Legal Article - Business Law

Cheque Fraud Prevention – Using the Romalpa Clause

There are many cases about the use of cheques and the law is complex. With regard to the use of normal bank cheques the contract is simply the exchange of a car for a cheque, representing the price. Title passes from the seller to the buyer. But what if the person writing the cheque is not who they say they are? What if the person cancels the cheque after they have received the goods?

In one famous case a rogue managed to con the seller, who was wary about accepting the cheque, by saying he was a famous actor and producing a pass for Pinewood Studios. The seller accepted the forged cheque. The conman then sold the vehicle on to another person assuming the identity of the first victim.

The courts held that the first contract was valid and the second buyer should get the good title. The courts stated the first sale to the rogue was “voidable” not “void”; this means that it could have been declared void but because that had not happened before the innocent buyer acquired the vehicle then that innocent buyer got good tile.

So what steps could a prudent seller take if they find they have been conned to “avoid” the contract. Essentially the person must let as many people as possible know, which, for a car retailer, means informing the Police and all the security registers as soon as the deception is realised.

If the seller accepts a cheque and the buyer subsequently cancels the cheque then generally title will be deemed to have passed and effectively all the seller can do is sue the buyer for the price.

It is a wise precaution to include a special clause on your motor industry stationery stating that title does not pass until the purchase price has been received in full and all cheques have been cleared. This type of term is called a Romalpa Clause. It will generally not disturb third party’s rights but it can help if the buyer still has possession.

As indicated before, the law is complex. The use of a stolen building society cheque was the subject of another appeal case. In that particular case a rogue used a stolen building society cheque to purchase an expensive watch and ring. When the seller presented the cheque to the bank it was found to be worthless. The rogue had completed the details on a stolen blank cheque.

This case was distinguished from the previous “cheque” case in that the type of cheque was held to be very important. The court took the view that title was intended to pass only in exchange for a valid building society cheque. In the case of selling a car title frequently passes when the customer hands over a deposit, which can be cash, cheque, credit card or simply the signing of the Order Form.

The contract simply ties in when delivery of the car and the balance is to be exchanged at some future date. In the building society cheque case the dispute arose when the seller tried to claim on his household insurance for theft. The insurers tried to argue that the sale was like the normal cheque case, the seller had agreed to the transfer before the exchange of goods and cheque and so the contract was voidable and not void.

The court would not support the insurers and as stated previously put great emphasis that the type of cheque had special attributes which most people see as good as cash. 

Although it wasn’t stated in the case we believe the case would have had the same outcome in the case of a stolen bankers draft.

Published: 10 Mar 2011


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