Commercial Bank of Australia Limited v Flannagan

The plaintiff, Patrick Joseph Flannagan, sued the defendant, the Commercial Bank of Australia Limited, for conversion of a cheque and alternatively for money had and received. The cheque, drawn by the plaintiff, was payable to "State tax or bearer," crossed generally, and marked "not negotiable." It was given to an agent, Coffey, to pay the plaintiff's income tax. Coffey, without authority, paid the cheque into his own account with the defendant bank, which then collected the proceeds. Coffey fraudulently misappropriated the funds. The plaintiff sought to recover the amount from the bank.

The central legal issue before the High Court of Australia was whether the defendant bank had discharged the onus of proving that it acted "without negligence" in collecting the cheque, as required by section 88 of the Bills of Exchange Act 1909. This protection is available to a banker who, in good faith and without negligence, receives payment for a customer of a crossed cheque, even if the customer has no title or a defective title. The court had to determine if the bank's actions, in accepting Coffey's explanation for paying the cheque into his personal account, met the standard of reasonable care owed to the true owner of the cheque.

The Court reasoned that the cheque's form, payable to "State tax" and marked "not negotiable," coupled with its delivery to an agent for tax payment, raised a clear indication that the funds were not intended for the agent's personal use. The bank's own internal regulations stipulated that such cheques should not be credited to an account other than the one indicated without inquiry. While the bank teller questioned Coffey, the explanation provided – that it included his fees – was accepted without further investigation, despite the apparent risk of misappropriation. The Court found that this reliance on the agent's unverified statement, without making further inquiries from the drawer or obtaining explicit authority, constituted negligence. The bank had not affirmatively established that it acted with the requisite degree of care to protect the interests of the true owner.

The High Court dismissed the appeal, affirming the decision of the Supreme Court of South Australia. The bank was therefore held liable for the conversion of the cheque and its proceeds, as it had failed to prove it acted without negligence in its collection.