The efficiency of allocation of fraud loss with consumer payment instruments and of the right to stop payment
thesisposted on 13.01.2017 by Edwards, Robin Russell
In order to distinguish essays and pre-prints from academic theses, we have a separate category. These are often much longer text based documents than a paper.
This thesis has three objectives: first, to examine the law relating to loss allocation resulting from fraud with consumer payment instruments and determine whether this allocation is efficient; second, to determine whether any right to stop or reverse payment associated with the payment instrument is efficient; and third, to suggest changes and reforms to achieve efficiency in these two areas. The basic test to determine efficiency of allocation of fraud loss to be used in the thesis involves looking at the following questions: which party in the transaction or system can, because of size, wealth, insurance, or the ability to pass on costs, best bear the risk of non–payment? Which party can most easily avoid the loss? And which rule is the least costly rule to enforce? In regard to electric funds transfer it was found that the test in the current Electronic Funds Transfer Code (EFT Code), although purporting to be worked out on efficiency principles is, in fact, unduly complicated and the thesis recommends the adoption of simple failure to report loss theft or fraud by the consumer as a test for allocation of fraud loss. Signature credit cards are currently not covered by the EFT Code and fraud loss allocation is determined by contract law but, nevertheless, a similar test is advocated in regard to them too. In regard to cheques it was found the forgery rule as regards the drawer’s signature and the ancillary Ligget rule are basically efficient but the rule regarding indorser’s signature is inefficient - making cheques not transferable would help eliminate this inefficiency. As to fraudulent alterations, it was advocated that paying banks should bear total loss for fraudulent and material alterations with a right, of course, against the person who has made the alteration. In regard to financial institution cheques, the thesis recommends that the definition of a financial institution cheque (which covers bank cheques) should be extended to cover cheques drawn by one financial institution on another one. It recommends that where consideration has been provided at any stage for a bank cheque then it should be able to be enforced. It was also advocated that the gist of the Australian Paper Clearing System assurances needs to be enshrined in legislation (an example of the sort of legislative change that would hopefully ensure certainty of payment has also been suggested). To ameliorate the position from an efficiency perspective, the following is also advocated: a duty of care in regard to the safekeeping of bank cheques should be introduced; responsibility for alterations should also be placed on the issuing banks as a spur to devise alteration proof bank cheques; and when consumers buy bank cheques they should be asked for what purpose it is being purchased and this should be written by the banks on the front of the bank cheque. Whether a uniform rule for fraud loss allocation across different payment systems is a possibility is also explored. It was found that a uniform rule for fraud loss allocation would seem to be more efficient than making efficiency ameliorations to existing fraud allocation tests in the various payment systems. Allied with the problem of fraud loss allocation is the issue of whether consumers should have a right of stopping or reversing payment if consumers perceive they are the potential victims of fraud or sharp dealing. Again the thesis examined whether this is efficient. In regard to cheques it was found that the right to stop payment is efficient but that such a right could be ameliorated by allowing the drawer a right to set up any dispute against the vendor in the same action where the vendor/payee brings an action on the stopped cheque. Moreover, the right to stop cheques should be explicitly extended to stolen cheques. In addition banks should have to reaccredit the account in accordance with the stop payment order and banks should have the burden of proving that no loss stemmed from their error. On the other hand, in regard to financial institution cheques (including bank cheques) if they are to be effective cash substitutes, efficiency demands that purchasers not be allowed to use their disputes with the vendor, even if they may seem to involve fraud, to stop the banks paying out on the bank cheques, unless there is a court order. As to signature credit cards it is advocated the gist of American law on chargebacks absent any territorial restrictions should be put into Australian federal legislation. Allegations of contractual non compliance should require the buyer to send the goods back to the seller or, at least be able to show a bona fide attempt to do so, as a precondition to the exercise of chargeback rights and as part of a requirement that the buyer should make an attempt to first settle the matter with the seller. Proposed federal legislation covering chargebacks should also extend to other forms of electronic payment like BPAY as well as PIN credit cards. Chargeback rights should also apply where debit systems mimic cash but with a $150 threshold before they apply and subject to the goods being returned to the seller. Finally, the thesis explores whether a uniform right to stop payment would be more efficient than the inconsistency and inefficiency of current Australian stop payment rules and concludes that such right should be along the lines of the never enacted American Uniform New Payments Code since is clear, concise and efficient compared with other attempts to formulate uniform rules.’