Commentary as found in the 1999 South African Mercantile Law Journal
Proposed Amendments to the Bills of Exchange Act 34 of 1964
Ntsietso Mofokeng
University of South Africa
JT Pretorius
University of South Africa
1. Introduction
It has, for some time, become clear that the Bills of Exchange Act 34 of 1964 (hereinafter ‘the Act’) may be in need of some revision (see, for example, DV Cowen ‘Bookreview’ 1982 Acta Juridica 117; FR Malan ‘Moontlike Hervorming van die Wisselreg’ 1991 TSAR 201). Proposals for the repeal of the Act and the introduction of two separate laws; one dealing with bills and promissory notes on the one hand and cheques on the other, were made in FR Malan, AN Oelofse & JT Pretorius Proposal for the Reform of the Bills of Exchange Act, 1964 (1988) (also published as Working Paper 22 of the South African Law Commission (1988)). The aforesaid proposals introduced new concepts and were a major departure from the existing Bills of Exchange Act. As a result and because of what was felt was a pressing need for ‘urgent’ reform in the law, amendments to the Act have now been proposed (the proposed amendments are published in General Notice 1427 in Government Gazette No 19075 of 21 July 1998, hereafter ‘the Amendment Bill’). Article 2 of the Amendment Bill sets out the objective of the amendments as being:
i) to simplify and clarify certain provisions and concepts;
ii) to provide consumer protection;
iii) to cater for technological advancements;
iv) to address collecting bank’s liability; and
v) to reduce the incidence of fraud.
Professor Cowen has described the Act as an ‘integrated and technical piece of legislation’ (DV Cowen ‘The Liability of a Bank in the Computer Age in respect of a Stolen Cheque’ 1981 TSAR 193 at 199). The author however, warned against the dangers of ad hoc amendments to the Act that may result in ‘piecemeal, and possibly one-sided tinkering’ with this integrated piece of legislation (Cowen op cit) and has further remarked that the revision or amendment of the Act ‘calls for a careful balancing of interests — manifestly, but not by any means exclusively, in regard to the sections directly affecting banks’ (Denis V Cowen & Leonard Gering The Law of Negotiable Instruments in South Africa I (1985) 5ed at 141 (hereafter ‘Cowen & Gering’). The amendment of the Act also ‘calls for business sense and an understanding of what is economically sound’ (Cowen & Gering at 141). The revision of the Act is, perhaps, long overdue.
It is, however, regrettable that the proposed amendments do not seem to have taken the aforesaid warning into account. The present ad hoc and piecemeal proposals may have far reaching and catastrophic implications for the consumer and bank clients and for the further development of the law in this regard. It is submitted that the proposals are by large biased in favour of commercial banks.
The paper will not attempt to deal with all the proposed amendments but attention will be directed at those proposals that may be termed controversial and a potential source of legal uncertainty as well as dealing with what may be termed important principles and concepts.
2. Proposed Amendments
2.1 Customer Duty
Article 28 of the Amendment Bill seeks to introduce a new s 72B to the Act. This section imposes a duty on certain clients of a bank to exercise reasonable care in the custody of their cheque books and to impose liability on the client in the event of a breach of such a duty. This proposal constitutes a fundamental and radical change from the existing law where no such duty exists (Malan on Bills of Exchange, Cheques and Promissory Notes in South African Law 3ed (1997) by FR Malan & JT Pretorius par 208 (hereafter ‘Malan’)). Professor Benjamin Geva, in a recent publication, examines this proposal to impose a duty of care on the drawer of cheque in South Africa against the background of other international trends and legal systems (Benjamin Geva ‘Allocation of Forged Cheque Losses—Comparative Aspects, Policies and a Model for Reform’ (1998) 114 Law Quarterly Review 250). Professor Geva warns against the adoption of such open ended legislation in South Africa (at 290). Geva makes the following general proposal with regard to the allocation of loss between bank and customer:
‘In principle, to implement effectively the policy of loss or risk distribution, as well as in order to encourage forgery detection and promote the development of pertinent technologies, forgery losses are to be allocated to the bank. Undoubtedly, the bank is the better risk bearer or insurer, as well as the superior prepayment detector. Presumably, the current English experience (no customer’s duty of care to prevent or detect forged drawer’s signature) supports the viability of such a scheme without the imposition of additional cost. In any event, charging costs to customers, either in the form of insurance premiums or reduced return for bank deposits is quite consistent with this general principle’ (at 288-289).
A similar proposal has been considered and found unacceptable in other jurisdictions. In the United Kingdom, the Jack Committee (Banking Services: Law and Practice Report by the Review Committee Cm 622 February 1989) when considering a similar proposal made the following recommendation:
‘It does seem most unfair that customers who exhibit the degree of negligence shown by the plaintiff in the Tai Hing case [Tai Hing Cotton Mill Ltd v Lui Chong Hing Bank Ltd [1985] 2 All ER 947 (PC), [1986] AC 80] should, in the eyes of the law, be entitled to sue their bank with impunity. But we join the opposition of the majority of our consultees to a statutory duty on customers to examine bank statements, which seems an unreasonable imposition. A fortiori, we also go along with the majority in rejecting a ‘settled account system’, even for business customers. In the case of both these options, we see force in Lord Scarman’s contention that banking is not the customer’s business. In other words, customers are entitled to rely on banks performing their own functions to the highest professional standards’ (par 6.13).
