Is Canada Ready for the Paperless Cheque?

The Bills of Exchange Act (BEA) was adopted in Canada in an era of exclusive manual processing of paper instruments. Not surprisingly, a cheque must be in writing. Its "issue" and transfer by "negotiation" require the "delivery" of the written cheque. "Delivery" is defined to mean "transfer of possession, actual or constructive, from one person to another." The delivery of the cheque for deposit confers on the collecting bank1 rights of a holder in due course. In short, a cheque must be in a tangible form and to give rights, it must be physically handled.

Then, to trigger payment, a cheque must be physically presented by the holder to the drawee bank, usually at its branch. Presentment serves two policy objectives. First, it is aimed at achieving certainty as to the moment of demand of payment addressed to the drawee bank. Second, the presentment purports to ensure that demand for payment be made by the holder, or a person on the holder’s behalf, who possesses the cheque. As well, unless excused, presentment of a cheque is required in order to charge its drawer, as well as any endorser, with liability thereon.

It is only upon the drawee bank’s dishonouring the cheque and the ensuing dishonour proceedings that the drawer becomes liable to compensate the holder. The bank of deposit is therefore under contractual obligation to its customer, the depositor-holder, to make the required presentment, which would lead either to the payment of the cheque or to the drawer’s liability upon its dishonour. The drawee bank’s authority and duty owed to its customer – to honour a cheque – takes effect upon the presentment of the cheque. Finally, each bank requires presentment in order to discharge its obligations toward its own customer.

With the introduction and spreading of electronic transmission of information, the physical delivery of cheques to branches on which they were drawn became a costly operation. While presentment may be waived, a waiver will not bind a third party; thus, a waiver agreed between a payee-holder and his or her bank will not bind the drawer. Moreover, an outright waiver deprives parties of the benefits derived from a presentment as outlined above.

Banks may nevertheless agree on an alternative procedure for presentment, as long as such procedure facilitates the two objectives of the statutory presentment mentioned above. However, to be effective and bind the customers, the procedure originally set out in the interbank agreement must be incorporated into banks’ respective banking agreements, so that it is implicit in banks’ own, inter-customer or drawer-payee/holder contract. It is in this context, that remote presentment, or cheque truncation, may be introduced even without a legislative amendment.

Introduction of Electronic Presentment of Cheque Image

Recognizing that a legislative amendment authorizing remote presentment would add certainty, Parliament passed an amendment to the BEA to this effect in 2007. Section 163.3(1) allows the electronic presentment of "an official image" of a cheque made "in accordance with by-laws, rules or standards" issued by the Canadian Payments Association (CPA).

Under this statutory mandate, the CPA has been working on the design and implementation of a comprehensive image-based enhanced framework. In December 2009, having moved away from an earlier mandatory scheme, the CPA Board approved an image rule facilitating the electronic presentment of cheques. In December 2010, the CPA Board approved an amendment establishing an enabling framework for the creation and use of Return Replacement Document (RRD) as an option for return of cheques. In March 2012, the Board approved further amendments (which will become effective in October 2012) designed to speed up cheque presentment by facilitating, within the bank of deposit, the transmission of images from branches/ABMs, directly to data centres, where the cheques could then be printed as Clearing Replacement Documents (CRDs) and cleared as paper items to the drawee or exchanged electronically. The amendment also envisages electronic deposit by corporate customers.

Next Steps and Implications

However, the 2007 amendments do not cover electronic issue, negotiation and deposit of a cheque, each of which involves the electronic transmission of the cheque image in lieu of its physical delivery. Under the BEA, everything but presentment is still required to be handled by the physical delivery of a tangible piece of paper.

Nevertheless, procedures for the electronic issue and negotiation, including deposit, of a cheque are already underway. Undoubtedly, the proper and certain functioning of such procedures requires appropriate BEA amendments – if not an overhaul. Indeed, an electronic issue will go as far as to generate a paperless "cheque."

At least for now, statutory authorization of the CPA to issue by-laws rules or standards, similar to those embodied in section 163.3(1) of the BEA is called for. Until this happens, and very likely even thereafter, careful contractual arrangements should be worked out among interested parties to ensure that the benefits of automation do not result in legal uncertainty and significant loss of rights and remedies.

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1 For our purposes, "bank" is broadly defined in section 164 of the BEA to include "every member of the Canadian Payments Association established under the Canadian Payments Act and every local cooperative credit society, as defined in that Act, that is a member of a central, as defined in that Act, that is a member of the Canadian Payments Association."

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