Reminder – bank’s duties to customers in relation to forged cheques
The purpose of this article is to provide a short reminder of a bank’s duties to its customers in relation to forged cheques and, in particular, where the allocation of risk lies as between a bank and its customer.
Cheque use in Australia has been dropping in recent years with the increasing trend towards electronic payment methods.
Even so, the total number of cheques drawn in the period January 2017 to January 2018 was still about 95.8 million and the total value of cheques drawn in January 2018 alone was about $74.767 billion.1 The Australian Payment Network’s fraud statistics2 indicate that between 1 July 2016 to 30 June 2017, of the circa 100 million cheques issued, about 796 were fraudulent, with a total value of $5,652,927. This is not an insignificant sum.
Given the trend away from use of cheques in Australia, it is not surprising that there is limited written guidance for a bank in the event that a forged or fraudulent cheque is issued, apart from reverting to long established case authorities. Regulation of fraudulent activity has been more focussed on electronic payment methods. For example, the ePayments Code – a modern instrument administered by the ASIC – sets out the circumstances in which a customer might be liable for any loss caused through a forged cheque – namely, if the bank can prove on the balance of probability that the customer contributed to a loss through fraud etc.
There is no equivalent code in relation to cheques, and so guidance regarding the liability of a bank must be ascertained by reference to historical case law, which banks have tried (with limited success) to modify and restrict through contract.
Bank’s responsibilities in relation to forged cheques
Generally speaking, the bank bears the burden in relation to a forged cheque.
Banks are under a duty to pay a cheque, provided the cheque is in a proper form, the customer has sufficient and available funds and the cheque is within any agreed limits.
In many instances, it will be very difficult for a bank to detect whether a cheque has been forged. Nevertheless, if a bank pays out a forged cheque, the loss will ordinarily be borne by the bank, unless:
- The customer has breached its duty to take reasonable precautions by drawing a cheque in a manner that facilitates a forgery and causes loss to the bank; or
- The customer breaches its duty to inform the bank of any forgery as soon as the customer becomes aware of it.3
Apart from the foregoing, the authorities make it clear that the customer does not otherwise have a more general duty of care in relation to the operation of their bank accounts. More specifically, it has been held that the customer does not have:
- A duty to organise its business to protect the bank’s interest;
- To review its statements for evidence of forgery; or
- To take physical possession and control of the cheque book etc.4
Attempts by banks to broaden the customer’s liability for a forged cheque
Attempts by banks to expand the scope of the customer’s duties, otherwise than through contractual provisions, have proved largely unsuccessful.
In National Australia Bank Ltd v Hokit Pty Ltd,6 the NSW Court of Appeal held that the limited qualifications to the principle that the bank bears the burden of forged cheques should not be extended to include a duty on the part of the customer to take precautions in the management of bank accounts to prevent the presentation of forged cheques. The court took a pragmatic approach, acknowledging that the existing law operates, to an extent, to impose upon a bank the burden of a default – forgery – for which it was not responsible and for which, in many instances, it could not have detected. Despite this acknowledgement, the court suggested that the bank could relieve itself of that burden by taking into account its economic effect in determining the fee to be charged to customers for the management of their accounts and in offering cheque facilities.
The courts have made it clear that, if the banks wish to impose upon their customers an express obligation to take specific steps to prevent the presentation of forgeries (eg by requiring customers to examine monthly statements and make those statements unchallengeable after a certain time), the imposition must be brought to the attention of the customer and specifically agreed by them.7
In National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust,8 the NSW Court of Appeal considered the enforceability of conditions contained in a separate booklet which sought to impose a duty upon the customer to review a statement of account promptly and inform the bank of any transaction which the customer suspected was unauthorised. The court held that these conditions were substantially more onerous than the duties imposed at general law, and found that the conditions were not incorporated into the agreement between the bank and the customer, principally because there was no express acceptance by the customer of them.
Observations on the state of the law
The courts have – rather unapologetically – placed the burden in respect of forged cheques squarely upon the shoulders of the banks. There seems to be little appetite at general law to extend the duties of the customers in relation to forged cheques.
In these circumstances, the options available to a bank to reduce its burden are to either:
- Include express terms extending the customer’s obligations in a signed agreement with the customer – even then, it needs to be done clearly and unequivocally, as the courts have shown that any uncertainty will be read in favour of the customer; or
- Seek economic recovery for the cost of the burden through fees charged to the customers.
This article was written by Sam Dundas, Partner and James Nagle, Solicitor.
P: +61 8 9420 1570
1 Reserve Bank of Australia payments data: https://www.rba.gov.au/payments-and-infrastructure/resources/statistics/payments-data.html
3 National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust  NSWCA 242 at .
4 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd  AC 80.
5National Australia Bank Limited v Dionys as Trustee for the Angel Family Trust  NSWCA 242 at .
6  NSWCA 377.
7 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd  AC 80 at 110.
8  NSWCA 242.