1.0 Overview of law of cheque

Basically, cheque is governed by Bill of Exchange Act 1949. It is also regarded as a bill of exchange by virtue of section 73(1) of the Act. The definition of bill of exchange is provided in section 3(1) of the Act as an unconditional order in writing signed by the drawer and addresses it to the drawee, requiring the drawee to pay on demand, a sum certain in money to payee, or to bearer. However, it should be noted that not all kind of cheque is negotiable. According to section 81A of the Act[1], the addition of the words ‘account payee’ or ‘a/c payee’ would restrict the cheque from being transferred or negotiated. As such, crossed cheque is not negotiable.

In general, the status and negotiability of a cheque can be affected by numerous matters such as undated cheques, ante dated and post-dated cheques, stale and overdue cheques, lost or stolen cheque, altered cheques and forged cheques[2].

2.0 Relationship between bank and customer in relation to cheque.

The relationship between bank and customer can be divided into two categories which are general relationship and special relationship. General relationship of a bank and its customer is a debtor-creditor relationship[3]. The bank is regarded as a debtor whereas the customer is regarded as a creditor. However, the relationship that governs bank and customer in respect of negotiable instrument is generally governed by principal and agent relationship. This relationship is a type of special relationship between a bank and customer where the bank is an agent to its customer and the customer is the principal.

Basically, bank has contractual obligation to strictly adhere to its customer’s instructions or mandates. The bank should exercise reasonable care in carrying out its customer’s mandate. For instance, paying banker’s is obliged to make reasonable inquiries prior carrying out its customer’s instruction.[4] Besides, customers also owe duty to their bank. According to common law, customer owes duty of care to bank by not drawing cheque in a manner which facilitates fraud or forgery and duty to notify the bank about the forgery after the customer discovered about it.

3.0 Law relating forged cheque

3.01 Nature of forged cheque and its legal consequence

According to Lee Mei Pheng, forgery is the act of making a false document in order that it may pass or be used as genuine. She further stated that:

A document is false if the whole, or a material part of it, purports to be made by, or with the authority of, a person who did not in fact make it or authorise its making.

The act of forging cheque is to obtain money by defrauding a customer. One of the methods to forge cheque is by forging one’s signature on the customer’s cheque. A forged signature can be done in either one of the two places which are on the face of the cheque by forging customer’s signature or on the back of the cheque by forging the indorsement of a payee or holder.[5] Forged signature is also different from an unauthorised signature.[6] An unauthorised signature is a signature made by unauthorised person to the cheque. According to section 24 of Bill of Exchange 1949, a forged signature or unauthorised signature on a bill would be regarded as wholly inoperative and render the bill invalid unless there was a representation by the customer to banker that the forged cheque is effective. Hence, a bank should not honour forged cheque since it doesn’t have customer’s mandate.

3.02 Bank’s duty of care and its liability

Basically, bank should strictly comply with its customer’s instruction. In case of Redmond v Allied Irish Bank Plc., Saville J. stated that a bank owes its customer a duty to take reasonable care and skill in interpreting, ascertaining and acting in accordance with instructions of its customer.[7] In Selangor United Rubber Estates Ltd. v Cradock & Ors. (No.3)[8] and case of Karak Rubber Co. Ltd v Burden[9], the court held that a paying bank has a duty to make reasonable inquires prior making payment from customer’s account if the bank has reasonable grounds to suspect that someone is attempting to defraud its customer. As such, the bank shall not honour the forged cheque due to the lacking of customer’s mandate. It is because the cheque is regarded as wholly inoperative. In Syarikat Perkapalan Timor v United Malayan Banking Corporation Berhad,[10]the court held that a bank which paid a cheque containing forged signature is not entitle to debit the plaintiff’s account with the payments by virtue of section 24 of the Act.

It is also noteworthy that the onus of proof for forgery rests on the plaintiff according to section 101(1) of Evidence Act 1950. In order to establish forgery, the plaintiff has to prove the presence of forgery on the balance of probabilities. This onus of proof in establishing forgery is twofold which are burden of establishing a case and burden of introducing evidence. In case of Farmosa Resort Properties Sdn Bhd v Bank Bumiputra Malaysia, the defendant bank had paid 68 cheques which were alleged containing forged signature. In proving existence of forgery, the plaintiff only contended that the signature of the 67 cheques is not similar to the specimen signatures. The court held that signatures signed on those cheques differed from the specimen signatures is insufficient to prove forgery. It is necessary to compare between signature on the cheques with the signature’s specimen held by the bank and also signature on the account application form.

3.03 Legal basis of claim against bank in respect of forged cheque

There are two legal basis of action for the true owner of the cheque which is conversion or an action for money had and received. It is very common that the true owner will sue for conversion against the bank which honoured forged cheque. In case of United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd[11], the court held that:

It is established principle that the liability of a bank for making payment on forged instruments of its customer is founded on the tort of conversion. That is a tort of strict liability.

Conversion can be defined as wrongful inference with goods of another without lawful justification.[12] Any action or interference which is inconsistent with the owner’s right to the property is a wrongful interference.

It is widely agreed that only the ‘true owner’ of the cheque can sustain action for conversion. The ‘true owner’ usually refers to the payee[13]. However, the payee will cease to be the true owner if the cheque thereon came into hand of holder in due course. It is because the true owner does not necessarily refer to the original owner but rather to a person who has a better title to the instrument.

Furthermore, ‘true owner’ can also choose to waive to sue the bank for conversion and claim for money had and received based on quasi-contract. The claim for money had and received is a common law action brought by plaintiff to have money returned to him if he had it before but then it was received by other person without any lawful justification.

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[1] This provision was inserted in the Act in 1998.
[2] Lee Mei Pheng, Forged Cheque and The Law, (Selangor: Fajar Bakti Sdn Bhd, 2005), 29.
[3] It was held in case of Foley v Hill (1848) 2 HL Cas 28 that general relationship between banker and customer is debtor-customer relationship.
[4] Poh Chu Chai, Banking Law, 2nd ed. (Selangor: Lexis Nexis Sdn Bhd, 2011), 697.
[5] Wu Min Aun & Beatrix Vohrah, The Commercial Law of Malaysia, (Selangor: Longman Malaysia Sdn Bhd, 1991), 349.
[6] Ibid
[7] [1987] F.L.R. 307
[8] [1968] 1 W.L.R. 1555
[9] [1972] 1 W.L.R. 602
[10] [1988] 3 MLJ 218
[11] [1993] 1 MLJ 182
[12]Lee Mei Pheng, Forged Cheque and The Law, 52.
[13] Lee Mei Pheng, Forged Cheque and The Law, 59.