THE BANK'S RIGHT TO RECOVER ON CHEQUES

PAID BY MISTAKE

On a Saturday A buys a motor-car from B. He gives B a cheque in

payment and drives off in the car. He is soon dissatisfied with the
car. Before banking hours on Monday morning, he instructs his bank I
not to pay the cheque. B, unaware that the cheque has been stopped,
presents it to a teller as soon as the bank is open for business. The
teller, who has not been informed of A's instructions, pays B cash for I
the cheque. When the error is discovered, the bank notifies B, who I
refuses to refund the money. In Cowmonwealth Trading Barzk v.
Reno Auto Sales Pty Ltd,' Gillard J. decided that in such circum-
stances the bank is unable to recover the money from B.2
It is proposed in this article to review generally the law relating I
to the recovery of a payment made by a drawee bank on a cheque,
where the payment would not have been made if the person making 1
the payment had not been mistaken. Examples3 of such mistake come
readily to mind. The person paying may think that the customer's 1
account is sufficiently in credit to meet the cheque, when it is not.
Similarly, he may overlook the fact that the customer has closed his
*B.A., LL.B. (Rand); B.C.L. (Oxon.); Senior Lecturer in Law, University of
Melbourne.
1 19671 V.R. 790. An unreserved judgment.
&Ithe actual facts of the case before him, Gillard J. held that the drawer of I
the cheque had not effectively countermanded payment. However, His Honour went 1
on to consider the law on the assumption that payment had been stopped. Only the
decision on the latter point falls within the scope of this article. Yet the writer,
with all respect, would not want it to be thought that he finds the decision that I
there was no countermand acceptable. Neither of the authorities relied on by the
learned Judge supports his reasoning fully. Curtice v . London, City and Midland I
Bank Ltd [I9081 1 K.B. 293 (C.A.) was concerned with whether the customer had I
effectively communicated his countermand to the bank and with whether an un-
authenticated communication is sufficient. In the present case the customer's wife
spoke by telephone to an employee of the bank. No doubt was expressed as to the
genuineness of the communication. If there had been a doubt, it could have been I
allayed by telephoning the customer. His Honour thought that there might be a I
duty to communicate with someone higher in status than the telephonist, but he
did not rest his decision on this. The telephonist was apparently authorized by the
bank to receive instructions to stop payment, since she testified that she would I
have filled in the appro riate forms if she had not foolishly believed that the cheque
would not be presenteBuntil at least the followin day. Westminster Bank Ltd v.
Hilton (1926) 136 L.T. 315 (H.L.) was decide2 on the ground that where a
principal gives ambi uous instructions to an agent, the principal cannot complain I
if the agent reasonabyy interprets the instructions in a way contrary to the principal's
true intention. With respect, it is difficult to see what construction the bank in the
present case could reasonably have put on the instructions other than not to pay
the cheque, either at all or until the customer himself called at the bank.
The writer readily admits that in settin out the facts in the text, he has used
emotive language designed to evoke the reakr's sym athy for A, rather than for B, in
their dealings concerning the car. His Honour's %nguage has the reverse effeot.
'Thus he speaks of A having 'repented of his bargain', where I have said that he
was 'dissatisfied with the car'.
3 The list which follows does not purport to be exhaustive.

308
AUGUST
19681 Iiecozlery o n Cheques Paid by Mistake 309
account. He may think that the drawer's signature is that of a cus-
tomer, whereas it is a forgery. He may not know that an indorsement
has been forged. He may by mistake pay more than the amount
appearing on the face of the cheque; or he may pay that amount when
it has been fraudulently increased above the amount for which the
cheque was drawn. He may be mistaken as to the identity of the
person he pays. H e may not notice that the cheque is post-dated or
'stale'. In some of the instances mentioned, the bank would be entitled
to debit its customer's account with the amount aid; in others, it
would not be. Whether or not it may debit its customer, it may prefer
to seek recovery of the amount paid (or overpaid) from the person to
whom payment was made, who will be called 'the recipient'."
If the recipient knew of the bank's mistake at the time when he
received the money, he would undoubtedly be obliged to repay the
bank. In many such cases, the recipient's conduct would amount to
fraud, whether he deliberately induced the mistake by a positive false
representation or by the concealment of relevant facts. In such circum-
stances, the bank might sue him for damages for deceit or waive the
tort and sue for money had and r e ~ e i v e d Thus
.~ in Holt v. Ely6 the
plaintiff, who, though a solicitor, was acting in effect as the banker
of the drawer of certain bills, was held entitled to recover from the
defendant who had represented that he held such a bill.7 An example
of fraudulent concealment is, perhaps, Martin v. M ~ r g a n ,where~
the defendants, contrary to a statute, took a post-dated cheque drawn
on the plaintiffs. When they presented the cheque, the defendants
knew that the drawer was insolvent, whereas the plaintiffs, while
aware that they held no funds on his behalf, expected to receive money
from the drawer. In holding the plaintiffs entitled to recover the pay-
ment they had made, some members of the Court relied on the
illegality attendant on the drawing of the post-dated cheque, but all
agreed that the plaintiffs were entitled to succeed because of the lack
of equality between the parties as to knowledge of the drawer's
insolvency.
It is possible that the recipient, though aware of the true facts,
is nevertheless innocent of fraud. He would still be obliged to restore
the money. There is ample authority permitting recovery by the
drawer of a cheque whose agent, to the knowledge of the recipient,
4 'The reci ient' has been chosen in preference to 'the payee' to avoid confusion
between the $esignated payee on a cheque or other bill of exchange and the person
who actually receives payment. If the bill has not been negotiated, the recipient
will be the payee, except in cases of mistaken identity.
5 See Goff & Jones, The Law of Restitution (1966), pp. 70-71.
6 (1853) 1 El. & B1. 795, 118 E.R. 634.
7 The Court rejected the argument of Bramwell for the defendant that the drawer
alone could sue. Similar arguments were rejected in Banque Belge pour L ' E ~ a n g e r
v. Hambrouck [I9211 1 K.B. 321 (C.A.) and Colonial Bank v. Exchange Bank of
Yarmouth, Novia Scotia (1885) 11 App. Cas. 84 (J.C.).
8 (1819) 1 Brod. & B. 289, 129 E.R. 734.
310 Melbourne University Law Review [VOLUME
6 I

has abused his authority in signing on the drawer's behalf? It is more

dificult to find authority permitting the drawee to recover. In Kendal
v, Woodlo the Exchequer Chamber allowed the acceptor of a bill
drawn in respect of a partnership debt to recover the payment when
the defendants had previously received money out of partnership
funds, but had credited that money to a partner's personal account.
However, Blackburn J., among others, rested his judgment to some
extent on the lack of voluntariness in the plaintiff's acceptance and
payment of the bill in order to save the credit of his father, the drawer.
Although Natal Bank Ltd v. Roordal' was a case where the recipient
knew that payment of the cheque had been stopped, no point was
made of this in the judgment. Despite this lack of direct authority,''
it is implicit, if not always explicit, in most of the decisions discussed
in the rest of this article that, where recovery has been denied, the
denial is dependent on the absence of knowledge on the part of the
recipient. Where recovery has been permitted in the absence of know-
ledge, it will be allowed a fortiori where the recipient knew of the
payor's mistake. In the rest of this article it will be assumed that the
recipient was ignorant of the payor's mistake. T o use the terminology
of Dr Cheshire and Mr Fifoot,13 we shall be concerned with common
and mutual mistakes, but not unilateral ones.
In order to recover a payment it has made, the bank will base its
claim on the action for money had and received to the use of the
plaintiff on the ground of mistake. W e shall consider first the auth-
orities which relate generally to this action as they bear on the bank's
right to recovery; then we shall look at the authorities directly relevant
to some of the particular situations in which a bank might be mistaken.

9lohn v . Dodwell G Co. [I9181 A.C. 563 (J.C.) and Reckitt v . Barnett, Pem-
broke 8 Slater Ltd [I9291 A.C. 176 (H.L.) are two examples. An analogous case,
not concerned with a cheque, is Taylor v . Smith (1926) 38 C.L.R. 48.
10 (1871) L.R. 6 Ex. 243. Cf., also, the cases in note 7, supra.
11 1903 T.H. 298, discussed below.
12 So far as general principles are concerned, cases such as Larner v . L.C.C.
119491 2 K.B. 683 (C.A.) may be regarded as turning on the recipient's knowledge.
In R. E. Jones Ltd v . Waring G Gillow Ltd [1926] A.C. 670 (H.L.), 696, Lord
Sumner said that in Kelly v. Solari (1841) 9 M. & W. 54 the recipient probably
knew, or at least ought to have known, of the mistake. His Lordship's dictum
supports the view here put forward that recovery will be permitted where the
recipient had the necessary knowledge, but in so far as it makes knowledge or
imputed knowledge a requirement of recovery in every case, it is not borne out by
the facts of Kelly v . Solari and numerous cases which have followed it. In the
passage from Parke B.'s judgment in Kelly v . Solari quoted below, the learned Baron
contemplated recovery 'in those cases in which the party receiving may have been
ignorant of the mistake'.
13 The Law of Contract (6th ed., 1964), p. 188; (Australian ed. 1966), p. 307.
T h e purpose of their classification is mainly to throw light on the effect of mistake
on the formation of a contract. W e shall mostly be concerned with the effect of
mistake on performance of a contractual or other obligation. The classification is
nonetheless a convenient one.
AUGUST
19681 Recovery on Cheques Paid by Mistake

Any discussion of the action for the recovery of money paid by

mistake must almost necessarily commence with the well known pass-
age in the judgment of Parke B. in Kelly v. Solari,I%hich reads:
I think that where money is paid to another under the influence of a
mistake, that is, upon the supposition that a specific fact is true, which
would entitle the other to the money, but which fact is untrue, and the
money would not have been paid if it had been known to the payor
that the fact was untrue, an action will lie to recover it back, and it is
against conscience to retain it; though a demand may be necessary in
those cases in which the party receiving may have been ignorant of the
mistake.
This passage has often been approved and applied.15 There are three
alleged requirements of the cause of action which are sometimes
thought to be derived from the passage-particularly from the clause
in italics-but which, it is hoped now to demonstrate, need not neces-
sarily be present for the plaintiff to succeed.

