Contractors seem to get more checks these days with a “something extra” on them. I’m referring to the growing use of check endorsements by customers — a restriction written on the check’s front or back. Usually they are on checks mailed to you; customers think it may slip through your accounts receivable. Many times the contractor cashes the check without ever seeing or understanding the restriction.
The endorsements that cause the most problems for my contractor-clients are the restrictive and the conditional.
In the restrictive endorsement,a customer prints some limit on how the check can be used, e.g., “For Deposit Only”, which means it can’t be used by the contractor for any other purpose or endorsed over to anyone else.
Another common restrictive endorsement is “Paid in Full”. which can be more of a problem than you might expect. If a disgruntled customer slips a “paid in full” check past your accounting department and you deposit it, you may have just settled out the debt without even knowing it — even for pennies on the dollar. This is often referred to as an “accord and satisfaction” in the law, and crossing out the restrictive endorsement and cashing the check anyway is not likely to make any difference.
The conditional endorsement is another common tactic, although this is something we often see on the down payment check. An example: “Payable to Smith Remodeling after the windows are installed.” Banks won’t take these checks (if they catch them) since the bank has no way of knowing when, or if, the condition is ever going to be satisfied. Your bank will usually kick back the check a week or two after you have deposited it.
Educate your accounting/deposit personnel to scan incoming checks and to flag checks with “extra” language on them before they get into your deposit envelope.
Article was written by attorneys at Berenson LLP and are informational only. Edited by, and reprinted with permission of, Remodeling Magazine.