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FINANCE PORTFOLIO COMMITTEE
29 August 2000
BILLS OF EXCHANGE AMENDMENT DRAFT BILL: HEARING [B47 - 2000]
Professor Lenard Gering’s submission
Banking Council of South Africa: brochure
Banking Council of South Africa: Proposed Amendments
Bills of Exchange Amendment Bill [B47 - 2000]
Prof J T Pretorius
Office of the Banking Adjudicator
Mr S Du Toit (Lecturer, Faculty of Law, Rand Afrikaans University)
Judge F R Malan (High Court of South Africa)
Ministry of Finance
Consumer Institute of South Africa
Prof Lenard Gering explained generally how this legislation would repair some mistakes of the apartheid government, but he also noted his concerns about some changes in the legislation. He urged a wider hearing on the sections dealing with the prevention of fraud and on non-transferable cheques, both of which he thought had some major, potentially undesirable effects for ordinary people.
The Banking Council of South Africa defended the three main changes that the Bill would effect and which banks were most concerned with obtaining: electronic presentment for efficiency and to avoid losses; a standardised method of making cheques non-transferable so as to gain certainty; and the provisions on the prevention of fraud to create a more equitable situation where those able to prevent losses would bear those losses.
In response, Prof Gering said that it should be possible to allow payees to ask a bank to cancel a crossing and that the bank can always make a phone call in this regard. He stated that the English have allowed this since 1882 and have not had a problem as a result. He added that millions of South Africans are without bank accounts and that banks have a responsibility to be cooperative towards South Africans.
The Consumer Institute’s written submission supported standardisation and thus the Bill, subject to the banks undertaking an educational campaign.
Professor Lenard Gering
Prof Gering of the Department of Mercantile Law at the University of Durban-Westville, made a submission as an individual very interested in the topic under consideration. Prof Gering noted that there had not been much opportunity to respond to the draft legislation as it had not been published in the Gazette. It was merely by chance that Prof Pretorius had let him know that the bill was being considered. He explained that there was some context for reform discussions such as the South African Law Commission Report in 1995, discussion through an academic links program, and a previous draft bill in 1998. He was pleased that the present proposals built on this previous work in and avoided some of the mistakes of 1998.
He emphasised that bills of exchange are an area of law for which there is judicial interpretation from around the world. He traced its background, stating that the first Act was passed in England in 1882. He explained how in 1964, the apartheid government was arrogant enough to think it could improve on this Act and made such errors as removing the words "or non-existing" from the section dealing with fictitious and non-existing payees and changing every "where" to "if". Many of the present proposals would appropriately restore the 1882 wording.
Prof Gering stated that slight changes in wording can make a big difference and that the present draft would correct many of the mistakes made by the apartheid government in its 1964 amendments. He stated four principles in considering other changes that were not simple corrections: (1) the burden should be on the proposer to show the desirability of any proposed change; (2) provisions should not be worded too widely; (3) inconsistent uses of the same word should be avoided; and (4) the wording should be designed to avoid new problems and costly litigation.
Prof Gering then focussed on two large areas that could affect ordinary people and that should face a wider hearing: Clause 27 on the prevention of fraud and Clause 31 on non-transferable cheques.
Clause 27 (s. 72B on the prevention of fraud)
Prof Gering stated that non-transferable cheques can make a major contribution in preventing fraud. However, introducing a duty on the drawer of cheques would be a major change from the common law, which does not recognise such a duty. He stated that a new and onerous duty on drawers of cheques is something with which Parliament must be very careful.
The Chair, Ms B Hogan, asked if he considered the provision’s main objective to be a shifting of responsibility to corporations and businesses. He agreed that it was. He observed that a fair case can be made for doing this with what the Canadian case law has called "sophisticated customers", but closed corporations, which are included in the section, are small businesses and should not face this same rule. The Chair asked if his objection, then, was to the inclusion of small businesses. He stated that this was the case and that while he did not like the amendment for others either, he saw some merit in it. He stated that the proposed amendment should appear in the Gazette for people to be able to comment on it.
The Chair asked for a clarification on what the common law currently is. Prof Gering stated that people are free to lose cheques and do not have to reconcile their statements. He stated that in practice, the problem occurs not with a lost cheque here or there but with a series of forged cheques that a company has not detected. This has been the situation in the major cases that have affirmed that there is no duty.
