M J Antony: The 'full and final payment' trap

OUT OF COURT

Supreme Court shows how to accept underpayment without losing right to claim the balance.

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.

The petitioner in this case sent two consignments of iodised salt by rail. They were not delivered. Therefore, he lodged two claims. The railway accepted only one-fifth in each case. It sent two cheques with a note stating that "if the offer is not acceptable, the cheques should be returned forthwith failing which it will be deemed that you have accepted the offer in full and final satisfaction of your claim. The retention of the cheque or encashment will automatically amount to acceptance in full and final satisfaction of your claim."

The petitioner in this case encashed the cheques "under protest" and demanded that the balance should be paid within 15 days. When the railway refused to pay further, the petitioner moved the railway claims tribunal. It held against him, stating that he had accepted the offer of the railway in full and final settlement. 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.

However, the court discussed the practical course available to a person in such a quandary. It is illustrated in the case, Assam Bengal Cereals Ltd vs Union of India. Here again, the railway sent a cheque to the consignee in full and final settlement of the claim, though it was far below the demand. 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.

There is another judgment emphasising the point in a slightly different context (Amar Nath vs Bharat Heavy Electricals Ltd). In this case, the contractor prepared a final bill, signed a no claim declaration and also gave a receipt in token of accepting the amount due to him. 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.

Section 8 of the Contract Act deals with acceptance of a proposal by performing conditions attached to it. According to the provision, if the conditions in the proposal are performed, it would amount to acceptance of the proposal. 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 of the offer by the railway.

However, the facts and circumstances of each case are important to decide whether the offer has been accepted unequivocally. If the facts of the case disclose that there was no reservation in accepting the offer, indicated by the conduct, it must follow that the offer has been accepted by conduct. 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.