International Journal of Science Commerce and Humanities Volume

International Journal of Science Commerce and Humanities

Volume No 2 No 8

November 2014

CONVERSION AND PROTECTION FOR BANKERS: WITH SPECIAL REFERENCE TO MALAYSIA PROF DR. NORHASHIMAH MOHD YASIN1 1 Introduction In practice, a banker acts as its customer‟s agent when it collects cheques for his customer. In this process, an issue that may arise here is that the liability of the collecting bank which receives payment of a forged cheque for a customer. So, the collecting banker runs the risk that some of the cheques may not have been lawfully deposited but it is paid in by someone whose title was defective, in such a case the collecting bank will be liable in an action in conversion by the true owner.2 As such, the available claim that can be brought against the bank on the ground that the bank has collected the proceeds of a cheque for someone who is in in fact is not entitled to it. Conversion in the context of collecting bankers refers to the presentation of the cheque for someone who is not entitled to it and obtaining the money. Only true owner of the cheque can sue the CB for conversion. The true owner is the person entitled to the property and possession of the cheque, and may be a third party.Ascertaining the true owner is not an easy task as a person in possession of the cheque may be not the true owner of the cheque.Conversion is a strict liability tort and may be committed without a mensrea (intention).In such a case, the most common defence pleaded by the collecting bank is the statutory protection under Section 85 of the Malaysian Bills of Exchange Act 1949. This Article will also discuss other general defences accorded to the collecting bankers which include defence of estoppel as well as defence of contributory negligence. Judicial precedents from various common law jurisdictions such as the UK, Australia and Canada will be carefully examined, while focus will be on the Malaysian context. 2 Statutory Defences for Collecting Bank for conversion Section 85 of Malaysian BOEA states: (1) Where a banker, in good faith and without negligence(a) receives payment for a customer of an instrument to which this section applies: or (b) having credited a customer‟s account with the amount of such an instrument, receives payment thereof for himself‟ and the customer has no title, or a defective title, to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only of having received payment thereof. Collecting bank can only get protection if it collects the cheque for its customer, it owes no duty of care either in contract or in to a drawer of the cheque or to any person. There is no statutory definition of a customer, has to explore the case law: a) the existence of an account3 1

Professor of Comparative Banking Law, Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia (IIUM), email: [email protected]. The writer wishes to acknowledge Mr. HushamSaeedHasaballahAlawsi for his valuable insights towards writing this article. 2 , Lee Mei Pheng, Forged Cheques and the Law, FajarBaktiSdnBhd, at p. 108. 3 See Great Western Railway v London and County Banking Co Ltd [1901] AC 414.

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b) the intention to enter a contractual relationship4 c) the duration of the account is immaterial5 ( d) the relationship of bank-customer existed from the date when the bank accepted the instruction from the customer even though the account is not opened yet6 In seeking statutory protection under S85, a collecting bank: (a) must have done so in good faith. (b) acting without negligence. (a) Good faith Good faith is defined in S95 of Malaysian BOE Act as “that a thing is deemed to be done in good faith where it is in fact done honestly whether it is done negligently or not”.This requirement is usually easily satisfied by bankers. It is sufficient if the bankers have no knowledge that the customer‟s title to the cheque is not defective. If the bank knows that the customer‟s title is defective and still collected the cheque, as such, the protections will be lost. In Australia, the same definition of good faith definition is given by virtue of the Cheques and Payment Order Act 1986 (CPOA) which re-enacts the relevant section from the BOE Act 1909. Although good faith must be pleaded by a bank, good faith on the part of the bank is usually presumed by the court.In Australia, there are 2 exceptions to the normal rule by virtue of 2 cases: a) Lawrie v Commonwealth Trading Bank of Australia7where an officer of the bank converted a customer‟scheque for his own use. The Court (Supreme Court of Queensland) found that no fraud could be attributed to the bank because he had acted outside his authority. So the bank is not liable and he himself was held liable personally because he was not liable in good faith. In this case, the Court did not automatically presume the bank‟s good faith. The important fact to be considered, whether or not the bank officer was acting within his authority and as he had committed fraudulent misrepresentation, he had therefore not acted within his scope of authority and the bank was not liable as the bank was acting in good faith and without negligence. The Court made a distinction between bad faith by the individual bank officer and bad faith by the bank as a whole. b) (Canadian case) Bank of Montreal v Tourangeau8 The Court held that the collecting bank had not acted in good faith when it collected a third party cheque against recognised banking practice and the bank internal rules. Facts: The stranger to the bank opened a personal a/c into which he deposited a third party company‟s cheque into his own account. The bank was not held to be negligent but was held to have acted in bad faith. In the Malaysian case of Affin Bank Bhd v Success Com Enterprise SdnBhd9, this case took the same view with the Australian case; it was held that the defendant was not precluded from relying on Section 85 of the BOEA as a defence to the plaintiff‟s claim. Section 85 provides a statutory defence to collecting banks in respect of claim made by the true owners of cheques, whether brought in conversion or from money had and 4