The reference to Lord Scarman’s contention is to the decision in Tai Hing Cotton Mill Ltd v Lui Chong Hing Bank Ltd (supra) where his lordship remarked:
‘The business of banking is the business not of the customer but of the bank. They offer a service, which is to honour their customer’s cheques when drawn on an account in credit or within a agreed overdraft limit. If they pay out on cheques which are not his, they are acting outside their mandate and cannot plead his authority in justification of their debit to his account. This is a risk of the service which it is their business to offer’ (at 106B-C).
In Canada, the Supreme Court has held that there is no duty on the part of the customer ‘to maintain an adequate system of internal accounting controls for the prevention and minimisation of loss through forgery’ (Canadian Pacific Hotels Ltd v Bank of Montreal et al (1988) 40 DLR (4th) 385 at 432).
Another aspect of the proposed section is that it would only be applicable to persons who are ‘required by law to have his [sic] financial statements audited by a person registered in terms of section 15 of the Public Accountants’ and Auditors’ Act, 1991 (Act 80 of 1991) (s 72B) (1)). This prerequisite will exclude partnerships, trusts and even close corporations.
2.2 Non-transferable Cheques
The so-called ‘non-transferable’ cheques are given a separate treatment by the introduction of s 75A. A non-transferable cheque is a cheque that is not negotiable under the provisions of s 29 (Malan par 234). No one but the named payee can be the holder of the instrument and since it cannot be negotiated in terms of s 29, no one can be the holder in due course thereof. ‘Not transferable’ cheques are indeed very important in these days and in KwaMashu Bakery Ltd v Standard Bank of South Africa Ltd 1995 (1) SA 377 (D) Combrinck J remarked the following with regard to the use of these cheques:
‘The public makes use of the non-transferable cheque particularly when large sums of money are involved. This is demonstrated by the statistics presented by the defendant — 14,73 % in number of cheques used per annum are non-transferable, representing 34,66 % in value. The banking public is therefore aware of the value of a non-transferable cheque and is in need of the protection against loss which it offers. As argued ¼, the non-transferable cheque reflects in modern society what most people want and use a cheque for — not for negotiation between a variety of holders, but as payment to one person. In the overwhelming majority of cases the drawer intends the cheque to go to the payee’s account and to no other (at 393A-C)’.
The proposed s 75A states that only a cheque which contains the words ‘not-transferable’ written boldly across the face of it is to qualify as a ‘not transferable’ cheque. Although s 75A is inserted in that part of the Act that deals with ‘Crossed Cheques’, it is not clear whether the proposed ‘non-transferable cheque’ must be crossed in order for it to qualify as such. Section 75A(4) seems to imply that the ‘non-transferable’ cheque should be crossed but there is no certainty in this regard.
At present it is possible to render a cheque a ‘not transferable’ cheque in quite a number of different ways (see DV Cowen ‘Two Cheers (or maybe only one) for Negotiability – the Sham Magazine case: Its Implications and Repercussions’ (1977) 40 THRHR 19 at 38ff for full a discussion in this regard). Section 75A(2) proposes that cheques that do not comply with the provisions of s 75A(1), that is, cheques that do not have the prescribed markings of the section, shall be negotiable. This provision will undoubtedly create considerable confusion. Section 6(1) of the Act provides that a ‘bill must be payable either to bearer or order to be negotiable’. If s 75A(2) provides that a cheque that does not comply with s 75A(1) shall be negotiable, the question then arises whether such a cheque will be payable to bearer or to order for it to be negotiable within the meaning of s 6(1). It is also not clear what is meant by the expression ‘negotiable’ in the proposed s 75A(2). Section 29(1) provides that a ‘bill is negotiated if it is transferred from one person to another in such a manner as to constitute the transferee holder of the bill’. Does this mean that if a cheque is made payable to ‘John Thomas only’ and does not have the prescribed words ‘not transferable’ written on it, that the named payee would be entitled to negotiate the cheque to Smith who would then be entitled to become the holder (or, for that matter, holder in due course) of it? On a strict literal reading of the Act, if the drawer writes the words ‘non-transferable’ across the face of the cheque where he intends the words ‘not transferable’, s 75A(1) should not apply. For purposes of the existing s 6(5) this is clearly an indication of an intention to prohibit transfer of the cheque. The proposed amendment will change this position and disregard the intention of the drawer and such cheque shall be negotiable ‘notwithstanding’ the provisions of s 6(5). In this regard it should be borne in mind that the general public are not only used to rendering a cheque not transferable in a certain manner, but they have also been educated to do so by the banks themselves. It is further not clear how this provision will affect those sections dealing with the negotiation and indorsement of cheques (ss 29-32), and whether these cheques will indeed be capable of being indorsed at all.
