Proposed Amendments to the Bills of Exchange Act

Submissions by the Banking Council (South Africa)

Portfolio Committee on Finance August 2000

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Background

In 1995, after 11 years of investigation, the South African Law Commission published its Report on the Investigation into the Payments System in South African Law ("the Report").

It was widely regarded both domestically and abroad as one of the most comprehensive investigation in its field.

At that time - in order to fast track reforms - the Banking Council commissioned one of the co-authors of the report – Professor (now Judge) F R Malan – to draft amendments that would incorporate the most important reforms proposed in the Report.

The Amendment Bill originated from this initiative.

After extensive negotiations with consumer representatives, the wording of the two sections dealing with "not transferable" cheques and "prevention of fraud" have evolved significantly. The Department of Finance brought about changes to the proposed amendment on electronic presentment (section 43A) in order to impose additional liability on collecting banks in the custody of cheques deposited for collection. Most of the other provisions remain substantively as originally drafted and as recommended in the Report.

In oral submissions Professor Jopie Pretorius alleged that the banks had picked out only the most beneficial of the amendments. Professor Pretorius made specific mention of the Law Commission’s recommendations regarding collecting banks’ liability.

Two facts are relevant: (i) at the time the Report was published in 1995, the collecting bank's liability had already been firmly founded in common law, and (ii) the original amendments drafted by Professor Malan did contain a section on the collecting bank's liability. Later, after initial circulation to leading academics, the unanimous response was for these provisions to be excluded - on the grounds that the matter had been adequately addressed in common law. The current draft neither absolves nor diminishes the collecting bank from the liability founded in common law.

The Banking Council is not aware of any other provision contained in the 1995 Report which benefits consumers, and which warrants the allegation that current amendments have omitted anything contained in the Report which is in the interest of consumers. We have requested that Professor Pretorius produce a list of provisions in order to substantiate his allegations and we are not aware of any response.

A further allegation was made that the current draft of the Bill differs significantly from the one published in 1998, and that this requires that the current Bill be re-published in the Government Gazette. The Banking Council has carefully compared the two version of the Bill. In this instance also, we have not found any alteration that would - in our view - warrant further publication.

Process and history

Apart from written submissions received from leading academics and industry bodies, all of which were taken into account in supervening drafts of the amendment, the following consultations and workshops took place since the commencement of the project:

The South African Reserve Bank was involved in the process as from January 1998 and the Department of Finance as from November 1998. These offices were responsible for further refinements to the Bill.

We are thus satisfied that the consultations were both inclusive and comprehensive. A further round of publication and consultation is therefor not warranted, from our point of view.

The way forward

Notwithstanding the above, we appreciate that this is a highly technical piece of legislation and that some of the technical objections raised by academics may be valid. The banking industry would therefore support a referral of the proposal to Judge Malan for final scrutiny. This does not mean that Parliament delegates its responsibility for deciding on the desirability of what is proposed, but merely that the technical correctness is verified.

A period of 4 to 6 weeks should be sufficient for such an exercise.

Specific provisions on which the banking industry would like approval in principle

Electronic presentment

(Sections 43A and 50)

motivation

Presentment is the moment at which the drawee bank decided whether to honour (pay) the cheque, or not. Current law requires that this happens by delivering the cheque to the branch at which the drawee (person who made out the cheque) banks. The movement of paper adds expense to the process and facilitates the interception and loss of the cheque.

Through technology it has become possible to convey an image of the cheque or the essential data pertaining to it, without moving the paper. This is called electronic presentment and has become standard practice in all countries which have the necessary technology. Electronic presentment is already happening in South Africa to limited extent, but this is illegal until the Act is changed.

This section is required in order legalise and promote the practice of electronic presentment.

Origin of the proposal

This proposal originates from the Law Commission's Report (refer Chapter 5 and pages 513 and 539 of the Report).

Precedent / position in other countries

Similar amendments have been made to the applicable legislation in the UK, Canada, Australia and New Zealand, amongst others.

The Not Transferable Cheque

(Sections 75A and 84)

motivation

The cheque-issuing public is increasingly making use of not transferable cheques in order to invoke additional protection - especially where cheques are sent through the mail. Collecting banks face a more onerous duty in the collection of these cheques, since they must ensure that no-one other than the designated payee receives payment. Currently several markings are used to render a cheque not transferable. The proposal standardises the use of this cheque in such a way that banks are more readily able to comply with their obligations in the collection of these cheques.

origin of the proposal

The Law Commission Report recommended the following draft legislation (at page 541).

"(1) A non transferable cheque is a crossed cheque that is payable to a specified person and on which the words "not transferable" or "not negotiable" appear with reasonable clarity between two parallel lines in the crossing.

(2) A non-transferable cheque may be negotiated to a collecting bank only."

Precedent / position in other countries

In order to render a cheque "not negotiable" in the United Kingdom the "account payee only" marking must be used. No other marking is valid. Prior to this, the use of non transferable cheques were not recognised in English law.

In the South African Bills of Exchange Act, the term "not negotiable" must be used in order to invoke the protections of sections 80 and 81. No variant or other term may be used.

Prevention of Fraud

(Section 72B(1) )

motivation

Cheques depend for their commercial viability on the fact that parties need not verify the underlying transactions, but merely the outward regularity of the cheque. The exception to this is a forged drawer's signature.

Banks are happy to accept responsibility for the loss in circumstances in which they could have detected the forgery, i.e. the forgery was not perfect. Banks will also continue to accept liability where the forgery is done by a third party without the negligence of the drawer. However, were the account holder facilitates the fraud through his / her negligence, the loss should be carried by that person.

The current law does not create incentives for the prevention of fraud. Any law which permits a person to be grossly negligent and then allocates liability for the loss incurred to some other person, is inefficient and contrary to legal principles.

origin

The Law Commission in its Report recommends the imposition of a duty of care on drawers of cheques in the drawing and custody of cheques and in the operation of their account. (Refer clause 62(1) on page 545 and pages 468 to 475.)

precedent / position in other countries

German law allows the drawee bank to pay a cheque if it appears to be regular (in other words, banks are not liable for any forgery which closely resembles the signature of a drawer).

In France, a bank may debit the cheque-account holder with the amount of a forged cheque if the account holder was negligent. In other circumstances the bank carries the loss.

The Uniform Commercial Code of the United States of America imposes an obligation on bank clients to scrutinise their account statements in order to detect unauthorised cheques (UCC section 4-406) and prevents any person who through his / her negligence facilitates a forgery from claiming against the bank (UCC section 3-406).