Updates and background for this project (Digest)
4.1 There have been some legislative reforms, both proposed and actually implemented, in the area of material alterations to instruments after execution. The most interesting relate only to negotiable instruments law – but these could be usefully extended into other related areas.
NEGOTIABLE INSTRUMENTS LAWS
4.2 The rule in Pigot’s Case once applied to negotiable instruments as much as to any other instrument.1 However, the law relating to the effect of alterations on negotiable instruments has long been codified. There are essentially two broad categories into which the codifications fall. First, those in common law jurisdictions based on s 64 of the Bills of Exchange Act 1882 (UK) of which s 69 of the Bills of Exchange Act 1909 (Cth) is an example and secondly, those originally based on certain conventions of the League of Nations relating to bills of exchange and promissory notes.2 The chief difference appears to be that, as a general rule, the provisions in common law jurisdictions based on the British Act render void an instrument that has been materially altered while the ones based on the international conventions, in general, render an instrument that has been materially altered enforceable according to its original terms. Examples of each are set out below.
Common law jurisdictions
Australia
4.3 The Bills of Exchange Act 1909 (Cth) provides as follows:
69. Alteration of bill
(1) Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorized, or assented to the alteration, and subsequent indorsers:
Provided that where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenor.
(2) In particular the following alterations are material, namely, any alteration of the date, the sum payable, the time of payment, the place of payment, and, where a bill has been accepted generally, the addition of a place of payment without the acceptor’s assent.
However, it should be noted that s 69(2) has been problematic in that it may render some otherwise immaterial alterations, such as the changing of a date which has no significant consequence, material, thereby avoiding the instrument in question.3
United States
4.4 The United States provides a slightly different approach to the other common law jurisdictions in that the material alteration must also have been made fraudulently for the instrument to be avoided. Article 3 of the Uniform Commercial Code, which has been adopted in its current form by most States,4 makes the following provision:
§ 3-407. ALTERATION.
(a) “Alteration” means
(i) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or
(ii) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.
(b) Except as provided in subsection (c), an alteration fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. No other alteration discharges a party, and the instrument may be enforced according to its original terms.
(c) A payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration, may enforce rights with respect to the instrument
(i) according to its original terms, or
(ii) in the case of an incomplete instrument altered by unauthorized completion, according to its terms as completed.
4.5 The following provision, relating to incomplete instruments, is also of interest:
§ 3-115. INCOMPLETE INSTRUMENT.
(a) “Incomplete instrument” means a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by the addition of words or numbers.
(b) Subject to subsection (c), if an incomplete instrument is an instrument under Section 3-104, it may be enforced according to its terms if it is not completed, or according to its terms as augmented by completion. If an incomplete instrument is not an instrument under Section 3-104, but, after completion, the requirements of Section 3-104 are met, the instrument may be enforced according to its terms as augmented by completion.
(c) If words or numbers are added to an incomplete instrument without authority of the signer, there is an alteration of the incomplete instrument under Section 3-407.
(d) The burden of establishing that words or numbers were added to an incomplete instrument without authority of the signer is on the person asserting the lack of authority.
The Uniform Commercial Code no longer employs the term “material” when dealing with alterations.5
International conventions
4.6 The most recent international convention relating to negotiable instruments is the United Nations Convention on International Bills of Exchange and International Promissory Notes (1988) which was adopted and opened for signature by the General Assembly in December 1988:
GENERAL PROPOSALS AND CHANGES IN OTHER JURISDICTIONS
New Zealand
4.7 The New Zealand Law Commission has recommended the following provision:
The rule that a deed becomes invalid if there has been a material alteration to it after its execution is abolished, but the abolition of that rule does not validate any such alteration if it is invalid on any ground other than that rule.6
The New Zealand Commission suggests that this abolition of the rule means that an alteration will now have “no more nor less effect than an unauthorised alteration to any other document”. The discussion paper suggested that:
It would be fairer and less arbitrary if the law in this respect were the same as that for an ordinary contract: namely, that the alteration is ineffective unless it has been agreed upon by the parties to the contract or gives rise to an estoppel.7
This may be a misreading of the law as it currently stands – especially in light of the uncertain position in relation to the extension of the rule in its strict form to instruments other than deeds.8
United States
4.8 It has long been the general position in America that a non-fraudulent alteration whether material or not has no effect and the document is enforced according to its original terms. This approach is also mirrored in negotiable instruments laws, as discussed above.