It is also not clear what is meant by the provision that the prescribed words must be written boldly across the face. What exactly does this mean and how is boldly to be determined?
The proposed amendment creates a lot of uncertainty and in more ways than one conflicts with the rest of the Act. It provides that the words ‘not transferable’ must be written across the face of the cheque by ‘the drawer’.It does not, however, state what the consequences will be, if any, where the words are written on the cheque by some other party, for example, the payee. In a dispute, who will decide which party wrote the words on the cheque, and who will bear the onus of proof? If the payee writes the words on the cheque, would that have the effect that the words are to be regarded as pro non scripto and will such instrument then be ‘negotiable’ within the meaning of s 75A(2)?
It is argued that it has become too onerous for banks to recognize ‘not transferable’ cheques and further that the costs involved in identifying the ‘not transferable’ cheques has become too much for the banks to bear (Par 7 of the ‘Backgrounder’ to the Amendment Bill). Thus the purpose of the proposed amendment is to make ‘not transferable’ cheques more identifiable and easily recognizable, which in turn will result in a considerable saving for the banks. The validity of the aforesaid arguments was dealt with in KwaMashu Bakery Ltd v Standard Bank of South Africa Ltd (supra) where Combrinck J said the following:
‘The banks ¼ have even, prior to the decision in the Indac Electronics case [Indac Electronics (Pty) Ltd v Volkskas Bank Ltd 1992 (1) SA 783 (A) which recognised that a collecting bank can be held liable under the extended lex Aquilia for negligence to the true owner of lost or stolen cheque] developed a system of checking that the proceeds of a non-transferable cheque go to the actual payee and not to someone not entitled thereto. This is not to say that the defendant has taken upon itself a duty which otherwise did not exist, because that would be a non sequitur, but it is of cardinal importance when considering whether such conduct can reasonably be expected from a banker. The analysis of the evidence above showed that the defendant requires the tellers to remove all cheques with restrictive endorsements and for a designated officer to examine such cheques and exercise a discretion as to whether further enquiry is necessary or not. This evidence also impacts on the argument regarding the costs associated with checking on non-transferable cheques because it appears that those costs have already been absorbed by the defendant without any difficulty.
There was evidence that the commercial banks of South Africa adopted the following resolution:
"Banks will deal with cheques, the transfer of which is prohibited by wording on the face thereof (such as "not-transferable") in only one manner, namely by accepting them for the credit of an account bearing the identical name to that of the payee named on the cheque."
The banks inter se accepted that it is a responsibility of a collecting bank to ensure that the instruments bearing non-transferable markings are applied to accounts in the identical name of a payee’s name thereon. ¼ This demonstrates that the banks inter se do not regard it as too onerous a duty for a collecting banker to ensure that it collects only for the named payee.’ (at 393 D—I).
The above demonstrates that there is no compelling reason for the adoption of this amendment. Furthermore, by making ‘not transferable’ cheques more easily identifiable, that will not in any way relieve the banks of the duty imposed on the collecting banks as a consequence of the decision in case Indac Electronics (Pty) Ltd v Volkskas Bank Ltd (supra). The particular cheque that the court was dealing with in Indac was not a ‘not transferable’ cheque but an ordinary crossed cheque that was marked ‘not negotiable’ (at 788I).Thus, even if the proposed s 75A will help the banks to identify ‘not transferable’ cheques, they still have to observe their common law duty in respect of other cheques as well as ‘not-transferable’ cheques.
2.3 Unindorsed and Irregularly Indorsed Cheques
Clause 40 proposes to amend the existing s 84 of the Act. The exiting section reads as follows:
‘Rights of bankers if unindorsed or irregularly indorsed cheques or certain other documents are delivered to them for collection.— If a cheque, or draft or other document referred to in section eighty-three, which is payable to order, is delivered by the holder thereof to a banker for collection, and such cheque, draft or document is not indorsed or was irregularly indorsed by such holder, such banker shall have such rights, if any, as he would have had if, upon such delivery, the holder had indorsed it in blank’.
The reasons for and purpose of the aforesaid section are explained by Coetzee J in Trust Bank van Afrika Bpk v Bendor Properties Ltd (1977 (2) SA 632 (T)) at 634A—F and Denis V Cowen & Leonard Gering Cowen on The Law of Negotiable Instrument in South Africa 4ed (1966) at 441-451 (hereafter ‘Cowen & Gering (1966)) and need not be repeated. It is, perhaps, more important to have regard to the interpretation of the existing section.
