Account opening and s 95
Alan L Tyree*
The fourth edition of Tyree, Banking Law in Australia, Butterworths, 2002 makes the following claim (at p 263):
The requirements of the Financial Transactions Reports Act 1988 (Cth) for opening accounts will be relevant in any future cases…. Certainly a bank which follows the requirements can successfully defend a claim that it was negligent in opening an account.
Once again, real life has show itself more inventive than the imagination of teachers and (some) textbook writers. The bank in Voss v Suncorp-Metway Ltd  QCA 252 followed the requirements of the FTRA as well as, it was claimed, normal banking procedures. It was unable to rely on s 95 of the Cheques Act 1986 since it had not acted “without negligence” in collecting certain cheques.
Mr Voss sold his farm and wished to find a good investment for the proceeds. He consulted his accountant, Mr Ripper. Voss had received a cheque in his favour for some $691,000. On Ripper’s advice, he deposited this cheque in his account with Suncorp Building Society and requested a Suncorp cheque drawn in favour of “Southern Pacific Equities Unit Trust” for the sum of $600,000. He handed this cheque to Ripper.
The Suncorp cheque was a so-called “counter cheque”. Suncorp was, at the time, a building society and so was unable to issue bank cheques. In form, the counter cheque was a cheque drawn by Suncorp on Westpac in favour of the Southern Pacific Equities Unit Trust.
It was not the first time that Voss had invested money on Ripper’s advice. A few months earlier he had consulted Ripper concerning the investment of some $200,000. On that occasion, Voss had deposited a cheque to a numbered account with Advance bank and had received a receipt from Ripper which was headed “Southern Pacific Equities Unit Trust”.
When Voss handed Ripper the $600,000 Suncorp cheque dated 22 May, there was no entity which answered to the name “Southern Pacific Equities Unit Trust”. The next day, 23 May, Ripper arranged with a local solicitor to execute a deed of trust which purported to settle $10 on Ripper. The trust document was headed “Southern Pacific Equities Unit Trust” but the sole beneficiary was Ripper.
Later that day, Ripper took the trust deed to Suncorp and opened an account in the name of “Southern Pacific Equities Unit Trust”. The cheque was opened with the Suncorp cheque. Later that day Ripper was permitted to withdraw several sums which together nearly exhausted the account.
At no time did Voss make any independent investigation as to the existence or nature of “Southern Pacific Equities Unit Trust”.
Voss sued in conversion. Both the court at first instance and the appeal court accepted Sir Owen Dixon’s definition from Penfolds Wines Pty Ltd v Elliott (1946) CLR 204 as “a dealing with a chattel in a manner repugnant to the immediate right of possession of the person who has the property or special property in the chattel”
Suncorp argued that it had not so dealt with the cheque since it had at all times followed exactly Voss’s instruction. In this view, Voss handed the cheque to Ripper for the purpose of depositing it in an account in the name of “Southern Pacific Equities Unit Trust” and Suncorp fulfilled that purpose.
The court at first instance accepted this view, but it was rejected by the Court of Appeal. Accepting that Ripper held the cheque on Voss’s behalf, it was never intended that the cheque would be deposited into an account to which Ripper was beneficially entitled. By depositing the cheque into such an account, Ripper had converted the cheque and therefore Suncorp had also.
The Court of Appeal decision here is clearly the correct one, and it is not the first time that Australian courts have held that a cheque may be converted by a person who is originally in lawful and proper possession of the cheque.
For example, in Commercial Bank of Australia Ltd v Flannagan (1932) 47 CLR 461 a cheque was drawn by Flannagan in the form “Pay State Tax or bearer”. It was handed to Coffey who was preparing tax returns for Flannagan. The High Court noted that the Coffey had the cheque for the purpose of paying the tax liability. Instead, he deposited in his account with the Commonwealth Bank. Flannagan successfully sued the bank in conversion.
The Flannagan case also shows that a bearer cheque may be the subject of a conversion action. The fact that a cheque is a bearer cheque may be relevant to whether the defendant bank may establish the statutory defence, but, in the absence of negotiation, not to the question of conversion itself: see Day v Bank of New South Wales (1978) 19 ALR 32.
The bank raised two defences, estoppel and s 98 of the Cheques and Payment Orders Act 1986.
The estoppel claim was based solely on Voss’s action with the cheque. It was said that obtaining a cheque in that form and handing it to Ripper amounted to a representation to Suncorp that Ripper had authority to deal with the cheque in the way that he did.
This was elaborated into two separate arguments. First it was said that there was estoppel by negligence. In this argument, it was said that Voss failed to make independent inquiries into the existence of the Trust, yet had armed Ripper with the means to mislead Suncorp.
The court at first instance agreed with this analysis, holding that it followed from cases such as London Joint Stock Bank Ltd v Macmillan and Arthur  AC 777 and Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 55 ALJR 574. The Court of appeal rejected the argument, holding that these cases were restricted by two factors. First was that the duty to take care arose from the contractual relationship between the drawer of a cheque and the drawee bank. There was no contractual relationship between Voss and Suncorp.