(a) Mistake as to the Pallor's Liability

It is frequently said that unless, on the facts as supposed, he would
have been liable to the recipient, i.e. that he would have been under
a legally enforceable obligation, the payor may not recover the pay-
ment after he has discovered his mistake. Thus in the Commonwealth
Trading B m k case16 Gillard J. held that since the drawee of a cheque
is not liable to the holder-there being no acceptance-the plaintiff
bank would not have been liable to the recipient even if the cheque
had not been countermanded; accordingly, the bank could not recover
when the true facts emerged.I7 It is not often noticed that the signifi-
cant words in Parke B.'s judgment from which this implication is
drawn do not appear in the report of the same passage in the Law
14 (1841) 9 M. & W . 54, 58, 152 E.R. 24, 26 (italics added). The other members
of the Court of Exchequer who delivered judgments were Lord Abinger C.B. and
Rolfe B., each of whom gave his own reasons for the decision in favour of the
plaintiff ordering a new trial in place of a nonsuit. Gurney B. concurred. Parke B.'s
judgment is the one most frequently cited.
15 In R. E. Jones Ltd v . Waring G Gillow Ltd [1926] A.C. 670 (H.L.), 689,
Lord Shaw said that no attack on Kelly v . Solari had ever been successful. See, too,
Imperial Bank of Canada v . Bank of Hamilton [I9031 A.C. 49 (J.C.), 56. The
quotation from Parke B.'s judgment is usually regarded as embodying the principle
of the decision.
16 Supra, n. 1 .
17 As authority for this proposition the learned Judge cited a sentence from the
joint judgment of the High Court in South Australian Cold Stores Ltd v . Electricity
Trust of South Australia (1957) 98 C.L.R. 65, 75 (Dixon C.J., McTiernan, Williams,
Webb and Taylor JJ.) which, out of context, may seem to emphasise the part of
Parke B.'s judgment italicized in the text. However, the very next sentence of the
High Court's judgment acknowledges that '[alccording to the decision of Pilcher J.
in Turvey v . Dentons 1923 Ltd. ([I9531 1 Q.B. 218) it is too restrictive to sav
that the fact would if true have entitled the payee to the money'. Even if the ~ i ~ f i
Court was not here approving Pilcher J., the point was at least left open.
312 Melbourne University Luw Review [VOLUME
6
Journal,"'which is as follows:
If a party makes a payment on the supposition that a fact is true, which
afterwards proves to be untrue, he may recover back money that has
been so paid . . 419 for if money is paid under a mistake, and it is
unconscientious in the receiver to keep it, it may be recovered back. In
some cases, indeed, it may be necessary to give notice before the action
is brought as, for instance, where the party receiving the money may
fairly think himself entitled to retain it.
On the facts of Kelly v. Solari it seems at least doubtful whether
the directors of the insurance company would have been obliged to
pay the recipient at the time when they did, since a discount was
deducted 'in consideration of the payment being made three months
earlier than by the rules of the office it was payable'.20 Furthermore,
there are cases of the highest authority in which recovery has been
permitted despite the absence of any legal obligation on the facts as
supposed. Two instances will ~uffice.2~
In Kerrism v. Glyn, Mills, Currie G C O . the ~ ~plaintiff had an
interest in a Mexican company. H e arranged for New York bankers
to honour bills drawn on them by the Mexican company on the basis
that he would reimburse the bankers through their London agents,
the defendants, up to £500. This sum was to be by way of a [standing'
(or ' r e ~ o l v i n g ' )credit.
~~ In practice, instead of allowing the Mexican
company credit up to £500 and then seeking reimbursement from the
plaintiff before allowing further credit, the bankers would inform the
plaintiff when the £500 was nearly exhausted and he would pay a
further £500 in advance. In response to such information on one
occasion, the plaintiff ?aid the defendants the £500 in dispute. Un-
known to the la in tiff and the defendants, the bankers had on the
previous day assigned all their assets for the henefit of their creditors.
The plaintiff sought to recover the E500 on the ground that at the
date of payment he was mistaken in thinking that the bankers were
a living commercial entity, able to perform their side of the contract.
18 11 L.J. (N.S.)Ex. 10, 13.
19 The omitted words deal with an argument based on laches and 'means of
knowledge' available to the plaintiff.
20 9 M. & W. 54. (The word 'made' appears before 'payable' in 11 L.J. (N.S.)
Ex. 10, 11.) If it is contended that in effect a new contract was entered into
between the directors and the recipient, so that the directors were liable to make
the ayment when they did, a decision permitting recovery must necessarily have
inv&ed setting aside the contract for mistake, something not discussed in the
judgments. It would be surprising to find mistake having this effect in a case at
law, despite cases such as Gompertz v. Bartlett (1833) 2 El. & Bl. 849, 118 E.R.
985, and Gurney v. Womersley (1854) 4 El. & B1. 133, 119 E.R. 51, which are
explicable on the basis of the warranty given by a transferor by delivery of a bill,
,-.
today set out in the Bills of Exchange Act, 1909-58 (Commonwealth), section 63
(5).
21 See also Kitto J. (dissenting) in Porter v . Latec Finance (Qld) Pty Ltd (1964)
111 C.L.R. 177. 190.
22 (1911) 17 corn. Cas. 41 (H.L.).
23 T h e word used depended on the side of the Atlantic on which the speaker
found himself.
AUGUST
19681 Recovery on Cheques Paid by Mistake 313

The defendants, who were owed £40,000 by the bankers, were anxious
to retain the £500. The Court of Appealz4 held that as a result of the
practice of the parties, the original contract had been varied so as to
make the plaintiff liable to pay each E500 in advance. This particular
payment had thus been made pursuant to a binding obligation, which
was not vitiated by mistake, whether the facts were as supposed or as
true. On this view there was no right of recovery.25This decision was
reversed by the House of Lords,26who restored the judgment at first
instance of Hamilton J.27(as he then was). It was held that the course
of practice had not varied the original contract. At the time when the
plaintiff paid he was not liable to pay on the facts as supposed, nor,
a fortiori, on the true facts. Obviously, he had not intended to make a
gift or to pay in all events, since he paid 'in a voluntary anticipation
of what might very shortly have become his actual legal l i a b i l i t ~ ' . ~ ~
The plaintiff was thus permitted to recover although he was not legally
bound to pay on the supposition that the relevant fact was true.
In llnperial Bank of Canada v. Bank of Hamilton29 the plaintiff
bank successfully recovered an excess payment made to a holder in
due course on a marked cheque that had been fraudulently increased
from $5 to $500 after the bank had marked it. While in the United
States 'certification' of a cheque by the bank is equivalent to accep-
tance,'O making the bank liable on the cheque, this is not so in English
law and the Privy Council did not treat it as such by Canadian law.'l
Although the bank, as mere drawee, would not have been liable to the
holder if the facts had been as supposed, recovery of the amount over-
paid was not debarred.
Kelly v. Solari itself makes it clear that the payor may not recover
where he intended that the recipient should have the money irrespec-
tive of the mistake. Thus the case was sent down for a new trial so
that a jury could determine whether the directors had paid with
knowledge that the policy had lapsed, or not caring whether it had
lapsed or not, for instance, in order to preserve the reputation of the
insurance company. If this were so, they could not subsequently
change their mind and reclaim the money. A payor's belief that he
was liable to the recipient is g o d evidence that he did not intend
the recipient to have the money in other circumstances, but it is
obviously not conclusive evidence of that. Nor is it the only evidence
24 (1910) 15 Com. Cas. 241 (C.A.).
25 Cf. Steam Saw Mills Co. Ltd v. Baring Bros G Co. Ltd [I9221 1 Ch. 244
(C.A.). Contrast British American Continental Bank v . British Bank for Foreign
Trade [I9261 1 K.B. 328 (C.A.).
26 (1911) 17 Com. Cas. 41 (H.L.). 27 (1910) 15 Corn. Cas. 1.
28 Ibid., 14.
29 [I9031 A.C. 49 (J.C.). Lord Lindley delivered the advice of the Board.
30 Uniform Commercial Code, section 3-411. Formerly, Uniform Negotiable In-
struments Law, section 187.
31 [1903] A.C. 49, 54.
314 Melbourne University Law Review [VOLUME
6 I

from which his intention may be deduced. A belief that he was liable
to a third party to make the payment to the recipient should be equally
good evidence. A bank is liable to its customer if it wrongfully dis-
honours his cheque; that is enough to show that it does not intend
the recipient to have the money whether or not the cheque is valid.32
( b ) Mistake as to the Recipient's Entitlement
There is an ambiguity in the words 'which would entitle the other
to the money' when more than two parties are involved in the trans-
action. As long as only two parties are concerned, if the recipient is
entitled to the money, then the payor is liable to him.33 A mistake as
to the recipient's entitlement is at the same time a mistake as to the
payor's liability. This is reflected in the reports of Bramwell B.'s judg-
ment in Aiken v. Short in Hurlstone and and the Law
Journal3* respectively. In the former it appears as though the learned
Baron was looking at the case solely from the plaintiff's p i n t of view:
In order to entitle a person to recover back money paid under a mistake
of fact, the mistake must be as to a fact which, if true, would make
the person liable to pay the money. . . .
According to the Law journal His Lordship was apparently consider-
ing the matter of the belief as it referred to the defendant:
It seems to me that the right to recover money paid under a mistake
of fact must have reference to a belief of the existence of a fact which,
if true, would have given the person receiving a right against the person
paying the money. . . .36
When we introduce more than two parties to the transaction, it
becomes possible for the recipient to be 'entitled' to the money without
the payor being liable to him: he may have a claim against a third
party. Here, a mistake as to the recipient's entitlement does not carry
with it a mistake as to the payor's liability. It might, perhaps, be
thought that Parke B. used the words attributed to him by Meeson
and Welsby (if he used them at all) in this sense, so that recovery
32 Cf. Leedon v . Skinner [1923] V.L.R. 401, where it was held that even if on
the facts as supposed by the payor he could not have been compelled by law to
pay, his belief in his liability was sufficient. See, also, Royal Bank v. T h e Kin
[193l] 2 D.L.R. 685, 689, where a legal, equitable or moral obligation was regardei
as sufficient; and Samek (1965) 39 Australian Law Journal 116, 125 (Conclusion 5).
33 Leaving out of account such thin s as limitation-barred debts.
34(1856) 1 H. & N. 210, 215, 156 I ~ R 1180,
. 1182.
3525 L.J. (N.S.) Ex. 321, 324.
36 In the Law Journal there also appears a qualification not found in Hurlstone
and Norman, since the former repoat continues: 'I do not know whether that is a
sufficiently comprehensive principle, but it is one which has existed throughout in
my mind.' Winfield, 'Mistake of Law' (1943) 59 Law Quarterly Review 327, 335-8,
discusses the 'chequered history' of Bramwell B.'s dictum, which seems to be cited
more often in the Law Journal version. In Gasson v. Cole (1910) 26 T.L.R. 468
Channel1 J. said that the dictum had never been acted on so as to disallow a claim;
but see Morton 6- Son v. Smith (1912) 18 Arg. L.R. 322, where a number of reasons
were given for disallowing the claim, the only supportable one being the change of
position of the recipient.
AUGUST19681 Recovery on Cheques Paid by Mistake 315
would be allowed only when there was a mistake as to the recipient's
entitlement, i.e. where the payor believed that the recipient was en-
titled to the money, but that was not so. Some support for this view
would come from Parke B.'s reference to it being unconscientious for
the defendant to retain the rn0ney.3~When the money is not due to
him at all, it is obviously unconscientious for the recipient to retain
it; when the money is in fact owing, even if not by the payor, it is
not necessarily so. Nevertheless, this view is not open on the authori-
ties. Again, only the highest authorities will be used as illustrations.
Had it been correct that the recipient could retain money to which
he was truly entitled, it would have been relevant in Imperial Bank of
Canada v. Bank of Hanziltoq~~~ to investigate the recipient's entitle-
ment to the money as against persons other than the plaintiff bank,
yet this was not done. As a holder of the bill the defendant bank
would have had a right of action on the cheque for the full apparent
value against the la in tiff bank's customer, who made the a l t e r a t i ~ n . ~ ~
Despite this 'entitlement', the Privy Council held that the money had
to be repaid.
In Colonial Bank v. Exchange Bank of Ymmouth, Nova
S~otia,~O the plaintiff bank wrongly followed instructions, which had
originated from one R., to pay a particular bank. It mistakenly
paid the defendant bank, where R. happened to have an account,
which was overdrawn. The defendant sought to retain the money in
reduction of the overdraft. It was held that the plaintiff could recover
the money.41 When making payment the plaintiff could not have
thought that it was liable to the defendant, but it must have thought
that the defendant was entitled to the money. There was thus no
mistake as to its own liability to the defendant, nor as to the defen-
dant's entitlement to the money, since the defendant did have a claim
against R. Its only mistake was as to R.'s instructions. This case shows
that mistake as to the recipient's 'entitlement'-in whichever of the
two suggested senses the word is used-is not a necessary condition for
the recovery of money paid in such circumstances.
Although it is unnecessary to set out in detail the facts of the
well-known case of R. E. Jones Ltd v Waring & Gillow Ltd42, atten-
tion should be drawn to certain features. The mistake here was
37 Kelly v . Solari, supra. 38 [I9031 A.C. 49 (J.C.).
39 Cf. Bills of Exchange Act, 1909-58 (C'th), section 69(1).
40 (1885) 11 App. Cas. 84 (J.C.).
41 In Commonwealth Trading Bank v . Reno Auto Sales [1967] V.R. 790, 796,
Gillard J. cited this decision in such a way as to appear that he regarded it as
depending on the defendant's knowledge that it was not entitled to the money. This
explanation is, with respect, unacceptable. There is nothing in the advice of the
Board to indicate that the defendant bank did not believe that it was entitled to
the money when it received it. Their Lordships said only that it was against
conscience for the defendant to retain the money once it learned of the mistake.
42 [1926] A.C. 670 (H.L.).
316 Melbourne Urziversity Law Review [VOLUME
6 I

