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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
WS NO. 1339 OF 2019
BETWEEN
PROSCAN LIMITED trading as RAPIDFONE
Plaintiff
AND
WESTPAC BANK - PNG - LIMITED
Defendant
Waigani: Linge A J
2021: 14th December
BANKING –purported fraudulent cheque-countermanding a cheque-Paying bank paying without knowledge of fraud-Duty of paying bank to payee-Bill of Exchange Act. ch. 250 s. 29 and 91.
The Plaintiff, Proscan Limited trading as Rapidfones (Proscan) sued Westpac Bank PNG Limited (Westpac Bank) claiming breach of duty of care and negligence. The cause of action arose when a cheque of K55,138.90 from a client of Proscan, China Shenyang International Corporation (PNG) Ltd (CSIC) deposited into Proscan’s Westpac Bank, Wewak Branch as payment for goods supplied by Proscan to CSIC to the full value of the said cheque was dishonoured and Proscan’s account debited after clearance by both Westpac Bank, the collecting bank and ANZ Bank, the paying bank. The debiting of Proscan’s account followed notification by CSIC to ANZ Bank that the cheque was a “fraudulent” cheque.
Fraud has not been established and the notification from China Shenyang International Corporation to ANZ Bank is a countermand notice
which was delivered after the cheque was presented and cleared. The debiting of Proscan Limited by Westpac Bank after cheque settlement
by both Westpac Bank and ANZ Bank is contrary to the Record of Agreement between Banks and Bank PNG (RABB). The countermand notice fails to be effective owing to the negligence and default of Westpac Bank through estoppel by representation
and hence it is liable to Proscan Limited for loss incurred in the full value of the debited cheque amount.
Cases Cited:
Papua New Guinea Cases
Bank of Hawaii (PNG) Limited v PNGBC PGNC 98; N2095
Richard Manui v ANZ Banking Group (PNG) Limited [2008] N3405
Peter Kolly v John Brutnal & Ors [2020], N8293
Pija Grannies Ltd v Rural Development Bank (2010), N5820
Overseas Cases
Bank of Baroda v Punjab National Bank Ltd [1944]AC176
Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363
Barclays Bank v W.J. Simms Ltd [1980] QB 677
Burnett v Westminster Bank Ltd [1966] 1QB 742
Marfani & Co v Midland Bank [1968] 2 All ER 573
National Westminsterv Barclays Bank Ltd [1974] 3 A11 ER 834
Legislation
Bills of Exchange Act, chapter 250
Counsel:
Mr. H. Kikira, for the Plaintiff
Mr. T. Kuma, for the Defendant
JUDGMENT
3rd February, 2022
1. LINGE A J: This is a judgment on a trial conducted between Proscan Limited trading as Rapidfones (called “Proscan” in the judgment) and Westpac Bank PNG Limited (called “Westpac Bank” in the judgment). The cause of action arises from Westpac Bank debiting of Proscans’s account in the amount of K 55,138.90, with the latter claiming damages due to breach of duty of care and negligence.
2 I conducted the trial by affidavits on the 17 November 2021 and counsels made oral submission on the 8December 2021.
Facts
3. Proscan Limited (Proscan) is a merchant, trading by the name of Rapidfone and have since December 2013 operated a business account No. 6003550101 with Westpac Bank.
4 In the normal course of trading China Shenyang International Corporation (PNG) Ltd (CSIC)deposited its ANZ Bank cheque No. 000941 into Proscan’s Westpac Bank, Wewak account No. 6003550101 on the 17 June 2019 as consideration for various goods to be supplied by Proscan.
5. The said Cheque went through Westpac Bank’s clearing processes and was cleared on the 20 June 2019and credited into Proscan’s account by Westpac Bank and became available so on the 26 June 2019 Proscan then dispatched goods in the value of K55,138.90 to CSIC.
6 However, on the 10 July 2019 Proscan received advice from Westpac Bank that the cheque already cleared, was dishonoured by Westpac Bank and the K 55,138.90 cleared funds were debited from Proscan’s Westpac Bank account and the cheque deemed to be fraudulent, returned by Westpac Bank to ANZ’s customer CSIC.
7. The drawer of the fraudulent cheque CSIC cannot be located in Papua New Guinea and Proscan then filed this cause of action against Westpac Bank claiming breach of duty and negligence for debiting its account.
Plaintiff’s case
8. Plaintiff relies on the Affidavit of Michael Huanong Lin who is the Managing Director of Proscan a company that has been in merchant business since 2013 and has a business account with Westpac Bank No. 600 3550101.