Malan explains that section 84 does not govern the status of the collecting bank, but only its rights (par 225). In Bloems Timber Kilns (Pty) Ltd v Volkskas Bpk 1976 (4) SA 677 (A) at 686D it was said: ‘Section 84 was not intended to define the status of a banker who takes delivery of a cheque in the circumstances outlined in the section. It deals purely with his rights.’ To qualify as holder of a cheque, one has to be the payee or indorsee of a cheque who is in possession of it or the bearer thereof (s 1 of the Act) . Section 6(2) provides that a bill (or cheque) is payable to bearer if it is expressed to be so payable, or if the only or the last indorsement on it is an indorsement in blank. (It is also trite that one cannot be a holder in due course of a cheque if one does not even qualify as its holder.) Section 84 does not alter or effect the definition of ‘holder’ in s 1 and merely work with a hypothesis that the collecting bank will have the same rights it would have had if the holder had indorsed it in blank after delivery (FR Malan ‘Aspekte van Art 84 van die Wisselwet’ (1974) 7 De Jure 59 at 60; CR de Beer ‘Artikel 84 van die Wisselwet -- ‘n Interpretasieprobleem?’ 1977 De Rebus Procuratoriis 196 at 197). Section 84 does not convert the document into one that is payable to bearer. If one is dealing, for example, with an uncrossed ‘not transferable’ cheque payable to the order of the payee and such cheque is not indorsed by the holder thereof before it is delivered to a bank for collection, the provisions of s 84 will not ‘transform’ such a cheque into a bearer cheque. A ‘not transferable’ cheque is not capable of being indorsed and can therefore not be negotiated or transferred within the meaning of s 29(1) and only the named payee can be holder thereof. Thus, even if one works with the hypothesis of s 84, the collecting bank cannot have any rights to such cheque despite the provisions of s 84 for the simple reason that even if the cheque had been indorsed in blank such indorsement would have had no effect on the negotiability or transferability of such cheque.
Clause 40 proposes to alter the aforesaid position by inserting a new subsection that provides that if a ‘not transferable’ cheque is delivered to a banker for collection, such banker shall have such rights, if any, as it would have had, had it been the payee of such cheque. The proposed amendment seeks to give a collecting banker rights which it would not and should not have. There are sound reasons why a collecting banker should not have any rights in respect of a ‘not transferable’ cheque. In drawing a ‘non-transferable’ cheque, the creator thereof indicates an intention that no one other than the named payee should have any rights in the cheque. There is also no indication whether a ius tertii (see Malan par 139) could be raised against a banker who will have rights under the proposed s 84(1).
2.4 Fictitious and Non-existing Payees
The purchaser of a cheque, if he qualifies as holder, has the power to sue on the instrument and to enforce payment against prior parties (s 36(a) read with s 71 of the Act). The payor of a cheque, on the other hand, must make payment in such a way that the drawer is discharged from further liability on the cheque. This would normally presuppose payment to the holder of the cheque (FR Malan, AN Oelofse, W le R de Vos, JT Pretorius & CJ Nagel Provisional Sentence on Bills of Exchange, Cheques and Promissory Notes (1986) 144n124). The question whether a cheque is payable to bearer or to order has important consequences for both the purchaser and payor of it. The significance of the distinction between order and bearer cheques lies in the manner in which these instruments are negotiated. ‘Negotiation’ means the transfer of an instrument from one person to another in such a manner as to constitute the transferee the holder of it (s 29(1)). A cheque payable to order is negotiated by the indorsement of the holder completed by delivery (s 29(3)). In contrast, a cheque payable to bearer is negotiated by delivery only (s 29 (2)). Section 1(ix) of the Act defines the holder as ‘the payee or indorsee of a bill who is in possession of it, or the bearer thereof’. ‘Bearer’ is defined as ‘the person in possession of a bill which is payable to bearer’ (s 1(iv)). In terms of s 22, a forged or unauthorized indorsement is wholly inoperative. A forged or unauthorized indorsement does not bring about a negotiation and no right to retain the cheque, to give a discharge for it or to enforce payment of it can be acquired through or under such indorsement (Etienne Labuschagne Die Wisselendossement in die Suid-Afrikaanse Wisselreg (unpublished LLM dissertation Randse Afrikaanse Universiteit (1986) 82ff). Thus, the purchaser of an order instrument on which an indorsement is forged or unauthorized cannot be the holder of it. A bearer instrument, however, is negotiated by delivery only and an ‘indorsement’ is superfluous to constitute the transferee bearer and thus holder of the instrument (s 1(ix) read with s 1(iv)).
