Presentment and Collection of Cheques in Canada, The

The Presentment and Collection of Cheques in Canada

Paul Thomas*

and

Vincent Orchard*

I.

INTRODUCTION

In 1972, there were 1.12 billion cheques drawn on deposit accounts
of the chartered banks in Canada.’ This excludes some 150 million
Government of Canada items amounting to a payment exchange of
over one billion dollars. In the United States, there were 21 billion
cheques processed in 1969 and the volume of cheques is expanding
at an annual rate of seven to nine per cent.’ An indication of the
proliferation and popularity of the cheque as a medium of payment
is the fact that the number of cheques issued by Canadians averaged
twenty-two per person in 1950 compared to fifty-one per person
in 1972.3

The cheque has supplanted currency as the accepted form of
payment for the transfer of assets and the discharge of obligations.4

* Of the Faculty of Law, Dalhousie University.
* Former Clerk to Mr Justice Dickson, Supreme Court of Canada.
The authors acknowledge the financial contribution of the Federal Department
of Justice in the development of this article.

1 The Canadian Bankers’ Association, Chartered Banks of Canada Factbook
(1973), 8, 9. This amount does not include “cheques” or orders written on the
“near-banks” such as credit unions and trust companies that offer chequing
services to their customers. Such instruments, however, are collected and
paid through the normal bank clearing machinery and help account for the
fact that over four million payment instruments are cleared through the
chartered banks in Canada every business day.

2 J. J. Clarke, H. J. Bailey, and R. Young, Bank Deposits and Collections,
Uniform Commercial Code Practice Handbook 3, 4th ed. (1972), 237. In 1965,
commercial banks in the U.S. processed more than seventy million items
every day and this figure is increasing by approximately 7% each year; J. J.
Clarke, Check-Out Time for Checks (1966) 83 Banking L.J. 847, 848-850.

3 Supra, note 1, 8.
4 One might think that the institution of bank credit cards such as Chargex
and Mastercharge have and will reduce the increasing volume of cheques
written in Canada, but so far there is no real evidence to support that pro-
position. Indeed, the swirl of paper between bank, merchant, and consumer
is increased because transactions once paid for in cash are now paid for by
credit card. Furthermore, the customer normally pays his monthly balance
by cheque.

In an effort to limit the scope of this article, no attempt to discuss
computerized payments systems or other electronic systems designed to

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The reasons for the acceptance of the cheque as a popular medium
of exchange are, inter alia: The relative security and ease of using a
cheque; the availability of a wide range of banking services to
attract deposits; and the general promotion of chequing services by
banks and other financial institutions; the willingness of merchants
to accept cheques; the use of cancelled cheques as evidence of
payment; and a growing population accompanied by increasing af-
fluence and use of credit.

In order to keep up with the burgeoning amount of cheques
that have to be processed for collection,’ banks have been hard-
pressed to develop new methods and technology for handling and
collection to ensure the prompt collection and payment of cheques.
Fortunately, banks have managed to keep the payments system
operating efficiently through reliance on automated and electronic
equipment. Less fortunately, the law has not kept pace with the
development of the modern system of deposit and collection of
cheques, and in this context, the chartered banks in Canada have
had to operate for the most part in a legal vacuum. Moreover, banks
have had to work out their own inter-bank agreements regarding
the mechanics of cheque processing and clearing,” so that the collec-
tion process could function in an orderly and efficient fashion
despite the inadequacies of the law resulting from anachronistic

reduce the flow of paper will be made. Nevertheless, examination of the follow-
ing non-exhaustive list of articles on the subject might prove enlightening
to the interested reader: Law Reform Commission of Canada, Study Paper,
The Canadian Payment System and Computers: Issues for Law Reform (1974);
H. Eddy, Impact of the Computer on the Canadian Payment System, Law Re-
form Commission of Canada, May 1973; G. T. Dunne, Variations On A Theme
by Parkinson or Some Proposals for the Uniform Commercial Code and the
Checkless Society (1965-66) 75 Yale L.J 788; J. J. Clarke, Mechanized Check
Collection (1959)
14 Bus. Law. 989; The Bank-Customer Relationship In An
Electronic Credit Transfer System (1971) 2 RutgersJ. Computers & Law 1;
P. E. S-omrighausen, One Large Step Toward Less-Check: The California Auto-
mated Clearing House System (1973) 28 Bus. Law. 1143; Clarke, Bailey, and
Young, Bank Deposits and Collections, supra, note 2, 237, ch.12, “New
Banking Practices”.

5 Four out of five of all cheques drawn are deposited in one bank for
collection and must travel through the clearing house machinery for pre-
sentment and payment; Clarke, Bailey and Young, supra, note 2.

The Canadian Bankers’ Association, comprising all the chartered banks
in Canada, is an association incorporated by An Act
to incorporate the
Canadian Bankers’ Association, S.C. 1900, 63-64 Vict., c.93. Among the powers
of the Association is that conferred by s.7 of the statute to establish clearing
houses and rules and regulations for the operation thereof. The Association
has adopted such rules and regulations in its by-laws.

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PRESENTMENT AND COLLECTION OF CHEQUES

legislation such as the Bills of Exchange Act 7 and uninformed judicial
thinking. The Bills of Exchange Act, indeed, gives only cursory
treatment to the cheque.6 While the cheque has become the nation’s
primary negotiable instrument for commercial purposes, the Act, as
its title suggests, concerns for the most part that relatively rare
creature of twentieth century commerce, the bill of exchange.

Despite a legal framework that often reflects the day of the
bank runner and stage coach, when the volume of business was
negligible compared with today, the payments system has been able
to function thanks mainly to the efforts of the banks, and to a large
degree the honesty of their customers. In the United States, a study
by the Federal Reserve Bank indicates that approximately 991/2 %
of the dollar value of all collection items are good-

If the system of bank deposits and collection is running quite well
in Canada in spite of the inadequacies of the law, why should one
bother to discuss law reform in this area? Legislative reform is
needed in order to give the payments system a clear and uniform
legal framework in which to operate and also to provide just and
fair legal guidelines for the bank/customer relationship as it relates
to the deposit and collection of cheques.

II. PRESENTMENT OF CHEQUES FOR PAYMENT –
THE BILLS OF EXCHANGE ACT AND THE CASES

Presentment for payment is one of the acts required by a holder
of a bill of exchange if he desires to enforce his right of recourse
against other parties liable on a bill. The other general duties of a
holder may include presentment for acceptance, giving notice of
dishonour, and protest. Since there is no acceptor on a cheque,
presentment for acceptance is not required by the holder.’0 The
Act defines a cheque as a bill of exchange drawn on a bank, payable
on demand.” Thus all the sections of the Act concerning bills of

7R.S.C. 1970, c.B-5 (hereinafter referred to as the Act).
8 Ibid. See especially Part III of the Act, “Cheques On A Bank”, ss.165-175.
Ss.168-175 deal with crossed cheques, a practice common in the U.K. but
unheard of now in Canada. As provided by s.165(2), however, the other pro-
visions of the Act applicable to a bill of exchange payable on demand apply
to a cheque, save where they are inconsistent with Part III.

9 D. J. Rapson, Article 4 – Bank Deposits And Collections (1962) 17 Rutgers

L.Rev. 79, 80.

10 Ss. 75-84 of the Bills of Exchange Act, supra, note 7, dealing with Pre-

sentment for Acceptance are therefore not relevant.

“Ibid., s.165(1).

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exchange, including sections 85 to 95 dealing with presentment for
payment, apply to cheques unless otherwise expressly provided in
Part III of the Act dealing with “Cheques on A Bank”.

It

is extremely important that the holder should present a
cheque for payment promptly: Firstly, in order to guard against
discharge of the parties liable on the cheque; secondly, to guard
against revocation of the drawee bank’s authority and duty to pay,
for example, when the account is closed or overdrawn, or the bank
has received notification of the customer’s death or insolvency, or
there is countermand of payment.

1. Discharge of the parties

Presentment of a bill must be duly made by the holder, otherwise
the drawer and endorsers will be discharged,’12 unless circumstances
are such that under the Act presentment is unnecessary13 or dis-
pensed with.14 If there is no due presentment of a bill of exchange,
a drawer or endorser is discharged from the statutory duty imposed
by section 130(a) that he

… engages that on due presentment it shall be accepted and paid
according to its tenor, and that if it is dishonoured he will compensate
the holder or any endorser who is compelled to pay it, if the requisite
proceedings on dishonour are duly taken.

(a) Endorser

A cheque (being a bill of exchange payable on demand) is duly
presented for payment for the purpose of affixing liability on an
endorser if by section 86(1)(b) it is presented within a reasonable

12 Ibid., s.85(1) and (2).
13Presentment is unnecessary under the circumstances set out in ss.82 and
96(3) of the Act, which relate only to situations where there has been dis-
honour by non-acceptance. These sections therefore have no relevance to
cheques.

