BBM Notes Compiled by Njihia Kaburu

Cheques i) Types of cheques ii) Endorsement of cheques iii) Duties of customer in drawing cheques iv) Duties of paying bank v) The collection bank vi) Regulations on bad cheques

DEFINITION S. ! of the "ills of E#change $ct defines a cheque as follows% "A cheque is a bill of exchange drawn on a banker payable on demand" CLASSIFICATION OF CHEQUES &heques may be classified as% "ear and order "earer% this is a cheque payable to the holder' (rder% this is a cheque payable to the order of a specified person. (pen and crossed (pen% this is a cheque whose proceeds are payable to the payee across the counter' &rossed% this is a cheque which contains two parallel transverse lines on its face. $ cheque may be crossed generally or specially. REQUISITES IN FORM/ VALIDITY REQUIREMENTS $ cheque) being a bill of e#change) must conform to the requisites prescribed by the "ills of E#change $ct as necessary to constitute a bill) namely% It must be uncon !t!on"#$ *nstruments which require as a condition of payment the signing of a particular form of receipt are not cheques. +owever) where the condition is not imposed on the drawee or banker but is addressed to and affects only the payee or holder) this does not make the cheque conditional. *n' Bavins, Junior and Sims v London and Sou h !es ern Bank Limi ed The &ourt of $ppeal ,England) had to deal with an instrument in the form of a cheque given to the plaintiffs by the -reat .orthern Railway &ompany for work done. The instrument read as follows% /The -reat .orthern Railway &ompany .o.0 $ccountants drawing account 1ondon) 2uly 0343) the 5nion "ank of 1ondon 1imited ... 6ay to 2. "avins 2nr and Sims the sum of si#ty7nine pounds seven shillings) provided he receip form a he foo hereof is duly signed ) stamped and dated 894 s/. *t was +E1D that the instrument was not a cheque within the definition given by the "ills of E#change $ct) 033: ,which is the identical with the ;enya "ills of E#change $ct) because it was not an uncon !t!on"# o% e%. The bank was not to pay the instrument unless the receipt was signed. The bank lost its protection because the instrument was not " cheque and had been collected by the bank for a person who had stolen it. The bank was liable in conversion to the true owner) "avins. NOTE& ,i) "ankers usually obtain "n !n emn!t' from customers having receipt forms on their cheques. This indemnity protects the bank if it incorrectly treats an instrument requiring a receipt as a cheque) although the bank should be protected by the &heques $ct) 0493. ,ii) Receipts on the backs of cheques are not common now because of S.<,:) of the &heques $ct 0493 which provides that a prescribed instrument which is not endorsed but which appears to have been paid by the banker on whom it is drawn is evidence that the payee has been paid by the banker the sum of money specified in the instrument. ,iii)=here receipts are used they must) by reason of banking practise) carry a large (R( on the face because bankers are not required to look for endorsements on cheques under the &heques $ct 0493. >urthermore) if an unconditional instrument was not regarded as a cheque a banker should still be
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BBM Notes Compiled by Njihia Kaburu

