Cheque rule
Disputes & Litigation

When goods or services are paid for by cheque, a separate contract is entered into between the seller and buyer to the contract that was entered into for the supply of goods or services. Thus, when a cheque is returned unpaid, the seller may sue either under the contract for supply or, independently of the contract of supply, the contract created upon issuing the cheque to the seller. The seller may commenced proceedings based on the Cheque Rule, as the cheque has been returned unpaid.

The basis for this independent cause of action lies because cheques are bill of exchange. Cheques have been construed as equivalent to deferred instalments of cash, and are unconditional promises to pay upon the presentation of the cheque. When the cheque is unpaid, the cause of action arises.

So, by commencing an action on the cheque and not on the contract of supply, the defendant is prevented from raising defences relating to the contract of supply – the buyer may only raise defences relating to the cheque.

The Cheque Rule applies to payments made by:

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

Accordingly, summary judgment is frequently available for pompt recovery of unpaid money.