The Chair asked how a customer showed that it had taken reasonable care. Prof Gering stated that this is always a question of fact and always a problem. He stated that some countries have automatic liability in the event of a car accident but that with a dispute on this matter in South Africa, there is no alternative to expensive litigation.
The Chair asked if in the case of a minor fraud it is up to the government or business to prove that it exercised reasonable care in order for the bank to be liable. The Chair added that a customer might find it feasible to prove this only on a major matter. Prof Gering stated that the usual course when a dispute arises is that the bank will debit the account and that matters of proof follow. He stated that given that ordinary humans best avoid litigation, it was very fortunate that the apportioned liability as in earlier drafts had been abandoned, as it would have been a disaster.
Dr Woods (IFP) asked what the meaning of the words "perfectly forged" was. Prof Gering replied that these words from the Memorandum on the Objects of the Bill were not helpful, and that there really was no difference between a perfect forgery and an imperfect forgery. However it was important to stick to looking at the words in the legislation itself, as these were the ones that would have a legal impact.
The Chair asked for the Prof Gering ’s views on the proposed s. 72B(2). He stated that it was most unusual and that he did not know what it means or what its purpose is.
Clause 31 (s. 75A on non-transferable cheques)
Prof Gering indicated his strong support for the use of non-transferable cheques, even though banks sometimes found them a nuisance. He stated that the South African courts have rejected the use of the phrase "account paid only", with Judge Holmes providing an obiter dicta on what would be a proper approach to the creation of non-transferable cheques. Prof Gering stated that any non-transferable cheque must be credited to an account bearing the same name as the payee. He said that ordinary people suffer in litigation and that this made the proposed amendment problematic.
The Chair asked the presenter if he disagreed with this proposed provision as a whole or if he would propose an amendment to it. Prof Gering objected to aspects of the provision. Requiring the words "not transferable" to be added by the drawer was something impossible to prove. He wondered why a holder could not add these words anyway. Moreover, he asked what would happen if a drawer used another official language or made a spelling mistake. He stated that Parliament should follow the English and New Zealand legislation and not require that non-transferability be indicated exclusively by the drawer nor that it be indicated in only one way. He suggested again publishing the proposed Bill so that interested groups could respond.
Prof Turok (ANC) asked about the consequences of printing on all cheques a crossing and an indication that they were non-transferable. How this would work for people without bank accounts? The Chair asked if Prof Turok was suggesting an end to negotiable cheques. Prof Turok indicated that he was looking for a system that would reconcile the competing considerations of the need for an efficient system and the need for ordinary people without bank accounts in rural areas to be paid.
Prof Gering responded that it should not be compulsory to make a cheque non-transferable in one particular way and that if cheques were pre-printed in this way, it would cause problems for people without bank accounts. He stated that it should not be compulsory to have such markings on a cheque. There was no problem as long as non-transferability was indicated boldly and clearly on the face of the cheque. There should be no difference between someone marking a cheque "non-transferable" and marking a cheque "not transferable" as under the English and New Zealand systems.
Mr Andrew (DP) noted that the New Zealand wording was clearer but still did not solve the problem of a misspelling and asked how any place could deal with the languages issue. He thought it would be onerous to expect bank tellers to be able to read poorly hand-written words in any one of eleven languages. Secondly, he stated that a rigid requirement might yield some clarity for ordinary people. He asked if a standard format might not be more user-friendly. Prof Gering replied that New Zealand’s legislation is sufficiently precise yet still allows for slight variations in the method of marking non-transferable cheques. Issues about spelling and the use of other official languages arise only when Parliament considers saying that there is just one way to do so.
The Chair asked Prof Gering to clarify this. He stated that undue rigidity in, for example, saying that only the drawer can make a cheque non-transferable or in obligating banks to print this marking on their cheques would be undesirable. He stated that so long as intentions are clear, exact words should not be required.
The Chair and Mr Andrew (DP) asked if what the presenter was objecting to was the requirement to have certain words and only those words. Prof Gering stated that we should be moving away from formalism. He stated that it is presently possible to write "pay Ken Andrew only" and that this remains clear and should not be discarded.
Mr Ramgobin (ANC) asked which gets precedence between a "not transferable" crossing and a "not negotiable" crossing and how a bank deals with a cheque with both these markings. Prof Gering stated that both parts would have an effect, the first in saying that the cheque must go into a bank account and a particular person’s specifically, and the second in giving additional protections in the event of theft. He indicated that he had read an article on how to write a cheque which recommended four steps on every cheque: crossing out "or bearer", crossing the cheque, writing in the crossing "not negotiable", and writing beside the numerals "not transferable".
