrangements.

11.5.8

Closing the account

Subject to the terms and conditions of the relevant banking service, a bank: will close an account that is in credit upon request by the customer; may close an account in credit by giving notice that is reasonable in all the circumstances and repaying the amount of the credit balance; may charge the customer an amount that is a reasonable estimate by the bank of the costs of closure: Code of Banking Practice, s 33. As to the right of the bank to close an account, this seems to be a restatement of the existing position: see Prosperity Ltd v Lloyds Bank Ltd (1923) 39 TLR 372; and see the discussion at 3.4.1. As to the customer’s rights, the Code may be more favourable to the bank, since the previous law was unclear about termination when the terms and conditions called for the return of a passbook: Jamieson (1991). The Code unfortunately does not address the question of when the bank may close an overdraft account: see 3.4.

11.5.9

Dispute resolution under the Code of Banking Practice

The Code requires a bank to have both internal and external procedures for dispute resolution. It must also assist in establishing a Code Compliance Monitoring Committee.

Code compliance monitoring The Code Compliance Monitoring Committee (CCMC) is intended to monitor compliance and to investigate any allegations that the code has been breached. The CCMC is specifically prohibited from making any determination on any other matter: Code of Banking Practice, s 36(b). [page 376]

The CCMC consists of a representative appointed by the banks who have adopted the Code, a consumer representative appointed by the consumer and small business representatives on the board of the FOS and one person who acts as Chair of the CCMC: Code of Banking Practice, s 36(a). The Australian Securities and Investment Commission (ASIC) had the task of monitoring compliance of the old Code. This direct responsibility is now performed by the CCMC, which is charged to ensure that a report of its yearly review is lodged with ASIC: Code of Banking Practice, s 36(h). The CCMC function is limited to consideration of the Code as applied since the CCMC was established. It has no power to investigate any issues relating to the Code before that time: Code of Banking Practice, s 36(b).

Internal processes Banks must have internal processes for handling a dispute. The process must meet certain standards set by ASIC: Code of Banking Practice, s 37.1. The ASIC standards apply to individuals and some, but not all, small businesses. Where the customer falls within the Code but not within s 37.1, the Code itself sets out minimum standards: Code of Banking Practice, s 37.3. A ‘dispute’ exists when a complaint by a customer about a banking service has not been immediately resolved. The process must be free of charge and must meet certain Australian standards. It must meet the timeframes described below, and the bank must provide written reasons for its decision: Code of Banking Practice, s 37.1. The bank must respond within 21 days of becoming aware of the dispute. Within that time, it must either complete the investigation and inform the customer of the outcome, or advise that more time is needed: Code of Banking Practice, s 37.3(b). Unless there are ‘exceptional’ circumstances, the bank must complete its investigation within 45 days: Code of Banking Practice, s 37.3(d). Where the bank is not able to resolve the dispute within the 45-day period, it must inform the customer of the reason for the delay, provide monthly updates on progress and specify a date when a decision may reasonably be expected: Code of Banking Practice, s 37.3(d).

External processes Each bank must have available an external impartial process for resolving disputes. This process must be free to the customer and be consistent with

ASIC Policy Statement 139 — ‘approval of External Complaints Resolution Schemes’: Code of Banking Practice, s 38.1. In practice, subscribing banks are members of the FOS: see 11.7. [page 377]

11.6

The ePayments Code

11.6.1

Introduction

The Committee of Inquiry into the Australian Financial System (1981) expressed concern about the appropriate mix of obligations and liabilities in the consumer EFT system. However, it indicated that it had not undertaken enough work to provide a full assessment. It recommended that the federal government establish a taskforce, with representation from governments and all interested parties, to examine the need for legislation. The recommendation was never acted upon: see Tyree (1983a). The EFT issue was re-examined in 1983 in a report undertaken by the Martin Review Group on the Australian Financial System. The Martin Report recommended that no legislation be undertaken. There was enough concern to recommend the establishment of the Australian Payments System Council. The Council was established in 1984 and charged with the oversight of the Australian payments system and, in particular, charged to consider the development of EFT standards. The Council was abolished in accordance with the recommendations of the Wallis Report. The development and oversight of the ePayments Code is now the responsibility of ASIC: see the discussion in 1.4.1. At the same time as the establishment of the Australian Payments System Council, the federal government announced the formation of an interdepartmental working group under the chairmanship of Treasury, to assess the operation of the EFT system. The working group was also to consider if formal arrangements were necessary to regulate the rights and obligations of the users and providers of EFT services. The report of the working group in October 1985 found that there was cause for concern. It recommended that financial institutions should be required to change their current practices — either by altering the conditions of use or, at the very least, by providing clear and honest information to users. The working group considered three options: legislation; an industry code of conduct; and voluntary action by the financial institutions. Partly because the

rhetoric of the day was ‘let the market decide’, the working group opted for the third of the options — conveniently overlooking the fact that it was the market which had produced the unsatisfactory results in the first place. At the same time the report of the working group was being finalised, a meeting of the Standing Committee of Consumer Affairs Ministers (SCOCAM) came to the conclusion that some government intervention would be necessary before any real changes could be expected. A draft code of conduct was prepared by Victoria and New South Wales and released at about the same time as the report of the working party. In an effort to forestall state legislation, the states — which had previously been pointedly excluded — were invited to join the working group. The second report of the working group appeared in September 1986. This report recommended [page 378] adoption of a voluntary code known officially as the ‘Recommended Procedures to Govern the Relationship between the Users and Providers of EFT Systems’ but usually referred to simply as ‘the EFT Code’. This Code, in terms identical to the Code prepared by Victoria and New South Wales, was endorsed by the federal government and the state Consumer Affairs ministers. The working group was requested to undertake a monitoring role to see that the implementation of the EFT Code proceeded smoothly. It was to report on that implementation in March 1988, but the report was initially delayed until late 1988 and finally appeared in mid-1989. The report found that some institutions had been slow to implement the EFT Code, and that there were inadequacies in complaint-handling procedures.

11.6.2

Revised EFT Code 2001

In March 1998, the Australian Competition and Consumer Commission and the Treasury released a report entitled Electronic Funds Transfer. The thrust of the report was that there are significant shortcomings in both the EFT Code and its implementation. The report offers a number of recommendations for modifications of the EFT Code and, most importantly, a specification of minimum, industry-based administrative and public reporting arrangements to support the modified EFT Code. Technical developments in the payment system, particularly the development of smart cards and other forms of ‘computer money’, made it

clear that major changes to the EFT Code were required. The original code applied only to transactions which were intended to be initiated by a combination of card and Personal Identification Number (PIN). With the development of telephone and computer banking, this requirement was clearly an anachronism. After a long process of consultation and revision, ASIC released a revised EFT Code of Conduct on 1 April 2001. While lacking the force of legislation, it is supported by both the industry and the federal government. Any EFT dispute which falls within the jurisdiction of the FOS is governed by the EFT Code: see 11.7. The revised EFT Code was itself subject to minor amendments in March 2002 and November 2008. The 2002 amendment made minor changes to the requirements for periodic statements. The 2008 amendments added Part D, which is aimed at facilitating account switching.

11.6.3

ASIC review 2007

Developments in electronic payments have admittedly outstripped the reach of the revised EFT Code. ASIC released a consultation paper on 12 January 2007, which discussed many of the issues relating to the existing EFT Code and called for submissions. [page 379] ASIC released Report 218, Electronic Funds Transfer Code of Conduct Review: Feedback on CP 90 and Final Positions, on 2 December 2010. The report summarised ASIC’s position on the review and indicated certain changes. The new EFT Code was drafted accordingly.

Changes from the revised EFT Code ASIC released the fashionably renamed ePayments Code on 20 September 2011. Most of the changes from the Revised Code are minor. Liability for unauthorised transactions, possibly the most important part of the Code, is essentially unchanged from the revised EFT Code, except where the customer leaves a card in an active automated teller machine (ATM). A consumer is now liable for unauthorised transactions that occur because the customer leaves a card in an active ATM. This change does not seem a significant step forward in consumer protection.

The ePayments Code purports to regulate the problem of mistaken payments, but the relevant sections might have been drafted by the banks, rather than consumer advocates. A set of ‘light touch’ requirements for low-value products (those with a maximum balance of $500) — ‘light touch’ should be understood as failing to protect consumers. The ePayments Code allows electronic delivery of code disclosures where consumers agree; this is to be welcomed.

A voluntary code The ePayments Code remains voluntary and continues to exclude small businesses. The exclusion of small businesses presents a rather charming anomaly. Small businesses are covered by the Code of Banking Practice and are able to take complaints to the FOS. As a result, small businesses have better protection than consumers against liability for unauthorised transactions: see the example of R v Johnson [2006] QCA 362, discussed in detail at 4.10. Small businesses may also get a better deal when complaining about mistaken transactions. The voluntary nature of the ePayments Code is likely to cause problems and disputes. The old EFT Code — also voluntary — worked well, partly because there were relatively few financial institutions to which it could apply. There was intense political pressure on these institutions to subscribe to the EFT Code, and the result was almost 100 per cent compliance with its requirements. The ePayments Code is much more ambitious. It attempts to cover all forms of electronic payment transactions. This is an ambitious undertaking, and the definition sections reflect the complications, but it also has the effect of potentially applying [page 380] to a very large number of institutions. Many of these institutions have little or no experience with payments or with the requirements of a code of conduct. It remains to be seen if the voluntary subscription model will continue to be successful in these conditions.

‘Plain English’ drafting Report 218 contained the usual obligatory commitment to ‘plain English’ drafting — usually honoured more in the concept than in the result. For

example, the ‘plain English’ of the ePayments Code redefines a common English word, ‘transaction’, as a transaction to which the ePayments Code applies.

The ePayments Code and consumer protection As a consumer protection measure, the ePayments Code is a significant disappointment. As discussed in the introductory section, most consumer protection either gives consumers greater rights or better methods of enforcing existing rights. The ePayments Code, under the stewardship of ASIC, trades strict legal rights for enforcement rights. It is a consequence of the approach taken by ASIC, illustrated by the following quote from Report 218 (at 1): In many instances we have had to make a judgement about the appropriate balance between competing stakeholder interests.

Consumer protection is not a poker game where all the players are equal. The whole reason for the existence of the original EFT Code was that some of the ‘stakeholders’ misused their power to oppress other ‘stakeholders’. Treating them as equal allows abuse to creep back in, as is seen clearly in the sections dealing with mistaken payment. The remainder of this section discusses the ePayments Code in more detail.

11.6.4

Application of the ePayments Code

The ePayments Code is effective from 1 July 2012 and, like its predecessor, it is voluntary. Institutions must ‘subscribe’ to the ePayments Code before it applies to them.

Low-value facilities The architects of the ePayments Code found it impossible to treat all forms of payment identically. There are ‘more limited’ requirements for low-value facilities — currently defined as facilities that can hold a balance of no more than $500. Why these should be treated differently from low balance account facilities is not explained. See Tyree (1999) for an argument that most facilities should be treated as accounts. [page 381]

Contractual effect When the ePayments Code applies, it is required to be a term of the contract

between the subscriber institution and the account or facility holder. This will not always be to the advantage of the holder: see, for example, 11.6.10.

Application of the ePayments Code The ePayments Code applies to ‘transactions’ by a holder or user other than those: through a business facility; through a facility where the holder and the subscriber are not in a contractual relationship; and where the transaction is on a ‘biller account’: ePayments Code (cl 2.1). The second exception is interesting, since the ePayments Code purports to deal with mistaken payments: see 11.6.10. Clause 43 of the ePayments Code allows ASIC to include or exclude transactions, and cl 2.3 allows a subscriber to extend the operation of the ePayments Code. Clauses 2.4 and 2.5 of the ePayments Code clarify the application. The ePayments Code applies to: payments; funds transfers; and cash withdrawal transactions initiated by electronic equipment, but not intended to be authenticated by comparing a manual signature with a specimen signature. Clause 2.5 then provides a ‘shopping list’ of included transactions, but there is no indication of whether it is to be exclusive.

Special definitions Clause 2.6 of the ePayments Code defines some terms. As noted above, this ‘plain English’ document gives special definitions to many plain English words. This is not the place to repeat all of the definitions, but an example may serve to point out some anomalies: ‘Account’, for example, refers only to an account maintained by a subscriber belonging to an identifiable holder who is a customer of the subscriber. As already noted, a ‘transaction’ is a transaction to which the ePayments Code applies. Suppose a funds transfer is mistakenly made to an account with an institution that does not subscribe to the ePayments Code. The payment is made from an account held by a subscribing institution. Do the mistaken payment provisions require the paying institution to investigate? According to the ePayments Code, the payment is not made to an ‘account’, since the

receiving account is not held by a subscriber, and a ‘mistaken payment’ must be made to an ‘account’. [page 382] The ePayments Code — supposedly a consumer protection measure — appears to give the consumer much less protection than the general law: see the discussion at 11.6.10 and Chapter 10.

Signatures Signatures cause some problems. The EFT Code was not intended to cover traditional transactions where the signature is the principal form of providing authority. The reason for this is that the common law rules adequately govern the allocation of liabilities when there is a dispute. However, technological advances mean that ‘signature dynamics’ might be used to provide an access method which clearly should be covered by the ePayments Code, since the common law is not adequate to resolve disputes. The ePayments Code solution is to exclude ‘transactions’ not intended to be authenticated by comparing a manual signature with a specimen signature. ‘Manual signature’ includes handwriting on an electronic tablet. An electronic device that compared the manual signature with a specimen in order to authenticate a transaction would not be caught by the ePayments Code.

Pass codes and identifiers The EFT Code distinguished between ‘codes’ and ‘identifiers’. The ePayments Code distinguishes between ‘pass codes’ and ‘identifiers’. Roughly speaking, ‘pass codes’ are secrets used to authenticate and identify the user. ‘Identifiers’ must be provided to perform a transaction, but the ePayments Code gives account numbers as an example. However, if the transaction device required the user to supply a fingerprint, then the fingerprint information would be an ‘identifier’. Various forms of biometric information, known more colourfully as ‘warm body identifiers’, have been proposed as identifiers. The fingerprint identifier would be used to authenticate the transaction.

Funds transfer Previous editions of these regulatory documents provided an unsatisfying definition of ‘funds transfer’. The ePayments Code avoids this problem by using the term but not defining it.

The problem is that the notion of a ‘funds transfer’ or a ‘transfer of value’ is a banking concept, not a legal one. In law, an account is merely a record of transactions, and a bank account is one which records indebtedness from the banker to the customer when the account is in credit. Even though the phrase ‘transfer of value’ may be useful to bankers and financiers, its importation into a legal document is bound to cause confusion: see the discussion at 9.12.6. [page 383]

11.6.5

Disclosure requirements

One of the earliest consumer complaints about the EFT system was that there was insufficient disclosure, in that: terms and conditions of usage were unavailable until the customer had applied for and been issued a card; terms and conditions were often incomprehensible to the average user, and were found to be unfair where they could be understood; liabilities of the user were often found in the ‘fine print’; the user was often left with insufficient information about what to do when the card was lost or stolen; and there was seldom any information available about how to contest disputed transactions. The ePayments Code addresses this problem at Chapter B.

Terms and Conditions Account institutions must provide clear and unambiguous Terms and Conditions of use of the facility: ePayments Code, cl 4.1. Terms and Conditions must comply with the requirements of the ePayments Code and must not impose liabilities or responsibilities that exceed those of the Code: ePayments Code, cl 4.2. The Terms and Conditions must be supplied to the holder no later than the time of initial use, and they must be available to any holder on request: ePayments Code, cl 2.2. This is a regrettable weakening of the disclosure requirements of the previous EFT Code. That Code required the Terms and Conditions to be available at all branches on request, not just upon request by a ‘holder’. Under both the revised EFT Code and the ePayments Code, an

institution would not be in breach if it refused to supply Terms and Conditions to a non-holder. For low-value facilities, the subscriber should supply Terms and Conditions if practical, but, if not practical, it suffices to provide a notice that highlights ‘key terms’. The ePayments Code gives some examples of ‘key terms’, but specifies no further requirements.

Other disclosures Clause 4.6 of the ePayments Code lists information which must be given to holders if known to the subscriber. These include: fees and charges for various transactions on the account; any restrictions over which the subscriber has control; description of the transactions available to holders and facilities available (but not for low-value facilities); [page 384] how to report loss, theft, etc, of a device or a breach of security; and how to make a complaint or query any required statement of account. Subscribers to the ePayments Code must provide a means for holders to report loss, theft, misuse or security breaches, but there is no such requirement for low-value facilities: ePayments Code, cl 4.9.

Expiry dates One of the most obnoxious ASIC capitulations to industry lobbying was the inclusion of expiry dates. It seems that any ‘facility’ can have an expiry date, after which the subscriber simply pockets the funds and has no further obligation to the holder. The expiry date must be disclosed if known, but the ePayments Code allows subscribers to have ‘floating’ expiry dates, determined by some algorithm which need not be disclosed to the holder. Clauses 18.1 and 18.2 of the ePayments Code set a minimum expiry date of 12 months after activation or reloading for certain types of facilities, but this ‘regulation’ is relatively useless once expiry dates are permitted.

11.6.6

Changing Terms and Conditions

When EFT was first introduced, it was common for the Terms and Conditions to contain a clause to the effect that the card-issuer had the right to unilaterally and without notice change the terms of the contract. At the other extreme, consumer groups sometimes argued that the Terms and Conditions were like any other contract and so could not be unilaterally altered by either party. Neither position is reasonable. Some Terms and Conditions are clearly important and should not be altered without notice being brought to the attention of each individual user, but others are less significant and may reasonably be changed by notice. It may be necessary to make rapid unilateral changes when the security of the system is in issue. The ePayments Code adopts a sensible classification and regime of alteration. Where the changes are necessary to maintain the security of the system or of individual accounts, the account institution is given the authority to change the conditions of use unilaterally and without advance notice: ePayments Code, cl 4.16. Certain changes require advance written notice of at least 20 days. Such changes include: increased or imposed charges; increased liability for losses; and variation of transaction limits: ePayments Code, cl 4.11. [page 385] If transaction limits are removed or raised, the notice for variation of transaction limits must include a ‘clear and prominent’ statement that the holder’s liability could be increased in the event of unauthorised transactions: ePayments Code, cl 4.12. Other variations must merely be notified in advance in a way that is likely to come to the attention of as many account holders as possible: ePayments Code, cl 4.13. This could be through notices accompanying the periodic account statement, notices on terminals and in branches or through press advertisements. As usual, little of this applies to low-value facilities, where disclosure requirements are almost non-existent: ePayments Code, cl 4.15.

11.6.7

Paper records

Should electronic transactions be evidenced by paper receipts? If so, what information should the receipt contain? Is it necessary to issue a paper receipt at the time of the transaction, or is it sufficient to issue them periodically? The EFT Code took a hard position on all of these questions, and the revised EFT Code maintained similar requirements, but made special provision for transactions conducted by voice communications, such as automated voice response systems.

Receipts The ePayments Code, as might be expected, further eases the requirements to give paper receipts. The basic rule is that a subscriber should take all reasonable steps to offer users a receipt at the time of the transaction, but the basic rule does not apply to telephone banking or to low-value facilities: see ePayments Code, cll 5.1, 5.7 and 5.8. Where a receipt is issued, it must include the usual information expected of a transaction receipt — namely: the amount; the date; the type of transaction; an indication of the account being debited or credited; and information enabling the subscriber to identify the holder and transaction. The receipt must not contain information that would increase the risk of unauthorised transactions. If the receipt is for payment of goods and services, it should contain the name of the merchant or an invoice reference number. If the transaction is a payment to a merchant, then the receipt must contain the name of the merchant to whom payment is made. Where possible, a receipt for a transaction should indicate the balance in the account, but only if it is not likely to compromise the privacy or security of the user. [page 386] Of course, the receipt provisions do not apply to low-value facilities: ePayments Code, cl 5.8.

Statements Clause 7 of the ePayments Code deals with the responsibilities of the

subscriber to provide periodic accounts. Statements should be provided at least every six months, unless the facility is a passbook account or has a zero balance with no transactions during the period: ePayments Code, cl 7.1. Holders must be given the option of receiving more frequent statements: ePayments Code, cl 7.2. The ePayments Code dictates the contents of a ‘usual statement’ in cl 7.4, and cl 7.6 provides that a special statement issued on request should contain as much of that information as possible. It almost goes without saying that none of the statement requirements apply to low-value facilities. If the holder of the facility is not known, the subscriber must only provide a means to access the information required by cll 7.1–7.6: see ePayments Code, cl 7.8.

Obligation to read statements The revised EFT Code forbade institutions from including clauses which would have the effect of imposing an obligation on the user to inspect the statement: revised EFT Code, cl 4.4; and see the discussion at 4.9.1 as to the general duty of the customer with regard to the statement of account. This restriction does not appear in the ePayments Code — another example of the influence exercised by the industry over this version of the Code. Indeed, according to cl 7.4(g) of the ePayments Code, the statement must contain: … a suggestion that the holder check each entry on the statement and promptly report any possible error or unauthorised transaction to the subscriber.

11.6.8

Liability for unauthorised transactions

Until the introduction of the EFT Code, the usual conditions of use issued by the financial institutions threw the risk of all unauthorised use onto the customer, at least until such time as the customer notified the institution of the loss of the card and PIN. For example, a typical condition read: If the Card and PIN is lost or stolen the Customer must immediately notify the Bank. Until the Bank receives such notification the Customer shall be liable for all transactions conducted with the Card and PIN.

It may be that such clauses could be attacked as unfair contract terms under the new Australian Consumer Law provisions: see 11.2. [page 387]

An unauthorised EFT transaction is analogous to a forged drawer’s signature on a cheque, and it is instructive to recall the common law position — namely that: the bank may not debit the account of the customer, even if the customer has been careless in the keeping of the chequebook: see Kepitigalla Rubber Estates Ltd v National Bank of India Ltd [1909] 2 KB 1010 and 7.4.2; the customer has no duty to discover forgeries; the customer must organise business affairs in such a manner as to guard against forgeries: see National Bank of New Zealand Ltd v Walpole and Patterson Ltd [1975] 2 NZLR 7; Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; and see the discussion at 7.4.3. The altered position of consumers was clearly intolerable, and the original EFT Code adopted a scheme which provided for limited liability in the event that the customer had not been careless with the PIN. The result was of limited success, partly because of an institutional attitude which held that the customer must have been careless if the transaction occurred. There was no provision in the EFT Code that clearly identified the burden of proof. The revised EFT Code provided a ‘no-fault’ allocation of liability unless the institution can prove certain matters. The ePayments Code retains most of this regime, although, as usual, none of it applies to low-value facilities. ASIC has no concern for consumers unless they risk more than $500.

No user liability The ePayments Code first identifies those unauthorised transactions for which it would be completely unfair to hold the user liable. The account holder has no liability for losses: caused by fraudulent or negligent conduct of the subscriber’s employee, agent, a third party involved in networking arrangements, a merchant or their employee or agent: ePayments Code, cl 10.1(a); resulting from a faulty, forged, expired or cancelled device, identifier or pass code: ePayments Code, cl 10.1(b); occurring prior to the receipt by the user of all components required for the transaction (devices, pass codes): ePayments Code, cl 10.1(c); caused by the same transaction being debited more than once: ePayments Code, cl 10.1(d);

occurring after the account institution has received notice that the device and/or pass code has been compromised: ePayments Code, cl 10.1(e); or occurring in any other situation where it is clear that the user has not contributed to the loss: ePayments Code, cl 10.3. [page 388] Clause 10.2 of the ePayments Code makes special provisions where the facility does not require a pass code to initiate a transaction. If only an identifier is required, then the holder has no liability for an unauthorised transaction. If a device is required, then the holder is liable only if the user unreasonably delays reporting the loss or theft of the device. The subscriber has the burden of showing that the user received any device or pass code. It is not sufficient to show delivery to the user’s address, and the ePayments Code also prohibits any term purporting to deem that devices or pass codes were received: ePayments Code, cll 10.4 and 10.5.

User liable for losses Clause 11 of the ePayments Code applies when cl 10 does not, and a holder may only be liable for losses arising from unauthorised transactions if the losses fall within the circumstances of cl 11. A holder is liable for actual losses in three circumstances — namely, where: the user contributed to the loss through fraud or mishandling the pass codes: ePayments Code, cl 11.2; the holder has left the card in an ATM: ePayments Code, cl 11.4; the user contributes to losses by unreasonably delaying reporting a loss, misuse or breach of pass code security: ePayments Code, cl 11.5. In all cases, the subscriber has the burden of proof. The standard is ‘the balance of probabilities’, and all reasonable evidence may be considered. The fact that the facility has been accessed with the correct device and/or pass code is significant but not decisive: ePayments Code, cl 11.8. Clause 12 of the ePayments Code sets standards for determining whether the holder has contributed to the loss though mishandling the pass codes: see 11.6.8. The holder who leaves a card in an ATM will not be liable unless the ATM

incorporates ‘reasonable safety standards’ that mitigate the risk of a card being left in an ATM. There are no publicly available standards by which this might be judged. The ePayments Code, in a note to cl 11.4, suggests that the ATM might capture cards that are not removed in a reasonable time, or ATMs may require a user to remove the card before the transaction can be initiated. Clause 11.3 deals with a facility that uses more than one pass code, where the user has breached the security requirements with respect to one of the pass codes. In order to hold the user liable, the subscriber must also show that the proven breach was more than 50 per cent responsible for the losses, when assessed together with all contributing causes. [page 389]

Limited user liability In the absence of proved ‘fault’, the account holder is liable for the least of: $150; the balance of the relevant accounts, including any pre-arranged credit facility; or actual loss at the time of notification that the access method has been compromised (excluding any single day loss which exceeds any periodic transaction limit).

Pass code security As mentioned above, ‘fault’ may be fraud, undue delay in notification or mishandling of pass codes. In order to prove that the user mishandled pass codes, the account institution must prove a breach of cl 12 of the ePayments Code. Clause 12 only applies where one or more pass code are required — pass codes being information known only to the user and which the user is obliged, by the Terms and Conditions, to keep secret. Clause 12.2 of the ePayments Code identifies three circumstances in which the user contravenes the clause: voluntary disclosure of the code to another person; if the facility uses a device, recording one or more of the codes on the device or keeping a record of the code with the device so that the complete access method is liable to simultaneous loss or theft; or

if the access method does not use a device, recording all codes on one article or several articles all subject to simultaneous loss or theft. In the last two cases, the user may record the codes, provided a reasonable attempt is made to protect the security of the record. This may be done either by making a reasonable attempt to disguise a code or to prevent unauthorised access: ePayments Code, cl 12.3. Certain self-selected pass codes may be prohibited by the subscriber, for example: a numeric code representing the user’s birthdate; or an alphabetic code that is a recognisable part of the user’s name. Although an account institution may provide guidelines for ensuring security of an access method, it must make clear that the liability of the user is determined by the ePayments Code, not by the guidelines: ePayments Code, cl 13. However, if a user follows security guidelines established by the account institution there will not be a breach of cl 12: ePayments Code, cll 12.8 and 12.9.

Application to credit cards Credit and charge cards present a special problem. When used in face-to-face sales, these methods of payment require a signature as the principal authentication method. [page 390] However, they may, in general, be used to make purchases by telephone or other electronic methods of communication. When so used, authentication is normally by means of card number together with a merchant-initiated ‘verification’ procedure. The ePayments Code applies when the cards are used to access the account through electronic means. However, credit and charge card schemes have their own procedures for dealing with unauthorised transactions. This could lead to a conflict between the solution offered by the ePayments Code and that contained in the Terms and Conditions of card use. The solution to this problem is found in cl 11.10 of the ePayments Code. The account holder cannot be held liable under cl 11 for any losses exceeding the amount of liability the holder would have had if the institution had exercised its rights under the rules of the card scheme.

The wording sounds awkward but is necessary, since the institutions regularly claim that the customer has no right to insist that the institution exercise its rights under the card scheme. This claim may be incorrect if the decision in Riedell v Commercial Bank of Australia Ltd [1931] VLR 382 is correct. That case held that, as agent of the customer, a bank was obliged to exercise its rights in a way that would serve the interests of the customer. While that case probably does apply, the wording of cl 11.10 of the ePayments Code is welcome, to ensure that the standard institutional argument may not be used against a customer.

Periodic limits Since the customer is not liable for any losses which exceed the daily or other periodic limit, there is a temptation for institutions to set unrealistically high limits, or none at all. Early drafts of the revised EFT Code set a daily limit, but representations from the institutions convinced the architects of the Code that a uniform limit was undesirable. Clause 11.9 of the ePayments Code attempts to reduce the potential for abuse. The clause expressly applies where there is an alleged unauthorised transaction and the account institution has not applied a reasonable daily or other periodic transaction limit. ‘Reasonable’ is to be determined having regard to prevailing industry practice: ePayments Code, cl 11.9(a). Clause 11.9 also authorises a dispute resolution body to reduce the cl 5.5 liability of the account holder by any amount that it considers fair and reasonable. In so doing, it must have regard to whether the security and reliability of the authentication scheme was adequate to protect the user in the absence of reasonable periodic limits: ePayments Code, cl 11.9(b). Where the losses involved drawing on a line of credit, the dispute resolution body may also consider whether the user was warned of the risks involved: ePayments Code, cl 11.9(c). [page 391]

11.6.9

‘Book up’ arrangements

According to cl 2.6 of the ePayments Code, a ‘book up arrangement’ means: … credit offered by merchants for the purchase of goods or services commonly used by Aboriginal people in remote and regional areas of Australia. It is common for merchants to hold a consumer’s debit card and/or pass code as part of a book up arrangement.

There is obviously room for abuse in book up arrangements, and the

ePayments Code addresses the issue in cl 20, albeit weakly and probably ineffectually. If a subscriber and a merchant have a merchant agreement, the agreement must prohibit the merchant from holding a user’s pass code as part of a book up arrangement.

11.6.10 Mistaken payments ASIC was determined to include regulation of mistaken payments in the ePayments Code. However, compromises made to placate ‘stakeholders’ resulted in a regime that deprives consumers of ordinary legal rights. The legal position of the consumer who makes a mistaken payment is discussed at Chapter 10. The rights under the ePayments Code are a pale reflection, even when the mistaken transaction is reported immediately. If not reported within 10 days, the rights are even fewer. In all cases, the consumer is at the mercy of the institutions, which need do nothing if not convinced that a mistake has been made.

Report made within 10 days Clause 28 of the ePayments Code applies when: the mistaken payment is reported within 10 days of the payment; the sending ADI is satisfied that a mistaken payment has occurred; and the account of the unintended recipient contains sufficient funds to support repayment. The receiving ADI must return the funds to the sending ADI — but only if satisfied that a mistaken payment has been mad. The return must be effected within 5 days if practicable, or within up to 10 business days, if longer is required. If not satisfied that a mistaken payment has occurred, the receiving ADI may seek the consent of the unintended recipient. The history of the way in which ADIs have dealt with mistaken internet payments gives little hope that many ADIs will be convinced that a mistaken payment has been made: see Tyree (2003). [page 392]

Report made after 10 days If the customer does not report the mistaken payment within 10 days, then the responsibilities of the ADIs under the ePayments Code are substantially

reduced. Note that this may often be the case, since the customer may not discover the mistake until learning that the original payment has not been received. If the receiving ADI is satisfied that a mistaken internet payment has been made, it must: prevent the unintended recipient from withdrawing the funds for 10 further business days; and require the unintended recipient to ‘show cause’ why they are entitled to the funds. If the unintended recipient does not establish that they are entitled to the funds within 10 business days, the receiving ADI must return the funds to the sending ADI.

Funds available, report made after 7 months If the sending customer does not report the mistaken payment more than 7 months after payment, then the responsibility of the receiving ADI is very limited. If satisfied that a mistaken internet payment has been made, it must seek the consent of the unintended recipient to return the funds to the user: ePayments Code, cl 30.2.

Funds not available Clause 32.1 of the ePayments Code provides that the receiving ADI must use reasonable endeavours to retrieve the funds from the unintended recipient for return to the payer where: both ADIs are satisfied that a mistaken internet payment has occurred; and the account of the unintended recipient is insufficient to make restitution; The clause gives as an example — presumably humorous — that the ADI might facilitate repayment by instalments.

11.6.11 Mistaken internet payments: evaluation The ePayments Code treatment of mistaken internet payments is worse than no treatment at all. The FOS had evolved procedures for dealing with mistaken payments that were working well — certainly much better than the feeble provisions of the ePayments Code. The new procedures are unlikely to be used at all, except in the clearest

possible cases. The ADIs will never be ‘satisfied’ that a mistaken payment has occurred. The notion that the unintended recipient will ‘consent’ to the return of funds is almost laughable. [page 393] The FOS has no jurisdiction to bring the receiving ADI to account, since there is no contractual relationship between the payer and the receiving ADI, and the receiving ADI is not providing a ‘financial service’ to the payer: see 11.7.2. If the sum involved is significant, the sending customer should consider taking direct action in a local court against the receiving ADI. The principles involved are set out at Chapter 10. See also Tyree (2003).

11.6.12 Other ePayments Code regulation The ePayments Code also regulates some other aspects of the EFT system — most notably: deposits using electronic equipment: ePayments Code, cl 19; aspects of electronic communications: ePayments Code, cl 21; complaint-handling procedures: ePayments Code, Chapter F; and monitoring and periodic review of the Code: ePayments Code, cl 44. In practice, most major subscribers are part of an industry complaint scheme. In the case of banks and other ADIs, this is the FOS.

11.7

The Financial Ombudsman Service

The FOS is a dispute resolution service. It is available to individuals and small businesses where the claim is for no more than $500,000 and where the claim meets the other requirements for jurisdiction: see the discussion at 11.7.3.

11.7.1

Establishment

Motivated by a desire to improve public relations and to forestall any proposed legislation, the Australian Banking Industry Ombudsman was established in 1990 to provide a mechanism for the resolution of disputes between banks and individual — that is, non-business — customers. The scheme was modelled on a comparable scheme in the United Kingdom: see Burton (1990).

The scheme was broadened in 2003 to include some non-bank members. At the same time, the name was changed to the Banking and Financial Services Ombudsman. In 2008 the service was merged with the Financial Industry Complaints Service (FICS) and the Insurance Industry Ombudsman Service (IIOS), and the name was changed to the Financial Ombudsman Service (FOS). Further consolidation in 2009 brought in the Credit Union Dispute Resolution Centre (CUDRC) and Insurance Brokers Disputes Ltd (IBD). Until 2010, the FOS operated under five different terms of reference, which reflected the five different organisations. It now operates under terms of reference approved [page 394] by ASIC. The scheme provides a free service to consumers and is funded by the subscribing members. The FOS has been approved by the ASIC as an alternative dispute resolution scheme. Every licenced financial services provider which provides services to retail clients is required to be a member of an approved scheme: Corporations Act 2001, s 912A(1)(g). As an approved scheme, the FOS must comply with certain standards — including providing ASIC with regular reports and other information, as specified in ASIC Policy Statement 139. The success of the FOS is beyond question. It provides accessible independent dispute resolution services that are a model for such schemes.

11.7.2

Jurisdiction

Jurisdiction of the FOS is limited by the Terms of Reference. The Terms of Reference were developed after extensive consultation during 2008 and 2009. They received approval from ASIC in December 2009 but have continued to evolve as new issues come to light. The Terms of Reference discussed here are dated 1 January 2010, as amended 1 January 2014. The principal limitations relate to: the financial services provider (that it must be a member of the scheme): FOS Terms of Reference, cl 14.1; the identity of the claimant: FOS Terms of Reference, cl 4.1; the nature of the dispute: FOS Terms of Reference, cl 4.2; and

a number of exclusions and limitations: FOS Terms of Reference, cl 5. It is not always easy to determine if a particular set of facts comes within the jurisdiction of the FOS. The details are scattered throughout the Terms of Reference — some appearing explicitly in clauses and others contained implicitly in the definitions at the end. The FOS has included guidance on their website, but the only definitive answer must be found in the Terms of Reference: see . This section discusses only disputes which are lodged with the FOS after 1 January 2014, which is when the current Terms of Reference came into effect. The Terms of Reference provide for different rules to apply for acts which occurred earlier.

Identity of disputant Clause 4.1 of the Terms of Reference authorises the FOS to consider certain disputes brought by an individual, certain partnerships, a small business and certain other entities. A ‘small business’ is one which, at the time of the events relating to the dispute, has fewer than: [page 395] 100 full-time (or equivalent) employees, if the business is or includes the manufacture of goods; or 20 full-time (or equivalent) employees, for other types of business. A ‘dispute’ is a disagreement in relation to the provision of a financial service which has not been resolved by the parties. A dispute may also be about certain types of privacy issues: see 11.7.2. The FOS is intended to be a dispute resolution scheme available to ‘consumers’. The concept of a ‘consumer’ has always been difficult to define. The Terms of Reference adopt a notion similar to the notion of ‘retail client’ in s 761G of the Corporations Act 2001. Clause 5.2 of the Terms of Reference gives the FOS the right to exclude an individual from the operation of the scheme on the basis that the person is not a retail client as defined in the Corporations Act 2001.

Nature of dispute Subject to the other clauses of the Terms of Reference, the FOS may only consider a dispute between a financial services provider and an applicant that arises from a contract or obligation arising under Australian law. In addition,

the dispute must arise from or relate to at least one of a long list of alternatives in cl 4.2(b) of the Terms of Reference. The most important ones for banking are: the provision of a financial service by the financial services provider to the applicant; and the provision of a guarantee or security for financial accommodation provided to an eligible applicant. The definition of a ‘financial service’ is wide. It encompasses all financial services provided by a member. Particular inclusions are: a loan or any other kind of credit transaction (including a credit card used overseas); guarantees or charges to secure any moneys owing; a deposit — including a term deposit, a fund management deposit or a retirement savings account; and a facility under which a person may make a non-cash payment. For the full list, see cl 20.1 of the Terms of Reference. ‘Financial services provider’ means a provider of a financial service that is a member of the FOS scheme. The right to complain about breaches of confidentiality is limited. Clause 5.1(a) of the Terms of Reference excludes such complaints, unless the complaint is part of a broader dispute or ‘relates to or arises out of the provision of credit, the collection of a debt, credit reporting and/or the banker-customer relationship’: FOS Terms of Reference, cl 5.1(a)(ii). [page 396] ‘Confidential information’ is not defined, but presumably covers information which would be considered confidential under the rule in Tournier v National Provincial & Union Bank of England [1924] 1 KB 461: see 6.2. The quoted clause would seem to allow the FOS to hear most privacy/confidential information complaints against a bank.

11.7.3

Limits on Ombudsman’s powers

The above requirements may be seen as ‘gateway’ conditions. Once a dispute qualifies under the above conditions, it may still be excluded by cl 5 of the FOS Terms of Reference.

General limitations The jurisdiction of the FOS is also limited to hearing disputes where the amount in dispute does not exceed $500,000: FOS Terms of Reference, cl 5.1(o). For disputes arising between 1 December 2004 and 31 December 2009, the limit is $280,000. The FOS is intended to be a kind of appeal structure. Consequently, it is expected that the financial services provider will have an opportunity to resolve the dispute. Clause 6.3 of the Terms of Reference effectively gives a period of time for this to occur. The general period is 45 days, but that is shortened to 21 days in matters that are more urgent. The FOS is not intended to substitute its commercial judgment for that of the financial institution. Clause 5.2 of the Terms of Reference prohibits the FOS from considering certain disputes which relate solely to a decision about lending or a security where the financial service provider has made a commercial judgment. This does not prevent consideration of disputes relating to the maladministration of a loan or security: FOS Terms of Reference, cl 5.2(c)(1). For similar reasons, the FOS may not consider complaints relating to a general practice or policy of a member. This includes such matters as fees, interest rates and other general charges: FOS Terms of Reference, cl 5.2(b). Of course, this exemption does not apply to complaints involving a breach of duty or contractual obligation with respect to these matters.

Test cases The Terms of Reference contain provisions for ‘test cases’. A financial services provider may notify the FOS in writing that it wishes the dispute to be treated as a test case. The notice must contain an explanation of why the provider believes that the case raises an issue that will have important business consequences for the provider or for providers generally: FOS Terms of Reference, cl 10.1(a). [page 397] The notice must also contain an undertaking that if legal proceedings are commenced within six months of the FOS receiving the notice, the provider will pay the disputant’s costs and disbursements. The disputant is also entitled to interim payments, if reasonable in all the circumstances: FOS Terms of Reference, cl 10.1(b).

