Legal Ease

As a roofing contractor, you sometimes may find yourself in disputes with building owners or general contractors about how much money is due according to a particular contract.

For example, you may argue your work is substantially complete and, therefore, you are due the remaining contract balance while an owner or general contractor may seek to impose miscellaneous backcharges against the remaining contract balance. In an effort to settle such a dispute, a building owner or general contractor may send you correspondence enclosing a check for an amount less than the balance you claim is due. The cover letter could indicate the check is being offered in settlement of the dispute, and the check may be marked "payment in full" on the memo line.

What should you do in such a situation? Can you cross out the words "payment in full" or make a notation on the check that the amount is disputed, cash the check and later file a lawsuit to recover the balance you claim is due?

The doctrine

If you receive a check on which "acceptance of this check is payment in full," "final and full payment" or similar words are written and cash the check, you may waive your right to later file a lawsuit to recover the balance—even if you cross out the words or indicate cashing the check was done under protest. The legal principle that applies in this situation is called the doctrine of accord and satisfaction.

The doctrine of accord and satisfaction is defined as a substitute contract between a debtor and creditor for the settlement of a debt for an amount different (and often less) than what is claimed due. The substitute contract is an "accord" because it is an agreement between the parties to settle the dispute, and the "satisfaction" is the payment of the amount expressed in the accord. There is not a valid, legally enforceable doctrine of accord and satisfaction unless four elements are satisfied: a bona fide or genuine dispute exists; the claim is uncertain or unliquidated; the debtor provides the creditor with consideration, something of value or something bargained for; and both parties intend to compromise the claim.

A bona fide dispute need not be based on a solid foundation, but there must be some justification for it. For instance, there cannot be a mere arbitrary refusal to pay. If a building owner's or general contractor's refusal to pay the amount rightfully due a roofing contractor is not in good faith, cashing a check offered as payment in full will not waive a contractor's right to file a lawsuit to recover the balance.

Whether a bona fide or genuine dispute exists is a question of fact and subject to the circumstances of each case. The burden is on the debtor to show the existence of a bona fide or genuine dispute. The debtor must prove he acted in good faith in tendering a check as full satisfaction of a claim. If the debtor was acting dishonestly, it will not meet the good-faith test. Although the burden is on the debtor to show the existence of a bona fide or genuine dispute, you should be careful when relying on this argument because it is not a difficult burden for a debtor to meet. A debtor simply must prove he acted in good faith in tendering a check as full satisfaction of a claim.

A claim is considered uncertain or unliquidated if the proper amount owed is in dispute. This is sufficient to satisfy the second element of accord and satisfaction.

The element of consideration required for an effective accord and satisfaction is met with the existence of a bona fide or genuine dispute between the parties and the settlement of that dispute.

The law implies both parties intend to compromise the claim and, therefore, meet the fourth element of an effective accord and satisfaction when the debtor offers a partial payment as payment in full and the creditor cashes the check. Words of protest placed on the check by the creditor do not prevent the cashing of the check from meeting the doctrine of accord and satisfaction.

The parties still must perform their obligations under the accord, so if a check offered as full payment of a disputed debt is returned for insufficient funds, you can file a lawsuit to recover the total balance due under the original contract.

Tough choices

What should you do with a check you receive under protest? You have two choices: reject the offered settlement and return the check promptly or cash the check and consider the debt satisfied. But be careful. If you keep the check for an unreasonable length of time, you may be deemed to have accepted the offer even though the check was not cashed.

In addition, you cannot simply cross out the language on the check or write "under protest" to get around the attempted accord and satisfaction. As discussed earlier, the law generally provides that these actions do not change the legal effect of the doctrine of accord and satisfaction.

If a check is cashed, the debtor can refuse to fulfill further collection attempts by the creditor. But if you file a lawsuit to recover the balance due after cashing a check offered in settlement, you can argue the dispute about the debt was not bona fide or genuine.

Also, you can argue there was no "meeting of the minds" or evidence to show the parties discussed and settled on an acceptable partial payment. In most states, a "meeting of the minds" will be presumed to exist when a creditor received notice of the debtor's offer of accord and satisfaction and accepted payment or cashed the check. The debtor has the burden of showing it made it clear to the creditor that cashing the check and accepting the amount tendered constituted the full satisfaction of the disputed debt. This often is accomplished by the debtor simply writing words like "final payment" or "payment in full" on a check's memo line.

UCC

The Uniform Commercial Code (UCC) also addresses the doctrine of accord and satisfaction in the commercial marketplace in Section 3-311. According to UCC, words of protest cannot change the effect of the doctrine of accord and satisfaction. However, according to UCC, a roofing contractor can avoid the doctrine of accord and satisfaction by returning the money within 90 days.

UCC also requires that a good-faith dispute exist between the parties for there to be an effective doctrine of accord and satisfaction. UCC defines "good faith" as honesty in fact. The debtor's mere refusal to pay the full claim does not make it a disputed claim. If a refusal to pay is arbitrary and the debtor knows it has no basis to refuse full payment of the amount claimed, the check issued does not operate as a doctrine of accord and satisfaction though it is tendered and received as such.

Change orders

Owners and general contractors successfully have argued that executed change orders fall under the doctrine of accord and satisfaction of any and all claims related to a change order. Depending on the language of a change order, the doctrine of accord and satisfaction typically will preclude you from receiving additional compensation and time beyond what is set forth in the change order.

Disputes about change orders often arise when a change causes delay. Sometimes, you may fail to appreciate the true effect of a change at the time of signing a change order and misjudge your anticipated costs and the time to complete the extra work. Other times, you may appreciate the effects and seek to include additional charges in a change order, but a building owner or general contractor disagrees and demands a change order be signed without your additional charges.

What happens when a building owner or general contractor hopes to limit your rights to additional compensation but you believe change orders are intended to address only the direct costs of the changed work? What if you were under economic duress when signing the change order?

The legal effect of each change order depends on the language set forth in the change order. You should look out for language in change orders that purports to make a change order the final adjustment of any and all amounts due or to become due to you for the changes referred to in the change order. Other language to watch for includes language stating that executing a change order acts as a release of all claims for additional compensation under the contract. In addition, language in a change order that seeks to have you waive your rights to additional compensation arising out of delays or disruptions that arose up to the date of the change order can be problematic. Language such as this can waive your right to pursue additional compensation for items such as financing costs, indirect field costs, extended home office overhead, and expenses for additional labor and equipment.

Think twice

Before a check can create a doctrine of accord and satisfaction, the party who presents the check must make clear—by appropriate and conspicuous wording—that cashing the check will be construed as settlement of all outstanding claims between the parties. Notice can be in the form of words on the memo line of a check or in a cover letter enclosing the partial payment. You must understand that endorsing such a check constitutes a complete settlement of a claim though, according to UCC, a party may avoid an accord and satisfaction by returning the money within 90 days.

A bid to prevent exhibiting accord and satisfaction by accepting the check but scratching out the restrictive endorsement by adding words "without prejudice" will be to no avail. If you have any questions about what to do with a check that purports to act as a doctrine of accord and satisfaction, you should contact your attorney.

Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.