The proposed amendment to s 5(3) provides that if the payee is a fictitious or a non-existing person, such document may be treated as being payable to bearer. The existing s 5(3) provides that where the payee is a fictitious person, or a person not having capacity to contract, ‘the bill may be treated as payable to bearer’. This provision is important when one deals, firstly, with the question whether the purchaser of an order instrument qualifies as a holder in the event of a forged or unauthorized indorsement, and secondly, whether the payor of a cheque has made payment in such a way that the drawer is discharged from further liability on the cheque. In Nedbank Ltd v Window Press (Pty) Ltd (1987 (3) SA 761 (SE)) the court had to determine the rights of a purchaser of a cheque which contained an unauthorized indorsement in the light of s 5(3). The facts were presented to the court by way of a stated case and involved a cheque drawn by the defendant at the instance of one Meyer on Volkskas Ltd in favour of Radarm (Pty) Ltd or order. No company known as Radarm (Pty) Ltd existed but the defendant was unaware of that fact. The defendant believed that the company did exist and intended the company to receive payment. Meyer knew of the non-existence of the payee and, purporting to act on behalf of Radarm (Pty) Ltd, indorsed the cheque to Euro Dynamics Systems (Pty) Ltd who deposited it with the plaintiff. The plaintiff in good faith credited the account of Euro Dynamics but the cheque was subsequently dishonoured by non-payment. The court held that since defendant was under the impression that the payee existed, the payee was in his mind not a ‘fictitious’ person within the meaning of s 5(3) and that the cheque should accordingly not be treated as being payable to bearer (at 765J). Thus, the plaintiff did not qualify as bearer or holder of the cheque and could therefore not enforce payment against prior parties.
For one to understand the implications of the proposed amendment, a résumé of the history is necessary. The law relating to the fictitious or non-existing payee was developed in England in the eighteenth century in order to combat a particular type of mischief: in order to finance their huge speculations in the money market, commercial concerns agreed with their financiers that the latter would draw or accept bills payable to fictitious payees. The commercial concerns indorsed these instruments in the names of the fictitious payees and discounted them. When the instruments were dishonoured in the event of a non-profitable speculation and the financiers were sued either as drawers or acceptors, they resisted payment on the ground that the indorsement through which the plaintiff acquired title had been forged (Anonymous ‘The Fictitious Payee and the UCC -- The Demise of a Ghost’ (1951) 18 University of Chicago Law Review 281; Malan par 46; J Milnes Holden The History of Negotiable Instruments in English Law (1955) at 146-147; M Kulp ‘The Fictitious Payee’ (1920) 18 Michigan Law Review 296). The drawers and acceptors of these bills were held liable by treating the bills as payable to bearer provided such drawer or acceptor knew that the bill had been payable to a fictitious person (Gibson & Johnson v Minet & Fector (1791) 1 H Bl 569, 126 ER 326). It has been suggested that the rationale of the fictitious payee doctrine at common law was understood to be an estoppel against a party with knowledge of the fraud (Benjamin Geva ‘The Fictitious Payee and Payroll Padding: Royal Bank of Canada v Concrete Colum Clamps (1961) Ltd’ (1978) 2 Canadian Business Law Journal 418 at 425-426).
The four provincial Acts, which preceded the Bills of Exchange Act of 1964, were closely modeled on the United Kingdom Bills of Exchange Act 1882 (45 & 46 Vict c 61), which codified the English law relating to bills of exchange, cheques and promissory notes. The corresponding provisions to s 5(3) in the Cape (Act 19 of 1893), the Transvaal (Proclamation 11 of 1902) and the Orange Free State (Ordinance 28 of 1902), in addition, contained references to a ‘non-existing person’. Section 6(3) of the Natal Law 8 of 1887, however, omitted the reference to a ‘person not having capacity to contract’. Section 7(3) of the English Act of 1882 reads as follows: ‘Where the payee is a fictitious or non-existing person the bill may be treated as payable to bearer’.
Section 7(3) of the English Act has been subjected to interpretation by the English Courts on several occasions: The Governor & Co of the Bank of England v Vagliano Brothers [1891] AC 107 (HL); Clutton & Co v Attenborough [1895] 2 QB 707 (CA); Clutton v George Attenborough & Son [1897] AC 90 (HL); Vinden v Hughes [1905] 1 KB 795; North and South Wales Bank Ltd v Macbeth [1908] AC 137 (HL). Since the import of these decisions is well documented elsewhere, it is unnecessary to deal with these decisions individually (see, for example, Byles on Bills of Exchange (1983) 25ed by Maurice Megrah & Frank R Ryder 26-30; Chalmers on Bills of Exchange 13ed (1964) by David AL Smout at 25-27, but compare the previous editions, for example the 7th ed (1909) 23; John Delatre Falconbridge Banking and Bills of Exchange 7ed (1976) by Arthur W Rogers 480ff; Anonymous ‘The Fictitious Payee and the UCC -- The Demise of a Ghost’ (1951) 18 University of Chicago Law Review 281; Malan § 46; June Sinclair ‘Fictitious and Non-Existing Payees -- The English Heritage’ (1973) 90 SALJ 369; Cowen & Gering (1966) at 66ff). See also Royal Bank of Canada v Concrete Column Clamps (1961) Ltd (1977) 74 DLR (3d) 26; Fok Cheong Shing Investments Co Ltd v Bank of Nova Scotia (1981) 123 DLR (3d) 416 (Ont CA), 146 DLR (3d) 617 (SCC); Town Advance Co v Provincial Bank of Ireland [1917] 2 IR 421 and Rhostar (Pvt) Ltd v Netherlands Bank of Rhodesia Ltd 1972 (2) SA 703 (R) and the discussions by June Sinclair in 1972 Annual Survey of South African Law 267-268 and (1973) 90 SALJ 369 at 375ff) of the last-mentioned decision. For present purposes, the principle that can be extracted from the English decisions is summarized by Byles (op cit) 29-30 as follows:
‘[I]n determining whether a payee is fictitious or not, the intention of the drawer of the bill is decisive. If he inserted the name as a mere pretence, to give colour to the instrument, the payee is fictitious, notwithstanding that he in fact exists ... . If, on the other hand, the drawer intended his named payee to receive his money, the payee is not fictitious, notwithstanding the fact that the drawer was deceived into drawing the instrument by a third person who intended to misappropriate the instrument, and to further his intention fraudulently presented to the drawer, contrary to the fact, that the payee was entitled to the sum specified in the instrument. Though the transaction is in fact fictitious, the drawer believes it to be real ... .’
