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The 'full and final payment' trap
June 21, 2006
Many of us as individuals or as persons holding financial responsibilities in establishments often receive cheques accompanied by a note that it is in "full and final settlement" of the claims.
The amount is usually far below the legitimate demand. Therefore, one is faced with the dilemma whether to accept the payment immediately or return it with a note of protest. The latter course would entail prolonged correspondence or litigation.
The Supreme Court recently gave some helpful hints to get over the predicament in its judgment in Bhagwati Prasad vs Union of India.
By his conduct in encashing the cheques, he showed acceptance of the terms of the contract, the tribunal explained. The petitioner appealed to the Supreme Court , which dismissed his pleas.
The consignee sent an ingeniously worded letter to the railway. It said that the cheque had been retained and the railway should give reasons for withholding the balance amount. If no reply was received within 15 days, the acceptance of the cheque would not amount to full and final settlement.
The cheque was not encashed for 15 days and the railway did not respond within the deadline set. Then the cheque was encashed. When the issue was taken to the court, it held that the encashment of the cheque in this case would not amount to acceptance of the offer made by the railway.
Later he raised a dispute alleging short payment and invoked the arbitration clause. Bharat Heavy Electricals contended that the contractor had given a no-claim certificate in final settlement of the claim and accepted the cheque. Therefore, the liability had been discharged and there was no dispute for arbitration.
When the contractor moved the Allahabad High Court, it examined the record and found that the final bill contained an endorsement to the effect that he had accepted the payment under protest. The high court ruled that the endorsement clearly showed that the acceptance of the cheque was conditional and it safeguarded the position of the contractor that he was accepting the payment with reservation.
In the Bhagwati Prasad case, the consignor accepted the cheque without making any counter-offer and, therefore, by his conduct and performance he accepted the terms of the railway. The protest and non-acceptance should have been conveyed before the cheque was encashed. He could not change his mind after the unequivocal acceptance
On the other hand, if the evidence discloses that the 'offeree' had reservation in accepting the offer, his conduct may not amount to acceptance of the offer in terms of Section 8 of the Contract Act. In such instances, the court will adjudicate the claims on the basis of the evidence. However, the rule of thumb is that the protest must be conveyed to the offerer before encashing the cheque.
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