IBA Compliance Connection

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One of our business customers has reported fraudulent checks drawn on its deposit accounts several times. We want to require this customer to use our Positive Pay check fraud prevention service. If the customer refuses, can we require the customer to sign a waiver excusing us from liability for fraudulent checks?

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No, we do not believe that the Uniform Commercial Code (UCC) would permit an agreement excusing a bank from its liability for fraudulent checks.

The UCC does permit parties to vary its provisions through private agreements. However, it does not permit an agreement that would “disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure.” As a result, we do not believe that you could require a customer to sign a waiver disclaiming your bank’s liability for fraudulent checks.

The UCC does permit banks to reduce the window of time in which customers must report fraudulent checks, which is one year under the UCC. For example, one Illinois court held that banks may shorten the reporting window to thirty days. Your institution may have adopted a similar reporting window, which likely would be found in your deposit account agreement or signature card.

Of course, if this customer refuses to use your Positive Pay service, the bank may exercise its right to terminate the customer relationship.

For resources related to our guidance, please see:

  • UCC, 810 ILCS 5/4-103(a) (“The effect of the provisions of this Article may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure. However, the parties may determine by agreement the standards by which the bank's responsibility is to be measured if those standards are not manifestly unreasonable.”)

  • UCC, 810 ILCS 5/4-406(c) (“[T]he customer must exercise reasonable promptness in examining the statement. . . If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.”)
  • Napleton v. Great Lakes Bank, N.A., 408 Ill.App.3d 448, 452 (1st Dist. 2011) (Banks may narrow the definition of “reasonable promptness” in a deposit agreement, so that customers have only a thirty-day window in which to report forged checks.)