9. Since opening the account with Westpac, Proscan and its customers/clients had deposited cash, bills of exchange or cheques into Proscan’s account No.6003550101 which were accepted and cleared by Westpac and Proscan after confirming the funds were cleared by Wespac Bank and also having satisfied that there were no impediments to use of funds in its account, it supplied goods to its customers or paid cheques or transferred funds to its customers, clients or suppliers who had delivered, provided or supplied the merchant products, items, goods or other services to it.
10. Mr. Lin deposes that in the course of business with overseas and within country clients, he does online banking by checking their banking account and availability of cleared funds, which are paid by customers or deposited into Proscan’s account before, making or approving payments online out of Proscan’s funds and into the nominated and known account of both the overseas or in country suppliers or clients who dispatched, delivered, or received the merchant products or sending goods to the customers of Proscan.
11. He deposes that on the 17 June 2019 a corporate customer CSIC advised that it had deposited into Proscan’s account at Westpac Bank, Wewak a cheque to the value of K55,138.90 drawn to Proscan Limited as valuable consideration for the purchase of various goods by CSIC and he confirmed with Westpac Bank that the CSIC cheque deposited had not been cleared so he did not authorize the release of the goods.
12. Mr. Lin deposes that on the 22 June 2019, he checked Proscan’s bank account and found that the cheque deposited by CSIC was cleared and the sum of K55,138.90 was credited to Proscan’s bank account No. 6003550101 as cleared funds so he organized for the despatch of the goods to CSIC on the 26 June 2019 after completing the receipt Point of Sale (POS) transaction.
13. He deposes that on the 10 July 2019 he was made aware by Westpac Bank through an email circulated notice that the K55,138.90 which was credited into Proscan’s account as cleared funds were reversed and Proscan’s Westpac Bank account debited in the same amount as the CSIC dishonoured cheque.
14. Mr. Lin deposes that he then caused an investigation to establish with CSIC the veracity of the advice of the dishonour it received from Westpac Bank, but he was unsuccessful due to difficulty andinability in contacting CSIC.
15. Proscan suffered actual loss of K55,138.90 being the actual value of the goods and items it supplied to the CSIC after relying on Westpac Bank clearance of the CSIC cheque and the crediting of its bank account as cleared funds but later reversed by Westpac Bank.
Defendant case
16. Westpac Bank relies on the affidavit of Sharon Kupp – Tengdui an employed lawyer with Westpac Bank who deposes that on the 16 June 2019 a cheque No. 000941 for K55,138.90 was deposited at Westpac’s Wewak branch into Proscan’s account.
17. Ms Tengdui confirms that the cheque was drawn by China Shenyang International Corporation (CSIC) and Australia and New Zealand Banking Group (PNG) Limited (ANZ Bank) being the drawer of the cheque.
18. She deposes that the CSIC cheque was cleared on the 20 June 2019 after going through Westpac Bank process and the funds became available; but that on the 02 July 2019 Westpac Bank received reports from ANZ Bank that the Cheque No. 000941 was a fraudulent cheque and requested Westpac Bank that the funds be debited out of Proscan Westpac Bank account and return to their (ANZ Bank) customer CSIC pursuant to the Record of Arrangement between banks and Bank of PNG (RABB).
19. She deposes that upon receipt of the written notification from ANZ Bank,Westpac Bank then placed a hold on funds in Proscan’s account, debited Proscan’s account, returned the cheque to ANZ Bank and the receipt of letter of indemnity from ANZ Bank.
20. She provided the text of Clause 8.11 of the Record of Arrangements dealing with Liability and Indemnity. The gist of Clause 8.11 is that despite a cheque being cleared, a collecting bank (Westpac Bank) is required to debit the funds from the beneficiary’s account (Proscan), once it has been made aware the funds were from a fraudulent cheque, she explains this as the reason for the action Westpac Bank took on the 2 July 2019.
21. Ms Tagdui also tendered copies of correspondences including a Letter of Indemnity from ANZ Bank and Westpac Bank, Record of Arrangement and emails which forms part of the Defendant’s evidence.
Issues
2. Whether the Letter of Indemnity from ANZ Bank to Westpac Bank releases Westpac Bank from any liability arising out its debiting of Proscan’s bank account?
Plaintiff
23. Mr. Kikira of counsel for the plaintiff outlines his client’s case commencing with the receipt of Cheque Number 00094 totalling K55,138.00 from a corporate customer, China Shenyang International Corporation (CSIC) for payments of goods and items.
