Member's view
Before you cheque out

Abolishing cheques doesn’t mean banks can ignore customers’ written instructions, warns Institute Fellow David Pearson. “There’s a real possibility of them being in breach of contract.”

Musing upon the planned abolition of the cheque, I came to wonder if what the banks are proposing by their apparently arbitrary act of abolishing cheques and the paper clearing perhaps breaches the contractual duties that they owe a customer. This seems to be the case if as a result they refuse to deal with any and all written instructions presented for payment and collection, not just cheques.

The abolition, is rather like the government tinkering with the British constitution: because the rules are written in some cases, achieved by precedent and statute in others or simply down to custom and practice, they are in danger of making things worse rather than better. By messing about with details of the banker–customer relationship, banks could find themselves having to do rather more work than they bargained for.

Cheques were introduced to ensure that the written instructions of a customer were in a clear and unequivocal format. Is there a danger, therefore, that through their abolition, all that will happen is a return to the days before cheques and the paper clearing, when banks had to undertake a great deal of work to collect each individual written order?

Given the law as it appears to stand, I do not think that the banks will be able, subsequent to the proposed abolition, simply to ignore written instructions from a customer by arguing that they have abolished cheques so no substitute is valid. If they try this, there is a real possibility of them being in breach of contract.

Should this be the case, those of us who remain keen to use cheques might consider simply continuing to use them – perhaps by way of a substitute home-made form, or any written order – just as our ancestors did before cheques and the clearing system were formally introduced.

Much of the contractual relationship between banks and their customers is implied, some is written whilst some arises through precedent, custom and use. In the most famous and pertinent case, Joachimson v Swiss Bank Corporation (1921), Lord Justice Atkins established that a cheque is simply a bill of exchange drawn on a banker – a written order to him to pay the drawer or another named person or to order.

Whilst the Bills of Exchange Act (1882) states that a bill must be in writing, it makes no mention of how it should appear. This seems to support the view of Lord Justice Atkins that if a bank is dealing with a written order, it does not have to be in any particular format for the bank to be contractually required to collect it for or pay it to a customer.

The Act does require such a written order to have various contents such as date, amount, address, signature, etc. to be valid. All of these are invariably present on a correctly drawn up letter of instruction from a customer to his bank. That’s why customers occasionally and successfully write cheques on things like doors and why the late A P Herbert, in one of his famous “misleading cases”, suggested that a cheque written on a cow could be a valid instrument.

Given all the above, surely, the only thing that can be abolished by the banks is the cheque form and clearing system, for which they are responsible? The banks must surely remain under a contractual obligation to pay and collect written orders presented by their customers?

Thus, unless the common law is changed by an Act of Parliament, customers must, after abolition, remain able to write to their banks asking for funds to be transferred to nominated payees and the banks will have no choice other than to undertake this work on a case-by-case basis, unless they wish to be sued for breach of contract. Similarly, banks will have to collect such written orders from other banks if presented for collection to their account by a customer.

This is, of course, what used to happen a couple of centuries ago before the cheque form and clearing were invented and is precisely what they were created to simplify. Progress?

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