This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 188.— The payee of a cheque drawn to order endorses it and presents it for payment. Can the bank rightfully apply the funds upon an overdue note it holds of the payee ? What if payee claims that funds for cheque are not his own? Would the drawer have any grounds for objecting or legal remedy against the bank for so treating his cheque ?
Answer.—The committee have thought it well to refer the above questions to the counsel for the association, Mr. Z. A. Lash, Q.C., and the following has been framed under his advice as to the law affecting the matter:
The questions involve some nice considerations. There are two aspects in which the matter may be viewed: first, the strictly legal one; second, the ethical one. Upon the latter, opinions of course may vary, and there is no rule for decision. We therefore refrain from expressing any opinion upon this branch, leaving each bank to decide for itself whether, under the particular circumstances which may surround the case, it would as a matter of ethics be justified in retaining the proceeds of the cheque.
With reference to the legal aspect, there appear to be no reported decisions expressly governing the case. The answer to the question as to the payee's rights against the bank, may, we think, be worked out in principle upon these lines:
Assume that the payee is the beneficial owner of a cheque. He presents it for payment. The bank accepts it in the usual way. This acceptance brings the payee into privity with the bank, and enables him to bring an action against the bank in his own name upon the cheque. If, therefore, instead of retaining the cheque and crediting the payee with the proceeds, the bank should hand back the accepted bank cheque to the payee and then refuse to pay it, the payee might bring an action against the bank for the amount. If he did so, what would be the bank's position? Clearly it could set off against such action the amount of the overdue note. If, however, the bank retains the cheque and claims to apply the amount upon the overdue note, what would be the payee's remedy? We think he could proceed in three ways:
(1) To sue in trover for the conversion of the cheque, or, speaking less technically, he could sue the bank for damages because he had been deprived of his property, viz., the cheque. The amount of his damages in this case would be the value of the cheque. He could have no further claim.
(2) If the bank has appropriated funds to the payment of the cheque—for instance, if the teller had counted out the money and had told the payee that it was the money for the cheque—he could probably sue the bank to recover the amount as money held by the bank for his use.
(3) He might possibly treat the possession of the cheque by the bank as his possession, and sue upon the acceptance.
If he took the last course, then the hank would, as above stated, have the right to set off the amount of the overdue note. If he took the second course the bank would have the same right, the demands in each case being liquidated. But, if he took the first course, the right of the bank to plead set off, as such, would be extremely doubtful, because set off can only be pleaded where the demand to which it is pleaded is a liquidated demand or one capable of being ascertained by computation as distinguished from a demand where the amount must be ascertained by assessment or valuation.
But the bank's right would not in such a case, be confined to pleading set off. Under the practice of the Courts in Ontario, where a defendant is allowed in his defence to set up by way of counterclaim any demands against the plaintiff, the bank could in its defence to the action counterclaim for the amount of the overdue note. It would, of course, get judgment upon this counterclaim, and, even if the payee got judgment against the bank for the amount of the cheque as damages for its conversion, the practical result would be that the two judgments would be set off one against the other, and the only question involved would be one of costs.
If the cheque, though payable to the order of the payee, really belonged to some other person, it is, we think, clear that the bank would not have the rights above explained. It could not pay its own claim against the payee out of funds belonging to another.
Our space for this number of the Journal will not allow us to deal with the other question, viz., whether the drawer would have any grounds for objecting, or legal remedy against the bank for so treating his cheque. We will allude to this branch of the question in our next issue, and explain also the rights of the payee against the drawer.