protected by the &heques $ct) 0493 since it protects a banker who collects an instrument which is not a cheque or pays an instrument which is not. *n "a han v #gdens Limi ed $%&'() The instrument had printed on its face the words /The receipt at the back hereof must be signed) which signature will be taken as an endorsement of the cheque/. *t was held that the order to pay was unconditional and therefore the cheque was valid. The words could be taken as addressed to the payee and not to the bank. It must be "n o% e%$ $ cheque must be an order' it must be !m)e%"t!*e in its terms) not precative) *mperative shows a mandatory order to pay e.g pay >rancis....) precative on the other hand indicates an option to decide whether to pay or not e.g. if you wish) if you have money etc pay >rancis.... The insertion of mere terms of courtesy will not make it )%ec"t!*e e.g. please pay It must be " %esse b' one )e%son to "nothe% $ cheque must be addressed by one person to another. There must be one person as %"+e%) another) a bank) as drawee. The drawer and the drawee must be different persons but the drawer and the payee can be the same persons e.g. you can write a cheque in your favour to withdraw money from your account. The head office and branches of a bank constitute for this purposes only one legal entity. *t is for this reason that drafts by one branch of a bank on another branch or head office are not cheques or bills so far as the bank is concerned. It must be s!,ne b' the )e%son ,!*!n, !t 5nder S.:! of the ".E.$. /no person is liable as drawer) endorser or acceptor of a bill who has not signed it as such/. Section :< of the $ct further provides that a forged signature on a bill is /wholly inoperative/% unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery. So a cheque with a forged signature on it is like an unsigned cheque. *t is thus not even a cheque in the first place I- must be )"'"b#e (on em"n ( S.0? of the "ills of "ills of E#change $ct provides that a bill is payable on demand% ,a) which is e#pressed to be payable on demand or at sight or on presentation' or ,b) in which no time for payment is e#pressed. "ecause a cheque is payable on demand) it cannot be /accepted/% The sum )"'"b#e must be " sum (ce%t"!n !n mone'( Section 4 provides that the sum payable by a bill of e#change is a sum certain within the meaning of the $ct although it is required to be paid% 7 with interest' 7 by stated instalments' 7 by stated instalments) with a provision that upon default in payment of any instalment the whole shall become due' 7 according to an indicated rate of e#change or according to a rate of e#change to be ascertained as directed by the bill. S.4 ,:) also provides that where the sum payable is e#pressed in words and also in figures) and there is a discrepancy between the two) the sum denoted by the words is the amount payable. It must be )"'"b#e to. o% to the o% e% o-. " s)ec!-!e )e%son$
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BBM Notes Compiled by Njihia Kaburu

This provision is already e#plained in above. +owever) cheques are sometimes drawn /pay cash/. /&ash/ cannot be a payee but bankers generally treat cheques so drawn as payable to bearer after the holder has endorsed it in blank. DIFFERENCES /ET0EEN CHEQUES AND OTHER /ILLS OF E1CHAN2E The following are some of the differences between cheques and other bills of e#change% a. $ cheque is drawn on a drawee called /banker/ and cannot be drawn on any other drawee. $ bill of e#change which is not a cheque can be drawn on anybody) whether an individual) a firm or a body corporate. b. $ cheque is payable on demand and cannot be paid at a fi#ed or determinable future time. $ bill of e#change which is not a cheque can be drawn payable at a fi#ed or determinable future time. c. "ecause it is payable on demand) a cheque cannot legally be accepted by the drawee. $ bill of e#change other than a cheque can be accepted if it is not drawn payable on demand but is payable at a fi#ed or determinable future time. d. $ cheque can be c%osse while other bills of e#change are not legally crossed. *n summary' "ill of e#change &an be drawn on any person including a banker. *s payable on demand or at a fi#ed or determinable future time. *s discharged if not presented. &annot be crossed. .otice of dishonour must be given. @ay be noted andAor protested. @ay be discounted. &heque &an only be drawn on a banker. *t is payable on demand. @ay be crossed. .otice of dishonour need not be given. *s not discharged by non7presentation. &annot be noted andAor protested.

0HEN THE /AN3 MAY RI2HTFULLY REFUSE TO 4AY CHEQUES& $ bankerBs authority to pay a cheque will be determined or terminated by% 0. &ountermand of payment) under s. C ,a). The $ct does not prescribe the mode in which the countermand is to be effected. *t may therefore be done orally or in writing. +owever) as a means of obtaining the evidence of the countermand) bankers usually require a +%!tten notice. $ cheque is countermanded when the drawer instructs the bank not to honour the cheque when presented for payment. To be effective) therefore) the notice must be given to the banker before the cheque is paid. *f) despite the countermand) the bank pays the cheque) it will be liable to refund the money to the drawer. :. .otice of the customerBs death &heques drawn by a customer before his death are valid but as a precaution the banker will not honour them. !. The customerDs account has insufficient funds <. .otice of the presentation of a bankruptcy petition against the customer% This terminates a bankerBs authority because of technical reasons under the "ankruptcy $ct. C. =here the cheque has been altered. 9. =here the cheque is irregular . -arnishee (rder% $ -arnishee (rder is an order of the &ourt to a bank manager freeEing the account of a customer till further notice from the court. 3. *nsanity of the drawer.