See Robinson v Midland Bank [1925] 41 TLR 402 See the cases of Commissioner of Taxation v English Scottish and Australiaan Bank Ltd 1920] AC 683, Ladbroke & Co v Todd [1914-15] ALL ER Rep 1134, Oriental Bank of Malaya v Rubber Industry (Replanting Board) (1957) MLJ 153 6 See Woods v Martin Bank Ltd[1959] 1 QB 55. 7 [1970] QD R 373 8 [1980] 118 DLR (3D) 293 9 [2009] 1MLJ 36. 5

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received. Furthermore, Section 85 relieves a collecting bank from liability provided that the bank discharges its burden in proving that the bank had acted in good faith and without negligence. Furthermore, in Globelink Container Line (M) SdnBhd10, stated that the element of good faith cannot co-exist with the element of fraud or conspiracy involving the defendant‟s staff. The converse need not be true, that if there is no fraud or conspiracy involving the bank‟s staff, it does not necessarily mean that the bank had acted in good faith assuming that the person whose signature had been forged had knowingly or negligently contributed to the forgery or unauthorized signature. The Court must look at all the circumstances of the case to see if the defendant‟s conduct as a whole both during the period complained of and after the discovery of the forgery, can be said to have been bona fide with respect to payments made out of those cheques. Moreover, there was a question, whether the defendant bank had acted in good faith within the meaning of Section 73A of the Bills of Exchange Act 194911. Customer‟s knowingly or negligently facilitating forgery assuming that the Court had been wrong in holding that the plaintiff (a customer of the defendant‟s bank) had not acted negligently in contributing to the forgery of its signature, the judge shall now consider if the defence of having acted bona fide in paying out on the forged cheques is available to the bank to relieve it of liability in paying out without a proper mandate. The burden is on the bank to show that it had acted bona fide in making the payment. In Leolaris (M) SdnBhd v Bumiputra Commerce Bank Berhad12, the plaintiff was a company involved in the restaurant business, bank accounts were opened in 2001, and there are four of the plaintiff‟s directors were authorized signatories to this account. Cheques which bearing sums up to RM 5,000 such a cheques may be signed by any one of the four directors but where the amount exceeded RM5,000 the cheques must be signed by any of two of the four directors. Plaintiff discovered that a total of 248 cheques bearing a total sum of RM1,091,921.78 had been paid out from the account. Then the plaintiff sued the defendant bank for recovery of that sum claiming forgery of cheques and unauthorized payments. However, her ladyship Mary Lim JC (as she then was) held that the operation of Section 73A was not automatic and evidence of good faith must be adduced. Even if the defendant in the case above can avail itself of Section 73A, it does not totally absolve the defendant of its liability to the plaintiff for breaching a fundamental term of the contract between them i.e., to strictly comply with the plaintiff‟s mandate to only make payment on a cheque which was signed by one of its four authorized signatories and not otherwise. Thus, the study is unable to agree with the decision in Leolaris case where the learned judge dismissed the plaintiff‟s claim on the ground that the cheques were enchased by the defendant bank in good faith and that the forgery/ fraud was contributed by the plaintiff‟s own negligence in not supervising his employee (Juliana Siew).As such, it is submitted that Section 73A can only go towards reducing the damages payable by the defendant bank in view of the contributory negligence of the plaintiff but not to absolve the defendant of a breach of its strict liability not to pay out on a forged cheque.