clearly mutual, not common.43 The plaintiffs believed that they were
paying pursuant to an obligation to 'International Motors', whom the
rogue Bodenham claimed to represent. Though deceived into believing
that the defendants were financing 'International Motors' and would
receive payment on behalf of that firm, the plaintiffs can hardly be
said to have believed that they had entered into a contract with the
defendants. The defendants on the other hand, received the payment
in the belief that it was made to discharge in part Bodenham's obli-
gations to them under the hire-purchase agreements in order to obtain
the release of the repossessed goods. The plaintiffs mistakenly be-
lieved that they were liable to pay (but this supposed liability was to
someone other than the defendants); the defendants correctly believed
that they were entitled to the money (though not from the plaintiffs).
All five members of the House of Lords held that the plaintiffs had
made out a cause of action for money had and received.44T o trans-
pose this to the case of a bank paying on a cheque: the bank believes
that it is liable to its customer to make the payment, even though it
knows that it is not liable to the holder; the holder believes that he is
entitled to payment on the cheque in discharge of the liability of the
drawer. If the bank is mistaken in its belief, so that it is not liable
to its customer, Jones [Link] O Gillow indicates that it may recover
the payment, notwithstanding the recipient's belief and even though
the recipient's belief is justified.
As a matter of policy, too, it is suggested that the recipient's entitle-
ment as against a third party should be disregarded. There may be-
and usually there will be in the case of a drawer stopping a cheque-
a dispute between the recipient and the third party as to the recipient's
right to the money. Such dispute ought to be adjudicated on in an
action between the recipient and the third party; not incidentally in
the course of an action by the payor, who is not a party to the dispute.45

(c) Mistake as between the Payor m d the Recipient

In Halsbury it is said: 'The mistake must be a mistake between the
party paying and the party receiving the money. If the fact about
which the mistake exists has nothing to do with the payee, the rule
does not apply.'46 It was presumably to give effect to this rule that
Gillard J. in the Cornwzonwealth Trading Bank case47said: '. . . since
4 3 On the meaning of these terms, see Cheshire and Fifoot, loc. cit.
44 Viscount Cave L.C. and Lord Atkinson dissented from the final result of the
case, since they held that the plaintiffs were estopped by their representations from
recovering.
45 This argument on policy is put forward solely in relation to the submission that
the entitlement of the recipient is an irrelevant consideration in determining whether
the plaintiff may make out a cause of action. Other arguments will be adduced as to
whether the law should permit recovery in each of the particular situations considered
below.
-.-- ..
46 Halsbury (3rd ed.), Vol. 26, p. 923. Footnotes omitted.
47 119671 V.R. 790, 798.
AUGUST
19681 Recovery on Cheques Paid by Mistake 317

the alleged mistake of fact here did not affect the legal character of
the relationship between the plaintiff and the defendant, there being
in law no privity between them, such mistake would not found the
action for money had and received.'
There are two alternative answers to this: either there is no such
requirement as that stated by Halsbury, or, if there is, Gillard J. was
wrong in holding that it is not satisfied in circumstances such as he
was considering. It is difficult to see how there can be such a require-
ment in cases of mutual mistake. In such situations it seems that the
payor's mistake alone is relevant, though this be a mistake with which
the recipient has nothing to do. Any privity between the plaintiffs
and the defendants in R. E. Jones Ltd v. Waring G Gillow L Larose ~ ~ ~
only because the plaintiffs effected payment by cheque; it cannot
seriously be contended that, all other things being equal, the plaintiffs
would have failed if they had paid cash. A further illustration may
be taken from another decision of the House of Lords, Kleinwmt,
Sons G Co. v. Dunlop Rubber C O . A~ rubber~ merchant having sup-
plied the plaintiffs with goods, assigned his right to payment to certain
financier^.^^ By mistake the plaintiffs paid the defendants, who had
financed the merchant in other transactions. The jury found, inter
alia, that the defendants received the money in the belief that they
were being paid in their own right. It was held that the plaintiffs
were entitled to recover the payment.
This last case-and Colopzial Bank v. Exchange Bank of Yarmouth,
Nova Scotia51-could possibly be explained as being concerned with
error of identity, to which special rules may apply.52 However, this
explanation would not do for cases such as T. Place G Sons Ltd v .
Turner,53a decision of Devlin J. (as he then was) which affords a neat
illustration. The plaintiffs were induced by their manager to draw
cheques in favour of the defendant, a bookmaker, on the representation
that the defendant was a merchant who had supplied the plaintiffs with
timber. The manager used the cheques to pay his own gambling debts,
representing to the defendant that the cheques had been drawn in
respect of bonuses due to himself. It was held that even though the
48 [I9261 A.C. 670 (H.L.).
49 (1907) 23 T.L.R. 696, 97 L.T. 263 (H.L.). Cf. Colonial Bank v . Exchange
Bank of Yarmouth, Nova Scotia (1885) 11 App. Cas. 84 (J.C.), discussed supra.
50 There was held to be a valid equitable assignment, so as to render the present
plaintiffs liable to the financiers, in Brandt's Sons C7 CO. v . Dunlop Rubber Co.
[I9051 A.C. 454 (H.L.).
51 (1885) 11 App. Cas. 84 (J.C.).
52 In Porter v . Latec Finance (Qld) Pty Ltd (1964) 111 C.L.R. 177, 187, Barwick
C.J. was clearly troubled by the view that if the requirements discussed in the text
were insisted on, a 'voluntary' payment to the wrong person would be irrecoverable.
His solution was to substitute a general test of whether the mistake was 'funda-
mental' to the transaction. This test was no doubt sueeested to His Honour bv
Nonvich Uniolz Fire Insurance Society Ltd v . W m H. %ice Ltd [I9341 A.C. 455
(J.C.) and Morgan v . Ashcroft [1938] 1 K.B. 49 (C.A.).
53 The Times, 7th Feb., 1951.
318 Melbourne University Law Review [VOLUME
6

defendant was in good faith, the plaintiffs were entitled to recover.

T h e alleged requirement must, therefore, apply, if it applies at all, I
to cases of common mistake, i.e. where the plaintiff and the defendant I
share the same mistaken belief. Stated in this way it might at first I
sight appear that the requirement will always be satisfied, since a I
common mistake is necessarily one 'between' the payor and the re-
cipient. However, it may be necessary here to heed the warning of I
Banvick C.J. in Porter v. Latec Finance ( Q l d ) Pty Ltd54 that the
transaction and the relationship of the mistake to it must be properly I
identified and that the mistake must be fundamental in this regard.
This may lead to some difference of opinion, as it did in the Porter I
case. One Lionel Herbert Gill induced first the appellant and then I
the respondent to believe that he was Herbert Henry Gill, the owner I
of a certain mortgaged property, and that he was thus able to discharge
an existing mortgage and to grant a new one if money were lent to I
him. T h e appellant advanced money to him, part of which was paid I
to the original mortgagee in purported discharge of the mortgage debt.
Later the respondent advanced money to him, part of which was paid I
to the appellant in order to secure the discharge of the mortgage which I
L. H. Gill had purported to grant in the name of H. H . Gill. T h e
Chief Justice held that there was n o operative mistake so as to enable
the respondent to recover the money to the appellant. Taylor and I
Owen JJ. took a view of the facts of the stated case which made it I
unnecessary for them to decide this. Kitto and Windeyer JJ., in their
dissenting judgments, held that there was an operative mistake. T h e
reasoning of Windeyer J. is particularly apposite: 5 5
As the argument was presented it seemed that it was the mistake as to
the identity of Lionel Herbert Gill arising from his fraudulent represen-
tation of himself as Herbert Henry Gill. But to recover in an action for
money had and received the plaintiff must establish a mistake operative
as between himself, the payer, and the defendant, the payee: cf. Weld-
Blundell v. Synott.56 And the peculiarity of the present case, distinguish-
ing it from some others that were referred to, is that, as between the
parties, it is not a case of unilateral mistake as to the party to a
supposed contract: it is a case of a common and fundamental mistake
as to the existence of a subject-matter. The mistake arose because
the appellant and the respondent had each earlier been mistaken as to
the identity of Lionel Herbert Gill. But now the operative mistake as
between them was their common belief that the appellant was a creditor
of Herbert Henry Gill in an amount of 61,592 2s. lOd., secured by a
valid legal mortgage. In reality the appellant was a creditor of Herbert
Henry Gill for some lesser sum secured by an equitable charge. The
respondent can succeed in its action for money had and received if,
using words used by Dixon and Fullagar JJ. in McRae v. Common-
wealth Disposals Commission,57 it is "a case in which the parties can
54 (1964) 111 C.L.R. 177, 187. 55 Ibid., 204.
56 [I9401 2 K.B. 107. 57 (1951) 84 C.L.R. 377.
AUGUST
19681 Recovery on Cheques Paid by Mistake 319
be seen to have proceeded on the basis of a common assumption of
fact so as to justify the conclusion that the correctness of the assumption
was intended by both parties to be a condition precedent to the creation
of contractual obligation~".5~ In my view it is such a case.
In Colnrnonwealth of Australia v. it was also accepted that
the mistake must be between the payor and the recipient, but again
it was held that the requirement was satisfied on facts very closely
analogous to the case of a bank paying on a cheque that has been
stopped. Here a soldier, before being posted overseas, signed an 'allot-
ment', directing the Commonwealth to pay part of his allowance to
the defendant, who was then his fiande. While he was oversees, he
married another woman, cancelled the allotment in favour of the
defendant and made a new allotment in favour of his wife. The Com-
monwealth, having overlooked the cancellation, continued to pay the
defendant. When the soldier died, they informed the defendant that
they would pay her a gratuity for two months, which they did. When
it was discovered that the original allotment had been cancelled, the
Commonwealth sought to recover the payments made between the
date of cancellation and the date of death of the soldier, as well as the
gratuity. Rejecting various defences put forward, the Full Court of
the Supreme Court of South Australia upheld the Commonwealth's
claims. Although the allotment and its cancellation both emanated
from the soldier, the mistake was held to be between the Common-
wealth and the defendant.
When a cheque is paid, both the bank and the recipient proceed on
the common assumption that the bank has a mandate from its cus-
tomer to make the payment. The existence of this mandate is surely
f ~ n d a m e n t a l .Thus
~ ~ if the mandate has been revoked-because the
cheque has been stopped-or if it never existed-as where the cus-

58 Ibid. 409.
59 [1919] S.A.S.R. 201 (F.C.).
60 It may be that when one is concerned with mistaken performance-as opposed
to the mistaken creation of contractual relations-it is not necessary in order to
recall the performance to show that the mistake attained the greater degree of
importance connoted b the word 'fundamental' in cases of contraotual mistake.
The test of fundamentayity seems to have originated with Lord Wright in delivering
the advice of the Board in Norwich Union Fire Insurance Society Ltd v . W m H.
Price Ltd [I9341 A.C. 455 (J.C.), an appeal from N.S.W. which, in so far as it
related to a payment under an insurance policy in the mistaken belief that an
event insured against had happened, would appear to be a case of mistaken per-
formance. However, the plaintiffs required the defendants to sign a notice of
abandonment in consideration of the payment and the Privy Council was concerned
with the validity of this agreement. It was held that the mistake was sufficiently
fundamental to vitiate the agreement. For the view that a mistaken performance
may be set aside more readily than mistaken contracts, see Palmer, Mistake and
Unjust Enrichment (1962), p. 25, who says: 'The policies supporting enforcement
of contract work against rescission for mistake in basic assumptions, whereas they
.
tend to work in favour of . . restitution of a mistaken ~[Link] difference
shows up in considering whether the mistake needs to be substantial. For rescission
it must be basic enough to overcome the pressures favouring finality of, contract, but
.
there is no such limitation on relief for . . mistake in performance.
320 Melbourne University Law Review [VOLUME
6

tomer's signature has been forged-the requirement that the mistake

be between the payor and the recipient presents no obstacle to recovery.
A different result might well be reached, however, when the mistake
is as to something extraneous to the mandate, such as a belief that I
the customer's account is sufficiently in credit to meet the cheque.
The authority cited by Windeyer J. in the passage quoted above
in connection with the proposition that the mistake must be between I
the payor and the recipient, Weld-Blundell v. S y n ~ t t , ~
isl also cited I
by Halsbury in a footnote to the first sentence of the quotation that I
commences this section. However, it provides a slender foundation on I
which to build such a magnificent edifice.62Asquith J. there explained I
the proposition as meaning no more than that the payor must suppose
himself to be under a legal obligation to pay. H e held that if the
amount which the payor must pay the recipient depends on the calcu-
lation of an amount owing between the payor and a third party, a I
mistake in the latter calculation is to be treated also as a mistake
between the payor and the recipient so as to satisfy the alleged rule.
Thus a mistake between the bank and its customer does not necessarily
prevent the same mistake being treated as one between the bank and I
the recipient.

