Historically creditors have been accepting payment of invoices by way of cheque from their customers for many years. If the cheque failed to clear on presentation with the debtor’s bankers, the creditor has been able to issue court proceedings to recover the outstanding sum on the basis of the dishonoured cheque rather than the unpaid invoice pursuant to the provisions of the Bills of Exchange Act 1882 (“the Act”).
It is settled law that the courts have treated payments made by way of cheque as cash payments and thus, issuing proceedings pursuant to the Act has meant that, save for a few exceptions (for example, fraud, lack of consideration or misrepresentation), debtors have been unable to defend such proceedings, resulting in many cases being disposed by way of summary judgment applications as opposed to fully contested trials. But what of the modern world where payment by cheque is less frequent and in any event will soon be unavailable following the abolition of cheque payments? Can creditors still rely upon the provisions of the Act?
Somewhat surprisingly, this was first considered as long ago as 1997 in the case of Esso Petroleum Company Ltd (“Esso”) v Milton. The defendant to the action was a long term licensee of two of Esso’s service stations in Exeter. The service stations were managed by the defendant under successive three year licence agreements and separate shop agreements.
Under the licence agreements the defendant agreed to buy its entire requirements in respect of motor fuels from Esso for sale to the general public. It was a condition of the agreements that the defendant was forbidden to offer the fuel for sale at prices greater than those notified to him by Esso as the maximum recommended retail price and there was also specific provision regarding the margins between the purchase and sale price of the fuel.
At the time competition within the oil industry was steadily increasing with supermarkets and hypermarkets selling petrol at deflated prices. In an attempt to deal with these pressures Esso notified the defendant that it would be reducing the amount of the margin in respect of the fuel whilst at the same time increasing the rental payments in respect of the shops.
The initial changes took effect from 1 January 1996 and a further change was proposed as from 1 May 1996. The defendant had already expressed his concern over the first proposed change but upon receipt of notification of the second proposed change he advised Esso that he considered their business relationship to be at an end, the defendant contending that he could no longer operate the shops on a profit making basis.
At the beginning of April 1996, Esso made 9 fuel deliveries to the shops. The total contractual price for those deliveries amounted to £167,885.81 which sum Esso sought to recover pursuant to a direct debit mandate as required under the terms of the agreements. That payment was not honoured by the defendant’s bankers as on 9 April 1996 the defendant had taken steps to cancel the direct debit mandate.
As a result Esso issued proceedings. Although Esso’s monetary claim was admitted by the defendant, he sought leave to defend the proceedings on the basis of Esso’s repudiatory breach of contract and sought damages for his losses in this respect, which he sought to set-off in extinction of the admitted debt to Esso. The defendant was granted unconditional leave to defend the proceedings on this basis, which decision Esso sought to appeal.
Finding in favour of Esso, the Court of Appeal held that the direct debit system was becoming increasingly common as a method of payment for debts. It considered that the modern mechanism for handling what are effectively cash sales was the direct debit system and that it therefore seemed a natural evolution to hold that the seller of goods for cash transferred by the direct debit mechanism should be in no worse position than if he had accepted a cheque on delivery. As a matter of policy the court considered that this should be an extension of the provisions of the Act, and that accordingly a defence of set-off should not be allowed. Esso’s appeal was successful.
The extent to which policy will be further extended to take account of more modern methods of payment for debts remains to be seen, but it would appear that the abolition of cheques will not necessarily mean the end of the proceedings issued under the Act.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.