Imagine, you’ve just paid your supplier for goods and/or services. But, you now want to stop the cheque as you have suddenly realised it is not conducive to your cash flow, or perhaps you have found a defect? Think again.
Did you know that stopping a cheque could put you at risk of a Summary Judgment? Read on to find out more about the Cheque Rule.
Stopping a Cheque
It is very dangerous to stop a cheque unless the payer is absolutely sure it can prove the supplier or contractor is at fault and is not entitled to any of the amount shown on the cheque. This is due to the fact that, technically, there is no defence to stopping a cheque. Once the cheque has been signed and handed over, then a legally binding contract has been entered into and the payer has to honour the debt.
What is a Cheque?
Under UK law, dating back to the Victorian Era, a cheque is a legally binding bill of exchange. Documented in the Bills of Exchange Act 1882, the cheque is a written promise that the owed money will be deposited into their account.
The Cheque Rule
When a cheque is issued as consideration for goods and/or services, a separate contract is entered into between the seller and purchaser to the contract that was previously entered into for the supply of the goods and/or services. Hence when a cheque is returned unpaid, the seller may elect to bring a claim either under the supply contract or, the separate contract entered into when the cheque was issued to the seller. If the seller elects to bring a claim under the cheque contract, this is referred to as the Cheque Rule.
The foundation for this cause of action is on the basis that cheques are a bill of exchange, being construed as the equivalent to instalments of cash, albeit deferred, and as such are unconditional promises to pay based upon the presentation of the cheque. If the cheque is stopped or is returned unpaid for whatever reason, a good cause of action arises.
What does the Cheque Rule Apply to?
The Cheque Rule applies to payments made by:
- Direct debit
- Cheques and bills of exchange
- Letter of credit
- Performance bonds
There are exceptions to the rule, for instance where the customer has received absolutely nothing in exchange for their payment, where the contract was illegal, or the cheque was obtained in a fraudulent way.
Dishonoured Cheques and Summary Judgments
It is a brave payer that issues and then stops a cheque, especially with the prospect of receiving a Part 24 Summary Judgment. Stopping a cheque can hold you liable for payment under the Bills of Exchange Act 1882, as your signature on it confirms your intention to honour it. If the cheque is dishonoured, you may be required to compensate the payee, who can pursue legal action against you for the cheque amount, interest, and expenses.
If legal proceedings are taken against you for dishonouring a cheque, the court may grant a Summary Judgment unless you can provide a “good reason to the contrary.” The only acceptable defences against such a claim are total failure of consideration or cheque fraud.
Total Failure of Consideration
Total failure of consideration occurs when the payee has not provided you with anything of value. If you were paying on someone else’s behalf or if the work was not performed, you could argue that there was a total failure of consideration.
Fraud
Cheque fraud involves a forged or unauthorised signature on the cheque. If you become aware of such fraud, you must inform the payee immediately to use it as a defence. However, if the payee provided you with something of value, you are unlikely to succeed with the defence of total failure of consideration.
If you have been accused of dishonouring cheques, contact our Commercial Debt Recovery solicitors today.