10

[2011] 5 AMR 555. Section 73A of the BOEA 1949 states “Notwithstanding section 24, where a signature on a cheque is forged or placed thereon without the authority of the person whose signature it purports to be, and that person whose signature it purports to be knowingly or negligently contributes to the forgery or the making of eh unauthorized signature, the signature shall operate and shall be deemed to be the signature of the person it purports to be in favour of any person who in good faith pays the cheque or takes the cheque for value”. 12 [2009] 10 CLJ 234. 11

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(b) Without Negligence The word is not statutory defined in the Malaysian BOE Act. However, it has been defined by Charlesworth and Perry on Negligence13which gives the term 3 meanings: a) A state of mind in which it is opposed to intention; b) Careless conduct (conversion) c) Breach of duty to take care imposed by common or statute law (negligence). In Australia, S95 of the CPOA 1986 gives the defence for collecting bank that it must received payment for a customer in good faith and without negligence. The bank must prove all the 3 points.Under the CPOA 1986, “without negligence” refers to the second definition (without careless conduct). Therefore, as a result, the action against the collecting bank had to be for conversion and not for negligence which is the third definition. Australia is unusual as the „without negligence‟ term has only existed since 1986. The BOEA 1909 protected banks that paid in good faith and „in the ordinary course of business.‟In the case of Hunter BNZ Finance Ltd v GC Maloney Pty Ltd14, the judge dealt with the definition w/o negligence. The Court reviewed all the earlier cases and accepted the majority view in Thackwell v Barclays Bank15where the English Court held: “As a matter of law, it is no answer for a B who has been guilty of negligence in the collection of a cheque to prove that, even had the Q the admission to ask which constitutes such a negligence been asked, a reassuring answer would have been given”. The judge basically stated that a bank could not make an excuse of not making enquiries on the ground that inquiries does not disclose anything is wrong. The bank has to make inquiries no matter what the result. Making inquiries is the must even it might be pointless. The judge in the Hunter BNZ case (supra) has to decide between 2 English cases of Thackwell and Marfani. Finally, the Court favoured the Thackwell case over the decision in Marfani& Co Ltd v Midland Bank16. In Marfani, the judge ruled that if the bank does not make inquiries on the ground that the dishonest person would give a satisfactory answer to the question, therefore no point in making the inquiries. Also if the customer is honest, then the inquiries may imply that the customer is dishonest and the bank might lose the customer. Lord Diplock stated: “It does not constitute any lack of reasonable care to refrain from making inquiries which it is improbable will lead to detection of the potential customer‟s dishonest purpose if he is dishonest, and which are calculated to offend him and maybe drive away his custom if he is honest.” The judge in Thackwell case took the different view and said that Lord Diplock‟s statement was merely an obiter. Thackwell case has overturned Marfani.Most cases have taken the view that even if making an inquiry may be: a. fruitless b. is not likely to disclose that the fraud is being committed c. will not reveal the truth 13

Sweet & Maxwell, 1983 [1988] 18 NSWLR 420 15 [1986] 1 ALL ER 676 16 [1968] 2 All ER 573 14

