Critical Analysis: Honouring Bank Cheques Vis-a-vis Liabilities and Implications

By Adeyemi Ogunremi, Esq. Associate Counsel for AAA Chambers

Mr Ken issued a cheque of N300,000.00 (Three Hundred Thousand Naira) to Mr David as payment for service rendered and upon presentation of the cheque at the bank by Mr David, the cheque was returned due to insufficient funds in Mr Ken’s account. Sequel to the ugly development, Mr David tried reaching Mr Ken but all to no avail.

Mr David remembered his cousin who once told him that issuance of dud cheques are criminal in nature and the idea to petition Mr Ken to Law Enforcement Agency suddenly came to mind, however, Mr David needs to be properly enlightened on the consequences and liabilities of issuance of Dud (Bounced) Cheques. When Mr David was informed that his cheque was not honoured, Mr David notified Mr Ken that his account was sufficiently funded in excess of the sum of N300,000.00 (Three Hundred Thousand Naira) but he cannot explain why his Bank will fail to honour the cheque issued by him. Presently, Mr Ken is equally exploring the possibilities of suing the Bank for failure to honour his cheque. This article analyses the implications of honouring of Bank Cheques vis a vis the liabilities and implications of issuance of dud cheques.

Introduction

In the Nigerian banking system, cheque books are only offered to current account owners who are in turn charged on the transaction. The present advancement in banking has invoked the offering of savings account with cheque books and quasi-cheque books with limited features and acceptability. As one of the most common negotiable instruments in Nigeria, the use of cheques invokes a lot of rights and duties on banks, bank account-holder/owners and payee (persons whose favour cheques are written) which is actionable in both civil and criminal law. This writing will broaden your mind to your rights and the duties of the banks in honouring cheques. 

Cheques

A cheque is an official instrument or a document that orders a bank to pay a certain amount of money, which is mentioned on the cheque to the payee, whose name is also mentioned on the cheque, from the bank account of the payer who issues the cheque. The Black’s Law Dictionary 8^th Edition defines cheque as a draft signed by the maker or drawer, drawn on a bank, payable on demand. It is however said that a cheque is not money until it is honoured and the amount stated on it is paid.

Attributes of A Cheque

The bank is under a duty to honour the customer’s cheque where the customer has sufficient funds or the customer not having sufficient funds the bank has granted the customer an overdraft.

• Cheques are usually in printed forms and issued by banks. 
• The bank must comply with the mandates of the customer, this is usually the instructions given by the customer as to the manner in which the cheque should be drawn. Some customers mandate the bank to confirm from them before honouring their cheques or that their cheques must bear company seal before it is honoured.
• It must be signed by the maker
• It must be dated
• It must contain a definite amount

Where a bank fails to comply with the mandate of the customer, it does so at its own peril.

•  Section 74 of the Bills of Exchange Act enjoins that the cheque must be presented within a reasonable time of its issue. In Nigeria, a cheque not presented within six months of issue is treated as stale or out of date by banks therefore unacceptable by the banks.
• Section 7 of the Bills of Exchange Act demands that where a bill is not payable to the bearer, the payee must be named or indicated with reasonable certainty e.g driver’s license, international passports, voters card e.t.c.

Types of Cheques

There are majorly two types of cheques, which are:

• Open Cheques: an opened cheque is one that can be paid over the counter of the drawee of the bank. An open cheque is an antonym of a crossed cheque.
• Crossed Cheque: A cheque is called crossed cheque when two parallel lines are drawn on the top left corner or top right corner of the cheque. Additional words like “& CO.” or “Account Payee” or “Not Negotiable” can also be mentioned along with two parallel lines. This cheque cannot be encashed on the bank’s counter. 

It can only be deposited in the bank account of the payee. Therefore, these types of cheques are considered the safest types of cheques. A payee must have a bank account to encash crossed cheque and it is advisable to write the same name as payee has on his or her bank’s passbook. In case of wrong spellings or unreadable handwriting, the cheque will not be accepted by the bank.