14 S.92(1) sets out the circumstances in which presentment is dispensed with
under the Act. For example, where, after the exercise of reasonable diligence,
presentment, as required by the Act, cannot be effected; where the drawee is a
fictitious person; as regards the drawer, where the drawee is not bound, as
between himself and the drawer, to pay the bill, and the drawer has no reason
to believe that the bill would be paid if presented; as regards an endorser,
where the bill was made for the accommodation of that endorser, and he
has no reason to expect that the bill would be paid if presented; by waiver
of presentment, express or implied.

Note, the distinction between making presentment unnecessary and
dispensing with it is that notice of dishonour and protest are still required
when presentment is dispensed with under s.92(1), whereas such is not the
case when presentment is made unnecessary.

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time after its endorsement. In determining what is a reasonable time
within the meaning of the section, attention is to be paid to “the
nature of the bill, the usage of the trade with regard to similar bills
and the facts of the particular case”.” With regard -to a cheque,
what constitutes a reasonable time may well be a shorter period,
than what is a reasonable time for presentment of a bill or note.
The rationale behind this distinction is that a cheque is generally not
intended for circulation (as an instrument of credit) but rather for
prompt payment.16
(b) Drawers

The drawer of a cheque is placed in a different legal position
from a drawer of a bill of exchange or promissory note by virtue of
section 166 of the Act 1 The effect of section 166(1) (a) is that a
drawer of a cheque will only be discharged to the extent of the
actual damage he suffers through the failure of the holder to present
the cheque for payment within a reasonable time. Apart from this,
the drawer is normally liable on the cheque for six years –
the
usual period of limitationya

Section 166(1)(b) states that if the drawer is discharged under
166(1) (a), the holder shall stand in the same position as the drawer
as creditor of the bank to the extent of the amount the drawer was
discharged. This is tantamount to giving an assignment of the
drawer’s charge or debt against the bank as creditor, a clear deviation
from the general rule of section 127 that a bill does not operate as an
assignment of the funds held by the drawee bank. The only event
readily envisaged under section 166 where the drawer will become

15 Supra, note 7, s.86(2).
16 See Down v. Halling (1825) 4 B. & C. 330; 107 E.R. 1082, 1083 where Bayley J.
said: “Now a cheque is intended for immediate payment, and not for cir-
culation”. See also the judgment of Middleton J. in Harris Abattoir Co. v.
Maybee & Wilson and Boyd (1914) 31 O.L.R. 453, 457: “From these authorities
it appears that because a cheque is intended for payment and not for general
circulation, the time allowed for presentation will not be enlarged by
transfer or by successive transfers …
.” This rationale for prompt pre-
sentment is also enunciated in two American cases: Keenan v. McClure 252
N.W. 204 (1934) and Millett v. Miller 280 N.W. 442 (1938), to the effect that
cheques are not designed for circulation as a medium of exchange and the
holder should present a cheque and demand payment with dispatch and
diligence consistent with the circumstances of the case and the usual method
of business transactions.

17The holder of a bill of exchange or promissory note payable on demand
must by s.86(1)(b) present it for payment within a reasonable time after its
issue in order to render the drawer liable.

i7aE.g., The Limitations Act, R.S.O. 1970, c.246, sA5(l)(g).

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a creditor of the drawee bank for a larger amount than would have
been the case had the cheque been presented on time and paid, is
the failure of the drawee bank. The possibility of that event occurring
today is hopefully very remote, and the likelihood that a drawer will
have the occasion to rely on section 166 equally unlikely.17b

What is a reasonable time for presentment for the purposes of
section 166 is determined according to section 166(2), having regard
to “the nature of the instrument, the usage of trade and of banks, and
the facts of the particular case”. By section 91, however, “delay in
making presentment is excused when the delay is caused by cir-
cumstances beyond the control of the holder and not imputable to
his default, misconduct or negligence”.

One anomaly regarding the discharge of the drawer on a cheque
arises from the legal distinction between a cheque written on a bank
and a “cheque” written on a financial institution such as a trust
company or credit union. Under the Act, a “cheque” written on one
of these financial institutions is not a cheque within the definition of
section 165(1), but is a bill of exchange payable on demand. Briefly,
the reasoning behind this view is that the Act defines a cheque as a
bill of exchange, payable on demand and drawn on a bank,17 and
a bank is defined in section 2 as “an incorporated bank or savings
bank carrying on business in Canada”. Clearly the “near-banks” do
not fall within the definition of bank and therefore the “cheques”
they provide for customers are not cheques 8 for the purposes of

17bOther possible situations covered by s.166 are sequestration by an
authority or the suspension of operations due to the outbreak of war. An
example of this latter situation is Arab Bank Ltd v. Barclays Bank [1954]
A.C. 495.

17cSupra, note 7, s.165(1).
18 See e.g., Collings v. Calgary (1917) 55 S.C.R. 406; Rogers v. Calgary Brewing
& Malting Co. (1918) 56 S.C.R. 165; Kilburn v. Co-op Centre Credit Union Ltd
[1973] 1 W.W.R. 757 (Alta S.C.); and s.189 of the Act, added by R.S.C. 1970, c.4
(1st supp.), s.1, which defines the concept of a consumer bill. S.189(1)(d)
defines such instruments as bills of exchange and not cheques:

“189. (1) A consumer bill is a bill of exchange
(a) issued in respect of a consumer purchase, and
(b) on which the purchaser or any one signing to accommodate him is

liable as a party, but does not include

(c) a cheque that is dated the date of its issue or prior thereto, or at the

time it is issued is post-dated not more than thirty days,

or

(d) a bill of exchange that

(i) would be a cheque within the meaning of section 165 but for the
fact that the party on which it is drawn is a financial institution,

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PRESENTMENT AND COLLECTION OF CHEQUES

Part III of the Act. As a result, section 166 has no application to such
instruments. Thus a drawer on such an instrument may be com-
pletely discharged from liability, regardless of the extent of loss, if
the bill is not- presented within a reasonable time.19

This result is anomalous and unfair because whether a customer
banks at a chartered bank or a credit union is often purely fortuitous.
Moreover, the “cheques” written on “near-banks” are treated vir-
tually in the same manner commercially and for clearing purposes
as cheques written on banks.

2. What is a reasonable time for presentment?

(a) To maintain liability against endorsers

The leading case concerning a reasonable time for presentment
to affix liability on an endorser of a cheque is Bank of British North
America v. Haslip, Bank of British North America v. Elliott.20 The
judgment of the Court in these two actions, which were heard to-
gether, was given by MacLaren J.A.2 ‘ The actions involved two
cheques drawn by the firm of Maybee and Wilson on the Standard
Bank of Toronto, one dated the 30th of September, 1913 to the
order of the defendant Haslip, and the other dated the 15th of
October to the order of the defendant Elliott. Both cheques were
endorsed and negotiated to the plaintiff bank on the morning of
October 1st. The plaintiff bank proceeded to present the cheques
for collection through the clearing house on the morning of October

other than a bank, that as part of its business accepts money on
deposit from members of the public and honours any such bill of
exchange directed to be paid out of any such deposit to the extent
of the amount of such deposit, and
(ii)
issued is post-dated “not more than thirty days.” (emphasis added)

is dated the date of its issue or prior thereto, or at the time it is

On the other hand, the proposition that such an instrument is a cheque by
the common law and governed by the law merchant was enunciated in
Winnipeg Trustee v. Kenny [1924] 1 D.L.R. 952 (Man. K.B.) and referred to in
Provincial Bank v. Bellefleur [1936] 1 D.L.R. 795 (N.B. Co. Ct). By the common
law, however, if a cheque was not presented within a reasonable time and the
drawer suffered actual damage by the delay, the drawer was completely dis-
charged. See, e.g., Alexander v. Burchfield (1842) 135 E.R. 431; Robinson v.
Hawksford (1846) 9 Q.B. 52, 115 E.R. 1195.

19 S.86(1) (b) of the Act, or-even by the common law, see cases cited, ibid.
20 (1914) 31 O.L.R. 442, aff’g 30 O.L.R. 299 (C.A.) (hereinafter referred to as

Haslip).

21 The late Mr Justice MacLaren was also author of Bills, Notes and Cheques

(see the 6th ed., edited by F. Read, 1940).

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2nd. The representatives of the Standard Bank on the afternoon
of the 2nd took the cheques to the head office of that bank where
they remained until the morning of the 3rd when they were even-
tually delivered to the drawee branch on which they were written
and subsequently dishonoured for insufficient funds.

