Wednesday, 25 February 2009

Don't rush to cash that cheque

Shropshire businesses who fear their customers may not be able to pay their bills in full must proceed with caution. Chris Detheridge, who leads our Commercial Litigation Team, said the credit crunch was causing real problems for many companies in terms of cash flow.

“In such difficult circumstances, it may be tempting to take a part payment from a customer, to cover some of their debt – but this can be a dangerous move. Obviously it will mean that you do have at least some of the money they owe, but it could mean you kiss goodbye to the rest of the outstanding amount.”

Chris said the circumstances may occur if, for example, a customer owed your business £100 but sent a cheque for £80, saying it was “in full and final settlement”.

“You’re quite entitled to bank the cheque as a part-payment, ask for the balance, and point out that if you don’t receive it, you’ll take legal action. But recently the courts have been taking a different view – where a customer has offered part-payment on an earlier date, or from another financial source, this can sometimes be seen as sufficient consideration.

“This means that if you then bank the cheque, you can’t claim the balance – the courts say this is because you have derived a benefit too, such as receiving the money earlier, or the settlement of a dispute.”

Chris said the situation was even more difficult if you and the customer were in dispute over the bill. “If this is the case, don’t cash a cheque paid in full and final settlement if you want the full amount – return the cheque with a covering letter demanding payment in full.

“If you do decide to cash the cheque, respond as soon as possible with a counter-offer of what terms you will accept. Cashing the cheque is seen as strong evidence of acceptance, so you need to reject the offer immediately.”

Chris said for many companies, receiving at least some of the money would be very difficult to resist, particularly in such challenging economic times. “But tempting as it may be, you need to check the wording of any offer very carefully, and ensure you’re not agreeing to something you may regret later.”