A person who opens an account enters into a contract with the bank. The precise terms of this contract depend upon the type of account.
- For an account operated by cheque, most of the terms of the contract will be implied terms, see Contracts.
- When the account is operated by a plastic card and personal identification number (PIN), the written terms of the contract will be contained in the Conditions of Use, generally given to the customer in a pamphlet when the account is opened, or whenever the conditions change.
- For savings accounts, the written terms of the contract are usually contained in the pass book provided.
A voluntary Code of Banking requires the banks which have adopted the Code to provide all customers with the terms and conditions, in writing, which apply to their contract, regardless of the type of account they have, see Complaints against banking and financial services.
The basic contractual relationship between the bank and customer is one of debtor and creditor. By depositing money into an account the customer is legally loaning the money to the bank. There are two elements in this basic relationship. The customer has no say about the way the bank uses the funds, and should the bank fail and be unable to meet its obligations, the customer is an unsecured creditor.
The Financial Transactions Reports Act 1988 (Cth) makes it an offence for people to open or operate an account for cash purposes in a name other than the name they are commonly known by. The effect of this Act is to change the previous law where a person could operate an account in any name provided there was no fraudulent intention. The law was changed to prevent accounts being used to conceal illegally obtained money or to avoid taxation.
Electronic funds transfer transactions are regulated by the ePayments Code which is a voluntary code of practice, which is administered by the Australian Securities and Investments Commission. The Code sets out the obligations of businesses to consumers, consumer rights and responsibilities and what to do in the event of a complaint or dispute, most commonly, unauthorised transactions (see below).
The Code covers the following:
- ATM transactions
- EFTPOS (Electronic Funds Transfer at Point of Sale) purchases
- Purchasing of goods by credit card, either online or by phone (i.e. where signature not required)
- Mobile phone or internet banking
- Telephone banking
- Transactions using stored value facilities* (e.g. prepaid phone cards)
* A stored value facility is a service which allows consumers to put money into a device to allow purchases of goods or services (e.g. phone credit voucher for use with mobile phone).
All banks, credit unions and building societies offering electronic banking services to retail customers have signed up to the Code and are covered by it.
Further information about banking transactions including electronic banking is available from the Australian Securities & Investments Commission’s Moneysmart website.
One of the primary purposes of the Code is to determine who is liable in the event of an unauthorised transaction.
Situations in which money can be refunded as a result of an unauthorised transaction include:
- where there was fraudulent or negligent conduct on the part of employees of your account institution or of merchants;
- a forged, faulty, expired or cancelled card, PIN or password was used;
- a merchant incorrectly debited your account more than once for a sale;
- no PIN or password was required to conduct the transaction (except where you have acted fraudulently or contributed to your loss e.g. unreasonable delay in reporting lost card)
- it is clear that you haven’t contributed to the loss.
To minimise your liability it is important to advise your financial institution immediately if your card has been lost or stolen or if someone gains access to your PIN or password.
Situations in which money will not be refunded include:
- where you have acted fraudulently;
- not keeping your PIN or password secret;
- unreasonably delaying before advising your financial institution that your card has been misused, lost or stolen or that someone knows your PIN or password;
Even in these situations your liability will be limited to only the amount of your account’s daily transaction limit. Similarly, if the amount taken exceeds the balance of your account or your prearranged credit limit.
Where it cannot be determined whether or not you have contributed to the loss, there are limits on how much you will be responsible for. Liability in these cases will be limited to the lowest of the following:
- $150, or any other lower figure established by your financial institution; or
- the balance of the account(s) at the time of the transaction;
- the amount of money that had gone out of your account before you let your account institution know that your card had been lost or stolen or that someone else knew your PIN or password.
Complaints and disputes
In the event of a complaint or dispute with your bank or credit union, see Complaints against banking and financial services. You should always try to resolve the complaint first with the provider.
If your complaint is against a merchant for an unauthorised transaction, you need to go to your Bank or credit union to ask what to do, and you need to act quickly. There may be grounds for a chargeback to the merchant (which means you may be able to get your money back).
