Definition of Cheque, Its Elements and Parties

Definition of Cheque:

A cheque is a written payment order, unconditional, directed by the drawer to the drawee bank to pay a specified amount to a designated person (payee) or bearer upon sight. A cheque is considered a payment instrument, not a credit instrument, meaning it requires sufficient balance in the drawer's account at the time of presentation for payment. It serves as a safe alternative to cash payment and a means of transferring money without carrying cash.

Elements of Cheque:

The word "Cheque": The word "cheque" must appear clearly in the text of the instrument in the language it's written in, which is an essential condition to distinguish it from other payment instruments like bills of exchange or promissory notes. Its absence makes the instrument lose its legal status as a cheque.

Payment Order: A clear and explicit instruction to pay a specified amount without conditions or restrictions, such as "Pay" or "Please pay." The order must be decisive and not conditional on any future condition.

Name of Drawee: The name of the bank or financial institution that will make the payment, with the necessity of having a valid account contract between the drawer and the bank. May include branch name or address for clarification.

Amount: Specified in both figures and words to avoid manipulation or forgery. In case of discrepancy between the amount in figures and words, the amount written in words is considered. Must be clear and specified in currency.

Date: The date of writing and issuing the cheque, important for determining the cheque's validity period (usually 6 months from issue date) and for accounting and banking audit purposes.

Signature: The drawer's signature (account holder) as registered with the bank, which is the means of verifying the cheque writer's identity. Compared with the specimen kept in the customer's file.

Parties to Cheque:

Drawer: The bank account holder who writes the cheque and commits to ensuring sufficient balance to meet its value. Bears legal responsibility in case of insufficient funds and may face criminal penalties under some legislations.

Drawee: The bank or financial institution that maintains the drawer's account and commits to paying the cheque value when sufficient balance is available and cheque validity is confirmed. The bank has the right to refuse payment if legal conditions are not met.

Payee: The natural or legal person designated to receive the amount, or cheque bearer in case of bearer cheques. The payee can endorse the cheque (transfer ownership) to a third party in some types of cheques, and has the right to demand payment during the cheque's validity period.

Types of Cheques and Their Characteristics

• Named Cheque: Written to a specifically named person, requires identity verification upon payment and can be endorsed to a third party. • Bearer Cheque: Payable to any bearer without identity verification, high risk in case of loss or theft. • Crossed Cheque: Marked with two parallel lines, non-endorsable and paid only through the payee's bank account. • Certified Cheque: Marked by the bank confirming balance existence and reserving it, guarantees payment upon presentation. • Bank Cheque: Issued by the bank against a prepaid amount, high security as the bank is both drawer and drawee. • Post-dated Cheque: Bears a future date but legally due for payment immediately upon presentation to the bank. • Traveller's Cheque: For international use, issued by an international bank and requires two signatures from the payee for payment. • Accepted Cheque: Signed by the bank with acceptance, the bank becomes obligated to pay even if insufficient balance is available.

Cheque Procedures and Operations (Issuance, Deposit, Payment)

Cheque Procedures and Operations:

Issuance Procedures: Ensuring sufficient balance in the account, filling all required data (payee, amount in figures and words, date), signing as matches the specimen registered with the bank, and recording in the chequebook for follow-up.

Deposit Procedures: Presenting the cheque to the bank within validity period (6 months), filling deposit slip with cheque data, verifying data accuracy and signature by the bank, stamping the cheque with deposit date, and issuing deposit receipt to the customer.

Payment Procedures: Sending the cheque to the drawer's bank through Saudi clearing system (SARIE), verifying balance availability and signature validity, debiting the amount from drawer's account, crediting the amount to payee's account, and notifying the customer in case of non-payment (cheque return).

Time Limits: Local payment occurs within the same day or next day through SARIE system, and return notification within one business day.

Legal Protection and Guarantees for Cheques

Legal Framework: Cheques are governed by commercial laws and central bank regulations, with legal guarantees to protect users' rights. Laws include detailed provisions for organizing cheque issuance, circulation, and payment, with defining responsibilities and obligations for all parties.

Criminal Protection: Issuing a cheque without sufficient funds is a criminal offense punishable by imprisonment and fines, with possibility of travel ban and listing in credit defaulters' lists. Penalties also include forgery crimes, signature counterfeiting, and data manipulation, with enhanced penalties for repeat offenses.

Civil Protection: Payee's right to claim cheque value with compensation, legal interest, and actual damages, and possibility of seizing drawer's money and property to ensure payment. Payee has the right to file lawsuit and obtain payment orders to collect the amount, with right to request forced execution through commercial courts.

Bank Guarantees: Banks are obligated to verify drawer's identity and signature validity according to banking security standards, and immediately notify customers in case of cheque returns, with providing grievance and review mechanisms. Banks bear responsibility for paying forged cheques in case of verification negligence, and provide fraud protection services and security monitoring.

