New Conditions on ‘Payment in Full’

Two years ago, if you thought you were overcharged for goods or services, you could have quickly settled the dispute with something called a “conditional check,” one with a notice on the back that said: “acceptance of this check constitutes payment in full.”

But that’s no longer the case. This commonly used method of settling consumer disputes has dramatically changed, as a result of a hardly noticed 1988 revision in California law.

The common law of “accord and satisfaction,” which existed before the new statute, provided that a conditional check of part payment constituted full payment and settled the dispute, as long as certain minimal legal technicalities were met.

An Offer to Settle

It was basic black letter-contract law. It applied only to good faith (not phony) disputes. The notice on the check, if it was clearly communicated, say in a letter, was an offer to settle. It could either be accepted or rejected, but it couldn’t be modified. By cashing the check, you accepted the offer of a lesser amount, even if you scratched out the notice on the check.

Your only other alternative was to reject the offer by returning the check. You couldn’t have it both ways.

“The advantage of the common law was that you didn’t have to check with a lawyer,” explained Scott J. Burnham, a professor of law at the University of Montana, who is writing a law review article on the new law. “You could just use a conditional check. It was a simple method for resolving disputes.”

Under the new statutory scheme, the person receiving the check can scratch out or delete the notation, cash the check and still collect the unpaid amount. And even if it isn’t deleted, the notice still may not be effective if you don’t follow certain cumbersome procedures.

Let’s try an example to compare the old and the new. Assume you hire a contractor to build a fence with a gate for $1,000. But the contractor builds the gate in the wrong place. As a result, you believe that the work is worth only $750--because you must now rebuild the gate. There is a good faith dispute about the amount owed.

After you receive the bill for $1,000, you tell the contractor that the work was worth only $750, and you explain that to him in a letter, accompanied with a check for $750 that says “acceptance constitutes payment in full.”

Under the old law, you clearly communicated an offer to settle a disputed amount, and when the contractor cashed the check, even if he scratched out the “payment in full” notice, he accepted partial payment as full payment, like it or not.

Under the new law, if the contractor scratched out the restrictive words, or can prove that he cashed the check inadvertently or without knowledge of the restriction, he has not accepted partial payment as full payment and can still try to collect the balance of $250.

You can show that the contractor should have known of the restriction and must be bound by it, by following the fairly complicated notice procedure in the statute.

You must give notice in writing “not less than 15 days or more than 90 days prior to receipt of the check” that it “will be tendered with a restrictive endorsement and that acceptance and cashing of the check . . . will constitute an accord and satisfaction.”

If that isn’t enough of a headache, the statute has other complications. Because it is so new, it has not yet been interpreted by the courts, which could change how it works in practice.

Insurance Claims

For example, it seems to carve out an exception for settlement of insurance claims, according to Burnham. So if you cash an insurance company check with one of these notices, you may have given up your right to sue for more. But the language is vague enough to be open to interpretation. And if you don’t follow the statutory instructions precisely, your conditional check may be ineffective.

If you are thinking of using a conditional check to resolve a dispute, or you are on the receiving end of one, you may find yourself later in court interpreting the statute. This is complicated stuff, so to be safe, you should consult a lawyer or, at a minimum, do some extensive legal research of your own. (The statute is found in Section 1526 of the California Civil Code.)

“A device that was used to prevent litigation may now cause litigation,” Burnham concluded.

Klein cannot answer mail personally but will respond in this column to questions of general interest about the law. Write to Jeffrey S. Klein, Legal VIEW, The Times, Times Mirror Square, Los Angeles 90053.