Customers face cheque-mate

District Judge Neil Hickman on the difficult battle to justify a stopped chequePeople tend to draw a cheque in the belief that if something goes wrong it can always be stopped.

But if a cheque is stopped, the drawer is likely to have problems.When a cheque is tendered in payment for goods or services, there are two distinct contracts.

The contract for the supply of the goods or services is separate from the contract represented by the cheque.

That second contract is an unconditional promise to pay the recipient.

A well-advised supplier will not sue on the original supply contract, allowing the customer to argue about the quality of the goods or services.

Instead, he will sue on the cheque which is to be treated as the equivalent of cash (Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, HL).This so-called 'cheque rule' is regarded as very important to the business community, so the courts must not 'whittle it away...by introducing unnecessary exceptions to it under the influence of sympathy-evoking stories' (Cebora v SIP [1976] 1 Ll R 271, per Lord Justice Sachs).Generally, before suing on a cheque or other bill of exchange, the payee must give 'notice of dishonour' to the drawer.

However, where the cheque has been countermanded, no notice of dishonour is required - section 50(2)(c) of the Bills of Exchange Act 1882.

The viable defences to a claim on a stopped cheque are limited.Fraud or duress'Fraud unravels all' they say.

However, there must not be a mere assertion or allegation of fraud but clear evidence of it, preferably documented, to avoid summary judgment on a cheque (see Bank Gemeinwirtschaft v London Garages [1971] 1 WLR 149, CA).More recently, Mr Justice Mance in Solo Industries v Canara Bank [2001] All ER (D) 34 (Jul), (which concerned a performance bond, to which, again, the 'cheque rule' applied) said: 'The evidence of fraud must be clear...

The mere assertion or allegation of fraud would not be sufficient (see Bolivinter Oil SA v Chase Manhattan Bank [1984] 1 Ll R 251, 257).

We would expect the court to require strong corroborative evidence of the allegation...

In general, for the evidence of fraud to be clear, we would also expect the buyer to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected.

If the court considers on the material before it that the only realistic inference to draw is that of fraud, then the seller would have made out a sufficient case of fraud.'A less clear-cut case may of course justify a conditional order on a summary judicial application.Failure of considerationA cheque is a contract.

Without consideration, it will not be enforced.

It is important to note that the failure must be total.

If defective goods are rejected for breach of condition this may suffice, but not if inferior goods are accepted (Lamont v Hyland [1950] 1 KB 585).A partial failure of consideration may be a defence as to part of the claim on the cheque, but only if it is an ascertained and liquidated sum.

If a cheque is given for 500 items and 400 are delivered, there will be a defence as to the price of the missing 100 - per Lord Wilberforce in Nova Jersey Knit at 720c-d, and Thoni GmbH v RTP [1979] 2 Ll R 282, CA.An interesting case where the defence did succeed was AEG v Lewis (1992) The Times, 29 December, CA.

D gave C's workman a cheque for work done for D's father and stopped the cheque the following day.

The Court of Appeal held that as the workman had no authority to accept a cheque to discharge the father's liability, no consideration had been given for the cheque, which D was entitled to stop.

But compare Diamond v Graham [1968] 1 WLR 1061 which emphasised that the value to support a cheque need not be given directly from payee to drawer.

And in Pollway v Abdullah [1974] 1 WLR 493 a deposit cheque given to an auctioneer was enforced even though, following its dishonour, the vendor treated the sale contract as repudiated and sold the property elsewhere.MisrepresentationMisrepresentation is both controversial and regularly advanced when it should not be.

If a misrepresentation is fraudulent then the defence of fraud would apply.

Can an innocent misrepresentation be a defence?Clovertogs v Jean Scenes [1982] Com LR 88, CA is regularly quoted as authority on the point, but it is a weak authority, inaccurately reported.

The appeal was by the drawer asking for unconditional leave to defend and there was no cross-appeal by the payee against conditional leave being given.Misrepresentation is often advanced as a way of dressing up a complaint about the quality of goods, but just as 'the goods were inferior' is not a defence to a claim on a cheque, neither, in the absence of fraud, is 'you promised me the goods would be better' (see Warwick v Nairn (1855) 10 Ex 762 and other cases reviewed in Lamont v Hyland [1950] 1 KB 585).But there is now decent Court of Appeal authority on misrepresentation.

It is Safa Ltd v Banque du Caire [2000] All ER (D) 1010, a case which directly concerned letters of credit (to which the 'cheque rule' applies).

Discussing Clovertogs, Lord Justice Waller pointed out that the alleged misrepresentation in that case related to the underlying contract rather than the giving of the cheque, but went on to say:'If there was a misrepresentation by a beneficiary made directly to induce the opening of a letter of credit in that beneficiary's favour and there was a real prospect of such being established at the trial, it would seem to me that a court would be entitled not to give summary judgment.'The same principle will apply to a cheque.

Lord Justice Waller's approach was endorsed by the Court of Appeal in Solo and I suggest that in future it is Safa and Solo which are the cases to cite on misrepresentation, not Clovertogs.IllegalityA cheque in payment of a gaming debt will be unenforcable, though if it is given in payment for gaming chips in strict accordance with section 16 of the Gaming Act 1968 it will be enforced (Crockfords Club Ltd v Mehta [1992] 1 WLR 355, CA).

A cheque given under a contract which is illegal because it breaches exchange control regulations will not be enforced, but the burden of demonstrating the illegality rests on the defendant (Mansouri v Singh [1986] 1 WLR 1393, CA and see also Bank Gemeinwirtschaft above on this point).A curious subspecies of illegality appears to affect solicitors.

In Boston v Levy [1982] 1 WLR 1434 Mr Justice Warner found himself bound by an earlier Court of Appeal decision, Ray v Newton [1913] 1 KB 249, CA, the effect of which he summed up as: 'a solicitor cannot escape from the provisions of the legislation relating to solicitors' remuneration by taking a cheque from his client and suing on the cheque.'The facts of that case repay study and it is difficult to avoid the conclusion that the solicitor was deliberately duped by a client who was anxious to free title deeds from the solicitor's lien.

Moral: in this situation, make sure the agreement with the client complies strictly with the Solicitors Acts.District Judge Neil Hickman sits at Milton Keynes County Court