Draw the Law: Contract Disputes, Breach Remedies – Stop Payment!

Before I get to today’s Draw the Law topic, which is about stopping payment in the case of a breached agreement, let me inform you of two speaking events coming up.

Speaking Events with Me: Contracts and Business Entity Formation

Join me at the Greenhouse Innovation Hub with startup Docracy next week Wed., July 25th from 6-7pm.

First, is my Basic Contract Law Talk with Docracy. This will be held at The Greenhouse Innovation Hub from 6 – 7p.m. next week Wednesday, July 25^th. Docracy is a startup providing open legal documents, with free e-signing. Their goal is to help take the mystery and fear out of legal agreements.  The goal with the workshop is a mixture of presentation and interactivity using documents provided by Docracy and helpful information to business owners when it comes to contract law.  If you are interested please find more information by clicking here.

The second is my Business Entity Formation talk, which will be done at the ING Direct Café found in Waikiki, on August 1^st, also from 6 – 7 p.m.  This talk is being done for the Honolulu Chinese Jaycees, but is open for the entire public. So come learn the difference between LLCs and corporations, and what the right entity for you might be.  Feel free to contact me for more information on these talks and future ones.

Self-Help, Deny Them Payment

So last week, I said you might want to consider talking things out.  When one side shuts down, tempers usually explode and one-side immediately wants to go to a lawsuit. Generally, speaking talking things out and coming up with a new agreement (albeit not the original one) is less costly.  Another approach you may take, and this is with caution, is that if you are the person paying for the goods or services, you may refuse to pay for lack of goods or services.  The problem with this method is that by not paying, depending on the circumstances, you may be breaching the contract as well. IF YOU BREACH THE CONTRACT YOU MAY LOSE CERTAIN RIGHTS OR CLAIMS. That’s why this option is cautioned, and generally you should speak to your attorney to figure out if this is a path you might want to consider. I will talk about checks, credit cards, and briefly of PayPal.

Stopping Payment with Checks

(1) you open a bank account; (2) you use a check to pay; (3) the other party accepts payment; (4) the deposit the check to their bank; (5) their bank requests payment from your bank; (6) your bank pays them from your account.

Yes, I realize that checks are quickly becoming a relic of the past, but a large portion of small businesses starting up still accept and use checks before they set-up other forms of payment.  This is as simple as calling up your bank and telling them to not pay out on the check from your account IF the transfer has not already been made.  Generally, when you set-up a bank account your bank and you have a contractual relationship, and the person you are trying to deny payment to also has a relationship with the bank that is trying to collect.  Therefore, the bank has an obligation to pay out on checks you authorize and also stop payment on checks you no longer okay.

Same process as before, but the breakdown comes when you dispute payment. So When you decide to self-help, step (4) and tell your bank to stop payment, when the other side’s bank tries to claim funds from your account due to the deposited check, your bank will refuse the request.

What you don’t want to do is empty your bank account, why? Consider, the fact that the bank is not a mind reader. However, you are a small business owner sending out tons of checks.  Consider for a moment that you, yourself receive tons of checks and different times, do you cash all those checks immediately? Probably not, you wait for a certain scheduled date and take all the checks down.  So given that, do you think you bank knows, which checks it should pay and not pay? Probably not.

Credit Cards

So if you are a small business owner, you may be using your personal credit card to pay for things.  Depending on the rights you have, as under contract with the credit card company, you may have your company not pay regarding the goods in dispute.  Recognize, that your customers may consider the same tactic.

Notice that I said personal credit cards, consumers generally have more protection than businesses as I have mentioned in prior posts.  The same goes for credit cards, there are personal ones and business ones. Check what you have, as you may far fewer rights on your business one than your personal one.

The credit card relationship works differently. (1) you form a contractual relationship with your credit card company (ccc); (2) you pay with card; (3) the person accepts; (4) the ccc receives the charge; (5) accepts; (6) charges you for that amount OR alternate (6) you dispute the goods or services, and the credit card company pulls that payment.

Good News For Merchants and Retailers: Charging More for Accepting Credit Cards

That being said, a good piece of news for you merchants and retailers that accept credit card. A recent class-action suit was decided in favor of the retailers and merchants against the major credit card companies. What this means is you may in the future be able to charge more for people who choose to pay by credit card. You can read more here.