‘In the case of a non-existing person the intention of the drawer is immaterial. If the payee is in fact not a real person, the subsection applies even though the drawer believed him to be a real person and intended him to receive payment under the instrument’.
See also the Nedbank case at 764I-765A where part of the aforementioned passage is quoted with approval, and Malan par 46.
Because s 5(3) of the South African Bills of Exchange Act omitted reference to a ‘non-existing’ payee, the debate surrounding the construction of this sub-section has centered on the question whether ‘non-existing’ was intended by the legislature to be included in the term ‘fictitious’ (see Sinclair (1973) 90 SALJ 369 at 372-373; PMA Hunt ‘The new Bills Act’ (1964) 81 SALJ 371 at 374; Malan par 46; Jean Davids 1964 Annual Survey of South African Law 274 at 276 and De Wet & Yeats Die Suid-Afrikaanse Kontraktereg en Handelsreg 4ed (1978) by JC de Wet & AH van Wyk at 748). Cowen & Gering (1966) at 67, for example, contemplated that ‘the new Act [ie the 1964 Bills of Exchange Act] will be construed as having made no change in the law; that is to say, it is desirable that the term ‘fictitious’ be now construed as being sufficiently wide to cover non-existing, for unless this interpretation is adopted the courts will be thrown back upon an extremely doubtful common law position’. This view was not adopted in the Nedbank case where it was held that since the draftsmen of the 1964 Bills of Exchange Act must have been aware of the ‘authoritative interpretation by the English Courts of the words ‘fictitious person’ in the parent Act of 1882 and of the references to and commentary on these cases in textbooks and journals ... the Legislature probably intended them to bear the meaning which the English Courts had ascribed to them’, with the result that the ‘omission of the words ‘or non-existing’ could not have had and did not have an effect on the meaning of the words ‘a fictitious person’ ‘ (at 765H-I).
It is submitted that the words ‘fictitious’ and ‘non-existing’ are difficult, if not impossible, to define with exactness or definiteness. In an often cited passage, Paget, in the 8th edition of his work (J Paget Paget’s Law of Banking 8ed (1972) by Maurice Megrah & Frank R Ryder) pointed out that the terms ‘fictitious’ and ‘non-existing’ are ‘suitable rather for a philosophic treatise than an Act dealing with mercantile instruments; interpretation is complicated by antithesis, necessitating differentiation of meaning; and, not unnaturally, judgments dealing with the question exhibit refinements, if not inconsistencies, which render it almost impossible to formulate the general effect of the subsection’ (at 231). Sir MD Chalmers (‘Vagliano’s Case’ (1891) 7 Law Quarterly Review 216) remarked that the term fictitious payee ‘affords a good illustration of the uncertainty of law, and of the kaleidoscopic nature of the judicial mind’. In this regard, the approach adopted by the Uniform Commercial Code (part 4 ‘Liability of Parties’ par 3-405) is incisive. Paragraph 3-405 regards the intention of the creator of the instrument as vital and stipulates that where the drawer’s intention is that the payee (whether existing or not) should have no interest in the instrument, then an indorsement by any person in the name of the payee will be effective. Paragraph 1 of the Official Comment to par 3-405 explains that ‘[the words ‘fictitious or nonexisting person’ have been eliminated as misleading, since the existence or nonexistence of the named payee is not decisive and is important only as it may bear on the intent that he shall have no interest in the instrument’.
2.5 Gender and Related Issues
The Amendment Bill introduces what one may term ‘cosmetic’ changes. ‘Banker’ has been changed to ‘bank’; ‘him’ to ‘it’ and ‘whom’ to ‘which’. The impact and cost of these changes to the banking community is enormous. For instance, banks will have to rewrite the many documents that are used. These amendments will not in any way change or improve any of the basic principles involved in the law of negotiable instruments.
