LO5: Legal Aspects of Banking Operations 🏛️

A key part of a banker's job is handling negotiable instruments, with cheques being the most common. The laws governing cheques are critical for protecting both the bank and its customers. In Zimbabwe, these laws are largely based on the Bills of Exchange Act.

Definition of a Cheque

A cheque is a specific type of bill of exchange that has a very precise legal definition. A cheque is an unconditional order in writing, addressed by one person to another (a banker), signed by the person giving it, requiring the person to whom it is addressed to pay a certain sum of money on demand to a specified person or to the bearer.

This definition breaks down into three key parties:

• The Drawer: The customer who writes and signs the cheque.
• The Drawee: The bank on which the cheque is drawn.
• The Payee: The person or entity to whom the payment is to be made.

A key feature of a cheque is that it must be payable on demand, meaning it can be presented for payment at any time after it is written.

Different Types of Cheques

Cheques can be classified based on how they are drawn and how they can be paid.

• Bearer Cheque: A cheque is a bearer cheque if the words "or bearer" are not crossed out. It can be cashed by anyone who holds it, meaning the bank will pay the person who presents the cheque at the counter, provided all other conditions are met. This type of cheque is risky if lost or stolen.
• Order Cheque: A cheque is an order cheque if the words "or bearer" have been crossed out. It is payable only to the person or entity named as the payee. If the payee wants to transfer it to someone else, they must endorse it (sign it on the back).
• Open Cheque: This is an uncrossed cheque. It can be paid in cash at the counter of the drawee bank.
• Stale Cheque: A cheque becomes stale if it is presented for payment after a specific period of time has passed since its date of issue. In Zimbabwe, this period is typically six months. The bank has the right to refuse payment on a stale cheque.
• Post-Dated Cheque: A cheque with a date that is yet to come. It cannot be presented for payment until the date written on it.
• Ante-Dated Cheque: A cheque with a date that is in the past, but still within the legally valid period for payment (e.g., less than six months old).

Crossing of a Cheque

The crossing of a cheque is a critical security measure. It is an instruction given by the drawer to the drawee bank not to pay the cheque in cash at the counter, but to pay it only into a bank account. This provides a safety net because it ensures that a record exists of who received the funds.

There are two main types of crossings:

1. General Crossing

   A general crossing is done by drawing two parallel transverse lines across the face of the cheque, typically in the top left-hand corner. The words "& Co.", "Not Negotiable", or similar phrases may be written between the lines, but the parallel lines alone are sufficient. The effect is that the cheque cannot be cashed over the counter and must be deposited into any bank account.

2. Special Crossing

   A special crossing is also done with two parallel transverse lines, but it has the name of a specific bank written between them. The effect is that the cheque must be paid into an account held at the specific bank named in the crossing. This provides an even higher level of security than a general crossing.

"Account Payee Only"

While not a formal crossing under the Bills of Exchange Act, the words "Account Payee Only" are often added to a cheque. This is a very strong directive to the collecting bank to ensure that the proceeds of the cheque are credited only to the account of the person named as the payee. This instruction is taken very seriously by bankers as a matter of good practice and a duty of care, as ignoring it would expose the bank to legal liability.

Legal Provisions of a Crossed Cheque 🔐

A crossed cheque is a powerful security tool with specific legal provisions under the Bills of Exchange Act that govern how it can be handled and paid.

• Payment through a Bank Account: The most fundamental legal provision is that a crossed cheque cannot be paid in cash over the counter. The drawee bank (the bank the cheque is drawn on) is legally obligated to pay the cheque only to another bank. If it is a specially crossed cheque, it must be paid to the specific bank named in the crossing.
• Liability of the Drawee Bank: If a drawee bank pays a crossed cheque in a manner contrary to the crossing (e.g., pays it in cash at the counter), it is liable to the true owner of the cheque for any loss they might suffer as a result.
• Protection for the Drawee Bank: A bank is legally protected if it acts in good faith and without negligence. If a drawee bank pays a crossed cheque in accordance with its crossing, it is not held liable even if the payee's endorsement was forged or the person who presented the cheque was not the true owner.
• Effect of "Not Negotiable": When the words "Not Negotiable" are added to a general or special crossing, the cheque remains transferable, but its legal effect is changed. A person who takes a cheque with this crossing cannot have a better title to it than the person from whom they received it. This means if a stolen cheque with this crossing is transferred, the new holder cannot claim to be a "holder in due course" and would not be protected from the true owner's claim.

Endorsements ✍️

An endorsement is the signature of the payee on the back of a cheque, bill of exchange, or promissory note. It is the legal action that transfers the title of the instrument to another person. The person who signs is the endorser, and the person to whom the instrument is transferred is the endorsee.

Types of Endorsements

1. Blank Endorsement: This is the most common type. The payee simply signs their name on the back of the cheque. The cheque then becomes a bearer instrument, meaning it can be paid to anyone who holds it. This is a very risky type of endorsement.
2. Special Endorsement: This is a more secure type. The endorser signs the cheque and specifies to whom it should be paid. For example, a cheque payable to "B. Sithole" can be endorsed "Pay to Lauryn Ncube" and signed "B. Sithole." The cheque can now only be paid to Lauryn Ncube.
3. Restrictive Endorsement: This endorsement restricts the use of the cheque. For example, writing "For Deposit Only" and signing below it instructs the bank to only credit the amount to the specified account. This is the safest way to endorse a cheque, as it prevents the funds from being cashed if the cheque is lost or stolen.

Legal Provisions of Endorsement 📜

The Bills of Exchange Act lays down specific legal requirements and implications for endorsements.

1. Validity: An endorsement must be made on the cheque itself. It must be a signature, and it must be a signature that is intended to transfer the title. A signature on a separate piece of paper attached to the cheque is legally valid, provided there is no space on the cheque itself.
2. Order of Endorsements: If a cheque has been endorsed multiple times, the endorsements are presumed to have been made in the order in which they appear on the cheque.
3. Liability of the Endorser: By endorsing a cheque, the endorser legally guarantees that the cheque will be paid. If the cheque is dishonoured (e.g., the drawer's account has insufficient funds), the holder can demand payment from the endorser. The endorser, in turn, can demand payment from any previous endorser or from the original drawer.
4. Transfer of Title: A valid endorsement transfers the full legal title of the cheque to the new holder. The new holder can then either present the cheque for payment or negotiate it further by endorsing it to another party.