This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 396.— A cheque drawn payable to John Smith or order is marked good by a bank, specially to pay a pressing claim of John Smith's. Subsequently it is altered by the drawers—who are also the holders—from " order'' to " bearer," and cashed at the outside bank by the drawers who used the money to satisfy what they considered a still more pressing claim than that of John Smith.
Can payment of the cheque be legally refused by the bank until endorsed by John Smith?
Answer.—The bank on which a cheque which has been materially altered being marked good, is drawn, would have the right to refuse payment, not because of the want of any particular endorsement, but because it is an altered cheque, and therefore void under sec. 63 of the Bills of Exchange Act.
The usual question arising out of such circumstances as you mention is whether the bank is justified or safe in paying the cheque. The answer to this would be that if the bank had come into privity with the payee of the cheque, by the cheque having come into his hands after they had accepted it, they certainly could not then pay it to another without his consent. If, however, the cheque has remained in the hands of the drawer, and has never been delivered to the payee, any arrangement between the bank and the drawer respecting the cheque would be free from risk.