The cheque is a convenient and common method of making payments. It is unusual for there to be any written contract between the bank and the customer when a cheque account is opened, although some banks, particularly where the account is an overdraft account operated by cheque, send the customer a letter requesting confirmation of ertain terms of the account. Where the terms of the contract are not in wriing, then the obligations of the bank and the customer are implied by law.
The major contractual obligation of the bank is to pay the customer's cheque, provided it is properly written and there are adequate funds available in the account. The major contractual obligations of the customer is to write the cheque so that it does not facilitate fraud and to notify the bank of any known forgeries. The customer does not have a legal obligation to take special care of the chequebook, or to examine the periodic statement of account. Prudent customers will, however, do both.
Cheques are governed by the Cheques Act 1986 (Cth) and all references in this part are to that Act. Since the bank is only obliged to pay 'cheques', the definition of 'cheque' [s 10] is important. A cheque is an unconditional order in indelible writing that:
- is addressed by a customer to a bank
- is signed by the customer (known as the drawer) giving it
- requires the bank to pay, on presentation the sum (written in words and figures) specified.
For certain purposes, it is necessary to distinguish between 'order cheques' and 'bearer cheques'. An order cheque is one that requires the sum to be paid to a specific person or organisation (the payee) or to their order, rather than to the bearer (or holder) of the cheque.
Most cheques follow a common pattern. The cheque is delivered by the drawer to the payee. The payee then deposits the cheque by delivering it to her or his own bank, called the collecting bank. The collecting bank then delivers the cheque to the drawer's bank, the bank to which the original order was addressed.
The drawer's bank is known as the paying bank, and the entire process is known as 'collecting the cheque'. A collecting bank will ordinarily be collecting thousands of cheques a day, and the paying bank will be collecting cheques drawn on the collecting bank. Rather than treat each cheque individually, representatives of the banks meet at a central place and exchange cheques. The exchange is known as 'clearing' and the place is known as the 'clearing house'. More and more these days the payment systems used by banks are electronic.
When must payment be made?
It is not always necessary that a cheque be deposited. A cheque may be payable on demand, so that the payee is entitled to be paid immediately (provided none of the restrictions discussed below apply) when a cheque is produced at the paying bank. The bank may take the time to refer to the account or to verify the signature on the cheque, but payment must be made readily and promptly.
When may payment be refused?
Payment may be refused on a cheque which is not completed properly, for example, if the sum to be paid is indicated in figures only. Payment may also be refused if the cheque is not dated or if there is any ambiguity in intention. If, for example, the amount in figures differs from the amount in words, payment may be refused even though the Cheques Act 1986 (Cth) provides that the lesser sum is to prevail.
Another reason for non-payment is if the account does not contain enough funds or if the cheque exceeds the agreed limit. A cheque for $1000 may be dishonoured if there is only $999 in the account. Cheques are normally paid in the order in which they arrive. However, if two cheques arrive at the same time and there are sufficient funds to pay only one, the bank will decide which one it will pay. The funds must not only be sufficient to cover the amount of the cheque, they must also be 'available'. Examples of funds that are not available are proceeds from cheques which have not yet been cleared or funds in an account at a different branch or even a different account at the same branch.
Although the bank may refuse to pay a cheque when there are insufficient funds, it has the option to treat the cheque as a request for an overdraft. If it chooses this option, the customer is liable for interest.
When must payment be refused?
There are certain circumstances in which payment must be refused. If the bank pays in any of these circumstances, it will be unable to debit the customer's account with the amount of the cheque. The most important of these are:
- the customer countermands payment (that is, 'stops' the cheque)
- the bank learns of a customer's serious mental disorder
- the cheque is presented more than ten days after the bank learns of the customer's death
- the cheque is 'stale', that is, it is dated more than 15 months prior to being presented for payment
- the bank learns that a bankruptcy petition has been presented against the customer.