2.6 Presentment For Payment
Section 43A of the Amendment Bill introduces a change on the aspect of presentment, which the ‘Backgrounder’ to the Amendment Bill says is necessitated by technological advancements (article 5). A brief discussion of what makes the amendment necessary is called for. Due presentment of a bill must be made in order to hold the drawer and indorser liable on the bill (s 43). Unless presentment is dispensed with in terms of the Act, the drawer and indorsers are discharged from liability if the bill is not duly presented (s 43 (1) (b) read with s 44). Section 43 (2) contains detailed provisions on when, where and to whom presentment must be made. The Act makes further provisions for presentment of cheques in s 72.
A bill must be presented at the proper place (s 43 (2) (c)). Where a bill specifies the place of payment, the bill must be presented for payment at that place (s 43 (4) (a)). The technological advancements in the banking field do complicate the issue of presentment (see Discounting and Shipping Co (Pty) Ltd v Franskraalstrand (Pty) Ltd and others 1962 (2) SA 559 (W); Navidas (Pty) Ltd v Essop; Metha v Essop Volkskas Bank Bpk v Bankorp Bpk (h/a Trust Bank) en ‘n ander 1991 (3) SA 605 (A); Van Vuuren v Van Vuuren 1994 (4) SA 209 (W)) . The holder of a cheque may himself or through a duly authorised representative present the cheque for payment. If the holder wants to be paid over the counter (where the cheque is uncrossed) he must present the cheque at the branch where it is drawn. The bank will then pay or dishonour the cheque, but due presentment will have taken place. Problems of presentment are experienced where the services of a collecting banker are used. Collection of cheques may be inter-branch or between a collecting bank and a paying bank.
Traditionally, cheques for collection are taken to a clearing bureau where they are then sent to the central depot or directly to branches of the drawee bank where the accounts are kept. From the branches they are sent to the drawers. Where the collection process is short-circuited, we have what is called ‘stalling’ or ‘truncation’ of a cheque. (for a full discussion of the problems relating to truncation see J van Zyl Tjekretensie in die Suid-Afrikaanse Wisselreg (LLM dissertation Randse Afrikaanse Universiteit) (1986); see also Coenraad Visser ‘The Evolution of the Electronic Paying System (1989) 1 SA Merc LJ 189 at 196; Ina Meiring ‘ Holder in Due Course, Truncated Cheques and Presentment for Payment: Recent Developments’ (1992) 4 SA Merc LJ 377 at 379-381; Malan par 190). Truncation can happen at different levels but the most experienced form of truncation is where the cheque is retained by the drawee bank. The introduction of Automated Clearing Bureaus (commonly known as the ACB) saw a new form of cheque truncation. In the areas where the ACB operate, cheques which are payable at branches within the areas are sent to the clearing bureau where they are sorted and data on the cheques is entered onto a magnetic tape. The cheques and the tapes are then sent to a central depot of the drawee bank, where it is decided whether a cheque is to be paid or not. The central depot is linked by computer to the branches of the bank and stores images of customer’s specimen signatures. If a decision is taken to dishonour a cheque, the cheque is returned to the collecting bank. The cardinal issue becomes whether presentment, for purposes of holding a drawer and indorsers liable, has taken place as illustrated by the following:
‘...[W]here the place of payment is specified in the cheque, it must be presented there.... Thus, where the branch of the drawee bank on which the cheque is drawn is set out in the cheque, presentment must be made there. Presentment at a clearing bureau or depot is not sufficient. The fact that the drawer keeps his account with a bank participating in some or other form of cheque retention or truncation does not amount to a waiver of proper presentment.’ (Malan par 190)
The pre-printed cheque forms may indicate the branch at which the particular account is kept. This is the place where the cheque must be presented for payment (Malan par 190; Meiring (op cit) at 380; see also Discounting & Shipping Co (Pty) Ltd v Franskaalstrand Ltd (supra) at 560H-561A ; Barclays Bank Plc & Others v Bank of England [1985]1 ALL ER 385 at 391). Where a cheque is presented elsewhere than at the branch where the account is kept, no due presentment takes place. Thus, presentment at the central depot, cannot be presentment as contemplated by s 43. Even where a bank performs the dual role of being a drawee and a collecting bank, if a cheque is dishonoured without it being presented at the branch where the account is kept, there will be no due presentment. Due presentment has been held to mean physical presentment (Navidas (supra) at 147D-G). Where cheques are cleared through the ACB, the cheques will obviously not be physically presented at the branch where the account is kept. Although the court has been sympathetic to holders in these cases, it has been held that presentment had not taken place thus the holder could not hold the drawer or the indorser liable (see Navidas (supra) at 148A-B).
In the light of technological advancements which have and continue to take place in the banking industry, ‘legislative reform to provide for truncation is desirable’ (Malan par 190). The proposed s 43A seeks to do exactly that. The motivation for the amendment is set out in article 5 of the ‘Backgrounder’ to the Amendment Bill which states that:
‘Technological advances have made it possible to present cheques and other instruments more efficiently by transmitting essential data electronically to the drawee. Section 43A makes provision for this mode of presentment....’
