Because every cheque is transferable, it is inevitable that cheques will be misappropriated and that the person who has misappropriated the cheque will sometimes obtain payment of the cheque. There are two general remedies for the 'true owner' of the cheque.
If the drawer is the true owner of the cheque, then there may be a claim against the paying bank for breach of contract, for paying the wrong person or the wrong amount, or both.
The true owner of the cheque will also have an 'action in conversion' against anyone who handled the cheque after its misappropriation. Conversion is when for example, someone sells property that does not belong to them without the owner's consent. In this context the cheque is treated as property, and its value is the amount of the cheque. Since most misappropriated cheques will have been handled by a collecting bank and a paying bank, both become possible defendants in an action for conversion.
The paying bank
The paying bank can defend both the action for breach of contract and the action for conversion, provided that it has paid the cheque in good faith and without negligence. Good faith means that it has paid honestly even though its actions may have been negligent. It would be extremely unusual for a court to find that a bank did not act in good faith. The phrase 'without negligence' is ver vague and people should seek expert legal advice in the event of a dispute with a bank. Alternatively, a customer in this situation could contact the Banking Ombudsman.
The collecting bank
The collecting bank also has a defence to the action in conversion, provided it collects the cheque in good faith and without negligence. Again, the phrase 'without negligence' is one which requires expert advice, but there are two common situations in which the bank will be unable to establish that collection has been 'without negligence'.
If the cheque is marked 'account payee only' and the cheque has been collected for someone other than the named payee, then the bank will ordinarily be unable to rely upon the defence unless it has made reasonable inquiries and received satisfactory replies. Failure to make inquiries is almost always fatal to the bank's defence.
The other common form of negligence is a failure to check the endorsement of a cheque which is being collected for someone other than the named payee. If the endorsement is missing or obviously defective, then the collection will almost always be negligent. The Act also provides that if the collection is for someone whose name is so similar to the name of the payee that confusion was reasonable in the circumstances, then the collecting bank need not concern itself with either the existence or the adequacy of the endorsement.
Payment orders are the same in all respects as cheques except that the order is addressed to a building society or credit union instead of a bank.
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