Conclusions
The basic requirements of the action for the recovery of money
paid under a mistake are: (1) that the payor should have been under
a mistake of fact;63 (2) that if not for this mistake, he would not have
made the payment;64 and (3) that he did not make the payment
pursuant to a contract which is not itself vitiated by reason of the
mistake.65 These three necessary conditions are not in themselves ,
61 I19401 2 K.B. 107.
62 A case which more directly supports the proposition is Toohey's Ltd v. Sydney
Municipal Council (1936) 12 L.G.R. 52.
63 The question of whether recovery may be had for a payment under a mistake
of law would not normally arise in the circumstances considered in this article.
On the troublesome distinction between law and fact in this area and for the
.
authorities on mistake of law, see Goff and Jones, o cit., pp. 79 ff.; Stoljar, T h e
Law of Quasi-Contract (1964), pp. 43 ff.; winfie14 'Mistake of Law' (1943) 59
Law uarterly Review 327.
64%.g., per Scrutton L.J. in Holt v. Markham 119231 1 K.B. 504 (C.A.). This
requirement excludes cases where the payor pays intentionally 'without reference
to the truth or falsehood of the fact, . . . meaning to waive all enquiry into it, and
that the person receiving shall have the money at all events' (per Parke B. in Kelly
v. Sohri, 9 M . & W. 54, 59).
65 It is often said that the payment must not be 'voluntary'. This may mean no I

more than that the payor must not intend the recipient to have the money in all
:vents (see the note). However, the payment is sometimes said to be
voluntary' in or er to defeat recovery of a payment made to secure the release
of a proprietary interest thought to exist in favour of the recipient in property in
which the payor has acquired an interest, as in Aiken v. Short (1856) 1 H . & N.
210, 156 E.R. 1180; Porter v. Latec Finance (Qld) Pty Ltd (1964) 111 C.L.R. 177-
on one view of the facts; Harris v. Loyd (1839) 5 M . & W. 432, 151 E.R. 183;
Krebs v. World Finance Co. Ltd (1958) 14 D.L.R. (2d.) 405. It is submitted that
what is meant here is that the payor was free to enter the contract by which he
AUGUST
19681 Recovery on Cheques Paid by Mistake 32 1
sufficient to impose liability on the recipient. In addition there ought
to be some sound reason why the recipient should be compelled to
restore the money to the payor. Reasons for and against allowing re-
covery vary greatly according to the circumstances-as will be illus-
trated when discussing particular instances of mistake by banks-and
are seldom articulated by judges. Judges may, perhaps, use the notion
that the mistake is 'fundamental' (rather than 'too remote') as a short-
hand statement of the conclusion that the reasons for allowing recovery
outweigh those for refusing it. T o require that a mistake be 'funda-
mental' in any other sense is to introduce a factor which is too sub-
jective to be of much assistance.
It has been shown that it is not essential in order to allow recovery
that under the facts as supposed the payor would have been liable to
make the payment, nor that he should have been mistaken in his
belief that the payor was entitled to the money. In cases of mutual
mistake, the mistake need not have been one between the payor and
the recipient; in cases of common mistake, if there be such a require-
ment, it may be satisfied more easily than was recognized by Gillard J.
in the Commonwealth Tradijzg Bank case. Thus in this case the three
main essentials were present and none of the alleged barriers to re-
covery was insurmountable. There remain to be considered the reasons
of policy for and against allowing the action. This will be done after
a discussion of the authorities dealing with the same subject-matter.
Before turning to those authorities, however, it is necessary for the
sake of completeness to look at the law relating to the defences to an
action for money paid under a mistake of fact.
Defences
Despite an early dictum that an omission to avail himself of the
means of knowledge would preclude the payor from r e ~ o v e r i n g ,it~ ~
has long been established that mere failure to discover the mistake-
as opposed to actual suspicion and wilful avoidance of the avenues of
enquiry-does not bar the payor's action for recovery, no matter how
negligent the payor may have been.67 Negligence may assist in estab-
lishing an estoppel against the payor, since, where it is the payor's
proposed to secure the release, or not, as he chose. Having chosen to make the
bargain, he will not be permitted to resile from it because it has turned out less
advantageous than he expected. The same principle leads the law to uphold the
validity of a compromise (as in Maskell v . Horner [1915] 3 K.B. 106 (C.A.)). If
the payment was made pursuant to a contract, it cannot be recovered unless the
contract is first set aside (see Goff and Jones, op. cit., pp. 21-22), which it will not
be in these circumstances. It does not matter whether the contract was unilateral-so
that the payor was not bound to pay--or synallagmatic (for the distinction between
these types of contract, see Diplock L.J. in United Dominions Trust (Commercial)
Ltd v. Eagle Aircraft Services Ltd [1968] 1 W.L.R. 74 (C.A.), 82-3).
66 Milnes v . Duncan (1827) 6 B. & C. 671, 677, 108 E.R. 598, 600, per Bayley J.
67 Kelly v . Solari, supra; Townsend v . Crowdy (1860) 8 C.B. (N.S.) 477, 141
E.R. 1251; R. E. Jones Ltd v . Waring G Gillow Ltd [1926] A.C. 670 (H.L.); Anglo-
Scottish Beet Sugar Corporation 1.. Spalding U.D.C. [I9371 2 K.B. 607.
322 Melbourne University Law Review [VOLUME
6
duty to inform the recipient of the amount due to him, the negligent
payment of an incorrect amount will be irre~overable.~~ It may be that
where such a duty exists, even if he exercised all reasonable care, the
payor would be estopped from denying that the amount paid was due;
in other words that these are cases of estoppel by representation, not
by negligence. However, a bank owes no such duty to the holder of a
cheque and would not be estopped by its payment.69 Where there is
no duty of this type, it becomes almost impossible to establish an
estoppel by negligence. If on the facts of R. E. Jones Ltd [Link] G
Gillow Ltd70 the payor was not estopped, as three members of the
House of Lords held, it is difficult to imagine circumstances where he
would be. Possibly there is scope for the extension of the duty concept
in this area along the lines of Hedley Byrne Ltd v. Heller €3 Partners
Ltd.71 Of course, an express representation by a bank, for instance,
that the signature on a cheque was that of a customer, might subse-
quently preclude it from contending that it was a forgery, if the repre-
sentee is induced to act on the
Sometimes stated as merely a requirement of the defence of estoppel
is change of position to the detriment of the recipient. It may be,
however, that such change of position is itself a substantive defence.73
Although widely recognized as such in America,74 its application in
English law seems to have been almost75exclusively confined to agents
who have paid the money over to their principals before notice of the
claim.76 Thus, in Standish v. Ross,77 Parke B., delivering the judg-
68 Skyring v. Greenwood (1825) 4 B. & C. 281, 107 E.R. 1064; Halt v. Markham
[I9231 1 K.B. 504 (C.A.).
69 Cf. Deutsche Bank (London A ~ e n c v v.
) Beriro G Co. (1895) 1 Corn. Cas. 255
. L.T. 669, '1 c&. Cas. 123) was
(C.A.), where the decision of ~ a t G e w ' ~(73
upheld only on his alternative ratio (change of position to the prejudice of the
recipient). Lindley L.J. expressly doubted the first ratio that the bank was in breach
of duty in wrongly informing the defendant that a bill had been collected.
70 [1926] A.C. 670 (H.L.). 71 [1964] A.C. 465 (H.L.).
72Cf. Leach v. Buchanan (1802) 4 Esp. 226, 170 E.R. 700. Contrast Kernan v.
London Discount G Mortgage Bank Ltd (1878) 4 V.L.R. (L.) 279, where there
was no evidence of the representee acting on the representation.
73 Alternatively, the payment itself may be regarded as an implied representation,
satisfvinz that reauirement of esto~oel.
.;, ~nnotation40 A.L.R. i d 997 (195 1).
74 E
75Deutsche Bank (London Agency) v. Beriro 8 Co. (1895) 1 Corn. Cas. 255
(C.A.) perhaps goes a little further, but not much.
76 E.g., Gowers v. Lloyds and National Provincial Foreign Bank Ltd [I9381 1 All
E.R. 766 (C.A.). In Continental Caoutchouc G Gutta Percha Co. v . Kleinwort Sons
G Co. (1904) '9 Corn. ~ a ; . 240, 90 L.T. 474 (C.A.) Collins M.R. adopted the
argument of Scrutton K.C. (as he then was) that if money is received as principal
it must be restored, notwithstanding that it has been paid away; whereas if it has
been received as agent, it need not be if it has been paid over to the principal.
Where it was received as agent and not actually paid to the principal, but credited
to the principal's account and set off against a debt owed by the principal to the
agent, this might be treated as payment and be a good defence to the original
payor's action for money had and received. However, if the account between the
principal and the agent had not been settled so that it was open to the agent to
reverse the credit and retain control of the money, then the agent's defence would
fail: cf. Buller v. Harrison (1777) 2 Cowp. 565, 98 E.R. 1243, with Holland v.
Russell (1863) 30 L.J. (N.S.) Q.B. 308; 4 B. & S. 14, 122 E.R. 365 (Ex. Ch.). It
AUGUST19681 Recovery on Cheques Paid by Mistake 323
ment of the Court, held that it was no defence that the recipient 'had
applied the money in the meantime to some purchase he would other-
wise not have made and so could not be placed i n statu Yet,
there is force in the dictum of Mansfield C.J. in relation to an action
which failed for other reasons:79
. . . it would be most contrary to aequurn et bonurn, if he were obliged
to pay it back. For see how it is! If the sum be large it roba ably alters
the habits of his life, he increases his expenses, he has spent it over and
over again; perhaps he cannot repay it at all, or not without great distress.
Even Lord Sumner admitted that it was hard for the defendant to
suffer for the mistake of another, 'but such is the law'.80His Lordship's
suggested solution of a short limitation period for such actions might
meet Mansfield C.J.'s objections; it does not assist where the action is
'very promptly begun',81 but the recipient has already released security
which he cannot recover or has suffered similar detriment. Since in
most cases concerning banks the mistake is likely to be discovered
quickly, the shortest limitation period will not help most recipients.
A defence analogous to change of position has received some recog-
nition in the area with which we are concerned. In Cocks v. Master-
mana2 the plaintiffs were the bankers of the drawee on a bill of
exchange, whose signature as acceptor had been forged. The forgery
was discovered on the day after the la in tiffs had aid the bill. Notice
was immediately given to the defendants, the recipients, and also to
the indorsers of the bill. It was held that the defendants were entitled
to know on the day when the bill was payable whether it was dis-
honoured or not and notice of the claim given on the next day was
too late. This distinguished the case from W i l k i n s o n v. J o l ~ n s o n , ~ ~
where the bankers of a supposed indorser paid a dishonoured bill for
the honour of their customer, but on the same day, having discovered
that his signature had been forged, informed the recipients. Probably,
Cocks v. Masterman went too far, since the recipients suffered no real
detriment, being entitled to give the necessary notices of dishonour on
the day after the bill had been d i s h o n ~ u r e dThe
. ~ ~ Court said that the
was presumably for this last reason that the bank's defence failed in Bavins Jnr 6
Sims v. London 6 S.W. Bank Ltd [I9001 1 Q.B. 270 (C.A.) and Admiralty Com-
missioners v . National Provincial 6 Union Bank of England Ltd (1922) 127 L.T.
452. In Dominion Bank v. Union Bank of Canada (1908) 40 Can. S.C.R. 366, it
pient bank had taken the cheque aH principal.