American Law Institute
4.9 The American Law Institute’s Restatement9 provides:
286. Alteration of Writing
(1) If one to whom a duty is owed under a contract alters a writing that is an integrated agreement or that satisfies the Statute of Frauds with respect to that contract, the duty is discharged if the alteration is fraudulent and material.
(2) An alteration is material if it would, if effective, vary any party’s legal relations with the maker of the alteration or adversely affect that party’s legal relations with a third person. The unauthorized insertion in a blank space in a writing is an alteration.
287. Assent to or Forgiveness of Alteration
(1) If a party, knowing of an alteration that discharges his duty, manifests assent to the altered terms, his manifestation is equivalent to an acceptance of an offer to substitute those terms.
(2) If a party, knowing of an alteration that discharges his duty, asserts a right under the original contract or otherwise manifests a willingness to remain subject to the original contract or to forgive the alteration, the original contract is revived.
These provisions have been looked at favourably by some courts in Australia.10
POSSIBLE COURSES OF ACTION
4.10 A number of possible courses of action were considered by the Commission in reaching its conclusion.
Leave to the common law
4.11 First, we could leave the development of the rule to the common law.11 This was what occurred in the United States, with somewhat satisfactory results, at least with regard to the requirement of fraud. However, the courts in Australia and elsewhere appear unwilling to overturn so ancient a Rule.12
4.12 As part of this option, parties could also be encouraged to adopt practical ways of getting around the problem such as drafting clauses specifying what happens if a contract becomes void or seeking permission from other parties before altering a contract.13 However, the types of cases that come before the courts may not be ones where such advice would be helpful (or heeded) in any case.
Minor legislative changes
4.13 Tidying up some of the doubtful areas of the law by means of legislation is another option. For example, making clear that an alteration by a stranger to the transaction will have no effect14 or limiting the operation of the rule to deeds or agreements required to be in writing. The codifications reproduced above15 could provide some useful guidelines.
Retain the rule in respect of fraudulent alterations
4.14 This would involve following the American approach of limiting the rule to cases of fraud.16 Matters such as whether the alterations would need to be material as well as fraudulent would need to determined. This option would also not exclude other alterations relating to the operation of the rule that might be considered necessary .
Abolish the rule
4.15 The abolition of the rule has also received some support.17 One way of achieving this would be to adopt the New Zealand approach of saying that an altered document takes effect as if alteration had not been made, unless the alteration “has been agreed upon by the parties to the contract or gives rise to an estoppel”.18 This would leave the punishment of fraudulent alterations to the criminal law.
THE COMMISSION’S CONCLUSION
4.16 The Commission has decided to recommend that the rule be abolished for the reasons outlined in this Report. In making this recommendation we note that there are other remedies available for fraud where the fraud causes harm to an innocent party. The Commission does not intend to affect any other remedies that may be available in relation to altered documents.
4.17 The abolition of the rule will need to be carried out by legislation. The only model for this is the New Zealand proposals outlined above.19 However, unlike the New Zealand Law Commission, we would avoid any attempt to state what the law is that we are abolishing since, as the preceding discussion has shown, the law is far from clear. We therefore recommend that the abolition of the rule be achieved by providing:
1. that the law deriving from the decision known as the rule in Pigot’s Case is abolished;
2. that an alteration to a contractual document made after execution by any person other than with the consent of the parties (or where an estoppel arises) does not make the contract void and the document continues to have effect in its unaltered form; and
3. that the provision does not affect any cause of action against the person who made the alteration, for example, in fraud.
4.18 A draft bill to implement these recommendations, by adding a section to the Conveyancing Act 1919 (NSW), follows in Appendix A. A copy of this bill, together with a draft of this report, was circulated to a number of interested parties. The responses received were generally in support of the Commission’s position.20 One response also emphasised the need to preserve other available remedies, for example, those in fraud.21 The Commission considers that the third provision in the previous paragraph will be achieved by including in proposed s 184(2) of the Conveyancing Act 1919 (NSW) the words “by itself” which must be understood in the context of the abolition of the rule achieved by proposed s 184(1).