The plaintiff-appellant bank sued the defendants for breach of
their statutory duty that as endorsers they warranted that on due
presentment the cheques would be paid according to their tenor.
Plaintiff’s counsel also argued that Rule 12 of the Toronto clearing
house allowed the drawee bank an additional day for presentment
and that the defendants were bound by this custom of the trade
with regard to cheques. Defendant’s counsel argued that: a) present-
ment was not within a reasonable time and that by sections 85 and
86 of the Act the defendants were absolutely discharged; and b)
the rule of the clearing house was not a custom that bound the
defendants.

MacLaren J.A., held that the defendants were discharged because
the cheques were not presented for payment within a reasonable
time after their endorsement.

The learned Judge begins by saying that for the purpose of
section 86 what is a reasonable time is a question of mixed law and
fact. By section 70, when a demand bill is deemed to be overdue,
what is a reasonable time is stated by the Act to be a question of
fact, but section 86 contains no such provision. Moreover, by virtue
of section 1022 and the existence of well-established common law
rules as to what is a reasonable time for presentment of demand
bills, it is clear to MacLaren J.A. that these provisions were not
meant to be overruled. He also points out that in section 166(2), in
considering what is a reasonable time for presenting a cheque with
reference to the liability of the drawer, regard is to be had to the
usage of banks, whereas section 86(2) has no such provision. In
spite of this, he nevertheless goes on to give specific reasons why
the clearing house rule in question could not be given effect in the
particular circumstances, one of these reasons being that the evidence
fell short of proving that the rule had become a usage of the trade
within section 86(2). This tacitly suggests that section 86(2) does in-
corporate the test of bank usage.

22 S.10 states that:

“The rules of the common law of England, including the law merchant, save
in so far as they are inconsistent with the express provisions of this
Act, apply to bills of exchange, promissory notes, and cheques.”

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PRESENTMENT AND COLLECTION OF CHEQUES

MacLaren J.A. continues by setting out the common law rules
relating to what constitutes timely presentment. Firstly, if the person
who receives a cheque and the bank on which it is drawn are in
the same place, the cheque must, in the absence of special cir-
cumstances, be presented for payment on the day after it is received.
Secondly, if the person who receives a cheque and the bank on
whom it is drawn are in different places, the cheque must, in the
absence of special circumstances, be forwarded for presentment on
the day after it is received, and the agent to whom it is forwarded
must, in like manner, present it or forward it on the day after he
receives it. Thirdly, the endorsement or delivery of the cheque to
others does not extend the time for presentment against prior en-
dorsers.23

The plaintiff had argued that the Toronto clearing house rules
allowed an extra day for the drawee to take the cheque to the
branch on which it was drawn. McLaren J.A. rejected this argument.
The evidence fell short of proving that the rule had become a custom
of the trade. It was “in no sense a usage of the trade within the
meaning of section 86, which must be known, certain, uniform,
reasonable, and not contrary to law”.24 Moreover, the evidence
did not show that the defendants knew of the clearing house or of
the plaintiff’s membership therein, and much less were they to
be presumed to have contracted with reference to the said rule.
Additionally, the rule was not a rule of the Canadian Bankers’
Association, who have parliamentary authority to establish clearing
house rules in their by-laws, subject to approval by the federal
Treasury Board 4a Lastly, a clearing house rule could not be de-
terminative of what was a reasonable time for presentment of
cheques, that power residing solely in Parliament4b

McLaren J.A. thus gave judicial assent, in Canada to the old
common law “one-day” rule for presentment, despite the usage of
clearing houses. By application of this strict rule, a cheque received
on Monday by the payee and cashed at his bank on Tuesday, but not
presented through the clearing house until Wednesday, would tech-
nically not be presented within a reasonable time for the purpose
of affixing liability on the endorser. In light of modern collection
conditions and machinery, ‘the validity of such an antiquated rule

23 Supra, note 20, 447.
24 Ibid., 450.
24a An Act to incorporate the Canadian Bankers’ Association, supra, note 6.
24b British North America Act, 1867, 30-31 Vict., c.3, s.91(15).

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is highly dubious. MacLaren J.A. places great stress on the fact
that the cheques were-allowed to lie at the head office of the drawee
bank for twenty-four hours, when the drawee branch was only three
or four blocks away. There is no doubt that geographic proximity
was an important factor in determining what was a reasonable time
for presentment in this case.25 It is submitted that given the volume
of cheques in the collection system today and the reliance on
automated clearing machinery, the distance between banks should
be irrelevant in determining what is a reasonable time for present-
ment.

However, geographical proximity was also a determining factor
in the case of Harris Abattoir Co. v. Maybee & Wilson and Boyd,20
which arose out of the same circumstances as the Haslip 7 case. A
cheque was drawn by M. W. on September 29th on the Standard
Bank, payable to Boyd. Boyd endorsed and negotiated the cheque
to the plaintiff company on the afternoon of the 29th. The plaintiff
company, on the same afternoon, deposited the cheque to its credit at
a branch of the Commerce Bank. Through various delays in the
process of clearing, the cheque was not presented for payment at
the branch of the drawee bank until October 3rd, at which time
there were not sufficient funds in the drawer’s account to pay for
it. The cheque was subsequently dishonoured. The plaintiff company
brought an action against Boyd as endorser of the cheque.

At first instance, Middleton J. held that Boyd was discharged
on the cheque for failure of the plaintiff to present it within a
reasonable time after his endorsement. The learned Judge invoked
the “one-day” rule, citing Boddington v. Schlenker2 8 as authority,
where Parke J. stated that “[t]here is no doubt that the receiver of a
cheque-has till the close of banking hours on the following day to
.29 Although Middleton J. adopted the common law “one-
present it
day” rule for presentment he was at least prepared to acknowledge
the usage of the clearing house for presentment of cheques:

From these authorities it appears that, because a cheque is intended for
payment and not for general circulation, the time allowed for presentation

25 Supra, note 23, 447 and 452 where MacLaren J.A. cites a remark of Lord
Mansfield in Tindal v. Brown (1786) 1 T.R. 167, 168, 99 E.R. 1033, 1034, that the
fact that all parties lived within twenty minutes walk of each other was to be
taken into account in deciding what was reasonable.

26 (1914) 31 O.L.R. 453.
2 Supra, note 20.
28 (1833) 4 B. & Ad. 752, 110 E.R. 639.
29 Ibid., 759.

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PRESENTMENT AND COLLECTION OF CHEQUES

will not be enlarged by transfer or by successive transfers; and, although
the usage of trade fully sanctioned the deposit by the endorsee of the
cheque in his own bank, and the use of the machinery of the clearing
house for the presentation of the cheque, this does not justify an extension
of time which is in fact unreasonable. There was no reason in this case
why the cheque in question should not have been at the market branch
of the Standard Bank on the 31st. I am not called upon to say that a delay
to the 1st October would have been unreasonable. What I determine is
that a failure to present until the 3rd was unreasonable;30

Thus, while Middleton I. recognized the custom of collecting cheques
through the clearing house, he insisted that such custom does not
sanction an unreasonable delay having regard to the facts of the
case, such as the geographical proximity of the banks in question 3
Nonetheless it is inconceivable that a collecting bank that handles
thousands of cheques every day is going to have time to determine
if it should send a particular cheque through its normal clearing
operations or send a messenger to collect on it personally. Such a
course of action would be impractical and financially prohibitive.
Even in 1913 geographical proximity should have been an irrelevant
factor in determining timely presentment.

Another Canadian decision that also seems to place more em-
phasis on geographic distance rather than bank clearing usage in
determining what is a reasonable time for presentment vis-a-vis

3OSupra, note 26, 457 (emphasis added).
31Ibid., 455 where Middleton J. emphasizes

the short distances between
banks and the effect this should have on determining a reasonable time:
“The facts of this case are that the cheque was endorsed in the office of
the abattoir company, a few yards from the office of the Standard Bank,
market branch, upon which it was drawn. It was deposited in the market
branch of the Bank of Commerce, which is within a few yards of the other two
offices. There was no physical difficulty in the way of the cheque being pre-
sented for payment at once.”
MacLaren J.A., affirmed the judgment of Middleton J., on appeal and equally
stressed the fact of distance: “Here the bank on which the cheque was drawn
was not more than one hundred yards from the office of the plaintiff company,
where it was negotiated; and it is not reasonable that it should have taken
from the 29th September to the 3rd October to reach its destination.” (at 460)
MacLaren J.A. also rejected the argument of plaintiff’s counsel that Boyd
should be presumed to have contracted with reference to the custom of
presenting cheques through the clearing house. The learned Judge merely
stated that the case of Firth v. Brooks (1861) 4 L.T.N.S. 467, cited by counsel in
support of his argument, did not in fact do so. Although the case upheld the
propriety of sending a cheque for collection through the’London County
Clearing House, it still affirmed the “one-day” presentment rule; (at 460). See
also Sterling Bank v. Laughlin (1912) 1 D.L.R. 383.