The provider must also give an undertaking to resolve the dispute expeditiously. This requires that the provider will institute court proceedings within six months of the date of the notice: FOS Terms of Reference, cl 10.1(c). Upon receipt of a notice which contains all the required undertakings, the FOS has discretion to cease consideration of the dispute: FOS Terms of Reference, cl 10.2. Previous Terms of Reference required the Ombudsman to cease consideration, and it is expected that the FOS will normally do so.

11.7.4

Procedure

Subject to the specific requirements of the Terms of Reference, the FOS may decide upon the procedures to be adopted when considering disputes. In keeping with the informal nature of the process, the FOS is not bound by any legal rules of evidence: FOS Terms of Reference, cl 8.1. Clause 8.5 of the Terms of Reference sets out general procedures for deciding disputes. In normal circumstances, the parties will be given a reasonable time to make submissions and provide information. The FOS then makes a ‘recommendation’: see FOS Terms of Reference, cl 8.5(a). The parties are given an opportunity to accept, but if the provider does not accept, or if either party requests it, then the FOS proceeds to make a ‘determination’: FOS Terms of Reference, cl 8.5(c). The provider is bound by the Determination if the applicant accepts it: FOS Terms of Reference, cl 8.7(b). Acceptance by the applicant releases the provider from liability in respect of all matters resolved by the Determination: FOS Terms of Reference, cl 8.8. If the applicant refuses either a Recommendation or a Determination, then neither party is bound, and other remedies may be pursued: FOS Terms of Reference, cl 8.9.

11.7.5

Access to and disclosure of information

The FOS may require a party to provide necessary information: FOS Terms of Reference, cl 7.2. The party is obliged to comply with such a request, unless prepared to certify that provision of the information would be a breach of a duty of confidentiality owed to a third party and the provider has used its best efforts to obtain consent of the third party to disclosure: FOS Terms of Reference, cl 7.2(a). The party is also excused if it can show that disclosure would breach a court order or prejudice a current police investigation — or if

it can show that the information no longer exists: FOS Terms of Reference, cl 7.2(c). [page 398] The FOS does not have power to compel a complainant to provide information, but failure to do so permits the FOS to proceed on the basis that an adverse inference may be drawn from the refusal. If the applicant refuses to provide requested information, the FOS may discontinue consideration: FOS Terms of Reference, cl 7.5. Either party may request that supplied information remain confidential. Such information may not be disclosed by the FOS without the consent of the party giving the information: FOS Terms of Reference, cl 8.4(b)(ii). Where a party refuses consent to provide information to the other party, the FOS may not use the information to reach a decision adverse to the party to whom confidential information is denied, unless the FOS determines that special circumstances apply: FOS Terms of Reference, cl 8.4(c). Special circumstances might include information provided by a bank regarding security procedures.

11.7.6

Remedies

The FOS may order the financial services provider to undertake a variety of remedial actions. When looking at cl 9.1 of the Terms of Reference, those actions most relevant for banks include: payment of money; forgiveness or variation of a debt; release of securities; repayment, waiver or variation of fees, including fees paid to an agent; and variation of terms of a credit contract in cases of financial hardship. Subject to an overall cap on monetary remedies, the FOS may also order compensation for direct financial loss or damage, for consequential financial loss or for non-financial loss: FOS Terms of Reference, cll 9.2 and 9.3. The FOS may order the provider to pay up to $3,000 of the applicant’s costs in pursuing the matter and may award interest: FOS Terms of Reference, cll 9.4 and 9.5. The FOS may not award punitive, exemplary or aggravated damages: FOS Terms of Reference, cl 9.6. Clause 9.7 of the Terms of Reference sets a cap on the maximum value of the remedy for any claim. At the present time, the limit is $500,000. This

includes actual monetary awards and any remedy — such as the forgiveness of a debt — where the value may be readily calculated. It does not include compensation for costs and awards of interest.

[page 399]

12 Lending: General Principles 12.1

Introduction

Although lending to customers is an important part of the business of banking, the normal relationship of banker and customer does not include any contractual terms related to lending by means other than overdraft. In general, lending by the banker to a customer is the subject of a separate and explicit contract, which is more often than not in writing. The banker has few statutory or other legal privileges when engaged in the business of lending. Aside from the banker’s lien discussed at 16.1 and a few provisions in the Bills of Exchange Act 1909, bankers are in the same legal position as any other credit provider. The Reserve Bank of Australia is given power to determine certain policies in relation to lending. Whenever it is satisfied that it is necessary or expedient to do so in the public interest, the Reserve Bank may give directions as to the classes of purposes for which advances may or may not be made. The power is one of policy only, and the Reserve Bank is prohibited from giving directions with respect to an advance made, or proposed to be made, to any particular person: see Banking Act 1959 (Cth), s 36(1). The power has not been used since ‘deregulation’, and it is unlikely to be in the near future.

12.2

Types of lending

In the past, most lending by Australian banks was in the form of short-term loans provided by way of overdraft. Even in the case of housing finance, where the parties expect that the loan would continue for a number of years, the legal form was that of an overdraft which was repayable ‘on demand’. With the onset of deregulation, as well as other economic changes, this pattern is now the exception rather than the norm.

[page 400] This text is not concerned with the principles of good lending, although such a topic is of the utmost importance to the practising banker. We are concerned here only with the legal aspects of lending. Further, in a general text of this type, we can only provide a survey of the law. There are significant textbooks on the law of securities and of guarantees. In this chapter we provide only an overview.

12.2.1

Secured/unsecured

An unsecured loan is a contract between the lender and the borrower whereby the lender advances money and the borrower promises to repay the sum together with any interest and charges which might be agreed upon. The lender’s only remedy in the event of default is the action for breach of contract. The problem with an unsecured loan is that in the usual case of default the borrower is unable — as distinct from unwilling — to repay the loan. A right of action against such a person is worthless. A secured loan, by contrast, requires that the borrower provide the lender with an interest in some property. In the event of default, the lender may seek to recover the amount due from the property. An interest in the property will not generally be affected by the insolvency of the borrower. A secured loan might be recoverable even when the borrower is unable — as distinct from unwilling — to pay.

12.2.2

Overdrafts

An overdraft facility is a current account which allows the customer to ‘overdraw’ the account. Generally, the overdraft is repayable upon demand: see the discussion at 3.7.4 concerning the meaning of repayment ‘on demand’. The account is operated like a normal current account, with interest being charged on the amount the account is actually overdrawn. There may be a penalty interest rate if the overdraft limit is exceeded. It is customary to charge an ‘establishment fee’ when extending an overdraft. Substantial overdrafts should be arranged ahead of time, but if the customer writes a cheque of a size which would, if honoured, result in the account being overdrawn, then this amounts in law to a request by the customer for an overdraft, which the banker may or may not grant: see Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226; Meldov Pty Ltd v Bank of Queensland [2015]

NSWSC 378; Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31. Australian banks usually charge a fee for permitting the overdraft. Bank fees are a contentious issue: see 4.5.2. In the absence of any agreement to the contrary, the banker may combine the overdraft account with any other current account belonging to the customer — whether that credit account be with the same or a different branch. An agreement which precludes combination may be relatively easily implied but [page 401] does not follow from the mere fact of more than one account being opened by the customer: see 4.4.

Repayment on demand Right to repayment ‘on demand’ does not mean that the facility may be terminated without notice to the customer. The customer must be given reasonable notice, and the bank may not refuse to honour cheques which are outstanding at the time when the notice is given: see, for example, Rouse v Bradford Banking Co Ltd [1894] AC 586; Parras Holdings Pty Ltd v Commonwealth Bank of Australia [1998] FCA 682. The right to claim repayment of an overdraft on demand may be altered or abrogated by an express or implied agreement to the contrary: see Williams and Glyn’s Bank v Barnes [1981] Com LR 205. There may be an obligation to pay outstanding cheques (that is, cheques drawn before notice in the honest belief that the facility was available), but the obligation only exists if the limit of the overdraft has not been reached. Lord Herschell in Rouse v Bradford Banking Co Ltd [1894] AC 586 suggested that the bank is obliged to honour cheques put into circulation before notice, but he qualifies it by saying that they must be within the limits of the overdraft. Problems occur when the bank repeatedly allows the agreed overdraft limit to be exceeded. The question is whether the bank may, without adequate notice, cease to honour cheques drawn in excess of the agreed limit. Illustration: Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31 The company operated an unauthorised overdraft for over a year before a formal agreement was put in place. For more than six months after that, the bank continued to honour cheques that exceeded the agreed limit. The bank manager warned the customer on three or four occasions during early 1989 but continued to honour cheques drawn in excess of the limit. In June 1989 the bank, without notice, dishonoured cheques. The Court held that the conduct of the parties did not lead to an estoppel, since the repeated

warnings showed that the bank retained a discretion. There was no implied term that the cheques would be honoured.

See Sheahan (2001) for a discussion of the Narni case and the issues. The result in Narni would, of course, be different if the customer had received assurances that the cheques would continue to be paid.

Interest The banker has a right to charge interest on overdrafts. The right derives from the usage and custom of bankers. The bank not only has a right to charge interest [page 402] on overdrafts, but may charge it at a variable rate which reflects the rates of the financial markets: see Re City and Country Property Bank Ltd (1895) 21 VLR 405; South Australian Banking Co v Horner (1868) 2 SALR 109. Banks compound interest on overdraft accounts by periodically adding the interest to the outstanding balance. Interest is then computed on the increased balance during the next period. The right to compound interest in this way has long been recognised: see Ex parte Bevan (1803) 9 Ves 223; 32 ER 588; Fergusson v Fyffe (1841) 8 Cl & Fin 121; [1835–42] All ER 48; Yourell v Hibernian Bank Ltd [1918] AC 372; National Bank of Australasia v United Handin-Hand and Band of Hope Co (1879) 4 App Cas 391. At one time, it was thought that this right was limited to certain forms of mercantile accounts, but this restriction is no longer recognised: see National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637 — overruling, on this point, the UK Court of Appeal in Deutsche Bank v Banque des Marchands de Moscou (1931) 4 LDAB 293. The basis for permitting the bank to charge compound interest on a loan is based on a fiction. The fiction, constructed to avoid the effects of the usury laws, is that the loan is considered repaid and then readvanced at each rest period: see National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637; Deutsche Bank v Banque des Marchands de Moscou (1931) 4 LDAB 293; Paton (Genton’s Trustee) v IRC [1938] AC 341. In any case, the right is based on the custom and usage of bankers. The right of bankers to charge compound interest on overdraft accounts was recognised by the High Court in Bank of New South Wales v Brown [1983] HCA 1. However, it also noted that the character of the amount owed as

interest does not change merely because it has been ‘capitalised’. The case concerned an amount owed to the plaintiff bank. Under the appropriate section of the Bankruptcy Act 1966 (Cth), interest could not exceed eight per cent. The bank argued that when the interest was capitalised and debited to the account, it lost its nature as interest, so the section did not apply. The High Court disagreed, holding that the rights of third parties given by the Bankruptcy Act 1966 could not be altered by agreement between the banker and customer: see also Bos International (Australia) Limited v Strategic Nominees Limited (in receivership) [2013] NZCA 643. There is no general presumption that non-bank lenders have a right to compound interest. In general, the loan agreement should be approached without any presumption in favour of either simple or compound interest: see Stein v Torella Holdings Pty Ltd [2009] NSWSC 971; Arlington Group Architects v Attorney-General [1998] 2 NZLR 183. Loan contracts often impose higher interest rates following default. If excessive, these may be unenforceable as penalties. [page 403] Illustration: Beil v Pacific View (Qld) Pty Ltd [2006] QSC 199 A mortgage provided for interest payable at 16 per cent. Clause 5 of the mortgage agreement stated that if it was not repaid by 31 December 2000, the rate would increase to 25 per cent. The defendants argued that clause 5 was unenforceable as a penalty. The Court held that the default rate must not be out of all proportion to the genuine pre-estimate of damages.

The finding in Beil was a rephrasing of the High Court’s decision in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, where it was said (at [32]): … the propounded penalty must be judged ‘extravagant and unconscionable in amount’. It is not enough that it should be lacking in proportion. It must be ‘out of all proportion’.

However, a clause which merely provides for compound interest is not a penalty: see David Securities v Commonwealth Bank of Australia [1990] FCA 148 at [29]. The case went on appeal to the High Court on different issues: see David Securities v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353. The right to charge interest and to compound it periodically does not cease when the bank demands repayment. The right continues until the debt is repaid or a judgment is obtained, whichever occurs first: see National Bank of Greece SA v Pinios Shipping Co No 1 (The Maira) [1990] 1 AC 637. This may

lead to a windfall for the bank if it is able to invoke escalation clauses that permit it to charge higher interest after default. A secured overdraft is not inconsistent with the relationship of banker and customer, nor does it alter in any way the bank’s right to charge and compound interest: see National Bank of Australasia v United Hand-in-Hand and Band of Hope Co (1879) 4 App Cas 391.

12.2.3

Term loans

Lending by way of overdraft fits comfortably into the usual banker-customer relationship, but loans for a fixed period must be more thoroughly documented. As mentioned above, the banker’s position is no different from any other lender in this type of transaction. The primary difference is that the loan is no longer repayable upon demand. Indeed, a demand for repayment before the contractual termination date would be a breach of contract by the bank. Further, while the loan agreement remains in force, the bank has no right to combine the loan account with any account which might be in credit, unless there is a term in the loan agreement which expressly grants the bank the right of combination in the circumstances: see Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, followed on this point by Cinema Plus Ltd v ANZ Banking Group Ltd [2000] NSWCA 195. [page 404]

12.2.4

Commercial/financial bills

Bills of exchange allow the bank to ‘lend its credit’ instead of advancing funds directly to the customer. A bill which bears the acceptance or the indorsement of a bank is known as a ‘bank bill’ and is obviously very valuable on the bill market. In establishing a bill line, the bank will agree to accept bills drawn on it by the customer, up to the limit agreed upon. The customer may then discount the bank bill in the commercial market. The bank charges an ‘acceptance fee’ which — together with the discount from the face value of the bill — represents the interest which the customer will pay for the funds. A related arrangement is a ‘discount line’, in which the bank agrees to discount bills drawn by the customer. As far as the customer is concerned, this is very much like a loan in that they receive money directly from the bank and are obliged to repay funds to the bank at a particular time. From the banker’s

point of view, however, the bill provides a hedge against liquidity pressures, since the banker reserves the right to discount the bill at any time. Commercial bills are usually for periods of 90 or 180 days. Since the customer is likely to need funds for a longer period of time, the line of credit usually provides that the bills may be ‘rolled over’ — that is, new bills will be drawn at the time of maturity of the original set. In this way, the borrower is assured of longer-term finance, although the interest rate will vary with the market.

Accommodation parties The use of a bill of exchange in the lending transactions may lead to certain legal problems. When the bank accepts a bill, it is the primary debtor on the bill. However, the commercial reality of the transaction is that the customer/borrower is the primary debtor. The Bills of Exchange Act 1909 reflects this economic distinction in s 33, through the concept of an ‘accommodation party’. Section 33(1) provides that an accommodation party to a bill: … is a person who has signed a bill as drawer, acceptor or indorser, without receiving value thereof, and for the purpose of lending his name to some other party.

The Bills of Exchange Act 1909 then makes certain provisions which give effect to the agreement between the party accommodated and the accommodation party. Thus, an accommodation party is liable on the bill to a holder for value and it is immaterial whether the holder knew that the other party was an accommodation party when they took the bill: Bills of Exchange Act 1909, s 33(2). Although the heading of the section refers to ‘accommodation bill or party’, the section itself defines only ‘accommodation party’. The term ‘accommodation bill’ is usually used to refer to a bill where the acceptor is an accommodation party, but commercial usage does not appear to have any inflexible rule. [page 405] The matter is not one of mere terminology, for s 64(3) implements the remaining legal framework of the commercial function of the accommodation facility. It provides that ‘where an accommodation bill is paid in due course by the party accommodated, the bill is discharged’. Is the bank an ‘accommodation party’ within the meaning of the Bills of Exchange Act 1909 when it accepts a bill under an acceptance facility

agreement? Can it be said that it accepts the bill ‘without receiving value thereof’ when it receives the acceptance fee? Ellinger argues that the acceptance fee is not consideration for the acceptance of each individual bill. As evidence, he notes that the fee would be payable even if no bills were ever accepted: see Ellinger and Lomnicka (1994) at p 628. The argument is only partially convincing, for it is also clear that there would be no acceptance if the fee were not paid, so that the fee must be at least partly the consideration for the acceptance of each bill. Further, s 33 of the Bills of Exchange Act 1909 does not refer to the value being directly related to the instrument, but rather to the acceptance. The High Court in Coles Myer Finance Ltd v Federal Commissioner of Taxation [1993] HCA 29 accepted that bank charges were not ‘value’ for the purposes of determining if a bill was an accommodation bill, citing Oriental Financial Corporation v Overend, Gurney and Co (1871) LR 7 Ch App 142. Case law on the subject is not conclusive. In Re Securitibank Ltd [1978] 1 NZLR 97, the New Zealand Supreme Court held that the bills in question were not accommodation bills, but the fee payable was more complex than a simple acceptance fee. Ellinger argues that this distinguishes the case: see Ellinger and Lomnicka (1994). The bills in KD Morris & Sons Pty Ltd v Bank of Queensland Ltd [1980] HCA 20 are referred to as ‘accommodation bills’, but it is clear that the term was being used in its commercial rather than its legal sense. In spite of these problems, it must be agreed that to hold that the bills drawn under an acceptance facility are not accommodation bills leads to strange commercial results. The drawer of the bill is obliged to put the acceptor into funds to meet the bill. If instead they pay the bill directly to the holder, can it be imagined that the acceptor may then be sued for the amount on the bill? There may be a way around the problem. In Cook v Lister (1863) 32 LJCP 121, Willes LJ said (at 127): In each case with reference to bills of exchange, if a question arises who is the principal debtor, prima facie the acceptor is the principal debtor; and then, in order, the drawer and the indorsers, as their names appear upon the bill. But the court is bound to test the evidence to show that in any case the person who is not the principal debtor on the face of the bill is, in fact, the principal debtor; and if he is the principal, he is the agent to pay for all those debtors subordinate to him including the acceptor.

[page 406] Cook v Lister was decided before the Bills of Exchange Act 1909, but the

logic of the argument remains intact. If that is so, then the commercial ‘accommodation bill’ would be discharged by payment by the drawer, even if the bill is not a legal ‘accommodation bill’ within the meaning of the Bills of Exchange Act 1909.

Securities A customer who wishes to borrow money from a bank using the mechanism of a ‘bill line’ may be required to give security. Problems have sometimes arisen where a party to the bill has been forced to pay and the party holding the security for payment is either not liable on the bill or has become insolvent. The person who has been asked to pay may argue that they are entitled to the security — that in some sense the security ‘runs with the bill’. Illustration: Ex parte Waring (1815) 19 Ves 346; 34 ER 546 An indorser was forced to pay on an accommodation bill where the drawer and the acceptor were both insolvent. The drawer had given securities to the acceptor to guarantee the payment of the bill. These were not securities held by the acceptor for the general liability of the drawer, but rather securities specifically appropriated to cover the acceptor’s liability on the bill. The Court held that the indorser was entitled to be subrogated to the securities.

The same result has been reached when the security was one given by the acceptor to a prior indorser who had become insolvent: see Commissioners of State Savings Bank of Victoria v Patrick Intermarine Acceptances Ltd (in liq) [1981] 1 NSWLR 175. For other cases on subrogation, see Re New Zealand Banking Co (1867) LR 4 Eq 226; Ex parte Dever; Re Suse (No 2) (1885) 14 QBD 611; Powles v Hargreaves (1853) 3 De GM & G 430; 43 ER 169; Royal Bank of Scotland v Commercial Bank of Scotland (1882) 7 App Cas 366; Re Standard Insurance Co Ltd (in liq) and Companies Act 1936 [1970] 1 NSWR 392; Re Securitibank Ltd [1978] 1 NZLR 97. Also see the article in Ellinger (1978). The rule in Ex parte Waring (1815) 19 Ves 346; 34 ER 546 was explained by Brownie J in Star v Silvia; Silvia v Genoa Resources & Investments Ltd (No2) (1994) 36 NSWLR 685 as applying only when: the security was given as between drawer and acceptor; the security has been specifically appropriated to meet the bill at maturity; and both drawer and acceptor become insolvent. In his view, the rule is merely a rule of administration and should not be extended to cover situations where the parties are not drawer and acceptor.

It is probably important that the security be given solely as security for the payment of the bill. [page 407] Illustration: Scholefield Goodman & Sons Ltd v Zyngier [1986] AC 562 The security was given by a person associated with the acceptor of the bill, to the payee of the bill. The security was for both the acceptor’s obligation to the payee on the bill and for other obligations as well. In the event, the drawer was forced to pay on the bill. The Court held that the drawer was not entitled to realise the securities.

See also D & J Fowler (Aust) Ltd v Bank of New South Wales [1982] 2 NSWLR 879; Maxal Nominees Pty Ltd v Dalgety Ltd [1985] 1 Qd R 51. Where there is a right to claim against the security, it arises at the time when the party becomes the holder of the bill by paying it. That is also the time for determining competing claims to the securities: see Westpac Banking Corp v AGC (Securities) Ltd [1983] 3 NSWLR 348; McColl’s Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365.

12.2.5

Standby credits and performance bonds

The banker might also ‘lend credit’ through the use of standby letters of credit and/or performance bonds. These will be discussed in detail in Chapter 17, but the basic idea is that the banker promises to some third party that payment will be made under certain circumstances. As an example, a foreign purchaser of Australian technology may be concerned that the vendor may not be able to deliver. Such a failure may expose the foreign importer to substantial expenses, either directly or by way of damages for breach of contract for further supply. One way to solve the problem is for an Australian bank to issue a performance bond in favour of the foreign purchaser. If there is a failure by the Australian supplier, the foreign purchaser may call upon the bank to pay a sum which will protect against the possible losses: for a real life example, see Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159. The arrangement works because the creditworthiness of the Australian bank — which may be easily assessed — has been substituted for the creditworthiness of the Australian supplier. The latter may either be difficult for the foreigner to assess, or may be unsatisfactory if it has been assessed. In this sense, the bank has ‘lent credit’. The banker will treat the issuance of a performance bond in much the same

way as a loan. The customer must promise to put the banker in funds should the bond be drawn upon, and the banker will need to assess the ability of the customer to fulfil this promise. The banker will take appropriate securities to guard against the possibility of insolvency. Although the performance guarantee is most often used in connection with the supply of goods or services (as in the above example), it can be used in purely financial transactions. The credit of the guaranteeing bank may be used to assist in [page 408] the acquisition of finance in (commercially) the same manner as the acceptance of the bank on a bill of exchange.

12.2.6

Letters of comfort

When making a loan to one of a group of companies, the prudent course for the lender is to take a guarantee from the parent company and, if possible, from all the companies in the group. It is only in this way that the lender can be certain that assets of the group will be available to meet the obligations of the legal borrower. Unfortunately, what is prudent for the lender is not always acceptable to the parent company. A variety of commercial reasons may make a guarantee unattractive. The parent company may not wish to incur legal liability or it may wish to avoid having a contingent liability showing on its balance sheets. The compromise position is the letter of comfort. Although the term is not one with a fixed legal meaning, a letter of comfort is some form of assurance from a third party (usually a parent company) to a lender which represents that some fact is true, that the third party is aware of the loan or that the third party agrees to a certain conduct in the future. Ellinger has classified letters of comfort into three basic types: the parent company may give an undertaking to maintain its shareholding or other financial commitment in the subsidiary; the parent will undertake to use its influence to see that the subsidiary meets its obligation under the primary contract; and the parent will confirm that it is aware of the contract with the subsidiary, without any express indication that the parent will assume any responsibility for the primary obligation.

Although Ellinger classifies ‘letters’, it is clear that a single letter may contain paragraphs of the different types: see Ellinger (1989). A letter of comfort may have legal effect, even though it is not a guarantee. The liability of the guarantor for the primary debt arises by the default of the primary debtor. But there may be other contractual promises — the breach of which would have the effect of allowing the lender to recover damages equivalent to the debt. The question in each case is to determine the legal effect of the terms of the letter. Illustration: Banque Brussels Lambert S A v Australian National Industries Ltd (1989) 21 NSWLR 502 The defendant held 45 per cent of the issued capital of the holding company, which owned 100 per cent of the borrower. The bank required the letter of comfort, in a form satisfactory to it, as a condition of the loan. The defendant had previously refused to give a guarantee. The disputed letter of comfort was the negotiated compromise. [page 409] The letter contained three paragraphs. The first was a ‘confirmation of awareness’ paragraph. It was agreed by both parties that the paragraph had no promissory effect. The second and third paragraphs were disputed, and the second paragraph was actually in two parts. The defendant ‘stated’ that: it was not their intention to reduce their shareholding in the borrower; and they ‘would’ provide the bank with 90 days’ notice of any decision to dispose of any shareholding. The second disputed paragraph — the third paragraph of the letter — was in the following terms: We take this opportunity to confirm that it is our practice to ensure that our affiliate [the borrower] will at all times be in a position to meet its financial obligations as they fall due. These financial obligations include repayment of all outstanding loans within thirty (30) days. Rogers J noted that there were two closely related questions. Was there an intention to create legal obligations and, if so, were the terms of the letter of a sufficiently promissory nature to be held to be contractual? The Court held that at least the second part of the second paragraph was promissory, and that the third paragraph was undoubtedly so. The Court heard evidence establishing that the defendants knew that the plaintiff regarded the obligations as binding.

See also Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785; and see the criticism of this case by Maurice Kay LJ, with whom the other two members of the Court agreed in Associated British Ports v Ferryways NV [2009] EWCA Civ 189. In interpreting letters of comfort, a court will invoke a presumption that in commercial dealings, an agreement is intended to create legal relations: see Rose & Frank Co v J R Crompton & Bros Ltd [1925] AC 445; cf Einstein J in Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004]

NSWSC 149. The presumption may be rebutted if the intention to so rebut is expressed with sufficient clarity. It is also necessary to consider the distinction between an undertaking as to the future and a mere statement of present intention. Statements of present intention need merely be true at the time that they are made, but an undertaking as to the future will be interpreted as a promise. Where a statement has a promissory effect, it will not easily be found to be void for uncertainty: see Banque Brussels Lambert S A v Australian National Industries Ltd (1989) 21 NSWLR 502; Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 All ER 785; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130; and Tyree (1989–90). [page 410]

12.3

Types of borrowers

The banker must be aware of the different legal characteristics of borrowers, for different types of securities may be taken, different forms of guarantees may be needed and different loan structures may be used — depending upon the class into which the individual borrower falls. In terms of numbers, the majority of bank lending is still to individual customers, either for ‘private’ purposes such as the purchase of a house or a vehicle, or for business reasons. Since it is highly unlikely that the banker would even be contemplating a loan which would be used for an illegal purpose, there is not much in the way of legal problems involved in such a loan, provided the borrower has contractual capacity. This section discusses four broad classes of borrowers: minors; unincorporated business borrowers; companies; and consumers. Each class raises particular problems for the lender.

12.3.1

Minors

Until relatively recently, any person under the age of 21 years was considered in law to be ‘an infant’ and so in need of special protection. At common law,

this protection was provided by the rule that most contracts with infants were voidable at the option of the infant. Exceptions were contracts for ‘necessaries’ and contracts that were made for the benefit of the infant. Unfortunately, the development of case law left considerable uncertainty in the meaning of these terms: see Harland (1974). In jurisdictions other than New South Wales, the common law rules are generally still applicable, subject to relatively minor variations. The statutes all change the age of majority to 18 years, and generally permit the use of the term ‘minor’ to replace ‘infant’. Most contracts are valid unless and until the minor chooses to avoid them. The repudiation must be made before the minor receives benefit from the contract. Illustration: Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 A minor was allotted shares in a company. She received no dividends and did not participate in the company in any way. The Court held that the minor could not repudiate the contract and recover the money paid, since the allotment of the shares had conferred a benefit to her under the contract.

[page 411] In some jurisdictions, certain contracts with minors are void. In Victoria and Tasmania all contracts for the repayment of money lent, or to be lent, and payment for goods other than necessaries are ‘absolutely void’: see, for example, Supreme Court Act 1986 (Vic), s 49. These contracts cannot be enforced, even if the person purports to ratify them upon attaining full age. Because of these provisions, the banker should avoid allowing any account with a minor to run into overdraft. In New South Wales, the Minors (Property and Contracts) Act 1970 provides that a contract is binding on a minor: if it is for the benefit of the minor at the time of entering the contract; and if the minor does not, by virtue of being a minor, lack the necessary understanding: Minors (Property and Contracts) Act 1970, ss 18 and 19. The meaning of ‘benefit’ is not defined in the Minors (Property and Contracts) Act 1970: see Harland (1974). Since it is uncertain when a loan to a minor would be for the benefit of the minor, it is best to avoid such loans unless guaranteed by someone of full age. If a minor’s debt contract is void by statute, then a guarantee of that debt is also void, since there is no debt on which the guarantee can fasten: see Coutts

& Co v Browne-Lecky [1947] KB 104. The same reasoning does not apply to indemnities which may be valid: see Yeoman Credit Ltd v Latter [1961] 1 WLR 828. New South Wales, South Australia and Tasmania have changed this. The relevant Acts provide that a guarantor of full age of a minor’s obligation is bound by the guarantee to the same extent as if the minor were of full legal capacity: Minors (Property and Contracts) Act 1970, s 47, Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) and Minors Contracts Act 1988 (Tas); see also 15.3.2. New South Wales Courts are given power to adjust the rights of the parties when a minor chooses to repudiate a contract: Minors (Property and Contracts) Act 1970, s 37. This power should allow the court to avoid the worst hardships of the older common law rules. South Australia has also implemented legislation which alters the rights and obligations of minors entering into contractual relations. The Minors Contracts (Miscellaneous Provisions) Act 1979 does not abolish the common law rules, but does ameliorate some of the harshness of those rules concerning the repudiation and ratification of contracts. A contract may be ratified by the minor upon the attainment of full age if the ratification is in writing: Minors Contracts (Miscellaneous Provisions) Act 1979, s 4. As under the New South Wales Act, a guarantor who is of full age may not escape their obligations merely because the minor had no liability by virtue only of being a minor: Minors Contracts (Miscellaneous Provisions) Act 1979, s 5. [page 412] Under the South Australian Act, the minor may enter into a binding contract, provided the prior approval of a court is obtained by either the minor or any party to the proposed contract: Minors Contracts (Miscellaneous Provisions) Act 1979, s 6. A contract of guarantee of a loan made to a minor which falls within the operation of the National Credit Code is not enforceable unless it contains a prominent notice stating that the guarantor may not be able to be indemnified by the minor debtor: Minors Contracts (Miscellaneous Provisions) Act 1979, s 60(3); see further 12.3.4.

12.3.2

Business borrowers — unincorporated

Different forms of business association will give rise to slightly different concerns when the banker is lending for the purposes of the borrower’s business activities.

Sole traders There are no special legal problems associated with lending to sole traders, although there may be a problem with obtaining proper security over stock in trade, as discussed at Chapter 14.

Partnerships The basic legal characteristics of partnerships are discussed at 3.8.3. Recall that a partnership is the relationship that exists between persons carrying on a business in common with a view to profit, and that such a circumstance may arise without any formal intention on the part of the parties to become partners. A single partner may bind the firm, but this is so only if the purpose is that of the firm or apparently that of the firm. The death, bankruptcy or insanity of a partner will dissolve the partnership. A partner who dies or becomes bankrupt is liable for the partnership debts, but the debts of the private estate have a prior claim. Since the banker is not generally in a position to monitor any of these possible changes, it is wise to make express provision for liabilities for loans to partnerships. This is usually done by expressly making each of the partners jointly and severally liable for the loan and by taking joint and several guarantees from each of the partners. Finally, when notified of any change in the partnership, the banker should rule off any overdraft account so as to prevent the operation of the rule in Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767, causing a loss of the bank’s rights against any of the parties: see 4.3.2. If it is desired to carry on arrangements with the newly constituted partnership, a new account should be opened and new documentation taken.

Limited partnerships Statutory references are to the NSW Partnership Act 1892; the Acts of the other states and territories are similar. [page 413]

Each state and territory has introduced the concept of a ‘limited partnership’. There are two versions: the limited partnership; and the incorporated limited partnership. The principal difference is that the incorporated limited partnership is a separate legal entity: NSW Partnership Act 1892, s 53. The Australian Central Territory and Northern Territory have only incorporated limited partnerships — the other jurisdictions have both. Both will be referred to as ‘limited partnerships’ unless it is necessary to differentiate the two. Limited partnerships are created by registration: NSW Partnership Act 1892, s 50A. A limited partnership has two kinds of partners: ‘limited partners’, whose liability is limited to the amount listed in the register; and ‘general partners’, whose liability is similar to that of a partner in a regular partnership. Each limited partnership must have at least one general partner and one limited partner: NSW Partnership Act 1892, s 51. A corporation may be a limited or a general partner, as may another partnership: NSW Partnership Act 1892, s 51. Each kind of limited partnership may have an unlimited number of general partners, but no more than 20 limited partners (with some special exceptions): NSW Partnership Act 1892, s 52. As in the case of dealing with a company, a person is entitled to make assumptions when dealing with a limited partnership: NSW Partnership Act 1892, s 73D. Although the assumptions are helpful, they will be of limited value to the banker. As in dealing with a company, the prudent banker will have the relevant documentation available and so will be aware of any of the assumptions of s 73D that are untrue.

Unincorporated associations The problems of lending to unincorporated associations relate directly to the previous discussion concerning the lack of a single legal identity for such organisations. There is no identity apart from the individuals, so special care must be taken that the individuals involved understand precisely the scope of their liability: see the discussion at 3.8.1. Some of the difficulties may be seen

from a reading of Re Anglican Development Fund Diocese of Bathurst [2015] NSWSC 1856.

12.3.3

Companies

A company is a separate legal entity, and all dealings with it are necessarily though agents of the company. This may raise problems of authority for the lending banker. [page 414] There are many companies which are virtually alter egos of one individual or a small number of individuals. Consequently, a loan to such a company will usually be accompanied by a taking of guarantees and/or securities from the individuals ‘behind’ the company.

Agency problems Even though the company has the power to borrow and to give securities and even though the loan is for a proper purpose, a banker deals with the company not as an abstract legal entity, but rather with directors and other individuals who are acting as agents of the company. These individual agents do not have unlimited power to commit the company by signing contracts on the company’s behalf. The agency problem is determining the extent to which the company may be bound by an agent even though that agent is acting beyond their actual powers. The relationship of company agents to outside parties is the subject of s 129 of the Corporations Act 2001 (Cth). Section 129 provides that such a person may, subject to certain exceptions, make assumptions concerning the validity of the agents’ acts, and those assumptions will have the effect of binding the company. These assumptions are discussed at 3.8.7ff.

Statutory prohibitions The banker should also be certain that there are no statutory restrictions on the company’s borrowing powers. The former prohibition on a company purchasing its own shares has been replaced with Chapter 2J which permits a corporation to reduce its share capital under certain conditions: see Chapter 2J of the Corporations Act 2001; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555; Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602; and the discussion at 6.4.

12.3.4

Consumers

The National Credit Code commenced on 1 July 2010. It is Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth). The National Credit Code supersedes the Uniform Consumer Credit Code, which governed consumer credit from 1 November 1996. The Uniform Consumer Credit Code was a result of an inter-governmental agreement known as the Uniform Credit Laws Agreement of 1993. Under this agreement, Queensland enacted the Consumer Credit (Queensland) Act 1994, which included the Consumer Credit Code. Other states were obliged to adopt the ‘template legislation’ or to pass alternative legislation consistent with the Queensland legislation. The Consumer Credit Code replaced the various existing Credit Acts. Although these Acts were intended to provide a uniform legal structure, they failed to so — the result being that lenders were forced into uneconomic and inefficient practices. [page 415] Unfortunately, the Uniform Consumer Credit Code, although an improvement, did not provide the uniformity needed for a federation. The National Credit Code is almost identical to the Uniform Consumer Credit Code but, as Commonwealth legislation, eliminates the variation between jurisdictions that was so expensive to lending businesses. For a complete discussion of the National Credit Code, see Beatty and Smith (2011).

Application The National Credit Code applies to credit contracts entered into from 1 July 2010. Contracts made between 1 November 1996 and 30 June 2010 remain governed by the Uniform Consumer Credit Code. Continuing credit contracts such as credit card accounts are governed by the National Credit Code. The National Credit Code applies to any provision of credit where the debtor is a natural person or a strata corporation and the credit is provided wholly or predominantly: for personal, domestic or household purposes; to purchase, renovate or improve residential property for investment

purposes; or to refinance credit that has been provided for the above purposes: National Credit Code, s 5(1). The National Credit Code only applies if a charge is or may be made for providing the credit, and the credit is provided in the course of a business of providing credit, or as a part of or incidentally to any business of the credit provider: National Credit Code, s 5(1)(c), (d). There is no general exemption for banks or any other class of financial institution. There are, however, certain classes of loans which are excluded from the operation of the National Credit Code, and these classes include certain types of loans which are traditionally made by banks. For example, the National Credit Code does not apply where credit is extended without prior agreement between the parties, the Code explicitly giving as an example the case of a cheque account becoming overdrawn where there is no agreement for overdraft facilities: National Credit Code, s 6(4). The National Credit Code applies to the provision of credit arising out of a bill facility, but not if provided by an authorised deposit-taking institution (ADI): National Credit Code, s 6(7)(a). This forestalls any attempt to circumvent the NCC using artificial structures: see Re Securitibank Ltd [1978] 1 NZLR 97 for an example where consumer lending was structured using bills of exchange. The National Credit Code does not apply to certain forms of ‘short-term’ credit — defined as credit limited by the contract to a total period not exceeding 62 days: National Credit Code, s 6(1). Section 6 enumerates other general exemptions from the operation of the National Credit Code. [page 416] The National Credit Code, like the Uniform Consumer Credit Code, applies only the ‘purpose test’ to determine if a transaction is to be regulated. The former Credit Acts imposed a ‘monetary test’, which generally excluded loans of more than a prescribed value.

Overview of regulation The National Credit Code has strict regulation of the form and content of the documents provided to the borrower. The credit provider must provide a precontractual statement which sets out matters required by the Code. The requirements are set out in ss 16 and 17 of the National Credit Code, and include routine matters such as:

the credit provider’s name; the amount of credit; the annual percentage rate; and interest charges, etc. The statement must be in the form required by the National Credit Code. There are also detailed requirements for giving copies of the credit contract documents to borrowers, mortgagors and guarantors: see National Credit Code, ss 20, 43 and 57. There are no restrictions on the type of credit fees and charges imposed, subject only to complete disclosure to the debtor. The fees and charges must be ‘authorised’ under the credit contract: see National Credit Code, ss 16(8) and 23(3). On the other hand, credit providers can only pass on the exact amount of third party fees. This prevents a credit provider from profiting from discounts or commissions that might otherwise be hidden from the debtor. Early termination fees are permitted, but such fees may be attacked as unconscionable if the amount exceeds the estimated costs or losses involved with the early termination: National Credit Code, s 76. The National Credit Code allows electronic transactions and documents. Section 187 effectively applies the Electronic Transactions Act 1999 (Cth) to a document required by the National Credit Code. The section is broadly stated to allow almost any requirement of the Code to be satisfied electronically. The National Credit Code specifies the time of receipt of electronic documents. Section 196(1)(c) of the Code provides that a notice or other document given by electronic communication is given at the time specified by s 14(3) of the Electronic Transactions Act 1999. This may not be altered by agreement. The purported originator of a message is bound by the message only if the person actually sent the message or, of course, if the person authorised it. In all cases, the consumer must make a positive election to engage in electronic communications. In the absence of this positive election, the credit provider must abide by the pre-electronic rules. [page 417]

Penalties The Credit Acts imposed a penalty of automatic forfeiture of interest where

certain requirements of the Acts had been breached. Although there were provisions for application to reduce this forfeiture when the breach was insignificant, the financial institutions lobbied to have the provisions removed. The Consumer Credit Code rejected the concept of automatic forfeiture, substituting a regime of simple civil penalties when there has been a breach of a ‘key requirement’. This has been continued in the National Credit Code. The concept of a ‘key requirement’ differs, depending upon whether the credit contract is a continuing arrangement or otherwise: National Credit Code, s 111. For non-continuing contracts, the civil penalty may be activated when there has been non-disclosure of various types in the credit contract: National Credit Code, s 111(1). Where the contract is a continuing one, the civil penalties may also be imposed when there is non-disclosure of certain information in the periodic statement of account: National Credit Code, s 111(2). A debtor may apply to have the contract reopened on the grounds that it is unjust: National Credit Code, s 76(1). ‘Unjust’ includes ‘unconscionable, harsh or oppressive’: National Credit Code, s 76(8). In determining if a term of a contract is unjust, courts are instructed to have regard to the public interest and to all the circumstances of the case. The National Credit Code then provides a ‘shopping list’ of matters to which the court may have regard: National Credit Code, s 76(2). The National Credit Code also applies to certain mortgages and guarantees. These are discussed at 15.1.4.