' 79 ~ r i s b a n ev. Dacres (1813) 5 Taunt. 142, 162, 128 E.R. 641, 649.
801, R. E. Jones Ltd v. Waring 6 Gillow Ltd [I9261 A.C. 670 (H.L.), 695-6.
81 As it had been in the case before Lord Sumner.
82 (1829) 9 B. & C. 902, 109 E.R. 335.
83 (1823) 3 B. & C. 428, 107 E.R. 792.
84Cf. Bills of Exchange Act, 1909-58 (C'th), section 54(b). See, also, section
55(1), which excuses delay in giving notice where the delay is not the fault of the
holder.
324 Melbourne University Lam Review [VOLUME
6
detriment lay in the loss of the privilege of giving notice of dishonour
on the same day; a somewhat nebulous detriment in the absence of
evidence that this led to financial loss through the insolvency or depar-
ture of a party to the bill. This was recognized in Imperial Bank of
Canada v. Bank of H a m i l t ~ nwhere
, ~ ~ it was said that, assuming Cocks
v. Mastermm to be right,85"the rule would not be extended. Although
it held that no detriment to the defendant had been proved in the case
before it, the Privy Council seems to admit that if notice had not been
given within a reasonable time and loss had been suffered by the
recipient as a result, the plaintiff's claim would have failed.85b
It is not clear whether the Privy Council considered that two
requirements must be satisfied for a successful defence, viz, (1) the
plaintiff must have delayed unreasonably in giving notice; (2) the
defendant must have suffered loss in consequence. If both are
essential, then provided the payor gives reasonable notice, detriment
incurred by the recipient between receipt of the money and receipt
of the notice will not avail him. This may be harsh on the recipient.
It is suggested that change of position to the recipient's detriment
before notice should in all cases be a good defence; and that the reason-
ableness or otherwise of the notice should be irrelevant. It will still be
in the payor's interest to give notice promptly, since change of position
after notice should not avail the recipient. 'Notice' should be construed
broadly, so that information that the payment was mistaken should
prevent the recipient relying on a later change of position, whatever
the source of the information. Constructive notice, on the other hand,
should have no greater role here than it has in commercial law gener-
ally. Just as it does not bar the payor's cause of action that he had the
means of discovering the mistake, so it should not bar the recipient's
defence of change of position that he ought to have realized that the
payment was mistaken.86 A wilful avoidance of enquiry would obvi-
ously be equated with actual knowledge.

It is now proposed to examine the case law directly relevant to

some of the particular types of mistake which might be made by a
bank in paying a cheque. The opportunity will be taken to draw
attention to the American law in each instance.

8 5 [1903] A.C. 49 (J.C.).

85a The correctness of Cocks v .
Masterman was accepted, obiter, by some members
of the
- - <,-
Court in Morison v . London, County G Westminster Bank Ltd 119141 3 K.B.
5>6 (LA.).
85b See Idington J. (dissenting) in Dominion Bank v. Union Bank of Canada
(1908) 40 Can. S.C.R. 366, 374-375.
86 Negligence on the part of the recipient bank in the case cited in the previous
note influenced some members of the Suareme Court of Canada to decide in favour
of the payor.
AUGUST19681 Recovery on Cheques Paid by Mistake 325
(a) Countermanded Cheques
Commmwealth Trading Bank v. Reno Auto Sates Pty Ltd appears
to be the first reported decision of a superior court in the English-
speaking world outside the United States which has considered an
action by a bank to recover payment from a recipient who did not
know that the cheque had been stopped. In Natal Bank Ltd v.
R ~ o r d the
a~~ drawer of a cheque had given notice to the payee at the
same time that he instructed the bank to stop payment. The payee,
on the advice of his solicitor, nonetheless presented the cheque to the
bank, in order to sue on the cheque after its dishonour. By mistake, the
bank paid the cheque. In holding that the principles of Roman-Dutch
law were similar to those laid down in Kelly v. S ~ l a r i and
, ~ ~that the
bank was entitled to recover, Smith J. placed no special significance
on the recipient's knowledge that the cheque had been stopped.
Two inferior courts have faced the problem: one permitted recovery,
the other denied it. In Bank of N.S.W. v. Deri,8g Clegg D.C.J., in
giving judgment for the bank, identified the mistake as common to the
bank and the recipient. In Royal Bank of Canada v. Boy~e,~O Costello
Co. C.J. held that the mistake was one with which the recipient had
nothing to do?l There is also an obiter dictum in the Irish Court of
Appeal favouring recovery. Re& v. Royal Bank of Ireland92 was an
action in which a customer succeeded in establishing against the bank
that he had validly stopped payment. O'Connor L.J. remarkedg3 that
'as at present advised' he would be disposed to think that the bank
would have an action for money had and received against the recipient.
Of closely analogous cases Commonwealth of Australia v.
where, as has been seen,95 the revocation of an authority to pay was
overlooked by the payor, undoubtedly supports the bank's right to
recovery. Barclays Bank Ltd v. Malcolm G is against. Here a
bank in Warsaw instructed the plaintiff bank by telegram to pay
£2000 to the defendants, which the plaintiffs did. Later the plaintiffs
received a letter from the Warsaw bank confirming the telegram, but
the plaintiffs, regarding it as a new instruction, paid a further £2000.
It was admitted that more than £4000 was owing to the defendants.
Subsequently, the plaintiffs did receive further instructions to pay-
this time £1000-but this sum was not paid. After discovery of the
mistake, the plaintiffs agreed to credit the defendants with £1000,

87 1903 T.H. 298. 88 (1841) 9 M. & W. 54, 152 E.R. 24.

89 (1963) 80 W.N. (N.S.W.) 1499. noted (1966) 5 M.U.L.R. 377.
\ ,

90 (1966) 57 D . L . R . ' ( ~ ~
683.
.)
91 He relied on Dominion Bank Q. Jacobs [I9511 3 D.L.R. 233, where the bank
mistook the drawer's signature for that of a customer. Le Be1 J. there refused the
bank's claim, citing the passage in Halsbzlry (supra) which requires the mistake to be
between the payor and the recipient.
92 [1922] 2 Ir. (K.B.) 22 (C.A.). 93 Ibid. 27.
94 [I9191 S.A.S.R. 201 (F.C.). 95 Supra.
96 (1925) 133 L.T. 512,41 T.L.R. 518.
326 Melbourne University Law Review [VOLUME
6

seeking to recover &lo00 of the &2000 paid by mistake. In denying

recovery, Roche J . upheld two of three alternative arguments for the
defendants. Only the first concerns us here.97 This was that the
mistake was not such as to entitle the plaintiffs to recovery. With
regard to this the learned Judge saw it as not within his function as a
judge of first instance that he 'sl~ouldexamine all the cases dealing
with money paid on a mistake of fact or should reformulate the
principles applicable to such cases'.98 In the circumstances the case
cannot be regarded as of great authority.
More formidable is the authority of Pollard v. Bamk of E n g l ~ n d . ~
Here a bill was payable at the acceptor's banker. It was presented by
the defendants, along with other negotiable instruments payable by
the banker, who gave a cheque to the defendants for an amount which
included the value of the bill. The defendants then credited the
account of the plaintiff, from whom they had received the bill. Before
the defendants finally closed for business on that day, the acceptor's
banker discovered that he had insufficient funds 'and the further fact
was also for the first time ascertained, that, at the same time, [the
acceptor] had stopped payment'. The banker immediately notified the
defendants, who agreed to take back the bill and to credit the banker
with the amount, reserving all their rights. It was held that the plaintiff
was entitled to retain the credit given to him. The true analysis of this
case shows that the mistake was as to the insufficiency of the acceptor's
funds with his banker. As will be seenloOthis is not a mistake against
which the Court will (or should) grant relief. The authority relied
on by the Court was Chambers v. Miller,l a case of insufficient funds.
Although the phrase 'stopped payment' is ambiguous, the context
seems to indicate that it was used in the sense 'ceased to pay his
debts',2 not 'countermanded his authority to pay'. It must be conceded
that the reasoning of the Court lends no support to the view that
in a case of countermanded authority the result would have been
different; on the other hand, it is certainly not conclusively against the
view.
In the United States, all states except Louisiana have now adopted
the Uniform Commercial Code,3 which explicitly deals with the
problem. By section 4-407 the bank is subrogated to the rights of the
recipient against the drawer, or those of the drawer against the
recipient, so as 'to prevent unjust enrichment and only to the extent
necessary to prevent loss to the bank by reason of its payment'. This
97 The other defence upheld was that the la in tiffs could not adopt the payment
in part as to L1000) and seek to set it aside i n part. Yet this is what the plaintiff
6
bank di in Imperial Bank of Canada v. Bank of Hamilton [I9031 A.C. 49 (J.C.).
9841 T.L.R. 518, 519. 99 (1871) L.R. 6 Q.B. 623.
100 Infra. 1 (1862) 13 C.B. (N.S.) 125, discussed below.
2 The Shorter O.E.D., s.v. 'stop', defines the ~ h r a s e'to stop payment' as 'to declare
oneself unable to meet one's financial obli$ations'.
3 Hereinafter referred to as the 'U.C.C. .
AUGUST
19681 Recovery on Cheques Paid by Mistake 327

would seem to place the bank in the difficult position of having to

decide for itself before instituting action where the merits of the
dispute between its customer and the recipient lie. If the customer
wrongfully stopped payment of the cheque or if the recipient was a
holder in due course, the bank would be subrogated to the recipient's
rights against the customer; if the customer was justified in stopping
the cheque and the recipient was not a holder in due course, the bank
would be subrogated to the rights of the customer against the recipient.
In order to determine who is the correct person to sue, the bank must
discover whether its customer was right or wrong, and, if he was right,
whether the recipient was a holder in due course or not. The solution
may be to sue both in the alternative, which might lead to unnecessary
complications and difficulty with regard to costs.
Before the enactment of the U.C.C. in each state, case law in the
United States appears to have been divided on the point. In 1925 an
Annotation4 to National Loan and Exchange Bank of Columbia: v.
Lachovitz5 stated that, although authority was scant, this was the
only decision permitting recovery, while National Bank of N e w Jersey
v. Berral16 and other cases had denied the bank's right to recover. S u b
sequently, in Turetsky v. Morris Plan Industrial Bank of N e w Yolk,'
it was held without an opinion that a bank was entitled to a refund.
On the other hand, in First National Bank of Chicago v. Moleskyg
the Illinois Appeal Court held that the bank could not recover in the
absence of evidence that the recipient knew that he was not entitled
. ~ last case was distinguished in National Boulevard
to ~ a y m e n t This
Bank of Chicago v. S c h w a r t ~ where,
, ~ ~ after he had deposited the
cheque in his own bank for collection, but before it had been pre-
sented by that bank for payment, the recipient received notice that
the cheque had been stopped; this was held to defeat his right to
retain the money. The Court recognized in this case that the substance
of the dispute was between the drawer and the recipient and it held
that the burden of the lawsuit should not be shifted to an innocent
party, the bank.
In two cases in 1963 the bank's right to recover was upheld. In
Capital National Bank i n Austin v. Woottonl' the recipient knew that
the cheque had been stopped, but mistakenly believed that the order
to stop payment had been rescinded. The Texas Court of Civil Appeals
held that, although it was negligent in paying, the bank could recover.
Wright v. Trust Co, of Georgia12 was an action against a bank on a
cheque it had issued in exchange for a customer's cheque which it
4 39 A.L.R. 1239. 5 128 S.E. 10, 39 A.L.R. 1237 (1925).
6 70 N.J.L.757, 58A. 189 (1904). 7 22 N.Y.S. 2d. 514 (1936).
8 146 N.E. 2d. 707 (1957).
9 For a case which turned on knowledge, see Smith 6- McCracken Inc. v. Chatham
Phoenix National Bank and Trust Co., 239 App. Div. 318, 267 N.Y.S. 153 (1933).
10 175 F. Supp. 74 (1959). 11 369 S.W. 2d. 475 (1963).
12 108 Ga. App. 783, 134 S.E. 2d. 457 (1963).
328 Melbourne University Law Review [VOLUME
6