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the liability of endorsers is Provincial Bank v. Bellefleur.32 In this
case, the defendant in New Brunswick endorsed a cheque drawn on
a trust company in Maine (about one mile over the St John River
from the plaintiff bank). The cheque was issued on February 28th,
1933 and made payable to the defendant. The plaintiff bank received
the cheque from the defendant on the same day and credited it to
an overdue note of the defendant. They then endorsed the cheque
and mailed it to their Boston correspondent bank. It was not until
March 4th that it was presented to the trust company in Maine. The
trust company however had suspended operations before present-
ment was made.

In determining that the cheque was not presented with proper
diligence and that the defendant was therefore discharged from
liability, the Court considered the factors set out by section 86(2)
of the Act which should be taken into account when determining
a reasonable time for the purposes of section 86(1) (b). On the facts
it was held that no real evidence existed of a trading or banking
usage with respect to the method of collection adopted by the bank.
The geographic proximity made out a prima facie case for lack of
due diligence on the plaintiff’s part. Instead of sending a messenger
across the river into the U.S. to present for payment, the plaintiff
bank elected to send the cheque on a circuitous 700-mile trip. This
method of collection did not meet the test of common sense and
ordinary business prudence.

Clearly, in view of the heavy volume of cheque collections today
and the reliance on bank clearing procedures, the wisdom of the
“one-day” rule is thrown into serious doubt. It is virtually incon-
ceivable for a payee to present his cheques for payment personally
at the drawee bank the day after receipt, and it is equally incon-
ceivable for a collecting bank to adopt a practice of presenting
cheques by messenger because of the geographic proximity of the
drawee bank. Today, the normal route a cheque takes for collection
is the following: The payee deposits the cheque in his own bank
for collection. In smaller centres, the collecting bank gives pro-
visional credit to the customer and then sends the cheque to the
clearing house where it is delivered to the drawee’s clerk and then
taken to the drawee bank for payment and verification. In the larger
centres, the cheque first goes to a data centre of the collecting
bank for processing, following which exchanges of debits and credits
are made by the representatives of the banks at the clearing house;

32 Supra, note 18.

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PRESENTMENT AND COLLECTION OF CHEQUES

then, the cheque is delivered to the data centre of the drawee bank,
from where it is -delivered to the drawee bank for final verification.
It is only with this last step that the payment becomes absolute and
the provisional credits given during clearance become finalized.33
The average time to route a cheque through the collection system
is two or three days, and involves two or more banks. But the total
elapsed time from initial deposit to final payment is often con-
siderably greater, depending on the circumstances 4 To require
earlier presentment is to ignore the almost universal usage of the
clearing system. Legislative amendment is not, however, required to
overcome the anachronistic judicial thinking embodied in the “one-
day” rule. Section 86(2) of the Act provides built-in flexibility for
the recognition of prevailing usages and customs and for taking into
account any particular facts that may extend or limit the time
considered to be reasonable for presentment.

On the other hand, adherence to a “one-day” presentment rule
for establishing the liability of endorsers rather than drawers may
lead to a more just result. While placing the loss on a bank vis-a-vis
an endorser where the facts are such as in Haslip3 5 might be a better
result because the bank is in a better position to bear the loss on a
bad cheque, in most cases, the collecting bank acts merely as an
agent for collection for the payee, against whom they retain the
right of charge-back. 36 Moreover, such a rule runs at cross-purposes
to one of the fundamental principles of negotiability on which the
Act is formulated, i.e., an endorser guarantees to a subsequent holder
or endorsee that the cheque will be honoured.

With our existing legislation, it is up to the courts to recognize
the pervasiveness and necessity of the bank collection system. A
drawer or endorser should not be entitled to any higher degree of
diligence in presentment than that achieved by compliance with
customary commercial practices, unless the practices are patently
unreasonable.

33 See text, infra, Part III.
34 Clarke, Bailey and Young, supra, note 2, 237-38.
35 Supra, note 20.
36 The issue of whether a collecting bank is acting as an agent for collection
or as a holder for value in its own right is discussed in D. Cowen, The Law of
Negotiable Instruments in South Africa 4th ed. by D. Cowen and L. Gering
(1966), 429. The question is basically one of fact and normally comes down to
the decision whether there was an express or implied agreement that the
payee could draw against uncollected funds. If there is such an agreement,
the bank is a holder for value and not an agent for collection.

McGILL LAW JOURNAL

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(b) To maintain liability against drawers

The common law “one-day” rule for prompt presentment applied
to the discharge of the drawer as well as endorsers. 7 Chalmers”,
indicates, however, that section 166(2) has placed the “one-day” rule
in limbo because a reasonable time vis-a-vis drawers is now a
question of mercantile practice. Falconbridge states that the earlier
cases should be considered subject to the statutory recognition of
the custom of bankers 3 9 This proposition is reinforced in the Quebec
case of Lajambe v. St Hilaie.40

In that case a cheque issued by the defendant on August 16th,
1923 drawn on the Home Bank in favour of the plaintiff, was de-
livered to the plaintiff’s office on the same day. The plaintiff was
absent and did not return until August 18th at which time he went
to deposit the cheque in his bank but did not do so when he learned
that the Home Bank had closed its doors on the afternoon of the
17th. The defendant argued that the cheque was not presented
within a reasonable time. It was held: a) that there was enough
evidence to prove that is was the usage of businessmen to collect
cheques by depositing them in their own bank and having present-
ment made through the clearing house; b) that the “one-day” rule
for presentment, although it has been followed in Canadian juris-
prudence, is subordinate to section 166(2) of the Bills of Exchange
Act which states that the usage of trade and banks and the facts of
the case must be considered in determining what is a reasonable
time for presentment within the meaning of section 166; c) that the
usage authorized presentment through the clearing house, but if
this had been done, the deposit according to the “one-day” rule
would not have been made until the 17th, the day after it was re-
ceived. The cheque therefore could not have been presented through
the clearing house until the 18th and by that time the Home Bank
had suspended operations; d) that even prompt presentment, follow-
ing the custom and usage of presentment through the clearing house,
would have been useless, and therefore the defendant was not
relieved from his liability on the cheque’ 1

Although the case implies that a payee should deposit a cheque
for collection the day after receipt, it recognizes the custom of

37 Chalmers on Bills of Exchange 13th ed. by D.A.L. Smout (1964), 252-3.
38 Ibid., 253.
39 Falconbridge on Banking and Bills of Exchange 7th ed. by A. W. Rogers

(1969), 868.

40 (1924) 30 R.L.N.S. 447.
41 Ibid., 449.

19761

PRESENTMENT AND COLLECTION OF CHEQUES

presentment through the clearing house and overcomes the “one-
day” presentment rule, at least for the purposes of determining
discharge of the drawer under section 166. The courts are provided
with a flexible test in section 166(2) for determining a reasonable
time and are enjoined to give recognition to the custom and usage
of collection and the facts of the case. The Lajambe case42 followed
the test sensibly.

There are other cases concerning what is an unreasonable time
for presentment in connection with discharging a drawer in the
event of bank failure under section 166 and where the drawer suffers
actual loss. It was held in Gunsolly v. Engstrom4 3 that a delay of
thirteen days from constructive receipt of the cheque on August 4th,
1924 until its deposit for collection on August 17th was unreasonable,
the drawee bank having suspended operations on August 17th. In
La Banque Jacques-Cartier v. La Corporation de Limoilou,14 a cheque
issued on July 11th, 1895 and not presented for payment until the
16th, by which time the drawee bank (Banque du Peuple) had
failed, was held not to have been presented within a reasonable
time. Another ground for the decision was that the plaintiff/holder
had had the cheque certified, and certification by the holder amount-
ed to payment of the cheque and the substitution of the bank’s
liability for that of the drawer. In another Quebec case,45 one day’s
delay was said to be unreasonable in view of the known facts that
the drawee bank was in difficulty and that the suspension of
operations was very likely. In view of the particular facts of the
case, the holder had a duty to act with special vigilance and celerity. 46
From one point of view, it is difficult to see a justification for
the cases concerning endorsers47 adhering to the “one-day” present-
ment rule and essentially ignoring clearing house usage, while in a
case involving the discharge of a drawer the rule is held to be sub-
servient to clearing house usage. MacLaren J.A. in Haslip s implied
that the difference lay in the different wording of sections 86(2) and

42 Ibid.
43 (1924) 2 W.W.R. 382 (Alta C.A.).
44 (1899) 17 C.S. 211.
45 Ldgard v. Arcand (1895) 9 C.S. 122.
4 0GThe actual ground for decision in this case was that because the holder
had the cheque certified on the day of receipt, rather than presenting it for
payment when it would have been paid, the certification amounted to discharge
of the drawer’s liability.

and Boyd, supra, note 16.

47See Haslip, supra, note 20, and Harris Abattoir Co. v. Maybee & Wilson
4 8 Supra, note 20, 447.