[page 419]

13 Secured Lending: Real Property 13.1

Securities

When a loan is made, the borrower promises to repay the amount loaned, together with any interest agreed upon. In the absence of unusual circumstances, such a promise is enforceable in a court of law. If the creditor is forced to take such proceedings and if those proceedings are successful, there are procedures for ultimately recovering the debt from the property of the debtor. But suit is both expensive and unsatisfactory. Most debtors do not want to default. They would prefer to pay their debt but are unable to because of their financial position. In such a circumstance, obtaining a judgment against the debtor will usually be of no value, for there is no property left from which to satisfy the debt. For this reason, creditors may prefer to take a security from the debtor along with the contractual promise to repay. A general definition of ‘security’ is notoriously difficult to formulate, but in all cases there is some right of the creditor to reclaim the debt, or part of it, from property which is reserved for that purpose.

13.1.1

Securities generally

For our purposes, a security may be defined as a lender’s interest in property that may only be realised under certain circumstances, usually a default in repayment. The security may arise either by agreement between the parties or by operation of law. The word ‘security’ is used by lawyers in a narrower sense than by the commercial community as a whole. There are at least three other ways in which the word ‘security’ is used in commercial practice — namely:

the property over which the security is given; documents of various kinds, including notes and bills, share certificates, bonds and a whole host of others; and a guarantee by a creditworthy third party. [page 420] A guarantee given by a third party is not a security in the sense used in this chapter. A guarantee is a purely contractual promise given by a third party that makes that party liable in the event of a default by the debtor. Guarantees are discussed at Chapter 15.

13.1.2

Legal and equitable security interests

Security interests may be legal or equitable. The difference is purely operational — a legal interest is one which, prior to the enactment of the Judicature Act 1873 (UK), would have been recognised by a court of common law. An equitable interest is one which, within the same time timeframe, would have been recognised only by a court of equity. The distinction remains important for us today because of the fact that the Judicature Acts did not merge the two related legal systems into a single legal system, but rather they merged the administration of each system of law into a single court system.

13.1.3

Priorities when there is more than one interest

The distinction between legal and equitable interests is most relevant when there are competing security interests in the same item of physical property. It must be emphasised that there is nothing improper or fraudulent in this. The borrower may give a mortgage over property to lender A and then give a second mortgage over the same property to lender B. If the borrower is unable to pay and the lenders have to realise the security, the question arises as to how the proceeds from the property should be distributed. Suppose lender A had provided $1,000 and lender B had provided $500. If the property realises more than $1500, then there is no problem. If it realises less, then the general rule would be that lender A takes the whole $1,000 (if there is that much), and lender B takes whatever is left (if any) and has only an action on the contract of loan to recover the remainder. This is a

very simplified example, since there are matters of interest due and costs of the sale of the property to take into account. The problem becomes more difficult when the security interests given to A and to B are of substantially different types. Suppose, for example, that the borrower gives lender A a mortgage over some jewellery, but then A later pledges the jewellery to B — that is, the borrower gives B the right to possession of the jewellery until such time as the debt may be repaid. Both A and B believe that they should be entitled to the ‘first bite’ of the money that might be realised from the sale of the jewellery in the event of the borrower’s default. This is a problem in priorities between competing security interests. Priority problems are generally very difficult and call for expert advice. Most problems of [page 421] this nature will now be resolved by statute — either the various Real Property Acts or the Personal Property Securities Act 2009 (Cth). However, there will be priority problems which fall outside the statutes, and for these the old priority rules apply. Subject to many exceptions, the basic rules which establish priorities depend upon first identifying the nature of the security as either legal or equitable. Subsequently: if both interests are legal, then the one which has been created first in time should have priority; if both interests are equitable, then the rule is the same — that is, the interest created first in time should have priority; if the first interest is a legal one and the second is equitable, then the legal interest has priority; if the first interest is equitable and the second is legal, then the equitable interest has priority — unless the legal interest was taken by the creditor without notice of the existence of the already existing equitable interest, in which case, the legal interest has priority. The fourth rule is a slightly simplified version of the priority rules, for the time at which the subsequent creditor must be without notice is not the time of taking the legal title, but the time of making the advance: see Taylor v Russell [1892] AC 244; Lane v Conlan [2004] WASC 15; Patroni v Conlan [2004] WASC 16.

This allows for a strange sequence of events. A lends to B, taking an equitable interest in some of B’s property. C lends to B, also secured by an equitable interest over the same property. Later, C learns of A’s prior interest which, of course, gives A priority if the security must be realised. C then takes steps to acquire a full legal interest in the secured property. C then has priority over A, who has been ‘squeezed out’. The effect is called a tabula in naufragio — it would seem to be restricted to the situation where C’s equitable interest is a fixed (as opposed to a floating) interest: see Taylor v Russell [1892] AC 244. Again, it must be noted that these rules are general only and are subject to many exceptions and modifications. In particular, they are replaced by statutory rules contained in the various Real Property Acts and, importantly, the Personal Property Securities Act 2009. Equitable security interests are also important because they are relatively easy to create. It may happen that the formalities necessary to create a legal interest have not been properly completed — so the legal interest is not created — yet the procedures are adequate to create a similar equitable interest. In some of the cases, it seems that an equitable interest has been created almost by ‘accident’, for it is sometimes sufficient for the court to find an ‘intention’ in the behaviour of the parties which will create the equitable proprietary interest. [page 422]

13.1.4

Consensual securities

Most security interests are created by agreement between the parties. These are called ‘consensual securities’. However, it is also possible for a security interest to arise by operation of the law. These proprietary interests arise by virtue of some set of circumstances, regardless of the intention or even the knowledge of the parties. Most of the security interests which are of interest to the banker will arise by agreement between the parties, but one very important interest, the banker’s lien, is a non-consensual security: see Chapter 16 for a discussion of the banker’s lien. Consensual securities will be examined first. The creation of these is usually a formal process, in contrast to so much of the banker-customer relationship. The contract which creates the security interest is usually a pre-printed form

used by the banker which contains many detailed and arcane clauses. Although they differ in detail from bank to bank, the contracts used by banks differ from those in general use in two ways. First, the contracts often call for the repayment of the loan ‘on demand’: see 3.7.4. The second peculiarity of bank forms is the detail and scope of the definition of moneys to be secured. The forms usually contain many clauses which attempt to explicitly define every conceivable situation in which the banker might advance money to the borrower or to someone associated with the borrower, together with any interest or charges which might be due. All are purported to be secured by the interest being granted by the borrower to the banker. The length and scope of bank forms has been the subject of judicial criticism. In Richards v Commercial Bank of Australia (1971) 18 FLR 95, a bank mortgage was given by a husband and wife, who were referred to in the document as ‘the mortgagor’. It was argued, unsuccessfully, by the bank that the document should be interpreted so as to secure the husband’s liability under a guarantee which was given by the husband alone. During the course of the judgment, Fox J said (at 99–100): It surely is a sad commentary on the operation of our legal system that a borrower should be expected to execute a document which only a person of extraordinary application and persistence would read, which, if read, is virtually incomprehensible and which, in any event, has a legal effect not disclosed by its language.

See also the criticism by Higgins J in Houlahan v ANZ Banking Group Ltd [1992] 110 FLR 259, where he referred to as ‘incomprehensible legal gobbledegook’, a single sentence of some 57 lines: see also Karam v ANZ Banking Group Ltd [2003] NSWSC 866. The ‘plain language’ movement has improved this situation, but it is far from eliminated and is unlikely to be, as long as lawyers determine the content of loan and security documents. [page 423] Apart from special interests created by statute, there are only three types of consensual security interest known to our law: the pledge the actual or constructive delivery of possession of an asset which is made with the intention that the creditor retain possession until the obligation is discharged; the mortgage the transfer of ownership of the asset upon the express or implied condition that the ownership be transferred back to the debtor when the obligation is discharged; and

the charge known only to equity, a charge transfers neither ownership nor possession but allows the creditor to satisfy the obligation out of the proceeds of the property.

A reservation of interest in an asset may serve the same function as a security interest. In a hire-purchase arrangement, the seller of the asset retains the legal title to the asset until such time as the buyer has completed the payment obligations under the contract. The arrangement is functionally, but not legally, the precise equivalent of a mortgage. In both, the creditor is the legal owner of the asset while the debtor gains possession. These different arrangements are treated similarly by the Personal Property Securities Act 2009: see Chapter 14. It seems that it is not possible to retain an equitable interest while transferring legal ownership — an attempt to do so has been interpreted as a total transfer to the debtor followed by a grant back of the equitable interest sought to be retained: see Re Bond Worth Ltd [1980] Ch 228; [1979] 3 All ER 919; cf Len Vidgen Ski & Leisure Ltd v Timaru Marine Supplies (1982) Ltd [1986] 1 NZLR 349, where the contract purported to retain ‘ownership’.

13.2

Securities over real property

Security interests may be taken in real property, in chattels and in choses in action. Each is governed by a fundamentally different set of legal rules. The remainder of this section will examine the taking of security interests over real property.

13.2.1

Legal aspects of mortgages over real property

The best way to understand the nature of a mortgage over land is to consider the form of the mortgage which existed prior to the introduction of the Torrens system of title registration. Under the so-called ‘old system’, or ‘deeds system’, a purchaser of land could obtain valid title only by having the land conveyed by the true owner of the land. In order to determine that the seller was the true owner, it was necessary to establish that the previous seller was the true owner, and so on, right back to the [page 424] original Crown grant. Such an investigation of ownership is expensive and

uncertain, with the result that title to land was subject to attack by the discovery of some defective link in the chain of title.

13.2.2

Old-style mortgages

In the deeds system, a mortgage of land took the form of a conveyance of the land coupled with a contractual promise that the lender — the new owner of the land — would convey it back to the borrower when the borrower complied with the terms of repayment of the loan. To anyone who was not privy to the contract of loan, the transaction looked like a sale of property. There are still echoes of this procedure in the Sale of Goods Acts, in those sections which provide that the Acts do not apply to transactions which — although in the form of a sale — are intended to be by way of security: see, for example, Sale of Goods Act 1923 (NSW), s 4(4).

13.2.3

The right of redemption and second mortgages

One of the main problems with the old form of mortgage was the strict interpretation which the common law placed on the contractual promise to re-convey. If the borrower was in default by even a day, then the lender no longer could be held to their promise. Further, even in the absence of default, the only rights left to the borrower were contractual ones — the common law recognised no property interest remaining in the borrower following the conveyance. This intolerable situation was remedied by the courts of equity, which recognised the ‘right of redemption’. By ordering specific performance of the contract to re-convey, and by a willingness to make such an order even when the borrower had been in default, the equity courts created a new property interest which remained with the mortgagor of the property. This equitable property interest is known as the ‘equity of redemption’. It was soon realised that this equity of redemption was itself a valuable property right which might be mortgaged as security for advances from other lenders. When this was done, the transaction became known as a ‘second mortgage’. The second mortgage is an equitable one since it is a mortgage — a conveyance — of property recognised only by the courts of equity. These developments were not without their problems, for the rights and obligations of the parties were complex and confused, depending as they did

upon two separate but interlocking systems of law. When ownership of land was put on the more certain footing of a system of registration, it was also necessary to change the form of the mortgage and to define more precisely the relationships between the mortgagor, the mortgagee and the land. [page 425]

13.2.4

Other forms of equitable mortgages

Before considering the Torrens land registration system, it should be noted that the second mortgage is not the only form of an equitable mortgage. Under the deed system, an equitable mortgage could be created by: the deposit of title deeds with the lender; and an informal attempt to create a legal mortgage. As will be seen, the importance of the equitable mortgage has been diminished by the introduction of the Torrens registration system, but it is by no means obsolete.

13.2.5

The Torrens system of land registration

The deficiencies of the deeds system led to the introduction into Australia of the Torrens system of land registration. The warning given earlier concerning the extent of the coverage of this section needs to be repeated here. The following material is the barest of outlines of the workings of the Torrens system. It is not intended and should not be used as a substitute for a textbook on the law relating to land tenure. The following descriptions focus on freehold property — certain property held on a lesser tenure from the Crown is also included in the Torrens system. The touchstone of the Torrens system is indefeasibility of title. Registration as the registered proprietor is conclusive evidence of ownership, subject only to certain exceptions related to a person who becomes a registered owner by means of their own fraud. It is not necessary for the registered owner to prove that previous transfers were valid. Each parcel of land which is registered under the Torrens system is issued with a certificate of title. The original of this certificate is always retained by the titles office in the district where the land is located, and a copy of the certificate is issued either to the registered owner or to the first registered

mortgagee. As will be seen, this copy of the certificate is important and can play a role similar in some respects to the old deeds of title. Most major dealings with the land must be registered with the appropriate titles office. These dealings are recorded on a public register by notations on the original certificate of title. Consequently, an inspection of the public register will reveal details about the previous dealings with the land, as well as any existing outstanding interests in the land which require registration. This public register is considered so important that everyone is deemed in law to know the contents of it. Dealings with the land are entered on the register together with the precise time of registration. As will be seen, mortgages over the land have priority determined by the time of registration — not by the rules mentioned at 13.1.3. It is possible to change the priority of two registered mortgages by agreement among the interested parties. [page 426] The Torrens system has a compensation system built into it for two reasons: the indefeasibility principle means that occasionally someone who would have remained the owner of land under the deeds system will lose ownership to an innocent registered owner; and it is possible that ownership of land could be lost through some error in the titles office.

Electronic conveyancing If the system of registration and notation and certificates of title seem archaic in the age of the Internet, that is because it is. Australia has introduced an electronic system of dealing with Torrens land, but it is in its infancy and most transactions are still conducted in the old way. The system is known as PEXA (Property Exchange Australia Limited), referring both to the system and the company that provides the electronic platform. Shareholders in PEXA include the state governments (except Tasmania) and the major banks. The electronic system permits electronic title transfers, lodging and withdrawal of caveats, settlement by electronic transfer of funds and, in general, most of the legal paperwork associated with property dealings. Electronic certificates of title are available on a limited basis at the current time. The legal aspects of the electronic system are governed by the Electronic

Conveyancing National Law (ECNL). The ECNL is not, in fact, a national law — rather, it is a set of rules first implemented in New South Wales as Appendix 1 to the Electronic Conveyancing (Adoption of National Law) Act 2012. It has since been adopted in a similar fashion by each state and territory. The basis of the ECNL is an intergovernmental agreement finalised in 2011. The agreement established the Australian Registrars National Electronic Conveyancing Council (ARNECC) which provides advice on the ECNL and other matters related to electronic conveyancing. The ARNECC also develops and maintains a national set of Model Operating Requirements and Model Participation Rules intended to be implemented in each jurisdiction. See the ARNECC website for more information: . It is early days for electronic conveyancing, but it is expected that uptake will be quick and that the older system will be ultimately retired.

Torrens land mortgages As noted above, when the deeds system was replaced with the registration system, the law relating to mortgages was also rationalised. Instead of a formal conveyance of the property, the interest could be placed on the register and the rights and obligations of the parties defined in the legislation. The end result is a clarification and simplification of the relationships established when land is mortgaged. [page 427] Under the provisions of the various Real Property Acts, a mortgage has effect as a security but does not operate as a transfer of the land. A registered mortgage is more in the nature of a charge than a mortgage, although, of course, the interest is legal rather than equitable. Any mortgage is a registrable instrument and should be registered for reasons which will become apparent. Note, however, that an unregistered mortgage is not a legal nullity — it may affect not only the immediate parties but third parties as well, since it may form an equitable mortgage. Further note that the distinction between legal and equitable mortgages, although blurred, is still relevant. For example, a mortgage document which purports to create a mortgage over Torrens system land is a valid equitable mortgage from the time of its creation, even though the mortgagee does not have the legal rights provided by the statute until such time as the mortgage is placed on the register.

Equitable mortgages

Under the old system of land transfer, an equitable mortgage could be created by the mortgagor depositing the title deeds with the mortgagee. Provided that the parties intended to create a security interest by this action, a court would hold that there was indeed an equitable mortgage created: for a modern discussion, see Re Molton Finance Ltd [1968] Ch 325. The nature of the transaction has been succinctly stated by Pape J in Re Nairn’s Application [1961] VR 26 (at 28): The nature of an equitable mortgage by deposit of title deeds is not in doubt. The deposit of title deeds as security for the payment of a debt is regarded as an imperfect mortgage which the mortgagor is entitled to have perfected, or as a contract for a legal mortgage which gives to the party entitled all such rights as he would have had if the contract had been completed. By the deposit the mortgagor contracts that his interest in the property comprised in the deeds shall be liable for the debt and binds himself to do all that is necessary to effect the vesting in the mortgagee of such interest as a mortgage should create.

It seems common for a lender to take a completed memorandum of mortgage together with the certificate of title. Even if the lender chooses not to register the mortgage, there is an equitable mortgage created, and it is not necessary for the lender to enter a caveat on the title for the mortgage to remain good. There may be circumstances when a failure to lodge a caveat will be held against the equitable mortgagee: see Abigail v Lapin [1934] AC 491. Note that no change in ownership can take place without the production of the duplicate certificate of title, except in extraordinary cases. If it becomes necessary for the lender to resort to the security for repayment of the loan, the mortgage may be registered at any time in order to take advantage of the powers of sale given to a registered mortgagee: see J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 45 ALJR 625. [page 428] There may be a problem when the depositor is not the owner of the land in question. The question then becomes one of authority, which is determined by the evidence available: see, for example, World Tech Pty Ltd v Yellowin Holdings Pty Ltd (1992) 5 BPR 11,729; Theodore v Mistford [2003] QCA 580. Although convenient because of the simplicity, unregistered equitable mortgages suffer from some disadvantages: they are liable to be defeated by any prior equitable interest, although such defeat is by no means certain; they are subject to defeat by fraudulent dealings by the owner, provided it is

possible for the owner to provide some plausible explanation for the absence of the duplicate certificate of title; and the mortgagee has no general power of sale. The last point is not overly important, since in the common form the lender has taken the certificate, and a memorandum of mortgage is no impediment to registration with its consequential statutory power of sale.

Registered mortgages A registered mortgage may be either a legal or an equitable mortgage in form, but since registration amounts to notice and since the rights and powers of the parties are the same, the distinction is of little practical importance. The essential features of a registered mortgage are that certain rights and obligations are implied by the statute into all mortgages except in so far as they are expressly varied or negatived by the parties to the mortgage. In addition, there are statutory powers of sale given to the mortgagee and powers of redemption given to the mortgagor. A bank mortgage will ordinarily be a long and comprehensive document which defines the rights and obligations of both sides. Basic obligations of the mortgagor will be to repay the principal and interest on the agreed terms and to keep the property in good repair and insured. The mortgagee undertakes to allow the mortgagor to remain in possession and to discharge the mortgage according to the terms of the agreement when the debt has been repaid.

Remedies The mortgagee’s main rights arise upon default by the mortgagor. There are two main remedies in the event of the borrower defaulting on the loan. The course of action which the mortgagee takes will depend upon all of the circumstances of the case, with particular attention given to the financial position of the borrower and the value of the security interest. [page 429]

Enter and take possession The various state Acts allow the mortgagee to enter into possession of the mortgaged property upon default by the debtor. For reasons which will become apparent, this is not a course which will ordinarily appeal to the banker, except in extraordinary circumstances.

Taking possession does not necessarily mean taking physical possession of the property, although this is allowed by the statutes. More common is that the mortgagee assumes management and control of the property, taking any rents or other income from it. This may be done, for example, by giving formal notice to any tenant to pay rent directly to the mortgagee. This is not a popular option with mortgagees under normal conditions. The reason is that the mortgagee is required to account to the mortgagor and assumes a responsibility toward the mortgagor to manage the property reasonably. Although not allowed a free hand in the management of the property, the mortgagee in possession is responsible for it and may, under some circumstances, be unable to quit the property when it suits.

Mortgagee sale on default The mortgagee’s power of sale is the most drastic and most effective remedy. In the usual case, the memorandum of mortgage will contain an express power of sale. In the case of a registered mortgage, this is not necessary, since there is a power of sale given to the mortgagee by the Acts, but in the case of an unregistered equitable mortgage, there would be no power of sale in the absence of an express contractual term. For reasons which will become clear, it is advisable for the holder of an unregistered equitable mortgage to register the mortgage before exercising any power of sale. Exercise of the power of sale requires compliance with the sections of the Real Property Acts which are designed to protect mortgagees from losing their property if there is any alternative. Under these Acts, no power of sale — whether expressed in the memorandum or given by the statute — may be exercised, unless the mortgagee has served the mortgagor with a notice giving the details of the alleged default and allowing the mortgagor a period of at least one month from the receipt of notice to remedy the default. The precise scope of the mortgagee’s duty to obtain a fair market price is not entirely clear. On the one hand, it has been said that the mortgagee is not like a trustee for the mortgagor, but the Privy Council has said that it is the duty of a mortgagee to behave ‘as a reasonable man would behave in the realisation of his own property’: see McHugh v Union Bank of Canada [1913] AC 299 at 311; Alexandre v New Zealand Breweries Ltd [1974] 1 NZLR 497. It is certainly clear that the mortgagee may not act fraudulently or sacrifice the property at a patently low price. [page 430]

A Queensland case has held that damages may be awarded against the mortgagee in certain circumstances for failing to exercise the power of sale: see Higton Enterprises Pty Ltd v BFC Finance Ltd [1997] 1 Qd R 168. In that case, a guarantor who suffered damage by the defendant’s breach of duty was able to claim damages. See also Permanent Custodians Ltd v AGB Development Pty Ltd [2010] NSWSC 540; Upton v Westpac Banking Corporation [2016] QCA 220.

13.2.6

Priorities

We have already discussed the basic rules of priority among mortgages of various kinds. In situations where the security is taken over Torrens land, these rules apply but need some amplification. The general law of mortgages applies to Torrens land but will operate subject to the provisions of the Real Property Acts.

Torrens: priority by registration Because of the importance of the register, the difference between a legal and an equitable interest is obscured if the competing interests are registered. Since registration constitutes notice to the world of the interest, there can be no such thing as a later legal interest created without notice of a prior equitable one. In effect, then, the priority of interests is determined entirely by the time of registration.

Other: normal rules of priority When one of the interests is unregistered, the registered interest will gain priority, even if it is registered with notice of the existence of the unregistered interest. If both interests are unregistered, then it would seem that the normal rules concerning priority of interests apply.

Second and subsequent mortgages The possibility of a mortgagor giving subsequent mortgages has a special importance to the banker, for in this instance, the operation of the rule in Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767 works against the interest of the banker, unless some steps are taken to safeguard their interest: see 4.3.2. The question concerns the priority advances made after the creation of the second mortgage. If the first mortgagee has the right to claim priority for

advances made after this time, it is said that the advances are ‘tacked’ on to the first security interest. For example, A takes a security interest over B’s property which is expressed to be a security for present and future advances. A lends B $1,000. Later, B grants a security interest to C in return for a loan of $500. Assuming that A has the security interest with the greater priority, then, if the security must be realised, A takes the [page 431] first $1,000 and, if there is sufficient, B takes the next $500. But now suppose that A lends a further $500 to B. Is A entitled to the first $1,500? Or is A entitled to the first $1,000, B the next $500 and then A the following $500? Illustration: Hopkinson v Rolt (1861) 9 HL Cas 514 A lender took a floating charge to secure advances already made to the debtor but also expressed to cover all future advances. The charge agreement contained a clause by which the borrower agreed not to grant any further encumbrances on the property. In breach of the agreement, the borrower granted further charges over the same property and the question before the court was whether the lender had the right to ‘tack’ advances made to the borrower which were advanced after the creation of the second encumbrance. The Court held that there was no right to tack future advances which were made after the first mortgagee had notice of the creation of the subsequent security interest, but that advances made before having such notice could be tacked.

In terms of the above example, A is entitled to first claim for the entire $1,500 if, and only if, the $500 advanced by A to B was made without notice of C’s security interest. The holding is known as the rule in Hopkinson v Rolt (1861) 9 HL Cas 514. See St George Bank Ltd v Mctaggart [2007] WASC 150 for a discussion of the ‘notice’ required. See also McDonald’s Australia Limited v Bendigo and Adelaide Bank Limited [2014] VSCA 209; Naxatu Pty Limited v Perpetual Trustee Company Limited [2012] FCAFC 163. In the latter case, it was held that the ‘notice’ is of the second mortgage, not of actual advances being made. The rule in Hopkinson v Rolt (1861) 9 HL Cas 514 may be displaced by agreement between the secured parties: Naxatu Pty Limited v Perpetual Trustee Company Limited [2012] FCAFC 163. See also ASB Bank Ltd v South Canterbury Finance Ltd [2011] NTCA 368, where a clause in the mortgage expressly excluded any application of the rule in Clayton’s case as well as the rule in Hopkinson v Rolt. The rule in Hopkinson v Rolt (1861) 9 HL Cas 514 applies to a mortgage of

Torrens land: see Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293. In this context, registration of the second interest does not provide notice of that interest to the first mortgagee, for there is no duty on the registered first mortgagee to continually search the register: see Nioa v Bell (1901) 27 VLR 82; Queensland Trustees Ltd v Registrar of Titles (1893) 5 QLJ 46. It might be thought that the situation would be different if A was under a contractual or other obligation to make the further advances to B, but a later case firmly established that this was not the situation. If the borrower does in fact grant a subsequent security over the same property, then the lender is relieved of any obligation to make the further advances: see West v Williams [1899] 1 Ch 132. [page 432] The importance of this to the banker is that the interaction of the rule in Hopkinson v Rolt (1861) 9 HL Cas 514 and the rule in Clayton’s case may work to erode the priority of the first security entirely. If the first security is for a loan by way of overdraft, then payments into the account will discharge the earlier debt (which is the one in which the banker has priority), whereas later advances will rank behind the second security in priority. The result is that if the account is a normal working overdraft, the banker gradually loses all priority to the subsequent security interest: see the discussion in ASB Bank Ltd v South Canterbury Finance Ltd [2011] NTCA 368 at [37]. There is a simple remedy. Immediately upon receiving notice of the creation of the subsequent security, the banker should stop the overdraft account. If the banker desires to continue making advances to the customer, then a new account must be opened, but understood to be on terms whereby the security for the advances is substantially inferior to the original arrangements. This course of action is the only way in which the banker may retain the priority for the advances made prior to the creation of the subsequent security interest. There have been several Australian cases which have allowed tacking in certain circumstances even after receiving notice of the second mortgage. Illustration: Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 The first mortgagor made further advances after receiving notice of the subsequent mortgage. The subject matter of the securities was a building under construction, and it was found as a fact that the advances were made for the purposes of completing the construction. The Court held that the completion of the construction was to the benefit of all concerned. In these circumstances, the further advances could be tacked to the first mortgage.

See also Network Finance Ltd v Deposit & Investment Co Ltd [1972] QWN 19; Overseas Chinese Banking Corp Ltd (OCBC) v Malaysian Kuwaiti Investment Co (MKIC) [2003] VSC 495; Naxatu Pty Limited v Perpetual Trustee Company Limited [2012] FCAFC 163.

[page 433]

14 Secured Lending: Personal Property 14.1

Introduction

A banker contemplating a loan to a modern business may find that the land belonging to the business represents a very small part of the total value of the business. If the business is one of manufacturing, for example, then the primary assets of the business are likely to consist of the raw materials used in the manufacturing process, the machinery used to manufacture the goods and the final product prior to sale. There may also be substantial assets in the form of debts owed to the manufacturer. If the business is primarily one of retailing, it is likely that the major assets will consist of stock and debts owed to the business. The point is that modern commercial borrowers are able to offer substantial security over chattels and over choses in action. Lenders must be familiar with the broad outlines of the law relating to security interests over ‘personal property’. The law relating to securities over personal property has been reformed with the introduction of the Personal Property Securities Act 2009 (Cth). The Act does not create securities, but does regulate their enforcement and, most importantly, priorities among competing interests.

14.2

Historical problems of securities over chattels

14.2.1

Early rules: Twyne’s case

The early common law adopted a very simple approach to chattel securities: no interest in chattels was recognised unless accompanied by a transfer of

possession. So, for example, a mortgage over chattels was invalid, since the essence [page 434] of the mortgage is the transfer of title to the mortgagee while the mortgagor retains possession. The rule is at least as old as Twyne’s case (1601) 3 Co Rep 80b; 76 ER 809 and may be considerably older. The justification for the rule was that such transactions are an invitation to fraud. It was argued that chattels are different from land, since there is no way to prove ownership. Whereas a would-be purchaser or mortgagee of land could rely upon the title deeds to determine the true owner of the land, there was no comparable method of establishing existing interests in chattels. Consequently, a person in possession of a chattel could mortgage it first to one then to another, always representing that the chattel was unencumbered. The rule in Twyne’s case survived for some 200 years. Since few legal rules survive intact for so long a period, it must be presumed that it worked well enough for the commercial necessities of the time. Indeed, some have speculated that it was only with the rise of the Industrial Revolution, and the subsequent movement of wealth from land to other forms of assets, that the rule in Twyne’s case began to inhibit commercial transactions: see Gilmore (1965). Whatever the cause, legislation was introduced all over the common law world at about the same time, to allow the creation or transfer of interests in chattels without the need to also transfer the possession of the chattels.

14.2.2

Bills of Sale Acts

In Australia, as in many Commonwealth countries, legislation was based on the Bills of Sale Act 1882 (UK). The Act sought to overcome the fraud problem through a system of registration. Any unregistered security interest would suffer from certain deficiencies. In some cases, the unregistered security would be completely invalid, but it was more usual that the interest would be invalid only in certain circumstances or against certain parties. The aims of the legislation are clearly stated in the introduction to the Bills of Sale Act 1878 — the precursor to the Bills of Sale Act 1882. An Act to consolidate and amend the Law for preventing Frauds upon Creditors by secret Bills of Sale of Personal Chattels.

The Bills of Sale Acts were neither popular nor successful. Registration

procedures were cumbersome, and the resulting registration process could damage the borrower’s credit. Registration fees and stamp duties were often onerous. These deficiencies led to many artificial arrangements that attempted to circumvent the registration requirements. Further adding to the problem was that the legislation was very badly drafted, resulting in what one commentator has referred to as ‘the quagmire of chattel securities’: see Riesenfeld (1970). [page 435]

14.2.3

Circumvention: hire purchase

A hire purchase agreement is a contract allowing a person to ‘hire’ a chattel with an option to purchase after a fixed period of time. The hire purchase agreement was a common form of contract for musical instruments in the late 1800s and well into the 20th century. The option to purchase was for a nominal sum, usually $1. The hire purchase agreement came in two versions: the compulsory purchase variety — where the ‘hirer’ was compelled to purchase at the end of the hire period: see Lee v Butler [1893] 2 QB 318; and the ‘pure’ hire purchase arrangement — where the hirer had the option to purchase at the end of the hire period: see Helby v Matthews [1895] AC 471. Circumvention of the Bills of Sale Acts by means of the hire purchase arrangement was routine after two decisions of the House of Lords, which found that: the hire purchase agreement is not a bill of sale: see McEntire v Crossley Bros Ltd [1895] AC 457; and the hire purchase agreement that offered the hirer an option — as opposed to an obligation — to purchase is not a conditional sale: see Helby v Matthews [1895] AC 471. The first decision relieved financiers of the burden of registration, the second from the risk that the hirer could pass good title as a buyer in possession: see Sale of Goods Act 1923 (NSW), s 28(2); and see Tyree (1998b). The Helby v Matthews type of contract thus overcame the deficiencies of the Lee v Butler type, which had been held to be a conditional sale. Of course, many jurisdictions then passed laws purporting to regulate hire

purchase agreements, thus further fragmenting the regulation of chattel securities: see, for example, the Hire Purchase Act 1960 (NSW).

14.2.4

Reform

Reform proved difficult. Most proposals were based on the US Article 9 of the Uniform Commercial Code. Article 9 has some valuable concepts, in particular: attachment the time at which the security interest comes into being; and perfection which establishes a time for priority purposes and protects against third party purchasers.

Article 9 attempts to treat all security interests equally, looking to function rather than form. This was a dramatic change from the previous law. Until the reform, only four types of security were recognised: charges, mortgages, pledges and liens. [page 436] Parties were free to structure their transaction as they wished, and they often wished to ensure that the interest of the lender was not one of the existing security interests. The Personal Property Security Act 2009 has changed that, sometimes with surprising results. One of the most surprising to many business people is that ownership is no longer sufficient to overcome all other interests. The Act provides that, in certain circumstances, ownership may be subordinate to a security interest. Each of the principles of the Act has exceptions, and defining the exceptions proved to be a difficult obstacle to reform agreement. New Zealand implemented the Personal Property Securities Act 1999 (NZ), based on Art 9 and the model Western Canada Personal Property Security Act, later known as the Canadian Conference Personal Property Security Law Model. Australia finally followed with the Personal Property Securities Act 2009. From October 2011, this Act replaces the various and varied state Acts governing securities over personal property. The Australian Act is based on New Zealand, Canadian and US legislation as well as work done by the United Nations Commission on International Trade Law and the International Institute for the Unification of Private Law.

14.3

Complexity

The Personal Property Securities Act 2009 is a long and complex Act. It has been criticised for this, but in fact the Act is a substantial simplification of the previous law. It replaces 71 separate Personal Property Security Acts, administered by 24 separate agencies: see Collier (2006). Some of the 71 replaced Acts were of general application, but some applied only to specific types of chattels or applied only in specific circumstances. The registration systems provided by these Acts were often cumbersome and incomplete. So, for example, the High Court found that reservation of title clauses (the so-called ‘Romalpa clauses’) did not require registration: see Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25. The rules of priority among security holders were complex and uncertain. Partly governed by various statutes, partly by common law decisions, it could be difficult to predict an outcome. The results were often confused by the conceptual approaches to the problem: see, for example, Broadlands Finance Ltd v Shand Miller Musical Supplies Ltd [1976] 2 NZLR 124; and see the discussion in McLauchlan (1977). The Personal Property Securities Act 2009 simplifies and rationalises the law. The most notable changes are: the form of the security is no longer an overriding consideration — the Act attempts to treat the substance of the transaction rather than the form; proceeds of secured property are themselves subject to a security interest; [page 437] future advances may be tacked — the rule in Hopkinson v Rolt (1861) 9 HL Cas 514 has been abolished for security interests regulated by the Act; ADIs may take a security interest in accounts held by customers; priorities among different security interests in the same collateral are determined by the Act; purchase money security interests (PMSIs) receive special preference; registration is simple and inexpensive, using an electronic ‘noticeboard’. The Personal Property Securities Act 2009 does not create security interests, although it declares certain arrangements to be security interests. It regulates priorities between competing security interests, as well as the effectiveness of security interests against third parties.

The Personal Property Securities Act 2009 applies to security interests in collateral that is personal property. ‘Collateral’ means any personal property to which a security interest is attached. The term also refers to any personal property described by a registered security interest, whether or not the security interest has attached. The Personal Property Securities Act 2009 is not a code. Section 254 specifically provides that it is intended to operate concurrently with other laws, and s 255 allows regulations to be made to resolve inconsistencies with other laws by modifying the operation of the Act. Parliament recognised both the complexity and the novelty of the new Personal Property Securities Act 2009. Section 343 provides for a review after three years of operation. An acknowledged expert in the field, Bruce Whittaker, conducted the review, and his comprehensive report was tabled in Parliament on 18 March 2015. The report makes nearly 400 recommendations, and it is essential reading for anyone interested in personal property securities.

14.4

Meaning of personal property

14.4.1

Introduction

Personal property includes almost any property interest other than land. Almost anything else that may be owned or otherwise treated as property is included, unless it is expressly excluded from the operation of the Personal Property Securities Act 2009. ‘Personal property’ is unhelpfully defined in s 10 of the Act to mean property (including a licence). The definition then goes on to exclude certain property — namely: land; or a right, entitlement or authority: –

granted by or under a law of the Commonwealth, a state or a territory and

–

declared by that law not to be personal property for the purposes of the Personal Property Securities Act 2009. [page 438]

‘Land’ is restricted by the exclusion of fixtures but otherwise includes all

estates and interests in land. ‘Property’ is not defined in the Personal Property Securities Act 2009. The Review discussed this, concluding that the term was best left to the general law. ‘Property’ may become more or less inclusive as the law develops: see Recommendation 25. ‘Licence’ is defined in s 10 to be a transferable right. The Review criticises this and recommends that the restriction be removed in the definition. The effect would be to allow the general law to determine whether any particular licence was ‘property’ for the purposes of the Act: see Recommendations 26 and 27. The definition of licence also excludes certain statutory licences granted by the Commonwealth, a state or a territory. The Review also suggest the deletion of this part of the definition and that the various governments agree that statutory licences should come within the ambit of the Personal Property Securities Act 2009: see Recommendation 31.

14.4.2

Exclusions

Section 8(1) of the Personal Property Securities Act 2009 enumerates interests to which the Act does not apply, even though they may fall within the broad definition of ‘personal property’. However, s 8(2) provides for the application of certain sections of the Act to the interests excluded by s 8(1). The list in s 8(1) is long, and it is not appropriate to go into it in detail in a general work such as this. However, several of the interests are of special interest to bankers and their advisors. These include: the interests of a seller who has shipped goods under a negotiable bill of lading or its equivalent, unless the parties indicate that they intended to create a security interest: Personal Property Securities Act 2009, s 8(1)(a). Bills of lading and the rights of the seller are discussed at 17.15.6. liens, charges or other interests created by a law of the Commonwealth, a state or territory, unless the owner of the property agrees to the interest: Personal Property Securities Act 2009, s 8(1)(b) — this would include solicitors’ liens and mechanics’ liens; a lien, charge or other interest in personal property that arises by operation of the general law — this would include the banker’s lien: Personal Property Securities Act 2009, s 8(1)(c) and see 16.1.

any right or set-off or combination of accounts: Personal Property Securities Act 2009, s 8(1)(d) and see 4.4. certain interests that arise by virtue of the Payment Systems and Netting Act 1998: Personal Property Securities Act 2009, s 8(1)(e); certain interests arising from transfers of accounts or negotiable instruments: Personal Property Securities Act 2009, s 8(1)(f). [page 439] The list of exclusions and application of particular sections to excluded interests may be expanded by regulation. The Review has suggested that this list be split into two parts — one stating that the items are not ‘security interests’, the other that the items are not ‘personal property’: see Recommendation 32. The Review also made a number of recommendations for amendments, additions and deletions to the list of exclusions.

14.5

Security interest

14.5.1

Definition

According to s 12(1) of the Personal Property Securities Act 2009, a security interest is: … an interest in relation to personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

14.5.2

Examples

The Personal Property Securities Act 2009 then goes on to give examples of security interests. Section 12(2) lists all of the security devices that we have discussed above, along with quite a few more. All kinds of charges and mortgages are included, as are pledges and leases of goods. Trust receipts are also security interests: Personal Property Securities Act 2009, s 12(2)(g). Conditional sales, sales subject to a retention of title and hire purchase agreements are ‘security interests’: Personal Property Securities Act 2009, s 12(2)(d) and (e). This is important, since the owner must consider registration if priority is not to be lost: see 14.13 and the discussion at 14.15. The Review noted that the term ‘conditional sale’ has come to mean

something other than retention of title. It was recommended in the Review that the example given in s 12(2)(d) be amended to make it clear that the example is only referring to retention of title: see Recommendation 4. Section 12(2)(l) of the Personal Property Securities Act 2009 lists ‘a flawed asset arrangement’. The Review noted that the term does not have a welldefined meaning among lawyers and that the example should be deleted: see Recommendation 8.

