Payment of a forged cheque raises one of the most important forms of liability in banking practice, because the drawee bank deals with funds deposited with it for the customer’s account, and as a general rule it may not debit that account on the basis of a cheque that was not genuinely issued by the customer.
Trade Law No. 17 of 1999 regulates this issue through a specific provision in Article 528, which allocates the loss resulting from payment of a cheque on which the drawer’s signature was forged or whose particulars were altered, while also taking into account any fault on the part of the customer that contributed to the loss.
The Legal Rule Governing Payment of a Forged Cheque
Article 528 of the Trade Law provides that the drawee alone bears the loss resulting from payment of a cheque on which the drawer’s signature was forged or whose particulars were altered, where no fault can be attributed to the drawer.
The Law also treats any condition contrary to this rule as if it had never existed.
Accordingly, the bank’s liability is not based solely on the idea that its employee was negligent in examining the signature; rather, it fundamentally arises from the fact that the bank debited the customer’s account on the basis of an instrument that did not contain a valid payment order issued by the account holder.
Is the Bank Exempt If the Forgery Was Sophisticated?
No. The mere fact that the forgery was precise or sophisticated to the extent that it was difficult to detect does not, in itself, exempt the bank from bearing the loss resulting from payment.
The Court of Cassation has consistently held that payment by a bank of a cheque bearing a forged signature attributed to the customer does not discharge the bank toward that customer, even where payment was made without fault on the bank’s part, provided that the drawer did not themselves commit a fault that contributed to the loss.
Accordingly, the test of liability is not only: «Could the bank employee have detected the forgery?», but is preceded by a more fundamental question: Did the payment order actually originate from the customer?
The Court of Cassation’s Position on a Forged Signature
In Appeal No. 430 of Judicial Year 49 – session of 11 June 1984, the Court of Cassation held that the drawer’s signature is one of the essential particulars required for the existence of a cheque. If the signature attributed to the drawer is forged, the instrument is not binding upon the drawer, and payment by the bank of its value does not discharge the bank toward the customer.
The Court reaffirmed this principle in Appeal No. 2687 of Judicial Year 84 – session of 9 April 2015, holding that the burden of payment falls upon the bank regardless of the degree of sophistication of the forgery, unless fault on the part of the customer is established.
When Does the Customer Bear Part of the Liability?
The bank’s liability is not absolute. Article 528 itself makes the bank’s bearing of the entire loss conditional upon the absence of any fault attributable to the drawer.
One of the principal forms of fault expressly identified by the Law is the customer’s negligence in safeguarding the cheque book delivered to them.
Examples may include:
- Leaving the cheque book in an unsecured place.
- Allowing unauthorized persons to access it.
- Signing blank cheque forms without appropriate controls.
- Unjustifiably delaying notification to the bank of the loss or theft of the cheque book.
The existence of fault on the part of the customer does not necessarily result in the bank being completely exempt from liability; rather, the extent to which each party’s fault contributed to the loss must be determined.
Concurrent Fault of the Bank and the Customer
The loss may result from concurrent fault, such as where the customer negligently safeguards the cheque book while the bank also fails to implement banking controls that could have detected the incident or prevented payment.
In such case, the burden of loss may be allocated according to the contribution of each fault.
The Court of Cassation recognized this principle in Appeals Nos. 393 and 413 of Judicial Year 43 – session of 7 March 1977, where fault was established on the part of both the customer and the bank.
Comparison of the Customer’s Signature
Comparing the drawer’s signature appearing on the cheque with the specimen signature maintained by the bank remains one of the most important banking procedures in the payment process.
Failure to make this comparison may reveal clear fault on the part of the bank, particularly where the difference in the signature was apparent or could have been detected through ordinary procedures.
However, even where the forgery could not be detected through ordinary means, this alone does not extinguish the bank’s liability toward the customer in cases involving forgery of the drawer’s signature, unless fault on the part of the customer is established pursuant to Article 528.
Alteration of Cheque Particulars
The rule in Article 528 is not limited to forgery of the drawer’s signature, but also extends to alteration of the cheque’s particulars.
The alteration may affect:
- The value of the cheque.
- The name of the beneficiary.
- The date.
- Any other material particular affecting the scope of the payment order.
In such cases, the original particulars, the time of the alteration, the extent to which the change was apparent, any fault on the part of the bank or customer, and the causal relationship between that fault and the loss must be determined.
Effect of Alteration on the Obligations of Signatories
Article 529 regulates alteration of the text of the cheque in relation to its signatories.
Signatories who sign after the alteration are bound by the altered wording, while those who signed before the alteration remain bound according to the original particulars.
This provision concerns the obligations of the signatories on the instrument and does not displace the specific rule governing the bank’s liability for payment under Article 528.
The Difference Between the Drawer’s Signature and an Endorser’s Signature
A distinction must be drawn between forgery of the drawer’s signature and forgery of one of the cheque’s endorsements.
