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Paying by cheque: the pitfalls

Have you ever been in the position where you made out a cheque but later regretted it? Perhaps, after writing a cheque to a builder for payment for materials or work on your property, you start having serious doubts about the quality of the work or whether it will ever get finished.

Whatever the reason, you might consider instructing your bank to cancel the cheque until these issues are sorted out. Be warned: the law says that, by giving someone a cheque as payment, the drawer of the cheque (i.e. your bank) is undertaking that it will be paid and therefore the person receiving the cheque (i.e. the payee) should be able to treat it as cash. In other words, cheques should always be honoured and the payee can seek recompense if they are not.

Cancelled cheque

Under the Bills of Exchange Act 1882, you can be held liable for payment of a cheque merely by the fact that you signed it. The Act states that once you present a cheque for payment, you are confirming that it will be honoured. If it is ‘dishonoured’ (e.g. by your cancelling it), you will be liable to compensate the payee.

The payee could issue proceedings against you for the cheque amount and make an application for ‘summary judgment’. This means the payee could ask the court to give judgment in their favour, without even giving you an opportunity to defend your action. Current case law states that this is to be routinely granted by the court unless there is a “good reason to the contrary.”

A claim against you could consist of the following:

  • The cheque amount;
  • Interest from the date the cheque was presented for payment;
  • Any expenses incurred in enforcing the above.

So what “good reason” for dishonouring a cheque might the court accept as a defence if proceedings were issued against you?

Firstly, it must be emphasised that – using our example from the beginning of this article – the fact that you may have a claim against the builder for substandard work is not a defence.

Total failure of consideration

There are only two defences acceptable to a court against a claim for a dishonoured cheque. The first is ‘total failure of consideration’. This means the payee provided you with nothing of value. For instance, you may have been paying on someone else’s behalf: you did not contract with the builders to do the work, somebody else did, and that person received the benefit of the works.  Alternatively, you did contract with the builders but they have not, through fault of their own, begun any work on your property.  In both scenarios, you could likely argue that there has been a total failure of consideration.

If, however, the payee has provided even something of value or potential value to you, it is unlikely you would be able to show total failure and you would be ordered to pay them the cheque amount.

Cheque fraud

The second defence is fraud. This is less common, but if a signature is forged or placed on a cheque without your authority, the person who would like to cash it cannot do so. However, as soon as you become aware of the forgery, you must inform the payee: if you do not, you may not be able to use fraud as a defence.

Customers should be fully aware of the pitfalls of drawing cheques, hoping to rely on their ability to cancel payment if concerns arise later. If you would like advice on this or any other matter involving small claims, please contact us enquiries@lyonsdavidson.co.uk.

Posted on Mar 7th, 2012 by Lyons Davidson