14.5.3

Extension: charge over current account

Section 12(3A) and (4) of the Personal Property Securities Act 2009 effectively legislate for a charge to be taken by the debtor over the debt owed. In particular, an ADI may take a charge over a current account as security for advances: Personal Property Securities Act 2009, s 12(4)(b). This is an important statutory change as Re Charge Card Services Ltd [1987] Ch 150 held that such a charge was ‘conceptually impossible’. [page 440]

14.5.4

Deemed security interests

Section 12(3) itemises certain interests which are deemed to be security interests whether or not the transaction, in substance, secures payment or performance of an obligation. The interests itemised are: the interest of a transferee under a transfer of an account or chattel paper; the interest of a consignor who delivers goods under a commercial consignment; and the interests of a lessor or bailor of goods under a Personal Property Security lease. The policy reason for including these interests is the usual one: in each case, it is difficult or impossible for a third party to determine ownership of the asset.

14.5.5

Exclusions

Certain interests are excluded. A mere licence is not a security interest, nor are certain agreements to postpone or subordinate debts: see Personal Property Securities Act 2009, s 12(6).

Section 8 details interests to which the Personal Property Securities Act 2009 does not apply, even though they might be security interests in personal property. The list is long and the reader is referred to the Act — save for several items that are important in the banker-customer context: various kinds of liens and charges that arise by law or that are created by the operation of the general law — most importantly, this would include the banker’s lien: see Personal Property Securities Act 2009, s 8(1)(b) and (c) and Chapter 16; and any right of set-off or right of combination of accounts: Personal Property Securities Act 2009, s 8(1)(c): see 4.4ff. Section 8(2) of the Personal Property Securities Act 2009 provides a table of exceptions to the exceptions of s 8(1) — that is, security interests to which the Act applies, even though they are listed in s 8(1). Certain sections of the Act may apply even to the excluded transactions.

14.6

The grantor

Under the law prior to the Personal Property Securities Act 2009, the ‘grantor’ was the person who conveyed an interest to another person. For example, in a hire purchase transaction, the grantor was the owner who granted the hirer the right of possession. In a chattel mortgage, the grantor was the person who retained possession but transferred the title to the mortgagee. [page 441] A ‘grantor’ under the Personal Property Securities Act 2009 has a much different meaning, and it is perhaps unfortunate that the term ‘grantor’ has been used at all. Section 10 of the Personal Property Securities Act 2009 provides that a grantor includes: … a person who has the interest in the personal property to which a security interest is attached (whether or not the person owes payment or performance of an obligation secured by the security interest).

For example, the ‘grantor’ in a hire purchase arrangement is the same person who is the grantor in a chattel mortgage — namely: in the case of a hire purchase, the person who gains possession; or in the case of the chattel mortgage, the person who grants the title. In both cases, the interest is the right to possession of the chattel in which

some other person holds a security interest. Only in the case of the chattel mortgage does the ‘grantor’ actually grant the other person an interest. In the hire purchase arrangement, it would be more natural to say that the owner grants the right to possession. The odd usage of ‘grantor’ is a result of an amendment of the original section: see Commonwealth Act No 96 of 2010. The clause of s 10 in parentheses is there since a third person may be the grantor of a security interest. The definition in s 10 goes on to clarify some special cases: a person who receives goods under a commercial consignment; a lessee under a Personal Property Security lease; a transferor of an account or chattel paper; and any transferee or, or successor to, the interests of a person mentioned above. The last point in included to ensure that the Personal Property Securities Act 2009 cannot be circumvented by simple transfers to subsidiaries. Some aspects of the Act deal with the person who is registered as the grantor. That person is, for the purposes of the sections that deal with registration, the grantor as is any person who fits within the main definitions.

14.7

Creating the security: security agreements

A security agreement is any agreement or act by which a security interest is created. It may also refer to writing evidencing the agreement or act: see Personal Property Securities Act 2009, s 10. Thus, for example, the deposit of title documents would itself be a ‘security agreement’, since the act creates an equitable mortgage over the goods. [page 442] The general rule is that a security agreement is effective according to its terms. The agreement may provide for security interests in future property and, if so, then the interest attaches without specific appropriation by the person who has granted the interest. In other words, the rule in Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999 is given statutory effect: see Personal Property Securities Act 2009, s 18(1), (2) and (3). However, the Act goes beyond the Holroyd v Marshall principle with respect to when the security becomes effective: see 14.10.

A security agreement may also provide for future advances, and all security agreements are taken to secure reasonable expenses in relation to the enforcement of the security interest, unless the parties agree otherwise: see Personal Property Securities Act 2009, s 18(4) and (5).

14.8

The chattel mortgage under the Personal Property Securities Act 2009

Prior to the Personal Property Securities Act 2009, a common form of security over chattels was the chattel mortgage. The essence of a chattel mortgage is that the debtor owns the goods and transfers title to the creditor, subject to a right of redemption: see 13.2.2. The technical problem with this is that the debtor must own the chattel before the mortgage can become effective. A security agreement that relies on the concept of ‘chattel mortgage’ might end up being ineffective over those chattels not owned by the debtor at the time of the agreement: see, for example, 20991 Ontario Ltd v Canadian Imperial Bank of Commerce (1998) 8 PPSAC 135, where it was held that a ‘mortgage’ was not an effective security over a non-transferable licence. An Australian court is unlikely to come to the same conclusion, being more likely to hold that there is a clear intention to create a security interest. However, to be on the safe side, the security agreement should avoid references to the ‘old-style’ securities and should merely refer to ‘security interests’.

14.9

Leases

The Canadian legislation draws a distinction between an ‘operating lease’ and a ‘financial lease’. A financial lease is thought to be a security interest in disguise, since the lease is usually for a term which covers the entire economic life of the chattel. In addition, there may be an option for the purchase at a nominal sum at the end of the lease. If the only purpose of the lease is to provide the lessee with the use of the goods, then the Canadian legislation would classify it as an ‘operating lease’. [page 443] Ideally, a financial lease would be treated as a security interest and an

operating lease would not. However, the conceptual distinction is not always clear and has given rise to much litigation. The New Zealand legislation took a different approach from Canada, and Australia has adopted the New Zealand approach. The answer is somewhat arbitrary, but clear. Section 12(3)(c) of the Personal Property Securities Act 2009 deems the interest of a bailee or a lessor of goods under a ‘PPS lease’ to be a security interest. The concept of the PPS lease replaces that of the financial lease. A PPS lease is a lease or a bailment of goods for a term of more than one year. In order to prevent obvious avoidance arrangements, s 13 of the Personal Property Securities Act 2009 extends this definition to include: leases or bailments for an indefinite period, even if the arrangement may be terminated by any party within the year; leases or bailments that are automatically renewable, or renewable at the option of one of the parties if the total extent of the arrangement might exceed one year; and leases or bailments under shorter terms if the lessee or bailee has retained substantially uninterrupted possession of the goods for more than a year after first acquiring possession. In this case, the lease is considered an ‘operating lease’ until the one year mark when it is converted to a ‘financial lease’. The application of the Personal Property Securities Act 2009 is intended to be restricted to commercial arrangements. Thus, s 13(2) provides that an arrangement is not a PPS lease unless the lessor or bailor is regularly engaged in the activity of leasing or bailing goods. Certain leases of consumer property as part of a lease of land are also excluded. The application to bailments is restricted to those for which the bailee provides value: Personal Property Securities Act 2009, s 13(3). The Review noted that such a bailment will almost certainly fall within the definition of a lease. The Review also considered that the inclusion of bailments has caused unnecessary confusion about exactly which bailments are included and which not. After an extensive discussion, the Review recommended that all references to bailment be removed from s 13 of the Personal Property Securities Act 2009: Recommendation 20.

14.10 Attachment

The security interest becomes enforceable against the grantor at the time when the interest ‘attaches’ to the collateral: Personal Property Securities Act 2009, s 19(1). Attachment is thus an important concept in the Act. [page 444] Section 19(2) provides that an interest attaches when the grantor has rights in the collateral or the power to transfer rights to the secured party and either: value is given for the security interest; or the grantor does an act by which the security interest arises. This seems to conform to the ordinary rules of creating security interests. There can be no interest created until the grantor has rights — this is the point that was overlooked in Broadlands Finance Ltd v Shand Miller Musical Supplies Ltd [1976] 2 NZLR 124: see 14.15. The Personal Property Securities Act 2009 has made a very important change in the rules with respect to attachment of security interests over future goods. In Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999, it was held that the interest did not attach until the grantor acquired title to the goods. The Personal Property Securities Act 2009 provides for attachment when the grantor obtains possession: see Personal Property Securities Act 2009, s 19(2) and (5) and the discussion at 14.15. Section 19(3) of the Personal Property Securities Act 2009 permits the parties to agree that attachment may occur at a time later than that specified by s 19(2). There are special rules for growing crops and the products of livestock. The requirement that the grantor has rights in the collateral or the power to transfer rights to the secured party is not as clear as could be wished. Is mere possession a right in the collateral? The Personal Property Securities Act 2009 is not entirely clear. Two New Zealand cases have held that mere possession is not sufficient: see JS Brookshank and Company (Australasia) Ltd v EXFTX Ltd (rec apptd & in liq) [2009] NZCA 122; Rabobank New Zealand Ltd v McAnulty (February Syndicate) [2011] NZCA 212. The arguments are canvassed in Whittaker (2013). The Review recommended that s 19 of the Personal Property Securities Act 2009 be amended to clarify that it applies to all security interests that arise in circumstances where the secured party has title to the collateral as a matter of general law: Recommendation 52. The Review also recommended that the reference to the power to transfer

rights be deleted: Recommendation 53.

14.11 Third parties Section 20 of the Personal Property Securities Act 2009 provides that an attached security interest is enforceable against third parties in three circumstances — namely where: the secured party has possession of the collateral; [page 445] the secured party has perfected the interest by control; or there is a security agreement in writing that provides for the interest, which is signed by the grantor (or acknowledged in some other way) and meets certain disclosure standards. The disclosure standards are outlined in s 20(2) of the Personal Property Securities Act 2009. The main requirement is that the signed agreement must give sufficient description of the collateral. The description requirement may be met by statement that a security interest is taken in all of the grantor’s present and after-acquired property: Personal Property Securities Act 2009, s 20(2)(b)(ii). A security agreement in writing probably cannot be ‘acknowledged in some other way’ by actions or words that occur before the agreement is reduced to writing: see Citadel Finance Corporation Pty Limited v Elite Highrise Services Pty Limited (No 3) [2014] NSWSC 1926. Where the particular personal property is inventory, then the agreement is enforceable only while the collateral is held or leased by the grantor: Personal Property Securities Act 2009, s 20(5). This allows for circulating assets to be acquired and sold in the ordinary course of business under a floating charge: see 14.14. The agreement does not need to be registered to be enforceable against third parties, but that is not as good as it sounds. Section 43(1) of the Personal Property Securities Act 2009 provides that a third party buyer or lessee for value of personal property takes the property free of unperfected security interests. When that happens, the secured party still has some limited rights. Section 53 of the Personal Property Securities Act 2009 provides that the rights of the secured party are subrogated to the rights of the person who transferred the

interest. Thus, for example, if the person who acquired the property still owes money for the purchase or the lease, then the secured party may claim it: for more details, see Personal Property Securities Act 2009, s 53. The Review expressed the view that s 20(2) of the Personal Property Securities Act 2009 could be clarified and simplified. In particular, it is unclear what terms of the security agreement need to be evidenced in writing. The Review recommended that only two terms were required: the security interest that is provided for by the security agreement; and a description of the collateral that is sufficient for it to be identified. The Review also recommended the deletion of s 20(4) and 20(5) of the Personal Property Securities Act 2009. Section 20(4) imposes additional description requirements on property described as ‘consumer property’ and ‘commercial property’. Section 20(5) deals with property described as ‘inventory’: see the discussion preceding Recommendations 57 and 58. [page 446]

14.12 Perfection 14.12.1 The purpose of perfection Perfection of the security interest protects against third party purchasers by publicising the existence of the security interest, but it is also used to establish priorities. It is important to understand these different purposes in order to understand the complexity of the Personal Property Securities Act 2009. Publication is important to prevent ‘secret trusts’ that allow fraud through the appearance of ownership. The Review expressed the opinion that publication may be the main purpose of perfection, and it should be one of the guiding principles in any alteration of the Personal Property Securities Act 2009. Priorities among competing security interests are also important, and they form the second purpose of perfection. Priorities are discussed more fully at 14.13.

14.12.2 Paths to perfection Subject to exceptions and special rules, s 21 of the Personal Property Securities

Act 2009 provides that a security interest is perfected by: registration: see 14.12.3; possession (other than possession as a result of seizure or repossession) by the secured party: see 14.12.4; control of certain types of chattel by the secured party: see 14.12.6; or ‘temporary perfection’, as provided by the Act: see 14.12.7. Except for temporary perfection, a security interest may only be perfected if it is attached to the collateral and enforceable against a third party: Personal Property Securities Act 2009, s 21(1)(b). Section 21(4) provides that multiple security interests may be perfected by a single registration. Perfection by registration, possession and control all have a publicity function. In each case, third parties are put on notice that the grantor may not have unlimited rights in the collateral.

14.12.3 Registration Nature of the Personal Property Securities Register Chapter 5 of the Personal Property Securities Act 2009 deals with the Personal Property Securities Register (the Register). Although the Register is an important cornerstone of the Personal Property Securities Act 2009, it is not all-important. Security interests may be perfected by other means, so not all perfected instruments will appear on the Register. [page 447] The Register is maintained on a website. It is not necessary to apply for a login to make a registration or to search the Register. Registration may be made online or by using a paper registration form. There is no need to file copies of the security agreement. The Personal Property Securities Act 2009 has adopted a ‘notice filing’ approach. In most cases, registration will be a one-page document — the ‘financing statement’ — which may be filed electronically. The Register has been described as an ‘electronic noticeboard’. Section 150 of the Personal Property Securities Act 2009 provides for registration of ‘financing statements’ by application to the Registrar. A financing statement is the data required to be registered: Personal Property

Securities Act 2009, s 10. The application may be to register either a security interest or personal property prescribed by regulation. The financing statement consists of information regarding the secured party, details of the collateral, grantor and certain other information: see Personal Property Securities Act 2009, ss 153 and 154. Registration of a security interest in personal property may be made before a security agreement is made and before the security interest attaches to the property: Personal Property Securities Act 2009, s 161.

Time of registration Since the precise time of registration may be relevant in determining priority, Pt 5.4 of the Personal Property Securities Act 2009 provides detailed rules to determine registration time, as well as rules on when a registration is ‘effective’. Subject to the sections which deal with defects in registration, a registration with respect to a security interest that describes particular collateral is effective from the registration time. It continues to be effective until certain events occur, which are specified in s 163(1) of the Personal Property Securities Act 2009. Roughly speaking, the registration remains effective until such time as it is removed from the Register or expires under its own terms.

Errors in registration A registration is not ineffective merely because it contains minor defects. It will be ineffective if there is a seriously misleading defect or one of the defects listed in s 165: Personal Property Securities Act 2009, s 164(1). The registration may be effective with respect to other collateral described in the registration: Personal Property Securities Act 2009, s 164(3).

Criticism The Review of the Act noted several criticisms of the Register. Submissions made it clear that the Register is too complex, full of jargon and unfamiliar concepts. [page 448] A person seeking to complete a registration is asked questions that they cannot readily understand and so, too often, they answer in an arbitrary way in order to complete the registration. The Review recommended (at [3.1.2.2]) ‘… that the Register should be a particular focus area for simplification’’

Illustration: In the matter of Accolade Wines Australia Ltd [2016] NSWSC 1023 The plaintiffs leased goods for terms in excess of one year which, accordingly, were PPS leases under the Personal Property Securities Act 2009. They registered their interests by lodging financing statements on the Register. However, they registered using the ABN of the grantor. The Regulations require that registration be made using the ACN. Because of this defect, a search of the Register by reference only to the grantor’s details would not disclose the registration. The result is that the registration was ineffective by ss 153 and 165(b). The plaintiffs later re-registered, but not in time to automatically protect their interests under s 588FM of the Corporations Act 2001 when Accolade Wines was placed into liquidation.

The result in Accolade Wines was that, due to a minor error, the property in question was prima facie available to creditors of Accolade Wines. The plaintiffs made an application under s 588FM of the Corporations Act 2001, which gives the courts a discretion to ‘forgive’ a timely registration. See also Caason Investments Pty Ltd v Ausroc Metals Ltd [2016] WASC 267, where a company not involved in the business of lending made a loan and took a security interest in the borrower’s property. Being unfamiliar with the Personal Property Securities Act 2009, the lending company failed to register its interest in a timely manner.

14.12.4 Possession The Review considered the restriction in s 21(2)(b) of Personal Property Securities Act 2009 that perfection by possession is restricted to possession that is not the result of seizure or repossession. It noted that the primary reason for retaining the restriction is that otherwise the secured party could enforce the security against third parties merely by seizing the collateral. The result is counter to the policy of the Personal Property Securities Act 2009 that requires a security agreement in writing in order to be enforceable against third parties. In the event, however, the Review recommended that the language remain: Recommendation 60. [page 449] The most important rule on possession is s 24 of the Personal Property Securities Act 2009, which provides that it is impossible for both the grantor and the secured party to be in possession of the personal property. Section 24(1) states: A secured party cannot have possession of personal property if the property is in the actual or apparent possession of the grantor or debtor, or another person on behalf of the grantor or debtor.

Section 24(2) of the Personal Property Securities Act 2009 is the complement to s 24(1): A grantor or debtor cannot have possession of personal property if the property is in the actual or apparent possession of the secured party, or another person on behalf of the secured party.

Goods in transit present special problems. Section 24(3) deals with possession of goods being transported by a common carrier. Such goods will often be represented by a document of title, and an agent may also deal with the goods. The grantor or debtor acquires possession when they (or their agent) obtain actual possession, or possession of the document of title. The time at which possession is obtained is the earliest of these times. The time of possession is important, since that is the time at which a security interest will most likely attach: see 14.10. Section 24 of the Personal Property Securities Act 2009 goes on to state more precise rules for possession of goods for forms of less tangible personal property.

14.12.5 Goods in the possession of a bailee In commercial transactions, the goods will often be in the possession of a third party bailee. So, for example, goods stored in a warehouse or customs shed, or goods in transit, are held by third parties who have only limited rights of possession. Section 22 of the Personal Property Securities Act 2009 provides special rules for the perfection of security interests in the goods held by a third party bailee. The concept of ‘attornment’ is important in this context. Attornment is a formal acknowledgement that the goods are being held on behalf of another party. Section 22(1)(b) of the Personal Property Securities Act 2009 provides that the security interest is perfected if the bailee attorns to the secured party, since, in that case, the bailee holds the goods in the name of the secured party and the interest is perfected by possession. The security interest may also be perfected if the bailee issues a document of title to the goods in the name of the secured party: Personal Property Securities Act 2009, s 22(1)(c). A security interest in the goods is also perfected if the bailee issues a negotiable document of title to the goods and the secured party has a perfected interest in the

[page 450] document: Personal Property Securities Act 2009, s 21(1)(d). This is important in the context of bills of lading and documentary credits: see Chapter 17. Section 22 also provides for temporary protection in certain types of documents issued by the bailee.

14.12.6 Control The Personal Property Securities Act 2009 sets out special rules about control of certain kinds of personal property. The kinds of property that may be perfected by control are itemised in s 21(2)(c): an ADI account; an intermediated security; an investment security; a negotiable instrument that is not evidenced by a certificate; a right evidenced by a letter of credit that states that the letter of credit must be presented on claiming payment or requiring the performance of an obligation; satellites and other space objects. Except for satellites and space objects, the property listed is intangible and cannot be perfected by possession. As a practical matter, the same might be said of satellites and other space objects. Perfection by control is, in a sense, the analogue of possession but, as the Review points out, the analogy is not perfect. By its very nature, only one security interest may be perfected by possession, but the same is not true for perfection by control. The reader should consult a specialist text for a complete discussion of perfection by control. Here we will discuss two aspects that are of special concern to the banker. A secured party has control over an ADI account for the purposes of perfection if, and only if, the secured party is the ADI itself: Personal Property Securities Act 2009, s 25. As a result, when an ADI takes a charge over a customer’s account, the security interest is perfected at the time of attachment. Further, since a security interest perfected by control has a higher priority

than security interests perfected by other means (as per s 57), the Personal Property Securities Act 2009 places ADIs in a very privileged position. The Review discussed this privileged position of ADIs and could find no compelling reason to protect it. The Review recommended that the term ‘ADI account’ be replaced with a more generic term such as ‘bank account’ and the definition be expanded to include accounts held with other financial institutions that are subject to similar regulatory control: Recommendation 72. Although the Review considered the possibility that parties other than the ADI itself should be able to perfect by control a security interest in an account, the [page 451] lack of support from respondents to the consultation paper ultimately led to the recommendation that no change be made: Recommendation 73. Section 21(2)(c)(v) of the Personal Property Securities Act 2009 contains the phrase ‘a right evidenced by a letter of credit that states that the letter of credit must be presented on claiming payment or requiring the performance of an obligation’. Most letters of credit do require presentation, but what exactly is the ‘right’ in the section? The Review suggested, at [5.3.9.1], that there are two ‘rights’ associated with a letter of credit: the right to draw on the credit and the right to receive the payment that is due if a draw is made. The Review notes that the section seems to be directed at the second, but that it is not entirely clear. Worse, the concept of control over the right is ill defined and inadequate to meet the general objectives of the Personal Property Securities Act 2009. Section 28 defines control over a letter of credit in a negative way: A secured party does not have control of a right evidenced by a letter of credit, to the extent of any right to payment or performance of an obligation by the issuer or a nominated person, unless the issuer or nominated person has consented to assigning the proceeds of the letter of credit to the secured party.

Unfortunately, it is not apparent to third parties that the issuer or nominated person has consented, and so this form of perfection does not fulfil the publicity objective of perfection. In the absence of consensus on the matter, the Review recommended that the government explore, in consultation with experts, whether the current method of dealing with security interests in ‘rights’ of a letter of credit is appropriate: Recommendation 76.

See Chapter 17 for a discussion of documentary credits.

14.12.7 Temporary perfection The Personal Property Securities Act 2009 provides for temporary perfection in a number of cases. Temporary perfection is intended to give protection to secured parties in circumstances where the secured party cannot act immediately to perfect. Temporary protection is a compromise. There is no way for a potential buyer or lessee to discover that there is a perfected security interest during the time of temporary protection, thus violating one of the basic principles of the Personal Property Securities Act 2009. The case of a negotiable document of title issued by a third party bailee has already been mentioned: Personal Property Securities Act 2009, s 22(2). Roughly speaking, the interest is temporarily perfected between the time of issue of the document and the time when the secured party receives it. [page 452] However, s 22(4) of the Personal Property Securities Act 2009 limits the time allowed to five business days after the day of issue of the document of title. Not only does the temporary perfection end, but it is deemed never to have happened. Several sections in the Personal Property Securities Act 2009 provide similar temporary protection, but only if certain events happen within the fivebusiness-day limitation period. The Review agreed with submissions that the five-day period is too short. It is often practically impossible to meet the timetable imposed by the Act. The Review recommended that in all cases the five-business-day period should be changed to ten business days: see Recommendation 79. Certain other sections of the Personal Property Securities Act 2009 provide temporary perfection for a period of 56 days. For example, subject to conditions, a security interest in collateral that is moved to Australia from another jurisdiction may receive temporary perfection: Personal Property Securities Act 2009, s 39. The temporary perfection cannot last more than 56 days. Several other sections have the 56-day time limit. The Review considered that 56 days was a somewhat odd length of time and recommended that the time be extended slightly to 60 days — apparently easier to remember than 8 weeks: Recommendation 80.

Similar temporary perfection is given to the proceeds of collateral which has been sold or otherwise transferred. See Pt 2.4 of the Personal Property Securities Act 2009 for the detailed circumstances in which temporary perfection is granted. Certain defects in registration may also receive temporary perfection: Personal Property Securities Act 2009, s 166.

14.13 Priority rules 14.13.1 Introduction There may be, and often are, two or more security interests in the same property. As long as the debtor remains solvent, this poses no problems, but if the security interests need to be realised, there is nearly always a problem. When the collateral is sold, there is seldom enough money realised to satisfy all of the secured creditors. How should the proceeds of the collateral be divided among the secured creditors? Although some form of apportionment might be feasible, the common law has always chosen a system of priorities. This allows one creditor to take everything owing, and, if there is anything left, it goes to the next creditor in the priority queue and so on. The Personal Properties Securities Act 2009 has adopted a system of distribution based on priorities. Part 2.6 of the Personal Property Securities Act 2009 deals with priorities between security interests. Section 55 sets out default priority rules that apply if there are not [page 453] more specific rules. There are many specific rules, so these default rules are usually only the beginning when considering a problem in priorities. The default rules on priorities are simple and easily stated: priority between unperfected security interests is determined by the order of their attachment: Personal Property Securities Act 2009, s 55(2); a perfected security interest has priority over an unperfected interest: Personal Property Securities Act 2009, s 55(3); and priority between perfected interests is determined by their ‘priority time’: Personal Property Securities Act 2009, s 55(4). ‘Priority time’ relates to the various methods available for perfection. There is nothing to prevent a security interest being perfected in two or more ways.

For example, it may be temporarily perfected by the Personal Property Securities Act 2009 itself and then later registered. The ‘priority time’ is, in effect, the earliest time at which the interest was perfected: Personal Property Securities Act 2009, s 55(5). There is an important qualification to the ‘priority time’. In order to qualify, the interest must remain ‘continuously perfected’: Personal Property Securities Act 2009, s 55(6). In other words, ‘priority time’ must be recalculated if perfection is interrupted. Section 56 of the Personal Property Securities Act 2009 provides a precise definition of what it means to be ‘continuously perfected’. The main rule is just what is expected. Section 56(1) provides: … A security interest is continuously perfected after a particular time if the security interest is, after that time, perfected under this Act at all times.

Section 56(2) of the Personal Property Securities Act 2009 provides that the perfection need not be by the same means at all times.

14.13.2 Some special rules on priorities There are far too many special rules to be discussed in a general text such as this. Several of the special rules are of particular importance to bankers and banking lawyers. They are: interests perfected by control; the status of future advances; perfected purchase money security interests; and priorities over proceeds. Each of these will be discussed in the following sections. There are, however, numerous other specific rules, many of which will be important to an ADI in some circumstances but are outside the scope of this text. The warning must be repeated — determining priorities of competing security interests is not for the amateur. [page 454]

14.13.3 Interests perfected by control If the security interest is currently perfected by control, then it has priority over other interests perfected by other means: Personal Property Securities Act 2009, s 57(1). This has obvious important consequences for an ADI that takes

a charge over an account held by a customer. Section 57 applies despite any other rules in Pt 2.6. Recall, however, that it is only the ADI with which the account is held that may perfect a security interest in the account by control: see Personal Property Securities Act 2009, s 21. There is nothing to prevent an ADI from holding a security interest in an account held with a different ADI, but the interest cannot be perfected by control.

14.13.4 Future advances The second important rule for ADIs is that future advances receive the same priority as the security interest created by the original security agreement, as long as the original agreement provides for the advances: Personal Property Securities Act 2009, s 58. There is, consequently, no problem with ‘tacking’, as long as the original agreement provides for future advances. Section 58 is subject to a minor exception concerning collateral that is not registered with a serial number. Illustration: C1 lends D $500 and takes a security interest in collateral held by D. The security agreement provides for future advances and the security interest is perfected. Later, C2 lends D $1000 and takes a perfected security interest in the same collateral. C1 then lends D a further $1000. D defaults and the collateral is sold at auction, realising $1500. C1 takes all and C2 is left with nothing.

14.13.5 Purchase money security interests Rationale and definition Securities law has long recognised that lenders who provide funds to purchase new equipment or inventory have a special claim. If the funds are used to acquire the proposed goods, then the net financial position of the debtor is (theoretically) not changed. The acquisition of new equipment or inventory might actually provide an advantage to existing creditors, since the business might prosper with new equipment. An example often given is the acquisition of a new, more efficient, printing press by a publishing business. [page 455] Illustration: Re Connolly Bros (No 2) [1912] 2 Ch 25

A company granted a floating charge (see 14.14) to X over all its property, present and future, promising not to grant any other mortgage or charge ranking in priority over the floating charge. Later, the company negotiated with Y for a loan to purchase some premises, agreeing to grant Y a charge over the premises. After purchase, the company handed the title deeds to Y by way of security. The Court held that, since the company had bound itself to Y before the purchase, that binding, itself, was an equitable charge in favour of Y. Consequently, X’s floating charge never attached to the premises, since the interest in the premises passed directly to Y and never passed to the company.

The application of the doctrine of ‘purchase money securities’ was uncertain: see Church of England Building Society v Piskor [1954] 1 Ch 553. The Personal Property Securities Act 2009 adopts the purchase money security principle and rationalises its operation. A PMSI is defined by s 14 and is, in effect, a security interest in collateral, to the extent that it secures the amount advanced for the newly acquired collateral. Several similar security interests are also included in the definition: the interest of a lessor or bailor of goods under a PPS lease; and the interest of a consignor who delivers goods to a consignee under a commercial consignment. In both cases, the principle of the purchase money security applies — the financial position of the debtor is unchanged under the arrangement. Section 14(2) of the Personal Property Securities Act 2009 lists some arrangements that might accidentally fall within the strict definition but do not satisfy the basic principle. For example, a transaction of sale and lease back is not a PMSI: Personal Property Securities Act 2009, s 14(2)(a). The effect of such a transaction is to give the ‘lender’ a security interest over collateral that originally belonged to the debtor, thus worsening the financial position. Section 14 of the Personal Property Securities Act 2009 provides some refined rules for the case where the security interest is a ‘partial’ PMSI, where the security is renewed or refinanced, and for other situations that might cause confusion.

PMSI has priority Section 62 of the Personal Property Securities Act 2009 details the circumstances under which a perfected PMSI will take priority over other perfected security interests in the same collateral. The rules are slightly different for inventory goods

[page 456] and other goods. Section 62 is subject to s 57, which gives priority to interests perfected by control. For inventory or proceeds of inventory, a PMSI will have priority over other perfected interests in the same collateral if: the interest is perfected by registration –

at the time when the grantor obtains possession of goods comprising the inventory; or

–

the PMSI attaches if the inventory is non-goods; and

the registration states, in accordance with the requirements of s 153 of the Personal Property Securities Act 2009, that the interest is a PMSI. The rules for non-inventory collateral are similar, save that the interest may be perfected before the end of 15 business days after the grantor acquires the goods or, for non-goods, the interest attaches. Special rules apply where: the competing interest has been perfection by control: Personal Property Securities Act 2009, s 57; the collateral consists of accounts: Personal Property Securities Act 2009, s 64; and the collateral consists of chattel paper: Personal Property Securities Act 2009, s 71. When considering priorities, it must be recalled that a PMSI can only be a security interest to the extent that it secures all or part of the purchase price. A PMSI cannot be a security for other debts owing for other purposes: see Personal Property Securities Act 2009, s 14; and see Yamaha Music Australia Pty Ltd v Blakeley [2016] VSC 391.

Priority when more than one PMSI Section 63 of the Personal Property Securities Act 2009 provides for the situation where there are two perfected PMSIs in the same collateral. For example, L lends funds to the debtor to acquire a new printing press, taking a PMSI interest in the press, and the press is acquired from a supplier S under a title retention agreement. Both L and S have PMSI interests in the printing press. Which should have

priority in the event that it is necessary to sell the press and distribute the proceeds? Section 63 again distinguishes between inventory and non-inventory, goods and other forms of collateral. Under the conditions specified in s 63 of the Personal Property Securities Act 2009, the interest of a seller, lessor or consignor of the collateral has priority over the ‘secondary’ PMSI. Special rules apply when the interest is perfected by control: see Personal Property Securities Act 2009, s 57; and see the discussion at 14.13.3. [page 457]

14.13.6 Proceeds Collateral may be sold or otherwise alienated. For example, where the collateral is inventory, both parties expect for it to be sold. A situation that amounts to alienation, without sale, is where collateral may be accidentally destroyed by fire or other natural calamity. In both cases, the Personal Property Securities Act 2009 refers to the ‘proceeds’ of the collateral and gives special consideration to the original security interest. Under s 31(1) of the Personal Property Securities Act 2009, ‘proceeds’ refers to: any identifiable or traceable personal property derived from dealings with the collateral; certain insurance and indemnity rights; and certain other rights related to intangible collateral, intellectual property rights, investment instruments and so-called intermediated securities. Section 31(2) of the Personal Property Securities Act 2009 also extends the notion of ‘traceability’, so there need be no fiduciary relationship between the parties. This can provide a valuable right to the security holder: see, for example, Flexi-Coil Ltd v Kindersley District Credit Union Ltd (1993) 107 DLR (4th) 129. Subject to certain exceptions, a security interest in collateral continues in the proceeds: Personal Property Securities Act 2009, s 32(1). Section 33(1) provides that the security interest in proceeds is perfected if:

the original interest was perfected by registration; and the registered financial statement describes the proceeds as being included. Security interests in proceeds are also automatically perfected if they are included in the description of the original collateral, or if the proceeds consist of: currency; cheques; an ADI account; or a right to an insurance payment or any other payment as indemnity or compensation for loss or damage to the collateral or proceeds. If not perfected under s 33(1) of the Personal Property Securities Act 2009, the security interest in proceeds receives temporary protection: Personal Property Securities Act 2009, s 33(2).

14.14 Fixed/floating charges The distinction between floating charges and fixed charges is probably no longer relevant. These concepts are replaced by those of ‘circulating assets’ and ‘non-circulating assets’. [page 458] The term ‘circulating asset’ is defined in s 340 of the Personal Property Securities Act 2009. The definition is complex, but the heart of it is in s 340(1) (b): … the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest.

Certain kinds of accounts, currency and negotiable instruments are also circulating assets, provided that they are not subject to the control of the secured party: Personal Property Securities Act 2009, s 340(2), (3) and (5). Goods where the security interest has been perfected by possession are not circulating assets: Personal Property Securities Act 2009, s 340(4). A reference to a fixed charge over property in a security agreement is taken to refer to a security interest attached to a non-circulating asset: Personal Property Securities Act 2009, s 339(4). A reference to a floating charge is taken to refer to a security interest attached to a circulating asset: Personal Property

Securities Act 2009, s 339(5). A simple reference to a ‘charge’ in a security agreement refers to either. The Personal Property Securities Act 2009 continues to recognise floating charges as security interests, but their use will probably decline as the new concepts become familiar and new documentation replaces old.

14.15 Example: Broadlands Finance Ltd v Shand Miller The following example shows how the Personal Property Securities Act 2009 changes the law of personal property securities. Illustration: Broadlands Finance Ltd v Shand Miller Musical Supplies Ltd [1976] 2 NZLR 124 Broadlands Finance took a mortgage over future goods and advanced funds to the debtor to purchase musical instruments. The debtor bought goods from Shand Miller under an agreement which stipulated that title remained with the seller until the full price was paid. Broadlands Finance registered the instrument under the Chattels Transfer Act 1924 (NZ), but Shand Miller did not. The Court held that the mortgage created by Broadlands Finance was a mortgage over future goods. The debtor never acquired title to the goods obtained from Shand Miller and, under the rule in Holroyd v Marshall (1862) 10 HL Cas 191; 11 ER 999, no interest in the goods ever passed to Broadlands Finance.

[page 459] The outcome would clearly be different under the Personal Property Securities Act 2009. Section 19(5) states: For the purposes of paragraph (2)(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.

The paragraph referenced in the section defines the time of attachment. Broadlands Finance’s security interest in the future goods attached when the purchaser obtained possession, not when the purchaser obtained title. As a result, both security interests had attached to the goods, but only Broadlands Finance’s had been perfected. Since perfected interests have priority over unperfected interests, the result of the case would be different under the Personal Property Securities Act 2009. This illustrates one of the most important changes made by the Personal Property Securities Act 2009 — ownership no longer guarantees priority. See also Graham v Portacom New Zealand Ltd [2004] NZLR 528, where a lessee of

portable buildings granted a security interest over the buildings, which gained priority over the interests of the owner. The owner cannot circumvent the operation of the Personal Property Securities Act 2009 by relying on a constructive trust or on unjust enrichment, since these claims would be inconsistent with the Act: see Gedye et al (2002) and KBA Canada, Inc v Supreme Graphics Limited 2014 BCCA 117.

14.16 Taking free of security interests Consumers who buy products in the ordinary course of business should not be required to consult the Register to see if the goods are subject to a security interest. In fact, knowledgeable consumers would probably know that goods are subject to financing arrangements. Consumers are just one class who, under certain circumstances, may acquire assets free of an existing security interest. Section 43 defines the ‘main rule’: a third party buyer or lessee takes personal property free of an unperfected security interest in the property. A ‘third party’ is a person who is not a party to the creation of the interest or is a party to the transaction which provided for the security interest. Certain types of property may be exempted by regulation. The ‘main rule’ is simple, but there are many special rules for different classes of property, and it is possible to lose a perfected security interest. The ‘special rules’ take precedence over the ‘main rule’ [page 460]

14.16.1 Serial numbered goods Certain goods may or must be described by serial number in a registration. The serial number uniquely identifies many more valuable chattels, so it is convenient and certain to search the Register for the serial number when contemplating a purchase or a lease. The registration may be defective in that the serial number is omitted or entered incorrectly. Either deficiency would cause the search to fail and leave the prospective searcher with the erroneous impression that there is no security interest in the goods. A buyer or lessee of personal property takes free of the security interest if a

search by serial number immediately before the time of the sale or lease would not disclose the interest: Personal Property Securities Act 2009, s 44(1). The rule has exceptions. It is not intended to apply to commercial financing arrangements, so s 44(2) of the Personal Property Securities Act 2009 provides that the rule does not apply if the person acquiring the property holds it as inventory or on behalf of someone who would hold it as inventory. The Review recommended that this exception be deleted: Recommendation 190. The second exception is that the buyer or lessee may not be a party to the transaction that created the security interest: Personal Property Securities Act 2009, s 44(2)(b). Allowing such people to take advantage of the main rule would be to negate the security interest from the outset.

14.16.2 Motor vehicles Motor vehicles represent a major expense for most individuals, probably exceeded only by the purchase of a home. It is important that the regime of security over motor vehicles correctly balances the interests of the parties. Although motor vehicles are serial numbered goods, they are treated slightly differently in the Personal Property Securities Act 2009. The reasons are, in part, historical. First the main difference: instead of the time of register search being ‘immediately before the sale or lease’, the time is based on what used to be called ‘the day and a half’ rule. More precisely, as stated in s 45(1)(b) of the Personal Property Securities Act 2009: … there is a time during the period between the start of the previous day and the time of the sale or lease by reference to which a search of the register (by reference otherwise only to the serial number of the motor vehicle) would not disclose a registration that perfected the security interest.

The Review stated that the reason for this extended rule was that many motor vehicles are sold after hours or on weekends. The original day-and-ahalf rule allowed the purchaser to search the Register before purchasing the vehicle when the relevant registry was closed. [page 461] As the Review points out, the rule is something of an anomaly in the modern context since the Register is available for searching 24 hours a day every day. Although it was mooted to delete s 45(1) of the Personal Property

Securities Act 2009, in the end the consensus was to retain it, but to restrict its operation to buyers/lessees who are individuals. The buyer or lessee cannot take free of security interest unless the seller or lessor falls within the rather confusing s 45(1)(c) of the Personal Property Securities Act 2009, which states that the seller or lessor must be: the person who granted the security interest; or a person who is in possession of the motor vehicle, and the person who granted the security interest has lost the right to possess the motor vehicle or is estopped from asserting an interest in the vehicle. Further, s 45(1) of the Act does not apply in certain circumstances, namely when: the secured party is in possession of the motor vehicle immediately before the time of the sale or lease; or the motor vehicle is bought at a sale held by or on behalf of an execution creditor; or the buyer or lessee holds the vehicle as inventory or on behalf of someone who would do so. Finally, the buyer/lessee does not take free of the security if they acquire the vehicle with actual or constructive knowledge of the security. Regulations may prescribe a class of persons from which a buyer or lessee ‘automatically’ takes free of any security interest. Regulation 2.2 has prescribed licensed motor vehicle dealers. However, this section is again subject to exceptions similar to those of s 45(1) and, in particular, if the buyer or lessee holds the motor vehicle as inventory: Personal Property Securities Act 2009, s 45(4)(c). The Review recommended that this ‘inventory’ rule be deleted: Recommendation 195.

