Supreme Court Creates Cheque Countermand Dilemma

Facts
Uniform Law on Cheques
Comment

On April 4 2008 the Supreme Court ruled that a bank can be held liable in negligence by a cheque holder for complying with a cheque countermand from a customer before the time limit for presentment expires. This decision challenges the traditional view that a bank’s duties in relation to the drawing of a cheque are owed to the customer only, creating a dilemma for banks which receive countermand orders. The court held that banks owe a duty of care to cheque holders when dealing with countermand orders issued by customers before the time limit expires.

Facts

The claimant cheque holder argued that the bank was liable for breach of duty to pay several cheques drawn by one of its customers that had been countermanded by the drawer before the expiration of the time limit for presentment. It claimed damages for the sums payable.

The bank argued that no relationship existed between it and the claimant; its duties in relation to the cheque were owed to the customer only. Therefore, the decision of whether to honour the cheque could be challenged by its customer (which had not done so), but not by the cheque holder.

However, the customer's available credit did not cover the amounts payable by the cheques. Therefore, had the bank invoked the lack of available funds, the decision not to honour the cheque would probably have been indisputable.

Uniform Law on Cheques

Case law has repeatedly confirmed the strict interpretation of Article 32 of the Uniform Law on Cheques (based on the Geneva Convention 1931), pursuant to which the countermand of a cheque takes effect only after the expiration of the time limit for presentment - under Article 29, the period in question was eight days in this case. However, doubts have remained on the question of whether a breach of this rule entitles cheque holders to claim for damages resulting from the decision not to honour the cheque.

Some assert that Article 32 merely grants the bank discretion: if the bank wishes to honour the cheque, it is entitled to do so and the customer cannot contest its decision, but it can also decide to comply with the customer’s instructions and refuse to honour the cheque. However, other interpretations stress the scope of the rule: if the effectiveness of the countermand is linked to the time limit for presentment, Article 32 also provides protection to cheque holders. Therefore, if a decision not to honour a cheque is based exclusively on a countermand, the holder is entitled to claim for damages.

The court adopted the latter line of reasoning and awarded damages to the claimant to the sum payable (approximately €88,500 plus interest).

Comment

This decision may create a dilemma for a bank that receives a countermand order from a client within the presentment period. If the bank pays the cheque in breach of the customer's instructions, it exposes itself to a contract-based claim for damages and loses its customer. However, if it does not honour the cheque, it exposes itself to a claim for damages in negligence (ie, for breach of duty not to comply with a countermand within the presentment period).

A possible solution for banks is to use the reasoning that underlies the ruling as a defence and argue that a countermand order given during the presentment period is not legitimate, thus giving it a legally sound reason for its non-performance. The customer will not be entitled to claim that the contract has been breached, although it will probably not remain with the bank.

Unfortunately, procedural issues prevented the court from addressing in depth the question of whether the decision not to pay the cheque had caused damage to the cheque holder, as the customer's credit balance was insufficient to cover the cheques. Herein lies a bank's alternative: to hope that the necessary funds are unavailable to the customer and to refuse to honour the cheque on these grounds, thus avoiding the delicate questions raised by a countermand.

For further information on this topic please contact Manuel Magalhães or Francisco Mendes Correia at Gonçalves Pereira Castelo Branco & Associados by telephone (+351 21 355 3800) or by fax (+351 21 353 2362) or by email (mmagalhaes@gpcb.pt or fmendescorreia@gpcb.pt).