The cheque rule in the UK – what is it? It is based on a simple legal rule that means if you write a cheque to pay money to somebody you are creating a contract by writing the cheque. If for example you have worked for someone who then pays you with a cheque and then the cheque is dishonoured, e.g it is stopped by the person drawing the cheque, you are able to rely on some old but well established law. Under the Bills of Exchange Act 1882 cheques are classed as a ‘bill of exchange’. In fact the law in this piece of legislation is very strictly interpreted even now.
The use of cheques as payment: the law. When any goods or services are paid for with a cheque, there are legally two separate contracts made by the parties involved in the transaction. The primary contract is what you expect which is for the sale of goods or the provision of services. The second contract relates to the cheque itself. This is the important part of the ‘cheque rule’. The person who writes the cheque to pay the primary contract is legally making an undertaking to pay the sum written down on the cheque. How can this help in practice? It gives an extra option to get payment if a cheque is stopped or bounces. Firstly, as expected, there is the normal option to take legal action for non-payment of the monies due under the primary contract. Additionally relying on the law in the ‘cheque rule’ there is the extra option to sue on the dishonoured cheque itself. In most every case suing on the cheque delivers the significant advantage of leaving the buyer who dishonoured the cheque with a very limited set of available defences. The defences that can be raised can only relate to the issuing of the cheque itself, e.g. the cheque was issued under duress or as a result of a fraud.
Is it quicker to use the cheque rule than the normal approach? In most cases it will be a lot quicker. If the seller sues on the primary contract, the buyer can put forward any of the normal defences that relate to the contract itself to defend the court action e.g. bad quality of work, defective products etc. This will normally result in a full trial of all the issues in dispute between the parties. However, by suing on the dishonoured cheque you can make an application for summary judgement. This allows a judge to decide the case without having a trial. Summary judgement is normally granted when there is no defence to the action. As mentioned above, ‘cheque rule’ defences only relate to the cheque itself and are rarely available. 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. This method of getting payment with so little to prove is something every business person should be aware of the.