The material features of the amendment are that, provided other requirements of s 43 are met, a collecting bank may present a bill to a drawee bank:
(a) at a place designated by clearing rules; or
(b) at a place designated by the drawee bank; or
(c) by means of data transmitted in terms of an agreement to which both the drawee bank and the collecting bank are party.
Where the latter mode of presentment is used, the bill must be identified with reasonable certainty (s 43A(1)(A)). This refers to the sum to be paid, the number of the bill (if any), the name and account against which the bill is drawn and the drawee bank (s 43A(2)).
The proposed amendment contemplates a non-physical presentment of a bill. Section 44 comes into operation where other requirements of s 43 have been met. One of these requirements is that where the place of payment is specified, the bill must be presented at that place. Is this requirement excluded from ‘other requirements’ for purposes of s 43A?
‘Paid cheques and other instruments are frequently used as evidence of payment, both judicially and informally’ (Malan par 190). Problems may arise when application for provisional sentence is made where a cheque has not been physically presented. In a case of a non-physical presentment, when the drawee bank dishonours a cheque, it will not have the opportunity of indicating the dishonour on the cheque. For purposes of obtaining provisional sentence, will the courts recognise a marking by the collecting bank of the dishonour, the collecting bank being regarded as the drawee bank’s agent in this regard?
Section 50(4) requires that when a bill is presented for payment, the holder must exhibit it to the payor and when it is paid he must forthwith deliver it to the payor. Where cheques are truncated, as contemplated by s 43A, the drawee bank may make payment without necessarily seeing the cheque and taking delivery thereof. Can a drawee, notwithstanding the provisions of s 43A, demand exhibition of the cheque and even refuse to pay if the cheque is not exhibited? Furthermore, the holder must, in terms of s 50(4), on payment, forthwith deliver the cheque to the payor. If the cheque is retained by the collecting bank, who acts an agent of the holder, the requirements of s 50(4) will not be fulfilled. Once a bill has been paid the holder loses all rights to it and it becomes the property of the drawer (Malan par 190). Where the cheque remains in the hands of the collecting bank, and it is not delivered to the drawer within a reasonable time , can the drawer vindicate the collecting bank and can he further sue the drawee bank, should he suffer damage as a result of the failure to timeously deliver the cheque to him and even hold it liable for failing to examine the document?
3 Conclusion
The Amendment Bill is in part an improvement on the existing Act. For instance, the recognition of cheque truncation in the banking sphere is welcomed. It is only regrettable that a law of such immense commercial importance is being subjected to ad hoc piecemeal amendments. Because of the apparent ‘urgency’ in drafting the amendments, the amendments have not, it is submitted, been thought through. As a result, some of the amendments are inconsistent with other parts of the Act, others are biased in favour of one or more interest groups while others are totally unnecessary and will only escalate costs to consumers. The following is but an illustration of areas of concern:
1 The proposed s 72B not only does it make unnecessary inroads into the common law rights of clients and consumers but also would be contrary to international trends in other jurisdictions. The exclusion of partnerships, trusts and close corporations and other legal persona from the application of the section will probably render the section ineffective, in any event.
2 The proposition to confer rights on the collecting banker as clause 40 does, runs contrary to any existing legal principle. The effect of the proposal may also be that rights are conferred on an outside party in circumstances where there was no intention that anyone but the named payee should receive rights.
3 The proposed amendment of s 5(3) will perpetuate the inconsistencies and problems that have beseeched the interpretation and application of these words. It also fails to take into account the underlying principles that characterise the problem.
4 The wisdom of a separate provision for the non-transferable cheques is questioned. The proposal in this regard will create legal uncertainty and is in any event one-sided as it only addresses concerns of the banking industry.
5 The requirement that cheques must in all cases be physically presented is an aspect of the Act that has lacked behind technological developments. A legislative initiative to address, in particular, cheque truncation in its various forms, may indeed be desirable. It is, however, by no means an insurmountable problem that is facing the banking industry. It is possible, for example, to avoid the strict provisions of s 43. If, for example, the specific branch on which the cheque is drawn is not indicated expressly on the cheque, presentment would be proper if it is made at the drawee’s place of business (s 43(4)(c)). One should bear in mind that through the magnetic ink character recognition system (for how the system operates see Malan par 189) the branch on which the cheque is drawn (albeit in a banker’s code) would in any event be indicated, though only for the banking fraternity.
The shortcomings of the Act should be addressed in a holistic and jurisprudential manner. As Cowen has correctly pointed out ‘... [the] need for a careful and comprehensive revision of the South African [Bills of Exchange] Act has long been obvious, but if the new product is to be an improvement on what we have, speed should be the last of the desiderata for success’ (Cowen & Gering at 141).