14.16.3 Ordinary course of business We shouldn’t expect a buyer or lessee to search the Register when personal property is purchased or leased from a business that ordinarily deals in property of that kind and the sale or lease is in the ordinary course of business. Section 46(1) provides that the buyer or lessee in those circumstances takes free of a security interest given by the seller or lessor. There are, as usual, certain exceptions. The first is that the section is not

intended to interfere with commercial financing arrangements. The security interest is protected if the property is of a kind that may, or must, be described by serial number and the buyer/lessee holds it as inventory or on behalf of another who would hold the collateral as inventory. [page 462] The restriction to property described by serial number is to restrict the exception to major items. The Review disagreed with this exception, and in keeping with the recommendations of ss 44 and 45 of the Personal Property Securities Act 2009, recommended that it be abolished: Recommendation 196. Another exception prevents improper behaviour. The security interest is protected if the buyer/lessee knows that the transaction breaches the security agreement: Personal Property Securities Act 2009, s 46(2)(b). The Review noted that the section does not protect the buyer or lessee from ‘upstream security interests’. It is possible that the personal property is subject to a security interest other than the one given by the seller/lessor. The Review considered that there was no strong reason to change the rule, since a buyer or lessee will usually take free of the earlier interest without change in the section due to the operation of s 52 of the Personal Property Securities Act 2009: see Recommendation 197 and the discussion preceding.

14.16.4 Domestic/household property It is not reasonable to expect a consumer, reasonably defined, who is purchasing low-value goods to search the Register for security interests. Section 47(1) provides the rule for taking personal, domestic or household property free of an existing security interest. The property included is that which the buyer or lessee intends, at the time of purchase or lease, to use predominantly for personal, domestic or household use. The buyer or lessee takes free of the security interest only if the total market value does not exceed a certain sum: $5000, or as prescribed by the Regulations — but this sum must be evaluated each time a part of the value is given by the buyer or lessee. This last requirement is unnecessary. It actually requires a market valuation at each payment if the goods are leased. The Review could see no sense in this and recommended simplifying s 47(1) of the Personal Property Securities Act 2009, so that the market value needs evaluation only at the time of entering into the transaction: Recommendation 199.

As usual, a list of exceptions is provided: Personal Property Securities Act 2009, s 47(2). Subsection 1 does not apply if the goods are ‘serial number’ goods, if the acquirer knows (actual or constructive knowledge) that the transaction is a breach of a security agreement, or if the acquirer believes that the market value is more than the prescribed amount. The Review noted that s 47(2) of the Personal Property Securities Act 2009 effectively penalises a consumer who ‘spots a bargain’ and purchases property for less than $5000, even though its market value is higher. The Review recommended that s 47(2) be changed so that the ‘exclusion value’ related to the buyer’s belief is higher [page 463] than $10,000: Recommendation 200. The $10,000 would permit the acquirer to take advantage of a bargain while still guarding against ‘sham’ transactions.

14.16.5 Currency The very essence of currency is that it may be transferred freely from person to person. It would be totally counterproductive if it were necessary to investigate the title of currency before taking it. Section 48 of the Personal Property Securities Act 2009 provides the protection necessary: A holder of currency takes the currency free of a security interest in the currency if the holder acquires the currency with no actual or constructive knowledge of the security interest.

Recall that registration does not, of itself, provide constructive notice: Personal Property Securities Act 2009, s 300.

14.16.6 Temporarily perfected interests Where a security interest is temporarily perfected by the Personal Property Securities Act 2009, there is no reasonable method for an acquirer of the property to discover the interest. Section 52 chooses to protect the buyer or lessee at the expense of the secured party. Section 52 of the Personal Property Securities Act 2009 provides that a buyer or lessee for new value of proceeds, of goods, or of a negotiable document of title takes free of a security interest that is only temporarily protected, provided the buyer or lessee has no actual knowledge that the transaction is in breach of a security agreement.

The Review noted that the restriction to the three types of personal property is an anomaly and recommended that the section be amended to apply to all ‘personal property’: Recommendation 205.

14.16.7 Other ‘taking free’ rules There are special rules for taking investment instruments and intermediated securities free of security interests. Since these forms of personal property are not discussed in this book, the reader is referred to the Personal Property Securities Act 2009 and to specialist texts.

14.16.8 Rights of the secured party/transferee When the property is taken free of a security interest, the former secured party has lost a valuable asset through the operation of the law. The Personal [page 464] Property Securities Act 2009, provides some limited remedies. There are three interested parties: the transferor — that is, the person who was entitled to possession before the transfer; the secured party; and the transferee — the person who took the property free of the security interest. The secured party is subrogated to the rights of the transferor and any predecessor of the transferor. If the transferee has made a payment before receiving notice of the secured parties’ rights, the payment discharges the obligation to the extent of the payment. Illustration: R is a retailer who acquires TV sets from distributor D. F is a finance company that provides funds for the TVs and that holds a security interest in all of R’s inventory, including the TV sets. R sells a TV to a consumer C on an instalment plan in circumstances where C takes free of all security interests in the TV. C makes a payment to R before receiving notice of F’s interest. In this scenario, R is the transferor and F is the secured party. F thus subrogated to the rights of R, in particular, the right to receive any unpaid instalments from C, although F has no right to any instalment paid by C before C receives notice of F’s interest.

[page 465]

15 Lending: Guarantees 15.1

Nature of a guarantee

Some definitions relating to guarantees include: guarantee a promise to the creditor to be responsible for certain amounts if the principal debtor defaults; principal debtor the person or entity to whom the loan is made by the creditor; creditor the lender to the principal debtor; and guarantor the person who extends the guarantee.

A guarantee is thus a conditional promise of the form, ‘If the principal debtor defaults, then I will honour the obligation’. There can be no guarantee if there is no principal debtor. If no cause of action has accrued against the principal debtor, then there is none against the guarantor — although, as will be seen, there may be circumstances where the principal debtor may escape liability while the guarantor cannot. Because most guarantees are in relation to debts, it is common to speak of the parties as the creditor, the principal debtor and the guarantor. However, the obligation guaranteed need not be a debt but may be the performance of any contractual obligation: see Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11.

15.1.1

Guarantee vs indemnity

A contract of guarantee is different from one of indemnity. While the

distinction is quite clear in theory, it may be very blurred when considering an individual case. [page 466] A contract of indemnity is an unconditional promise by one person to another that the obligation of a third party will be discharged. It is a promise of the form, ‘If you lend $1000 to A, then I will see that you are paid’. A guarantee, on the other hand, is a conditional promise of the form, ‘If you lend $1000 to A and A does not pay you, then I shall’: see the discussion of Mason CJ in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11. The difference between a guarantee and an indemnity is brought sharply into focus when the principal debtor has some defence which negates or reduces liability. If the agreement is a guarantee, then the guarantor also escapes liability, for there is no liability on the guarantor if the principal debtor has met their obligation: see Turner Manufacturing Co Pty Ltd v Senes [1964] NSWR 692. There are exceptions to this rule when the guarantor is a minor who cannot be held liable: see 12.3.1. However, if the agreement is an indemnity, then the indemnifier remains liable, for the liability under an indemnity is a primary liability, which exists independently of the liability of the principal debtor: see, for example, Yeoman Credit Ltd v Latter [1961] 1 WLR 828; Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11. The courts will look to the substance of a promise to determine if it is a contract of guarantee or one of indemnity. The words used are not in themselves conclusive as to the nature of the contract, and it is possible to draft documents which are both guarantees and indemnities: see, for example, Precious Metals Australia v Xstrata (Schweiz) Ag [2005] NSWSC 141.

15.1.2

Continuing guarantees

A guarantee may be made to cover a continuing series of transactions such as might be found when the principal debtor is operating an overdraft. In such a case, the sum being guaranteed is not only a fluctuating amount, but the debt itself is one which is constantly changing, due to the rule in Devaynes v Noble; Clayton’s case (1816) 1 Mer 529; 35 ER 767: see 4.3.2. For obvious reasons, guarantees taken by bankers are often continuing guarantees.

15.1.3

Requirements of a guarantee

Contracts of guarantee were included in the Statute of Frauds 1677 (UK), which required certain contracts to be evidenced in writing, failing which they were unenforceable. The requirement of writing now varies in different jurisdictions, but for the reasons outlined below, all guarantees taken by banks will be in writing, so there is little reason to dwell upon the matter. A contract of guarantee, like all other contracts not under seal, must be supported by consideration: see McKay v National Australia Bank [1998] 1 VR 173. [page 467] Consideration must move from the promisee — the banker. There are three common formulae. The guarantor requests that: the banker will give continuing financial accommodation to the debtor; the banker will give the principal debtor extra time to pay the existing debt; and the banker will forgo taking legal action against the principal debtor. Each form is sufficient consideration to support the contract: see Colonial Bank of Australasia v Kerr (1889) 15 VLR 314. Since each depends upon a request from the guarantor, the banker should take care to see that the guarantor actually makes such a request. In Reid Murray Holdings Ltd v David Murray Holdings Pty Ltd (1972) 5 SASR 386, evidence was given that there was no such request and that there was no intention that the named consideration should exist. The guarantee was only saved by virtue of the fact that it was given in the form of a deed. The precise wording of the guarantee may be important. Illustration: Clarke & Walker Pty Ltd v Thew [1967] HCA 28 The promise by the creditor was ‘not to sue or take any proceedings against’ the principal debtor. During the currency of the guarantee, the creditor served a notice to pay and indicated that in lieu of payment the creditor would present a winding-up petition. There was no payment, but, instead of presenting a winding-up petition, the creditor claimed on the guarantee. The guarantor pleaded total failure of consideration. The Court held that, on the facts, the promise was to refrain from taking proceedings in a court, but there was no dispute that the defence would have been good had the meaning been that argued by the guarantor.

See also Scott v Forster Pastoral Co Pty Ltd [2000] NSWCA 241.

15.1.4

Guarantees under the National Credit

Code The National Credit Code (Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth)) applies to certain guarantees. The National Credit Code applies to a guarantee of an obligation under a credit contract if the guarantor is a natural person or a strata corporation: National Credit Code, s 8(1); see 12.3.4 for a discussion of the National Credit Code and 12.3.4.1 for the notion of a ‘credit contract’. Where the guarantee also guarantees other obligations, it will be subject to the Code to the extent that it guarantees obligations under the credit contract: National Credit Code, s 8(2). The National Credit Code. [page 468] Regulations may limit or exclude the application of the National Credit Code to certain classes of guarantees: National Credit Code, s 8(3). A guarantee to which the National Credit Code applies will be called a ‘related guarantee’ — a term which is used in the Code but not defined: see, for example, National Credit Code, s 7(1)(a). A related guarantee must be in writing and signed by the guarantor. Regulations may stipulate the form and content of a guarantee, and failure to comply with these requirements renders the guarantee unenforceable: National Credit Code, s 55(1), 55(3) and 55(4), respectively. A minimum disclosure requirement calls for the guarantor to be given a copy of the credit contract: National Credit Code, s 56(1)(a). The guarantor must also be given a standard form document that explains their rights and obligations: National Credit Code, s 56(1)(b). These documents must be supplied before the guarantor signs the guarantee, and failure to make these disclosures renders the guarantee unenforceable: National Credit Code, s 55(1) and 55(2). An important provision gives the guarantor a ‘cooling-off’ period, so that the guarantor may withdraw at any time before credit is provided: National Credit Code, s 58(1)(a). The guarantor may also withdraw if the actual credit contract differs materially from the proposed contract given to the guarantor before the guarantee was signed: National Credit Code, s 58(1)(b). A guarantor cannot be liable for more than the amount of the credit contract to which the guarantee relates, plus a sum which represents the reasonable expenses of enforcement: National Credit Code, s 60(1). Where

the principal debtor is a minor, the guarantee cannot be enforced, unless it contains a prominent statement to the effect that the guarantor may not be entitled to an indemnity against the minor: National Credit Code, s 60(3). This is an exception to the general rule that a guarantor cannot be liable if the principal debtor is not: see 15.1. Guarantees of continuing credit contracts may become onerous for the guarantor if circumstances change. Many consumer guarantees are given because of the personal relationship between the guarantor and the principal debtor. If that relationship changes, the guarantor may wish to terminate the guarantee. Section 60(4) of the National Credit Code gives the guarantor the right to limit the guarantee so that it applies only to liabilities already accumulated — in effect a stop order on the guarantee. A guarantor may apply to have the transaction reopened on the grounds that it is unjust — ‘unjust’ including ‘unconscionable, harsh or oppressive’: National Credit Code, s 76(1) and 76(8). The Code provides a ‘shopping list’ of factors which are to be taken into account in determining if a transaction is unjust: National Credit Code, s 76(2). [page 469]

15.2

Guarantor’s rights against the other parties

The guarantor who has been forced to pay on default of the principal debtor may have rights against other parties. In this section, we examine the rights against the principal debtor, against other co-sureties and against any securities provided to secure the debt.

15.2.1

Debtor

When the guarantor has paid any amount to the creditor in accordance with the terms of the guarantee, they acquire an immediate right of action against the principal debtor. The right of action does not arise until such time as the guarantor has actually paid: see Re Fenton; Ex parte Fenton Textile Association Ltd [1931] 1 Ch 85 and Pitman v Pantzer [2001] FCA 957. The guarantor also has the right to prove in the principal debtor’s bankruptcy for any amount which they have paid under the guarantee, but this right is usually circumscribed by standard clauses in the contract of guarantee that prohibit the guarantor from proving in competition with the bank. If the

guarantor is sued by the creditor, the guarantor may join the principal debtor as a third party to the proceedings. The guarantor cannot prove in bankruptcy for any amounts that are not actually paid: Fenton, Re; Ex parte Fenton Textile Association Ltd [1931] 1 Ch 85.

15.2.2

Co-guarantors

If the guarantor is forced to pay the creditor, they may look to any coguarantors to pay a ‘fair’ share. What constitutes the ‘fair’ amount is a matter of some complexity when there are multiple co-guarantors — some of whom may have paid sums to the creditor, some of whom have different limits of liability and some of whom may have taken advantage of the rights of subrogation to securities: see, for example, Re Arcedeckne (1883) 24 Ch D 709; Knight v Hughes (1828) 172 ER 504; Albion Insurance Co Ltd v GIO (NSW) [1969] HCA 55. The right of contribution arises only when the various guarantees are in respect of the same debt. The High Court has indicated that it is wrong to take too technical an approach in determining payment by a surety when that surety has supplied money. In Mahoney v McManus [1981] HCA 54, the surety had provided money directly to the principal debtor, who then paid the creditor. The Court found, by a majority, that the money had been provided to be applied in payment of the debt and that the guarantor was therefore entitled to contribution: see also Obvious Deadline Pty Ltd v Clancy [2016] NSWSC 1837. The right of contribution arises whether the guarantors are bound jointly, jointly and severally, or severally — and whether they even knew of the existence of [page 470] other guarantors at the time of entering into the guarantee, provided only that the guarantee is in respect of the same debt: Mahoney v McManus [1981] HCA 54.

15.2.3

Rights to securities

In general, if the guarantor pays off the entirety of the debt, then they are entitled to be subrogated to all of the rights previously enjoyed by the principal creditor in respect of the debt. As a natural consequence of this rule, the guarantor is entitled to the benefit of all securities for the debt which are held

by the lender. This entitlement extends to all securities received from the customer, whether received before or after the making of the guarantee and irrespective of whether the guarantor knew of the existence of the securities at the time of entering into the guarantee: see Forbes v Jackson (1882) 19 Ch D 615. The right extends to securities given by third parties: see Duncan, Fox & Co v North & South Wales Bank (1880) 6 App Cas 1. The right of subrogation is usually restricted by clauses which ensure that the right of the guarantor does not come into existence until the entire debt owed by the principal debtor is paid, not just the amount for which the guarantor might be liable. Because securities held by the creditor are potentially so valuable to the guarantor, the creditor has a duty to preserve them. In Forbes v Jackson (1882) 19 Ch D 615, it was said (at 621): The principle is that the surety in effect bargains that the securities which the creditor takes shall be for him, if and when he shall be called upon to make any payment, and it is the duty of the creditor to keep the securities intact; not to give them up or to burthen them with further advances.

See also Omlaw Pty Ltd v Delahunty [1993] QCA 420. When the creditor bank holds securities, it might be thought that the guarantor could force the banker to resort to those securities before calling on the guarantor, but such is not the case. In spite of some earlier confusion, it is clear that the creditor has the right to sue the guarantor without resorting to the securities: see Duncan, Fox & Co v North & South Wales Bank (1880) 6 App Cas 1, per dictum of Lord Watson at 22. In Ewart v Latta (1865) 4 Macq 983, it was said: Until the debtor [ie the guarantor] has discharged himself of his liability, until he has fulfilled his own contract, he has no right to dictate any terms, to prescribe any duty, or to make any demand on his creditor. The creditor must be left in possession of the whole of the remedies which the original contract gave him, and he must be left unfettered and at liberty to exhaust those remedies, and he cannot be required to put any limitation upon the course of legal action given to him by his contract by any person who is still his debtor, except upon the terms of that debt being completely satisfied.

Most bank guarantee forms contain clauses which are intended to put the matter beyond doubt. [page 471]

15.3

Avoidance

Many guarantors have little or nothing to gain by entering into the guarantee.

Perhaps for this reason, the law tends to be protective. Changes in the obligation of the principal debtor will often discharge the guarantor entirely. Clauses which purport to detract from the rights which guarantors might otherwise enjoy are construed strictly against the bank (which is always the party responsible for the form of guarantee) — particularly those clauses which attempt to deny the guarantor the rights to terminate the guarantee and so to limit liability: see Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092. The effect of many of these clauses must now be reconsidered in the light of the Australian Consumer Law (Schedule 2 of the Competition & Consumer Act 2010), the state Fair Trading Acts and, in New South Wales, the Contracts Review Act 1980. It may be that clauses which overprotect the bank’s interest will be struck out as ‘unconscionable’: see, for example, Westpac Banking Corp v Sugden (1988) NSW Conv R 55–377 — an action brought under the Contracts Review Act l980 (NSW) — and the discussion at 15.3.3ff. The guarantee is a contract, and the contents of the guarantee must be proved in any court action. Illustration: Gattellaro v Westpac Banking Corp [2004] HCA 6 The bank was able to show that there had been a guarantee executed but was unable to produce the documentation. It argued that the contents of that guarantee could be established by reference to its standard forms. Reversing a New South Wales Court of Appeal decision which took ‘judicial notice’ of standard form guarantees, the Court held that the bank could not rely upon inferences to establish the contents of the guarantee. The High Court noted that there are often handwritten amendments, and that reference to standard forms was therefore not sufficient to establish the contents of the guarantee.

See the case note of Gattellaro at Devlin (2004).

15.3.1

Pre-contractual circumstances

Certain pre-contractual circumstances may permit a guarantor or mortgagor to avoid the contract. These circumstances are, generally speaking, those which are vitiating factors in any contract. The following pages discuss: misrepresentation and non-disclosure; undue influence and unconscionable conduct; certain principles applicable to guarantees; [page 472] unconscionable conduct under the Competition and Consumer Act 2010;

reopening or setting aside ‘unfair contracts’ under the Contracts Review Act 1980 (NSW), the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010; and reopening or setting aside contracts under the National Credit Code. The application of the ‘unfair contract’ provisions is discussed at 11.2; the application of the Contracts Review Act 1980 (NSW) at 15.3.3.

Misrepresentation/non-disclosure A contract of guarantee, like any other contract, is liable to be avoided by the misrepresentation of a material fact, even if the misrepresentation is made innocently: see MacKenzie v Royal Bank of Canada [1934] AC 468, 475 and Commercial Bank of Australia Ltd v Amadio [1983] HCA 14. However, a mere failure to disclose information which would obviously be relevant to the guarantor’s decision will not usually avoid. The normal rule is that a contract of guarantee is not a contract uberrimae fidei — that is, one of the utmost good faith — and that generally the creditor is not obliged to disclose information to the would-be guarantor: see Davies v London and Provincial Marine Insurance Co (1878) 8 Ch D 469 and Commercial Bank of Australia Ltd v Amadio [1983] HCA 14. Illustration: Cooper v National Provincial Bank Ltd [1946] KB 1 The plaintiff guaranteed an overdraft of Mrs R, a customer of the defendant bank. The plaintiff claimed to be released from the guarantee on the grounds that the bank had failed to inform him of several facts which, had they been known to the plaintiff, would have resulted in his refusal to enter into the guarantee. The relevant facts were: the principal debtor’s husband was an undischarged bankrupt who had authority to draw upon the account; and there was information known to the bank that the husband had, in fact, used the account improperly in the recent past. The argument of the bank was that there was no legal requirement for it to disclose this information and that, indeed, to do so would be a breach of the banker’s duty of secrecy concerning the affairs of the customer. The Court held that the bank had no duty or authority to disclose the information to the prospective guarantor.

Although Cooper reaffirmed the principle that a guarantee is not a contract uberrimae fidei, the point as to the duty of secrecy is less certain: see Holden in Chorley (1974) at fn 30, p 335. Probably the correct approach is that the banker

[page 473] has an implied authority to disclose relevant information if the surety is one which has been proposed by the principal debtor, but not if the surety is one of which the debtor is unaware. To be on the safe side, the banker should probably seek the customer’s consent or, alternatively, decline to answer the inquiries. If the would-be guarantor asks a direct question of the banker concerning the account, then the banker must answer truthfully and accurately, or else decline to answer. The precise scope of the information the proposed guarantor is entitled to receive, in the absence of express authority from the principal debtor, is by no means clear. It would seem that the guarantor may ask from time to time the amount for which they are liable, but, again, Holden argues that if the total debt of the principal debtor is larger than the amount of the liability of the guarantor, the guarantor should not be told the amount of the total debt, but only the liability under the guarantee: see Holden (1986). The surety is not entitled to examine the customer’s account activity or to be given a copy of the statement: see Ross v Bank of New South Wales (1928) 28 SR (NSW) 539. In the event that the surety does demand information concerning the account, or concerning other matters which appear to infringe upon the customer’s right of confidentiality, the banker should decline to answer unless the customer is present and/or gives their authority to disclose the information sought by the surety. Misrepresentation may also attract the operation of s 18 of the Australian Consumer Law (formerly s 52 of the Trade Practices Act 1974).

Cases where disclosure required Although the guarantee is not a contract uberrimae fidei, there are certain circumstances in which information should be brought to the attention of the proposed guarantor, even if the banker is not explicitly asked. Lord Campbell set out the general rule in Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339: I should think that this might be considered as the criterion whether the disclosure ought to be made voluntarily, namely, whether there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction, that is, whether there be a contract between the debtor and the creditor, to the effect that his position shall be different from that which the surety might naturally expect; and, if so, the surety is to see whether that is disclosed to him. But if there be nothing which might not naturally take place between these parties, then, if the surety would guard against particular perils, he must put the question …

In North Shore Ventures Ltd v Anstead Holdings Inc [2011] EWCA Civ 230, the Chancellor said (at [8]): It is not in dispute that a creditor is under some duty of disclosure to a prospective surety, the issue is its extent.

[page 474] In North Shore Ventures the Court also found that, if the duty arises, the creditor is not absolved because they reasonably believed that the guarantor already knew the information. If that reasonable belief turns out to be incorrect, it is the creditor that should suffer the consequences of the error, not the guarantor. It is not easy to find examples of situations where the banker has a duty to disclose under the rule in Hamilton v Watson. In one case, the Court indicated that there might be a duty to disclose where the account to be guaranteed was not really that of the person in whose name it appeared, but rather belonged to an undischarged bankrupt: see Cooper v National Provincial Bank Ltd [1946] KB 1. In Harrison v Watson (1925) 4 LDAB 12, the Court held that the bank had no duty to disclose that the debtor was substantially overdrawn and in financial difficulties. There have even been cases where the banker suspected that the customer was defrauding the guarantor, yet non-disclosure was held not to invalidate the guarantee: see National Provincial Bank of England Ltd v Glanusk [1913] 3 KB 335 and Royal Bank of Scotland v Greenshields [1914] SC 259. It seems difficult to imagine circumstances which would fit more precisely into the category of cases defined by Lord Campbell. Failure to discharge the duty of disclosure will not result in the guarantee being discharged unless the guarantor is misled or deceived. In Pham v ANZ Banking Group Ltd [2002] VSCA 206, the Court held that the guarantors were possessed with appropriate knowledge or the transaction and therefore were bound by the guarantee even if there had been a duty of disclosure. At best, then, it can be said that the situation is a very uncertain and unhappy one for the banker, for in a case which appears to fall within the rule in Hamilton v Watson (1845) 12 Cl & Fin 109; (1845) 8 ER 1339, a failure to disclose might invalidate the guarantee, while disclosure of the customer’s affairs might be a breach of the banker’s duty of secrecy. Disclosure may also be required when the banker is aware, or possibly should be aware, that the proposed guarantor is acting under a misapprehension as to the truth of a material fact. If the banker allows the

contract of guarantee to be concluded in such circumstances, it may be that their silence will amount to a misrepresentation, allowing the guarantor to escape liability: see Royal Bank of Scotland v Greenshields [1914] SC 259.

Undue influence and unconscionable conduct Special circumstances may impose a heavier obligation on the banker. It is sometimes necessary to see that the intending guarantor is capable of making a free and informed opinion concerning the advisability of proceeding with the guarantee. In the absence of doing so, there will be a presumption that the banker has exercised [page 475] undue influence on the guarantor, with the result that the guarantee may be set aside or the banker may be required to pay damages. The conditions under which this duty will arise are usually ones where the bank knows of some special relationship between the guarantor and the principal debtor, or where the bank itself is obtaining a benefit from such a relationship. The legal categories considered here are ‘undue influence’ and ‘unconscionable conduct’. The two are closely related but distinct. Undue influence depends upon the existence of a relationship that has arisen prior to the disputed transaction. This may be a relationship which belongs to a category of relationships where influence is presumed, or it may be proved on the facts that it is one of dominance and subservience: see Spina v Conran Associates Pty Ltd; Spina v M & V Endurance Pty Ltd [2008] NSWSC 326; Turner v Windever [2005] NSWCA 73. Unconscionable conduct (also called ‘unconscionable dealing’) does not depend upon a previously established relationship. It has the following components: the weaker party must, at the time of entry into the transaction, suffer from a special disadvantage vis-à-vis the stronger party; the special disadvantage must seriously affect the weaker party’s capacity to judge or protect their own interests; the stronger party must know of the special disadvantage (or know of facts which would raise the possibility in the mind of any reasonable person); the stronger party must take advantage of the opportunity presented by the disadvantage; and the taking of advantage must have been unconscionable.

It has also been said that once the first three of these are established and the transaction is shown to be ‘improvident’, there is an assumption that the transaction was a consequence of the disadvantage and that the defendant has unconscionably taken advantage: see Spina v Conran Associates Pty Ltd; Spina v M & V Endurance Pty Ltd [2008] NSWSC 326; Turner v Windever [2005] NSWCA 73.

Special relationships Some relationships are characterised by a ‘dominant’ and a ‘weaker’ party. When a transaction bestows a benefit on the dominant party, there is a presumption of undue influence. Some relationships are so obviously asymmetrical that they are presumed to be special. These include: parent or guardian and child; solicitor and client; and trustee and beneficiary. When a special relationship exists, there is a burden of proof on the dominant party to show that they did not exercise undue influence. [page 476] The presumption of undue influence is of concern, not only for the parties directly concerned, but also those third parties who might also benefit from the transaction. Illustration: Bank of New South Wales v Rogers [1941] HCA 9 A niece had resided with her uncle since the death of her father. She sought advice from the uncle on all matters related to business. She mortgaged virtually the whole of her property in order to secure advances made by the bank to the uncle. The bank had notice of the special relationship between the uncle and the niece. The Court held that there was an onus on the bank to prove that the niece had given the security free from any undue influence, and that she had given it freely and with a full understanding of the consequences of her actions. Since she had obtained no independent advice, it was virtually impossible for the bank to show this, and the security was set aside.

Starke J in Rogers summarised the law relating to such situations: … creditors cannot improve their security … by instigating or inducing [debtors] to obtain further security for their debts from near relations or persons under their influence and not in a situation to resist their importunity. The inference of undue influence operates not only ‘against the person who is able to exercise the influence’, but ‘against …every person who claimed under him with notice of the equity thereby created, or with notice of the circumstances from which the court infers the equity’. But … it would not operate against a person who is not shown to have taken with such notice of the circumstances …

Married women The relationship of husband and wife requires some special mention. Married women have long been able to act as guarantors. In Yerkey v Jones [1939] HCA 3, it was held that there was a presumption of undue influence when the wife acted as guarantor or in some other way was disadvantaged by the husband’s business dealings. The principle in Yerkey v Jones was thought to be out of line with modern social attitudes. Apart from the anachronistic attitude that women were unduly influenced by their husbands, there was the reality that a married couple who wished to borrow for business purposes would usually have a significant portion of their capital in the matrimonial home. Decisions had already been made which indicated that married women were not to be considered as disadvantaged persons: see European Asian of Australia Ltd v Kurland (1985) 8 NSWLR 192; Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32. Merkel J held that the principle has been replaced by the doctrine in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447: see Gregg v Tasmanian Trustees Ltd (1996) 143 ALR 328. See also Akins v National Australia Bank (1994) 34 NSWLR 155; and see the discussion of Amadio below. [page 477] That trend was reversed by the High Court. In Garcia v National Australia Bank Ltd [1998] HCA 48, it was held that the principle in Yerkey v Jones [1939] HCA 3 was good law. In so doing, the Court explained away the fact that the wife was an experienced businesswoman, and it refused to follow UK cases such as Barclays Bank plc v O’Brien [1993] 3 WLR 786, which reaffirmed that there is no basis for providing special protection to wives in relation to surety transactions. Garcia v National Australia Bank Ltd [1998] HCA 48 was applied in Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588, even though the wife was a 25 per cent shareholder in the company which received the loan. Bryson J refused to extend the principle to de facto wives, in State Bank of New South Wales Ltd v Hibbert [2000] NSWSC 628. Not every case of a wife giving a guarantee will lead to the guarantee being held invalid. Illustration: Commonwealth Bank of Australia v Cohen (1988) ASC 55-681 The wife signed the documents at home at the request of her husband. The mortgagee clearly could not ensure that she was properly informed. However, the Court noted that she benefited

from the transaction, since she relied on her husband for income, the income was derived from the company and she was aware that the guarantee was necessary to enable the company to continue. The Court held that the guarantee was enforceable.

See also Spina v Conran Associates Pty Ltd; Spina v M & V Endurance Pty Ltd [2008] NSWSC 326. The result is that a financier contemplating taking a guarantee from a married woman must seriously consider the problem of proving that she had sufficient understanding and knowledge of what she was doing. Since it is not at all obvious how this might be done, guarantees from married women must be discounted for the risk that they may be uncollectable if challenged. See also Pascoe (2003).

Amadio’s case In Australia, the duty to explain will arise when the banker is aware that the guarantor is under some special disability which will make them vulnerable in the particular transaction. Illustration: Commercial Bank of Australia v Amadio [1998] HCA 48 The bank knew that the business of the principal debtor was in financial difficulties, and it sought a mortgage from his parents — the respondents in the case — as [page 478] security for the debt owed to the bank. They were an elderly couple who read little English. They believed that their son’s business was a growing and profitable concern and that their liability under the proposed guarantee would be limited to $50,000. They signed the mortgage in the presence of the bank manager, without reading it. The bank sought recovery under the mortgage of more than $200,000. The Court considered that the respondents were under a special disability due to their age and restricted knowledge of the language. In such a case, the Court considered that it should look to the conduct of the party attempting to enforce the dealing, holding that the facts known to the bank were such as to raise in the mind of any reasonable person a very real question as to the respondents’ ability to make a judgment in their own best interests. The bank had a duty in these circumstances to make inquiries. The Court held that, since no such inquiries were made, the mortgage was set aside.

See also Nobile v National Australia Bank Ltd (1987) ASC 55–580 and Portman Building Society v Dusangh [2000] 2 All ER(Comm) 221. When the ‘special disability’ exists, it is not enough that the banker takes all steps to explain the effects of the contract, if the other party does not in fact understand the terms. Illustration: Westpac Banking Corp v Clemesha 29 July 1988, SC (NSW), (Cole J), No 18226 of

1987, unreported The defendant gave a mortgage to secure the borrowing of the husband of her former daughterin-law. Cole J came to the conclusion that she did not understand that the bank could exercise a power of sale if the borrower defaulted, even though he accepted that the bank officer took steps to see that the defendant was fully informed. As a result of the close relationship between the borrower and the mortgagor, the defendant was under a special disability vis-à-vis the borrower, and this extended to the bank. The Court held that the mortgage was unenforceable.

See also the decision of the High Court in Stern v McArthur (1988) 165 CLR 489; Barclays Bank plc v O’Brien [1993] 3 WLR 786; CIBC Mortgages plc v Pitt [1993] 3 WLR 802. In the cases considered so far, there has been no direct threat on the part of the banker which is intended to force the guarantor–mortgagor into the contract. [page 479] Illustration: Public Service Employees Credit Union Cooperative Ltd v Campion (1984) 56 ACTR 74 The plaintiff’s administrative officer threatened to prosecute the defendant’s son for alleged fraudulent misappropriation of funds. In order to forestall the prosecution, the defendant agreed to act as guarantor. The Court held that the guarantee was not enforceable, since the threat amounted to undue pressure on the defendant, which was the equivalent of undue influence.

The lesson for the banker in all of this is clear. In any situation where there might be a possibility of undue influence, or where there is a duty to explain the effects of a guarantee or similar security to a customer, the banker should ensure that independent advice is obtained by the party proposing to give the security. When the debtor is a person who might unduly influence the proposed giver of the security, then this advice should be given in the absence of the debtor. Since this merely amounts to good business practice, as well as good law, it should cause little hardship to the banker.

Economic duress When is it inappropriate to apply economic pressure on a debtor? If the debtor is in financial difficulties, is it unconscionable for the stronger party to take advantage of the difficulties? The notion of ‘economic duress’ gained a foothold in Universe Tankships Inc of Monrovia v International Transport Workers Federation (‘The Universe Sentinel’) [1983] AC 366, where Lord Scarman said (at 400): It is, I think, already established law that economic pressure can in law amount to duress; and

that duress, if proved, not only renders voidable a transaction into which a person had entered under its compulsion but is actionable as a tort, if it causes damage or loss …

The notion had some success, but a decision of the New South Wales Court of Appeal dealt it a severe blow. In ANZ Banking Group Ltd v Karam [2005] NSWCA 344, the Court, after a careful review of the authorities, held that something more is required than the mere fact that one of the parties is in known financial difficulties. The Court held that any claim to relief should be determined under the equitable doctrines of undue influence, unconscionability and the relevant statutory remedies. ‘Duress’ should be limited to threatened or actual unlawful conduct. The Court stated (at [68]): The fact that one party is in financial difficulties, of which the other party is aware, as in the present case, will be relevant, but not sufficient to establish unconscionable conduct on the part of the stronger party.

[page 480] See also May v Brahmbhatt [2013] NSWCA 309; The Owners — Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317; Westpac Banking Corporation v Billgate Pty Ltd [2013] NSWSC 1304.

15.3.2

The creditor–principal debtor contract

In the absence of express clauses in the guarantee, the guarantor may use certain aspects of the contract between the creditor and the principal debtor as a defence to a claim on the guarantee. Some of these defences may be avoided by clauses in the contract of guarantee.

Principal debtor under a disability Subject to certain important qualifications, the basic rule is that when the contract with the principal debtor is void or unenforceable, the guarantor cannot be held liable under the guarantee. This rule follows logically — if somewhat harshly — from the basic notion that there can be no guarantor if there is no principal debtor. In those jurisdictions where the contractual capacity of minors is still governed by the common law, the rule could be applied to allow a guarantor to escape liability where the principal contract was void due to the infancy of the principal debtor, even when all parties knew at the time of contracting that the principal debtor was underage: see Coutts & Co v Browne-Lecky [1947] 1

KB 104, followed in Robinson’s Motor Vehicles Ltd v Graham [1956] NZLR 545. This rigid application of the principle is so harsh that it is not surprising that courts have occasionally sought to circumvent the result. After all, presumably one of the reasons that the bank sought the guarantee was precisely because of the minority of the borrower, and one of the reasons that the guarantor was willing to guarantee was to assist the minor to obtain the loan. The way around the problem is to construe the ‘guarantee’ as being an indemnity, for, as already noted, an indemnity imposes a more severe obligation on the surety, and the fact that the principal debtor is suffering from some contractual incapacity will not in any way assist the surety to escape liability. This approach seems to have gained some sympathy from the courts. In Yeoman Credit Ltd v Latter [1961] 1 WLR 828, Harman LJ said (at 835): Where all concerned know that the first promisor is an infant, so that as against him the promise cannot be enforced, the court should incline to construe the document signed by the adult (the second promisor) as an indemnity, for that must have been the intention of the promisee and the second promisor. Both know that the first promise has no legal validity; it may be that both hope that the first promisor will honour his engagement, but with the knowledge that he cannot be obliged to do so it must have been their intention that the promise of the adult promisor should have an independent validity. Otherwise the whole transaction is a sham.

[page 481] Bankers have sought to avoid the problem by including in their forms of guarantee a clause to the effect that, even if the moneys guaranteed are not recoverable from the principal debtor by reason of that person’s contractual incapacity, the guarantor shall nevertheless be liable for the sum as a principal debtor on the basis of an indemnity. The efficacy of such a clause does not appear to have been tested in court. Recall that the terms used by the parties are not conclusive: see Total Oil Products (Aust) Pty Ltd v Robinson [1970] 1 NSWR 701. In New South Wales, South Australia and Tasmania, the problem with minors is now eliminated. Legislation in those states provides that a guarantee shall be enforceable against the surety to the extent that it would have been if the minor had at all material times been a person of full age: Minors (Property and Contracts) Act 1970 (NSW), s 47; Minors Contracts (Miscellaneous Provisions) Act 1979 (SA), s 5; Minors Contracts Act 1988, s 4. However, presumably the principle in all of the ‘minors cases’ applies to other forms of contractual incapacity, so the cases are by no means irrelevant. A guarantee governed by the National Credit Code which guarantees the liability of a debtor who was under 18 years of age when the liability was

incurred cannot be enforced against the guarantor unless it contains a prominent statement to the effect that the guarantor may not be entitled to an indemnity against the debtor: National Credit Code, s 60(3). The guarantor has no right to rely upon any set-offs or partial defences which may have been available to the principal debtor: see, for example, Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237. It is different when the guarantor is arguing a set-off in their own right: see GE Capital Australia v Davis [2002] NSWSC 1146.

Variation in the principal contract It is a basic rule that a material variation of the contract between the banker and the principal debtor will result in the discharge of the guarantor from all liability, and it does not matter that the variation may have been beneficial to the guarantor, unless it is patently obvious that the variation either is beneficial to them or immaterial: see Dan v Barclays Australia Ltd (1983) 46 ALR 437; Dunlop New Zealand Ltd v Dumbleton [1968] NZLR 1092. Since the basic rule is so strictly construed, once again we find that many forms of guarantee contain clauses designed to circumvent it. Such clauses must be carefully drawn, if they are to be effective. In National Bank of Nigeria Ltd v Oba M S Awolesi [1964] 1 WLR 1311, the Privy Council held a guarantor to be discharged when the banker opened a second account for the principal debtor through which all later transactions passed. The action was held to be a substantial variation of the principal contract, which was unknown and detrimental to the surety, in spite of the fact that [page 482] the guarantor had agreed to guarantee all advances, overdrafts and liabilities of the principal debtor. The case is solely one of construction, but it shows the need for care in drafting the clauses which purport to limit the rights which the guarantor might otherwise enjoy. The problem of breach of contract by the creditor is closely related to the problem of variation in the principal contract. The High Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15 found that when the creditor breached a condition of the debtor-creditor contract, the surety was released. There was no need for the surety to rescind the contract of guarantee, or for breach of an essential term, because the circumstances of the surety’s liability no longer existed.