Further, the cases mentioned have long been restricted to the actual manner in which the cheque is drawn. Wider duties have nearly always been rejected, including the duty to read and reconcile accounts (Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd  AC 80), the duty to take care of the chequebook (Westpac Banking Corp v Metlej (1987) Aust Torts Rep 80–102) and the duty to organise business to protect the interests of the bank (National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377; National Bank of New Zealand Ltd v Walpole and Patterson Ltd  2 NZLR 7)
The second form of estoppel was loosely related to ostensible authority. This was also rejected by the Court of Appeal. Far from representing that Ripper had authority to deal with the cheque, the cheque on its face suggested that there was limited authority, that Ripper had the cheque only for a limited purpose which clearly did not include the deposit of the cheque into an account where Ripper was the sole signatory.
Finally, the Court noted that Suncorp was not misled by Voss. It would have acted the same way even if Ripper had stolen the cheque. It acted on Ripper’s representations, not Voss’s.
4.2 Section 95
Suncorp’s final defence was s 98 of the (then) Cheques and Payment Orders Act 1986. At the time of the events in question, Suncorp was still a building society. Section 98 is in terms identical to s 95 except that it applies certain non-bank financial institutions including, at the time, building societies. For convenience, all further references in this section will be to s 95.
Section 95 provides financial institutions with a defence to conversion which is not available to the general public. The history of this defence is outlined in Holden, History of Negotiable Instruments in English Law, London, 1955. As a defence, it is on the financial institution to prove the elements: see, for example, Papandony v Citibank Ltd  NSWSC 388 where a failure to call evidence was fatal to the bank’s case; the issue was not in issue at the appeal: Citibank Ltd v Papandony  NSWCA 375.
In its current form, s 95 requires collection of the converted cheque to be in “good faith” and “without negligence”. “Good faith” simply means “honestly” and is seldom in issue: s 3(2). “Without negligence” does not refer to the tort of negligence or to any duty of care. The test is usually accepted is that stated in Commissioners of Taxation v English Scottish and Australian Bank  AC 683 by Lord Dunedin (at 688):
…the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary course that it ought to have aroused doubts in the bankers’ mind, and caused them to make inquiry.
It has long been accepted that one of the “antecedent” circumstances may be the opening of the account. The matter was mentioned in the English Scottish and Australian Bank case itself and in London Bank of Australia Ltd v Kendall (1920) 28 CLR 401.
The circumstances surrounding the opening of the account could hardly have been worse. Ripper was depositing a cheque marked not negotiable and account payee only to the new account. This, it has been said, should in itself call for extra vigilance since a rogue would necessarily have to obtain an account to deposit a crossed cheque: see Savings Bank of South Australia v Wallman (1935) 52 CLR 688 .
Further, the cheque being deposited was drawn on the day before the date on the trust deed. It would not require a particularly suspicious mind to suspect that something was not quite right.
Surprisingly, the court at first instance held that there was no negligence, guided in part by testimony that Suncorp followed normal banking practice. The Court of Appeal rightly rejected that idea. To do otherwise is to sanction business practices that invite fraudulent practices.
Suncorp was apparently not alerted by the unusual facts. Had it been, it might have saved itself by making enquiries about the situation. In the first place, even the most elementary of enquiries would probably have halted the fraud. If, however, the fraud had been more sophisticated, the enquiries would, perhaps, have not produced evidence to halt the transaction, but the enquiries might be enough to provide a s 95 defence.
“Banking practice” will be relevant, but not determinative in deciding whether collection has been “without negligence”.For example, in Savory (E B) & Co v Lloyds Bank Ltd  2 KB 122; aff’d  AC 201 there was evidence available that it was the practice of bankers which had a head office in London and branch offices elsewhere to accept cheques paid in at any branch for the credit of an account at any other branch. It was said that this was a practice which had been established for over 40 years. The House of Lords found the practice to be inconsistent with prudent precautions against known risks. This particular practice may no longer be objectionable in the age of computerised bank accounts.
Davies JA makes a reference (in footnote 35) to the Civil Liabilities Act 2003 (Qld). Although not entirely clear, the context suggests that he is referring to s 22 “Standard of care for professionals”. So far as relevant, this section provides:
(1) A professional does not breach a duty arising from the provision of a professional service if it is established that the professional acted in a way that (at the time the service was provided) was widely accepted by peer professional opinion by a significant number of respected practitioners in the field as competent professional practice.
(2) However, peer professional opinion can not be relied on for the purposes of this section if the court considers that the opinion is irrational or contrary to a written law.
With respect, I doubt that this section makes any difference to the principle. Section 95 provides a bank with a defence to conversion. It is not a new duty imposed on a banker, and the section is not concerned with a “breach of duty”. Section 50 of the Civil Liability Act 2002 (NSW) refers to “liability in negligence” which even more clearly does not apply to the s 95 defence.
Voss does not establish any new banking law principles, but it reinforces known principles that are often forgotten or overlooked in the complexities of litigation. These are:
- a cheque may be converted by someone who is initially has proper possession
- a cheque may be converted by a bank even if it is paid into the account with the same name as the payee; the same principle shows that a bearer cheque may be converted
- the drawer of a cheque does not, in general, owe a duty of care to the collecting bank
- a bank must exercise care in the opening of accounts; this is particularly so when the account is opened with the deposit of a crossed cheque
- a failure to make enquiries when the transaction is unusual will make it very difficult to establish a s 95 defence
- “banking practice” does not always provide a s 95 defence.
- Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are my own and do not necessarily reflect the views of any other person or organisation.