Do You Really Want to Cash That Check?

Periodically, I receive inquiries involving a variation of the following fact pattern: a client who has cashed a check for less than the full amount due, but with the words “Payment in Full” in the memo line of the check. Savvy business owners know that, according to what’s called “accord and satisfaction,” the acceptance of a check under certain circumstances may result in the business losing the right to recover remaining moneys otherwise due and owing. 

The gist of accord and satisfaction is that you and your client/customer enter into a sort of contract to settle a dispute for payment of less than the full amount. The “accord” occurs because the parties modify their original contract to allow for partial payment. The “satisfaction” occurs because by accepting partial payment, the business gives up any claim for additional payment. As one court stated, “Where [a] creditor takes and keeps a debtor's reduced payment with actual or constructive knowledge of the condition, the creditor has accepted the debtor's offer, and the original debt is settled for the reduced amount.”

The Illinois Uniform Commercial Code has a very detailed statute that sets forth when accord and satisfaction may be claimed.

First, the debt in question must be subject to a bona fide dispute and must be unliquidated.  In other words, there must be an honest dispute. For example, if your customer admits to owing $1,000 but sends in a check for $500 marked “payment in full” because he merely hopes to save himself money, accord and satisfaction will not work.

Second, the check must be sent in “good faith.” Good faith is a loaded term and there are hundreds of cases defining what it means. In this context, however, good faith means honesty in fact and, also, the observance of reasonable commercial standards of fair dealing. For example, someone that has all of his or her checks printed with “payment in full satisfaction” would likely not be able to meet the definition of good faith. Likewise, good faith would not be met where a customer deducts 25% of full payment for a trivial dispute.

In determining whether there is good faith and a bona fide dispute, courts often look to see if there’s a paper trail that documents the purported dispute. Shady customers sometimes try to build a foundation for claiming accord and satisfaction by sending several emails complaining of certain problems. The well advised business owner responds to such communications to deny the debtor the possibility of using accord and satisfaction.

Third, there must be a “conspicuous” statement on the check to the effect that the check is being tendered in full satisfaction of a claim. Or, it must be accompanied by some writing to the same effect. Illinois law defines conspicuous as something written such that a reasonable person against whom it is to operate should have noticed. Thus, as long as someone can be expected to review the check, pretty much anything that indicated “payment in full” would be deemed to be conspicuous. The most common methods of satisfying this requirement are to write “payment in full satisfaction” or words of similar meaning in the memo line of the check. In fact, one court even found that the words “final paym” were sufficient when coupled with previous correspondence disputing the amount due and owing.

But, what about a high volume business where checks are sent to a lock box or other office for processing – often by employees or contractors who know little about the business, let along particular customers. Illinois law provides a mechanism for businesses to protect themselves by providing customers with a conspicuous statement that communications regarding disputed debts must be dent to a designated person, office or place. This allows checks subject to a possible claim of accord and satisfaction to be segregated for review by someone more knowledgeable about the law and the creditor’s business. The savvy business owner would place such a statement on all invoices and bills.

The final requirement is that the check must be “accepted.” Typically a check is accepted by being processed for payment – that is, being deposited.

It is important to note that crossing out the “payment in full” language still constitutes acceptance. So, too, does writing the debtor and advising that although you are cashing the check, you don’t agree to it being payment in full. Business owners are put to a choice – either accept the check with the condition that it be in full and final payment or refuse the check entirely and sue for the full amount. The courts have ruled that creditors can’t accept the benefits of an offer (cashing the check) without taking on the burden of the compromise (accepting less than full payment.)

What if one of your employees accidentally deposits a check from a client attempting to establish accord and satisfaction? Again, Illinois law provides some protection. A business can prevent accord and satisfaction by re-paying the amount accidentally deposited to the client/customer within 90 days. But, if the other requirements are met, failure to return the money within 90 days will likely result in any claims for the rest of the money due and owing being waived.

It’s not easy to establish accord and satisfaction, but business owners need to educate their employees. Checks accompanied by letters disputing the amount owed, or checks with “payment in full” should be flagged and reviewed with management. Failure to do so may result in money being “left on the table.”