BBM Notes Compiled by Njihia Kaburu

CROSSED CHEQUES $ crossing is generally an instruction to the banker not to pay the proceeds of the cheque across the counter only through a bank account. There are several types of crossing though some may overlap. These include' 7 -eneral crossing 7 Special crossing 7 .ot negotiable crossing 7 $ccount 6ayee crossing 7 $ccount 6ayee (nly crossing !5 2ene%"# C%oss!n, S. 9 ,0) provides that where a cheque bears across its face an addition of% 7 The words /and company/ or any abbreviation thereof between two parallel transverse lines) either with or without the words /not negotiable/) or ' 7 two parallel transverse lines simply) either with or without the words /not negotiable)/ That addition constitutes a crossing) and the cheque is crossed ,ene%"##'/ The following are the general crossings provided for by this provision%

!!5 S)ec!"# C%oss!n, S. 9 ,:) provides that /where a cheque bears across its face an addition of the name of a banker) either with or without the words /not negotiable/) that addition constitutes a crossing) and the cheque is crossed specially and to that banker/. The following are e#amples of Special &rossing%

BBM Notes Compiled by Njihia Kaburu

(n the first two types of crossings) S. of the "ills of E#change $ct provides that% a) $ cheque may be crossed generally or specially by the drawer. b) =here a cheque is uncrossed) the holder may cross it generally or specially. c) =here a cheque is crossed generally) the holder may cross it specially. d) =here a cheque is crossed generally or specially the holder may add the words /not negotiable/. e) =here a cheque is crossed specially) the banker to whom it is crossed may again cross it specially to another banker for collection. f) =here an uncrossed cheque) or a cheque crossed generally) is sent to a banker for collection) he may cross it specially to himself. The essence of a general crossing are the two parallel transverse lines while the essence of a special crossing is the addition of the name of a banker. !!!5 The (Not Ne,ot!"b#e( C%oss!n, /The /not negotiable/ crossing is often misunderstood) many people believing that a cheque so crossed is not transferable) but payable only to the payee through his banker. Even 1indley 1. 2.) in "a ional Bank v Silke ,0340)) uses words which might be so interpreted. /.ot negotiable/ is often intended to mean not transferable) and it is only by reference to S.30 ,of the "ills of E#change $ct) that the true effect of the crossing is arrived at. The e--ect !s th"t the cheque %em"!ns t%"ns-e%"b#e. but !s e)%!*e o- the -u## ch"%"cte% o- ne,ot!"b!#!t'$ +owever honestly and for value a transferee may take it) he cannot acquire any better title to the cheque or its proceeds) or any better right against any prior party to it) than his transferor had. So long as there is no defect of title) or failure of consideration the cheque may pass from hand to hand Fust as if it was an open cheque or a simply crossed cheque) and each successive holder acquires full rights and title thereon/. ,6agetBs 1aw of "anking) 3th Edition) pp%:C? 7 :C0).*n' *rea !es ern +ailway ,ompany v London and ,oun y Banking ,ompany $%&'') 1ord 1indley stated% /Everyone who takes a cheque marked Bnot negotiableB takes it at his own risk) and his title to the money got by its means is a defective as his title to the cheque itself... =hether the ,title to) cheque was *o! or only *o! "b#e ... appears to me really immaterial. "e it void or be it voidable) it was not negotiable' and by s.30 of the "ills of E#change $ct +iggins 6the ho# e%5 +"s not c")"b#e o- ,!*!n, " bette% t!t#e to the cheque th"n he h" h!mse#-$( +owever) it should be noted that the words /not negotiable/ have no statutory effect unless combined with one of the regular crossings. $ cheque bearing these words without one of the regular crossings !s not " c%osse cheque. !ilson and -eeson v .ickering The plaintiffs drew a cheque in blank after crossing it Bnot negotiableB. They told the secretary to write in GBs name as payee and a specific amount. The secretary dishonestly wrote in the defendantBs name and a larger amount and gave it to him in settlement of her personal debt. *t was held that) as the Secretary had no title to the cheque) the defendant had also no title to the cheque and) despite his innocence) he must refund to the plaintiff the money which he had been paid by the plaintiffBs bankers.
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BBM Notes Compiled by Njihia Kaburu

