Cashing a Customer’s Check: What Creditors Need to Know about Accord and Satisfaction

By James R. Vann
Attorney at Law


We had a webinar on this topic on Tuesday, May 13, 2014 from 3:00 - 3:30 p.m.   Our webinar was titled : Handling Money of Others – Sales Tax, Escheat Property & Cashing Checks.  Visit our event page for details.

You have billed a customer for amounts past due on an open account.  After a few invoices and requests for payment have been ignored, you receive a check for a lesser amount than what is owed.  You notice that on the memo line of the check is the following notice: “Paid in Full — All Claims Satisfied.”  What do you do?  Should you keep the check, knowing that it may be all you can coax out of the debtor, or should you return the check and demand the full amount?

Accord and Satisfaction

The legal principle of accord and satisfaction arises from common law rules allowing a creditor and debtor to rewrite a previous contract in order to settle a dispute without legal intervention.  An “accord” is an agreement where one of the parties agrees to accept something different from the amount believed owed in order to settle a disputed claim.  The “satisfaction” is the execution or acceptance of this agreement, and once satisfaction occurs, the previous contract is extinguished.  Accord and satisfaction is an affirmative defense to a breach of contract claim, requiring the asserting party to plead and prove the defense.

Under the traditional common law, the creditor had two options upon receiving a check for less than the amount owed and containing a clear and noticeable statement that the check was offered in satisfaction of the entire obligation: (1) the creditor could either return or destroy the check and then demand or sue for the entire amount, or (2) the creditor could accept the check for the lesser amount.  The creditor may not, however, accept the check under protest or cross out the “full satisfaction” notation on the check.  If the creditor elected to cash the check, the debtor’s offer was deemed accepted and the principle of accord and satisfaction barred the creditor from asserting a claim for additional amounts under the former agreement.

The Uniform Commercial Code and the “Bona Fide Dispute” Requirement

The Uniform Commercial Code (UCC) has been adopted in all but one state; its purpose is to simplify and modernize commercial transactions.  With respect to accord and satisfaction, UCC Section 3-311 follows the common law rule, with minor variations to reflect the modern business environment.  According to the Official Comment to this section of the UCC, “Section 3-311 is based on a belief that the common law rule produces a fair result and that informal dispute resolution by full satisfaction checks should be encouraged.”

Under the UCC, a bona fide dispute must first exist before an accord and satisfaction may take place.  Whether or not a bona fide dispute exists is sometimes difficult to determine, however, the UCC has offers some guidance on this issue.  Whether or not a bona fide dispute exists depends on whether the claim was disputed in good faith.  The debtor must prove accord and satisfaction as an affirmative defense, therefore, the debtor must show that it was an honest dispute in relation to reasonable commercial standards of fair dealing.   A debtor’s unilateral refusal to pay the full obligation is not a good faith dispute; the debtor generally must prove a legitimate reason for nonpayment.  Likewise, intentional deception or delay will defeat a finding of good faith, and the debtor’s business practices may reveal an indication of such a shortcoming as well.  For instance, if a debtor routinely sends out checks with full satisfaction language, this fact will indicate an absence of good faith and honesty in fact.  One recent federal court has made the requirement of an honest, good faith dispute abundantly clear:

The debtor’s mere refusal to pay the full claim does not make it a disputed claim.  Where the refusal is arbitrary and the debtor knows it has no just basis, the payment of less than the full amount claimed does not operate as an accord and satisfaction even though it is tendered and received as such. (emphasis added)        McMahon Food Corp. v. Burger Dairy Co. (7th Cir. 1996) 

Clear and Conspicuous “Full Satisfaction” Language

The check must have a clear and noticeable statement that the check is offered in full satisfaction of the debt before an accord and satisfaction may be established.  The statement must be conspicuous so that a reasonable person either noticed it or should have noticed it.  The notice should establish that the party offering the check is doing so as an offer to settle the outstanding claims between the parties.  This requirement is in keeping with the general principle of contract law requiring a “meeting of the minds.”  Obviously, if a creditor does not have notice of an offer, no acceptance of the offer may occur.  Stated another way, no one can agree to something unless they first know of it.  Simply sandwiching the full satisfaction language in the last few lines of the accompanying payment voucher is not enough; the language must be noticeable.