FOOTNOTES
1. J B Byles, Byles on Bills of Exchange (26th edition, Sweet & Maxwell, London, 1988) at 267.
2. League of Nations, Treaty Series, Volume 143 (1933-1934) No 3313 and 3314. See now United Nations Convention on International Bills of Exchange and International Promissory Notes (1988) Art 35.
3. See Heller Factors Pty Ltd v Toy Corporation Pty Ltd [1984] 1 NSWLR 121 at 143-144.
4. All states except Massachusetts, New York, Rhode Island, South Carolina, and Utah have adopted the 1990 revision of the Uniform Code.
5. For an example of the older American drafting, see South Carolina Code of Laws (1988) s 36-3-407 which provides:
(1) Any alteration of an instrument is material which changes the contract of any party thereto in any respect, including any such change in
(a) the number or relations of the parties; or
(b) an incomplete instrument, by completing it otherwise than as authorized; or
(c) the writing as signed, by adding to it or by removing any part of it.
(2) As against any person other than a subsequent holder in due course
(a) alteration by the holder which is both fraudulent and material discharges any party whose contract is thereby changed unless that party assents or is precluded from asserting the defense;
(b) no other alteration discharges any party and the instrument may be enforced according to its original tenor, or as to incomplete instruments according to the authority given.
(3) A subsequent holder in due course may in all cases enforce the instrument according to its original tenor, and when an incomplete instrument has been completed, he may enforce it as completed.
6. New Zealand, Law Commission, A New Property Law Act (Report 29, 1994) at 51.
7. New Zealand, Law Commission, The Property Law Act 1952: A Discussion Paper (PP No 16, 1991) at para 58.
8. See para 2.67-2.79.
9. American Law Institute, Second Restatement of the Law of Contracts (St Paul, 1981) Vol 2.
10. Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259 at 275; Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238 at 244; Chilcott v Goss [1995] 1 NZLR 263 at 271; Kaffe Pty Ltd v Vasta (Queensland, Supreme Court, No 949/1992, Kiefel J, 4 August 1994, unreported) at 22. See also Citibank Savings Ltd v Executors of the Estate of Vago (NSW, Supreme Court, No 50443/1991, Cole J, 1 May 1992, unreported) at 25; and Farrow Mortgage Services Pty Ltd v Slade (1996) 38 NSWLR 636 at 648.
11. Suggested, for example, by H Tarlo, “The Unilateral Alteration of Instruments” (1959) 2 Melbourne University Law Review 43 at 52 with regards to the issue of materiality.
12. See especially Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259 at 282. See also P Young, “Recent Cases: The Rule in Pigot’s Case” (1997) 71 Australian Law Journal 117 at 117-118; and Crossseas Shipping Ltd v Raiffeisen ZentralBank Osterreich AG (England and Wales, Court of Appeal, 21 December 1999, unreported) at para 29.
13. A Beehag, “Unilateral Alterations to Mortgage Documents” (1997) 8 Journal of Banking and Finance Law and Practice 289 at 303-304.
14. See the suggestion in H Tarlo, “The Unilateral Alteration of Instruments” (1959) 2 Melbourne University Law Review 43 at 76.
15. By the American Law Institute at para 4.9; and in relation to negotiable instruments at para 4.3-4.6.
16. See also the suggestion of S M Waddams, The Law of Contracts (4th edition, Canada Law Book, Toronto, 1999) at para 351.
17. H Tarlo, “The Unilateral Alteration of Instruments” (1959) 2 Melbourne University Law Review 43 at 75-76; P Young, “Recent Cases: The Rule in Pigot’s Case” (1997) 71 Australian Law Journal 117 at 117-118; and A Beehag, “Unilateral Alterations to Mortgage Documents” (1997) 8 Journal of Banking and Finance Law and Practice 289 at 303.
18. See New Zealand, Law Commission, The Property Law Act 1952: A Discussion Paper (PP 16, 1991) at 20.
19. See para 4.7.
20. J W Carter, Submission; Property Law Committee, Law Society of NSW, Submission; D Mulcahy, Submission; W Windeyer, Submission; and A Beehag, Submission.
21. J W Carter, Submission.
