Checks and Bank Liability in Ethiopian Law
Introduction: Checks as Negotiable Instruments
Checks are fundamental instruments in modern commerce, facilitating secure and efficient financial transactions. In legal terms, they are classified as negotiable instruments, carrying specific characteristics and legal implications for all parties involved: the drawer (issuer), the payee (recipient), and the drawee bank. The unique nature of checks, particularly their negotiability and the strict liability associated with their payment, necessitates clear legal frameworks and consistent judicial interpretation. This chapter delves into the Ethiopian legal framework governing checks, drawing insights from key decisions of the Federal Supreme Court Cassation Bench, and explores various aspects of their interpretation, conditions, defenses, and the liability of paying banks.
Interpretation of a Check (Cassation File No. 62452, Volume 13)
A check is defined as an unconditional order to pay a specified sum of money, functioning as a substitute for cash upon presentation. The right embedded in a check is inseparable from the document itself, and it is a transferable monetary instrument.
- Relevant Commercial Law Articles: Commercial Code Articles 827(a), 840, 868, 872, 854.
- Additional Reference: Cassation File No. 20232, Volume 7.
This definition highlights several key characteristics of checks:
- Unconditional Order: The instruction to the bank to pay must not be subject to any conditions.
- Specified Sum: The amount to be paid must be clearly stated.
- Payable on Demand: Checks are generally payable immediately upon presentation to the drawee bank.
- Negotiability: Checks can be transferred from one person to another, conferring rights to the new holder.
- Inseparability of Right from Document: The legal right to payment is intrinsically linked to the physical check document itself.
Compulsion/Duress in Check Issuance (Cassation File No. 20232, Volume 7)
A check drawer (signatory) should not be compelled to make payment on a check that they signed under duress, without their free will and consent.
The Commercial Code, in Article 715, stipulates that checks are negotiable instruments. These negotiable instruments are the means by which the rights and obligations of the contracting parties are created and confirmed. While the issuer of the document undertakes an obligation, the holder (bearer) of the document has a right or benefit. This being the case, it is undeniable that to create this situation, the fundamental provisions of contract law must be fulfilled, just like any other contract. This is because, even though the basis of these negotiable instruments is unique in their nature and purpose, the contracting parties must fulfill and respect the general principles of contract law to create rights and obligations through this document.
One of these fundamental principles is the necessity of the parties’ willingness and freedom to enter into the contract. If a contract is not based on the full consent of the contracting parties, it cannot be legally valid. Therefore, one of the fundamental reasons for contract invalidity is an act of force or compulsion committed by one party during the contract formation process. This fundamental principle is explicitly stipulated in Civil Code Article 1679.
- Relevant Commercial Law Articles: Commercial Code Articles 715, 841.
- Relevant Civil Law Article: Civil Code Article 1679.
This principle is crucial as it links the validity of a check, a commercial instrument, to the foundational principles of general contract law, particularly the requirement of free and uncoerced consent.
Conditions for Checks (Blank Checks) (Cassation File No. 193270)
When a check is issued, if it is incomplete in terms of date and amount, as per Commercial Code Article 827, it is considered a “Blank Check.” However, when such a blank check is filled in with the date and amount and presented to the paying bank, if it is presented in a complete form, it fulfills the characteristics stipulated in Commercial Code Articles 827 and 828 that qualify a document as a check, or it is considered a check and has legal effect.
This interpretation acknowledges the commercial reality of blank checks while ensuring that they gain legal validity once the essential elements (date and amount) are properly filled in before presentation.
Leave to Defend (Summary Procedure) (Cassation File No. 43315)
In the context of a lawsuit filed under a short procedure, a defendant’s request for leave to defend (i.e., permission to present a defense) is accepted by the court. Whether the reason given for not paying the demanded money is sufficient can only be determined after the court moves from the short procedure to the regular litigation procedure and properly hears evidence from both parties.
At the stage of a leave to defend request, what should be examined is not the nature of the check itself, but whether the reason presented by the defendant for seeking leave to defend is one that warrants permission. The factual dispute (on the merits of the case) is to be heard after leave to defend is granted.
- Relevant Civil Procedure Code Articles: Civil Procedure Code Articles 284-286.
This clarifies the two-stage process in short procedure cases involving checks: an initial assessment of the defense’s plausibility to grant leave, followed by a full trial on the merits if leave is granted.
Defenses to Check Payment (Cassation File No. 62452, Volume 13)
A check is a document where the right is inseparable from the document itself, and the drawer of the check is liable for the payment of the money written on the check. This is understood from Commercial Code Articles 827(a) and 854, and from the content of Commercial Code Articles 840, 868(c), and 872. Therefore, when a check is unpaid, both the drawer and the endorsers become liable for its payment.
Due to its nature as a substitute for money and its easy transferability to various persons, a check is generally not subject to any defense. Unless explicitly provided for by law, check payment cannot be stopped or suspended for any reason. Accordingly, when the defenses stipulated in Commercial Code Articles 717 and 850 arise, the drawer or endorsers can raise a defense that the check should not be paid.
Based on these provisions, a person sued on a check can discharge themselves from the debt by raising certain defenses, as the law has laid down the system. A person sued on a check can raise a defense based on personal relationships only with the holder (bearer) of the check.
The specified defenses include:
- Defenses based on the form of the document’s writing and the words written on the document, arising from the personal relationship between the debtor and the holder of the document.
- Defenses related to forgery of signature, lack of capacity or authority at the time the document was issued, or non-fulfillment of necessary conditions for filing a lawsuit.