Extension of time to the debtor At first sight, it may seem strange to argue that an extension of time to the principal debtor can possibly result in the discharge of the guarantor, yet upon reflection it will be seen that the result is correct. During the extended period of time, it is quite possible that the financial position of the principal debtor will deteriorate even further from the circumstances which forced the granting of extra time in the first place: see Nisbet v Smith (1789) 2 Bro CC 579; 29 ER 317; Bolton v Buckenham [1891] 1 QB 278; Deane v City Bank of Sydney [1904] HCA 44. Since the guarantor also has rights against co-sureties, the same principle applies, and a guarantor may be discharged when extensions of time are given to a co-surety. In either case, the banker should include clauses which will allow the extension of time and any other indulgence which the banker believes to be in the best interests of both the bank and the customer. It is well known that such an extension is often the difference between successful recovery of a loan and its total or near total loss through the customer’s insolvency.

Release of the debtor It is clear that, in the absence of express provisions, the release of the principal debtor by the creditor has the additional effect of releasing the surety: see Perry v National Provincial Bank of England Ltd [1910] 1 Ch 464. It may seem extraordinary to think of the banker releasing the debtor, but there are situations which amount to an implied release — the most common being that in which the customer enters into a voluntary composition with their creditors outside of bankruptcy. This would ordinarily discharge the surety: see Ex parte Smith (1789) 3 Bro C C 1. However, it seems that a proper clause in the guarantee will prevent this. [page 483] In Perry v National Provincial Bank of England Ltd [1910] 1 Ch 464, the efficacy of such a contractual term was precisely in point. During the course of the judgment, Cozens-Hardy MR said (at 473): It is said … there can be no right as against the surety, because by reason of this arrangement with Perry Brothers you [the creditor] have released Perry Brothers, and there can be no suretyship after the release of the principal debtor. But I think the answer to that is that it is perfectly possible for a surety to contract with a creditor in the suretyship instrument that notwithstanding any composition, release, or arrangement the surety shall remain liable although the principal does not.

The decision in Perry was applied to a similar clause in Bank of Adelaide v Lorden (1970) 127 CLR 185; see also Greene King Plc v Stanley [2001] EWCA Civ 1966.

Payment Payment of the debt by the principal debtor extinguishes any potential liability of the guarantor. The only problems that have arisen in these cases is where the payment is properly made and the guarantor discharged, but then the payment is set aside by the operation of some other law — typically as being a preference under some equivalent of the Bankruptcy Act 1966 (Cth). It has been held that, on the wording of the particular guarantee in question, the liability of the guarantor did not revive: see Commercial Bank of Australia Ltd v Carruthers (1964) 6 FLR 247. The Court in that case did, however, note that it was a simple matter for the bank to include a clause which would have led to the opposite result. Most bank guarantee forms now include such a clause. The reasoning in Carruthers was doubted by the Full Court of the Federal Court in Western Australia v Bond Corp Holdings Ltd [1991] FCA 313.

Change in the constitution of the debtor A change in the constitution of either the debtor or the creditor terminates the guarantee as to any future advances in the absence of express agreement to the contrary: see National Mortgage and Agency Co of New Zealand Ltd v Tait [1929] NZLR 235 and Spencer v Lotz (1916) 2 TLR 373. Consequently, when the principal debtor is a group which might change its legal identity by a change in its membership, the lender runs a risk that the guarantors are inadvertently discharged: see Partnership Act 1892 (NSW), s 18 and similar sections in the other Partnership Acts. Once again, the difficulty is overcome by a standard clause to the effect that the guarantor remains bound, notwithstanding any change in the constitution of the principal debtor.

Death, etc, of the debtor or guarantor The death of the principal debtor causes the guarantee to ‘crystallise’. It is clear that the principal debtor will not be receiving any further advances from the banker. [page 484] The Cheques Act 1986 obliges the banker to pay cheques which were drawn prior to the customer’s death and presented within 10 days: Cheques Act

1986, s 90(2). However, unless there is an express clause in the guarantee, it is thought that the guarantor would not be liable for the amount of these payments. The death of the guarantor does not automatically terminate the guarantee. If the banker makes advances after the guarantor’s death, but before receiving notice of it, it appears that the banker is entitled to call upon the estate for the additional sums: see Bradbury v Morgan (1862) 1 H & C 249; (1862) 158 ER 877. Notice of the death of the guarantor terminates the agreement and again ‘crystallises’ the liability under the guarantee to the amount for which they were liable at the time when the banker received notice of the death: see Coulthart v Clementson (1879) 5 QBD 42. Clauses in the standard form of bank guarantee modify this position. The usual clause calls for continuing liability until the expiration of a fixed period of time (typically three months) following the receipt of a notice in writing of the personal representatives’ intention to determine the guarantee. It is thought that notice of mental illness of the guarantor operates in the same way as notice of their death, but there is little authority on the matter: see Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833.

15.3.3

The creditor–guarantor contract

A breach by the creditor of any condition of the contract of guarantee will provide a complete defence for the guarantor. Illustration: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15 The appellant guaranteed performance of the lessee of some machinery. The lessee fell into arrears and assigned their rights under the lease. Under the contract of guarantee, the respondent was required to notify the appellant if the lessee fell into arrears, or if there was to be an assignment of rights under the lease — neither of which were done. The Court held that there had been a breach of condition of the contract, and therefore the surety was discharged. Deane J considered that the breach was such that the obligations of the surety never arose, so it was unnecessary for the appellant to rescind the contract. The respondent’s argument was that only a breach going to the root of the contract could discharge the surety, but this argument was rejected.

A breach of a warranty will not totally discharge the guarantor. Illustration: Skipton Building Society v Stott [2000] 2 All ER 779 The lending building society failed to obtain market value when exercising the right to sell property held as security for the loan. The guarantor argued that he [page 485]

was discharged, under the principle in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 70 ALR 641. The Court held that there had been a breach of the obligations owed to the guarantor, but that it was merely a breach of a warranty, not a breach of condition. The breach reduced the amount which could be recovered from the guarantor but did not discharge his obligation entirely.

Ascertainment of liability Under the normal rules of guarantee, the guarantor is not liable unless the principal debtor has defaulted. This has the potential of raising difficult evidentiary problems. In a bid to avoid these problems, standard bank guarantee forms usually contain a ‘conclusive evidence’ clause, which provides that a certificate signed by an appropriate bank officer is conclusive evidence of default by the principal debtor for the purposes of establishing the liability of the guarantor. The effectiveness of these clauses was upheld by the High Court in Dobbs v National Bank of Australasia Ltd [1935] HCA 49. The so-called ‘Dobbs clause’ is usually in the form, ‘Unless there is a manifest error …’. In Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203, this was interpreted to mean an error to the extent that there were powerful reasons for considering, on a preliminary basis and without prolonged adversarial argument, that it was indeed an error: see also State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587; St George Bank Ltd v Emery [2004] WASC 35. Dobbs v National Bank of Australasia Ltd [1935] HCA 49 was a commercial case, and it may be possible that conclusive evidence clauses could be challenged in appropriate cases under the Contracts Review Act 1980 (NSW), or under the provisions of the Australian Consumer Law and related state legislation: see Westpac Banking Corp v Sugden (1988) NSW Conv R 55–377.

Limitation of the guarantor’s liability There is no reason why a guarantee may not be limited either in duration or in amount. A limitation as to duration causes no difficulties beyond those of interpretation — it is necessary to precisely spell out the obligations of the parties. As an example, it may be difficult to ascribe a clear meaning to a phrase such as, ‘This guarantee shall cease to have effect two years after the date thereof’: see Goode (1988). In the case of a limitation of amount, the problem is more difficult. It is understandable that the guarantor will wish to limit the amount of total liability. There are two separate ways in which this might be done:

the guarantor may guarantee only a certain amount of the debt; or there may be a guarantee of the whole of the advance, but with a limit on the liability. [page 486] As an example, the first form is, ‘I hereby guarantee $5000 of the $10,000 that you are to loan to D’. The second form is, ‘I hereby guarantee the entire amount that you are to loan to D, subject to my liability being limited to $5000’. It may seem that there is little difference in these forms, but they have quite different legal consequences. Suppose that the banker does, in fact, lend D the amount of $10,000 and that D then defaults. The banker may then turn to the guarantor under either of the above formulae and demand the payment of $5000. However, under the second formula, the guarantor is not permitted to prove in the bankruptcy of the principal debtor in competition with the banker unless the guarantor has paid the full amount of the principal debtor’s indebtedness, even though that amount is greater than the amount for which the guarantor agreed to be liable. Indeed, the banker is entitled to prove for the full amount of the principal debtor’s debt, even having received only a part of the sum from the guarantor. It is only if the total amount recovered by the banker — from both the guarantor and the dividend in the bankruptcy — exceeds the amount of the debt that the guarantor has any rights to recover: see Re Sass; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12 and Lumley General Insurance Ltd v Oceanfast Marine Pty Ltd [2001] NSWCA 479. The situation is similar with regard to the guarantor’s right to have resort to any securities given to the banker to secure the debt. If the second form of guarantee is used, the guarantor has no right against the securities until the whole debt is paid. If the first form is used, then the guarantor is entitled to share in the benefit of the securities. Where the upper limit was left blank, the Full Court of the Supreme Court of New South Wales has held that the guarantee was for an unlimited amount: see Caltex Oil (Aust) Pty Ltd v Alderton (1964) 81 WN (Pt 1) (NSW) 297.

Notice of determination Most bank guarantees are, as previously noted, continuing guarantees. Under ordinary conditions, the guarantor is entitled to terminate the guarantee as to future advances at any time by notice to the banker: see Beckett v Addyman

(1882) 9 QBD 783. Of course, such a notice does not relieve the guarantor of any liability which existed at the time of notice, and the terms of the guarantee may very well call upon the guarantor to pay what is then due under the guarantee. If the guarantor gives a notice of determination to the banker, the banker should stop the account immediately, to prevent any possible erosion of rights against the guarantor through the operation of the rule in Clayton’s case. It is, of course, possible to open a new account for the principal debtor on terms to be arranged. The important point is that payment into the new account will not reduce the advances which were secured by the guarantee. [page 487] Most forms of guarantee used by bankers specify that the guarantee may only be determined by a specific period of notice — typically three months. The object of such a clause is clearly to allow the banker and customer to make mutually satisfactory arrangements. It is not at all clear whether, after receipt of the notice, the banker may continue to make voluntary advances during the intervening period. The position where the contract is governed by the National Credit Code is discussed at 15.3.3. On the one hand, the point of giving notice is to allow the guarantor the opportunity to limit their losses, and it is hard to see how the banker is prejudiced by being unable to rely upon the guarantor. On the other hand, to allow the guarantor to withdraw from any further liability may prejudice the principal debtor, who may already have made plans which will call for finance which was fully and fairly expected to be forthcoming. The only advice which may be given is to express the rights and obligations as clearly as possible in the form of guarantee. The notice of determination may also cause a problem when there is more than one guarantor. In Kalil v Standard Bank of South Africa Ltd [1967] 4 SA 550 (AD), the particular wording of the guarantee stated only that the guarantee was in force until the bank should receive notice ‘from us’ terminating the arrangement. The Court held that one of the guarantors, acting alone, could give notice of termination in relation to his own liability.

Release of securities/co-sureties It is common practice for the banker to take securities from the debtor in addition to the guarantee. It may be that from time to time the banker may wish to realise some of the securities, to exchange them for other more

appropriate securities, or even to release some of them so that the principal debtor may deal with them free of encumbrance. Under the general law, many, perhaps most, of these actions would result in a discharge in whole or in part of the guarantor: see Carter v White (1883) 25 Ch D 666 and Dale v Powell (1911) 105 LT 291. This flows logically from the fact that the guarantor would be prejudiced by such actions, possibly losing rights against securities. The same result flows from the release of any co-sureties, for the same reason: see Ward v National Bank of New Zealand (1883) 8 App Cas 755. The liability of the guarantor may also be reduced if the creditor sells securities at less than market value: see Skipton Building Society v Stott [2000] 2 All ER 779. The general law result may be avoided by the inclusion of an appropriate clause in the form of guarantee, and such clauses are routinely found in bank guarantee forms.

Unconscionable conduct: legislation The scope of unconscionable conduct has probably been extended by ss 18 and 21 of the Australian Consumer Law. Section 18 provides that: ‘A person must not, in [page 488] trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. Section 21(1) is in the following terms: A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services to another person, engage in conduct that is, in all the circumstances, unconscionable.

Section 21(2) of the Australian Consumer Law provides a ‘shopping list’ of factors which may be considered by the courts when determining if conduct has been ‘unconscionable’. These include, but are not limited to: inequality of bargaining power; whether the customer is required to comply with conditions which are not reasonably necessary for the protection of the legitimate interests of the supplier; whether the customer was able to understand the documents; whether there was any undue pressure or influence on the customer by the supplier or a person acting on behalf of the supplier; and

the possibility of alternative supplies of the goods or services which might be available to the customer at a lower cost. Contravention of ss 18 or 21 may give rise to an action in damages: Australian Consumer Law, s 236. However, the courts may make orders varying the contractual rights of the parties if it is found that there is ‘unconscionable’ conduct which has prejudiced the customer: Australian Consumer Law, Pt 5-2. The approach of the courts seems similar to that adopted under the Contracts Review Act 1980 (NSW), although s 21 of the Australian Consumer Law deals with conduct, whereas the Contracts Review Act 1980 deals only with contracts: see 15.3.3; and see Goldring (1988). There may not be a great deal of difference between actions brought under ss 18 and 21 of the Australian Consumer Law and those which rely only upon the general law, particularly Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447: see 15.3.1. When the plaintiff has established that the losses suffered were due to conduct prohibited by ss 18 or 21 of the Australian Consumer Law, the defendant cannot reduce those damages by a ‘contributory negligence’ type of argument: see I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41.

Contracts Review Act 1980 (NSW) In New South Wales, a guarantee may come within the scope of the Contracts Review Act 1980. The Contracts Review Act 1980 is directed not at conduct, but at contracts which are unjust or unconscionable. The Act is not intended to limit or restrict the operation of any other law providing relief against unjust contracts or [page 489] unfair contract terms: Contracts Review Act 1980, s 22. It is therefore complementary to the Unfair Contract Terms provisions of the Australian Consumer Law and the Australian Securities and Investment Commission Act 2001. The Contracts Review Act 1980 provides no protection for those contracts which are entered into in the course of or for the purpose of a trade, business or profession other than a farming undertaking: Contracts Review Act 1980, s 6(2). Illustration: Australian Bank Ltd v Stokes (1985) 3 NSWLR 174

Two people had formed a company for the purposes of engaging in a business activity. When the company wished to borrow money, the two were asked to guarantee the loan and to give security. The Court held that the collateral transactions were not ‘in the course of or for the purposes of a business carried on by them’, and so were not precluded from the operation of the Contracts Review Act 1980.

The Stokes case followed Toscano v Holland Securities Pty Ltd 1985 1 NSWLR 145, and was followed by Chen v Song [2005] NSWSC 19 — all finding that the party in question could take advantage of the Contracts Review Act 1980 (NSW). Section 6(2) has caused problems for the courts. On the one hand, there is the well-known distinction between a company and its shareholders, but on the other the well-recognised fact that in a one- or two- shareholder company, the company is, in effect, acting as the alter-ego of the shareholders who are ordinarily also directors of the company. Rogers J stated the problem clearly in Australian Bank Ltd v Stokes (1985) 3 NSWLR 174 (at 176–177): It seems illogical in the extreme that Parliament should have excluded, from the purview of the Act, relief to a two dollar company which is carried on by the corner grocer and to the grocer carrying on business in his own name, yet if that grocer carries on business in the name of the two dollar company and then gives a guarantee in respect of the business of the company, on the face of it he is not carrying on business for the purposes of s 6(2) and the Act operates in relation to a guarantee.

Consequently, several cases have pondered the issue: see Multi-Span v Portland [2001] NSWSC 696; Ford v Perpetual Trustees Victoria Ltd [2009] NSWCA 186; Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152; Quikfund (Australia) Pty Limited v Airmark Consolidators Pty Limited [2014] FCAFC 70. In the latter case, the Court held that, though not necessarily logical, ownership of the business was a clear and certain place to ‘draw the line’. To quote from the judgment (at [136]): Whilst, as Rogers J said, the policy behind drawing the line short of those who do not own the business may, from one point of view, be obscure. It does, however, conform

[page 490] with one clearly available linguistic reading of the section; it creates a tolerably certain test: In the course of whose business (that is owned by whom) was the contract entered into? Further, all the circumstances of what might be the close relationship between the person, the business and the company can still be explored in resolving the issues as to whether the contract was unjust and, if it is, what relief, if any, should be granted.

The Contracts Review Act 1980 gives the courts wide powers to reopen the contract in the event that the contract is found ‘to have been unjust in the circumstances relating to the contract at the time it was made’: Contracts

Review Act 1980, s 7(1). It is not necessary to make a formal application to obtain the benefits of the Contracts Review Act 1980 — it is available as a general defence. When such a defence is available, the application of the defence on the merits should not be determined on a motion for summary judgment: see Commercial Banking Co of Sydney Ltd v Pollard [1983] 1 NSWLR 74. A contract may be unjust because of the way in which it operates, or because of the way in which it was made, but it will not be considered unjust simply because it was not in the interests of one of the parties to make the contract, or because the party received no independent advice: see West v AGC (Advances) Ltd (1986) 5 NSWLR 611. The mere fact that contractual terms have been in use for a long time will not save them from the consequences of the Contracts Review Act 1980. In Westpac Banking Corp v Sugden (1988) NSW Conv R 55–377, Brownie J held that several standard clauses in a guarantee were unjust under the provisions of the Contracts Review Act 1980 in the circumstances, since they were not reasonably necessary for the protection of the legitimate interests of the bank. The guarantees were signed by the guarantors, who did not ‘[know] the meaning of [the] complex provisions, and were told nothing of them’. The clauses found to be unjust in the circumstances provided that: the bank may, without affecting the liability of the guarantors, release any security held; the guarantee was not prejudiced by any other security or guarantee, or by the bank losing any security or failing to recover any of the moneys secured; a certificate was conclusive evidence of the facts; and the guarantee was binding upon a guarantor upon execution, notwithstanding that another guarantor failed to execute the document. Brownie J noted that the ‘conclusive evidence’ clause went far beyond what was reasonably necessary for the protection of the bank. It seems that he would have accepted a clause which referred to ‘prima facie evidence’. The case is important for showing that mere long use in the industry will not prevent a finding that the clause is unjust. [page 491] The lender in Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 showed complete indifference to the purpose of the loan, demonstrating that it was content to rely solely on the security, rather than the borrower’s capacity

to repay. This so-called ‘asset lending’ may be evidence for finding the contract unjust. Basten JA noted (at 128): At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f).

All members of the Court agreed that pure ‘asset lending’ is a factor in determining if the loan is unjust: see also First Mortgage Managed Investments Pty Limited v Pittman [2014] NSWCA 110.

Reopening contracts of guarantee Where the National Credit Code applies, a guarantor may apply to have the transaction reopened on the grounds that it is unjust — ‘unjust’ including ‘unconscionable, harsh or oppressive’: National Credit Code, s 76(1) and 76(8). The Code provides a ‘shopping list’ of factors which are to be taken into account in determining if a transaction is unjust: National Credit Code, s 76(2). The Credit Acts contained similar provisions for reopening. The courts will continue to be reluctant to reopen contracts when the relative strength of the parties is approximately equal, or when the weaker party has received independent advice prior to entering into the contract. However, when these requirements are not satisfied, then the credit provider must expect to have the contract scrutinised closely. In Murphy v Esanda Finance Corp Ltd (1988) ASC 55–650, the Tribunal said that: … a lender who fails to protect itself and the borrower by requiring the borrower to supply evidence showing that it is at least probable that the borrower has the ability to repay the instalments, runs a very real risk that this Tribunal will decide the contract is unjust.

[page 493]

16 Banker’s Lien and Freezing Orders This chapter discusses the banker’s lien and the freezing order, although the two topics are grouped together only for convenience.

16.1

The banker’s lien

The banker’s lien is the right of the banker to retain certain documents as security for debts due from the customer. The banker’s lien: arises by law; may be excluded by agreement; exists even if the customer is unaware of the lien; is a general lien; has a power of sale; and is different from rights of set-off and account combination. The lien was recognised and the above properties were explained in Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622.

16.1.1

General lien

The banker’s lien is a general lien — documents falling under the lien are held as security for all debts owed to the banker: see 16.1.7 and Re Keever (A Bankrupt); Ex parte Trustee of Property of Bankrupt v Midland Bank Ltd [1967] Ch 182; Duke Finance Ltd (in liq) v Commonwealth Bank of Australia (1990) 22 NSWLR 236; National Australia Bank Ltd v KDS Construction Services Pty Ltd (In liq) [1987] HCA 65. Most liens are particular liens, giving the creditor the right to retain goods as security only for particular debts related to the goods themselves.

[page 494]

16.1.2

Power of sale

The banker’s lien carries with it the power of sale and recoupment from the proceeds. This is such an unusual characteristic of liens that the banker’s lien has been described as in the nature of an implied pledge: see Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622 and Holden (1986). This power of sale is not particularly important in the case of negotiable instruments which are encompassed by the lien, since the banker will deal with these as holder or as agent for collection, but when the securities consist of other documents, the power of sale may become an important method of realisation: see Bills of Exchange Act 1909, s 32(3) and Cheques Act 1986 (Cth), s 96. The precise scope of the power of sale is not clear. It may be that it is restricted to those documents and securities in which title may be passed by delivery or, at least, by some method which may be exercised by the bank by its own means: see Gellibrand v Murdoch [1937] HCA 10, where it was said that the bank had no power to dispose of shares, although it could retain them under a lien until payment of the debt. Where the power of sale exists, it may be exercised on default if a fixed time for the repayment of the debt has been nominated. If no time has been fixed, then the bank may sell after request for repayment has been made and a reasonable notice of intention to sell has been given: see Australia and New Zealand Banking Group Ltd v Curlett Cannon and Galbell [1992] 2 VR 647, which seems to have been argued on the basis that the shares were pledged.

16.1.3

Distinguish the right of combination

The lien does not attach to the credit balance in a current account, since that sum is a debt owed by the banker to the customer. The banker’s remedy is the right of combination: see 4.4 and National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785. It is generally thought that money cannot be the subject matter of a lien. The idea that it possibly could is traced to a speech by Lord Hatherley in Misa v Currie (1876) 1 App Cas 554. This seems wrong in principle, for either the money would not be identifiable or, if it were, the money would be paid in for some specific purpose, which would exclude the possibility of the banker’s

lien. The correct analysis is probably that Lord Hatherley was referring to the right of set-off. As noted in the discussion at 4.4.4, the terminology was often used rather carelessly prior to National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785. Note that the Personal Property Securities Act 2009 allows a bank to take a security interest in an account held with it: see 14.5.3. [page 495]

16.1.4

Documents attached by the lien

The precise scope of the documents to which the lien attaches is not entirely clear.

‘All securities deposited with’ the banker In Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622, the Court suggested that the lien could be exercised over ‘all securities deposited with’ the banker. While it is generally agreed that this is far too wide, there is no consensus on precisely which class of documents are subject to the lien. On the narrowest view, the lien attaches only to instruments that are fully negotiable. On the widest view, it attaches to all securities which are ordinarily dealt with on behalf of the customer, other than those which are deposited for safekeeping. The correct view almost certainly falls somewhere in the middle, for the lien has been held to apply to share certificates and various other nonnegotiable documents: see Re United Service Co (Johnston’s Claim) (1870) LR 6 Ch App 212; Misa v Currie (1876) 1 App Cas 554. In McLaughlin v The City Bank of Sydney (1914) 18 CLR 598, the Privy Council held that title deeds to land were encompassed by the lien. Similarly, in Dale v Bank of New South Wales (1876) 2 VLR (L) 27, it was held that a banker may have a lien over title deeds which the customer had deposited in the ordinary course of business, but not over deeds deposited for safe custody only. The problem is unlikely to be common in practice, since the usual reason for the deposit of title deeds is to create an equitable mortgage: see 13.2.5. In that case, the relationship is governed by the express contract of the mortgage, and there is no room, or need, to consider the banker’s lien.

The lien extends only to securities which belong to the customer — at least when the securities in question are not fully negotiable instruments: see Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226. Securities which do not belong to the customer and are deposited with the banker, for whatever reason, may not be retained by the banker.

The lien over negotiable instruments By far the most important application of the lien in practice is in the noncontroversial case of negotiable instruments. The most common example is the lien over cheques which have been deposited by the customer who has an overdrawn account. The fact that the cheques have been deposited for collection does not indicate an intention which is inconsistent with the operation of the banker’s lien: see Bank of New South Wales v Ross, Stuckey and Morowa [1974] 2 Lloyds Rep 110 and Akrokerri (Atlantic) Mines Ltd v Economic Bank [1904] 2 KB 465. [page 496] In National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65, the High Court suggested that the position might be different where the bank is a ‘mere’ agent for collection, when it stated: The existence of the lien is not affected by the fact that the bank receives the cheque as an agent for collection, so long as the bank is not a mere agent for collection.

This extract was considered by Giles J in Duke Finance Ltd (in liq) v Commonwealth Bank of Australia (1990) 22 NSWLR 236. He noted that ‘… it is not easy to discern what their Honours meant by the sentence under consideration’, but concluded that it did not mean that a bank which was an agent for collection, but which was not also a holder for value, did not have a lien. This conclusion is, of course, supported by the actual decision in National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65, as well as by the reasoning in Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527.

Qua banker The banker’s lien only attaches to those documents which have been deposited with the banker in their capacity as banker. Thus, as mentioned above, the lien does not attach to those documents which are given to the banker for safekeeping, because safekeeping is not, strictly speaking, a part of the bankercustomer relationship.

The document must be some document which is ordinarily dealt with by bankers, and it must have been left with the banker for the purpose of being dealt with in that way. Again, the main example is a bill of exchange which has been delivered to the banker for collection — the bill is a document that bankers deal with in their roles as bankers, and leaving it with a banker for collection is leaving it to be dealt with in the usual way. The lien does not attach to securities which are delivered to the banker for a special purpose other than the general purpose of collection. This is merely an application of the general principle that the lien may be excluded by express or implied agreement: see 16.1.5. If the special purpose for which the securities are deposited is inconsistent with the operation of the lien — which is usually the case — then there is an implied agreement that the banker will not benefit from the right of lien. So, for example, securities received by the bank for safe custody are not attached by the lien: see Brandao v Barnett (1846) 12 Cl & F 787; 8 ER 1622 and Hamilton v Bank of New South Wales (1894) 15 LR (NSW) L 100. See also Duke Finance Ltd (in liq) v Commonwealth Bank of Australia (1990) 22 NSWLR 236; Coshott v Barry [2016] FCAFC 173.

16.1.5

May be excluded by express agreement

The lien may be excluded by an express contract between the customer and banker or by circumstances which are inconsistent with a lien. Thus, for example, money [page 497] paid in for the express purpose of meeting a bill which has been accepted by the customer payable at the bank is not subject to a lien, even if money could be the subject matter of a lien, nor can such money be subjected to the banker’s right of set-off. Again, a bill or other negotiable instrument which is handed to the banker solely for safekeeping is not subject to the banker’s lien. Perhaps the most difficult problem here is the situation where securities are handed to the banker as security for a particular liability but are allowed to remain in the banker’s custody when that particular liability is discharged. There is little authority on the matter, but in Re London and Globe Finance Corp [1902] 2 Ch 416, the Court held that in such a circumstance — in the absence of evidence to the contrary — the documents had become subject to a general lien at least as regards future advances. There is some older authority that the lien would not encompass existing indebtedness: see Re Bowes; Earl of Strathmore v Vane (1886) 33 Ch D 586.

However, there is no doubt that, in the event that the security must be realised in order to recover the debt, any surplus proceeds are available to the banker — either by way of the banker’s lien or, more correctly, the right of set-off: see Johnson v Peppercorne (1858) 28 LJ Ch 158 and Re London and Globe Finance Corp [1902] 2 Ch 416. It is very peculiar that the immunity which attaches to the securities themselves do not extend to the proceeds, but the law is clear on the matter.

16.1.6

Creation and termination of the lien

The lien is not a consensual security. The fact and the time of its creation and duration are matters of law, not matters of agreement between the parties. Whatever the range of documents to which the lien might attach, the time of attachment is when the documents have come into the banker’s hands in their capacity as banker — that is, in the course of the banker’s business. The most common example of this is the cheque which has been paid in for collection by a customer who has an overdraft: see National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] HCA 65. The lien over a cheque or a bill deposited for collection does not negate the banker’s duty of collecting the instrument. Of course, this is no disadvantage to the banker, for in the ordinary course of things, receiving the proceeds for the instrument will either go to reduce an overdraft or into an account over which the banker has the right of set-off. Note also that where the banker is a holder of a cheque over which there is a banker’s lien, then the banker may be a holder for value to the extent of any such lien: see Cheques Act 1986, s 96. In certain cases, therefore, the banker may be in a position to pursue remedies ordinarily available to a holder for value. For an example where the banker was able to take advantage of this status, see Barclays Bank Ltd v Astley Industrial Trust Ltd [1970] 2 QB 527. [page 498] The rights of the creditor end when they part with possession. However, as noted above, in the most important example of the banker’s lien — negotiable instruments — the normal way in which the lien will be terminated is through the collection of the instrument by the banker, in which case the right of the lien is replaced by the right of set-off. The banker may apply the proceeds of the collection to reduction of the debt owed by the customer. This will not amount to a preferential payment

where the customer is insolvent, since the repayment replaces the lien: see Duke Finance Ltd (in liq) v Commonwealth Bank of Australia (1990) 22 NSWLR 236.

16.1.7

Debts encompassed by the lien

In the absence of an express agreement to the contrary, the lien can only be exercised when the debt owing from the customer to the banker is one which has arisen out of the banker-customer relationship. Illustration: Commercial Bank of South Australia v Wake (1880) 14 SALR 31 A customer of the bank, A, had an overdraft with the bank, which the bank wished to have reduced or secured. As a security for the overdraft, A gave the bank a bill of exchange that had been accepted by W. Later, A’s overdraft was paid off. However, the bank had discounted another bill which had been accepted by A — since it was clear that A owed the bank the amount of the accepted bill, the bank claimed to be able to retain the bill accepted by W under the banker’s lien. The Court held that the lien did not attach, for the debt did not arise from the banker-customer relationship.

16.2

Freezing orders

16.2.1

Introduction

Freezing orders restrain a defendant from removing from the jurisdiction, disposing of, or dealing with, certain assets. The purpose of the freezing order is to ensure that the assets are available to meet a plaintiff’s pending claim. The order is ordinarily made in a very wide form — at least in the first instance — and has the effect of ‘freezing’ the assets of the defendant pending the outcome of the litigation. Terminology has varied over the years — first known as the ‘Mareva injunction’, the High Court in Cardile v LED Builders Pty Ltd [1999] HCA 18 thought the description improper — that ‘Mareva order’ or ‘asset preservation order’ [page 499] would be preferable. That has evolved into ‘freezing order’ as the preferred term: see PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36; JSC BTA Bank v Ablyazov (Rev 1) [2013] EWCA Civ 928. The original name is derived from the name of the second case in which the

injunction was granted: Mareva Compania Naviera SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509. The first case was Nippon Yusen Kaisha v Karageorgis [1975] 3 All ER 282. The discussion of the freezing order in this chapter is necessarily incomplete. For a more detailed treatment, see Hetherington (1983); Ough (1993); and Hoyle (2006).

16.2.2

Purpose

The operation of the freezing order is well illustrated by the Mareva case itself — Mareva Compania Naviera SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509. The action was brought by the owners of a ship against the charterers in respect of unpaid hire charges. Prior to obtaining judgment, the owners sought an injunction of the kind now known as the ‘freezing order’. Lord Denning described the plight of the shipowners (at 511): There is money in a bank in London which stands in the name of these time charterers. The time charterers have control of it. They may at any time dispose of it or remove it out of this country. If they do so, the ship owners may never get their charter hire. The ship is now on the high seas. It has passed Cape Town on its way to India. It will now complete the voyage and the cargo will be discharged. And the ship owners may not get their charter hire at all. In the face of this danger, I think this Court ought to grant an injunction to restrain the defendants from disposing of these moneys now in the bank in London until the trial and judgment in this action.

Courts in Australia and New Zealand soon followed the UK courts: see BP Exploration Co (Libya) Ltd v Hunt [1976] 3 All ER 879; [1982] 1 All ER 986; Deputy Commissioner of Taxation (Vic) v Rosenthal (1984) 16 ATR 159; Jackson v Sterling Industries Ltd (1987) 162 CLR 612. In Jackson v Sterling Industries Ltd (1987) 162 CLR 612, Brennan J observed (at 621): A judicial power to make an interlocutory order in the nature of a Mareva injunction may be exercised according to the exigencies of the case and, the schemes which a debtor may devise for divesting himself of assets being legion, novelty of form is no objection to the validity of such an order.

16.2.3

Requirements for granting

Just as the name of the order has evolved, so too have the ingredients necessary for the granting of the order. [page 500] Early decisions restricted the circumstances in which the order should be

granted. In Z Ltd v A [1982] QB 558, Kerr LJ thought the order should only be granted when: it appeared likely that the plaintiff would receive judgment for a certain or approximate sum; and there were reasons to believe that the defendant might move assets from the jurisdiction in order to defeat the judgment. Even before that, a NSW court had held that the applicant for the order need not even have an existing cause of action against the other party, so long as it seems likely that there will eventually be such a cause of action: see Turner v Sylvester [1981] 2 NSWLR 295. The freezing order probably should not be granted if there is little likelihood of the defendant removing the assets from the jurisdiction. In Etablissement Esefka International Anstalt v Central Bank of Nigeria [1979] 1 Lloyds Rep 445, the Court refused to grant the order against the defendant bank, for the simple reason that it was not believed that there was a danger that the bank would remove assets. For this purpose, it is probably not removing assets from the ‘jurisdiction’ if there is a danger that they will only be moved about within Australia: see Parsram Brothers (Aust) Pty Ltd v Australian Foods Co Pty Ltd [2001] NSWSC 436. The freezing order is usually granted as an interlocutory order, but it is possible to obtain the order after judgment and before execution: see Orwell Steel (Erection and Fabrication) Ltd v Asphalt and Tarmac (UK) Ltd [1985] 3 All ER 747. There have been problems when orders have been sought to restrain persons who are not party to the proceedings. Illustration: Bank of Queensland Ltd v Grant (1984) 54 ALR 306 The plaintiff had succeeded in an action against the first and second defendants. The bank learned that the second defendant planned to go abroad and was planning to transfer his interest in the matrimonial home to his wife, from whom he was separating. The bank sought a freezing order to restrain the wife from registering her title. The order was refused on the grounds that the Court may not have had jurisdiction to make such orders against parties who were not party to the proceedings. The view was expressed that the proper course of action was to make orders against the defendant only and to make an ancillary order that notice be given to the bank.

See 16.2.6 for the effect of receiving notice of a freezing order. The High Court has clarified the problem of making orders against persons

who are not parties to the litigation. In Cardile v LED Builders Pty Ltd [1999] HCA 18, [page 501] the Court held (at 57) that freezing orders may be appropriate in circumstances in which: the third party holds, is using, or has exercised or is exercising a power of disposition over, or is otherwise in possession of, assets, including ‘claims and expectancies’, of the judgment debtor or potential debtor; and some process, ultimately enforceable by the courts, is or may be available to the judgment creditor as a consequence of a judgment against that actual or potential judgment debtor, pursuant to which the third party may be obliged to disgorge property or otherwise contribute to the funds or property of the judgment debtor to help satisfy the judgment against the judgment debtor. On the other hand, a freezing order should not be made where it would involve undue hardship on a third party, or where it would interfere with the right of the third party to conduct business: see Galaxia Maritime SA v Mineralimportexport; The Eleftherios [1982] 1 All ER 796. Foreign assets pose particular problems in considering whether to grant a freezing order. The prevailing attitude has been that there is jurisdiction to grant a freezing order which includes foreign assets, but that the power should be used sparingly. Staughton LJ discussed the foreign assets problem in Republic of Haiti v Duvalier [1990] 1 QB 202, where it was said that relevant factors in deciding to grant an order which includes foreign assets are: the plain and admitted intention of a defendant to move assets out of the reach of courts of law; the resources obtained and the skill shown in doing so; and the magnitude of the sums involved. See also National Australia Bank Ltd v Dessau [1988] VR 521; Ballabil Holdings Pty Ltd v Hospital Products Ltd (1985) 1 NSWLR 155. The High Court in PT Bayan Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36 has confirmed that there is power to make a freezing order in relation to a prospective judgment of a foreign court. The applicant had commenced proceedings in Singapore, but the proceedings were still pending.

The High Court held that the order was within the inherent power of the Supreme Court of Western Australia. A freezing order should not be made against a defendant where the proceedings are punitive instead of compensatory or restitutionary: see Australian Competition and Consumer Commission v Chaste Corp (in liq) [2003] FCA 180.

16.2.4

Effects of a freezing order

A freezing order affects all who know of it, for it would be a contempt of court to assist in violating the terms of the order by dealing with the assets of the defendant in any way which is inconsistent with the terms of the order. This is obviously of [page 502] importance to bankers and others who deal with, or have a claim to, the assets of the defendant.

16.2.5

Not a proprietary interest

The granting of a freezing order does not give the creditor or anyone else a lien on the assets of the debtor. Illustration: Cretanor Maritime Co v Irish Marine Management; The Cretan Harmony [1978] 3 All ER 164; [1978] 1 Lloyds Rep 425 The owners of a ship sought an order against the charterers. The charterers had only one asset within the jurisdiction — a certificate of deposit with the First National City Bank of London. This asset was covered by a floating charge given by the charterers to the Ulster Bank prior to the time when the order was sought. After the order had been granted, the Ulster Bank appointed a receiver under the terms of the floating charge. The question for the Court was whether the terms of the order precluded the receiver from dealing with the certificate. The Court held that the receiver could deal with the certificate, as the freezing order conferred no property rights.

During the course of the judgment, Buckley LJ said (at 431): It seems to me … that it is not the case that any rights in the nature of a lien arise when a Mareva injunction is made. Under such an injunction, the plaintiff has no rights against the assets. He may later acquire such rights if he obtains judgment and can thereafter successfully levy execution upon them but until that event his only rights are against the defendant personally.

This view has recently been reaffirmed by the High Court. In PT Bayan

Resources TBK v BCBC Singapore Pte Ltd [2015] HCA 36, the High Court said (at [77]) (footnotes omitted): The power to make a freezing order is one which is to be exercised judicially, having regard to the considerations which inform the exercise of the power. It will always be necessary for the court to bear steadily in mind that a freezing order is not a mode of converting a would-be creditor into a secured creditor before a dispute is determined. On the other hand, a person likely to become a debtor ought not be allowed to dispose of their assets so as to defeat the capacity of a court to enforce a just claim.

The fact that it is not a security is emphasised by the cases where the defendant was permitted to use some of the assets to make payments of legitimate debts: see, for example, Iraqi Ministry of Defence v Arcepey Shipping Co SA (Gillespie Bros Ltd Intervening) [1980] 1 All ER 480. [page 503] The same line of argument has resulted in the defendant being permitted to use assets for the purposes of meeting legal costs. This is important, since the financial position of the defendant will often be such that the solicitors will require payment in advance: see the comments by Rogers J in Riley McKay v McKay [1982] 1 NSWLR 264. A freezing order will not be granted when there would be a consequential unjust interference with the rights of third parties to carry on their normal business. This has most often arisen when the order applied for would, if granted, have the side effect of preventing ship’s cargo or the ship itself from leaving the jurisdiction. Illustration: Gilfoyle Shipping Services Ltd v Binosi Pty Ltd [1984] 2 NZLR 742 The plaintiff sought a freezing order to prevent the defendant from dealing with fuel in the ship’s bunkers. If the order had been granted, there would have been considerable hardship on the owner of the ship and the ship’s crew — the latter being mainly of Greek nationality. Barker J refused the order, even though it meant the assets of the defendant would literally be ‘going up in smoke’, as the ship sailed for Australia the next day.

The decision was a direct application of the UK decision in Galaxia Maritime SA v Mineralimportexport; The Eleftherios [1982] 1 All ER 796, where the Court similarly considered the welfare of the crew of a ship to be a significant factor in refusing the order: see also Bank of Queensland Ltd v Grant (1984) 54 ALR 306.

16.2.6

The effect on third parties

The effect of a freezing order on third parties — particularly third party bankers — was discussed in Z Ltd v A [1982] QB 558.