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is not an excuse for the B to not make an inquiry17 There are cases when a bank has to drop its defence of without negligence due to the obvious negligence of the staff. Having admitted conversion, there is no hope of statutory protection and the best the bank can do is to limitthe damages. For example, see the Hunter BNZ Finance v ANZ Banking Group18, as well as AGC v State Bank of Victoria19and Harrisons Group Holdings v Westpac20. In The Hunter BNZ Finance case, the Court held that it was possible for a bank to reduce its liability below the face value of the converted cheque. However, in this case, the bank was unable to do so due to some technical reasons (the defence is possible but difficult). In India, collecting banks can claim protection under S131 of the Negotiable Instruments Act 1881 (NIA), but the bank has only to show that it acted in a bona fide manner and was not significantly negligent. Indian courts place great importance on whether a bank followed its own rules correctly and this is a major part of a bank‟s defence. Indian courts follow the principles as found in the Ladbroke case, egBharat Bank Ltd v Kishan Chand Chella Ram21. Interestingly, in S131A which applies to bank drafts, the bank must prove that it acted in good faith and without negligence. Paying banks are protected under different sections of the NIA, such as S10 which covers payment in due course in good faith and without negligence. This is usually read together with S82 which discharges liability. The Australian CPOA also distinguishes between paying and collecting banks. Ss 91-94 cover protection for the paying bank, and ss95 and 96 cover protection for the collecting bank. A collecting bank in Australia is not only protected when collecting a cheque for a customer, but also for another bank. (c) Standard of Care One has to refer to the precedent to determine what standard of care the bank must exercise before it could have said to collect the proceeds of the cheque without negligence. The onus of proving the absence of the negligence rests on the bank since it is relying upon this defence. There is no definite standard of care (SOC) required by the collecting bank as the Malaysian BOE Act is silent on this. The courts have to decide the SOC based on current banking practice. In the English case of Commissioner of Taxation v English Scottish and Australian Bank Ltd (supra). Lord Dunedin says: “If therefore a standard is sought, it must be the standard to be derived from the ordinary practice of bankers, not individuals” In the case of Lloyds Bank Ltd v EB Savory (supra), Lord Warrington stated: “The standard by which the absence, or otherwise, of negligence is to be determined must …be ascertained by reference to the practice of reasonable men carrying on the business of bankers, and endeavouring to do so in such a manner as may be calculated to protect themselves and others against fraud. ..It is argued that …a bank is not negligent if it takes all precautions usually taken by bankers” In determining the standard of care which a banker has to observe, one must not forget the commercial setting in which the banker operates. The prevailing practice of bankers might vary from time to time and locality. What has been practice 10 years ago might not be relevant now and what is the standard 17

See also E B Savoury and Co Ltd v Lloyds Bank Ltd [1952] 2 KB 122. [1990] VR 41 19 [1989] VR 617 20 (1989) 51 SASR 36 21 (1954) 24 Comp. Cas. 67 18

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practice of bankers in England might not be so relevant in Malaysia.Case law seems to have set out 2 tests or standards for determining whether a CB‟s conduct is negligent or not. They are : (i) the ordinary practice of banker‟s test (OPBT); and (ii) the protection against fraud test (PAFT). The Ordinary Practice of Banker‟s Test was formulated by the Australian case of Commissioners of State Savings Bank v Permewan, Wright & Co22, where the High Court stated: “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 course that it ought to have aroused doubts in the bankers‟ mind, and caused them to make inquiry” The above test was endorsed by the Judicial Committee of the Privy Council in Commissioner of Taxation (supra) and in Marfani (supra). Lord Diplock in Marfani stated: “Where the customer is in possession of the cheque at the time of delivery for collection, and appears on the face of it to be the „holder,‟ that is, the payee or indorsee or the bearer, the banker is, in my view, entitled to assume that the customer is the owner of the cheque unless there are facts which are known, or ought to be known, to the banker which would cause a reasonable banker to suspect that the customer is not the true owner. What facts ought to be known to the banker, that is, what enquiries he should make, and what facts are sufficient to cause him reasonably to suspect that the customer is not the true owner, must depend on current banking practice, and change as that practice changes. Cases decided 30 years ago, when the use by the general public of banking facilities was much less widespread, may not be a reliable guide to what the duty of a careful banker, in relation to inquiries and to the facts which should give rise to suspicion, is today”.