McGILL LAW JOURNAL

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166(2), i.e., the fact that section 166(2) includes reference to usage
of banks and section 86(2) does not. Yet as pointed out above, the
learned Judge tacitly took the position that section 86(2) did intend
a reference to bank usage. 40 Moreover, Meredith J. in Maybee &
Wilson recognized that “usage of the trade” in section 86(2) ne-
cessarily involved the usage of banks and clearing house pro-
cedures 0 Therefore, it would appear that the different wording
between the two sections does not result in a different meaning.
Indeed, it is submitted that it would be wrong to suggest that
“usage of trade with regard to similar bills” in section 86(2) would
not include reference to the practice of collection.

Nonetheless, as already suggested, there does seem to be some
good sense about discharging an endorser in a shorter period of
time than the drawer. The drawer is the one who issues the cheque
in the first place, he is the one principally liable on the instrument
and -should be expected to stand behind a cheque for a longer period
of time than an endorser who merely receives the instrument and
passes it on by negotiation. Even if this difference is recognized,
however, it cannot justify Canadian courts adhering to a “one-day”
rule of presentment for affixing liability on an endorser and dis-
regarding the fact that normal collection through a clearing house
will take from two to three days. This is particularly absurd in view
of the fact that the courts are willing to recognize the practice
in the unlikely situation of discharge of the drawer in the event
of bank failure as envisaged under section 166Y.0

3. Revocation of the drawee bank’s authority and duty to pay

It is imperative that a holder should present a cheque promptly
for payment not only to avoid discharge of the parties liable on a
cheque, but also to guard against determination of the bank’s
authority and duty to pay a cheque drawn by its customer. Section
167 of the Act states that:

The duty and authority of a bank to pay a cheque drawn on it by its
customer, are determined by

(a) countermand of payment;
(b) notice of the customer’s death.

The circumstances determining the bank’s authority and duty to pay
set out in section 167 are by no means exhaustive. Such authority

4o Ibid., 449.
50 Supra, note 16, 457.
50a See supra, note 17b.

1976]

PRESENTMENT AND COLLECTION OF CHEQUES

and duty may also be curtailed on notice of the customer’s in-
solvency or insanity, on the winding up of a corporate customer,51
or by court order.52 Moreover, the holder should guard against the
possibility of the account being overdrawn or closed, in which case
he may have to resort to the courts to recover from the drawer.
Finally, the holder should be aware of the practice of banks not
to pay “stale-dated” cheques53 without inquiry.

(a) Countermand of payment

Countermand or stop-payment of a cheque terminates .the bank’s
duty to pay and substitutes a duty to refuse payment. 54 To be
effective, the countermand must come to the conscious knowledge of
the bank, constructive knowledge being unknown in mercantile
matters 5 The countermand must also be made by or on behalf
of the drawer, must reach the drawee bank before the cheque is
paid, and refer unequivocally and unambiguously to the cheque
in question.56 When a cheque is countermanded, the holder has no
right against the bank to demand payment but if he has duly pre-
sented the cheque and given notice of dishonour, he can proceed
against the drawer and endorsers on the cheque.

(b) Notice of the customer’s death

Actual knowledge of the customer’s death, however acquired,
terminates the banker’s authority and duty to pay, formal notice
being unnecessary. 57 No specific form of notice is necessary, but
mere rumour would probably not be sufficient for the bank to
act upon, although any fairly reliable information such as an an-

G’Paget’s Law of Banking 8th ed. by M. Megrah and F. R. Ryder (1972),

316-17.

52 Cowen, supra, note 36, 418.
53 Generally banks consider a cheque to be “stale” that is presented after a
six month or one year period; Paget, supra, note 51, 222 and 302-3. In Canada,
the period is six months, see infra, note 66.

54 Cowen, supra, note 36, 416.
55 Paget, supra, note 51, 313.
56 Cowen, supra, note 36, 416 citing the English cases of Westminster Bank
v. Hilton (1926) 43 T.L.R. 124 (H.L.); and Curtice v. London & City Midland
Bank [1908] 1 K.B. 293. See also the recent Canadian cases of Giordano v.
Royal Bank of Canada (1973) 38 D.L.R. (3d) 191 (Ont.C.A.); and Capital
Associates Ltd v. Royal Bank of Canada (1973) 36 D.L.R. (3d) 579 (Que.C.A.).

57 Cowen, ibid., 417. See also the Canadian case of ‘Kendrick v. Dominion

Bank (1920) 47 O.L.R. 372.

McGILL LAW JOURNAL

[Vol. 22

nouncement in a responsible newspaper could not be safely dis-
regarded. 5

(c) Notice of the customer’s insanity

It is suggested by Paget that if the customer becomes mentally
disordered, the banker should not honour his cheques. If the state
of the customer’s mind is such that he does not know what he is
doing, he can give no mandate and any existing mandate is revoked.
However, the mandate remains operative as long as the banker
has no knowledge and no reason to suspect the situation.,9

(d) Notice of the customer’s insolvency

If a bank has notice of a customer’s insolvency, the bank’s duty
and authority to pay are terminated. In Canada, section 56 of the
Bankruptcy Act 60 governs the situation:

Where a banker has ascertained that a person having an account with
him is an undischarged bankrupt, it is his duty forthwith to inform the
trustee of the existence of the account, and thereafter he shall not make
any payments out of the account, except under an order of the court or
in accordance with instructions from the trustee, unless upon the ex-
piration of one month from the date of giving the information no
instructions have been received from the trustee.

(e) Stale-dated cheques

Banking custom generally regards a cheque in circulation for
over six months as “stale” and a bank will not normally pay such a
cheque without consulting the drawer if this is at all possible. It is
tp be noted that a bill payable on demand is deemed to be overdue
when it appears to have been in circulation for an unreasonable
length of time.61 The consequence is that the cheque can only be
transferred subject to existing equities, or in other words, one
cannot be a holder in due course if one receives an overdue cheque.

The concept of the stale-dated cheque is reflected in bank clear-
ing agreements. The chartered banks in Canada have agreed that a
drawee bank may return unpaid a cheque over six months old.02

58 Paget, supra, note 51, 315.
59 Ibid.
60 R.S.C. 1970, c.B-3.
G1 Bills of Exchange Act, supra, note 7, s.70(2).
02The Royal Bank of Canada, Interbank Procedures and Standards (1973)
(containing material
the Canadian Bankers’
Association); s.1 D (3), Circular B9-05-05: “An item dated more than six

the by-laws of

taken from

19761

PRESENTMENT AND COLLECTION OF CHEQUES

Whether a bank will face an action by the drawer in damages for
wrongful dishonour, for having returned a stale-dated cheque, has
not yet been decided by Canadian courts.6 It is clear, however, that
the drawer will not be discharged on the cheque because it is not
presented until it is “stale”.64

III. THE COLLECTION OF CHEQUES THROUGH
CANADIAN BANK CLEARING, MACHINERY

The collection system in Canada is operated by the Canadian
Bankers’ Association, an organization of the chartered banks in
Canada incorporated by Parliament in 1900.65 Section 7 of the in-
corporating statute confers on the Association the power to set up
clearing houses in Canada and to make rules and regulations for the
operation of such clearing houses.6 6 The Association has adopted in
article 24 of its by-laws rules and regulations respecting clearing
houses. ”

Historically, the idea of a clearing house originated in France
during the Middle Ages, and early clearing operations took place
at the great fairs.Y The birthplace of the modern clearing house,
however, was London: Clerks would go from bank to bank in order
to collect and present cheques and other items. Eventually; the clerks
began to meet at public-houses to exchange cheques in an attempt
to avoid the needless journey around the city to other banks. The

months prior to the date of receipt by the drawee branch bank may be
returned for the reason “Stale Dated”.

honour, 394-416; and Paget, supra, note 51, 302-3.

63See Cowen, supra, -note 36 on the subject of damages for wrongful dis-
64The drawer’s liability lasts for six years on the cheque except for a s.166
5 Supra, note 6.
06 Ibid.; s.7 reads:

situation.

“1. The Association may from time to time establish in any place in
Canada a clearing house for banks, and make rules and regulations for the
operations of such clearing house: Provided always, that no bank shall be or,
become a member of such clearing house except with its own consent, and a
bank may after becoming such member at any time withdraw therefrom.

2. All banks, whether members of the Association or not, shall have an
equal voice in making from time to time the rules and regulations for the
clearing house; but no such rule or regulation shall have any force or effect
until approved of by the Treasury Board.”

6OSupra, note 39, 384.
68F. R. Andrews, The Operation Of The City Clearing House (1942) 51

Yale L.J. 582, 584.

McGILL LAW JOURNAL

[Vol. 22

next step was to simplify matters still further by appointing two or
three of the clerks to deal with all the paper. This arrangement was
formalized in’ 1805, when a committee of bankers “promulgated a
set of rules for the clearing procedure, and in 1821 a permanent
committee was appointed to assume the management of the clearing
house”.69 Finally, a permanent clearing house was erected in 1833.10
Today, the following steps are normally taken for the simple

deposit and collection of a cheque:

1. The payee deposits the cheque in his own bank (the collecting

bank).