had by mistake certified after payment had been stopped. T h e Georgia

Court of Appeal held that the bank was not liable on its own cheque,
which was given without consideration, since if it had paid on the
customer's cheque it would have been able to recover the money. At
first sight the decision of the New York Court of Appeals in Rosen-
baum v. First National City Bank of New York13 is to the contrary
on apparently similar facts. This was a 'per curiam' decision, giving no
reasons other than that 'the weight of authority' favoured the view that
the bank could not recover. In the report of the case in the Appellate
Division,14 whose judgment was affirmed by the Court of Appeals,
there appears a significant fact not mentioned in the report of the
proceedings before the higher court: the bank, when permitting the
customer to stop payment of the cheque, had taken an indemnity from
him, the validity of which was upheld. T h e bank, therefore, had no
real interest in the matter-there being no suggestion that the customer
was unable to pay-and the Court refused to allow the bank to fight
its customer's battles for him.
By section 33 of the Restatement of the Law: Restitution (1937)15
'[tlhe holder of a cheque . . . , who having paid value in good faith
therefor, receives payment from the drawee without reason to know
that the drawee is mistaken, is under no duty of restitution to him
although the drawee pays because of a mistaken belief . . . that he is
. . . under a duty to pay'. This qualifies the rule laid down that there
may be no recovery in so far as the recipient has constructive notice
of the mistake.
De lege ferenda it would seem to be best to allow the bank a
general right of recovery, subject to the defence of change of position.
If the law refuses to allow the bank to recover, it compels the bank
to bear a loss and permits someone without merits to receive a wind-
fall. The real dispute is between the customer and the recipient: either
the customer owes the money to the recipient or he does not. If he
does not, then clearly the recipient has made an unmeritorious gain
at the expense of the bank. If the customer does owe the money, then
he has made an unmeritorious gain at the expense of the bank, be-
cause-in the absence of subrogation as under the U.C.C.-he will not
have to pay the bank and will not be pressed by his creditor for
payment.16 On the other hand, if the law allows the bank to recover
against re-delivery of the cheque to the recipient, unless the latter has
changed his position to his detriment, the recipient, ex hypothesi, is no
worse off than he would have been if the payment had not been made,
1 3 227 N.Y.S. 2d. 670 (1962). 14 213 N.Y.S. 2d. 513 (1961).
1 5 Hereinafter referred to as the 'Restatement'.
16 The debt may not be discharged (Simpson v. Eggington (1855) 10 Ex. 845,
156 E.R. 683), but this need cause no alarm to the customer so long as the creditor
is content. If the creditor were to sue on the undischarged debt, the customer could
ratify the payment. In so doing, he would render himself liable to the bank. This
course of events is most unlikely.
AUGUST19681 Recovery on Cheques Paid by Mistake 329
nor is the customer in any better position. The recipient would still
have the advantages of an action on the cheque against thc drawer.
Although this may seem to lead to circuity of actions, that is referable
to a short cut that leads to injustice.

(b) Insufficient Funds

Different considerations arise where the bank pays a cheque in the
mistaken belief that the customer's account is in credit or that a
limited overdraft has not been exceeded. The bank will in such cir-
cumstances be entitled to recover from its customer, since it will have
performed a valid mandate. There will also not usually be any dispute
that the money was owing by the customer to the recipient. It may
thus seem to be fair to require the bank, rather than the recipient, to
bear the burden of an action against the customer and the risk of the
latter's insolvency. The authorities all support this view.
In Chambers v. Mi1lerl7 the point arose incidentally in the course
of an action for trespass to the person. The plaintiff, having presented
a cheque to the defendant bankers, was counting the money he had
been given when a clerk discovered that the drawer's account was over-
drawn and seized the plaintiff in an effort to get the money back.
Byles J. recognized that even if the defendants were entitled to recover
the money, the forcible seizure of the plaintiff was not justified. HOW-
ever, all the judges considered, and answered in the negative, the
question whether the bank was entitled to recover the money. Erle
C.J. said" that 'as between the parties here, there was no manner of
mistake', which is best explained by Williams J. when he
observed19 that the teller thought that it was a genuine cheque and
there was no mistake in that. The state of the customer's account was
a remote considerati~n.~~ Byles J. was of the opinion that there was no
mistake because the banker had full notice,21 but his main ratio
decidendi depends on an awareness of commercial practice: it 'would
create a great sensation in the City of London, if it were to be held
. . . that, after a cheque has been regularly handed over the banker's
counter and the money received for it . . . the banker might treat
the cheque as unpaid . . . because he has subsequently . . . ascertained
that the state of the customer's account was u n f a ~ o u r a b l e ' . ~ ~
As has been seen,23 Chambers v. Millerz4 was followed in Pollard

17 (1862) 13 C.B. (N.S.) 125, 143 E.R. 50, 32 L.J. (N.S.) C.P. 30.
18 Ibid., 134 (C.B.), 53 (E.R.). 19 32 L.J. (N.S.) C.P. 30, 33.
20 In the Law Journal, loc. cit., Williams J. is reported to have said also that it was
a mistake with which the recipient had 'nothing to do'.
21 This reasoning is inconsistent with Kelly v. Solari itself, since the insurers there
had as full notice as the bankers here. Similarly, Keating J. in the course of argument
drew an untenable distinction between the present case and Kelly v. Solari on the
basis that here there was laches and that there was none.
22(1862) 13 C.B. (N.S.) 125, 136, 143 E.R. 50, 54.
23 Supra. 24 Supra.
330 Melbourne University Law Review [VOLUME
6

v. Bank of England.25 Woodland v. where a bank was allowed

to recover a payment made at a branch other than the one on which
the cheque was drawn when the cheque was later dishonoured for lack
of funds, is of little authority after the aspersions on it in Prince V .
Oriental Banking C ~ r p o r a t i o n . ~ ~
In the United States, too, the rule 'almost uniformly adopted . . .
is that no recovery may be had against the payee'.28 There are only
occasional exception^.^^ Where the payee happens to have his account
at the same bank as the drawer, it is likewise held that the bank
may not reverse a credit to the payee's account on discovery of the
drawer's lack of funds. Chambers v. Miller also had the support of
J. B. Ameq30 while the Restatement31adopted the same solution where
the recipient 'paid value in good faith' for the cheque. Similarly, the
U.C.C.32 lays down that 'payment . . . is final in favour of a holder in
due course33 or a person who has in good faith changed his position
in reliance on the payment'. Since under the Code a payee may be a
holder in due course34 (which is not the law in England35), in most
commercial transactions recovery will be barred, but questionable
exceptions remain. A Comment points out that '[ilf no value has been
given for the instrument the holder loses nothing by the recovery of
the payment . . . and if he has given only an executory promise or
credit he is not compelled to perform it after the . . . reason for
recovery is di~covered'.~~This is by no means self-evident, particularly
in the case of an 'executory promise or credit'. Where the customer
is solvent, the bank has an adequate remedy against him; where the
customer is bankrupt, the laws of bankruptcy are surely adequate to
adjust the rights of the parties in respect of payments made without
consideration or for an illegal consideration. If the customer has dis-
appeared, or for some other reason the bank is unable to recover from
him, there may be something to be said for allowing it to recover
from a recipient who gave no value; but not necessarily from one
who, though relieved from performing an executory contract, may
have lost an expected profit. In practice the problem is likely to be rare.
The Comment3' also says that '[ilf he has taken the instrument in
25 (1871) L.R. 6 Q.B. 623. 26 (1857) 7 El. & B1. 519, 119 E.R. 1339.
27 (1878) 3 App. Cas. 325 (J.C.).
28 Annotation, 114 A.L.R. 382, 385-8 (1937). T o the cases listed may be added
First National Bank of Portland v. Noble, 179 Or. 26, 168 P. 2d. 354, 169 A.L.R.
(1946), and Central Bank CT Trust Co. v . General Finance Corporation, 29 F . 2d.
126 (1961).
29 A comparatively recent one is Manufacturers Trust Co. v. Diamond, 17 Misc.
2d. 909, 186 N.Y.S. 2d. 917 (1959).
30 (1891) 4 Harvard Law Review 297, 305.
31 Section 33. 32 Section 3-418.
33 This includes a transferee from a holder in due course: section 3-201.
34 Section 3-302 (2).
35 R. E. Jones Ltd v. Waring 6 .Gillozv Ltd [I9261 A.C. 670 (H.L.).
36 Section 3-418, comment 3. 37 Ibid.
AUGUST
19681 Recovery o n Cheques Paid by Mistake 33 1
bad faith or with notice he has no equities as against the drawee'. W e
have seen that in Martin v. Morgan38 the bankers were held entitled
to recover in circumstances in which the recipient could be described
as 'in bad faith or with notice'. However, in Central B a ~ kG- T r u s t C O .
~ ~ U.S. Court of Appeals (Fifth
v. General Finance C ~ r p o r a t i o nthe
Circuit) rejected an argument that the bank was entitled to recover
because, in the ~eculiarcircumstances of the case, the recipient had
superior knowledge as to the financial position of the customer, the
recipient having stopped payment of its own cheque in favour of the
customer which had already been deposited to the customer's account
but had not yet been resented for payment. It was held that in the
absence of 'fraud, misrepresentation or overreaching', the recipient was
not liable to repay the bank.
(c) Forged40 Signature of Drawer
In Price v. Neal,41a man (who was subsequently hanged for the
forgery) had forged the drawer's signature to two bills. In one instance,
the drawee paid on presentation of the bill; in the other, he accepted
and later paid the bill. On discovery of the forgery, he sought to
recover the amounts paid from the recipient, an innocent indorsee for
value. Lord Mansfield held that he could not recover on either bill.
He gave a number of reasons, the main one being that all the fault
lay on the side of the drawee and none on the side of the recipient.
Although Lord Mansfield did not distinguish between the two bills,
only the decision in relation to the accepted bill is expressly confirmed
by the Bills of Exchange Act,12 which provides as follows:
The acceptor of a bill, by accepting it . . . is precluded from denying
to a holder in due course . . . the existence of the drawer, the genuine-
ness of his signature, and his capacity and authority to draw the bill . . .
Since a bank will rarely, if ever, accept a cheque,43it is the decision
with regard to the other bill that concerns us. In the light of later
cases44negligence on the part of the payor is not a criterion for refus-
ing relief in an action for money had and received. Moreover, mere
failure to recognize a signature does not necessarily connote fault.45
Nor is innocence on the part of the recipient ordinarily a defence to
an action for money had and received.
38 (1819) 1 Brod. & B. 289, 129 E.R. 734. 39 29 F. 2d. 126 (1961).
40 Throughout this article 'forged' includes
'unauthorized'.
41 (1762) 3 Burr. 1354,97 E.R. 871. 42 1909-58 (C'th), section 59(b)(i).
43 Bank of Baroda Ltd v. Punjab National Bank [I9441 A.C. 176 (J.C.); Smith
v. Commercial Banking Co. of Sydney (1910) 11 C.L.R. 667, 683. In the United
States, both under the Uniform Negotiable Instruments Law (section 187) and the
U.C.C. (section 3-411), the certification ('marking') of a cheque by the bank is
equivalent to acceptance.
44 Supra, n. 67.
45 This point was taken by Chambre J., dissenting, in Smith v. Mercer (1815)
6 Taunt. 76, 128 E.R. 961, and Mathew J. in London G River Plate Bank Ltd v.
The Bank of Liverpool Ltd [I8961 1 Q.B. 7.
332 Melbourne University Law Review [VOLUME
6