In carrying out the duties as a collecting bank, he is expected to act with reasonable care but he is not required to be an amateur detective. In National City Bank of New York v Ho Hong Bank Ltd [1932] MLJ 64, Simpson J. said: “Bank officials can be expected to be reasonably competent and careful but not to be amateur detectives and with a detective‟s trained power of observation.”

To determine whether a banker is negligent in receiving payment on a cheque, the circumstances surrounding the operation of a customer‟s account and the receipt of payment on the cheque may be taken into consideration.Negligence per se in carrying out thebank‟s duty does not necessarily stop a collecting bank from seeking protection under S85 of BOE Act. Collecting bank will only be excluded from seeking protecting if it is negligent in receiving payment. The receipt of payment of the cheque and the bank‟s negligence in opening a customer‟s account must be directly connected (causal link) therewith. A case of a banker who opens an account for the customer but failed to follow the ordinary practice of a reasonable banker (eg. introducer), as a result, a stolen cheque was able to be deposited into the customer‟s account. 22

[1914] 19 CLR 457

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The Privy Council decided in the Commissioner of Taxation (COT)(supra) case, although the bank has been negligent in the opening of an account, the bank was not negligence in the paying of the cheque.Facts: A cheque sent to COT was stolen from the Tax Office letter box. The thief then opened an account with the defendant bank. The next day, he deposited the cheque and subsequently withdrew the entire proceeds of the cheque. The bank contended that the person who introduced himself as Steward Talon was not the bank‟s customer on the ground he had used the false name and address. The bank claimed protection under S88 of the Australian BOE Act 1909 (cheques are now covered under CPOA 1986). The Court found that this person was a customer and the bank was not negligent as there was nothing on the cheque to arouse suspicion. The negligence of the bank in opening an account was unconnected with the receipt of payment of the cheque. Compared to the case of Ladbroke & Co v Todd (supra), the bank tried to claim protection under S82 of the English BOE Act 1882. The Plaintiff was a bookmaker which sent the cheque to one of his clients which was stolen from the post box. The thief opened an account using the stolen cheque claiming to be Richard Henry Jobson as the cheque was payable to RH Jobson. The bank did not make any inquiries and the action was brought for conversion. The Court held that the bank was negligent as it failed to make inquiries to verify the customer‟s identity before allowing to open an account. Contrary to the COT case above, the Court linked the negligent in the opening of an account to the collection of the cheque. The key factor which persuaded the Court was the fact that the bank could easily have contacted Oxford University and discovered that Richard Henry Jobson did not exist but Robert Howard Jobson did exist. It is interesting to note that the Ladbroke case was heard in 1914, 6 years before the COT (1920), why COT (PC from Aust) refused to follow Ladbroke (HC) although the facts are quite similar is a big mystery! In the Malaysian case of Rubber Industry (Replanting) Boards v HSBC23 the Court held: When a link is proved between bank‟s negligence in opening an account and the subsequent collection of the cheques, the bank could not gain protection of S85 of the BOE Act 1949.Facts: The P sent the cheque to TohWhyeTeck, it was crossed „Account Payee‟ only. It was stolen in the post. Then, a Lee Man Choi opened an account supposedly for a company which he claimed to be called Chop TohWayeTeck. The TohWhyeTeckchequewas deposited into the Company‟s account. Then it was discovered that the business registration of the Company supplied to the bank was a forgery. It was also noted that the address of the introducer, Mr John, was unknown. As with the Ladbroke case, the Court found a direct link between the bank‟s negligence in opening an account and the subsequent conversion of the cheque. There are a few controversial cases which have held that it is not possible to convert a forged cheque. In the Australian case Kosters Premier Pottery Ltd v The Bank of Adelaide24it was held that a forged cheque is not a bill of exchange within the meaning of the Australian BOEA 1909 and therefore the bank was not liable either for conversion or for money had and received.It is not certain if this case makes good law, particularly as cheques in Australia are now governed by the CPOA 1986 (no longer under BOE Act 1909). The trial court followed the Canadian decision in Arrow Transfer Co Ltd v Royal Bank of Canada25.

