A restrictive endorsement controls the use of a financial instrument, typically a check. The most recognized form of restrictive endorsement is “For Deposit Only,” which limits the ability to cash a check over the counter or endorse the check to a third party.
Restrictive endorsements, however, can also be used to resolve disputes. For example, an owner in a dispute with a contractor may issue a check to the contractor on which the owner writes "payment in full" or similar words. If the contractor deposits that check, does that resolve the dispute? The answer depends on what law governs and how the contractor accepts the payment.
In Oregon, depositing a check endorsed as “payment in full” generally does not discharge a disputed debt. Oregon law restricts an owner’s (or any other debtor’s) attempts to unilaterally settle a disputed claim simply by sending a check with language on it stating the contractor’s (or any other creditor’s) deposit of the check constitutes a settlement of the dispute. ORS 73.0311. Thus, in Oregon, an owner may not successfully discharge a debt for a reduced sum through a restrictive endorsement on the face of the check or accompanying letter.
In Washington, by contrast, depositing a “payment in full” check usually does satisfy a disputed debt. Washington law allows an owner to unilaterally settle a disputed claim simply by sending a check with this type of language on it. RCW 62A.3-311. Thus, in Washington, an owner may successfully discharge a debt for a reduced sum through a restrictive endorsement on the face of the check or accompanying letter.
Of course there are exceptions to each state’s general rule. In Oregon, if the contractor accepts the check in writing, then a “payment in full” check will discharge the disputed debt. If the contractor is an organization, the written acceptance must come from an officer or employee with authority to settle the claim.
In Washington, if the contractor notifies the owner that payment must be sent to a specific person or place, then the owner must send the “payment in full” check to that person or place or the debt is not discharged. Also, the debt is not discharged if the contractor, within 90 days of depositing the “payment in full” check, returns the payment to the owner.
Applying Oregon's or Washington’s laws becomes even more complex when an Oregon contractor is performing work on a Washington project or vice versa. Oregon law provides that only the law of Oregon applies to Oregon projects, but Washington has no such limitation. Obviously, the safest course of action for a contractor or owner is to seek experienced legal counsel when sending or accepting a “payment in full” check. As an owner, you don’t want to assume your worries are gone because you stamped a few words on a check. And as a contractor, you don’t want to be wrangled into an unfortunate situation because you were eager to get that money in the bank.
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