Are Checks Legal Contracts?

Small business owners enter into a number of contracts on a regular basis. In addition to contracts clearly marked as such, purchase orders, proposals with acceptance addendums and service agreements are all contracts. Other contracts are not as readily apparent. Checks fall into this latter category, since fully executed checks constitute legal contracts.

When you write a business check to purchase an item, you do so under an implied contract with your bank to pay the check. When you write a check to pay a vendor's invoice, you have the implicit bank contract but you also fulfill a payment obligation under your agreement - a contract or proposal - with the vendor. Checks as contracts are generally governed by common law.

A contract becomes valid under two conditions. First, both parties are in agreement. An offer and the offer's acceptance, both of which may be express or implied, written or verbal, serve as evidence of an agreement. Second, each party to the contract receives some benefit, or consideration, that justifies the agreement. To be enforced, a contract's terms must be specific enough to know what to enforce. In addition, both parties must be sufficiently competent to enter into the contract.

Although many contracts can be express or implied, written or oral, the law mandates that to be valid, some contracts be in writing. These are called formal contracts. In addition, formal contracts must include specific language as legally required by statutes. A negotiable instrument is one example of a formal contract and a check is an example of a negotiable instrument. The specific language required on checks to make them a valid contract includes the payment amount, payee and the signature of the account holder.

You write a check for $5,000 as initial payment on a $15,000 consulting engagement. The consultant cashes the check, but never provides the service. By cashing the check, he implied acceptance of the engagement and, by not providing the service, has defaulted on a contract. If you write a check for $1,000 as payment for a product but you stop payment on it, you could be in default unless the product was never delivered or delivered in poor or nonusable condition.

Writing a check that you have no intention of paying is considered fraud. Each state has laws delineating the specifics of what constitutes a bad check and whether or not the writing or passing of the check is classified as a misdemeanor or a felony. Because operating as a business entity tat provides no liability protection for its owners, you may be held criminally liable for any bad business checks you write.