The case arose from an alleged fraud on a non-UK company. Telex and cable orders were forged, which resulted in the transfer of some £2 million to London banks and which then reached the hands of the conspirators. When the fraud was discovered, the company sought and obtained a freezing order from Bingham J that prevented any dealings with the defendants’ assets, except in so far as they exceeded the disputed £2 million. By a prompt use of orders for specific discovery, interrogatories, injunctions and Anton Piller orders, the plaintiffs were able to recover £1 million. There then followed a settlement whereby a ‘good deal of the balance’ was recovered: see Z Ltd v A [1982] QB 558 at 560. In spite of this settlement, the five London clearing banks and one other defendant sought and obtained leave to appeal, with a view to clarifying the position of third parties when receiving notice of a freezing order. [page 504] The Court of Appeal held that a third party will be liable if, having notice of the terms of the order, they knowingly assist in the disposal of any of the assets of the defendant, whether or not the defendant has knowledge of the order. One obvious consequence of this view is that upon receiving notice of the order, the banker should freeze all accounts known to belong to the defendant, as well as other assets held on their behalf: see Z Ltd v A [1982] QB 558 at 562 and 567. The basis for the liability is that the third party who ‘knowingly assists in the disposal of [the assets] … will be guilty of a contempt of court, for it is an act calculated to obstruct the course of justice’: Z Ltd v A [1982] QB 558 at 563. See also Ling v Enrobook Pty Ltd (1997) 74 FCR 19. The banker’s obligation to honour the defendant’s cheques is discharged, because to do so has now become an unenforceable illegal obligation or, alternatively, it must be taken that the customer has only authorised the banker to do that which is lawful: see Z Ltd v A [1982] QB 558 at 563 and 572. From these principles, the Court extracted a set of guidelines which is intended to assist in the drafting and the interpretation of freezing orders. The guidelines proposed are divided into two groups — the first aimed at applicants who are seeking freezing orders which might affect third parties and the second describing the obligations imposed on the third parties who have received notice of the order. Since the banker may often be in either position, both sets of guidelines are given here. Matters to be considered at the time of seeking and making the order

include the following. The plaintiff should normally be required to give an undertaking to indemnify against any liability incurred and to pay any expenses reasonably incurred in complying with the terms of the order. The plaintiff should identify third parties upon whom it is intended to serve notice of the order. This, presumably, will enable the court to insert terms intended to protect the third parties from unreasonable obligation. It is not intended that this should preclude the giving of notice to other third parties if additional information is obtained. If possible, the plaintiff should identify assets held in the hands of third parties. The ability to make such an identification will probably be the exception rather than the rule in the case of assets held by the bank, since the bank owes a duty of secrecy to its customer, which should preclude it from voluntarily disclosing either the existence or the extent of the defendant’s assets held: see Tournier v National Provincial & Union Bank of England [1924] 1 KB 461. In this circumstance, the power of the court to order the defendant or the third party bank to make discovery in proper cases is of the utmost importance: see A J Bekhor & Co Ltd v Bilton [1981] 2 All ER 565. [page 505] If the order is intended only to restrain dealings with the defendant’s assets up to a maximum amount, the order should contain terms which state clearly that the ‘maximum sum part of the order does not include assets known or believed to be in the hands of a third party’. This is a matter of particular concern to the banks, since, without such a term, they are left in the position of being in possible breach of the order if they allow dealings with the account (and those dealings involve assets which are within the terms of the order), as well as in possible breach of contract with the customer if they do not permit dealings (and the defendant has adequate assets elsewhere). If it is thought desirable to allow the defendant normal living expenses or, presumably, an operating account for any reason whatsoever, the order should indicate the sum to be allowed, but it should not state the purpose for which the sum is to be used. The bank should open a special account for the defendant, placing the account in funds in accordance with the amounts mentioned in the order. It is no concern of the bank to inquire as to the actual use of the account. The obligations on the bank when receiving notice of the order include the

following. All accounts known to belong to the defendant should be frozen at once. All cheques should be dishonoured for the reasons given above. There are some payments which may be made and which may be debited to the defendant’s account. These payments may be loosely described as those which the bank is under some independent obligation to make. Thus, payments under a letter of credit or a bank guarantee, credit card transactions and cheques drawn by the defendant which are supported by a cheque guarantee card may all be paid and debited to the defendant’s account: see Z Ltd v A [1982] QB 558 at 563, 570 and 576. However, it appears that the sums from any commercial transaction which are paid into the defendant’s account will then be covered by the order: see Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyds Rep 256. Unless expressly stated in the order, certain assets held by the bank are not to be frozen by the bank. Specifically mentioned are: –

shares or title deeds held by the bank as security;

–

articles in a safe deposit in the name of the defendant;

–

future assets — that is, any assets which come within the control of the bank subsequent to the date on which the bank is served with the order, save in so far as any of these assets are specifically referred to in the order; and

–

money held in a joint account which is in the name of the defendant and any other person or persons.

Unfortunately, these guidelines may be safely relied upon only if the order is carefully drawn so as to include specific terms which conform to the first set of guidelines. Since the granting of the order and the terms of the order fall within [page 506] the discretion of the granting judge, and since the exercise of this discretion must inevitably be influenced by the specific facts before them, bankers and other third parties can by no means be assured that orders will necessarily be so favourably drawn. In particular, the items of property mentioned in the last guideline must be considered as ‘frozen’, unless the terms of the order specifically relieve the bank from responsibility. A bank which is subject to a freezing order is probably not responsible to

the party which applied for the order if they inadvertently fail to honour it. Illustration: Her Majesty’s Commissioners of Customs and Excise v Barclays Bank Plc [2006] UKHL 28 The plaintiff notified the bank that it had obtained a freezing order against one of the bank’s customers. The bank failed to honour the order, and the plaintiff had been unable to recover substantial sums from the customer. The Court held that the bank did not owe a duty to the plaintiff to take reasonable care to comply with the order. The bank was not a volunteer, and it would be anomalous to impose a duty when there was no corresponding duty on the account holder.

16.2.7

Costs of enforcement

The concern for the interests of third parties is also shown in the practice of requiring the applicant to meet many of the costs of enforcement. In Sea Rose Ltd v Seatrain in (UK) Ltd [1981] 1 Lloyds Rep 556, the order was granted only on the basis that the plaintiff — who naturally wished to notify the bank of the existence of the order — would undertake to pay costs incurred by the banker in searching for relevant accounts of the defendant. In the absence of a centralised computing system, the costs of such a ‘trawl’ for the accounts may be substantial. The perceived ability of the applicant to pay such costs may itself be a factor in the decision to grant a freezing order. In Gilfoyle Shipping Services Ltd v Binosi Pty Ltd [1984] 2 NZLR 742, the applicant offered to meet the costs of requiring the ship and crew to remain in Timaru. The third party shipowner expressed doubts about the ability of the applicant to meet such costs — this appeared to be one of the factors considered by Barker J in refusing the order. See also National Australia Bank Ltd v Bond Brewing Holdings Ltd [1990] HCA 10.

[page 507]

17 Documentary Credits 17.1

Introduction to international trade problems

Suppose that an Australian exporter sells goods to an overseas importer. The following problems arise: the seller wishes to be paid as early as possible, while the purchaser wishes to pay as late as possible; both the seller and the buyer will be concerned about the solvency of the other; and the buyer may have no opportunity to inspect the goods and will be concerned that they meet contract specifications. These are not minor problems. The seller may require payment early in order to acquire the goods. The buyer may need to on-sell the goods in order to obtain funds. If the seller becomes insolvent after payment but before delivery, then the buyer suffers losses. If the goods are delivered before payment and the buyer becomes insolvent, then the seller is left in the same financially disastrous position.

17.2

Documentary transactions: CIF contracts

The ‘documentary transaction’ solves many of these problems. Roughly speaking, the buyer agrees to purchase documents that represent the goods. The CIF contract is the legal embodiment of this notion. The initials stand

for ‘cost, insurance and freight’. The contract is expressed as ‘CIF (Port of destination)’. The contract price for the goods includes: the cost of the goods; a transferable marine insurance policy covering the entire transport; and the cost of transport to the named destination. [page 508] However, the CIF contract incorporates many obligations beyond the mere pricing terms. The seller is obliged to make all the arrangements and to load the goods on board transport to the named destination. The seller must obtain appropriate insurance cover and is responsible for any freight charges. Importantly, the seller is obliged to obtain documentation evidencing fulfilment of each obligation. The documents, when passed to the buyer, enable the buyer to deal with the goods. Traditionally, the documents must include: a negotiable bill of lading that is a document of title to the goods; a commercial invoice that describes the goods in sufficient detail; and a transferable policy of marine insurance. These three documents represent the goods, and the goods may be bought and sold by the person lawfully in possession of these documents. The seller may fulfil a CIF contract by purchasing goods afloat — unless specifically prohibited by the contract — and it is not unusual for there to be a ‘chain’ of contracts with goods bought and resold several times before reaching the port of destination. Most CIF contracts will call for many documents other than the three basic ones, most commonly certificates of quality and various import and export documents. These additional documents help to ensure the quality and legitimacy of goods that the buyer cannot personally inspect. The classic CIF contract contemplates carriage by sea. Where other forms of transport are used, the contract may be expressed as ‘CIP(destination)’, where the acronym stands for ‘Carriage and Insurance Paid’. The obligations under a CIP contract are similar in all respects to a CIF contract, except that the negotiable bill of lading is replaced by a suitable transport document. The primary obligation of the buyer is to pay the exporter if the documents are in order. In other words, a CIF/CIP contract of sale is performed by the

delivery of documents representing the goods. The results can be startling at first sight. Illustration: Manbre Saccharine Co Ltd v Corn Products Co Ltd [1919] 1 KB 198 The defendants sold American pearl starch to the plaintiffs on CIF London terms. The goods were shipped on board the ‘Algonquin’, which was subsequently sunk by a submarine or a mine. With knowledge of the loss of the ship and goods, the defendants tendered documents to the plaintiffs for payment. This tender was refused, and the plaintiffs sued for breach of contract. The Court held that the tender of documents was good, notwithstanding that the seller knew at the time of the tender that the goods had been lost.

[page 509] This is not as unreasonable as it first appears. The purchaser acquires all rights to claim against the insurance. For this reason, the general rule is that the policy of marine insurance should cover not only the price of the goods but also the cost of freight and a percentage above that cost, which represents a reasonable profit to the buyer. If payment is made at the same time the documents are delivered, called ‘documents against payment’, or ‘D/P’, then the insolvency problem is also solved by CIF/CIP contracts. If, however, the buyer is in a position to insist on a period of credit, then the seller remains exposed to the risk of the buyer’s insolvency. As noted above, the seller may also require payment to ease its own cash flow problems. The inclusion of a bill of exchange drawn by the seller on the buyer may ease the payment problem, since the seller can discount the bill to obtain funds. Unless the discount is ‘without recourse’, the insolvency problem remains.

17.3

Banks in international trade

The seller must deliver the documents to the buyer. Since the parties are in different countries, it is convention to present the documents through the agency of a bank in the buyer’s country. The usual arrangement is: the seller delivers the documents to its own bank; the seller’s bank forwards the documents to its correspondent bank in the importer’s country; and then the importer inspects the documents and makes arrangement for payment at the correspondent bank. If the parties have arranged for deferred payment, the documents will

include a bill of exchange drawn by the seller on the buyer or, by arrangement, on one of the banks. This allows the seller to discount the bill and receive payment in advance. The prevalence of banks in international trade led to the rise of the documentary credit and to the expansion of documentary transactions far beyond the confines of the CIF/CIP contract.

17.4

Documentary credits

A documentary letter of credit (‘DLC’) is any arrangement that is an irrevocable undertaking by the issuing bank to honour a presentation of documents that meets the requirements of the credit. The meaning of ‘honour’ is discussed at 17.12.1. In less formal terms, a credit is a promise made by a bank to a beneficiary, the seller in an international trade transaction, that the beneficiary will be paid, provided only that the required documents are tendered and found to be in order. The DLC is obviously well suited to act as a payment device in a CIF contract. At the request of the buyer, the buyer’s bank issues a DLC in favour of the seller. [page 510] The DLC specifies the documents required, and the bank will pay the beneficiary if the presented documents are in order. The buyer is assured of receiving the goods — that is, the documents — and the seller is assured of payment when parting with the goods. The essential features of the DLC are: the DLC is a unilateral promise by the bank to the beneficiary; although the beneficiary gives no consideration for the promise, the promise is enforceable against the bank; the promise is irrevocable and may not be modified without the consent of all parties; the promise is documentary — that is, the obligation is to pay against the presentation of specified documents; the promise is autonomous — that is, it is independent of the contract of sale or other contract which gave rise to the DLC.

Each of these matters will be discussed further in the remainder of this chapter.

17.5

Related instruments

The DLC has been adapted to serve other purposes. Whereas the DLC is designed to ensure proper performance of international trade contracts, similar instruments are used to make payment on default or non-performance. A ‘first demand guarantee’ (or simply ‘demand guarantee’) is a promise by a bank to pay the beneficiary on demand. The guarantee will usually call for some minimal documentation — often no more than a written statement that the beneficiary is entitled to call on the guarantee. Demand guarantees serve as a method to control the risks of contractual default. For example, in a construction project, the builder may be contractually bound to provide a ‘performance bond’, which is a demand guarantee providing for payment if the project fails to meet construction deadlines: see, for example, Edward Owen Engineering Ltd v Barclays Bank International Ltd and Umma Bank [1978] QB 159; Simic v New South Wales Land and Housing Corporation [2016] HCA 47. The demand guarantee has been described as providing the beneficiary with an ‘unfettered, immediate remedy upon the triggering event on the letter of credit, pending resolution of any dispute on the underlying contract’: see Ideas Plus Investments Ltd v National Australia Bank Ltd [2006] WASCA 215 per Steytler P, citing Bachmann Pty Ltd v BHP Power New Zealand Ltd [1998] VSCA 40. Demand guarantees will often be called upon when there is a dispute between the parties. When used in this way, the instrument is used to determine which of the parties holds the money until the dispute is resolved: see 17.10.5. [page 511] The term ‘guarantee’ is misleading. Demand guarantees are primary undertakings, not secondary. It is not a ‘guarantee’ in the sense used in Chapter 15, but it is common commercial language. The bank’s obligation is to pay against conforming documents, and it is neither necessary, nor even permitted, to investigate whether a breach of the underlying contract has occurred: see Wood Hall Ltd v The Pipeline Authority [1979] HCA 21 per

Barwick J (at 2); Simic v New South Wales Land and Housing Corporation [2016] HCA 47. A standby credit is similar to a demand guarantee but is in the form of a documentary letter of credit. Standby credits were developed in the USA, where banks were prohibited from issuing guarantees. The Court in National Bank of Dallas v Northwest National Bank of Fortworth 578 SW 2d 109 (1978) held that a standby credit was not a guarantee and therefore not ultra vires. Standby credits and demand guarantees, like DLCs, require the bank to pay on the basis of the documents alone. The issuer is not required — and probably not entitled — to question if there has been a ‘real’ breach of the underlying contract. Since the documents are often little more than a demand by the beneficiary, these instruments have been compared to promissory notes payable on demand: see Edward Owen Engineering Ltd v Barclays Bank International Ltd and Umma Bank [1978] QB 159.

17.6

The credit and payment

The DLC effectively solves the final problem of international trade, since the credit of the bank is substituted for the credit of the buyer. In short: the buyer is assured of delivery, since the buyer’s bank will not approve payment unless the documents are in order; the seller is assured of payment, since the buyer’s bank is obliged to pay if the documents are in order; neither party has control of both the goods (as represented by the documents) and the money at the same time. The seller will be expected to look to the credit for payment in the first instance. But suppose that the bank will not or cannot pay. Can the seller then have recourse to the buyer for the price? The contract of sale could specify that merely opening the credit with the named bank was payment, but that would be most unusual. The UK Court of Appeal in Alan (W J) & Co Ltd v El Nasr Export & Import Co [1972] EWCA Civ 12 rejected the argument that merely opening the credit totally discharged the payment obligation. Lord Denning argued that opening the credit amounted to conditional payment. The consequences are: the beneficiary of the credit must look to the bank to be paid; [page 512]

if, however, the bank fails to meet its obligation, the beneficiary may claim payment from the account part. This conflicts with dicta in Saffron v Societe Miniere Cafrika [1958] HCA 50, where the High Court of Australia indicated that the effect of opening a credit might depend upon the type of credit. In particular, the Court suggested that an irrevocable confirmed credit ‘might perhaps not unreasonably be regarded as a stipulation for the liability of the confirming bank in place of that of the buyer’. This conflict has not been considered in later Australian cases, but it now seems unlikely that an Australian court would follow the Saffron dicta. It should require very clear contractual terms before finding that the mere opening of the credit is absolute payment.

17.7

The International Chamber of Commerce standard terms

The law of documentary credits was developed by the common law judges and by banking practice. There were obvious benefits in ‘standardising’ the law, and this task was undertaken by the International Chamber of Commerce (ICC). In 1933, the ICC published the first ‘Uniform Customs and Practices for Documentary Credits’ (UCP). The 1933 version of the UCP was not widely accepted. The London banks — the most influential of the time — refused to approve it. However, the ICC persisted, and later revisions of the UCP have become universally accepted. The current version is the sixth revision, which became the official version on 1 July 2007. It is ICC publication number 600 and is known as the UCP600. The UCP is a set of contractual terms incorporated by reference into a documentary credit. As such, the terms are subject to interpretation by national courts. The UCP is not, nor can it be, a truly standardised international law, but the ICC monitors judicial decisions and coordinates national bodies that encourage uniformity. Since the terms of the UCP are incorporated by reference, there is potential for conflict between the terms of the UCP and the express terms of the letter of credit. As will be seen below, this is a major cause for concern. Because the UCP is incorporated into almost every letter of credit, the UCP articles will be given close attention when discussing the law of credits,

keeping in mind always that they act merely as contractual terms between the parties. The ICC has also issued standard terms for demand guarantees and for standby credits. The ‘Uniform Rules for Demand Guarantees’ (URDG758) has not gained wide acceptance. Australian banks do not include the URDG758 in demand guarantees. The UCP provides that it may be incorporated into standby credits ‘to the extent to which they may be applicable’: UCP600, Art 1. Many of the UCP600 terms are [page 513] not applicable to standby credits. The ICC has issued the ‘International Standby Practices’ (ISP98), but, like the URDG758, the ISP98 has not gained wide acceptance.

17.8

Terminology

Credit transactions involve multiple parties, and it is wise to have a standardised terminology: credit any arrangement, however described, that is an irrevocable undertaking to honour a complying presentation; applicant the person on whose request the credit is issued; account party the person responsible to reimburse the issuing bank; usually but not necessarily the same person as the applicant; beneficiary the party in whose favour the credit is issued — the person who is entitled to present documents and receive payment; issuing bank the bank that issues a credit on the request of the applicant; advising bank the bank that advises, at the request of the issuing bank, the beneficiary of the credit — this will usually be a bank in the country of the beneficiary; confirming bank a bank that adds its independent promise confirming the credit; nominated bank any bank at which the credit is available to the beneficiary — a credit may be available at a

specified bank, a class of banks or all banks; complying presentation a presentation of documents that is accordance with the terms and conditions of the credit, the UCP and international standard banking practice.

Credits themselves are often classified according to the mode of payment. The following are common terms, all of which presuppose a presentation of conforming documents: acceptance credits a nominated bank will accept a bill of exchange drawn on itself or the issuing bank; sight credits a nominated bank will pay upon presentation of conforming documents; sometimes called ‘clean credits’;

[page 514] negotiation credits the nominated bank will negotiate a bill of exchange drawn on another bank in accordance with the terms of the credit — sometimes called ‘discount credits’; deferred payment credits a credit which promises payment at some time later than the presentation of documents.

Credits are also classified in other ways. Some of these classifications are legal, some commercial. The most important are: revocable/irrevocable a revocable credit may be cancelled or altered at any time by the issuing bank — the UCP600 presumes that credits are irrevocable; revolving credit an arrangement between the issuing bank and the applicant that allows for periodic renewal; import/export credits related to the commercial function of the credit; red clause credits credits which allow partial payments in advance of the presentation of documents.

17.9

When the UCP applies

The UCP600 rules apply to a credit if and only if the credit expressly states that it is subject to the rules. According to Art 1, the rules are binding on all parties, unless expressly modified or excluded by the credit. It is not common for a credit to expressly modify or exclude UCP rules, but the credit may contain terms which are incompatible with the UCP rules. The usual rules of contract interpretation dictate that the express terms of the credit

override those included by reference: see, for example, Korea Exchange Bank v Standard Chartered Bank [2005] SGHC 220; Kumagai-Zenecon Construction Pte Ltd v Arab Bank Plc [1997] 3 SLR 770; Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631. However, where there is no conflict in the terms, the incorporated terms of the UCP rank equally with the other terms of the credit. Illustration: Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631 The defendant was a confirming bank for a letter of credit that contained a marginal note incorporating the UCP as part of the terms of the contract. The buyers refused to accept bills drawn upon them, and the defendant bank claimed that they were [page 515] liable only if the buyers actually accepted the bills. This construction of the credit was reasonable if the terms of the credit were read in isolation. The Court held that the terms of the UCP, included by reference, were not merely fall-back terms, to be consulted only if the express terms of the credit failed to solve the problem at hand. They were to be read as part and parcel of the credit, on an equal footing with the express terms. It was clear that the terms of the 1983 revision of the UCP required the bank to honour the credit.

The Forestal Mimosa problem should not occur with a modern credit, since the UCP600 provides that a credit should not be available by a draft drawn on the applicant: see Art 8, UCP600.

17.10 Some basic principles 17.10.1 Multiple contracts Many of the legal problems associated with documentary credits arise because of the multiplicity of parties, their contractual relationships and the interaction of the credit with these other contracts. It might be that these problems should be analysed within a multilateral theory of contracts. We have no such theory in the common law world — we are restricted to analysis by means of our bilateral theory of contract. The following contracts will be important in any credit: the contract between the account party and the beneficiary — this will often be a contract for the supply of goods or services; the contract between the account party and the issuing bank; the contract(s) between the issuing bank and any advising or confirming banks; and

the contract of the credit itself between the issuing bank and the beneficiary; if the credit is confirmed, the contract between the confirming bank and the beneficiary; if the credit may be honoured by a nominated band, the contract between that bank and the beneficiary; and if the credit is negotiated, the contract between the negotiating bank and the beneficiary. There may well be conflict and interaction between these contracts. The most common is that the account party — usually the buyer of goods or services — claims that the contract of supply has not been fulfilled by the beneficiary. The account party wants to prevent the beneficiary from obtaining payment under the credit. The starting point in these disputes is the so-called ‘autonomy principle’. [page 516]

17.10.2 Independence: the autonomy principle The credit is independent of the underlying contracts that give rise to the credit. This very important statement is known as ‘the autonomy principle’. The UCP addresses the matter of autonomy in Arts 4 and 5. The principle has several limbs: the credit is a separate transaction; banks are not concerned with the underlying transaction, even if there is a reference to it in the credit; an obligation of the bank under the credit is not subject to claims or defences of the underlying contract; the beneficiary of the credit is not concerned with the contractual relationships between the banks or between the applicant and the issuing bank; and banks deal only with documents. The autonomy principle, although stated in the UCP, was recognised by the common law. Illustration: Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 The plaintiff company had machinery under a contract that called for payment by an irrevocable

documentary credit issued by the defendant bank. The contract of sale provided for several shipments of the machinery and also contained a clause which called for a variation in the contract price in certain circumstances. There was no reference to the variation clauses in the credit. After several shipments had been made, the buyers claimed that the price on the next shipment should be reduced under the variation clause. The sellers did not agree. The buyers instructed the defendant banker to refuse to make the payment under the letter of credit for any amount over the sum that the buyers claimed was the correct price. The Court held that the bank must pay according to the credit. The credit was in no way subservient to the contract of sale but was fully autonomous.

The autonomy principle also applies to demand guarantees: see ALYK (HK) Limited v Caprock Commodities Trading Pty Ltd [2012] NSWSC 1558. Because the autonomy principle is so well established, a bank will be reluctant to consider its customer’s request to refuse payment. However, such a request puts the bank in a difficult position. The usual response these days is to advise the customer to apply to the courts for an injunction. The application may seek an injunction against the bank to prevent payment or against the beneficiary to prevent presentment of documents. In order to succeed in these actions, [page 517] the account party must show that the circumstances fall within one of the accepted exceptions to the autonomy principle: see the discussion of exceptions at 17.10.5.

17.10.3 Autonomy principle: other consequences The autonomy principle has other consequences. In particular, the issuing bank must pay even if the account party is insolvent, and, because the obligation to the beneficiary is a direct one, the payment may not be recovered as a preference: see Thompson Land Ltd v Lend Lease Shopping Centre Development Pty Ltd [2000] VSC 140. Where the documents are faulty, payment must be refused, even if the goods are known to comply with the requirements of the underlying contract — the bank’s duty is to pay against a complying presentation and to refuse payment if the documents are not in order: see J H Raynor v Hambro’s Bank Ltd [1943] 1 KB 37; Kydon Compania Naviera SA v National Westminster Bank Ltd (The Lena) [1981] 1 Lloyd’s Rep 68. This will be relevant when the buyer

wishes to avoid the contract — for example, where the market has fallen between the time of sale and the maturity of the credit. Finally, the bank must honour the credit even if the seller supplies defective goods. In Hamzeh Malas & Sons v British Imex Industries [1958] 2 QB 127, the contract was a sale by instalments — this may be overridden if it can be shown that the beneficiary is fraudulent: see 17.10.5. The autonomy principle applies even when the credit refers directly to the contract. For example, where a credit called for documents ‘in accordance with the contract dated 22.12.1947’, the Court held the bank had no duty to inspect the terms of the contract: see Davis O’Brian Lumber Co v Bank of Montreal [1951] 3rd DLR 536; and see Art 14(h), UCP600. See also 17.13.

17.10.4 Documentary: strict compliance Banks must pay only against a complying presentation of documents. Even before the introduction of the UCP, the courts established the rule that banks must adhere strictly to the documentary requirements. In Equitable Trust Co of New York v Dawson Partners Ltd (1927) Ll LR 49, Lord Sumner said: It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is no room for documents which are almost the same or which will do just as well.

The rule is known as the ‘doctrine of strict compliance’, and it regularly causes problems for beneficiaries. When work began on the revision of the UCP500, ICC surveys showed that approximately 70 per cent of documents presented were rejected on first presentation. [page 518] Most of the documents required in an international sale of goods are issued by third parties, over which the seller has no control. The ICC has published the ‘International Standard Banking Practice for the Examination of Documents under Documentary Credits’ (ISBP 2007), which attempts to clarify some of the issues. The doctrine of strict compliance does not extend to mere typographical errors. Illustration: Westpac Banking Corp v ‘Stone Gemini’ [1999] FCA 434 Westpac had negotiated a letter of credit issued by the Bank of China. It was argued that Westpac had represented that the documents were a complying presentation, but that the description of the goods in the invoice differed from that required by the letter of credit.

The argument was based on the description on the invoice, which read: ‘PHYSICAL SPEC: FINE ORE TO BE DELIVERD [sic] SHALL BE SIZED AT MOMINALLY [sic] BELOW 6.00 MM ON A SQUARE APERTURE SCREEN ON A NATURAL BASIS’. The Court held that the doctrine of strict compliance does not invalidate a document with obvious typographical errors.

Tamberlen J said (at 84): Even taking the strictest approach to the requirement for compliance between description and documents furnished there is no substance in this claim. The error is obvious and in my view insufficient to warrant rejection.

See also Soproma SpA v Marine & Animal By-products Corp [1966] 1 Lloyd’s Rep 367 and Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711. In Simic v New South Wales Land and Housing Corporation [2016] HCA 47, the performance bond inadvertently called the intended beneficiary by the wrong name. No organisation with the name had ever existed. The High Court held that the bank was right to refuse payment and that the autonomy principle prohibited the use of background documents to identify the proper beneficiary. However, application to the Court could be made to rectify the error.

17.10.5 Exceptions to the autonomy principle The autonomy principle, important as it is, must yield in certain cases. The courts have repeatedly asserted that there is a power to grant an injunction to prevent the operation of credits when the circumstances so dictate. There are four recognised circumstances which give rise to an exception to the autonomy principle: fraud in the transaction; illegality; [page 519] the negative term exception; and unconscionability and the unconscionability provisions of the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)).

The fraud exception A bank should not honour a credit of demand guarantee when the demand for

payment is fraudulent and known by the bank to be so. ‘Fraudulent’ means: the beneficiary has no contractual right to draw on the credit or guarantee; and the beneficiary has no honest belief in such a right. The ‘fraud exception’ to the autonomy principle is very old. Davidson traces it to Pillans v Van Mierop (1765) 3 Burr 1663; 97 ER 1035: see Davidson (2003). However, the modern treatment is from an American case. Illustration: Sztejn v J Henry Schroder Banking Corp 31 NYS 2d 631 (1941) The plaintiff contracted to purchase a quantity of bristles from an Indian firm. As partial fulfilment of that contract, the plaintiff arranged with the defendant to open an irrevocable letter of credit in favour of the Indian sellers. The complaint alleged that the seller filled some 50 crates with cow hair and other worthless material, with intent to defraud the plaintiff. The plaintiff sought a declaration that the letter of credit was void, as well as an injunction preventing the defendant banking corporation from paying pursuant to the letter of credit. The Court held that the plaintiff was entitled to injunctive relief.

It is fundamental to the understanding of the case to recognise that it came before the Court under a motion for dismissal filed by the defendant. Court procedure called for the Court to assume that the facts alleged — in particular the fraud — had been proved by the plaintiff. The Court emphasised the entitlement was subject to several assumptions: fraud by the defendant had been proved; the bill of exchange (required under the letter of credit) was still in the hands of the seller; and the bank had been given notice of the fraud. It may be very difficult to show that the beneficiary has been fraudulent. Illustration: Discount Records Ltd v Barclays Bank Ltd [1975] 1 Lloyds Rep 444 A contract for the sale of phonograph records and tape cassettes called for more than 8,000 records and 800 cassettes to be delivered. The goods were not shipped until 12 days after the latest date for shipment. It was alleged that only 275 records and 25 [page 520] per cent of the delivered cassettes conformed to the contract, and that the rest were either rejects or unsaleable. Some of the boxes were empty, some filled with packing material and some appeared to contain ‘rubbish’. The boxes had been altered by placing a semi-transparent material over the serial numbers, and different numbers were then put on the material. The outside numbers corresponded with the serial numbers of the order, but the covered-up numbers — which indicated the actual contents of the boxes — did not.

The Court held that Sztejn v J Henry Schroder Banking Corp 31 NYS 2d 631 (1941) involved ‘established fraud’, whereas the case before the Court involved only an allegation of fraud. An injunction was refused.

Given the facts of Discount Records Ltd v Barclays Bank Ltd [1975] 1 Lloyds Rep 444, it is difficult to see how extrinsic — that is, non-documentary — fraud could be shown. Also note that the Court considered it very relevant that the bill of exchange might be in the hands of a holder in due course. The House of Lords has held that the fraud exception will not apply unless the beneficiary is party to the fraud. Illustration: United City Merchants v Royal Bank of Canada [1983] 1 AC 168 A bill of lading was altered by an employee of the loading brokers. The alteration made it appear that the loading was timely, when the good were not actually shipped until a day after the credit expired. The false date on the bill of lading became known to the confirming bank when the documents were presented. It refused to pay, claiming the fraud exception. The Court held that the bank was obliged to pay, since the documents appeared to be in order. The fraud exception did not apply, since the fraud was committed by a third party.

The result is strange, to say the least. If the bill of lading had shown the true position, the bank would have been obliged to reject it: see Gao (2001) for further criticism of the case. The Australian rule as to presentation of documents known to be false may be wider than that proposed by United City Merchants. In Contronic Distributors Pty Ltd v Bank of New South Wales [1984] 3 NSWLR 110, it was held that the beneficiary of a commercial letter of credit may be restrained from claiming under the credit where the documents which are needed to require payment are known by the beneficiary to be false. It is not just the account party who has the right to seek an injunction. Both the issuing bank and any person who will suffer loss in the event of payment against false documents may restrain payment against the letter of credit. [page 521] A restraining injunction will not be given merely because the documents do not conform to the known facts. In Inflatable Toy Co Pty Ltd v State Bank of New South Wales (1994) 34 NSWLR 243, it was noted that commercial people often are ‘not fussed’ when documents indicate a state of affairs which is contrary to what is actually happening. An injunction will only be granted when a court is convinced that there is a particularly strong prima facie case of fraud.

See Davidson (2003) for a comprehensive discussion of the fraud exception.

Illegality ‘Illegality’ may refer to the credit itself or to the underlying contract. Whether either is ‘illegal’ must be judged by the law governing the credit or the contract — the so-called ‘proper law of the contract’. The proper law of a contract is, roughly speaking, the place which has the closest connection to the contract. Subject to a few exceptions, parties are free to choose their own governing law: see Compagnie d’Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1970] 2 Lloyds Rep 99. If the parties do not make an express choice of law, the proper law of a credit is the place where documents are to be presented and payment made. Illustration: Power Curber International Ltd v National Bank of Kuwait SAK [1981] 1 WLR 1233 A letter of credit had been issued in Kuwait by the National Bank of Kuwait. The advising bank was located in the American state of Florida, and documents were to be presented and payment made in the state of North Carolina. The Court held that North Carolina — the place where the bank’s obligations fell due — was the proper law of the credit.

A court will not recognise an impediment to payment unless it is under the proper law of the credit. In Power Curber itself, a court in Kuwait had issued an injunction preventing payment of the credit. The injunction was ineffective in an English court, since Kuwait was not the proper law of the contract. Similarly, a court may prevent payment when the underlying contract is illegal under the proper law of that contract. In United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, the parties had agreed to falsify invoices in an effort to circumvent currency restrictions. The House of Lords held that the bank should not honour the part of the payment related to the currency circumvention. [page 522]

The negative term exception The contract between the parties may contain terms that limit the right of the beneficiary to claim under the credit or demand guarantee. Although the bank is not concerned with the underlying contract, a court may insist that the beneficiary abide by the contractual restrictions.

This ‘negative term’ doctrine has its origins in the High Court decision of Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443. Gibbs J, (with the agreement of Barwick CJ and Mason J) expressly found (at 490) that the underlying contract entitled the beneficiary to claim against the guarantees and refused to speculate on what effect the opposite conclusion might have had. Stephen J went so far as to say (at 493): Had the construction contract itself contained some qualification upon the Authority’s power to make a demand under a performance guarantee, the position might well have been different.

A contractual term restricting the beneficiary’s right to call on the credit or demand guarantee is called a ‘negative term’ or a ‘negative pledge’. It is not, strictly speaking, an exception to the autonomy principle, since it is agreed that the bank need not — indeed, should not — have regard to the term. Courts have recognised that demand guarantees and standby credits serve two distinct purposes — namely: to protect the beneficiary from the insolvency of the counterparty; and to allow the beneficiary to ‘hold the money’, in the event of a dispute between the parties. Austin J gives a thorough discussion of the negative term exception in Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713. The beneficiary agreed not to call upon the credit in the event of a dispute. Austin J found that, in the circumstances, there was no dispute. When the guarantee or credit is for the second purpose, there is no room for preventing payment in the event of a dispute. The courts have differed in their approach to the second purpose — should it be assumed or should it require specific terms in the contract? Clough Engineering Ltd v Oil & Natural Gas Corporation Ltd [2008] FCAFC 136 set out principles to be followed when asked to find a ‘negative pledge’. The most important of these are: clear words will be required to support a construction which inhibits a beneficiary from calling on a demand guarantee where a breach is alleged in good faith; and the proper construction of the right to call on the guarantee must be informed by a consideration of the prescribed form of the guarantee. The NSW Court of Appeal has taken a different approach. In Lucas Stuart

Pty Ltd v Hemmes Hermitage Pty Ltd [2010] NSWCA 283, it found that the beneficiary had [page 523] to establish objectively that a breach had occurred. Further, it seemed to approach the problem by assuming that the guarantee served only the first purpose mentioned above. Although the negative exception to the autonomy principle has only been applied in cases involving standby credits or demand guarantees, there is nothing in principle to prevent it from arising in a documentary credit case. It would, however, be unusual to find a negative term in a documentary credit.

The unconscionable conduct exception Sections 20 and 21 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) (Cth) prohibits conduct that is unconscionable. Section 20 deals with conduct that is unconscionable within the meaning of the unwritten law but does not apply where s 21 is applicable. Section 21 prohibits unconscionable conduct in connection with the supply or acquisition of goods or services. The issue first appeared in Olex Focas Pty Ltd v Skodaexport [1998] 3 VR 380. Batt J held that general law principles could not justify an injunction preventing the beneficiary from calling on demand guarantees, but that s 51AA of the Trade Practices Act 1954 (Cth) (the predecessor of the Competition and Consumer Act 2010), expanded the scope of the general law and justified granting an injunction. The Olex Focas decision was controversial, and for some time it was doubtful if the unconscionability provisions would again be applied to demand guarantees or credits: see, for example, Browne (1999); Baxt (1997) and Leondis (2010). However, in a careful and decisive judgment, Austin J granted an injunction on the grounds of unconscionability in Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713. Illustration: Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713 As part of the claim under a standby letter of credit, the defendant certified that the full amount claimed represented funds due. This was incorrect, since only 14 of a required 48 items had been delivered. The defendant also certified that demand for payment had been made and remained unsatisfied.

The latter claim was held to be misleading, because it falsely suggested that a period of time had elapsed. In fact, the demand for payment and the application under the letter of credit had been made on the same day. The Court held that an injunction would be granted to prevent the beneficiary from drawing against the demand guarantee.

In both Olex Focas Pty Ltd v Skodaexport [1998] 3 VR 380 and Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713, [page 524] the unconscionable conduct was calling on the payment of funds to which the beneficiary was clearly not entitled. However, in the absence of further factors, it is not unconscionable to: claim against a guarantee when the amounts are disputed: see Wood Hall Ltd v The Pipeline Authority [1979] HCA 21; demand payment even if it is acknowledged that the sole purpose for claiming is to put pressure on the account party to resolve a dispute: see Austin J in Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (in administrative receivership) [2003] NSWSC 713 at 82; fail to notify the account party of an intention to draw against a guarantee or credit if the underlying contract contains no requirement to do so: see Minson Constructions Pty Ltd v Aquatec-Maxon Pty Ltd [1999] VSC 17; or make a demand for payment of disputed sums, even when the dispute has not been settled due to delay on the part of the beneficiary: see Fletcher Construction Australia Ltd v Varnsdorf Pty Ltd [1998] 3 VR 812. In spite of early doubts, it is now clear that unconscionable conduct on the part of the beneficiary will justify court intervention to prevent calling on a guarantee or credit.

Freezing orders Several Australian cases have refused an injunction, but have granted a freezing order to prevent dissipation of the funds prior to the fraud allegations being litigated: see the discussion of freezing orders at 16.2. In Pedna Pty Ltd v Sitep Society per Azioni SC(NSW), Santow J, No 1032/1997, 8 January 1997, unreported, Santow J reiterated the need for caution in restraining payment of a letter of credit. However, payment was to be made to an account in a local account, and he was able to grant a freezing order in respect of the account.

Hamilton J took this approach a step further in Manzel Equipment Pty Ltd v APE Pty Ltd [2000] NSWSC 1172. The goods delivered did not conform to the invoice, and there was some evidence of fraud. Although an injunction against payment was inappropriate in the circumstances, it was ordered that the payment be made into the bank manager’s suspension account and a freezing order given to ensure that the funds were not then dissipated.

17.11 Form of the credit There is no fixed form for a credit, but the UCP imposes some content requirements. Of course, for the UCP to apply, there must be a clause in the credit which incorporates the UCP rules. Article 6 requires a credit to state: the nominated banks at which the credit is available; [page 525] the mode of payment; an expiry date; and the place where presentation of documents is to be made. Credits are always available at the issuing bank, and documents may be presented at the issuing bank. The credit is binding on the issuing bank from the moment of issue: Art 7(b), UCP600. The UCP only recognises sight payment, deferred payment, acceptance and negotiation as payment methods. Each of these will be discussed below. Article 3 of the UCP lists many words and phrases and provides interpretations for them. For example, an expression ‘on or about’, or similar, is to be interpreted to mean that the event is to occur during a period covering five calendar days before, through until five calendar days after, the specified date. These interpretation provisions should help to avoid unnecessary rejection of documents.