The Chair asked about s. 75(3) and whether the words "not transferable" can be cancelled. Prof Gering stated that since 1882, people have been allowed to cancel crossings and that this should not now be changed. He indicated that people dealing with many cheques should consider using the stamp "issued without any alteration". However, in general, he stated that there needs to be a good reason to take away freedom and that there is no reason not to allow a holder to change a crossed cheque to "pay cash". He stated that non-transferable cheques pose no real problem and should not require special legislation.
The Chair indicated that a parliamentary researcher had inquired to the Department of Welfare and found that it is only in the Eastern Cape that the Department pays only in cheques and by no other method.
Dr Koornhof (UDM) asked whether the insertion of 72B and 72A will discourage fraud. Prof Gering stated that 72B will help prevent fraud and that anything doing so should be encouraged. He stated that the present amendment will not eliminate fraud but help to prevent it. However, he stated that before imposing an onerous duty such as the duty in 72B, the government ought to tell the people about it and that even the Memorandum as it dealt with these sections was very cursory. He also referred to oddities in the definition such as advocates will not be affected but attorneys will because the latter must be audited. He stated that there remains a question of how to define which customers are subject to an onerous new duty.
Mr Andrew (DP) asked whether 72B(2), which the presenter had described as unusual, was superfluous as banks already delay clearing cheques for five or seven days. He also asked what law authorises the current seven-day delay and whether it could cover the 72B(2) situation. Prof Gering stated that a possible application for 72B(2) might be in the case of a large cheque with a funny request to withdraw the money after the seven days had already elapsed, in which case the bank might have another day to deal with the matter. However, he noted that the memorandum made no reference to this subsection and provided no motivation for it, concluding that the banking industry needed to explain it better.
Mr Andrew (DP) asked if the effect of the subsection was to change the time from seven days to eight days. Prof Gering reiterated that he did not understand the section either. The Chair suggested leaving these issues for the Banking Council.
Prof Turok (ANC) spoke of a situation in the Transvaal where thousands of cheques issued to employees had been fraudulently altered at the post office, deposited, and immediately withdrawn. Prof Gering noted that there was already generally a waiting period of seven days and that any changes should not be done in an amateurish way, but with complete explanations.
Clause 1 ("bank" and "banker")
The Chair suggested moving on to other issues, such as the definitions of "bank" and "banker".
Prof Gering stated that Clause 1 would lead to litigation and endless problems. Changing to the term "bank" might be an advantage in that a bank is an "it", but the term "business of banking" is quite different. The definition of this term was a difficult thing and that if it was now changed to "business of a bank", the court will have to say that it has a different meaning. He stated that the term "business of banking" is a technical expression and should not be altered, although he was indifferent to the rest of this amendment. He did wonder why it should be implemented when the banks themselves seemed quite neutral on it.
Banking Council of South Africa
Mr Kevin Daly, General Manager of the Banking Council of South Africa, supported the amendments. He explained the background and reasons for these amendments. The South African Law Commission had done a very thorough report in 1995, of which the banking industry was generally supportive. The banking industry commissioned Prof (now Judge) Malan to draft an amendment bill at that time. Since then, there have been several versions with different variations. Mr Daly stated that most of the amendments in the present Bill are not at the instigation of the banks but at the instigation of the Law Commission, so he indicated that he would not defend all of them.
Mr Daly stated that closed corporations had been added in the proposed 72B simply for the sake of consistency. In response to Prof Pretorius’s comments that the banks had tried to get a Bill favourable only to them and not to consumers, he said that the only piece of the Law Commission report that was favourable to consumers that was not in the draft Bill had been unanimously thought to be already well-established in the common law. He said that there had been much consultation, contrary to Prof Pretorius’s suggestions of a lack of transparency. He noted that the banks would support a referral to Judge Malan on the technical accuracy of the legislation, but he stressed that the Committee had to make a basic determination on its desirability.
Mr Daly discussed with the committee three areas that were especially important to the banks:
Clauses 13 and 15 (electronic presentment)
Although nobody had really contested this area, it was very important to the banks. Every time there is a transfer of paper, there is a risk of loss. Other countries use technology to get around this. The sections on electronic presentment would legalise and promote the use of electronic presentment.