24. The cheque was an ANZ Bank issued cheque deposited into Westpac Wewak Branch on the 17 June 2019 to be credited into Proscan’s Westpac Bank Account Number 6003550101.
25. The CSIC cheque was cleared on the 21 June 2019 and Proscan was advised by Westpac Bank. His client then released the goods and items on the 26 June 2019 worth of the cleared funds of K55,138.00. He submits that Proscan’s release of the goods was 4 days after CSIC’s cheque clearance advice his client had received from Westpac Bank.
26. That the Subsequent advice from Westpac Bank to the Plaintiff’s on the 10 July 2019 due to the fraudulent CSIC cheque and the debiting of Proscan’s account with the K55,318.00 is crucial to his client’s case he submits.
27. Prior to Westpac Bank debiting Proscan’s account, it received a Letter of Indemnity from ANZ Bank dated 2 July 2019 to which Counsel submits that the Letter of Indemnity is an admission of negligence by Westpac Bank for having allowed the CSIC purportedly forged cheque cleared and now seeks indemnity cover.
28. Counsel referred me to the case of National Westmount Bank -v- Barclays Bank Ltd [1974] 3 A11 ER 834, which established the principle that money paid under a mistake of fact or law can be recovered.
29. Counselsubmits however that there are exceptions specified by Justice Kerr at page 44 in the National Westmount Bank which can be relied on by Proscan. These exceptions are:
“1) The need to preserve the commercial value of the security of withdrawals, which have once been negotiated to a holder for value and the undesirability of unravelling transactions based on them.
2) In part on the doctrine of estoppel by representation.
3) The competing equities with the balance favouring entirely blameless defendants; and
4) On proof of negligence against the party which mistakenly made the payments and is seeking to recover.”
30. That in the circumstance, Counsel submits that Proscan is an innocent party and should not be estopped from benefiting from the cheque later found to be fraudulent. It acted responsibly by not releasing the goods earlier but after the cheque was cleared.
31. Counsel submits that Westpac Bank was negligent in not dispatching the Notice of dishonour promptly within 2 Business Days to Proscan as is the requirement under Clause 8.7 of the Record of Arrangements between banks and Bank of PNG (RABB).
32. Counsel also submits that the defendant has an option to invoke the Arbitration process under Clause 12 of Record of Arrangement between Banks in relation to disputes, questions, or difference between them as is the status of the cheque, but that option was not used. Arbitration process is available only to the participating banks under the Record of Arrangements.
33. Mr. Kikira submits that Westpac Bank ought to have pursued negligence proceedings against ANZ Bank.
34. In any case, Westpac Bank breached the duty of care to plaintiff as customer and that the debiting of the account was not authorised by Proscan Counsel submits. He cites Richard Manui v ANZ Banking Group (PNG) Limited, [2008] N3405, where the Court held that the withdrawal from the plaintiff’s account was not authorized by the plaintiff and the defendant was liable for negligence.
35. Counsel also cites Peter Kolly v John Brutnal & Ors [2020], N8293, where at paragraphs 94 and 95 Justice David held that the clearing of the big cheque immediately and not allowing 4 days clearance was not consistent with the inter-bank clearing arrangement under the Record of Arrangement between Banks and Bank PNG (RABB).
36. Counsel submits that Westpac Bank did not act in good faith when it acted outside of the time frame allowed by the Kina Automated Transfer System (KATS) provided for under the RABB in debiting the plaintiff’s account.
37. Counsel further submits that Westpac Bank cannot invoke the protection accorded by Section 29 of the Bills of Exchange Act because clearly Westpac Bank was negligent in dishonouring the CSIC cheque, and in acting outside the scope of Clause 8.7 of the Record of Arrangements between Banks and the Bank of Papua New Guinea (RABB).
38. Finally, Westpac Bank failed to plead the statutory defence contained in Section 91, Bills of Exchange Act which in general terms protects the collecting bank (Westpac Bank) acting in good faith and without negligence.
Defendant
39. Mr. Kuma of Counsel for the defendant, referred to his extract of his submission filed and raised a preliminary issue of ANZ Bank and not being joined as a party in the proceeding as well as CSIC as the drawer of the fraudulent cheque.
40. He refers me to Section 29 of the Bills of Exchange Act which deals with forging of signatories on bills of exchange including cheques, where a signature on a cheque is placed on the cheque without the authority of the person whose signature it purports to be, the forged signature is wholly inoperative, and no right to retain, give, or enforce payment of the cheque against any party ..”... unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.”
