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 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.