Price v. Neal46 was followed in Smith v. M e r ~ e r . ~Here ' the

drawee's signature was forged on the acceptance of the bill, but the
drawee's bankers paid the holders in due course. Dallas and Heath I
JJ. held that it is a banker's duty to know the signature of his customer I
and failure to recognize it is negligence. The dissenting judgment I
of Chambre J., who observed that a forgery might be so skilfully done
as to negative negligence, is surely preferable on this point.48 Gibbs
C.J. decided the case on the narrow ground that the defendants lost I
the opportunity of giving notice of dishonour to the drawer and prior
ind~rser~~-i.e. he upheld the defence of change of position-but he
did not dissent from the broader reasoning of Dallas and Heath JJ.
Chambre J., in his dissent, relied on Bruce v. Bruce,50 which is
meagrely reported, but appears to be a case where the acceptor was
permitted to recover an overpayment as a result of a fraudulent alter-
ation. Gibbs C.J., in the course of argument, stated the facts of Bruce
v. Bruce more fully than in the report and cast doubt on the decision.
The other members of the majority were content to distinguish it.
Yet Bruce v. Bruce was relied on in Wilkinsm v. johnson51 where
the facts were held to be closer to that case than to Price v. Neal. Here
the bill bore the forged signatures of a drawer, acceptor and indorser.
It was paid by the bankers of the purported indorser, who were held I
entitled to recover when the forgery was discovered on the same day
and the recipients were immediately informed. This last case was dis-
tinguished in Cocks v. Masterm~an,~~ which was again a case of the
drawee's bankers paying on a forged acceptance. But the distinction
made was that the recipients were not informed until the next day
and so lost the 'privilege' of giving notice of dishonour on the first day.
This goes to the defence of change of position, which has already
been discussed;53it does not preclude recovery where notice is given
timeously .
In Hart v. Frontino and Bolivia South American Gold Mining CO.
Ltd,54 a case concerned with the forgery of a share transfer form,
Bramwell B. made the following remark:55
This is no novelty; as against a bona fide holder for value a banker
paying a forged cheque, or a drawee paying a forged bill, cannot after-
wards recover back the money, nor can an acceptor deny the drawer's
signature.
46Supra,n. 41. 47(1815)6Taunt. 76, 128E.R.961.
48 See, too, London 8 River Plate Bank Ltd v . The Bank of Liverpool Ltd [I8961
1 .B. 7.
99 Dallas J. gave as a subsidiary reason for his decision that the defendants may
have suffered prejudice. He held that the onus lay on the plaintiffs to prove that
t--h-i-- --- - -cnl
..n--s nnt
s w -.
50 (1814) 5 Taunt. 495 n., 128 E.R. 782.
51 (1824) 3 B. & C . 428, 107 E.R. 792.
52 (18291
- ,~
-~
9 B. & C . 902.
- - 109 E.R. 335.
53 supra, where the strikgency i f the decision is doubted.
54 (1870) L.R. 5 Exch. 1 1 1. 55 Ibid., 115.
AUGUST19681 Recovery on Cheques Paid by Mistake 333
In a similar case a few years later56 Lindley J. (as he then was) uttered
a similar obiter dictum57 adding, however, that the bank would be
compelled to pay the cheque 'twice over', which would be more appro-
priate where the bank paid a genuine cheque to the wrong person.
These dicta were not cited when Lord Lindley delivered the advice
of the Board in Imperial Bank of Canada v. Bank of Hamilton58 but
were referred to with approval by Vaughan Williams L.J. in another
case concerned with a forged transfer form.59
In Ceylon there is authority in which the bank was actually held
entitled to recover when it paid on a forged cheque: The Imperial
Bank of India v. Abeysinghe.60As is observed by Paget,61the defence
of change of position should have been available on the facts of the
case.
There are conflicting Canadian decisions on the point. In Dominion
Bank v. Jacobs62a cheque was drawn by a man who had no account
with the drawee bank. Mistaking the signature for that of one of its own
customers, the bank paid the payee of the cheque. Le Be1 J. held that
the bank could not recover, because the mistake was not one between
the payor and the recipient. However, recovery was permitted on the
more complicated facts of Royal Bank v. The King.63 A taxgatherer
both for the Province and a municipality t aid money that he had
collected on behalf of the latter into the former's bank account. Al-
though he had no authority to draw cheques on that account, the
bank permitted him to draw a cheque in order to transmit money
which he owed the Province to the provincial headquarters. After the
taxgatherer's death in insolvent circumstances, the bank was com-
pelled to refund the money to the municipality. It then brought action
against the Province and was held entitled to recover the amount
it had paid on the cheque.
'The doctrine of Price v . Neal', as it was called in the title of an
article by J. B. A m e ~has
, ~had
~ much influence in the United States.'j5
Ames himself supported the decision on the ground that where the
equities are equal, the loss should lie where it falls and the Iegal
title to the money should prevail. He thought that the equities were
56 Simm v . Anglo-American Telegraph Co. (1879) 5 Q.B.D. 188. The judgments
on appeal to the Court of Appeal, re orted immediately after, do not mention the
matter, though Bramwell L.J. presided:
57 Ibid., 196. 58 [1903] A.C. 49 (J.C.).
59 ShefieZd Corporation v . Barclay [I9031 2 K.B. 580 (C.A.).
60 (1927) 29-30 Ceylon N.L.R. 257, cited in Paget's Law of Banking (7th ed.,
1966). DD. 367-8.
61 Lk cit.
62 [I9511 3 D.L.R. 233 (Ontario H.C.). See, also, Bank of Montreal v. The King,
38 Can. S.C.R. 258, which was explained in Dominion Bank v. Union Bank of
Canada, 40 Can. S.C.R. 366, as turning on the defence of change of position.
63 [I9311 2 D.L.R. 685 (Manitoba K.B.).
64 (1891) 4 Harvard Law Review 297.
65 See, e.g., Lockwood, 'Current Status of Price v . Neal in New York,' (1962) 13
Syracuse Law Review 426.
334 M e l b o u r n e University Law Review [VOLUME
6
not equal where the recipient received the cheque as a gift or made
no enquiries as to the person from whom he received it. In these
situations the bank would be entitled to recover. On this reasoning
Ames also supported Chambers v. He would also have re-
fused relief to a bank which had paid an increased amount on a
fraudulently altered cheque to a holder for value in good faith. T h e
latter application of his reasoning is inconsistent with Imperial Bank
of Canada v. Bank of Hamilton,67 while many other cases where
recovery has been allowed for money paid under a mistake of fact
cannot be reconciled with his general principle. After all, the remedy
is in law, not equity, despite Lord Mansfield's invocation of ex aequo
et bono in Moses v. M a ~ f e r l a n The
. ~ ~ most widely recognized reason
given in the American cases which have followed Price v. Neal has
been commercial expediency, not logic.69Although cases applying the
doctrine are legion, there is an undercurrent of authority allowing
banks to recover, unless the recipient has changed his position to his
detriment.'O
In the United States certification (or 'marking') of a cheque is
common and by statute is equivalent to a ~ c e p t a n c eFurthermore,
.~~ the
payee of a cheque may be a holder in due course.72 Thus many of
the cases allowing recovery are explicable on the basis of that aspect
of Price v . Neal which was confirmed by the Bills of Exchmge
Some of the cases treat payment as equivalent to, or greater than,
acceptance, so as to estop the drawee from denying the validity of
the drawer's signature to a holder in due c0urse.7~The R e ~ t a t e m e n t ~ ~
adopted the following rule:
The holder of a bill of exchange . . . who has received payment thereof
. . . from a drawee on a bill on which the drawer's name was forged,
is not thereby under a duty of restitution if he paid value and received
payment without reason to know that the signature was forged.
Under the U.C.C.76 a holder in due course (who may be the payee)
or any person who has in good faith changed his position in reliance
on the payment cannot be made to repay except where he actually77
66 (1862) 13 C.B. (N.S.) 125, 143 E.R. 50, discussed supra.
67 [I9031 A.C. 49 (J.C.), discussed supra. See also infra.
68 (1760) 2 Burr.
- -- 1005.97
- .~. E.R.
- .~- 676.
- . ..
69 knnotation, 12 A.L.R. 1089 (1917).

73 Supra, n. 42.
74 See, e.g., the cases cited in the Annotation 71 A.L.R. 337 (1929); Ames, (1900)
14 Harvard Law Review 241, 243.
75 Section 30. 76 Sections 3-417 and 3-418.
77 In White v . First National Bank, 22 App. Div. 2d. 973, 254 N.Y.S. 2d. 65 1
(1964), it was recognized that before the enactment of the U.C.C., the bank could
recover if the recipient was in bad faith or negligent. The negligence exception is
abandoned by the U.C.C. section 3-418, Comment 4.
AUGUST
19681 Recovery on Cheques Paid by Mistake 335
knows-presumably at the time of presentment-that the drawer's
signature is forged.78 If he does know, then he is in breach of an
implied warranty under section 3-4 17(l)(b).
In principle there is no distinction between payment on a forged
cheque and on one which has been stopped. However, there will be
no dispute to be resolved between the recipient and the bank's cus-
tomer. The recipient will usually have given value for the cheque to
a rogue. This means that the loss will have to be borne by one of two
innocent parties, the bank or the recipient. Should the bank be made
to bear the risk of a forgery rather than the recipient who was willing
to take a cheque without verifying the drawer's signature? Banks do
encourage the use of cheques; they are also in a favourable position
to distribute the loss among all users of cheques. On the other hand,
since millions of cheques pass through the banks each day, the oppor-
tunity for detecting a forgery is perhaps smaller than when the cheque
is handed to the recipient. If the bank does detect the forgery before
paying, the loss will fall on the recipient anyway. If it does not and
pays, there is obviously much to be said for letting the loss lie where
it falls, so that the bank should be unable to recover. Yet, this situation
resembles most closely that discussed under (e) below (fraudulent
increase in the amount), where, as we shall see, both authority and
desideratum point to allowing recovery. Consistency demands that
recovery be permitted here, too.
(d) Forged
- Indorsements
The overwhelming majority79 of cheques in use in Australia today
are paid into the account of the payee or direct to him personally.
Negotiation of cheques is rare. Of those negotiated many will be
drawn payable to bearers0 and, since no indorsement is necessary, no
problem can arise with regard to a forged indorsement. In the occa-
sional case where an indorsement on an order cheque has been forged,
the bank will usually be amply protected under the Bills of Exclzarzge
Act if it acted in good faith in the ordinary course of business (where
the cheque was not crossed)81or in good faith and without negligence
(where the cheque was cro~sed).'~
78 In Citizens Bank, Booneville, Arkansas v . The National Bank of Commerce,
Tulsa, Oklahoma, 334 F. 2d. 251 (1965), the U.C.C. was held not to have changed
the rule that the doctrine of Price v. Neal operates only in favour of a holder in
due course, which the defendant was held to be on the facts.
79 The Committee appointed to review the Bills of Exchange Act, 1909-58 (C'th),
received an estimate that of more than 300 million cheques drawn in Australia each
year, 77 per cent. are deposited to the credit of the accounts of the payees named
in the cheques (Report (1964), section 27).
80 This will include cases where the payee is fictitious or non-existing (Bills of
Exchange Act, section 12(3)), as will usually be the situation where both drawer's
and indorser's signatures are forged. This situation is to be treated as falling under
(c) in the text: see O'Malley, 'The Code and Double Forgeries' (1967) Syracuse
Law Review 36.
81 Section 65. 82 Section 86.
336 Melbourne University Law Review [VOLUME
6

