London Joint Stock Bank Ltd. v. Macmillan (1918)

This is the leading authority on the customer's side of the banker-customer contract. Most of the law protects the customer: the bank must honour his cheques, keep his affairs secret, and bear the loss of a forged signature. Macmillan states the one significant duty running the other way — the duty to draw a cheque so that it cannot easily be altered.

It matters for a second reason. Lord Shaw's opinion fixes the moment at which the obligations of banker and customer meet, and once that moment is identified the allocation of loss follows almost mechanically. That is the analytical move to reproduce in an answer.

The facts, as Lord Shaw said, are very simple. It is a case between banker and customer.

A customer drew a cheque in his own favour on his banker. He gave it to a clerk, who tampered with the figuring and wording so as to increase the amount. The alteration was made so skilfully that no man of ordinary skill could find the roguery out. The bank paid the altered amount and debited the customer.

It is important to notice what the case is not. It is not a case between the drawer and the acceptor of a bill, nor between an acceptor and a holder in due course, nor anything analogous. The cheque never passed to a third-party payee, so no question arises about the conduct of a payee. And the signature was admitted to be genuine — this is not a forged-signature case at all.

1. Does a customer owe his banker a duty of care in the way he draws and fills up a cheque?
2. Where an alteration is made between signature and presentment, who bears the loss?
3. At what point of time do the obligations of banker and customer meet?

The customer was liable. The loss fell on him, not on the bank.

The obligations are reciprocal

Lord Shaw set them out on each side.

On the banker. If the cheque does not contain on its face any reasonable occasion for suspicion as to the wording and figuring of its contents, the banker, under the contract of mandate which exists between him and his customer, is bound to pay. He dare not, without liability at law, fail in that obligation: the consequences to both parties of the dishonour of a duly signed and ex facie valid cheque are serious and obvious. If there is on the face of the cheque reasonable ground for suspecting that it has been tampered with, the usual course is to mark it to refer to the drawer and delay payment until the reference clears the doubt. Provided the doubt was reasonable, the refusal to pay is warranted.

On the customer. His cheque must be unambiguous and ex facie in such a condition as not to arouse any reasonable suspicion. It follows that it is his duty, if his own business or other requirements prevent him from presenting it personally, to frame and fill up the cheque so that when it passes out of his hands it will not be so left that alterations and interpolations can readily be made upon it before presentation without giving the banker reasonable ground for suspicion that they did not form part of the original body of the cheque when signed. To neglect this duty of carefulness is a negligence cognisable by law, and the consequences of that negligence fall alone upon the party guilty of it, namely the customer.

The crucial moment is presentment

This is the heart of the opinion. The point of time at which the respective obligations meet is the presentment of the cheque. Not until that moment is the banker confronted with any mandate or order. Responsibility for the cheque and for all that happened to it between its signature and its presentment is not, and ought not to be, laid upon the banker.

If at the moment of presentment three things are satisfied, the banker is bound to pay:

1. that the cheque is duly signed;
2. that its appearance and statement of contents present no reasonable ground for suspicion; and
3. that there are customer's funds available.

The alternative was unworkable. If a banker were bound to inquire, for every cheque with a genuine signature, what its history had been from the time the customer lifted his pen until the time of presentment, banking business would be greatly impeded or impossible, and would be subjected to risks for which there is no foundation in legal principle.

The intervening period belongs to the customer

The period between signature and presentment is in the customer's control. When a customer makes a cheque payable to himself or bearer it is entirely at his option when to present it. If he gives it to a clerk who tampers with it so that no man of ordinary skill can detect the alteration, there is no foundation in law for discharging the customer from responsibility for those events or for laying them on the banker, who was in no position of control over or participation in them. That the tampering was a crime does not help the customer: it was a crime brought about during the period of his responsibility and, as frequently happens, by his own servant.

The forged signature is a different case altogether

Lord Shaw disposed at the outset of the authorities on forged cheques. A cheque with the signature of a customer forged is not the customer's mandate or order to pay. With regard to that cheque, it does not fall within the relation of banker and customer at all. If the bank honours such a document not proceeding from its customer, it cannot make the customer answerable for the signature and issue of a document which he did not sign or issue; the banker paying has paid without authority and cannot charge the payment against a person who was a stranger to the transaction.

What was left open

Lord Shaw expressly declined to decide the case in which the customer has not been negligent, but erasures of great skill or deletions accomplished by chemical aid have undone all the care he properly exercised. That reservation is worth a sentence in an answer: the rule is founded on the customer's negligence, not on strict liability.

A customer owes his banker a duty to draw the cheque so that it cannot readily be altered without giving reasonable ground for suspicion; the obligations of banker and customer meet at presentment, so that the risk of everything occurring between signature and presentment lies on the customer; and where the customer's breach of that duty enables the alteration, the loss falls on him.

Read it with s. 89 of the Negotiable Instruments Act 1881. Where an instrument has been materially altered but does not appear to have been so altered, payment by the banker according to the apparent tenor and otherwise in due course discharges him, and the payment may not be questioned by reason of the alteration. Section 89 is the statutory form of the Macmillan rule as it affects the paying banker; Macmillan supplies the reason.

Read it against s. 87. Material alteration renders an instrument void against a party who did not consent. Sections 87 and 89 must be read together: the alteration destroys the instrument as between the parties, but protects the banker who could not see it.

Read it against the forged-cheque cases. In India the leading authority is Canara Bank v. Canara Sales Corporation, where the Supreme Court rejected the pleas of implied terms, constructive notice and estoppel by negligence, and held that a forged cheque carries no mandate at all. Macmillan and Canara Sales Corporation are the two halves of one subject and are best learnt as a pair: the customer bears the loss of his own negligence in framing the cheque; the bank bears the loss of a forgery of the signature.