!*5 The (Account 4"'ee( C%oss!n, /=ords such as Baccount payeeB) Baccount of $."B are frequently added to the crossing of a cheque. They are in no way authorised or recognised by the "ills of E#change $ct. Such an addition to the crossing does not prevent the cheque from being transferable ... *t may) however) be briefly stated here that) apart from the possible question of the duty of the paying banker where these words are found together with endorsementsHan obviously inconsistent combinationHthe +o% s on#' const!tute " !%ect!on to the co##ect!n, b"n7e%. s!,n!-'!n, the "ccount to +h!ch the )%ocee s o- the cheque +hen %ece!*e "%e to be )#"ce . +h!ch he !s%e,"% s "t h!s )e%!# . *f received by that banker for anyone other than the customer indicated) such receipt is not Bwithout negligenceB) and e#cludes the banker from the protection of S.3: ,of the bills of E#change ... even though the crossed cheque be payable to B$.". or bearerB. ,6agetBs L"+ o- /"n7!n,) 3th Edition) p.:C9 7 :C ). Bevan v "a ional Bank, Limi ed it was held that it would be ne,#!,ence to take a cheque marked Baccount payeeB for an account other than that of the payee. -orison v London ,oun y and !es mins er Bank Limi ed 1ord Reading stated% /The words Baccount payeeB ... are only to be found on the crossed cheques made payable to Abbot o% O% e% or Abbott o% be"%e%) e-en "nts o% be"%e% and e-en "nts o% o% e%. The words Baccount payeeB are a direction to the bankers collecting payment that the proceeds when collected are to be applied to the credit of the account of the )"'ee es!,n"te on the -"ce o- the cheque/. The now general practice of bankers) e#cept where the customer is undoubted) is to collect crossed cheques marked Baccount payeeB for the account of the payee designated on the face of the cheque and not for any other account. v) (Account 84"'ee8 On#'( C%oss!n, /*t would seem to follow) ... that the only meaning which can be given to the word BonlyB is that it requires the )"'!n, banker to pay the payee only) in account) which would mean that the collecting banker must indemnify the paying banker either specifically or pursuant to the general agency arrangements between the banks. The same effect could) of course) be reached by drawing the cheque in favour of the payee BonlyB. (n the whole) it would seem wise for banks to discourage the use of the word /only/ and for the drawer to be content with the protection afforded by the use of /account payee/ simply. *n no sense is he Fustified in placing an e#tra burden on the banks/. ,4",et8s L"+ o- /"n7!n,) 3th Edition) pp.:C4 7 :9?). CROSSIN2 A MATERIAL 4ART OF A CHEQUE S. 3 provides that /a crossing authorised by this $ct is a material part of the cheque' it shall not be lawful for any person to obliterate or) to add or to alter the crossing/. LE2AL 4ROTECTION OF /AN3ERS 4"'!n, /"n7e% $ paying banker is protected by the following% ,i) "ills of E#change $ct) S.9? Subsection ,0) 7 This subsection is concerned only with endorsement and affords no protection to the banker where the custome%8s s!,n"tu%e as Drawer is forged. $n instrument purporting to be a cheque) but to which the %"+e%8s s!,n"tu%e is forged) is not a cheque at all) is not %"+n on a banker and is outside the subsection altogether. 7 The protection conferred by the subsection is limited to /bills/ and does not e#tend to a bankerBs %"-t.
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BBM Notes Compiled by Njihia Kaburu

The words /deemed to have paid the bill !n ue cou%se/ are intended to equate the person in possession of a cheque under a forged endorsement with a holder in due course) and to protect the banker accordingly. This is a purely technical provision since) as a matter of substantive law) a person in possession of a cheque under a forged endorsement is) UNDER s$9: of the "ills of E#change $ct) neither payee) endorsee nor bearer to whom a payment can ever be a payment in due course within S.C4,0). Section :< declares total inefficacy of a forged endorsement to convey any title or the right to give a discharge.