23

[1957] MLJ 103 (1981) 28 SASR 355 25 [1972] 27 DLR (3d) 81 24

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3) Defence of Estoppel The collecting bank has another defence which is occasionally available is, namely the defence of estoppel. In short, the defendant bank pleads that the plaintiff is precluded from succeeding in his claim as a result of something which he has said or done. Thus, this defence might be relied on where the plaintiff had done something which led the collecting bank to believe on reasonable ground that it would be in order for the bank to collect the instruments concerned for the account of its customer.26 The Malaysian Federal Court in the case of Boustead Trading v Arab Malaysian Merchant Bank Berhad27lays down the scope of estoppel as follows: “The time has come for this Court to recognize that the doctrine of estoppel is a flexible principle by which justice is done according to the circumstances of the case. It is a doctrine of wide utility and has been resorted to in varying fact patterns to achieve justice. Indeed, the circumstances in which the doctrine operates is endless.” In the case of Affin Bank Bhd v Successcom Enterprise SdnBhd28, one of theissues was whether the defendant in that case was entitled to rely on the defence of estoppels against the plaintiff‟s claim in conversion or money had and received. In that case the judge adopted the same reasoning as he had found in allowing the defendant‟s appeal in respect of the summary judgment entered against the defendant on the issue of the defence of estoppels as in appeal No J-03-90 of 2006. Thus, in that case the defendant had relied on the plaintiff‟s own conduct and suffered a change of position by collecting the cheques and paying the proceeds to payee (URT) between 1999 and 2005. In the circumstances, it was an issue as to whether the plaintiff was estopped from claiming against defendant bank either in conversion or for money had and received. As such, defence of estoppel by the bank was allowed. In the case of UCO Bank v HSBC (Malaysia)29. In that case the issue to be considered was whether the alteration of the said bank drafts by unauthorized parties was facilitated by the plaintiff‟s breach of duty to the defendant bank to take reasonable care, and if so, whether the defendant bank was entitled to set up an estoppel against the plaintiff‟s claim. It was held that the bank was able to invoke the defence of estoppel against the plaintiff. In the English case of Kepitigalla Rubber Estate Ltd v National Bank of India30. It was argued that a customer of a bank does not owe a duty to the bank to prevent the forging of his signature. While acknowledging that there was a duty on the customer to exercise care in writing out his cheque, the court rejected the contention that there was a corresponding duty on the part of the customer to take reasonable precaution to prevent his servant from forging his signature. However the customer is under the duty to inform the bank immediately the moment he is aware that somebody is forging his signature. This duty gives rise to a plea of estoppel by the bank to assert that customer by choosing to remain silence is amounting to a representation by conduct that his account is in order and correct. Thus, it would constitute an estoppel preventing the customer from an action against the bank that his signature is a forgery. This defence was successfully pleaded by the defendant bank in the English celebrated case of Greenwood v Martins Bank31. It was held that the bank can invoke the plea of

26

Lee Mei Pheng& D. Samen, Banking Law, Third Edition, LexisNexis, at p. 421. [1995] 3 MLJ 331. 28 [2009] 1 MLJ 36. 29 [2010] 2 CLJ 754. 30 [1909] 2 KB 1010 31 [1933] AC 51 27