Consumer Protection: Consumer protection laws ensure customers' rights to obtain safe and transparent banking services with disclosure of fees and conditions, and complaint mechanisms through central banks and regulatory authorities. This includes the right to compensation for banking errors and protection from misleading commercial practices.

Guarantee Mechanisms: Possibility of requesting certified and bank cheques for large transactions with bank guarantee, and modern clearing systems that reduce fraud risks and accelerate collection processes, with defaulters' lists and banking supervision mechanisms. Includes advanced fraud detection systems and protection from electronic crimes and forgery.

Reasons for Cheque Rejection and Recurring Problems

Although cheques are reliable payment instruments, they may face problems leading to rejection or return from the bank. These problems vary between financial, administrative, and technical reasons, and knowing them helps avoid them and ensure successful banking transactions. Among the most prominent of these reasons:

Insufficient Funds: The most important reason for cheque rejection, occurs when available balance is less than cheque value, leading to cheque return and bearing additional fees.

Data Errors: Writing payee's name incorrectly, mismatching amount in figures and words, incorrect dates, or leaving blank fields that make the cheque susceptible to manipulation.

Signature Problems: Signature not matching the registered specimen, unclear or distorted signature, or complete absence of signature leads to immediate bank rejection.

Expiry: Presenting the cheque after validity period expiry (usually 6 months from issue date) makes it legally uncashable.

Account Closure: Cheque rejection in case of drawer's account closure or freezing for legal or banking reasons, without prior notice to payees.

Damaged Cheques: Tearing, wetting, unclear writing, or physical damage makes the cheque unprocessable or unreadable.

Technical Problems: Failures in clearing systems, communication problems between banks, or errors in electronic systems delay or prevent cheque processing.

Fraud and Forgery: Forged cheques, changing data after issuance, or using stolen cheques leads to immediate rejection and legal procedures.

Comparison of Cheque with Other Commercial Papers

The cheque differs from other commercial papers in several fundamental aspects related to purpose, timing, and guarantees. The most important of these papers are promissory note and bill of exchange, each having different characteristics and uses.

When comparing cheque with promissory note, we find that promissory note is a written commitment from debtor to pay a specified amount to creditor on a certain date, such as personal loan notes or installment payment notes when buying cars or real estate or commercial loan notes between companies. While cheque is an immediate payment order to the bank due upon sight and requires prior balance, promissory note is a direct commitment from debtor that can be deferred and doesn't require prior balance. Cheque is valid for 6 months and the bank is responsible for payment, while note is valid for 3 years and the debtor is obligated to pay.

As for bill of exchange, it differs from cheque in being a long-term credit instrument acceptable for acceptance, endorsement, and guarantee, used primarily in domestic and foreign trade. Cheque is a payment instrument for immediate transactions not acceptable for acceptance or additional guarantee and limited by available balance, while bill of exchange can be discounted at banks and provides greater flexibility in commercial financing.

Basic differences summarize that cheque is designated for immediate payment and daily transactions, promissory note for acknowledging deferred personal and commercial debts, and bill of exchange for commercial credit. In terms of parties, cheque requires bank presence, note needs only two parties, and bill of exchange includes three parties. As for guarantees, cheque is guaranteed by balance, note by debtor's liability, and bill of exchange is subject to multiple additional guarantees.

Exceptional Cases and Special Circumstances for Cheques

There are special cases that depart from general cheque rules, where legal or procedural exceptions are applied considering special circumstances or the nature of the issuing entity. These exceptions aim to ensure justice and facilitate transactions under unusual circumstances. Among the most prominent of these cases:

Emergency Cheques: In emergency cases or natural disasters, banks may extend cheque validity periods or accept partially damaged cheques after verifying payee's identity. Some banks also allow payment of limited amounts even if balance is insufficient under exceptional circumstances.

Government Cheques: Government salary and pension cheques receive special treatment in terms of extended validity periods and possibility of payment even after legal period expiry. These cheques don't follow the same commercial cheque laws and enjoy state guarantee.

Judicial Cheques: Cheques issued by court orders or as court compensations receive special treatment, where they can be executed forcibly even if balance is insufficient. Courts may order banks to pay them from debtor's other money or through asset seizure.

International Cheques: Subject to different laws according to issuing and receiving country, with longer payment periods and strict verification procedures. May need special approvals from central banks or subject to foreign exchange restrictions.

Death Cases: Upon drawer's death, accounts are frozen and cheques aren't paid except with heirs' approval or court order. Cheques written before death may be paid if presented before notifying the bank of death.

Institutional Cheques: Cheques of large companies and financial institutions may receive special treatment in terms of daily payment limits and clearing speed, with possibility of immediate payment for large amounts after additional verification.