The customer may countermand payment at any time before the cheque is paid. Although banks usually ask the customer to fill in a printed form, this is legally unnecessary. A fax sent to the relevant branch that clearly identifies the cheque, or a telephone call to one of the bank's officers (such as an accountant) would be a valid countermand, although speaking to a switchboard operator would not. If the instructions are unclear or the cheque is not clearly identified, the countermand will not be effective. The safest procedure is to promptly follow any phone calls with a visit to the branch to fill out the standard form used. Any one of the co-owners of a joint account may stop a cheque drawn on the account.
A bank usually refuses to immediately exchange a crossed cheque for cash when presented in person by the payee. Because a cheque may easily fall into the wrong hands, banks and customers during the last century devised special markings which constitute particular instructions to the bank. These markings are called crossings [s 53].
The most common marking consists of two parallel lines drawn across the face of the cheque. The words 'not negotiable'may, and usually should, be placed between the lines. The effect of these words is discussed below. Simply writing the words 'not negotiable' without including the parallel lines is not a valid direction to the bank.
A general crossing is an instruction to the paying bank to pay the sum only to a collecting bank. The cheque must not be paid across the counter directly to the payee. To obtain payment, the payee must ask a bank to present the cheque through the clearing system to the paying bank. Since this will ordinarily be done only if the holder of the cheque has an account with the second bank, the crossing provides a valuable safeguard when a cheque is lost. If the bank does pay the crossed cheque to someone other than another bank, the bank will be liable for any losses caused to the true owner of the cheque as well as to the customer, since it has not followed its customer's orders.
The words 'account payee only' on a cheque have no authority under the Act, but have received authority by judicial interpretation. The words direct the amount of the cheque to be paid only into the payee's bank account. The order is directed to the bank of the payee (the collecting bank). Since the drawer is not usually a customer of the payee's bank, the bank is not ordinarily obliged to follow their orders, but courts have held that the words should put the collecting bank on guard. It should make inquiries if asked to credit the account of anyone other than the named payee. If adequate inquiries are made and if the results are satisfactory, the cheque may be paid to someone other than the named payee.
The customer must be careful in drawing the cheque. If the bank is misled into paying a cheque where the customer has not fulfilled their obligations, then the bank may debit the account and the loss will fall on the customer. So, for example, where a customer filled in only the numbers for the amount to be paid and left the writing blank so that it was easy for another person to 'raise' the cheque from a small amount to a large amount, the bank would be able to debit the account of the customer. The obligation to take care extends only to the circumstances surrounding the immediate drawing of the cheque. There is no obligation to take special care of the chequebook.
The second major obligation of the customer s to notify the bank of known forgeries. In one example, a man learned that his wife was forging his name on cheques, but did not notify the bank after she promised that she would not do it again. She did forge his name on further cheques. He was held liable for the amounts, since the bank would have taken precautionary measures had it known about the forgery. This duty extends only to known forgeries. There is no contractual duty to discover forgeries, even if this could be done simply by reading the periodic statement.
If the bank wrongly refuses to pay a customer's cheque, it breaches its contract with the customer and is liable for damages. If the customer suffers losses which are directly and foreseeably the result of the dishonour, these losses may be recovered from the bank. The most common damage is to the customer's credit. If the customer is a trader, then this damage is considered to be so inevitable that it is not even necessary to prove any actual damage. Customers who are not traders must prove damage to their credit.
There may be damages for defamation as well as for breach of contract. This occurs because it is common for the bank to note on the cheque the reasons for the dishonour. Many non-trading customers, for example, those engaged in other forms of business, clergy or others whose reputation is an essential part of their calling, may obtain substantial damages as a result of defamatory notations on the cheque. 'Present again', 'not sufficient funds', 'refer to drawer' and other phrases suggesting the customer has written a cheque without having adequate funds in the account, are nearly always defamatory. Of course, these damages are only available if the dishonour was wrongful.
Cheques are not merely orders to a bank to make a payment, they are transferable orders and, if not marked 'not negotiable', they are negotiable instruments. The Cheques Act 1986 (Cth) regulates the transfer of cheques from person to person and defines their liabilities to each other. The terminology is slightly confusing; the Act provides for 'transfer by negotiation' even when the cheque is 'not negotiable'. It is not possible to restrict the ransfer of a cheque.