Role of a Bank in Honouring Cheques

Majorly, banks serve two main functions in domestic transactions. The first is that of paying their customers’ accounts by honouring their cheques and, generally, enabling a customer to deposit their money in current accounts or in accounts bearing interest, such as savings accounts and fixed deposits. 

Bank’ Role as a Paying Agent: Cheques

• Cheques basically serve two main objectives, first to enable a customer who has a current account to obtain repayment of the funds lent by him to the bank (creditor-debtor relationship) and secondly, to facilitate the payment of an amount due from the drawer to a third party. Although, these two transactions can also be effected by other means than the drawing of cheques.
• The cheque constitutes an instruction, or order, given by the customer, who is regarded as the principal, to the bank which is its agent. The bank is therefore under a duty to observe the terms of the authority or mandate conferred on it by the customer.
• A cheque, however, has two separate roles. One determines its basic nature and the rights of a person who obtains it either as ostensible payee or by way of transfer; the other defines the effect of the cheque as regards the relationship of the customer who draws it with the bank on which it is drawn

Honoured and Dishonoured cheques

A cheque is said to be honoured if the banks give the amount to the payee while in a situation where the bank refuses to pay the amount to the payee, the cheque is said to be dishonoured. In other words, dishonour of cheque is a condition in which the bank refuses to pay the amount of cheque to the payee. Whenever the cheque is dishonoured, the drawee bank instantly issues a ‘Cheque Return Memo’ to the payee banker specifying the reasons for dishonour. The payee banker provides the memo and the dishonoured cheque to the payee. The payee has an option to resubmit the cheque within three months of the date specified on the cheque after fulfilling the reason for the dishonour of cheque.

A banker is bound to pay cheques drawn on him by a customer in the legal form provided he has in his hands at the time sufficient and available funds for the purpose or provided the cheques are within the limits of an agreed overdraft. See London Joint Stock Bank v. Macmillian and Arthur.

There must be sufficient funds to cover the whole amount of the cheque presented, for, in the absence of special arrangement, there is, as a general rule, no obligation on the banker to pay any part of a cheque for an amount exceeding the available balance. The banker only contracts with the customer to honour cheques when he has “sufficient” and “available” funds in hand. 

Exceptions

Where a banker does not honour a customer’s cheque or he refuses to follow the mandate of the customer, he does so at his own peril and will be liable in damages. There are however instances where a banker will not be liable for dishonouring a customer’s cheque, which are:

• If the signature is absent or the signature on the cheque does not match with the specimen signature kept by the bank. Babalola v. Union Bank of Nigeria Ltd (1980) NCLR 201.
• If the name of the payee is absent or not clearly written.
• If the amount written in words and figures does not match with each other.
• If the account number is not mentioned clearly or is altogether absent.
• If the drawer orders the bank to stop payment on the cheque.
• Where the cheque is presented outside banking hour. Joachimson v. Swiss Bank Corporation (1921) 3 KB 110 @ 127.
• If the drawer has closed the account before presenting the cheque.
• If the fund in the bank account is insufficient to meet the payment of the cheque. Ademiluyi v. African Continental Bank (1969) 3 ALR Com 10.
• Where there is a subsisting court order restraining the operation of the account. Awaramgbo v. Union Bank of Nigeria Plc (2001) 4 NWLR (Pt. 702) 1 @ 25-26
• If the bank receives the information regarding the death or lunacy or insolvency of the drawer. Section 75(b) Bills of Exchange Act
• If any alteration made on the cheque is not proved by the drawer by giving his/her signature.
• If the date is not mentioned or written incorrectly or the date mentioned is of three months before.

Liabilities of a Banker: Remedies of A Customer

The moment a banker places money to its customer’s credit, the customer is entitled to draw upon it except something occurs to deprive him of that right. Once in a while and due to negligence a banker may wrongly dishonour the cheque of a customer.  It has, however, long been established that refusal by a banker to pay a customer’s cheque when he holds in hand an amount equivalent to that endorsed on the cheque belonging to the customer amounts to a breach of contract for which the banker is liable in damages for injuries to the customer. 

If the customer is in trade at the time of such dishonour, then damages will be at large and a judge may within reason award substantial damages, in the case of a non-trader, only nominal damages may be awarded the customer except where the non-trader proves actual damage in which case substantial damages may be awarded. The only question which will arise in these circumstances will be that relating to quantum or amount of damages.