41. Counsel cites the case of National Westminster Bank v Barclays Bank Ltd [1974] 3 All ER 834 which stands for the proposition that money paid under a mistake of fact or law can be recovered which he submits applies in this case.
42 Counsel also refer to the exceptions pointed out by Justice Kerr, that displaces the above proposition,and submits that none of the exceptions can be relied on by the Plaintiff.
43. Mr. Kuma relies on the proposition in the Bank of Hawaii (PNG) Limited v Papua New Guinea Banking Corporation, [2001] PGNC 98; N2095 wherein Kandakasi J affirms that a paying bank has the right to recover monies paid under a fraudulent or forged cheque. He quotes part of page 9:
“This means in my view that, a party seeking to prevent a paying bank as in this case, from recovering a payment under a forged cheque, must prove that the paying bank was in fact negligent in making the payment. It is not simply good enough to claim that, because the paying bank honoured a forged cheque, it was negligent...
In relation to notice of fraud once discovered, Justice Kerr in National Westmount Bank case, (supra) did not find the paying bank negligent in notifying the presenting bank of the forgery after a lapse of two weeks, as is the present case. This was because, that was the earliest, the notice of forgery got to the paying bank,and it could in turn notify the presenting bank”
44. Mr. Kuma of Counsel for Westpac Bank submits that the notification by his clients to and the debiting of Proscan’s account was in accordance with the Letter of Indemnity it received from ANZ Bank pursuant to the Record of Arrangements between Banks and Bank of Papua New Guinea (RABB), and the interbank payment system known as the Kina Automated Payment System (KATS).
45. In summary he submits:
1. The cheque was drawn from SCIC’s bank account and the claim should have been against SCIC as they have taken delivery of the goods valued at K55,138.90.
2. Westpac Bank had no reason to know even suspect the cheque was fraudulent when it was initially deposited and that it went through the normal three (3) days clearance.
3. That it was after 10 days that Westpac Bank was notified of the fraud by ANZ Bank and ANZ Bank had requested for the funds to be taken out of Proscan’s account and remitted to CSIC’s account at ANZ Bank.
4. As to time limitation for giving notice of fraud, Clause 8.7 gives no time limitation.
5. That the action taken byWestpac Bank was in line with law and accepted banking practice.
6. Money paid under mistake of fact or law can be recovered except under the exceptions referred to in Justice Kerr’s judgement referred to above in the National Westminster Bank’s case (supra); and that none of the exceptions apply here.
7. The Plaintiff has not proven through any evidence that the Defendant was negligent in the discharge of its duty of care and thus the claim that the Defendant was negligent cannot stand.
Findings of Fact
46. The Plaintiff, Proscan Limited is a merchant business involved in importation of merchant products in bulk and retailing or selling to customers out of their various shops in Papua New Guinea andhad been a customer and operate a business account number 600 3550 101with Westpac Bank since December 2013.
47. On the 13 June 2019 Proscan issued a Quotation for the goods to be supplied to CSIC valued at K 55, 138.90. The goods range from various laptops, various brands of smart mobile phones, television, watches, digital cameras and gadgets.
48. On the 17 June 2019 China Shenyang International Corporation deposited into Proscan Limited T/as Rapidfones, Wewak Westpac Bank Account Number 6003550101 Cheque No.000941 dated 13 June 2019 for K 55,138.90, drawn to Proscan Limited signed in Chinese vernacular and style.On the face of it the cheque was valuable consideration for goods itemized in the Quotation.
49. Cheque 000941 was cleared by Westpac Bank on the 20 June 2019 after going through Westpac Bank process and then processed via the Kina Automated Transfer System (KATS) at ANZ Bank on the 21 July 2019 respectively.
50. Westpac Bank notified Proscan of the cheque clearance, and on the 26 June 2019, it released the goods listed in the Quotation to CSIC after completing Point of Sale transaction (POS). The transaction was in good faith and in the normal course of merchant
trading and paid for by the cleared funds in the amount of K55,138.00, the proceeds of the CSIC cheque; this legally and effectively
completes the transaction.