The 'holder' of a bearer cheque is the person in possession of it. The 'holder' of an order cheque is either the original payee of the cheque who is also in possession of it, or a person to whom the cheque has been transferred by negotiation. For definitions of bearer and order cheques, see: cheques.
The requirements of a valid transfer by negotiation depend upon the form of a cheque. A bearer cheque is transferred simply by delivery of the cheque by the holder to the new holder. An order cheque is transferred by being endorsed (signed) by the holder and then delivered to the endorsee.
There are two kinds of endorsements. First, the person wishing to transfer the cheque may simply sign the back of the cheque. This is known as 'endorsement in blank' and converts the cheque from an order cheque to a bearer cheque.
Secondly, the person wishing to transfer the cheque may write on the back of the cheque 'pay X or order' followed by their own signature. This is known as a special endorsement and the cheque remains an order cheque with the named endorsee as the new holder.
Endorsement has other consequences. A person who endorses a cheque also makes promises to later holders. The most important of these promises is that the bank will pay the cheque and, if it does not, the endorser will pay. In effect, the endorser adds her or his credit to the cheque. Stopping a cheque does not end the drawer's liability, and the drawer may be sued by any holder of the cheque, or by any later endorser who has been forced to pay.
The ordinary rule for the transfer of personal property is that the transferee of the property can take no better title than that of the transferor. That rule, designed to protect original ownership, does not apply to negotiable instruments. It is possible for a holder to obtain a good title even when the transferor has no title.
A 'holder in due course' is a holder who has taken a negotiable cheque in good faith and for value, with no notice of any defect in title of the transferor, and the cheque itself is 'complete and regular on the face of it'. The effect of being a 'holder in due course' is that the holder takes the cheque free of any defects in title of her or his predecessor.
By comparison, when a person takes a crossed cheque which bears the words 'not negotiable' written between the lines (or a cheque simply marked with two parallel lines across it), they shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom they took it had. In other words, there is no such thing as a holder in due course of a cheque which is crossed and marked 'not negotiable'.
The words 'not negotiable' between two lines does not stop a cheque from being transferred. Both bearer cheques and order cheques may be transferred from person to person in the same way that cheques without the marking may be transferred. But if the cheque is lost or stolen, the person who lost it or the person from whom it was stolen still retains ownership of the cheque and may raise the fact that it was lost or stolen as a defence against anyone who attempts to claim on the cheque.
As an example, consider if a cheque is given by the drawer D to the payee P as payment for goods and the cheque is stolen by T and handed to a grocer G as payment for groceries. These variations of the example show how the ownership of a cheque may be changed to the detriment of an earlier holder where the cheque is:
- an uncrossed bearer cheque - G becomes the holder (owner) in due course and is entitled to the cheque. Neither D nor P may complain
- an uncrossed order cheque - T must forge P's endorsement to transfer the cheque to G. G has no right to the cheque as ownership cannot be acquired through the forged endorsement
- crossed and marked 'not negotiable' - G obtains no rights to the cheque as T had no rights.
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.
The following precautions should therefore be taken when writing a cheque or a payment order:
- cross it 'not negotiable'
- if the customer's written account contract with the financial institution permits it, cross out the words 'or bearer', which ordinarily appear on printed cheques
- do not leave any space after the name of the payee or, after the amount in writing or, between the figures in the amount expressed in figures
- mark it account payee only
- whenever possible, write the purpose on the face of it (for example, electricity payment).
When payment for goods or services is made by cheque, it is a conditional payment. The condition is that the cheque will be paid on presentation. This has some important practical consequences. Suppose that A buys goods from B and pays by cheque. The cheque is stolen from B by C who forges B's endorsement and cashes it through the banking system in circumstances where the bank is protected and A's account is debited. B cannot demand further payment from A, because the condition for payment was not breached since the cheque was, in fact, paid upon presentation.
