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.
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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.
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