It must be made clear that the award of substantial damages for wrongful dishonour of cheques only applies to customers who are in business either as traders or professionals. A person in paid employment who operates a salary account cannot expect to obtain substantial damages for wrongful dishonour of his cheque and may in fact only get nominal damages.

Dud Cheques

Bank cheques invoke a web of rights and duties; from the bank to the account holder and from the account holder to the payee (person in whose favour cheque has been issued). A DUD (worthless) CHEQUE popularly known in Nigeria as “bounced cheque” is a cheque issued by a bank customer whose account is in debit or whose credit balance is lower than the amount indicated on the cheque.  It is an empty cheque that has no monetary value as no money can pass through it.  Therefore, a dud cheque paid into a bank account is not only an embarrassment to the payee and bank but also a crime. A bank that is not vigilant can get itself involved in serious accounting and financial problems where it honours dud cheques.

The law cannot be partial, so it has spread protection nets over banks and payee against fraudulent customers (drawers) that offer dud (worthless) cheques. Just the way a bank is obliged to honour valid and regular cheque so is a drawer duty-bound to reasonably draw his cheque with care to avoid aiding forgery. 

Liabilities of A Customer

Section 1(a) (b) of Dishonoured Cheques Offences Act, 1977 defines the act of offering dud cheques for credit, goods and services as an offence. On conviction under Dishonoured Cheques Offences Act, 1977; an individual shall be sentenced to imprisonment for 2 years without an option of fine, while in the case of a body corporate (Companies, Business and Non-Government Organisations, etc) it shall be sentenced to a fine of not less than N5,000. A company involved in the issuance of a dud cheque is liable as a corporate body while its owners and staff by whatever title or description that consented, connived or was negligent in duty are punishable and liable individually.  

Proof of A Dishonoured Cheque

To successfully prove a dishonoured cheque, there must be:

• The presentation of a cheque to the bank, 
• A communication/marking made by the bank on the cheque or on any means showing that there is insufficient fund in accountholder’s account and oftentimes, the bank may be summoned to show account statement to establish account deficit on the date of presentation of the cheque. 

Exceptions

Issuance of a dishonoured cheque will not be an offence where the drawer (accountholder) :

• Sends a letter/Countermand Order of payment to bank instructing bank not to honour and pay a given cheque before such cheque is presented to the bank. It is also safer to also send a copy of such letter to the beneficiary of the cheque to avoid the presentation of such cheque.
• Proves to the satisfaction of the court that at the time of issuance of the dishonoured cheque, he/she had reasonable ground to believe that the cheque will be honoured.

Conclusion

It is important to note that Section 3 of the Dishonoured Cheque Offences Act, 1977 vests the exclusive jurisdiction of the offence of Dishonoured Cheques in the State High Courts, the Federal High Court, Magistrates’ Court cannot entertain cases of Dishonoured Cheques regardless of the amount of money involved and status of parties (Companies or Individual).

The definition of Dud Cheques in law seems limiting and too narrow. By the definition it is arguable that it is not an offence under Dishonoured Cheques Offences Act, 1977 to issue dud cheque as gift, charity or for goods and services that are yet to be delivered.

Definition of Terms

BANKS: Black’s Law Dictionary 8^th Edition defines a bank as a financial establishment for the deposit, loan, exchange or issue of money and for transmission of funds. It is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.

BANK’S CUSTOMER: When a person, whether corporate or incorporate, opens an account in a bank with a specified sum of money, the person is termed, a customer to that named bank. A customer is a person whom the bank has agreed to collect items and includes a bank carrying on an account with another bank. It is, however, not compulsory that one must maintain an account with a bank before one would qualify as a bank’s customer.

In Union Bank v. Integrated Timber and Plywood Product ltd (2000) 12 NWLR (Pt. 630) 99 @110,  it was held that there must have been some money transaction connecting the prospective customer and the banker which must have arisen from the nature of a contract.

BANKER: An individual that is employed by a banking institution and participates in various financial transactions, which may or may not include investments.