51. The purported forgery was not discovered by ANZ bank, the payingbank or by Westpac Bank the receiving bank but upon notification
by China Shenyang International (PNG) Ltd to ANZ Bank on the 1July 2019 as referred to by ANZ Bank in its letter to Westpac Bank
on the 2 July 2019 which I have received into evidence. It states:
“We received notification on 1st July 2019 from our customer China Shenyang International Corporation (PNG) Ltd that Cheque Number 941 in the sum of Fifty-Five Thousand One Hundred Thirty-Eight kina and Ninety Toea (K 55, 138.90) processed via the Kina Automated Transfer System (KATS) on 21st June 2019 in favour of your customer, Proscan Limited (“Beneficiary”) was fraudulent.”We evoked Clause 7.9 (cl.8.11) of the Record of Arrangements between Banks in Papua New Guinea (Revised 9th December 2014) (“the RABB”) and request that you place a hold on the Funds, debit the account of the Beneficiary and return the Funds to Australia and New Zealand Banking Group (PNG) Limited.
In so doing, ANZ hereby indemnifies and saves harmless Westpac Bank PNG Limited from and against any and all claims, demands, actions, suits, loses, costs,charges, expenses, damages and liabilities whatsoever which BSP may pay, sustain, suffer or incur by reason of or in connection with the debiting of their customers account to satisfy Clause 7.9 of RABB.” in which the ANZ Bank invoked Clause 7.9 (clause 8.11) of the Record of Record of Arrangement between the banks and Bank of PNG (RABB).”
52. The ANZ Bank letter of 2 July 2019 triggered off an inter- bank process that includes ANZ Bank indemnifying Westpac Bank pursuant to clause 7.9 (now clause 8.11) of the RABB and, requesting Westpac Bank to place a hold on the funds and to debit account of Proscan Limited to the amount of K 55,138.90, and to return the Funds to ANZ Bank.
53. On the 10 July 2019 Westpac Bank debited Proscan’s account, following notification by ANZ Bank of even date that cheque number 000941 was “fraudulent” and therefore payment cannot be honoured, and that the paying bank, ANZ Bank delivering a letter of indemnity and the said cheque previously credited to Proscan Limited business account on 17 June 2019 to be debited in line with guidelines accorded in the RABB.
Legal Consideration
54. The law as applied in this jurisdiction is that money paid under mistake of fact or law are recoverable. Generally, where a banker
has in error, paid a cheque on which a customer has not authorized payment and because of that cannot debit the customer’s
account, the banker may recover the amount from the person to whom he paid it.
55. This principle was expounded on in National Westminster Bank v Barclays Bank Ltd [1974] 3 All ER 83456, a decision of the English High Court relating to the duty of care of a bank in relation to forged cheques, with respect to persons
other that their customer where at page 839 Kerr J held:
1. As a general rule, where a banker has, in error, paid a cheque on which a customer has not in fact authorized payment and because of that cannot debit the customer’s account, the banker may recover the amount from the person to whom it paid it.
2. As long as the bank’s cheque clearing procedure was complied with and the bank was satisfied that the cheque was in order on its face, with nothing to arouse suspicion about it, the bank cannot be held to have been negligent in honouring the cheque.
56. However, there are exceptions as identified by Justice Kerr at page 844 in the National Westmount Bank case which I will consider whether any or all can be applied in this case, these exceptions are:
“1) The need to preserve the commercial value of the security of withdrawals, which have once been negotiated to a holder for value and the undesirability of unravelling transactions based on them.
2) In part on the doctrine of estoppel by representation.
3) The competing equities with the balance favouring entirely blameless defendants; and
4) On proof of negligence against the party which mistakenly made the payments and is seeking to recover.”
57. The principle discussed in the National Westminster Bank’s case was considered in Barclays Bank v W.J.Simms Ltd, [1980] 1 QB 677, a High Court decision relating to the recovery of a payment mistakenly made by a bank after the customer had countermanded the cheque.
58. The High Court re-stated the general principle that a bank paying under a mistake of fact is prima facie entitled to recover. It further considered the law of restitution of payments made under mistake of fact and the defence of change of position. This is where a payee has changed their position in good faith in reliance upon the payment, in such a case, they should not be required to repay sums where it would be inequitable to do so.
59. His Honour Robert Goff J, at page 695C then summarized the position as:
“(1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.
(2) His claim may however fail if,
(i) “the payer intends that the payee shall have the money at all events,whether the fact be true or false or is deemed in law so to intend;
(ii) the payment is made for good consideration, in particular if the money is paid to discharge and does discharge a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt;
(iii) the payee has changed his position in good faith or is deemed in law to have done so.”
(1) The mistake of the bank in overlooking the instruction to stop the cheque caused the payment.
(2) As the bank was acting without mandate, no obligation of the Association to the payee was discharged, and it follows from this that the payee gave no consideration to the bank for payment.