Acceptance of the Check “Under Protest”

A creditor or seller may not add a notation to the check indicating that the check is accepted under protest or only in partial satisfaction of the claim.  The UCC does not allow words of protest to change the legal significance of accepting an accord and satisfaction by cashing the debtor’s check.  Again, the UCC has codified to a great extent the strict common law rules regarding accord and satisfaction; a creditor has two options: either return or destroy the check or accept the debtor’s offer by cashing the check.  Some states have also adopted a third option to allow a creditor or seller to tender repayment to the debtor of the amount of the check within 90 days of the payment of the check.  The purpose of this option is to prevent accord and satisfaction by mistake.  Many large businesses receive numerous checks into their accounting office, drop box or collection center.  This provision allows a business to remedy their mistake if they discover that an accord and satisfaction was inadvertently accepted.

A North Carolina opinion recounts an example of the unavailing nature of words of protest.  The plaintiff, a house painter, presented the defendant with a final bill of approximately $2,400.  The defendant complained that the bill was too high and offered the house painter a check for $1,813.19 with the words, “painting in full” written on the check.  The plaintiff accepted and cashed the check after telling the defendant he was only doing so because he was “in a rather tight position” and the defendant still owed him $615.19.  The Court concluded that the cashing of the defendant’s check established an accord and satisfaction and the plaintiff was therefore barred from recovering any further amount from the defendant.  This case makes clear that once a creditor has notice of the full satisfaction check, the lack of knowledge regarding the legal effect of cashing the check is of no consequence.  This ruling is simply one more illustration that “ignorance of the law is no defense.” 

Designating a Disputed Claim Center

Under the UCC, a claim will not be discharged if a business sent a conspicuous notice to the debtor that all communications concerning disputed debts, including any instrument tendered as full satisfaction of a debt, are to be sent to a designated person, place, or office, and the instrument or communication was not received by that designated person, place, or office.  This provision recognizes that many businesses have accounting, drop boxes or collections centers that take in large numbers of checks.  In processing these checks, an accord and satisfaction may inadvertently occur; this mistake may easily occur where, for example, a notation that the check is in full satisfaction of all claims is written on the reverse side of a check. In order to gain protection of this provision, a creditor must show that it (1) sent a statement to the debtor that any communications or instruments regarding disputed debts were to be sent to a specific person or place; (2) the statement was conspicuous and sent to the debtor before the debtor tendered the full satisfaction check; and (3) the designated person or place did not receive the instrument or accompanying communication.

 Protecting Yourself from Accord and Satisfaction

Knowing the general principles of accord and satisfaction will help you determine whether a debtor’s check should be returned or cashed; knowing the legal significance of cashing a full satisfaction check will allow you to make an informed decision as to whether pursuing the debtor for the remaining amount is worth the effort.  Additionally, carefully documenting any communications regarding unpaid accounts will be helpful in determining whether or not a disputed claim is in good faith.  Even though an accord and satisfaction is essentially like any other contract that requires courts to disregard any evidence other than the contract itself unless the contract is ambiguous, courts will generally admit outside evidence under the UCC provisions regarding accord and satisfaction.  Therefore, documenting telephone calls and letters received from the debtor will assist you in a lawsuit.

One word of caution: the UCC is a “model” code to govern commercial transactions.  Since states are free to adopt the UCC with certain variations, local law should always be consulted.  Additionally, at least one court has held that in an accord and satisfaction situation, the contract is separate and distinct from the original contract that governed the transaction itself (remember that accord and satisfaction is essentially a contract modifying the terms of the original contract).  Therefore, despite language in the original contract that a certain state’s law will govern, the state in which the full satisfaction check was cashed will govern.  For example, your original sales contract stated that Virginia law will control.  After your customer disputes the amount with you because of a confusion of invoices, you agree to accept a lesser amount.  Your customer sends a check marked “PAYMENT IN FULL SETTLEMENT OF ALL AMOUNTS” to your home office in New York according to your instructions.  Once your company cashes the debtor’s full satisfaction check at your home office in New York, New York’s laws regarding accord and satisfaction will be applied.  In effect, once the customer’s check was cashed, your original contract was re-negotiated.  The acceptance of the customer’s offer took place in New York, where the check was cashed.  Knowledge of this wrinkle may help you keep the “home court advantage.”

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