A cheque is essentially an order addressed to a banker to pay a certain sum of money on demand. This creates a legal obligation for the banker to honor cheques drawn by their customers. When a bank refuses to pay a presented cheque, it is considered dishonored, or in banking terminology, the bank returns the cheque unpaid.
While general negotiable instruments often involve defenses between a drawer and a holder, cheque dishonor frequently involves issues specifically between the banker and the drawer. In the Ethiopian banking context, common reasons for return include missing or irregular endorsements, signature discrepancies, unauthorized alterations, post-dating, or the cheque being out of date (stale).
Termination of the Banker-Customer Relationship
The relationship between a banker and a customer is contractual. By accepting a deposit, the bank agrees to repay those funds according to agreed conditions, usually via a current account. This gives the customer an implied right to draw cheques up to the credit balance or within an agreed overdraft limit.
If this contract is terminated—whether by mutual agreement, the customer closing the account, a court order, or the balance reaching zero—the bank's duty to honor cheques ends. If a customer continues to issue cheques after the account is closed, the bank will dishonor them because the underlying legal relationship no longer exists.
Stopping of Payment
Under Article 857 of the Commercial Code, a drawee bank is authorized to refuse payment if ordered to do so by the drawer. This is known as countermanding payment. Common reasons for stopping payment include the loss or theft of the cheque, or a dispute where the drawer believes the payee has failed to fulfill their part of a contract.
To minimize liability and ensure accuracy, Ethiopian banks typically require a written and signed "stop payment request" detailing the cheque number, date, amount, and payee. It is important to note that only the drawer has the legal right to stop payment. If a holder loses a cheque, the bank will usually advise them to contact the drawer immediately to initiate the stop order.
Insufficiency of Funds and Court Attachments
A bank's duty to pay is strictly dependent on the existence of "cover" (available funds). If a cheque exceeds the account balance and no prior arrangement for an overdraft exists, the bank will return the cheque marked "insufficient funds."
Additionally, a bank must honor court orders. If a third party obtains a court attachment or an injunction against a customer's account—often pending the outcome of a lawsuit or to satisfy a judgment debt—the bank is legally required to restrain the funds and dishonor any cheques that would conflict with that order.
Improper Form: Signatures and Dates
A cheque must be in proper legal form to be valid. If the drawer's signature is missing or does not match the specimen signature provided to the bank, the cheque will be dishonored to prevent fraud.
Dating also plays a critical role:
Undated Cheques
Article 827(d) and 828 specify that a cheque must mention the date of drawing to be valid. While an undated cheque is technically invalid, a holder generally has the right to fill in the date before presentment.
Post-dated Cheques
A cheque is post-dated if the date written on it is later than the actual date of issue. In practice, banks often dishonor these if presented early. However, under Article 854, a cheque is legally a "sight" instrument, meaning it is payable upon presentment regardless of the date. Ethiopian courts, such as in Civil Case No. 977/86, have ruled that post-dating a cheque to use it as a "pledge" or security for a debt is inconsistent with the law, as the holder can legally demand payment the moment they possess it.
Out-dated (Stale) Cheques
According to Article 855, a cheque must be presented for payment within six months of its stated date. If presented after this period, the bank will return it as "out-dated" or stale unless the delay is legally excused.
Alterations and Endorsement Irregularities
Any change to the date, sum, currency, or place of payment is considered an alteration. Banks will typically dishonor a cheque containing such changes unless they are confirmed by the drawer's full signature.
Endorsements must also be regular. If a cheque is drawn "to order," it must be endorsed by the payee or the last endorsee. Under Article 860, the drawee bank must verify the regularity of the series of endorsements and the signature of the drawer. Furthermore, if a cheque is "crossed" (intended for deposit), presenting it for cash payment by someone other than a banker or a known customer is a ground for dishonor.
Rights of the Holder Upon Dishonor
When a cheque is presented in due time and payment is refused, Article 868 grants the holder the right of recourse against endorsers and the drawer. To exercise this right, the refusal must be evidenced by one of three methods:
- A formal protest certificate.
- A dated declaration by the drawee bank written directly on the cheque, specifying the day of presentment.
- A dated declaration from an approved financial institution stating the cheque was presented and not paid.
In the Ethiopian system, the dated declaration written on the cheque by the bank is the most common method of establishing evidence for legal recourse.