(3) There was no evidence of any change of position by the recipient.
Accordingly, the court ordered that the sums be repaid to the bank.
61. The above legal principle is followedin this jurisdiction as in Bank of Hawaii (PNG) Limited v Papua New Guinea Banking Corporation, [2001] PGNC 98; N2095. The plaintiff in the case was seeking restitution from the defendant sums it claimed paid in error under a cheque fraudulently drawn against its customer’s account.At page11, Kandakasi J held that,
“the plaintiff did nothing more than pay on the cheque through its normal cheque clearing process and there was no reason to arouse suspicion that the signature was not genuine...There was no relationship between the Plaintiff’s customer and the payee on the cheque or the rogue or the plaintiff and the payee or rogue.When the plaintiff became aware of the fraud, it immediately notified the Defendants. There was no evidence of the plaintiff having had notice of the fraud much earlier and failed to immediately notify the Defendants. The Defendants have failed to produce any evidence of any negligence. In the circumstance, I find that the Plaintiff was not negligent in any respect.”
62. The Court also found that in relation to notice of fraud once discovered, the paying bank was not negligent in notifying the presenting bank of forgery after a lapse of two weeks. That was because, that was the earliest notice of forgery the paying bank got and it in turn notified the presenting bank or collecting bank.
63. In Peter Kolly v John Brutnal & Ors [2020], N8293, a case involving unauthorized cheque clearance by a bank staff, the Court held that the plaintiff in that case was in clear breach of the bank’s clearing procedure when he cleared funds immediately and not waiting for 4 days clearance as is the requirement under the Record of Arrangement between banks and bank PNG, (RABB). The Plaintiff, Peter Kolly who was a staff of BSP the paying bank but not a clearing officer, was found to be in breach of the Bank’s clearing procedures and was terminated.
64. In coming to that conclusion, His Honour Justice David adopted the procedure pertaining to timing of cheque clearance under the Record of Arrangement (RABB)and at paragraphs 94 and 95 states:
“Under the Record of Arrangement (RABB), four (4) working days must be allowed for clearance of cheques which are drawn on a bank (drawer bank) and then deposited in an account of another bank (Collecting Bank) where both are located in National Capital District. “Special Clearance” is now abolished. The period of few days is to allow sufficient time for the drawer bank to dishonour that cheque, if necessary. If the collecting bank allows its customer to draw on funds, earlier than four days and that cheque is dishonoured, then the collecting bank will have to bear the loss.
Alternatively, if the drawer bank fails to give notice of the dishonour within that four-day period and then looks to dishonour the cheque which the collecting bank’s customers has drawn upon, the collecting bank may refuse the “end of time” dishonour and the drawer bank would be responsible for any loss arising in those circumstances.”
Present Case
65. The case emanates from notice of purported fraud given by CSIC to its bank ANZ Bank on 1st July 2019 which prompted it to notify Westpac Bank. There is no other evidence confirming the type of fraud, for example whether it was a forgery (signing without authority), theft (steal to use for fraudulent purpose or counterfeit (illegally printing cheque using information from owners account) or other cheque fraud.
66. A copy of the purported fraudulent cheque number 000941 bearing a signature in Chinese vernacular and style is in evidence but no details of the fraud it purports. I am not satisfied that evidence of fraud had been established. It might have been a different situation if either or both CSIC and ANZ Bank had been made parties in this proceeding I would think. I therefore consider the notification from CSIC to ANZ Bank as a countermand notice.
67. The principle of law in relation to countermand is that a drawer of a cheque may countermand the payment of a cheque at any time before the cheque is presented and cleared. Usually, the countermand notice is due to some breach of contract or other misconduct by the creditor. The countermand notice is in effect a stop payment order. Where electronic fund transfers are concerned, if the funds have not yet been transferred, a countermand order would cancel the original fund transfer order.
68. If the countermand order or notice come in time the bank is precluded from paying the cheque however, it acts otherwise, the liability of such payment lies wholly with the bank as the bank acted contrary to its customer’s instructions. If the customer’s countermand fails to be effective owing to the negligence or default of the bank, the bank will be liable to the customer for loss incurred thereby. Fraud does not come into consideration of a countermand notice.