There are other serious consequences of accepting payment by cheque, particularly in private sales of motor vehicles. For example, if A pays B by cheque for a motor car, the basic rule would be that ownership of the car passes to A when the cheque is handed over. If A acts fraudulently and the cheque is not paid, B may be unable to recover the motor car if A has sold it to someone else in the meantime.
There are some practical advantages and disadvantages in paying by cheque. If the goods are defective, it may be of considerable negotiating advantage for a person to be able to stop the payment on te cheque and then return the goods, rather than trying to argue for a refund. However, if a customer stops the cheque, all the seller need do to take legal action is show that the cheque was dishonoured.
Passing valueless cheques
Under the Summary Offences Act 1953 (SA) [s 39] it is a criminal offence to obtain goods or money by using a cheque that is not paid on presentation, unless the person who offered the cheque proves that there were reasonable grounds for believing that the cheque would be paid on presentation and there was no intention to defraud.
A 'bank cheque' is a cheque which is drawn by a bank on itself. They are traditionally used as a safe and secure form of payment, since it is highly unusual for a bank to dishonour its own cheque. There are several reasons why a bank might dishonour its own cheque including:
- it has been reported lost or stolen
- the cheque is a forgery or counterfeit
- a court has ordered it not be paid [Lyritzis v WBC (1994) ATPR 41-360]
The only practical protection when offered a bank cheque is to ring the bank which appears to have issued the cheque and seek verification that the cheque has in fact been issued by the bank. This may be done by telephone, but notes of the time and other details of the conversation should be made. It is also important to get the name of the bank employee spoken to. This simple precaution should prevent any loss from a bad cheque. The person handing over the cheque should not object since it is in the interests of all parties that confidence be maintained. Indeed, if the person handing over the cheque protests about the procedure, it is even more important that it be carried through.
For information on resolving disputes with banks and other financial institutions see Complaints against banking and financial services.
As a result of the introduction of the National Consumer Credit Protection Act 2009 (Cth), uniform legislation to protect the interests of consumers (and especially those of vulnerable consumers) applies to all credit providers, including banks, building societies, credit unions and anyone else providing credit in the course of their business. For greater detail, see Credit.
Direct debits from your bank account are useful for paying regular fixed amounts, such as housing, utilities or other recurring payments. Some financial institutions may charge a fee to process a direct debit.
Cancelling a Direct Debit
The Code of Banking Practice sets out what a bank must do if you want cancel a direct debit from your bank account.
The Code states:
21.1. We [the bank] will take and promptly process your:
- instruction to cancel a direct debit request relevant to a banking service we provide to you; and
- complaint that a direct debit was unauthorised or otherwise irregular.
21.2. We will not direct or suggest that you should first raise any such request or complaint directly with the debit user (but we may suggest that you also contact the debit user).
Cancelling a direct debit is an important safeguard to allow you to control your money and avoid additional fees for overdrawn accounts.
To be safe, put the request to cancel the direct debit in writing. If the bank refuses to cancel the direct debit or does not process it promptly, you can complain. More information about how to do this can be found here.
Confusion may arise because payments may be coming out of your credit or debit card, and not your bank account. If you are unsure, check the authority given to the business or organisation. If you gave the business your BSB and account number, it comes from your bank account.
You can revoke the authority to take a recurring payment from a credit card at any time. The request must be directed to the merchant, not the bank. Put the request to the merchant in writing and send a copy of the request to the bank.
If the merchant refuses to comply and continues the recurring payment from your credit card, you can ask for a chargeback from the bank.
Consequences of Cancelling the Direct Debit
If you stop payments, there could be unintended consequences from the person or organisation that you are paying. You can be sued for an outstanding debt, or goods and services may be stopped. You need to find an alternative way to pay your regular bills, which need to be put in place before you cancel.
If you dispute a debt or have a problem with goods or services, get legal advice as soon as possible.
If you need to cancel a direct debit or recurring payment from a credit card because you are experiencing financial hardship, getting help from a free financial counsellor is a good idea. You can call 1800 007 007 to reach the National Debt Helpline.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.