Cheque washing - Part 2 (2024)

Cheque washing uses common household chemicals to lift the ink fromcheques. The washer then rewrites the payee and/or the amount. Acetone,benzene, bleach and carbon tetrachloride may all be used to removevarious inks. Cheque washing is typically done on stolen cheques and theeffect is difficult or impossible to detect with the naked eye. Theproblem is serious enough that blank cheque manufacturers are exploringspecial papers and technologies which will address the problem.

This article continues the examination of the legal effects of chequewashing in Australia.2 As in the first part, I willgenerally assume that:

• the cheque is stolen;

• the cheque is washed by the thief who is not a payee or indorseeof the cheque;

• the washing and subsequent alterations are not authorised by anyparty to the cheque; and

• the washing is not readily detectable.

A cheque is not always discharged by an alteration,3 butwhen it is s82(3) of the Cheques Act 1986 gives the “holder” certainrights:

(a) a person who, but for the discharge of the cheque, would be theholder may enforce payment of the cheque, according to the tenor of thecheque as altered, against:

• the person who made the alteration;

• a person who authorized or agreed to the alteration; or

• a person who indorsed the cheque after the alteration was made;as if the cheque had not been discharged; …

This section is not as useful as it first appears. As noted in thefirst part, a “washed” order cheque will seldom be discharged byalteration, and even if it is, there can be no holder under the(necessarily) forged indorsem*nts. The section will apply to the personin possession of a bearer cheque which has been discharged byalteration, but it obviously gives rights which are of very limitedapplication. Most importantly, however, is that a washed cheque is not“avoided” as under the UK legislation.

Strictly interpreted, the section does not even provide theprotection accorded by the common law position for order cheques. Sincewe are assuming that the indorsem*nt is forged, there can be no “holder”except for the original holder from whom the cheque was stolen. That is,there is no person who “but for the discharge” would be the holder.

Therefore, strictly interpreted, the section will not apply. Sincethe cheque has been “discharged” it may be questionable if the “holder”can take action against previous post-alteration indorsers under theusual warranty sections. Presumably, the section will be interpretedmore generously than this.

Section 82(3)(b) provides more extensive rights to the “holder in duecourse”:

in a case where the alteration is not apparent–a person who, but forthe discharge of the cheque, would be a holder in due course may enforcepayment of the cheque, according to the original tenor of the cheque,against any other person as if the cheque had not been discharged.

Again, this is of little use for the typical “washed” order cheque.For a bearer cheque, the section could be useful, but of obviouslylimited value if the amount of the cheque has been substantially raised.Again note, however, that the washed cheque is not without value.

An alteration is “apparent” an inspection shows that the text hasundergone some change, that is, there has been some revision of the textafter its original completion.4 This might be the casewhere the rogue has used white-out, but is unlikely if the cheque hasbeen properly “washed”.

The position of the collecting bank has been discussed at some lengthin Tyree(Tyree2001) and in Edwards(Edwards 2000). In short, if thecheque has been “discharged”, then the rule in Smith v Lloyds Bankplc [2001] 1 All ER 424 would hold that no action in conversionwill succeed. The case is criticised in the above mentioned articles. Asnoted there and above, the typical washed order cheque will not bedischarged.

Assuming that Smith v Lloyds Bank plc will not be blindlyfollowed in Australia, the question arises as to the amount of damages.The general rule in tort is that damages should be assessed so as toreturn the plaintiff to the position he or she would have been in hadthe tort not occurred.5 In the case of conversion, theamount is normally the market value of the goods at the time of theconversion.6

These rules have never been easy to apply to the conversion ofnegotiable instruments. Scrutton J traces the evolution of the remedy inLloyds Bank Ltd v Chartered Bank of India, Australia and China.7 He explains (at 55–6) that the tortapplies to such instruments ’ by treating the conversion as of thechattel, the piece of paper, the cheque under which the money wascollected, and the value of the chattel converted as the money receivedunder it’.