Mr Feinstein (ANC) later asked if electronic presentment is secure, indicating that Barclays in the UK had recently shut down some of its electronic systems since they were not secure. Mr Daly stated that he did not have precise statistics but that most statistics he had seen suggested that losses when dealing with paper exceed those when dealing with electronic presentment by an order of a thousand times. He thus stated that crude statistics suggest that it represents a major improvement.
Clause 31 (non-transferability)
Mr Daly stated that in an ideal world, free expression in every area is great, but that in the real world, absolute certainty is a more desirable goal with respect to cheques. He stated that the proposed section would get rid of disputes about negligence and about whether markings were sufficiently bold. He stated that there were precedents for the use of rigid terms in the phrase "account payee only" in the UK and the phrase "not negotiable" already used in South Africa.
On Prof Gering’s objections about only the drawer being able to make a cheque non-transferable, Mr Daly stated that this was already the situation on the banks’ understanding of current legislation. He stated that s. 34 of the Act operated to mean that only the drawer can add words making it non-transferable. The Chair asked if restrictive endorsements had an equivalent effect. Mr Daly stated that restrictive endorsements were only on the back of a cheque and that negotiability is then limited in one sense but not strictly so. The Chair asked if a restrictive endorsement made a cheque non-transferable. Mr Daly replied that it could have a similar effect and that the law on this would not be changed.
Mr Andrew (DP) asked if one can restrictively endorse a cheque to oneself. Mr Daly replied that a restrictive endorsement is just an endorsement, and one cannot endorse a cheque to oneself or one makes nonsense of everything.
The Chair asked if one could make a cheque non-transferable through an endorsement. Mr Daly replied that a restrictively endorsed cheque was still transferable in its origin and that a non-transferable cheque is not transferable at all.
Mr Andrew (DP) stated that it seemed highly desirable that there be a provision to enable a payee to make a cheque non-transferable. Mr Daly stated that he had no objection as long as there was consistency.
In answer to Mr Ramgobin (ANC) query on a restrictive endorsement, Mr Daly explained that a holder uses it when wishing to transfer a cheque but not transfer it to just anyone.
Mr Daly spoke briefly on the issue of people in rural areas, indicating that cancelling a crossing is currently not accepted by the banks but that it has been done - so it has been accepted to an extent. He indicated that the legislation prohibits "obliterating" a crossing and that in the banks’ view, this prohibits cancelling a crossing. The proper approach for a cheque recipient in a rural area needing to alter a drawer’s instruction is to send the cheque back to the drawer for alteration. He noted that it is against the policy of some government departments and insurance corporations to send uncrossed cheques in the mail. He indicated that Parliament must decide which is the better approach: allowing people to cancel crossings and thus allowing fraudsters to get payment without banks being liable or being consistent and standardised and not allowing cancelling.
The Chair said that the government must look at how it provides payments.
Mr Andrew (DP) asked about the meaning of adding "or altering" a crossing. Mr Daly stated that an alteration of a crossing would be a change from a general crossing to a special crossing by adding the name of a bank. Mr Andrew (DP) asked if this strengthens the protection from crossing. Mr Daly stated that this depends on a subsequent party altering the crossing.
Prof Turok (ANC) noted again his concerns with balancing making protection from non-transferability stronger in all cases against protecting the needs of the poor and disadvantaged. The Chair stated that discussions about making all cheques non-transferable were distracting attention and suggested returning to the subject at hand.
Mr Daly stated that the whole law of negotiable instruments is about negotiability and that cheques are designed to be negotiable.
Ms Joemat (ANC) asked if it would be possible to make a non-transferable cheque cashable with proper identification in order to get rid of the need for a bank account. Mr Daly stated that the problem with this is that a bank has to ensure that it pays the correct person. He stated that false identification books are readily available and that he could get one for R25 in Hillbrow. He also remarked that every second Nigerian drug dealer is running around South Africa with an identification book. In his view, this meant that the only certainty on non-transferable cheques is with an account with the same name on it.
In answer to Ms Hogan’s question about cheques marked "not negotiable", Mr Daly indicated that such cheques could be endorsed at a local trading store and that there must be a careful distinction drawn with the term "not transferable". The Chair noted that there was perhaps much confusion arising from these two different terms.
Mr Lekgoro (ANC) stated that there were different problems in rural areas that the legislation was not solving. The Chair stated that these were in part due to how the government issued its payments and asked Mr Daly to move on to other issues.
