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A restrictive endorsement controls the use of a financial instrument 鈥� typically a check. The most recognized form of restrictive endorsement is 鈥淔or Deposit Only,鈥� 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 to the contractor a check on which the owner writes 鈥減ayment in full鈥� 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 鈥減ayment in full鈥� generally does not discharge a disputed debt. Oregon law restricts an owner鈥檚 (or any other debtor鈥檚) attempts to unilaterally settle a disputed claim simply by sending a check with language on it stating the contractor鈥檚 (or any other creditor鈥檚) 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 鈥減ayment in full鈥� 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鈥檚 general rule. In Oregon, if the contractor accepts the check in writing, then a 鈥減ayment in full鈥� 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 鈥減ayment in full鈥� check to that person or place; otherwise the debt is not discharged. Also, the debt is not discharged if the contractor, within 90 days of depositing the 鈥減ayment in full鈥� check, returns the payment to the owner.

Applying Oregon鈥檚 or Washington鈥檚 law 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 either a contractor or an owner is to seek experienced legal counsel when sending or accepting a 鈥減ayment in full鈥� check. Owners should not assume that worries are gone because they stamped a few words on a check. And contractors don鈥檛 want to be wrangled into an unfortunate situation because they were eager to get that money in the bank.

Jacob Zahniser is an attorney in Jordan Ramis PC鈥檚 Dirt Law practice group. He focuses on construction and real estate litigation, as well as insurance coverage disputes arising from construction defects. Contact him at 503-598-5546 or [email protected].