It is well accepted in our law that when a debtor makes payment by way of a cheque, the payment remains conditional until the cheque has been honoured.  If the debtor chooses this method of payment, the risk of the cheque being intercepted and misappropriated is squarely on the debtor because it is the debtor’s duty to seek out the creditor.  However, if the creditor stipulates a particular method of payment and the debtor complies with it, the risk accompanying the particular payment method is assumed by the creditor. 

These principles were reiterated in a recent Supreme Court of Appeal judgment, and the court emphasised the requirement that the creditor must stipulate the method of payment and the debtor must accede to the request in order for the risk of non-payment to pass from the debtor to the creditor. 

In this particular case, SARS owed a taxpayer, Stabilpave, a tax refund.  SARS issued a tax assessment form to Stabilpave reflecting the amount owing by SARS to Stabilpave.  The tax assessment form contained a notice which stated that payment of the refund would be made by cheque, which could be collected from the taxpayer’s nearest post office or by means of an electronic transfer if valid banking details were available.

SARS did not have valid banking details for Stabilpave and a cheque was drawn by SARS and handed to a division of the post office dealing with secure mail.  A delivery notice was sent to Stabilpave, but this notice never came to its attention.  What followed was a somewhat detailed and well thought out scheme which involved the cheque being stolen and the money being credited to an account which had been fraudulently opened.  The result was that Stabilpave did not receive the refund which was due to it by SARS.

SARS contended that in light of the notice contained in the tax assessment form and Stabilpave’s failure to provide SARS with banking details amounted to an election by Stabilpave that payment of the refund should be made by cheque.  Stabilpave, said SARS, was given a choice regarding the method of payment and chose payment by way of a cheque.  Stabilpave contended that SARS has not fulfilled its obligation to make payment of the refund because there could be no payment in law if the cheque was posted and lost before it reached the creditor.

The court held that an agreement concerning the method of payment is only reached if the creditor stipulates, requests or authorises a particular method of payment and the debtor accedes to that request.  The notice contained in the tax assessment form did not give Stabilpave a choice as to the method of payment but simply informed it of the manner of payment.  This position was supported by the fact that the notice contained no invitation to furnish SARS with banking details, nor did was a deadline provided within which banking details should be furnished to SARS.  In the circumstances, the court found that the method of payment was dictated by SARS and the risk of loss of the cheque and the consequent non-payment of the refund amount to the creditor remained with SARS.  In conclusion, SARS’s debt was not discharged by posting the cheque to Stabilpave.

This case is a reminder that payment by way of a cheque does carry certain risks.  In order to mitigate these risks, debtors should take steps to ensure that a clear agreement is reached regarding the method of payment.

It is also likely that SARS will in future find a way of shifting the risk of payment to a taxpayer.  If you are ever due for a tax refund, ask for an EFT payment immediately.

Written by Jocelyn Evans, Associate, Litigation and dispute resolution, Norton Rose Fulbright