Clause 27 (prevention of fraud) and discussion
Mr Daly stated that the only thing banks can do to verify cheques is look at their face. He stated that expeditious commerce prevented other measures such as making phone calls about every cheque as Prof Gering seemed to urge. He stated that there are cases of blatant negligence in which the bank assuming liability is quite unfair. He referred to a case in Durban in which a company’s bookkeeper had gone to jail for fraud, been rehired by the same company, and got away with fraud again, only to have the bank held liable for the cheques. Mr Daly stated that for efficiency in the law, losses should be allocated to the persons who can prevent them. He stated that there should be a duty on those adequately equipped to prevent losses and that this would be merely a very limited duty on sophisticated clients.
Mr Daly accepted that there had not been any explanation on the motivation for 72B(2) and indicated that the banks were prepared to give it up.
Prof Gering’s response
Responding to Mr Daly, Prof Gering stated that if cheques are made non-transferable, then for consistency, restrictive endorsements should be got rid of as well. However, in his view, there was no reason to confine the power to make a cheque non-transferable to the drawer alone and reiterated that the UK and New Zealand do not do this.
Prof Gering also stated that it should be possible to allow payees to ask a bank to cancel a crossing and that the bank can always make a phone call in this regard. He stated that the English have allowed this since 1882 and have not had a problem as a result. He added that millions of South Africans are without bank accounts and that banks have a responsibility to be cooperative towards South Africans.
Adv de Jager (SARB) added some brief comments on the definition of "banking" and indicated that the term "business of banking" in s. 1(b) did not refer to banking but to the word "bank". He stated that a refusal to accept the proposed terminology would affect later definitions insofar as the Act was to address post office instruments and South African Reserve Bank instruments.
Prof Gering commented that he could not leave this unanswered and stated that even a post office can carry on the "business of banking"; he reiterated that changing this well-recognised term would be dangerous.
Mr Daly noted that Prof Gering’s concern seemed quite limited. Adv de Jager stated that contrary to all appearances, he agreed.
The Chair noted, then, that there were at least two likely amendments: the removal of 72B(2) as well as a change on this "business of banking" issue.
The Chair referred to the Consumer Institute’s written submission which supported standardisation and thus the Bill subject to the banks undertaking an educational campaign.
Mr Daly said that the banks had discussed in principle the idea of an educational campaign and that they would have a formal commitment hopefully within a week. The Chair noted that the Banking Council had indicated that it would need three months to implement the educational program and that the Consumers Institute supported the Bill on this basis. Mr Daly suggested that this would be an opportunity to educate the public and explain the notion of crossings. A member noted his hopes that the education campaign would be effective.
The Chair asked the Finance Department to include the Banking Adjudicator in its consultations in future. The Chair read briefly from the Banking Adjudicator’s comments.
Mr Andrew (DP) asked about the effect of the new duty of care and how many companies it might affect and why there was not a clear explanation of this for companies without extensive legal departments. Adv de Jager indicated that he had no answer for this. He stated that putting a duty on specific institutions was not so much about the size of those institutions as about the sophistication of people. Mr Daly indicated that these provisions were not part of the information package because they were more complicated. The Chair suggested flagging this issue.
The Chair said that there could be a formal consideration of the Bill on Thursday.
Mr Andrew (DP) reminded the committee of the suggestion of referring the Bill to Judge Malan to see that nothing had been overlooked. He suggested that it would not do any harm to delay consideration of the Bill. The Chair stated that there was no reason to hold the Bill back if there were no substantive concerns and that a reference to Judge Malan could follow on technical aspects.
Mr Andrew (DP) said that there might be a conflict in cross-referencing s. 32 of the Act. The Chair asked Adv de Jager to consult with Prof Gering and Judge Malan on this.
Mr Nene (ANC) suggested also consulting with Prof Pretorius who had stressed that the overriding protection here was for banks rather than for consumers. The Chair believed that with Prof Pretorius’s submission and the submission of the Consumer Institute, it should not be necessary to go to a third round of consultations. Adv de Jager noted that Judge Malan’s views would probably be similar to Prof Pretorius’s.
The Chair also noted that there would be a need to reconcile 43A in Clause 13 with s. 50 of the Act. The Chair concluded that all committee members were now more knowledgeable about cheques and that she looked forward to formal consideration on Thursday.