The Cheque Rule

The cheque rule – what is it?

cheque rule law societyIf you have done some work for somebody who pays you by cheque and then the cheque is not honoured, because it bounces or is stopped, you can get help from a bit of ‘old fashioned’ law.

This is because cheques are classed as a ‘bill of exchange’ under the strict rules contained in the Bills of Exchange Act 1882.

The law on the use of cheques as payment

When goods or services are paid for by cheque, there are actually two contracts made by the parties involved.

The initial contract is for the sale of goods or the provision of services.

The second contract relates to the cheque itself. The person who writes the cheque for payment of the initial contract is making an undertaking to pay the sum written on the cheque.

How does that help?

Well, if a cheque bounces or is stopped the seller has an extra option available.

Firstly, as always, there is the option to sue for non-payment of the money due under the initial contract.

However, under the ‘cheque rule’ there is the extra option to sue on the cheque itself.

Suing on the cheque has the distinct advantage of leaving the buyer with very limited chances of providing any defence. The only defences that can be used must relate to the cheque itself, e.g. the cheque was issued under duress.

Is it quicker?

If the seller sues on the initial contract, the buyer can use any available defences in respect of the contract itself to defend a court action e.g. poor quality of workmanship. This can mean a full trial of all the issues in dispute.

However, if you sue on the dishonoured cheque you can apply for summary judgement which means a judge decides the case without a trial.

Summary judgement will be granted when there is no defence to the action. So suing on a stopped cheque can be a more certain and simple process of litigation than suing for non-payment for the initial contract.

There is so little to prove in this type of action every business person should be aware of it.

Author: Bill Ryan LLB (Hons)
Bill Ryan
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