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estoppel if the bank can prove that the customer has knowledge about the forgery but yet did not inform the bank as soon as possible. Likewise, in the case of Brown v Westminster32, it was held that the customer was estopped from alleging that her signature had been forged because silence has been construed as representation by conduct that all the account were correct. As such, the claim for conversion against the defendant bank failed as estoppel was used as a defence against a customer. In Malaysian case of Proven Development SdnBhd v HSBC33, the High Court ruled that it is incumbent upon a customer to inform the bank of any irregularity in the customer‟s account as soon as he became aware of it. Failure to do so gives rise to estoppel. ArrifinZakariaJ. decided that “It was incumbent the company to inform the bank of any irregularity in the company‟s account as soon as the company became aware of it. The company failed to inform the bank of the alleged irregularities in the account as soon as the same (company) came to the attention of their directors and waited nine years before bringing this suit. This was certainly to the prejudice of the bank and under the circumstances, the company should be estopped from claiming against the bank for the loss arising therefrom”. 4) Defence of Contributory Negligence Another defence occasionally pleaded by a collecting bank is that of contributory negligence on the plaintiff‟s part. This part of defence is shown in the case of Caswell v Powell Duffryn Associated ColleriesLtd 34. In this case, the House of Lords held that the plaintiff who had failed to take reasonable care for his own safety against foreseeable risks could be met with a defence of contributory negligence, even though the plaintiff owed no duty of care to the defendant. Furthermore, in another English case of case of Lumsden& Co v London Trustee Savings Bank35on which the defendant bank was sued for damages for the conversion of certain cheques which it had collected for a customer. Further, the bank had been guilty of negligence and so was not entitled to the protection of S4(1) of the English Cheques Act 1957. However, the plaintiffs had also been negligent, and consequently was held by the judge that the bank was entitled to plead contributory negligence on the part of the plaintiffs. Thus, this case became the precedent for the principle that a collecting bank may plead contributory negligence as a defence to the claim of conversion. In the Malaysian case of Public Bank Berhadv Anuar Hong &Anor36, where the judgeZalehaZahari explained that “the customer clearly also owes a duty not to facilitate fraud. Furthermore, in the absence of express terms to the contrary, the customer‟s duty in relation to forged cheques is limited to exercising due care in drawing cheque so as not to facilitate fraud or forgery. On the fact of the case, the respondent as employer, appeared to have been rather lax in exercising its supervision in respect of its financial affairs. It was held that the respondent had clearly failed to exercise due care in protecting their own interest from any misconduct of their own employees.In addition, with respect to breach of contractual duties that had the effect of negligently facilitating the forgery, the judge observed that the appellant‟s counsel had laid stress on the respondent‟s failure to comply with the express provisions of the agreement governing the operation of the bank accounts between the parties, and then requires the respondent to scrutinize the account. Furthermore, it was submitted that had the respondent scrutinized their monthly statements as envisaged by this clause the true character of the cheques would have surfaced and loss can be averted. As such, the Appeal judge found in favour of the bank by reason of the fact that the loss sustained by the customer (respondent) had been contributed wholly or in part by their own negligence. 32

[1964] 2 LR 187 [1998] 6 MLJ 150-161 34 [1940] AC 152. 35 [1971] 1 Lloyd‟s Rep 114. 36 [2005] 1 CLJ 289. 33

