Cheque Rule – think carefully before stopping a cheque

By November 28, 2016news

Just paid your supplier for goods and/or services but now want to stop the cheque because you have suddenly realised it is not conducive to your cash flow or perhaps you have found a defect? Think again!

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 because, 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.

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 in 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.

The Cheque Rule applies to payments made by:

  1. Direct debit
  2. Cheques and bills of exchange
  3. Letter of credit
  4. Performance bonds.

There are exceptions to the rule, for instance where the customer has received absolutely nothing in exchange for their payment, or where the contract was illegal, or the cheque was obtained in a fraudulent way.

However, it is a brave payer that issues and then stops a cheque, especially with the prospect of a Part 24 judgement application looming over ones head!

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