If the bank nevertheless wishes to recover the money from the

recipient, London and River Plate Bank Ltd v. T h e Bank of Liverpool
LtdS3 presents an obstacle. This was an action by the acceptor of a
bill to recover a payment made to a 'holder' under a forged indorse-
ment which failed. However, Mathew J.'s reasoning depended on an
extension of the defence associated with C m k s v. M a ~ t e r m a n .In ~~
Imperial Bank of Canada v. Bank of Hamiltms5 the Privy Council
was prepared to 'assume' that the rule was as stringent as put forward
in these cases, but was not prepared to extend it. The result is that if
it discovers the forgery immediately and gives notice to the recipient
on the same day, the bank may certainly recover. It is arguable that it
may recover if it gives notice at any time before the recipient has
suffered prejudice such as losing the right to give notice of d i s h o n ~ u r . ~ ~
In Canada a statutex7confers on the bank the right to recover from
the recipient if notice is given within a reasonable time after it dis-
covers the forgery to persons who indorsed subsequently to the forgery.
Ames, who, as we have seen, would have denied a right of recovery
in the two previous situations, was prepared to allow recovery in these
circumstances, since the recipient would not have any legal title to
the cheque and would in any event be liable to the true owner in
c o n v e r s i ~ n According
.~~ to Palmer,89in the United States an acceptor
is regularly held entitled to recover where he has paid on a forged
indorsement. However, in National Bank of Commerce v. First
National Bank of Cou7eta,go it was held that negligence on the part
of the bank ~recludedit from setting up the forgery. The combined
effect of sections 35 and 37 of the Restatement would allow the bank
to recover, unless the recipient had already satisfied the true owner
or the drawer's signature was also forged. By reason of a warranty
given to the payor that he has good title, the recipient would today
be liable to the bank under the U.C.C.91

83 [I8961 1 Q.B. 7. Also, in Leal G Co. v. Williams, 1906 T.S. 554, 559, Innes
C.J. suggested that if it was protected as against the true owner, the bank could not
recover from the recipient.
84 (1829) 9 B. & C. 902, 109 E.R. 335. See, supra.
85 [I9031 A.C. 49 (J.C.).
86 The Bills of Exchange Act, section 55(1), ensures that in most cases this right
will not be lost.
87 Set out and discussed in Falconbridge, Banking and Bills of Exchange (6th
ed., 1956), pp. 558 ff. In Dominion Bank v . Union Bank of Canada (1908) 40 Can.
S.C.R. 366, the bank was held entitled to recover, without reference to any statu-
tory provision where inter alia the rogue had changed the name of the payee and
indorsed in the fictitious name.
88 ( 1 89 1) 4 Harvard Law Review 297.
89 Mistake and Unjust Enrichment, p. 28, citing Canal Bank v. Bank of Albany,
1 Hill (N.Y.)287 (1941), and Britton, Bills and Notes (1943), section 139.
90 51 Okla. 787, 152 P. 596, L.R.A. 1916E 537 (1915).
91 Section 3-417 (l)(a). On 'double forgeries', see the Comment by O'Malley,
supra, n. 80.
AUGUST19681 Recovery on Cheques Paid by Mistake
(e) Mistake as to Amount
Imperial Bank of Cmzada v. Bank of Hamilt0n,9~as has been seen,
decided that a bank may recover, even from a holder in due course,
the amount by which a cheque had been fraudulently increased after
it had been marked by the bank. Since the decision did not depend
on treating certification as equivalent to acceptance, it seems that the
decision should apply also to an unmarked cheque which has been
increased contrary to the drawer's intention. It is true that if the
drawer was negligent in his manner of drawing the cheque, the bank
might still be able to debit his account with the full yet
although in the Imperial Bank case the forgery was committed by the
drawer himself, no point was made that the bank ought to look to him
for its remedy.
If the bank may recover where the amount has been altered, it
ought to be allowed to recover where it simply makes an overpayment
as a result of misreading the cheque. In most cases the recipient will
then be aware of the mistake, but even if he were not, recovery
would be allowed in accordance with general principle^.^^ Thus in
President, etc. of the Shire of Rutherglen v. Kelly95 the drawer of a
cheque was allowed to recover from the payee who, without noticing
that it was for &lo0 more than the amount due, had negotiated it for
the lower sum. In the absence of evidence that he was unable to
recover the excess from the indorsee, the payee was held not to have
suffered prejudice so as to give him a defence.
Where the matter is not complicated by ~ertification,~~ which in the
United States is deemed to be equivalent to a ~ c e p t a n c e the
, ~ ~Ameri-
can courts have held that the bank may recover if it acted in good
faith and without negligence.98 Kansas Bankers Surety Co. V . Ford
County State Bank99 is an isolated decision in which a bank was held
unable to recover from a holder in due course. The reasoning was
that since an acceptor under the Uniform Negotiable Instruments
Law99(")undertakes to pay in accordance with the tenor of his accep-
tance, and since payment is stronger than acceptance, the bank may
not recover the payment. There are dicta to the effect that the bank
92 [1903] A.C. 49 (J.C.).
93 London Joint Stock Bank v. Macmillan G Arthur [1918] A.C. 777 (H.L.).
d
Colonial Bank o Australasia v . Marshall [I9061 A.C. 559 (J.C.) must be regarded
as wrongly deci ed, even if technically binding in Australia.
94 Cf. Weld-Blundell v. Synott [1940] 2 K.B. 107; Anglo-Scottish Beet Sugar
Corporation Ltd v. Spalding U.D.C. [I9371 2 K.B. 607; Turvey v. Dentons (1923)
Ltd [1953] 1 Q.B. 218.
9 5 (1878) 4 V.L.R. (L. 119.
96 The cases on certif! ed cheques which have been altered--either before or after
certification-are athered in an Annotation, 22 A.L.R. 1157 (1921). See, further,
Breckenridge & ~fewellyn(1921) 31 Yale Law Journal 522, and note, ibid. 548.
97 Supra, n. 43. 98 Annotation, 75 A.L.R. 2d. 611 (1959).
99 184 Kan. 529, 338 P. 2d. 309,75 A.L.R. 2d. 600 (1959).
99P) Section 62(1). Cf Bills of Exchange Act, 1909-58 (C'th),section 59(a).
338 Melbourne University Law Review [VOLUME
6

would have succeeded if it could have shown that the recipient was I
negligent.
It may be doubted whether payment should be treated as equivalent I
to or greater than acceptance. Furthermore, if liability is to be deter-
mined according to the provisions of the Bills of Exchange Act, then I
the relevant section is that dealing with alteration of a bill.' Can an I
acceptor or a drawee who pays be said to have 'assented to the alter-
ation' when he accepts or pays in ignorance of the alteration? In I
Langton v. Lazmus2 the acceptor pleaded to an action by the holder I
that the bill had been altered. A demurrer was upheld on the ground I
that the plea did not state that the bill had been altered after
acceptance. This implies that the acceptor would be liable if the
alteration was before acceptance. But the editor of Chalnzers3 must I
think that this is not necessarily so under the Act, for he gives the
following illustration :
A genuine bill fraudulently altered in amount from & 10 to & 100 is I

subsequently4 accepted and paid. Four months afterwards the acceptor

discovers the fraud and gives immediate notice to the holder he paid.
He can (probably) recover the money.
The rule adopted by the Restatement5 imposes a duty to restore the
excess amount of an unaccepted bill even on a holder who has paid
value 'if the drawee was in the exercise of care in making payment
in the belief that the instrument had not been altered'. Under the
U.C.C.6a person obtaining payment of a cheque warrants to a person
who pays in good faith that the instrument has not been materially
altered.7 Liability thus depends on breach of this warranty.
From the point of view of what is the most desirable rule, we must
note that where the amount is fraudulently increased, as in the case
where the drawer's signature is forged, one of two innwent parties
will have to bear the loss if the rogue cannot be traced. Here the bank
will have the opportunity of shifting the loss back to its customer if
he was negligent in the manner of drawing the cheque. There is no
reason to suppose that the customer will be better able to bear the
loss than the recipient and it is possible that the recipient may have
been equally negligent in taking the cheque without full enquiry. The
customer's breach of duty to the bank may well be held not to con-
stitute a breach of duty to the ultimate recipient, so that he will not
be estopped from recovering the excess from the r e ~ i p i e n t .It~ would
1 Section 69. 2(1839) 5 M. & W. 629, 151 E.R. 266.
3 Bills of Exchange, 13th ed. (1964), p. 208. 4 My italics.
5 Section 3 1(b). 6 Section 3-417(1)(c).
7 The exceptions in section 3-417(l)(c)(iii) and (iv), relating to payment after
acceptance, need not concern us.
8 Under the Bills of Exchange Act, 1909-58 (C'th), section 69, if the alteration
is not apparent and the recipient is a holder in due course, the drawer is liable, on
the instrument as originally drawn. Thus, where payment has been made in these
AUGUST
19681 Recovery on Cheques Paid by Mistake 339
be absurd to make the recipient bear the loss where the drawer has
been negligent vis-6-vis the bank, but not where the drawer has exer-
cised all reasonable care. T o achieve consistency the bank should be
permitted to recover from the recipient in all cases where he has not
changed his position to his detriment. In other words, the decision in
Imperial Bank of Canada v. Bank of Hamilton9 should be held to
apply to all cheques, marked and unmarked.
(f) Mistake as to the Recipient
In most cases where the bank pays the wrong person (not as the
result of a forged indorsement),1° the recipient will be aware of the
mistake and will be liable to make restitution. Although there appear
to be no cases concerning cheques, the principles of Colonial Bank v.
Exchange Bank of Yarmouth, NOT@Scotial1 and Kleinwort, Sons G
Co. v. Dunloy Rubber Co.12 clearly allow the payor to recover where
he is mistaken as to the identity of the recipient, even where the latter
is innocent. Likewise, the Restatement has no special rule for bills in
this regard, but the matter falls under the general wording of section
22, which allows recovery 'unless the [recipient] is protected as a
contracting party or as a bona fide purchaser'. Under the U.C.C. the
warranty of good title,13 which protects the bank in the case of a
forged indorsement, will also serve here.
(g) Others
The case law yields no direct answers to other problems which may
arise. Material alterations of a cheque, other than a change in the
amount, should undoubtedly14 be dealt with in the same way as an
alteration in the sum payable. Other situations will similarly have to
be decided in accordance with the analogies they present to the situ-
ations discussed. Enough has been said to show that the main reason
given in the Commonwealth Trading Bank15 case, viz. that a bank

circumstances, only the excess would be recoverable. If these conditions are not
satisfied, the bill is avoided under section 69 and the drawer would ~resumablvbe
able to recover the full payment.
9 [I9031 A.C. 49 (J.C.).
10 As to forged indorsements, see supra. The present discussion would be relevant
where the 'indorsement' is a mere receipt: see Nmional Bank v. Paterson, 1909 T.S.
322, approved in Smith v . Commercial Banking Co. of Sydney (1910) 11 C.L.R.
667.
11 (1885) 11 App. Cas. 84 (J.C.).
12 (1907) 23 T.L.R. 696, 97 L.T. 263 (H.L.). See, too, Continental Caoutchouc 8
Gutta Percha Co. v . Kleinwort Sons 8 Co. (1904) 90 L.T. 474 (C.A.), Steam Saw
Mills Co. Ltd v . Baring Bros 8 Co. Ltd [1922] 1 Ch. 244 (C.A.) (where it was
recognized that if the 'identity' of the Russian Government had changed, the plain-
tiffs would have been entitled to recover the money), Kerrison v . Glyn, Mills, Currie
8 Co. (1911) 17 Com. Cas. 41 (H.L.) (where the insolvency of the New York
bankers was said to have changed their identity from that of a living commercial
entity), Morgan v . Ashcroft [1938] 1 K.B. 49 (C.A.), 66-7, 74.
13 Section 3-417(1)(a).
14 Cf. Dominion Bank v . Union Bank of Canada (1908) 40 Can. S.C.R. 366.
1 5 [1967] V.R. 790.
340 Melbourne University Law Review [VOLUME
6
is precluded from recovery because it is not under a legal obligation
to the holder of the cheque to pay him, is not a good one in law, and
that in every case consideration should be given to the effect of either
allowing or refusing relief on all persons concerned, whether or not
they are parties to the action.