2. The bank gives its customer provisional credit pending col-

lection of payment of the cheque by the drawee bank.

3. The collecting bank prepares the cheques for machine pro-
cessing by encoding in magnetic ink the dollar amount of the
cheque.71

4. The collecting bank sorts the cheques. If the cheque is an
”on-us” item (drawn upon the same bank where deposited)
internal processing completes the transfer of the amount of
the cheque from the drawer’s account to that of the payee.
If the cheque is drawn on another bank (which is normally
the case) the cheque usually goes through the clearing house
process.

5. In the larger Canadian centres, 72 the cheques are processed
and sorted at a data centre of the collecting bank. The bank
then prepares cash letters, deposit tickets or computer printed

69 Ibid., 584-85.
70 Ibid., 585.
71 Magnetic Ink Character Recognition (MICR) encoding is a method of
printing coded information on a cheque so that it can be processed auto-
matically by machine. The bottom half inch or so of a cheque is reserved
for MICR encoding. The transit number fields include: a) on the far left
a field encoded with the identifying code of the drawee bank; b)
the middle
transit field identifies the drawer’s account number; c) the field on the right
indicates the amount, this last field being placed on the cheque by the first
negotiating bank. The legal problems encountered by MICR encoding of
cheques such as underencoding, overencoding, the “scratched-out” cheque
and the “ricocheting” cheque are discussed in Clarke, Bailey and Young,
supra, note 2, 145-154.

72The regional settlement points of the Bank of Canada are at Halifax,
Saint John, Quebec, Montreal, Ottawa, Toronto, Winnipeg, Regina, Calgary,
and Vancouver and these centres are therefore the sites of the larger clearing
houses in Canada. See Interbank Procedures and Standards, supra, note 62,
1A(2), Circular B9-05-02. Clearing procedures differ at regional points, com-
pared with the local or non-regional settlement points.

19761

PRESENTMENT AND COLLECTION OF CHEQUES

lists for each category sorted, showing the total dollar amount
of the cheques involved.

6. One or more representatives of the bank are then sent to
the clearing house where they exchange debit and credit
amounts with representatives from the other member clearing
banks:”

7. A list of the final balances due to or by each member is given
to the local agency of the Bank of Canada and written
direction is given to that agency for communication to the
Bank of Canada where debits or credits are made to the
members’ accounts in Ottawa.

8. The cheques themselves (if not exchanged at the clearing
house, and evidently this is not the practice at the larger
centres) are delivered to the data centre of the drawee bank
from where they are sent to the actual branch on which they
were drawn.

9. The drawee bank on which the cheque was drawn verifies it.
If it is an N.S.F. cheque, or there is a stop-payment on it,
or it is a forgery, the drawee bank does not pay the cheque
and it must be returned within a specific length of time. If
the drawee bank finds no reason to dishonour the cheque,
it is posted to the drawer’s account (if this has not already
been done at the data centre), and is cancelled and paid.

10. The provisional credits given in the collecting process become

final, or, in the case of a returned cheque, are reversed.

The chartered banks in Canada have developed a fairly com-
prehensive set of rules and procedures for governing the collection
of cheques. Clearly the law must extend recognition to these rules
of clearing usage unless they become unreasonable or unfair to the
banking customer. In general the banks have provided a sound
service with regard to the collection of cheques, and’no advantage

73 This is a simplified description of what might actually take place at a
clearing house. This will depend on the location of the clearing house (whether
a regional or non-regional settlement point), the nature of the cheque or item,
whether other intermediary banks are employed as agents for collection, etc.
Falconbridge, supra, note 39, 385 gives a more detailed description of what
actually transpires at a clearing house. See also A. B. Jamieson, Chartered
Banking in Canada (1962), ch.XXII, 341-5; Andrews, supra, note 68, 590-603,
gives a detailed if somewhat dated description of an American city clearing
house. See also Clarke, Bailey and Young, supra, note 2, ch.8, 155-160.

McGILL LAW JOURNAL

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has seemingly been taken of the customer.74 It is also important that
the law remain flexible with respect to the deposit and collection of
cheques in view of the new banking practices being adopted to
further increase the efficiency of the payments system.75

IV. THE COLLECTION AND PAYMENT OF CHEQUES IN THE

UNITED STATES – AN OVERVIEW OF THE
UNIFORM COMMERCIAL CODE

The Americans have done a very thorough job of codifying the
law respecting commercial paper,76 bank deposits and collectionsY
It is intended here to set out and discuss some of the important
sections of the Uniform Commercial Code relating to the collection
and payment of cheques, in order to evaluate their effect and to
discover whether the principles enunciated would be suitable for
adoption in Canada.

1. Article Three – Commercial Paper

Part 5 of Article Three of the Code deals with the subjects of

presentment, notice of dishonour and protest.

14 Indeed, in view of the fact that a normal collection for payment of a
cheque takes at least 2 or 3 days, the drawer can really take advantage of the
bank with a later deposit. This involuntary extension of credit by a bank is
one kind of “float” the banks are always trying to reduce.

75The banks are planning to develop electronic payments systems, for
example. See generally the articles cited supra, note 4. Development of
computerized and electronic payments systems will necessarily involve new
legal problems. Apparently the by-laws of the Canadian Bankers’ Association
concerning clearing rules and procedures will be revised shortly.

7G Uniform Commercial Code (U.L.A.), art.3.
7Ibid., art.4. There is also a wealth of articles and papers on this article
as there is on the other articles of the Code. See, inter alia: J. J. Clarke,
Bank Deposits and Collections (1963) 80 BankingL.J. 1; D. J. Rapson, supra,
note 9; W. D. Malcolm, How Bank Collection Works – Article 4 of the U.C.C.
(1965) 11 How.LJ. 71; D. Dalony, The Presentment Problem In The Collection
10 U.Fla.L.Rev. 382; W. 0. Morris, The
of Checks Through Banks (1957)
Importance of Promptly Presenting Checks for Payment (1959) 61 W.Va.L.Rev.
191; Bank Procedures and the U.C.C. When Is a Cheque Finally Paid (1968)
9 B.C. Ind. & Com.L.Rev. 957; Final Payment And the Process of Posting Under
the U.C.C. (1968) 68 Col.L.Rev. 357; R. J. Rohner, Posting of Cheques: Final
Payment and the Four Legals (1968) 23 Bus. Law. 1075.

This article of the Code has also been subjected to severe criticism by:
F. F. Beutel, The Proposed Uniform [?] Commercial Code Should Not Be
Adopted (1950) 61 Yale L.J. 334, esp. 357-367.

19761

PRESENTMENT AND COLLECTION OF CHEQUES

Article 3-502 states that in the event of untimely presentment
without excuse, 8 endorsers will be completely discharged, and the
drawer will be discharged in the case of the drawee bank’s in-
solvency to the extent of his loss, the claim for which is assigned
to the holder. This article expressly limits discharge of the drawer
to the situation of bank failure, which is the only situation to
which section 166 of the Bills of Exchange Act 7
1a will normally
apply.78b

Section 3-503 of the Code states the rules applicable to the time
of presentment in one section rather than dealing with the subject
in different sections as does the Canadian Act:7 9

3-503. Time of Presentment
(1) Unless a different time is expressed in the instrument the time for

any presentment is determined as follows:
(a) where an instrument is payable at or a fixed period after a
stated date any presentment for acceptance must be made on or
before the date it is payable;

(b) where an instrument is payable after sight it must either be
presented for acceptance or negotiated within a reasonable time
after date or issue which-ever is later;

(c) where an instrument shows the date on which it is payable

presentment for payment is due on that date;

(d) where an instrument is accelerated presentment for payment is

due within a reasonable time after the acceleration;

(e) with respect to the liability of any secondary party presentment
for acceptance or payment of any other instrument is due
within a reasonable time after such party becomes liable thereon.
(2) A reasonable time for presentment is determined by the nature of
the instrument, any usage of banking or trade and the facts of the
particular case. In the case of an uncertified check which is drawn
and payable within the United States and which is not a draft drawn
by a bank the following are presumed to be reasonable periods withii
which to present for payment or to initiate bank collection:
(a) with respect to the liability of the drawer, thirty days after date

or issue whichever is later; and

(b) with respect to the liability of an indorser, seven days after his

indorsement.

(3) Where any presentment is due on a day which is not a full business
day for either the person making presentment or the party to pay or

8 The circumstances under which presentment or notice of dishonour or

protest are made, or delay therein, are set out in- s.3-511 of the Code.

