Suppose one of your customers is rumored to be nearing the brink of bankruptcy. You're relieved to finally receive a check from the company for the latest shipment of goods--until you notice it's for only half the amount owed. On the back, the check is stamped "payment in full." What should you do?
A decade ago, according to common law, you could endorse the check with the phrase "under protest." Then you could cash it and still have the right to pursue the customer, in court if necessary, for the balanced owed. That practice, however, has been disallowed by many states. In the past several years, many statutes have been passed that update the Uniform Commercial Code, the set of laws that govern commerce. Now if you cash the check, you've accepted that amount to settle the debt. If you're not willing to accept that amount, you have to send the check back.
"Frankly, I think it's a good law," says Douglas W. Campbell, a corporate attorney and in-house counsel for Structural Dynamics Research Corp. in Cincinnati. Campbell, who reports that many of his private-practice clients encounter this situation, acknowledges that it's irritating for business owners to be faced with a decision: Accept a lesser amount or send the check back. "Under the old law, the debtor could accept the money as payment on the account and reserve its right to seek additional payments," Campbell says.
The approach can also work well when there's a dispute over the quality of goods. Suppose you order 10 cases of custom-made widgets from The ABC Co. for $4,000. When they arrive, the widgets don't meet specifications and you have to modify them to make them meet your purpose. Then the bill arrives, and with it, a decision to make. You did indeed receive the widgets, but they weren't worth the $4,000 you'd agreed to pay. Because of time constraints, you didn't send the shipment back and insist the problem be corrected. Now what should you do? Of course you'll call or write the company to express your dissatisfaction, and you'll probably make an offer for partial payment. But keep in mind that ABC may not budge in its demand for full payment.
Under the old law, if you wrote a check for $2,000 and marked it "payment in full," The ABC Co. could cash the check and then turn the remaining debt over to its bill collectors. The whole matter would drag on and might end up in a lawsuit--hardly a cost-effective way to settle a relatively small debt. Under the new law, The ABC Co. has the partial payment in hand and can take it or send it back and pursue full payment--at the risk of getting even less. If the company cashes the check, legally that's the end of the matter.
"If a respectable amount is tendered, many creditors cash the check and accept it as full payment," Campbell says. The dispute is then settled and both companies can get back to business.
Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.