Banks and the Fraudulent Alteration of Cheques
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alteration of cheques
With the introduction of self-correcting electronic typewriters, banks
must instigate new safeguards against fraud. By P J M Fidler, of
Stephenson Harwood in London
The possibility of altering cheques and bills of
exchange in a way which is difficult to detect is not
new. For years the banks have warned against using
anything other than indelible ink for drawing
cheques. Recent technology has created yet another
possibility Some electronic typewriters now use
ribbons which make an alteration of type possible
without it being apparent, opening the way to
further opportunities for fraud. What is the position
of a bank in relation to a cheque which has been
fraudulently altered? The strict legal position in
relation to bills of exchange (including cheques) is
easy to state, but in practice not so easy to apply.
A valid instrument
Section 64 of the Bills of Exchange Act 1882
provides that where a bill or an acceptance is mat-
erially altered without the assent of all parties liable
on the bill, the bill is made void except when used
against a party who has himself made, authorised, or
assented to the alteration, and subsequent
endorsers. There is a proviso to the effect that where
the bill has been materially altered but the alteration
is not apparent and the bill is in the hands of a holder
in due course, such a holder may avail himself of the
bill as if it had not been altered, and may enforce
payment of it according to its original tenor. What are
material alterations?
Section 64 refers to alterations of the date, the sum
payable and the time or place of payment. The name
of the payee would also be material.
In a case of fraudulent alteration the drawer of a
cheque, and the drawer and the acceptor of a bill of
exchange, will cease to be liable. The bank is not
liable on any of its customer's cheques, as it has not
signed the cheques. However, if a bank pays a
cheque which has been materially altered without
the drawer's consent, it does so at its own risk. It
cannot in general debit its customer with the money
which it has paid out without the customer's
authority, since the cheque is no longer a valid
instrument. The only exception to this rule is that if
the drawer has himself facilitated or given
opportunity for the material alteration to be made,
he may be prevented from asserting that the
alteration was made without his authority. This
certainly applies where the material alteration is one
of amount (London Joint Stock Bank v Macmillan and
Arthur [19181 AC 777).
It is possible that the courts today would hold that
a customer who had signed the cheque typed on an
electronic typewriter so that an unnoticeable
correction could be made by the use of a 'lift-off' tape
International Financial Law Review November 1986
might be regarded as having facilitated or given
opportunity for the alteration. In the recent Tai Hing
case the court was not leaning over backwards to be
helpful to the bank in its view of the duties of the
customer to the bank. The position of banks would
certainly be improved if they informed all customers
of these risks. If a bank informed its own branches,
that would show clearly that it perceived the risk of
fraudulent alteration going undetected to be high. It
would certainly assist the bank in arguing that the
customer had, by using such electronic typewriters,
facilitated or given opportunity for the alteration, if
the bank could show that it had informed each
customer of the risks of using such typewriters. It
might be possible to send this warning by means of
a note on each cheque book.
In Burnett v Westminster Bank [1975] 3 All ER 81 a
customer who had two accounts at different
branches of the same bank (one automated, one not)
drew a cheque on his account at the automated
branch, and then altered in ink the account number
on which the cheque was drawn, so as to make it
payable at the other branch, which was not
automated. He later stopped the cheque, giving
notice to the non-automated bank and quoting the
account number, as altered. The cheque was
presented for payment and was passed through the
bank's computer, and the magnetic ink coding took
the cheque to the automated branch, where no one
noticed the handwritten alteration, and the cheque
was paid. The bank was held liable to the drawer
because it should have informed him that ink
alterations could not be detected by the computer.
His cheque book cover contained a warning that
cheques which bore magnetic ink characters would
'be applied to the account for which they have been
prepared. Customers must not, therefore, permit
their use on any other account'. This, however, was
not held to be sufficient to alter the pre-existing
contractual relationship, as the bank could not show
that the customer had read the warning, or that he
had agreed to it in writing.
Form of consent
While it may be useful to print a warning on
cheque books it must be safer for a warning to be
sent specifically to each client, by means of a special
circular. Alternatively, a form of consent to an
appropriate disclaimer might be incorporated in the
cheque book request form, and the bank then satisfy
the requirement if cheque books were only issued
against signed request forms incorporating the
words of warning. Even then, it might be necessary
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