69. In Burnett v Westminster Bank Ltd, [1966] 1QB 742 the plaintiff drew a cheque and altered the branch name to the other and initialed the cheque. Later he decided to stop payment and contacted the second branch manager. The cheque however passed through the computer system which could not read the changes. The cheque itself was forwarded to the first branch where the employees were unaware of the stop payment instructions. After the suspense period, the cheque amount was debited to the plaintiff’s account at the first branch. The Court ruled that first branch was liable and ordered it to credit the plaintiff’s account.
70. In Barclays Bank v W. J. Simms Ltd, [1980] 1 QB 677, the customer made out acheque to pay his builder (WJ Simms) but countermanded the cheque by putting a written stop payment notice to Barclays Bank (the Bank) and the same notice was entered into Barclays Bank computer system. The Court held that due to the mistake of the bank in overlooking the instruction to stop the cheque but went ahead and paid the receiver appointed for builder, WJ Simms, the bank was acting without mandate and thus no obligation of the Royal British Legion Housing Association (the Association) to the payee was discharged, and it follows from this that the payee gave no consideration to the bank for payment.
71. The Bank accepted that it was not entitled to debit the account of its customer, the Association and brought proceedings against WJ Simms for the return of the funds which the Bank had by mistake paid out notwithstanding the countermand notice. The court ordered that the sums be repaid to Barclays Bank.
72. In this case the countermand notice (dishonour notice) was purportedly given by CSIC on the 1 July 2019 to ANZ Bank and ANZ Bank notified Westpac Bank, the collecting bank on the 2 July 2019 which was about 12 days after settlement of the cheque. Westpac Bank did not advise Proscan of the notice of dishonour immediately but on the 10 July 2019, 9 days after it first received the notice from ANZ Bank and 20 days after the settlement of the cheque.
73. The Settlement of the cheque by both Westpac Bank, the Collecting bank and ANZ Bank, the Paying bank on the 20 June 2019 and 21 June 2019 respectively utilizing the Kina Automated Transfer System (KATS), established pursuant to the RABB. Neither of the two banks detected any defect with the cheque.
74. The RABB sets out at Clause 8.7 – time limits for return of dishonoured cheques. It provides:
“(a) Notification of a cheque dishonour must be sent to the Collecting Bank within two (2) Business Days of the Settlement of that cheque, inclusive of the date of Settlement.
(b) If cheque dishonour cannot be sent within the timeframe specified above due to system issues or matters outside the bank’s control a manual cheque return form has been agreed for use on an exceptions basis only. Refer Annex A. Manual cheque returns must be sentbefore close of business on the third (3rd) day, the day following the end of the dishonour period.
(c) No time limit applies to cheques that are deemed to be fraudulent (see Section 8.11). In the event that a suspected fraudulent cheque results in a dispute then standard arbitration procedures will apply as set out in Section 12 of this document.
(d) Participants may refuse to accept Dishonours that do not conform to KATS Rules as set out in this Section, 8.7. “
75. The notification of the dishonour is clearly outside of four(4) working days allowed for clearance of cheques which are drawn
on a bank (drawer bank) and then deposited in an account of another bank (Collecting Bank). This is a breach of the bank practice
as enshrined in Clause 8.7 (a) of RABB and is also inconsistent with the timing requirement for countermanding cheques.Westpac Bank is constrained and bound by
the time limit of the normal 4 days clearance. It is not entitled to and cannot invoke Clause 8.7 (c) of RABB which allows for unlimited time in the event of cheques that are deemed to be fraudulent.
76. Clause 8.11 of RABB is another operative clause relied on by Westpac Bank. I set out the text in full.
“Liability and Indemnity
(a) Where the paying bank becomes aware that an Item for Value has been accepted by a Collecting Bank and payment of that Item for Value was the result of any unlawful act or instrument, e.g a fraudulent cheque, the paying Bank shall inform the Collecting Bank in writing by email of this fact setting out full details of the relevant item and the amount involved.
(b) The Collecting Bank agree and undertakes to debit the Beneficiaries account, subject to availability of funds in the Beneficiary’s account irrespective of the normal clearing days referred to in Clause 8 (7).
(c) This is subject to the receipt by the Collecting Bank of a suitably authorized letter of indemnity from the paying Bank. If a
bank does not act on the letter of indemnity, it may be referred to arbitration as detailed in Section 12 (clause 12).”
77. I accept that ANZ Bank, the paying bank upon becoming aware on the 1 July 2019 that an Item for Value (cheque) has been accepted
by a Collecting Bank and payment of that Item for Value was made informed Westpac Bank, the Collecting Bank in writing by email of
this fact.But I do not accept that the payment of that cheque was the result of any unlawful act or instrument, like a fraudulent
cheque, Clause 8.11 (a) is thus inapplicable.