7sa Supra, note 7.
78b Supra, note 17b.
79 The Bills of Exchange Act, supra, note 7, deals with a reasonable time
for presentment with respect to endorsers in, s.86(2) and to drawers in
s.166(2). This division has created a certain amount of confusion in the cases.

McGILL LAW JOURNAL

[Vol. 22

accept, presentment is due on the next following day which is a full
business day for both parties.

(4) Presentment to be sufficient must be made at a reasonable hour, and

if at a bank during its banking day.

Subsection (2) gives a similar flexible test to that of the Canadian
Act for determining what is a reasonable time for presentment,”0
but also provides specific time limits presumed to be reasonable.
Adoption of the specific time limits tacitly rejects the “one-day”
presentment rule.8 l The subsection also sets down the proposition
that a drawer should be responsible on a cheque for a greater period
of time than an endorser. The thirty-day time period specified for
the drawer’s discharge also coincides with section 3-304(3)(c) of
the Code which establishes a similar period for determining when a
holder has notice that a cheque is “stale” or overdue.

Section 3-504 sets out the rules on how presentment is to be
made. In particular, subsection 2(b) authorizes the presentment of
cheques “through a clearing house” although, of course, presentment
is not then actually made at the clearing house but rather when
the cheque reaches the drawee bank.8 2 The adoption of subsection
2(b) would overcome the technical and out-dated requirement of
section 85(2) of the Bills of Exchange Act. Moreover, subsection 3
would reverse the troublesome requirement of presentment to all
drawees or acceptors as set out in section 87(2) of the Act.83

80Note that the test refers to “usage of banking or trade” and would
clear up any doubts fostered in the Canadian Act by the reference to banking
usage in s.166(2) and the lack of such reference in s.86(2). If a similar
single section were adopted in Canada it would be clear that a court, in
determining the question of reasonable time for presentment for discharge of
both drawer and endorsers, would b! obliged to consider clearing house rules.

81 See the U.C.C. Official Comment no.3 on this section.
82 This rule is also accepted by English case law. See Falconbridge, supra,

note 39, 387.

83 S.3-504 reads:

“S.3-504. How Presentment Made*

(1) Presentment is a demand for acceptance or payment made upon the
maker, acceptor, drawee or other payor by or on behalf of the
holder.

(2) Presentment may be made

(a) by mail, in which event the time of presentment is determined

by the time of receipt of the mail;
or

(b) through a clearing house; or
(c) at the place of acceptance or payment specified in the instrument
or if there be none at the place of business or residence of the
party to accept or pay. If neither the party to accept or pay

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PRESENTMENT AND COLLECTION OF CHEQUES

Section 3-506 sets out the time allowed the drawee bank, on
presentment for acceptance and presentment for payment, to decide
whether to dishonour or pay the instrument (or accept in the case
of acceptance) .84 This section tacitly condones the bank practice of
deferred or delayed posting by allowing the drawee bank one
business day after receipt of the item to pay or dishonour it.’ A
similar section, if adopted in Canada, would end confusion in the
banking trade as to how long a drawee has to determine whether
to pay or return a cheque.

2. Article Four – Bank Deposits and Collections

Article Four of the Code is an attempt to codify the legal relation-
ship between banks and their customers and the law relating to the
bank collection process. It also strives to attain greater clarity and
certainty in the legal rules involved in the law relating to bank
deposits and collections. The framers of the Code, however, re-
cognized the need to balance certainty with flexibility. This flexibility

nor anyone authorized to act for him is present or accessible at
such place presentment is excused.

(3) It may be made

(a) to any one of two or more makers, acceptors, drawees or other

payors; or

(b) to any person who has authority to make or refuse the acceptance

or payment.

(4) A draft accepted or a note made payable at a bank in the continental

United States must be presented at such bank.

(5) In the cases described in Section 4-210 presentment may be made
in the manner and with the result stated in the section. As amended
1962.”

84 S.3-506 reads:

“S.3-506. Time Allowed for Acceptance or Payment.

(1) Acceptance may be deferred without dishonour until the close of the
next business day following presentment. The holder may also in a
good faith effort to obtain acceptance and without either dishonour
of the instrument or discharge of secondary parties allow post-
ponement of acceptance for an additional business day.

(2) Except as a longer time is allowed in the case of documentary drafts
drawn under a letter of credit, and unless an earlier time is agreed to
by the party to pay, payment of an instrument may be deferred
to determine
without dishonour pending reasonable examination
whether it is properly payable, but payment must be made in any
event before the close of business on the day of presentment.”

85 See also, ss.4-301 and 4-302 of the Code on deferred posting.

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[Vol. 22

is provided by section 4-103,” 6 which permits, within specified limits,
variation of the provisions of Article Four by authorized agreements.
Subsection (1) confers a general power to vary all provisions of
Article Four by agreement, within the specified limits that a bank
cannot disclaim responsibility for lack of good faith or failure to
exercise reasonable care or limit the measure of damages for such
lack or failure. Nevertheless, the limits are made very wide by the
provision that the parties can agree on the standards by which such
responsibility is to be measured as long as such standards are not
“manifestly unreasonable”. Only parties to the agreement are affected
by subsection (1) of section 4-103, unless they are bound by ratifica-
tion, estoppel or the likeY7 On the other hand, subsection (2) provides
that certain types of “official” or “quasi-official” agreements, such
as clearing house rules, may affect the rights of other interested
parties without their specific assent, subject, of course, to the limita-
tions of good faith and ordinary care. 8 Subsection
is an
extremely important section of Article Four and demonstrates the
importance of recognizing bank usage and custom. It also demon-
strates that the framers of the Code placed great faith in the integrity
of the banks by allowing such great freedom. This faith is justified
by the lack of evidence indicating that banks have tried to take
unfair advantage of their customers either through adhesive agree-
ments or bank clearing rules and regulations. In Canada, where
clearing rules, for example, are approved by the Treasury Board
and are thus “quasi-official” in nature, a similar statutory provision
might instill both clarity and flexibility into the law relating to
bank deposits and collections.8 9

(2)

8
6 The framers of the Code realized the wisdom of building flexibility into
the article in view of the ever-changing nature of bank collections: “In view
of the technical complexity of the field of bank collections, the enormous
number of items handled by banks, the uncertainty of changing conditions
and the possibility of developing improved methods of collection to speed
the process, it would be unwise to freeze present methods of operation by
mandatory statutory rules.”; U.C.C. Official Comment no.1 to s.4-103.

87 U.C.C. Official Comment no.2 to s.4-103.
88 Subsection (3) of 4-103 also provides that action or non-action in com-
pliance with clearing house rules, inter alia, constitutes prima facie the
exercise of ordinary care. According to U.C.C. Official Comment no.3 to
s.4-103 defining clearing house rules, it is not the intent of subsection (2)
that clearing house rules should rewrite the basic law generally but rather
the effect of the rules should be limited to functions historically exercised
by clearing houses.

89 The rule in Canadian jurisprudence that unless it can be assumed or
proved that a person sought to be charged had contracted subject to the

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PRESENTMENT AND COLLECTION OF CHEQUES

Section 4-202 provides rules with respect to the responsibility
and reasonableness of action by a collecting bank in presenting,
sending notice of dishonour and protest, and in settling for’an item.
The general rule is that the collecting bank must take action by
midnight of the next business day after receipt. If a longer time is
taken, the bank then has the burden of establishing reasonableness.
The collecting bank generally must use ordinary care. Section 4-108
is important with regard to the timeliness of action by the collecting
bank in that subsection 4-108(1) permits a one-day extension in
special circumstances where the collecting bank is attempting in
good faith to secure payment.90

Section 4-204 sets out rules governing the methods of sending and
presenting items for collection by the collecting banks.” Sub-
section (3)
is very important in light of the development of com-
puterized collecting and posting techniques in ‘that the validity of
presentment at a centralized data centre maintained or used by the
drawee bank is accepted, if that is where the drawee bank has re-
quested presentment. The legal question of off-premises present-
ment has not been settled in Canada and the adoption of a similar
provision would certainly clarify the law for bankers. Section 88 of
the Bills of Exchange Act covering the proper place for presentment
obviously does not deal with this relatively modern legal problem.

rules of the clearing house (see Sterling Bank v. Laughlin, supra, note 31)
would be laid to rest.

90Delay is also excused by s.4-108(2)

if caused by interruption of com-
munication facilities, suspension of payments by another bank, war, emer-
gency conditions or other circumstances beyond the control of the bank,
provided it exercises such diligence as the circumstances require.

11 “S.4-204. Methods of Sending and Presenting; Sending Direct to Payor Bank
(1) A collecting bank must send items by reasonably prompt method
taking into considera’tion any relevant instructions, the nature of the
item, the number of such items on hand, and the cost of collection
involved and the method generally used by it or others to present such
items.

(2) A collecting bank may send

(a) any item direct to the payor bank;
(b) any item to any non-bank payor if authorized by its transferor;

and

(c) any item other than documentary drafts to any non-bank payor,
if authorized by Federal Reserve regulation or operating letter,
clearing house rule or the like.