Under Article 528, the bank is not required to verify the authenticity of the signatures of endorsers or avalists and is not liable for their forgery.
The drawer’s signature, however, is the source of the payment order directed to the bank and therefore has a different legal status.
Is Verification of the Cheque Holder’s Identity Sufficient?
No. Verifying the identity of the person presenting the cheque for payment does not substitute for the existence of a valid payment order from the account holder.
The identity of the person presenting the cheque may be genuine while the drawer’s signature is forged. In such case, the debit from the customer’s account does not become valid merely because the bank knew the identity of the person who received the funds.
Accordingly, the issue of the identity of the beneficiary or holder must be distinguished from the issue of the validity of the drawer’s signature and payment order.
A Stolen and Subsequently Forged Cheque
If a cheque form is stolen from the customer’s cheque book and then used after the customer’s signature is forged, the manner in which the cheque book was safeguarded becomes a fundamental element in determining liability.
If the customer establishes that the cheque book was safeguarded with ordinary care and that the loss occurred despite reasonable precautions, the general rule remains that the bank bears the loss resulting from payment.
However, if it is established that access to the cheque form resulted from negligence by the customer, this may affect the allocation of liability.
Notification of Loss of the Cheque Book
The customer should notify the bank immediately upon discovering the loss of the cheque book or any of its forms.
The importance of notification lies in giving the bank an opportunity to take the necessary measures to prevent payment of the lost cheques.
Delay in notification may constitute an element in assessing the customer’s fault where it is established that payment could have been avoided had the bank been notified in due time.
Account Statements and Objection to Transactions
The customer should review account statements regularly.
Article 530 of the Trade Law regulates the effect of account statements sent by the bank to the customer, including the effect of failure to object to entries within the period prescribed by law.
Accordingly, discovery of a debit for an unrecognized cheque should be followed by a clear and immediate objection to the transaction, together with a request for a copy of the cheque and the information relating to its payment.
Civil Liability of the Bank
The principal claim where a cheque bearing a forged signature has been paid is usually for reimbursement of the amount debited from the account without a valid order from the customer, in addition to compensation for any other damage where the requirements for such liability are established.
To make the bank bear the value of the cheque – where Article 528 applies and there is no fault on the part of the drawer – it is not necessary to establish that the bank employee committed a criminal offence or gross fault.
This is a point that distinguishes civil and banking liability from criminal liability.
Does Paying a Forged Cheque Constitute a Crime by the Bank Employee?
Not automatically.
The bank may be civilly liable to reimburse the value of the cheque while no criminal liability arises against the employee who processed the payment.
Criminal liability requires an intentional act criminalized by law, such as proven collusion with the forger, participation in the forgery, misappropriation of funds, or another offence depending on the facts.
Mere failure to detect a sophisticated forgery is not, by itself, sufficient to attribute a criminal offence to a bank employee.
Burden of Proof in the Dispute
The elements of proof vary depending on whether the dispute concerns a forged signature, alteration of the cheque’s particulars, or concurrent fault.
The most important documents and evidence include:
- The original disputed cheque.
- The customer’s specimen signature approved by the bank.
- Reports from the Forgery and Counterfeiting Research Department or technical experts.
- The account statement showing the debit transaction.
- Notification of loss or theft of the cheque book, if any.
- Objection correspondence submitted to the bank.
- Details of the person who cashed the cheque and the method of payment.
- Records concerning delivery and use of the cheque book within the company.
Practical Precautions for Companies
Cheque-related risks increase within companies where multiple departments or persons handle cheque books and signatures. Accordingly, it is preferable to implement a clear internal system that includes:
- Keeping cheque books in a secure location.
- Identifying the persons authorized to receive and use cheque books.
- Creating a record tracking each cheque form.
- Avoiding the signing of blank cheques.
- Using dual approval levels for accounts where available.
- Reviewing account statements regularly.
- Immediately notifying the bank of any loss or unauthorized use.
Conclusion
Bank liability for paying a forged cheque under Egyptian law is not determined solely by the degree of care exercised by the bank employee in detecting the forgery.
The rule established by Article 528 of the Trade Law and the jurisprudence of the Court of Cassation is that the bank bears, in principle, the loss resulting from payment of a cheque on which the drawer’s signature was forged or whose particulars were altered, unless fault attributable to the customer contributed to the loss.
Accordingly, the sophistication of the forgery does not constitute an independent ground for exempting the bank. Legal examination therefore focuses on three principal elements: the authenticity of the drawer’s signature, the existence and extent of any fault on the part of the customer, and the causal relationship between the parties’ faults and the loss resulting from payment.
Mostafa El Rouby Law Firm and International Arbitration provides services in banking and commercial disputes, including reviewing banking documents and disputed cheques, identifying the legal basis of liability, and determining the appropriate judicial procedures according to the circumstances of each case.