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Likewise, in Prima Nova SdnBhdv. Affin Bank Bhd37, his Lordship in dealing with the defence of the bank under S.73A of the BOEA 1949 was influenced by the contractual terms that went towards modifying the duty of care in tort with respect to the customer‟s negligence in having contributing to the forgery. It is clear from the case that the Rules and Regulations governing the operation of the account is part of the contract between the plaintiff and the defendant. Clause 4.2 reads that all instructions to stop payment of cheques must be in writing and the bank shall not be responsible for any loss or damage, occasioned by reason of any delay or omission in executing such instruction. Based on the case, the plaintiff‟s letter instructing the defendant to stop payment of the stolen cheques was only received by the defendant on 19 November 2003. By the time the defendant received the said letter, it was impossible for the defendant to fully comply with the plaintiff‟s instruction since the stolen cheques had been honoured by the defendant between 13 November 2003 and 18 November 2003. On the other hand, in Abdul Rahim Abdul Hamid &Ors v Perdana Merchant Bankers Bhd&Ors38, the bank was bound by a duty of care toward account holder and then to ensure that the bank acts within the mandate giving by his customer. Even though the customer mostly has escaped liability in forged signature, so it is not every case that they are exonerated of liability. From the aspect of the bank that the Federal Court decided that a bank owed a contractual duty of care in carrying out a customer‟s instructions. Likewise in the case of Malayan Testing Laboratory SdnBhd v Standard Chartered Bank Malaysia Bhd39, the Penang High Court found in favour of the customer and decided inter alia that the bank had breached the customer‟ mandate by making payments without the customer‟s authority. The primary duty of care of the paying banker was to make payment in accordance with the customer‟s mandate. When the Bank made payment on behalf of MTL (plaintiff), it was under a duty to exercise care in carrying out the instructions of the customer. The Bank was negligent by paying to RK who had no right to receive the payment. Further, the Court rejected the claim of contributory negligence on the part of the plaintiff as contended by the Bank. In Kehar Singh v Standard Chartered Bank Malaysia Bhd40, the Malaysian former Supreme Court held that it was a case of contributory negligence. TunSalleh Abbas (Lord President, as he then was) gave a dissenting judgement that the possession of the money must have been passed to the respondent bank the moment the money was placed in the trough. The majority of judges, Tun Syed Agil and Wan Hamzah viewed that the possession of the money had not passed to the bank because the cashier did not push the lid to close the customer‟s site. It is most unfortunate that the customer had lost the money in the trough by an unexpected event of theft as his attention was distracted to a mere RM 10 on the floor. Both the banker and customer were equally liable for the loss. 5 Conclusion Lord Atkin, in Joachimson v Swiss Bank Corp41, said that, as part of the banker-customer contract, "The bank undertakes to receive money and to collect bills for its customer's account." „Bills, included cheques since the cheque was, and is, a special form of the bill of exchange.Collection of cheques and bills will, if the customer has no title to the instrument, expose the bank to an action in conversion by the "true owner" of the instrument. At first, banks enjoyed no special privileges with respect to the action in conversion, but when crossings were given legal significance, this changed. Now, legislation has determined that crossed cheques can only be paid into an account at a financial institution, usually a bank. Since it was 37

[2010] 9 CLJ 75. [2006] 3 CLJ 1. 39 [2010] 9 MLJ 94 40 [1987] 2 MLJ 71 41 [1921] 3 KB 110 38

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now an obligation on banks to deal with cheques, banks were given a special defence against actions in conversion. The defence was originally restricted to crossed cheques, but in response to lobbying from the banks, was extended to all cheques by S4 of the Cheques Act 1957 (UK). In Australia, the defence was included in the Bills of Exchange Act 1909 as S88D and later in S95 of the Cheques Act 1986 and later extended to "financial institutions" as defined by the Act. In S85 of Malaysian BOEA states:(1) Where a banker, in good faith and without negligence-(a) receives payment for a customer of an instrument to which this section applies: or (b) having credited a customer‟s account with the amount of such an instrument, receives payment thereof for himself‟ and the customer has no title, or a defective title, to the instrument, the banker does not incur any liability to the true owner of the instrument by reason only of having received payment thereof. Collecting banker can only get protection if it collects the cheque for its customer, it owes no duty of care either in contract or in to a drawer of the cheque or to any person. It is for the bank to establish the defence. In order to do so, it must show that it collected the cheque (a)for a customer (b)in good faith (c) without negligence. If the defence is established, the consequence is that the collecting institution does not incur any liability to the true owner by reason only of having received payment of the cheque. This statutory defence has been successfully pleaded by the banks, especially collecting banks in all Common law jurisdictions as has been examined above. Finally, besides the statutory protection accorded to bankers, there are some other general defences that have been widely adopted by banks which include defence of estoppel and defence of contributory negligence. Ultimately,given thelimited protection that banks have at law inrespect of forgedcheques and claim of conversion, a bank‟s bestprotectionwould lie inconsistentcompliancewithestablishedprocedures and duevigilance intransactions between banker and customer.

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