Subsection ,:) 7 This subsection incorporates S.04 of the 5.;. Stamp $ct 03C! into the "ills of E#change $ct and regulates the protection of the banker with regard to %"-ts or o% e%s which are not cheques or bills within the definition in the "ills of E#change $ct. 7 *t does not e#pressly require the payment to be made /in good faith/ and in the ordinary course of business/. ,ii) "ills of E#change) $ct S.3? $ banker paying a c%osse cheque bearing a forged indorsement is protected against his own customer and against the t%ue o+ne% of the cheque provided that he paid the cheque *. -((D >$*T+ $.D =*T+(5T .E-1*-E.&E. ,iii)The &heques $ct 0493) S.! The protection which this section offers is additional to that given by ss.9? and 3? of the "ills of E#change $ct and) therefore) the banker is entitled to whatever advantage he can gain from all or any. *t specifically protects the banker in cases where the indorsement is !%%e,u#"% or "bsent. Co##ect!n, /"n7e% $ collecting banker is protected by the following provisions% ,i) "ills of E#change $ct. S.3: ,0) provides that where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself) and the customer has no t!t#e o% " e-ect!*e t!t#e the%eto) the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment. ,ii) The &heques $ct) S.!: ,:). The legal conception of the collecting banker was that of a me%e con u!t )!)e) receiving the cheque from the customer and then) and not till then) placing it to the customerBs credit) e#ercising -unct!on st%!ct#' "n"#o,uous to those o- " c#e%7 o- the custome% sent to " b"n7 to c"sh "n o)en cheque -o% h!s em)#o'e%$ ,api al and ,oun ies Bank Limi ed v *ordon *n that case the +ouse of 1ords held that the bank had not acted as such conduit pipe) had not %ece!*e payment for the customer but for itself and so lost the protection of S.3: of the "ills of E#change $ct 033:) because it had credited the customer with the face value as cash on %ece!)t -o% co##ect!on "n be-o%e c#e"%!n,$ This has been changed by S.3: ,:) of the ;enya $ct. ,iii) The &heques $ct 0493 S.< 5nless the banker can bring himself within the conditions formulated by the section) he is left with his common law liability for con*e%s!on or money had and received) in the event of the person from whom he takes the cheque for collection having no t!t#e or a defective title thereto. /urner v London and .rovincial Bank Limi ed $%&'0) Evidence was admitted) as proof of negligence) that the customer had given a reference on opening the account and that this was not followed up.
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BBM Notes Compiled by Njihia Kaburu