(3) Presentment may be made by a presenting bank at a place where
the payor bank has requested that presentment be made. As amended
1962.”

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[Vol. 22

Section 4-213 of the Code is also important since it deals with
the point in the collection process at which the drawee bank deter-
mines whether to pay the cheque or not. If the bank makes final
payment, then it becomes liable on the cheque in the place of the
drawer and endorsers, and provisional credits become final. Section
4-213 sets out rules for determining when final payment is made
by the drawee bank and provisional debits and credits become final. 2

92 “S.4-213. Final Payment of Item by Payor Bank; When Provisional Debits
and Credits Become Final; When Certain Credits Become Available for
Withdrawal

(1) An item is finally paid by a payor bank when the bank has done any

of the following, whichever happens first:
(a) paid the item in cash; or
(b) settled for the item without reserving a right to revoke the
settlement and without having such right under statute, clearing
house rule or agreement; or

(c) completed

the process of posting the item

indicated
account of the drawer, maker or other person to be charged
therewith; or

to the

(d) made a provisional settlement for the item and failed to revoke
the settlement in the time and manner permitted by statute,
clearing house rule or agreement.

Upon a final payment under subparagraphs (b), (c) or (d) the payor bank
shall be accountable for the amount of the item.

(2) If provisional settlement for an item between the presentment and
payor banks is made through a clearing house or by debits or credits
in an account between them, then to the extent that provisional
debits or credits for the item are entered in accounts between the
presenting and payor banks or between the presenting and successive
prior collecting banks seriatim, they become final upon final payment
of the item by the payor bank.

(3) If a collecting bank receives a settlement for an item which is or
becomes final (subsection (3) of Section 4-211, subsection (2) of Section
4-213) the bank is accountable to its customer for the amount of the
item and any provisional credit given for the item in an account
with its customer becomes final.

(4) Subject to any right of the bank to apply the credit to an obligation
of the customer, credit given by a bank for an item in an account
with its customer becomes available for withdrawal as of right
(a) in any case where the bank has received a provisional settlement
for the item – when such settlement becomes final and the
bank has had a reasonable time to learn that the settlement
is final;

(b) in any case where the bank is both a depositary bank and a
at the opening of the

payor bank and the item is finally paid, –
bank’s second banking day following receipt of the item.

(5) A deposit of money in a bank is final when made but, subject to any
right of the bank to apply the deposit to an obligation of the customer,
the deposit becomes available for withdrawal as of right at the
opening of the bank’s next banking day following receipt of the deposit.

19761

PRESENTMENT AND COLLECTION OF CHEQUES

Closely connected is section 4-302 governing deferred posting and
delayed return. Time limits are imposed on action taken by the
drawee bank, which if not observed make the drawee bank re-
sponsible on the item. Generally speaking, the drawee bank must
return the item or provisionally settle for it before midnight of the
banking day of receipt, and it has until midnight of the business
day after receipt finally to pay, return, or send notice of dishonour.
The clearing rules93 adopted by the chartered banks of Canada
tacitly adopt the practice of delayed posting and the concept of the
midnight deadline, but the issue of how long a drawee bank has
to decide payment appears to be unsettled in Canadian juris-
prudence. Also olosely related to section 4-213
is section 4-212
dealing with the collecting banks’ right of charge-back or refund,
section 4-303 which establishes the times or events when notice of
set-off or legal process or stop-order is too late to freeze the process
of payment, and section 4-109 which defines what is meant by the
process of posting for the purposes of section 4-213. 4

One final provision of Article Four which is of interest is section
4-404 dealing with cheques over six months old. This section estab-
lishes that -a drawee bank is not obliged to pay a “stale” cheque, other
than a certified cheque, but may pay out in good faith. The drawee
bank will not be liable for wrongful dishonour for non-payment of a
cheque more than six months old. Adoption of a similar provision
in Canadian legislation would give sanction to current bank practice95
and relieve the bank refusing payment from an action by the drawer
for wrongful dishonour. Because a cheque is intended as an instru-
ment for immediate payment, and not as a continuing security,
adoption of this rule would be both acceptable and beneficial.

V. CONCLUSIONS AND RECOMMENDATIONS

In comparison to the Uniform Commercial Code of the United
States, the Canadian Bills of Exchange Act96 is jejune and out-dated.
It is submitted that an examination of the modern Canadian case

93 See Interbank Procedures and Standards, supra, note 62, s.l.E.(2).
94 In connection with clearing house rules, the time of final payment, the
process of posting, and priorities under s.4-303, see the much discussed case
of West Side Bank v. Marine Exchange Bank 155 N.W. 2d 587 (1968), dis-
cussed by W. D. Malcolm, Reflections on West Side Bank: A Draftman’s View
(1968) 18 Catholic U.L.Rev. 23, and Rohner, supra, note 77.

95 Interbank Procedures and Standards, supra, note 62, s.10(3).
96 Supra, note 7.

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[Vol. 22

law in the area of commercial paper will show that members of the
judiciary are compelled in many instances
to place extremely
strained interpretations on provisions of the Bills of Exchange Act
in order, to recognize the practices and needs of the public and the
commercial community; some judges choose completely to ignore
provisions of the statute in coming to a decision. 1
7 Perhaps what is
being witnessed is the development of a new “law merchant” by a
hesitant and uncertain judiciary with all the attendant caprice. The
ideal course of reform would be to repeal the Bills of Exchange Act
and enact entirely new legislation with modern concepts dealing with
commercial paper and bank deposits and collections.

In the problem area relating to presentment and collection of
cheques, much is being written on the development of computerized
systems designed to reduce the flow of ‘commercial paper and
eventually perhaps, produce a chequeless or cashless society. Until
that era arrives, it is submitted that the law should take formal
cognizance of modern conditions including the custom and usage
of bankers.

To foster these aims, and until those charged with the task of
legislating changes in the law arrive at a satisfactory alternative
to the Bills of Exchange Act, the following recommendations are
made, taking into account the ambit of the present statute:

Firstly, Part III of the Act should be changed so that bills of
exchange drawn on financial institutions”9 that offer chequing ser-
vices to their customers, such as credit unions and trust companies,
are recognized as cheques within the meaning of section 165(1).
All the sections in Part III of the Act, including section 166, should
apply to such instruments. Secondly, section 86(2) should be
repealed and a new section enacted, establishing a single test for
determining what is a reasonable time for presentment for payment,

97 See, e.g., J. I. Case Thresing Co. v. Desmond (1915) 22 D.L.R. 455 (Alta
C.A.); Keys v. The Royal Bank of Canada (1947) S.C.R. 377; Bank of Montreal
v. Independent Grain Co. (1951) 1 W.W.R. (N.S.) 162 (Alta S.C.); H. B. Ettin
Co. v. Asselstyne (1962) 34 D.L.R. (2d) 191 (Ont. C.A.); Mazur v. Imperial
Investment Corp. (1963) S.C.R. 281; Circle Acceptance Co. v. Sigouin [1963]
C.S. 97.

98 Supra, note 4.
99 In connection with the so-called “near-banks” and the clearing system,
it should be noted that the Report of the Royal Commission on Banking and
Finance (1964) 393-4 suggested that these financial institutions should be
required to hold their reserves at the Bank of Canada like the chartered banks
and that all clearing institutions should be part of an association created to
manage the clearing system in place of the Canadian Bankers’ Association.

19761

PRESENTMENT AND COLLECTION OF CHEQUES

vis-&-vis the discharge of the drawer and endorsers of a cheque.
Adoption of a thirty-day presumed limit for the discharge of the
drawer and a seven-day limit for discharge of endorsers is suggested.
Section 166(2) should be repealed and a subsection to the suggested
new section 86(2) added, providing that the section also applies to
section 166(1). Thirdly, a section similar in intent to section 4-103
of the Uniform Commercial Code allowing variation of the legislation
by agreement, and especially by clearing house rules, should be
adopted. Such a section could be framed so that the courts would
be bound by such rules as long as they did not violate the limits
of good faith and ordinary care.

This last recommendation

is by far the most important and
controversial. It would give legal sanction to such common banking
practices as delayed posting and the return of stale-dated cheques,
and allow the banks to determine such basic principles as when a
cheque is paid and how long a drawee bank has to decide whether
to pay a cheque or dishonour it. Since there is little evidence of
banks taking unfair advantage of their customers with respect to
bank deposits and collections, and in view of the need to build
flexibility into any legislation because of the development of new
and improved methods and techniques for processing and collecting
cheques, it is submitted that the granting of fairly broad scope to
the banks is justifiable. The adoption of a section similar in intent
to section 4-103 of the Uniform Commercial Code would be a large
step in the right direction in the effort to bring the law up to date
with modern banking practices.