Smith v Lloyds Bank plc applied this version of the rule ina simple-minded way: at the time of the conversion, the “cheque” wasavoided and therefore the paper was worthless.

However, the “face value” rule is merely a prima facie rule forestablishing damages. It is a rule which implements the basic principleof restitutio in integrum in the normal case. It is not a“legal fiction” as described in the Smith case, but awell-founded rule which implements a well-established principle.

Also note that the rule is merely a prima facie rule. It is wellunderstood that the defendant may bring evidence to reduce the value ofawarded damages: see (Weaver et al. 2003 at para15.1310).

The question is: what is the value of the washed (or otherwisealtered) cheque to the true owner at the time of the conversion?Smith said “nothing”. In response to the argument that it wasthe conversion by the bank that robbed the true owner of rights to areplacement, Potter LJ said:

However, this does not seem to me to meet the point that the claimfor conversion was in respect of a specific cheque or draft which at thedate of conversion (which is the relevant date at which to assess thevalue of the chattel) had no value as a piece of paper and no value as achose in action, because it had earlier been robbed of such value as atthe date it was materially altered.

That is to apply the prima facie rule as a hard and fast rule. Somepieces of paper have substantial value even if they are not choses inaction. Obvious examples are books and drawings, but there is no reasonthat an “avoided” cheque cannot fall within the same principles. If thetrue owner could use the “piece of paper” to obtain a replacementcheque, then certainly it has value as a piece of paper.

What is the value of a washed cheque? There are severalcirc*mstances. If it is a washed order cheque then it is not dischargedunless fraudulently altered by the holder. The value to the true owneris the face value of the original cheque.

If it is a washed bearer cheque, then it can be enforced by thebearer against the person who made the alteration. Its value is at leastthe face value of the original cheque, possibly more since it can beenforced for its new face value against the washer.

If the alteration is not apparent (as is the case with any properlywashed cheque) then it can be enforced by a “holder in due course”against any party for the amount of the original cheque. Since the trueowner is the person entitled to possession, it would seem that the valueis again at least the face value of the original cheque.

If the cheque was originally drawn in a manner which facilitates thealterations, then the paying bank may debit the account under theprinciples of the Macmillan and Sydney Wide cases.8 However, this is not likely to bethe case in the normal case of cheque washing since the originalmarkings are completely obliterated.

Section 91 of the Act deals with the situation where the cheque hasbeen raised. Provided that the alteration is fraudulent and the onlymaterial alteration, the paying bank may debit the account for thecheque as originally drawn.9

A washed cheque could fall within the operation of s 91. Theprincipal problem is the requirement that the raised sum payable be theonly material alteration. Washed cheques are likely to have the name ofthe payee changed. If the original cheque is an order cheque, then thealteration of the payee’s name is certainly a material alteration. Ifthe original cheque is a bearer cheque, then the alteration may notnecessarily be material.

In any case, the operation of s91 is not of great importance if theamount raised is substantially more than the amount of the originalcheque. The paying bank may only recover the original amount of thecheque.

If section 91 does not apply, then it appears that the paying bankmust bear the loss, at least initially. As acknowledged inSmith, the paying bank cannot debit the drawer’s account withthe amount of the cheque.

It may, of course, bring action against the collecting bank torecover money paid under a mistake of fact, but this will only succeedif the collecting bank has not accounted to its principal.10 Merely crediting the account of thecustomer is not “accounting” to the customer for this purpose.11 Even if the receiving bank hasaccounted to the customer, it must show that it has done this on thebasis of good faith, believing that the customer was entitled to thefunds. This belief must be induced by the actions or representations ofthe payer, not the representations of the customer.12

In the case of a washed cheque, the most likely scenario is that thefraudulent washer will have "cleaned out" the account. Unless the payingbank can show some unusual circ*mstances, it will be unlikely to be ableto recover from the collecting bank.