78. It follows that Westpac Bank as the Collecting Bank is not entitled to agree and to undertakes to debit the Beneficiaries (Proscan’s) account in terms of Clause 8.11(b) of RABB.
79. I have considered the Exceptions raised in the NationalWestminster Bank’s case (supra) and whether any is available, and it is apparent that Westpac Bank has changed its position from previously representing to Proscan that the funds have been cleared. The principal of estoppel by representation is one of the exceptions and applies where one person represents to another with an intention of inducing the other to rely upon it or is made in circumstances where his conduct is such that a reasonable person would understand that it was intended to be acted upon, to the second person’s detriment.
80. The principal of estoppel was established in Pickar v Sears, 1837 6 Ad & El 439. It established that a person by his words or conducts induces by his words or conducts induces another person to believe a fact and subsequently acts according to that belief or to alter his previous position, other person is barred from later changing his position.
81. The release of the goods took place after Westpac Bank represented to Proscan that the funds have been cleared and Proscan relied on that representation and in good faith prior to countermand or dishonour notice, supplied the goods to CSIC, in the normal course of merchant trading. It is not denied that the goods in the face value of the CSIC cheque were supplied to CSIC.
82. Westpac Bank would be acting contrary to the mandate of the CSIC’s cheque when it debited Proscan’s account. The countermand notice came after settlement of the cheque and Westpac Bank is obliged to honour the cheque. As a collecting bank Westpac Bank is required to act with honesty and in good faith and without negligence. See Marfani & Co v Midland Bank [1968] 2 All ER 573.
83. The relationship between a customer and bank is contractual, and a bank owes a basic obligation to its customer that it will honour on presentation cheque drawn by the customer on the bank, provided that there are sufficient funds in the customer’s account to meet the cheque. Where the bank honours the cheque, it acts within its mandate and the bank is entitled to debit the customer’s account with the amount of the cheque, and further the bank’s payment is effective to discharge the obligation of the customer to the payee on the cheque, because the bank has paid the cheque with the authority of the customer. see, Barclays Bank v W. J. Simms Ltd (supra)
84. Courts in this jurisdiction have consistently held that a bank has an implied contractual duty towards its customer not to be negligent in the performance of the contract, see for example Pija Grannies Ltd v Rural Development Bank, (2010), N 5820.
85. A Bank is required to act without delay in discharging its obligation to pay the customer’s cheque. The bank must either pay or refuse the payment by dishonour or countermand, Bank of Baroda v Punjab National Bank Ltd, [1944] AC176.
86. In Barclay s Bank v Quincecare Ltd [1992] 4 All ER 363, what is referred to as ‘Quincecare duty of care’ imposes a negative duty on the bank not to pay even where there are compliant instructions. Banks must refrain from making payments
where there are reasonable grounds for believing that the payment is part of a scheme to defraud the customer. The duty is part of
a bank’s overall duty of reasonable skill and care in executing customer’s order. It arises by reason of an implied term
of the contract between a bank and its customer or under a coextensive duty of care in negligence.
87. In my consideration of Section 29 (1) of the Bills of Exchange Act, as I have formed a view that there is no fraudulent or forged signature in the CSIC cheque, Westpac Bank cannot avail itself
of the provision. Further, Section 29 (2) clearly states that the Section does not affect the ratification of an unauthorized signature not amounting to fraud.
88. In relation to Sections 91 of the Bill of Exchange Act, a provision which provides safeguards and protection to the Collecting bank when acting in good faith and without negligence, and where there is defect to the cheque, from incurring liability to the true owner of the cheque by reason only of having received payment of the cheque.
Westpac Bank as the collecting bank had not pleaded this provision in its defence and thus the protection of acting in good faith and without negligence is not available.
89. On the issue of the legal efficacy of the Letter of Indemnity, it can be inferred that ANZ Bank recognizes the potential of legal suit arising out of the debiting of Proscan account by Westpac Bank. It does not excuse Westpac Bank from any legal suits and claims from its customer, Proscan Limited.
It is available and tenable in an inter-bank situation in the event of fraud contemplated in Clause 7.9 (clause 8.11) of the Record of Record of Arrangement between the banks and Bank of PNG (RABB) which is not the situation in this case.
Order
90. Accordingly, I order the following:
_____________________________________________________________
Rageau Manua & Kikira Lawyers: Lawyers for the Plaintiff
Bradshaw Lawyers: Lawyers for the Defendant
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