- If the holder obtained the document knowing that it was intended to harm the debtor.
- Relevant Commercial Law Articles: Commercial Code Articles 827(a), 840, 868, 872, 854.
- Additional Reference: Cassation File No. 90434, Volume 16.
This section underscores the principle of abstractness in negotiable instruments, meaning the underlying transaction is generally irrelevant to the obligation to pay the instrument itself. Defenses are limited to those affecting the instrument’s validity or the holder’s good faith.
Payer Bank’s Liability for Forged Signatures (Cassation File No. 213835)
A bank that makes payment on a check, if it is confirmed that it verified the signature on the check visually against the signature specimen in its system and found them to be identical, shall not be liable, even if it is later confirmed that the payment was made to an undeserving person or based on a forged signature.
Whether the signature on the check is indeed identical to the signature specimen is a factual issue that must be proven by evidence to render a decision on the matter. The check itself, on which payment was made, is presented as evidence to prove this. Whether the signature on the check resembles the specimen signature should be verified by an independent body, and the judge themselves should not make a presumption based on visual inspection.
This interpretation emphasizes the bank’s duty of care in verifying signatures, but also sets a standard of “visual similarity” rather than absolute authenticity, shifting the burden of proving a discrepancy to the party alleging forgery and requiring expert verification.
Bank Liability for Payments with False Identification (Conflicting Decisions)
This area presents a notable conflict in the Cassation Bench’s jurisprudence, highlighting the challenges of maintaining consistency in judicial interpretation.
Bank Not Liable (Cassation File No. 188419)
If money sent via money order (hawala) was paid to a person who presented a false identification card, impersonating the correct recipient, and not to the actual intended recipient, the bank is not liable to pay the correct recipient again.
When money is sent via money order, the bank is primarily expected to verify the recipient’s identity by visually confirming that the identification card bears the kebele (local administration) stamp and the name and signature of the relevant official. There is no legal reason to compel the bank to conduct further investigation, such as verifying whether the stamp belongs to the kebele or if the signature belongs to the relevant official. It is also known that the nature of banking operations does not permit such additional investigation. The bank is primarily expected to verify factual information that only the recipient is presumed to know, such as the identity of the sender, the amount of money sent, the secret code, and the name of the recipient. If these factual details are confirmed to be identical with the bank’s information, and the person presenting the information is considered the correct recipient, and they present an identification document showing their identity and are authorized to be paid under the name of the person to whom it was sent, there is no reason to hold the bank liable for failing to exercise due diligence. In this regard, as the Cassation Bench’s decision in Cassation File No. 41535 indicates, if the bank performed its usual procedures and exercised due diligence in making the payment, it is not liable to pay again for failing to verify the legality of the documents.
This stance emphasizes the practical limitations on a bank’s ability to verify identity beyond reasonable visual inspection and adherence to established procedures. It places the burden of loss on the sender or recipient if the bank has exercised due diligence according to its operational standards.
Bank Is Liable (Cassation File No. 38289, Volume 9)
If money sent via money order was paid to a person who presented a false identification card, impersonating the correct recipient, and not to the actual intended recipient, the bank is liable to pay the correct recipient again.
The court’s commentary reads as follows:
“The applicant paid the appropriate commission and handed over the money to the bank. She gave the money to the bank for it to deliver to the intended recipient. Indeed, since the bank was entrusted with delivering the money to the intended recipient, it has an obligation to deliver it. However, the bank (respondent) did not deliver the money to the intended recipient. Rather, it is confirmed that it paid it to an unintended/unauthorized person. As stated in the respondent’s argument, the money was paid because a person presented an identification booklet claiming to be the intended recipient. However, this person is indeed not the person the applicant sent the money to. Therefore, in this situation, the defrauded party is the respondent (the bank), not the applicant. It is the respondent, not the applicant, who can sue the fraudster and recover the money. As is clearly seen, there is no relationship whatsoever between the applicant and the person who defrauded the money from the respondent bank. There is no situation that leads to the conclusion that because the respondent was defrauded, the applicant is also considered defrauded.”
This contrasting decision emphasizes the bank’s fundamental contractual duty to deliver funds to the correct recipient. It views the bank as the party in the best position to prevent fraud and to recover losses from the fraudster, placing the risk of impersonation on the bank rather than the customer who initiated the legitimate transaction.
Analysis of the Conflict
The conflicting decisions regarding bank liability for payments made with false identification create significant legal uncertainty. One line of reasoning prioritizes the bank’s operational realities and adherence to standard due diligence, while the other emphasizes the bank’s core contractual obligation to ensure proper delivery of funds. This inconsistency can lead to unpredictable outcomes for both banks and customers, undermining confidence in the legal system’s ability to provide clear guidance on such common commercial transactions. Resolving this conflict through a clear and binding interpretation from the Cassation Bench is crucial for enhancing legal certainty in the banking sector.
Conclusion: Towards Clarity in Commercial Jurisprudence
The jurisprudence surrounding checks and bank liability in Ethiopia, as evidenced by the Cassation Bench’s decisions, reflects a blend of established commercial law principles and ongoing interpretive challenges. While the nature of checks as negotiable instruments, the importance of consent in their issuance, and the limited defenses against payment are generally clear, areas such as bank liability for payments made under fraudulent circumstances reveal inconsistencies. The conflicting precedents on payments made with false identification underscore the critical need for the Cassation Bench to provide definitive and consistent interpretations. Such clarity is essential not only for the predictability of legal outcomes but also for fostering a robust and trustworthy financial environment in Ethiopia.