This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 192.— A cheque in favour of one T. A., and purporting to be endorsed by him, is received from a customer of ours on deposit; he endorses the cheque after T. A. We send it to another bank, which collects the amount from the drawee bank, but first stamps on the cheque a guarantee of the prior endorsements. This guarantee is given without the authority of the prior endorsers. T. A.'s endorsement proves to be a forgery. Is the liability of our customer affected by the guarantee, and what is its effect generally?
Answer.—Assuming that notice of the forgery has been given within reasonable time, as required by the amendment to section 24 of the Bills of Exchange Act, your customer must repay the amount. His liability is not affected by the guarantee of the prior endorsements, which in this case is a contract only between the bank which guarantees and the drawee bank.
The effect of such a guarantee generally is to make the guarantor liable to return the amount to a subsequent holder if the endorsements prove to be forged or unauthorized. The law imposes practically the same liability without the guarantee, but liability under see. 24 (as amended) is conditional on reasonable notice being given after discovery, while inability under a guarantee is a matter of contract, which might exist until barred by the Statute of Limitations. The guaranteeing bank might therefore be liable under its contract of guarantee, under circumstances in which the prior endorsers would he discharged, by reason of want of notice within reasonable time.
We do not think guarantees should be asked or given except for irregular endorsements, as provided in the rules adopted by the Association, but that each bank paying or negotiating a cheque should do so on the protection afforded by the statute, and subject to the performance of its duty in connection therewith.