Ladbroke 1 ,ompany v /odd The bank was held negligent because they did not make enquiries about a proposing customer. This was described as an ordinary precaution other banks tookHbankers or bank officials having given evidence that they made enquiries in such cases. COMMON LA0 4ROTECTION TO /AN3ERS The customer of the bank is under a duty to e#ercise care when drawing cheques. This is demanded so as to prevent forgery or alteration. *f the customer of the bank breaches this duty) then common law protects any banker who goes ahead to process and pay such a cheque) processed due to negligence or lack of care on the customer. The bank cannot be forced to refund or credit the customerDs account again) but the customer has to personally follow up the fraudulent person. London Join S ock Bank v2 -c-illan 1 Ar hur Defendants clerk was authoriEed to draw cheques for signature by employer. +e drew a cheque worth :I) left space between the symbol I and the figure :. The space for amount in words was also left blank. The employer signed the cheque. The clerk then inserted 0 before : and ? after two to read I0:?. +e then filled this figure in words) withdrew the cash and disappeared. The employer sued the bank) but the court held that the employer could not succeed. +is negligence in drawing the cheque allowed the fraud. The court held that if a customer fails to e#ercise reasonable care when drawing cheques so as to prevent forgery) he will be estopped from denying the genuineness of the signature. RE2ULATIONS ON /AD CHEQUES The issuance of bad cheques is a practice that has continued to undermine the moderniEation of ;enyaDs commercial sector and the integrity of the national payment system. &riminaliEation of issuance of bad cheques in ;enya in :??< was meant to promote cheques as an alternative mode of payment to cash) which up to now remains the most widely used form of non7cash payment according to &entral "ank of ;enya ,&";) statistics. &heques account for over 3? per cent of total non7cash transactions every year. +igh incidents of bad cheques hold down the usage of cheques as a means of payment) forcing the country to rely heavily on cash which is a much more e#pensive means of payment. The government spends billions of shillings minting new currency each year while companies pay similar amounts to cash in transit companies to transport cash. $ll these e#penses could be greatly reduced if the country was to turn to non7cash means of payment such as use of cheques. Section !09,$) 0 ,a) of the 6enal &ode which was introduced by the >inance $ct .o.< of :??< criminaliEed issuance of bouncing cheques. The section states that' !09$.,0) $ny person who draws or issues a cheque on an account is guilty of a misdemeanour if the person 7 ,a) knows that the account has insufficient funds' ,b) knows that the account has been closed' or ,c) has previously instructed the bank or other institution at which the account is held not to honour the cheque. ,:) Subsection ,0),a) does not apply with respect to a post7dated cheque. ,!) $ny person who) by deceit or any other fraudulent means) assists a person to obtain anything on the basis of a cheque drawn or issued in the circumstances described in subsection ,0) is guilty of a misdemeanour. ,<) $ person who is guilty of a misdemeanour under this section is liable to a fine not e#ceeding fifty thousand shillings) or to imprisonment for term not e#ceeding one year) or to both. This has failed to eliminate issuance of bad cheques. This is due to the low penalties) and also the fact that even if we were to increase the penalty for offenders) the law still provides for out of court
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BBM Notes Compiled by Njihia Kaburu

settlements and most victims of bad cheques are never interested in pursuing legal cases after getting compensation from the drawers of the cheques. The out7of7court settlement is a legitimate way of settling disputes and has the advantage of checking against an escalation of the already unmanageable backlog of court cases) making many issuers escape punishment. The attempt to criminalise was further weakened by 2ustice 2" (Fwang in the case' Joseph 3imani 3amau v 4ilphan Arende Abila @r $bila had complained that @r ;amau had issued a I:!)<49 bad cheque ,Sh: million at the time of the offence in :??C) for the importation of a @ercedes "enE. *t had been drawn on &ommercial "ank of $frica but was referred to drawer for insufficient funds. *n the trial at the magistrateDs court) @r ;amau pleaded guilty the probation officer in his report recommended a non custodial sentence but the @agistrate did not find this case a suitable one for probation) given the prevalence of this kind of offence. +e thus overlooked the probation officers report and sentenced the accused to serve 03 months in Fail. @r ;imani appealed to the +igh &ourt. The +igh &ourt) disagreed and concluded that the sentence could not stand because of its non7compliance with established legal principles. 2ustice (Fwang said' JThe offences charged in this case were misdemeanours) and related to private contractual matters) in respect of which the most practical course of action was to see to a process of compensation and reconciliation between the parties e;ce)t +he%e contem)t o- cou%t !s e*! ent . &onsidering that the parties) by their own devices) were well agreed on a process of compensation) in my opinion) it was inappropriate for the lower court to abstain from accommodating the principle of reconciliation. (n this account) * would not sustain the sentence awarded by the lower &ourt)K *t now means that issuers of these cheques can escape Fail terms by quickly entering into private agreements with the payees on how to make good on the payments. +owever) 2" (FwangDs Fudgment has been criticiEed for being contrary to clear provisions of the law. Do you agree with the Fudge or notLLLLMMMMMMM