17.12 Modes of payment Article 6(a) of the UCP600 recognises four methods of payment: sight payment; deferred payment;

acceptance; or negotiation. In each of the four cases, the bank at which the credit is available is required to ‘honour’ the credit if the beneficiary makes a complying presentation of documents. ‘Honour’ means something different when applied to each mode of payment.

17.12.1 Meaning of ‘honour’ A credit available by sight is honoured by paying the beneficiary on acceptance of documents: Art 2, UCP600. Sight payment credits may call on the beneficiary to draw a non-recourse bill of exchange on the confirming or issuing bank, but this is of little practical effect. A deferred payment credit is honoured by incurring a payment undertaking when the documents are accepted, followed by payment at maturity: Art 2, UCP600. A bank which undertakes a deferred payment obligation may sometimes advance funds to the beneficiary by agreement. This has caused some problems: see 17.12.2. An acceptance credit is honoured by accepting a bill of exchange drawn by the beneficiary and paid at maturity: Art 2, UCP600. Article 6(c) provides that the bill should not be drawn on the account party — an attempt to avoid the problem litigated in Forestal Mimosa Ltd v Oriental Credit Ltd [1986] 1 WLR 631: see discussion at 17.9. Credits available by negotiation are discussed at 17.12.3. [page 526]

17.12.2 Deferred payment credits Deferred payment credits are a relatively new development. From the beneficiary’s point of view, they are less valuable than an acceptance credit. The promise of the bank under a deferred payment credit cannot be converted to cash, but a bank-accepted bill may be discounted in the market. Deferred payment credits are used primarily in those jurisdictions that retain stamp duties or some other form of tax on negotiable instruments. To overcome the liquidity problem, the bank incurring the deferred payment obligation may agree to advance funds to the beneficiary before the maturity date. This is sometimes (inaccurately) called ‘discounting the credit’.

Provided the payment is made as scheduled, there is no problem with this arrangement. If the payment fails for any reason, then there may be problems recovering the advance. Illustration: Banco Santander SA v Banque Paribas [2000] EWCA Civ 57 Banque Paribas issued a deferred payment letter of credit in favour of Bayfern, to be paid 180 days from the presentation of the bill of lading. The letter of credit was issued subject to the UCP500, the 1993 revision. Documents were to be presented to Santander, and Paribus undertook to ‘cover’ (ie pay) Santander on the date of payment. Santander confirmed the credit and offered Bayfern the possibility of a discounted early payment. In exchange for the early payment, Bayfern stated that it ‘irrevocably and unconditionally assign[ed] to [Santander its] rights under this letter of credit’. Before the time of payment specified in the letter of credit, it was alleged that there had been fraud on the part of Bayfern.

If the fraud allegation was true, then the letter of credit should not have been paid to Bayfern: see 17.10.5. The question for the Court was whether Santander was entitled to be paid by Paribus. Note that if Santander had been the holder of a bill of exchange — the normal case when an early payment is made under an acceptance credit — then the fraud argument would not be permitted. Santander argued that its position was merely that of a bank seeking reimbursement under the UCP. The Court found no reason to depart from the general rule that an assignee takes subject to equities. Note that there was no request from Paribus that Santander make advance payment. The case provides another example of the superior certainty of a bill of exchange over an assignment for the transfer of debts. The UCP600 attempts to provide protection for a discounting bank. Art 12(b) provides that an issuing bank authorises a nominated bank to prepay a deferred payment undertaking incurred by the bank. Art 7(c) provides that the issuing bank [page 527] will reimburse a nominated bank for the amount of a complying presentation under a deferred credit, whether or not the nominated bank prepaid before maturity. These provisions would seem to solve the Banco Santander problem, although some doubts have been expressed: see Profazio and Chuah (2007).

17.12.3 Negotiation credits ‘Negotiation’ has a special meaning as a method of realising credits. According to Art 2, UCP600, it means:

[T]he purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

A negotiation credit is ‘available’ at nominated banks, but, with the exception of the confirming bank, a nominated bank may choose not to honour the credit, since nomination is merely an authority to deal, not a commitment: see Art 11(a), UCP600; and see 17.14.4. Where more than one bank is a nominated bank — a common occurrence — the beneficiary is free to deal with any of the nominated banks, perhaps ‘shopping’ for most favourable terms.

17.13 Conditions not evidenced by documents Although it shouldn’t be done, a credit may include a condition but not specify a document which shows compliance with the condition. Illustration: Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 A letter of credit called for goods to be shipped on a conference line vessel. The credit did not specify a document which showed compliance with the condition. The defendant bank claimed that the condition could be ignored, since no document was called for. The Court held that the condition meant some documentary evidence must be tendered that would attest to the fact that the carrying ship was a conference line vessel.

The problem with this solution is that it requires the bank to decide if a tendered document shows some particular fact. The 1993 revision of the UCP reversed the Rayner decision, and this has been retained in the UCP600. Article 14(h) provides that an examining bank may ‘deem’ the condition not to be stated, and that the condition will be ignored. [page 528] Article 14(h) may not be effective in certain circumstances. The UCP is usually incorporated into the credit by reference. It is open to a court to decide that the express terms of the credit override the incorporated terms of the UCP, at least where the condition may be verified by a document. The Singapore Court of Appeal favoured this approach in Kumagai-Zenecon Construction Pte Ltd v Arab Bank Plc [1997] 3 SLR 770. See also Korea Exchange Bank v Standard Chartered Bank [2005] SGHC 220 and Adodo (2008). Neither solution is satisfactory. The decision in Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 gives effect to the

intention of the parties but leaves the bank in the unenviable position of evaluating the adequacy of a document. The UCP position simply ignores the intention of the parties. The converse problem is dealing with a document that is presented but not mentioned in the credit. The problem is particularly significant when the presented document contradicts certain terms in the credit or the other required documents. Again, the UCP addresses the problem by making it invisible. By Art 14(g), the extraneous document will be ignored and returned to the presenter.

17.14 Participating banks The UCP considers four separate roles for banks: issuing bank a bank that promises to ‘honour’ the credit and reimburse other banks where appropriate; advising bank a bank authorised to notify the beneficiary of the existence and the terms of the credit; confirming bank a bank that undertakes obligations similar in all respects to the issuing bank — usually located in the country of the beneficiary; and nominated bank a bank where the credit is available — the undertakings of a nominated bank will depend upon the authorisations of the issuing bank and the responsibilities accepted by the nominated bank.

17.14.1 The issuing bank The credit is always available at the issuing bank, so the principal undertaking of the bank is to honour the credit if there is a complying presentation: Art 7(a)(i), UCP600. In addition, the issuing bank acts as a kind of guarantor for the obligations of the other banks. Provided the documents constitute a complying presentation, the issuing bank must honour a credit if a nominated bank fails to do so: Art 7(a), UCP600. [page 529] The issuing bank also undertakes to reimburse a nominated bank that honours the credit. Reimbursement is due at maturity when the credit is an acceptance or a deferred payment credit, and it is not relevant that the nominated bank may have advanced funds before maturity: Art 7(c), UCP600.

Although the issuing bank undertakes to reimburse, it may be that the obligation is fulfilled by another bank. The credit may indicate that a nominated bank is to seek reimbursement from another party — the ‘reimbursing bank’. Article 13 of the UCP sets out the requirements of the credit and the obligations of the parties.

17.14.2 The advising bank A credit may be advised to the beneficiary by an ‘advising bank’. An advising bank that does not confirm the credit does not undertake to honour or negotiate the credit. The act of advising, however, does indicate that the bank has satisfied itself as to the apparent authenticity of the credit and that the advice is accurate as to the terms and conditions of the credit: Art 9(a) and (b), UCP600. An advising bank may use another bank to advise, and, in that case, the second bank has obligations similar to those of the advising bank. If the advising bank does use another bank to advise, then it must use the same bank to advise of any amendments: Art 9(c) and (d), UCP600. A bank may be asked to act as an advising bank but for some reason may not wish to do so. In that case, it must promptly inform the bank from which the credit has been received: Art 9(e), UCP600. If the bank cannot satisfy itself that the credit is authentic, then it must promptly inform the bank from which the instructions appear to have originated. In these circumstances, the bank may proceed with advising the beneficiary, but must inform the beneficiary that the credit may not be authentic: Art 9(f), UCP600. It is necessary for the advising banker to take some care in dealing with the letter of credit. Illustration: Aotearoa International v Westpac Banking Corp [1984] 2 NZLR 34 Aotearoa International was the beneficiary of a letter of credit that had been issued by an overseas bank. The local Westpac bank acted as an advising bank only — the letter was not confirmed. The letter of credit — which incorporated the terms of the UCP — called for the usual shipping documents and for a bill of exchange drawn on the issuing bank by the beneficiary. The parties had a rather unusual procedure that was customarily followed in these letter of credit transactions. The beneficiary would sign, as drawer, a blank form of a bill of exchange and leave it with the bank to be filled up when the precise figures were available. That procedure was followed on this occasion, but during the filling [page 530] up of the form, a typing error was made. The form was destroyed, and a new form was completed

and ‘signed’ by one of the bank officials per pro the name of the beneficiary. The completed form was presented for payment under the letter of credit, together with the rest of the shipping documents, but, due to deficiencies in the documentation, payment was refused by the issuing bank. In the meantime, the advising bank had credited the account of the beneficiary, imposing no conditions on the crediting of the account. In the words of the Court, the bank ‘negotiated’ the letter of credit.

The advising bank claimed to be able to recover from the beneficiary — either as a holder of the bill of exchange or by virtue of a general right of recourse which, it was said, an advising bank has against the beneficiary when the letter of credit is ‘negotiated’ in the manner described. Although the bank clearly had the authority to fill in the original form of the bill of exchange, there was no authority to sign a new form, even though it was filled up in the same way that the old one should have been. Consequently, the beneficiary was not liable on the bill, as their signature had been placed there without their authority. The Court held that there was no general right of recourse. There was no bill of exchange and no explicit contractual agreement which required the plaintiff to pay. The lesson for advising bankers is very clear. When crediting funds under a credit in which the bank is acting as an advising bank only, it should be made clear that it is a conditional credit and the letter is not being ‘negotiated’. It will not always be sensible to rely upon the bill of exchange, for some letters of credit do not call for a bill, and the customer will usually draw the bill ‘without recourse’ in any event.

17.14.3 The confirming bank The undertaking of a confirming bank is similar to that of the issuing bank. Provided there is a complying presentation of documents, the confirming bank must honour the credit. The confirming bank also undertakes to honour the credit in the event that a nominated bank fails to do so: Art 8(a) and (b), UCP600. The confirming bank also undertakes to reimburse a nominated bank which has honoured a credit. Reimbursement of an acceptance or deferred payment credit is due at maturity: Art 8(c), UCP600. A bank, requested to confirm a credit, may be unwilling to do so. It must then inform the issuing bank without delay. It may advise the credit without confirmation: Art 8(d), UCP600.

Under earlier versions of the UCP, problems sometimes arose when the credit called for a bill of exchange drawn on the account party. The UCP attempts to avoid [page 531] this problem by requiring no credits to be issued that are available by a bill drawn on the account party: Art 6(c), UCP600. This should reduce the incidence of the problem, but it is unlikely to eradicate it.

17.14.4 Nominated bank A nominated bank is any bank at which the credit is available — that is, where the beneficiary may present documents and have the credit honoured. A bank may be nominated by name or by being a member of a certain class. A nominated bank thus has the authority to honour or negotiate a credit, but it need not do so unless it specifically agrees. A bank may be authorised to accept a draft or incur a deferred payment undertaking. When that is done, it is also authorised to prepay or purchase the draft or deferred payment undertaking: Art 12(b), UCP600. The prepayment authorisation overcomes the problem posed by Banco Santander S A v Banque Paribas [2000] EWCA Civ 57: see the discussion of deferred payment credits at 17.12.2. A nominated bank, although having authorisation to honour or negotiate the credit, may choose only to receive the documents from the beneficiary and forward them to the confirming or issuing bank. Even if it examines the documents on behalf of the other banks, it is not liable to honour and negotiate. The act of receiving and forwarding documents is not honour or negotiation, even if the nominated bank examines the documents: Art 12(c), UCP600.

17.15 Documents The letter of credit must specify required documents. There are at least two reasons for this: banks deal only in documents: Art 5, UCP600; and documents provide the only protection available to the account party, since there is no opportunity to inspect the goods to determine quality. The second point often leads an account party to require too many

documents. An extreme example is Bankers Trust Co v State Bank of India [1991] 1 Lloyd’s Rep 587 (QB), where the credit called for over 950 documents. The bank must inspect the documents to determine if it is a complying presentation. The degree of care involved in the inspection has been a problem for the UCP. One of the main reasons for revising the 1993 version of the UCP was the document rejection problem. According to the Introduction to the UCP, approximately 70 per cent of document presentations under letters of credit were rejected on first presentation. This level of rejection seriously threatens the use of the letter of credit as a financing option in international trade. Traders believe that the rejection rate reflects an over-cautious [page 532] approach by the banks, but the banks argue that they are responsible if they accept a non-complying presentation of documents. The ICC tried to address the problem in the International Standard Banking Practice of the Examination of Documents under Documentary Credits (ISBP). Many of the principles of the ISBP have been included in the UCP, and the ISBP itself will be updated to reflect the new rules of the UCP.

17.15.1 Common documentation requirements There are three documents which are fundamental in most international trade contracts: the commercial invoice, which provides a contractual description of the goods; a ‘clean’ transport document — traditionally, this was a marine bill of lading, but modern transport methods have introduced many other transport documents: see 17.15.7; and an insurance document which provides coverage during transport. The rules for these three documents are strict, but they seldom cause significant problems. The reason for this is that they all have a relatively standard form and well-understood requirements. By contrast, many documents may be required under a credit that are vague and far from standard. For example, a credit may call for a certificate of quality. The credit may or may not indicate the required issuer of this document or it

may be in vague terms. The document itself does not necessarily conform to any international standard. The UCP responds to this situation by having a more relaxed approach to documents beyond the three fundamental ones. In any document other than the commercial invoice, a description of the goods may be in general terms, provided only that they do not conflict with the description in the credit: Art 14(e), UCP600. If the document does not specify an issuer, then banks will accept it, if its content appears to fulfil the function of the required document: Art 14(f), UCP600.

17.15.2 Original documents Computers have blurred the distinction between ‘originals’ and ‘copies’ of documents. A document prepared on a computer and printed on an adjacent printer is obviously an ‘original’. Is the same document printed on the other side of the world via a network still an ‘original’? The UCP addresses the problem in Art 17, which begins by demanding that there be at least one original of each stipulated document: Art 17(a), UCP600. The article then considers the meaning of ‘original’. In all cases, a document will not be considered an ‘original’ if the document itself indicates that it is not an original: Art 17(b) and (c), UCP600. A document will be accepted as original if: [page 533] it appears to be written or otherwise marked by the issuer’s hand; it is apparently on the issuer’s original stationary; or the document itself states that it is an original. Technology has also had an impact on the concept of the ‘signature’. Article 3 of the UCP provides that a document may be ‘signed’ by handwriting or by other mechanical or electronic method of authentication. Signature by stamp is explicitly included.

17.15.3 Repeated presentations It has occasionally been alleged that the bank owes a duty to the beneficiary to discover all defects in the documents at the time of the first presentation, thus giving the beneficiary the optimum chance of correcting the deficiencies in

time. The legal form of this argument is that the bank is estopped from raising new reasons for rejection after it has communicated some other reason. The Court in Skandinaviska Kreditaktie-Bolaget v Barclays Bank Ltd (1925) 22 Ll L Rep 523 held that there is no such estoppel. When the documents were presented, the bank referred the matter to their customer. They then advised the beneficiary of the customer’s complaints. Those complaints were completely untenable, but there were other problems with the documents. The beneficiary argued that the bank was estopped from claiming the documents were deficient or, alternatively, had waived their right to do so. The Court held in favour of the bank — noting that it had, as a courtesy, forwarded the documents to the account party to see if they would be acceptable in spite of the deficiencies. There was no reason why this action should deprive the bank of the right — indeed, the obligation — to reject non-conforming documents.

17.15.4 Standard for examination Since the parties are dealing in documents, and since the obligation of the bank to pay only arises when there is a complying presentation, there are bound to be questions concerning the meaning of ‘complying presentation’. It is clear that the term relates only to conditions which are actually embodied in the credit and that no external factors will be considered. So, for example, in one case it was the custom of a bank to send a standard memorandum to all beneficiaries of credits which had been opened by the bank. The Court held that the contents of the memorandum were not part of the credit and could not be used to impose conditions on the beneficiary: see Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711. Of course, if the credit itself contained a clause which incorporated the memorandum as part of its terms, then the result would be different. [page 534] Previous versions of the UCP called for the bank to examine stipulated documents ‘with reasonable care’. That requirement does not appear in the UCP600, but it must certainly be considered as a continuing requirement. Article 14 of the UCP addresses the standard required for examination of documents. It sets out some particular rules for transportation documents and some general rules for other documents. The general rule is that a document must be read in context with the credit, the document itself and in accordance

with international standard banking practice. In so reading, the document need not be identical to, but must not conflict with data in, that document or any other stipulated document or the credit itself.

17.15.5 Acceptance ‘under reserve’ The procedure in Art 14 of the UCP should probably be followed whenever the inspecting bank believes that the documents are non-complying. However, where the parties have a close relationship, the solution sometimes adopted is that the banker will accept the documents ‘under reserve’ and forward them to the issuing bank, which will, in turn, consult with its customer concerning the acceptability of the documents. If the seller is known to the intermediary banker, payment may be made — again, ‘under reserve’. The Court in Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711 was faced with precisely this problem. It was found by the Court that: the remitting bank genuinely believed there were discrepancies in the documents which would have justified non-payment; the beneficiary genuinely believed that the bank was wrong and that payment should have been made; and both parties hoped that, notwithstanding the alleged discrepancies, the issuing bank would, with the concurrence of the account party, take up the documents and reimburse the intermediary bank. The intermediary bank made the payment to the beneficiary ‘under reserve’. The Court of Appeal held that ‘under reserve’ meant that the beneficiary would be bound to repay the money on demand, should the issuing bank reject the documents. Of course, if the intermediary bank was under a contractual obligation, then the beneficiary has rights against the bank for a breach of contract. However, a right of suit against the bank is very much less valuable than being able to retain the payment. The 1993 revision of the UCP included reference to acceptance ‘under reserve’, but the UCP600 does not. The practice of accepting ‘under reserve’ may die out, being replaced by the procedures approved by Art 14 of the UCP600. The problem of advancing funds for payment is also addressed by the ‘letter

of indemnity’. This is a promise from the beneficiary to reimburse the bank for any [page 535] losses which may occur from the early advancement of funds. The letter of indemnity cannot protect the bank from the beneficiary’s insolvency, but it would have protected the bank in Banque de l’Indochine et de Suez SA v J H Rayner (Mincing Lane) Ltd [1983] QB 711.

17.15.6 Transport documents A documentary credit supporting an international sale of goods will usually call for the presentation of transport documents. In the early days of international trade, this was invariably a bill of lading, but developments in international transport have complicated matters. The UCP recognises a number of transport documents, and includes detailed rules on each. These are: bills of lading; transport documents covering at least two different modes of transport; non-negotiable sea waybills; charterparty bills of lading; air transport documents; road, rail or inland waterway transport documents; and courier receipts, post receipts and certificates of posting. The rules contained in Arts 19–25 of the UCP are detailed but generally specify: who must sign the document; that the transport document must contain details about the disposition of goods — for example, that they have been shipped on board a named vessel or accepted for carriage by the air carrier; that the document must cover the entire journey, explicitly stating the points of departure and arrival; that the document is the sole original or a complete set; that the document contains the terms and conditions of the carriage, or a

reference thereto; and rules regarding the transhipment of the goods. The requirements for courier receipts, post receipts and certificates of posting are, of course, less rigorous, since these documents are intended only to note the dispatch of goods.

17.15.7 Clean transport documents A credit will usually state that the transport document must be ‘clean on board’. A ‘clean’ transport document is one that has no clause or notation expressly stating a defective condition of the goods or their packaging. Article 27 of the UCP requires [page 536] that a bank only accept clean transport documents. It is not necessary that the word ‘clean’ appear on the document, even if the credit requires ‘clean on board’. The requirement is that the document be ‘clean’ at the time of shipment, even if annotations are added at some later time. Illustration: Golodetz & Co Inc v Czarnikow-Rionda Co Inc (the Galatia) [1980] 1 WLR 495 A cargo of sugar had been loaded in good order and condition and a bill of lading issued. The cargo was later damaged by fire. A notation was added to the bill of lading which recorded the state of the cargo after shipment and after the fire damage. The issue in the case was whether the bill was ‘clean’. The Court held that the bill was ‘clean’, as it showed that the goods were shipped in apparent good order and condition.

Article 26(a) of the UCP prohibits transport documents which indicate that the goods are or will be loaded on deck. However, a transport document that contains a clause stating that the goods may be loaded on deck is acceptable. This is to prevent the rejection of pre-printed bills of lading, which often have the offending phrase included, even though there is no intention to ship on deck.

17.15.8 Insurance documents An insurance policy is a vital element in the operation of international trade contracts. When the contract is CIF (Cost, Insurance and Freight) or C&I (Cost and Insurance), a buyer is entitled to receive a valid policy, even if it is

known that the goods have arrived safely: see Orient Co Ltd v Brekke and Howlid [1913] 1 KB 531. An insurance policy is a document which actually embodies the contract between the insurer and the insured. A marine insurance policy is governed by the provisions of the Marine Insurance Act 1909 (Cth). The benefits of a marine insurance policy may be transferred — an essential feature in the operation of CIF contracts. There are two documentation problems related to insurance. The first is that when a policy of insurance is first negotiated, it will usually be not with an insurer directly but with a broker. The broker will issue a ‘cover note’ — which is legally binding so far as the initial insured is concerned, but which does not, of course, contain the terms of the contract of insurance and is not transferable. However, because of the delay which may occur between the issue of the cover note and the policy, sellers have sometimes wished to tender the cover note as the insurance documentation. If the credit does not explicitly authorise this, then a cover note issued by a broker is not an acceptable insurance document: Art 28(c), UCP600. Similarly, unless expressly authorised by the contract, a cover note is not a good tender under a CIF contract: see Manbre Saccharine Co Ltd v Corn Products Co Ltd [page 537] [1919] 1 KB 198. It has been suggested that a certificate which incorporates the terms of the contract might be good tender: see Donald H Scott & Co Ltd v Barclays Bank Ltd [1923] 2 KB 1. The second problem concerns the move to so-called ‘open cover’ policies. A large exporter that makes frequent shipment might arrange with an insurance company for a general cover of all exports. In practice, this means that there is only one policy, which places certain ceilings on the amounts to be insured. When the exporter ships goods, the insurer is notified and the goods are covered, usually evidenced by a ‘declaration’. It is clearly impossible for the seller to include the policy, yet any certificate issued by the insurer or the insured suffers from the same legal deficiencies as the broker’s cover note. The UCP has accepted that commercial practice has changed. Article 28(a) refers to ‘insurance documents’ and includes as examples: an insurance policy; an insurance certificate; and

a declaration under an open cover. An insurance policy is good tender in lieu of an insurance certificate or a declaration under an open cover: Art 28(d), UCP600. It is customary for CIF contracts to call for the insurance to be the CIF price of the goods plus 10 per cent, to allow the buyer a profit in the event of the loss of the goods. If, however, the credit is silent on the amount of cover, the UCP calls for a minimum insurance cover of the CIF or the C&I cost plus 10 per cent: Art 28(f)(ii), UCP600. This is no problem if the CIF or C&I cost is determinable from the documents. If the price is not so discernible, then the minimum amount is 110 per cent of the amount for which honour or negotiation is requested or 110 per cent of the gross amount of the invoice, whichever is greater: Art 28(f)(ii), UCP600. The credit should state the type of insurance required and any additional risks to be covered. It is dangerous to use imprecise terms such as ‘usual risks’, since the insurance document will be accepted without regard to the risks covered: Art 28(g), UCP600. The insurance document must cover risks for the entire journey: Art 28(f)(iii), UCP600.

17.15.9 Commercial invoice The commercial invoice is the only basic document which provides a full description of the goods. The description of the goods should be in terms identical to those of the credit. Unless otherwise stipulated in the credit, an acceptable commercial invoice must appear to be issued by the named beneficiary and made out in the name of the applicant: Art 18(a), UCP600. There is an exception to this rule for transferable credits: see 17.16.4. [page 538] A problem which sometimes arises is that the invoice is for an amount in excess of the amount of the credit. This may be because the invoice covers more goods than the credit, or because the parties always intended that the credit should cover part only of the payment. If the terms of the credit do not address the problem directly, the UCP gives the bank the option of rejecting the documents or operating the credit for the invoice amount — provided, of course, that the invoice amount is not in excess of the amount permitted by the credit: Art 18(b), UCP600. The descriptions of quantity and quality are particularly important, and many disputes have concerned the conformity of descriptions that in other

circumstances might seem to be of little importance. Thus, it has been suggested that an invoice which describes 1,000,000 kilograms (1000 metric tonnes) would not be a good tender under a credit which calls for 1000 tons: see Gutteridge and Megrah (1985) at p 172. The UCP states only that the description in the invoice must ‘correspond’ with that in the credit: Art 18(c), UCP600. In order to overcome the problem, it is common to use words such as ‘about’, ‘approximately’, and so on — either in connection with the amount of goods or the unit price. The UCP interprets these to mean a tolerance of 10 per cent over or under the stated amount. When the credit does not provide for a stipulated number of packing units or individual items, a tolerance of five per cent is allowed, even when these words are not used. Article 30 sets out other rules regarding tolerance in credit amount, quantity and unit prices.

17.16 Some special problems 17.16.1 Silent confirmation An issuing bank may be reluctant to authorise or request a bank to become a confirming bank. The issuing bank may be subject to local regulations restricting its relations with foreign banks, or it may be subject to exchange controls which either prohibit or penalise its use of a foreign bank as a confirming bank. In some cases, it may be reluctant to enter into a relationship because of the reputation of the foreign bank. This leaves the beneficiary in a difficult position. The local bank may be a nominated bank, but the beneficiary would like some comfort that the credit will be met. In the absence of a request or authorisation, the nominated bank cannot be a confirming bank: see Art 2, UCP600. According to the UCP, the local nominated bank may provide assurance to the beneficiary by expressly agreeing to honour or negotiate and communicating that decision to the beneficiary: see Art 12(a), UCP600. The issuing bank is, of course, obliged to reimburse any nominating bank that has honoured or negotiated a complying presentation of documents: Art 7(c), UCP600. [page 539] Instead of following this simple and effective procedure, nominated banks sometimes choose to make separate agreements with the beneficiary that

purport to ‘confirm’ the credit subject to certain conditions. The conditions are always unfavourable to the beneficiary. The procedure is called ‘silent confirmation’, but the term is extremely misleading, since the beneficiary has almost none of the rights that a proper confirmation would give. Illustration: Commonwealth Bank of Australia v Greenhill International Pty Ltd [2013] SASCFC 76 The plaintiff arranged, through its business name Valley View International (VVI), the sale of waste paper to an Indian firm, SBP. As part of the transaction, SBP arranged with the Bank of India to issue a letter of credit in favour of VVI. The credit was available by negotiation at any Australian bank and the defendant bank was named as the advising bank. The defendant bank entered into a ‘silent confirmation’ agreement with the plaintiff. The agreement expressly reserved the right of recourse against the plaintiff. The plaintiff presented the documents along with a bill drawn on the Bank of India made in favour of the defendant. These were forwarded to the Bank of India, which accepted the bills and returned them to the defendant. No objection was made to the documents by either bank. Later, SBP claimed that the goods were defective. An Indian Court issued an order forbidding Bank of India to make payment on the credit. The defendant bank debited the plaintiff’s account, claiming the right to do so arising under the silent confirmation agreement.

The Full Court held that the bank was entitled to claim against the beneficiary without doing anything to enforce its rights against the Bank of India, in spite of the agreement being called a ‘confirmation’. It was, of course, nothing of the kind. Leave to appeal to the High Court was refused: see Greenhill International Pty Ltd v Commonwealth Bank of Australia [2014] HCATrans 46. If the bank had followed the simple procedure of agreeing to honour the credit, the results would have been very different. The bank would have been unable to recover from the beneficiary. It could have brought proceedings against the Bank of India, claiming recovery under Art 7(c) of the UCP600. Unless the Bank of India letter of credit expressly stipulated for a choice of law, the proper law of the letter of credit would have been Australian law. In fact, it probably would have been unnecessary for the defendant bank to take any legal action since the reputation of the Bank of India would have been at stake. [page 540] It is a very serious matter for a bank to fail to honour its commitments under a documentary credit. The Bank of India would have had reason to seek to have the injunction reversed.

‘Silent confirmation’ as practiced in Australia is a perversion of the documentary letter of credit structure and purpose. Indeed, referring to it as a ‘confirmation’, even a ‘silent’ one, is completely misleading. Beneficiaries should resist it wherever possible, but, given the gross inequality of bargaining power, it is probably a feature that is unfortunately here to stay.

17.16.2 Transhipment ‘Transhipment’ means unloading from one means of conveyance and reloading to another during transit: Art 19(b), UCP600. Transhipment has caused serious problems in the past, since CIF contracts would often forbid it: see Hansson v Hamel and Horley Ltd [1922] 2 AC 36; Holland Colombo Trading Society Ltd v Alawdeen Segu Mohammed Khaja [1954] 2 Lloyd’s Rep 45. Most transport documents, including bills of lading, contain a printed clause which gives the carrier unlimited rights to tranship. It has never been finally decided if the tender of such a bill of lading may be defective under a CIF contract, but, with regard to credits, the point is now clear as to the tender of both through bills and bills which contain transhipment clauses. A through bill is acceptable tender: Art 20(c)(i), UCP600. Where the bill of lading indicates that transhipment will or may take place, the bill is still acceptable, provided the goods have been shipped in a container, trailer or LASH (Lighter Aboard Ship) barge as evidenced by the bill of lading: Art 20(c)(ii), UCP600. Finally, a bill containing a clause that the carrier reserves the right to tranship is acceptable tender: Art 20(d), UCP600. Similar rules apply to other transport documents, although there is no exception for goods packaged in any particular way.

17.16.3 Damages The Court in Urquhart Lindsay & Co Ltd v Eastern Bank Ltd [1922] 1 KB 318 considered the question of damages when the bank wrongly dishonours a letter of credit. The bank argued that there was a mere failure to make a payment. By analogy to an action in debt, there should be no assessment of damages beyond the amount of the payment in question. The Court rejected the bank’s argument, holding that the normal rules of assessment applied. In particular, the Court found that the rules of Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 applied, by which the beneficiary is

entitled to damages that flowed from the breach. Damages may include loss of profit if this flows [page 541] naturally from the default: see, for example, Trans Trust SPLR v DAnubian Trading Co Ltd [1952] 2 QB 297; Ian Stach Ltd v Baker Bosley Ltd [1958] 1 Lloyd’s Rep 127.

17.16.4 Chain transactions Suppose that X wishes to purchase goods for the purpose of resale. X contracts with a supplier to provide the goods and may be required to procure a letter of credit in favour of the supplier. Similarly, X may require that the sub-buyer obtain a letter of credit in which X is the beneficiary. The commercial problem is this: X would like to use the credit in X’s favour as a security or a substitute for the letter of credit that X is obliged to open in favour of the supplier. A simple-minded solution would be to ask the sub-buyer to open the letter of credit in favour of the supplier, thereby simplifying the transaction and reducing the costs. However, this is not a sensible commercial decision for three reasons: the sub-buyer will be paying a higher price for the goods, so the amounts will not match; where X is buying a large bulk of goods for the purpose of supplying smaller purchasers, there will be a number of sub-buyers; X, for good commercial reasons, may not wish the sub-buyers to be aware of the identity of the supplier.

Back-to-back credits A more sophisticated solution is known as ‘back-to-back’ credits. The subbuyer is asked to open a credit in favour of X, and X opens a credit in favour of the supplier. The important feature is that each of the credits must have identical terms, save for the amount and possibly the dates during which it is permissible to operate the credits. X may request the letter of credit from the sub-buyer to be deposited with X’s bank as a security for the establishment of the credit in favour of the supplier. There are several problems with back-to-back credits. If the stipulations as

to documents are not identical, then the primary aim of using the first letter as security for the second may fail, for a good tender by the supplier may fail to be a good tender by X to the sub-buyer. Unexpected insolvencies may also upset the operation of inter-connected credits. When the credits are standby credits, other problems may arise. Illustration: Commercial Banking Co of Sydney Ltd v Patrick Intermarine Acceptances Ltd (1978) 52 ALJR 404 Standby credits were intended to secure some financing arrangements. Patrick Intermarine Acceptances Ltd (PIAL), a large merchant bank, borrowed some A$1.5 [page 542] million from the State Electricity Commission of Victoria (SECV). The purpose of the borrowing was to make a loan to First Leasing, a finance house. First Leasing was an Australian subsidiary of the First National Bank of Boston. In order to secure the loan from SECV, PIAL made arrangements whereby the Commercial Banking Co of Sydney (CBC) opened a standby credit in favour of SECV. The credit could be drawn upon by means of a certificate from SECV to the effect that repayment of the loan to PIAL had been demanded but not received. PIAL also required security from the Boston bank in the form of a standby credit in favour of PIAL that could be operated by a statement from PIAL to the effect that the First Leasing loan repayment had been demanded but not received. There was an undertaking by PIAL that if it was necessary to call on the Boston credit, they would lodge with the CBC their draft and any documents called for by the Boston credit.

The arrangement was perfectly good security for the CBC in the event of the failure of First Leasing, but what in fact happened was that PIAL went into liquidation before the loans became due. SECV called on the credit which had been opened by CBC and were, of course, paid. The CBC argued that by virtue of that payment, it was entitled to an equitable charge on the debt owed to PIAL. This argument was dismissed by Lord Diplock in the Privy Council, who stated (at 407): Their Lordships find it impossible to imply, from the provision that in a certain event the Commercial Bank should have a proprietary interest in Boston’s liability to PIAL, a provision that, if that liability should never arise, the Commercial Bank should have a proprietary interest in a different liability of a different person to PIAL.

Note that the CBC could have protected itself very easily by taking an assignment of the First Leasing debt. Even an equitable assignment would have protected them from the liquidation of PIAL. It appears that the failure of PIAL was the one event the bank never considered.

Transferable credits The solution provided by the UCP is the ‘transferable’ credit. The ‘first

beneficiary’ — generally the seller in the contract of sale — requests the buyer/account party to open a transferable credit. The first beneficiary may then request the ‘transferring bank’ named in the credit to transfer the credit in whole or in part to one or more second beneficiaries: see Art 38, UCP600. The ‘second beneficiary’ will usually be the supplier/manufacturer of the goods. A credit is not transferable unless it specifically states that it is ‘transferable’: Art 38(b), UCP600. It is likely that any other description of the credit will not result in a transferable credit. The transferring bank is under no obligation to make any [page 543] transfer, except to the extent and in the manner that it has expressly consented to: Art 38(a), UCP600. The UCP permits only a single transfer, in the sense that the second beneficiary may not transfer the credit to a third beneficiary: Art 38(d), UCP600. This does not prohibit the first beneficiary from making fractional transfers in favour of several second beneficiaries — provided, of course, that the total sums do not exceed the value of the original credit: Art 38(d), UCP600. The strength of a transferable credit is that the terms of operation do not change — thus overcoming one of the major problems of back-to-back credits. The UCP specifically provides that the transferred credit must be on the same terms as the original, except for those details which are essential to account for the interests of the first beneficiary. Under Art 38(g) of the UCP, it is permissible to: reduce or curtail the amount of the credit; change any unit price stated in the credit; change the expiry date; alter the last date for presentation of documents and the period of shipment; increase the percentage requirement for insurance cover; and substitute the name of the first beneficiary for that of the applicant, unless the credit specifically requires otherwise. In order to meet the commercial requirements of the arrangement, the UCP also allows the first beneficiary to substitute their own invoices and/or drafts for those of the second beneficiary, provided that the amounts are not in

excess of the amount stipulated in the original credit. The first beneficiary may also substitute a new unit price. When this substitution is made, the first beneficiary is entitled to draw under the credit for the difference between their invoices and those of the second beneficiary: Art 38(h), UCP600. When this ‘substitution’ option exists, the transferring bank has the right to call for the substituted documents to be exchanged for the invoices and drafts of the second beneficiary. If the first beneficiary fails to provide the substituted documents on the first demand by the transferring bank, the transferring bank may deliver to the issuing bank the documents received from the second beneficiary. This is done without any further responsibility to the first beneficiary: Art 38(i), UCP600. One of the major reasons the UCP prevents multiple transfers is the problem of making amendments to the credit. The UCP attempts to address this problem by requiring that the request for transfer must indicate if, and under what conditions, amendments may be advised to the second beneficiary. These conditions must be clearly stated in the transferred credit: Art 38(e), UCP600. The second problem concerning amendments arises when there is more than one second beneficiary. One or more of the second beneficiaries may agree to proposed [page 544] amendments, while one or more may not agree. In that case, the amended credit is operative with regard to those who have agreed, while the terms and conditions of the original credit remain operative with respect to those second beneficiaries who have not agreed: Art 38(f), UCP600.

17.16.5 Assignment of credits The problem of transferability is made much more difficult by the possibility of assigning some or all of the benefits of the credit — a possibility which is governed by the law relating to the assignment of benefits under a contract. A contractual right is a chose in action, and normally such rights may be assigned either legally — for example, under the equivalent of s 12 of the Conveyancing Act 1919 (NSW) — or equitably. In either case, the assignee is subject to any equity which may have attached to the assignor. Generally speaking, only those contractual benefits which are essentially personal cannot be assigned. It has been said that the substitution of one person

for another should be confined to those situations where it can make no difference to the person on whom the obligation lies which of the two persons they are to discharge it to: see Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 (CA); [1903] AC 414 (HL). The general view appears to be that the benefit of credits can be assigned under our law, but it appears that the precise question has never been litigated. Of course, when the credit is operated by means of a bill of exchange, then the drawer and drawee of the bill must be as specified in the credit. If the bill is a time draft, then payment will ultimately be made to the holder of the bill, and it seems that assignment of the proceeds will have no effect — at least so far as the operation of the credit is concerned. From the standpoint of the assignee, the procedure is fraught with uncertainty and difficulty. Nothing will be paid until such time as the beneficiary complies strictly with the terms of the credit. Since the assignee is not usually in a position to know if the conditions have been fulfilled and is not usually in a position to influence that fulfilment, they will be uncertain as to the time, or even the fact, of payment. Sometimes, in order to overcome these difficulties, the assignee will require that the documents be delivered for inspection, so that the assignee might have the opportunity of correcting any deficiencies in the documentation. In such a circumstance, the assignee may also wish to tender the documents directly. Unfortunately, this may not be possible if the decision of an Austrian commercial court is correct. [page 545] Illustration: Singer & Friedlander v Creditanstalt-Bankverein [1981] Com LR 69 The defendants opened a letter of credit in favour of one Aronson, to be payable against a commercial invoice and warehouse receipts. The letter was for nearly $10 million and was to pay for a consignment of drugs. The plaintiff bankers were supplying finance to Aronson, and, as part of the security arrangements, the credit was to be assigned to them. This was done in the terms, ‘I hereby irrevocably and unconditionally assign to you all my rights and benefits under documentary credit’. The documents were given to the plaintiffs, but when they were finally presented, payment was refused on several grounds, including that the purported assignment could give the assignee no right to present the documents to the issuing bank. Fraud was alleged, and it was said that Aronson could not himself have presented the documents and claimed payment. The Court held that there had been no transfer of the letter of credit in accordance with the provisions of the UCP. The Court went on to argue that to allow the third party presentation of documents would violate the prohibition on transferability.

The matter of assignment remains one on which the law is unsettled. The

decision of the Austrian court has not been entirely satisfactory — not in the least because it failed to deal adequately with certain communications between the parties that occurred before the attempted presentation of the documents. Of course, even if the whole of the benefit of the credit may not be assigned, it is still possible to assign the proceeds of the credit, a possibility which is expressly recognised in Art 39 of the UCP. Article 39 expressly reserves the right of the beneficiary to assign proceeds in accordance with the applicable law. Article 39 refers only to the right to assign proceeds, not to the assignment of the right to perform under the credit.

[page 547]

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