PayPal

Finally, as I know we live in the age of smartphones and electronic payment, what about PayPayl?  With PayPal it is very simple.  You can cancel any payment that has not been claimed yet.  However, it must be unclaimed. If it has been claims you are back to last week’s post and contacting the other side for a refund. For more information on the step-by-step process, click here.

Last Word: Stop and Consider What you are Doing When you Try to Stop Payment

Consider what you are doing when you try to stop payment. This definitely is shutting off communications, which is why you might want to try to talk to them first as last week post suggested. In addition, depending on the situation, you may be reducing chances of settling this, losing claims or rights (being breach yourself), and finally subjugate yourself to a debt collection action.  Therefore, even if talking is not working, this still may not be the best option, may be you need an outsider to talk to the other side, which will be the subject of next week’s post.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law, Payment Issues I: Accepting Credit

Following in the vein of making agreements with customers or clients, and then warranting or disclaiming your products and/or services we come upon one the most important parts to your business, how do I get paid?

Obviously, in a tight economy cash is king, and having cash today as opposed tomorrow is princely. However, nowadays in the world of plastic and convenience many businesses accept some sort of credit payment.

Today I am going to focus on just the idea of accepting credit, but before we get to that let’s set-up a general framework for thinking about credit.

What is it Credit?

Credit is a payment option other than cash upfront. It includes like I said credit cards, promissory notes, and checks.

There is cash, and then there is everything else from checks, credit cards, and payment contracts.

Who would I Accept Credit Payment From?

This is really up to you, and you should consider some sort of internal payment policy that handles cash payments, credit payments, extension of credit and debt collection, etc . . . based on the trade or industry you are in. That being said there are two groups of people to think about in the credit situation, your consumers and then your commercial clients.

Businesses can choose to accept credit from its consumers as well as it bigger commercial clients, the methods though may vary.

Clearly, the former has a variety of payment options and their transactions tend to be smaller and quicker with you whereas the latter, due to their involvement with you may require a more formal type of payment system. In the commercial case, consider the size of payment owed to you and frequency of good and/or services flowing from you to them. They may not have cash on hand to pay on receipt of the goods and/or services from you because they in turn need to finalize it to someone else further down stream.

What are the Types of Credit and Some Concerns Accepting Them?

• Indirect Credit – is you will receive payment indirectly from the customer/client through a 3^rd party, such as a bank with checks or an issuing credit card company through its cards.
• Checks – you will have worry about fraud and insufficient funds situation, in addition be wary of “Paid in full” on the check, as that may be legally binding.
• Credit Cards – you are playing on the terms of the credit card service, so always check what the fees and policies are, as you might have to past those cost onto your customers if they eat too into your profit. PayPal operates similarly, as it deducts fees when you take the money from your PayPal account and get a check or deposit into your tied in bank account.

The customer pays with check or charge, the information is sent to the indirect party by the business for the money due to customer's purchase. The amount is either deducted from their account (bank) or a bill (credit card company) is sent later.

• Direct Credit – this is where you would extend credit directly from yourself to the customer, and is easily seen in the situation of appliance or electronic stores for big-ticket items. This can certainly increase sales, and the financing charges can become and additional source of revenue. However, realize you expose your business to several laws, namely the Truth in Lending Act, the Equal Credit Opportunity Act, FTC Credit Practices Rule, and the Fair Credit Reporting Act (as well as any other applicable state laws).
• Other Credit Types – commercial credit (B2B situations), contracts, and promissory notes all provide more formal and long term arranges to accept payment. However, more formal means longer processing times, review processes, and even the help of legal counsel to negotiate and reduce the terms in writing. However, having a formally pay system in place probably means a sustainable cash flow and good business relations with the other business for the long term.

Policy and Planning

If you choose to extend credit to a customer you have a lot of internal paperwork to do. Then someone should check if that is in compliance with the law.

What does your financial plan call for? Do you want more sales? Then you might want to have a robust credit acceptance policy, but you should be aware you will not be able to get all that credit (and will need to go to debt collection), plus there are administrative costs and legal oversight to worry about.  While cash is the safest form of payment it sometimes is unlikely in this day and age to have it be your sole payment system for many types of businesses. The existence of many smartphone apps to accept credit cards and use of systems like Paypal may certainly provide ways for businesses to avoid the higher cost of merchant fees on traditional credit cards. The bottom line is that accepting credit does requiring some planning and foresight.

In the following weeks, I will take a look at some of the legal concerns with extending credit, contract law issues (also be covering Boilerplate Blurb), and debt collection.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.