When the bank mistakenly pays out a forged, stopped, altered or insufficient account cheque, the bank may recover money mistakenly paid in the following circumstances considering that it is his duty to do so. The bank will not be able to recover money for paying a wrongful payment when it would have paid the cheque even if it had realized the true situation which is very unlikely. When the holder receiving payment could stop the bank from claiming the funds, the holder receiving payment must show that the bank made a representation to him or her that it was making the payment.
Likewise the bank will not be able to recover for wrongful payment when the holder receiving payment has changed his or her position and acted in good faith. An example best shows when A draws a cheque in favor of B for goods supplied. When the goods are not supplied, A therefore countermands/cancels the cheque. However B has already endorsed the cheque and delivered it to C for services (value). C is a holder in due course and presents the cheque for payment which A’s bank fails to give him notice of the countermand.
The bank must reimburse A after failing to comply with his instructions but may claim the money that they paid to C by mistake. C on the other hand may claim estoppel as he is a holder in due course and so has given value and is acting in good faith. He is therefore entitled to payment and can use the estoppel as a defence. Likewise, it has been provided that banks can avoid liability for dealing with a cheque on behalf of a customer who despite defects or no title in it .
A good defence for a bank to show is by claiming that it was “acting in good faith and without negligence” in dealing with a defective cheque and this case concerned the negligence element of this test. Forgery of Signature Where there is forgery of the drawer or endorser’s signature in cheques, this renders the cheque inoperative and “makes difference if the forgery could not be detected”. If a customer fails to complain and inform the bank of a forgery, then the customer may be estopped from suing the bank for paying out on the forgery involved.
Under equitable estoppel, the customer by not telling the bank about the forgery have made an assurance to the bank that there is not need not take action against the perpetrator or the forger. The bank in return will not take any action against the forger to the detriment of the client . If an alteration is present, whereby words or figures are added to increase the amount or changing the name of the payee, it will be declared void .
Somehow in Tai Hing Cotton v Liu Chong Hing Bank , the Privy Council based on prima facie evidence ruled against the bank since the cheque was indeed forged. No amount of explanation in the bank’s defense could dissuade a ruling that reiterated the principles cited in London Joint Stock v Macmillan and Arthur that relates the duties of the customer in preventing forgeries and alterations and notifying the bank immediately upon actual knowledge of the forgery.