PAYMENT IN FULL? contractors over how much money is due for a particular contract. A roofing contractor may

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1 PAYMENT IN FULL? What should roofing contractors do if they receive a check for less than the full amount, but the check contains language indicating it is final payment? INTRODUCTION Roofing contractors sometimes find themselves in disputes with either owners or general contractors over how much money is due for a particular contract. A roofing contractor may argue his work is substantially complete and is, therefore, due the remaining contract balance, and an owner or general contractor may claim entitlement to miscellaneous backcharges that are disputed by the roofing contractor. In an effort to settle the dispute, the roofing contractor receives correspondence from either the owner or general contractor enclosing a check made payable to the roofing contractor. The check is in an amount less than the balance the contractor claims is due. The cover letter enclosing the check indicates the check is being offered in settlement of the dispute, and the check itself is marked payment in full in the memo line. What should the roofing contractor do with the check? Can the roofing contractor cross out the words payment in full or make a notation on the check that the amount is disputed and then cash the check and later file a lawsuit to recover the balance he claims is due? -1-

2 Payment in Full?/2 THE DOCTRINE OF ACCORD AND SATISFACTION If a roofing contractor receives a payment check from a debtor on which is written, Acceptance of this check is payment in full, final and full payment, or similar words to that effect and you cash the check, he may be waiving his right to later file a lawsuit to recover the balance even if he crosses out those words or indicate his cashing of the check is done in protest. The doctrine of law that applies to this situation is called the doctrine of accord and satisfaction. Accord and satisfaction is defined as a substitute contract between a debtor and creditor for the settlement of a debt for a different amount than allegedly owed. It is referred to as a contract because the accord is an agreement between the parties to settle the dispute and the satisfaction is the payment of the amount expressed in the accord. An accord and satisfaction is not valid unless four elements are satisfied: a bona fide or genuine dispute exists; the claim is uncertain or unliquidated, or, in other words, the proper amount of the claim is in dispute; the debtor provides the creditor with consideration or something of value or bargained for; and both parties intend to compromise the claim. A bona fide dispute need not be based on solid foundation, but there must be some justification for it. There cannot be a mere arbitrary refusal to pay. If an owner s or general contractor s refusal to pay the amount rightfully owed the roofing contractor is - 2 -

3 Payment in Full?/3 not in good faith, cashing a check offered as payment in full will not waive the contractor s right to file a lawsuit to recover the balance. Roofing contractors should be careful when relying on the argument that the dispute was neither bona fide nor genuine. The burden is on the debtor to show the existence of a bona fide or genuine dispute. The debtor must ordinarily prove he acted in good faith in tendering a check as full satisfaction of a claim. 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 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 acting as an accord and satisfaction. The parties must still perform their obligations under the accord, so if a check offered as full payment of a disputed debt is returned for insufficient funds, the roofing contractor can then file a lawsuit to recover the total balance due

4 Payment in Full?/4 TOUGH CHOICES What should a roofing contractor do with the check? The roofing contractor has two choices: reject the offered settlement and return the check promptly or cash the check and consider the debt satisfied. If the roofing contractor holds on to the check for too long before deciding what to do, the roofing contractor may be deemed to have accepted the offer even though the check was not cashed. Actually cashing the check prevents the roofing contractor from later filing a lawsuit to recover the balance he claims is due. The debtor has the burden of showing his notice made clear to the creditor that cashing the check and accepting the amount tendered is subject to the condition that it will be full satisfaction for the disputed debt. This is often accomplished by the debtor simply by writing words like final payment or payment in full on the memo line of the check. ACCORD AND SATISFACTION UNDER UCC The Uniform Commercial Code (UCC) also addresses the doctrine of accord and satisfaction. Section of the UCC specifically deals with accord and satisfaction in the commercial marketplace. Under the UCC, words of protest cannot change the effect of an accord and satisfaction. However, under the UCC, a roofing contractor can avoid an accord and satisfaction by returning the money within 90 days. This prevents a debtor - 4 -

5 Payment in Full?/5 from slipping through an accord and satisfaction to automated collection centers or large contractors where checks are cashed by an accounting or bookkeeping department without inspecting the check for endorsements such as final payment or payment in full. Contractors can also require that, to be effective, any attempted accord and satisfaction must be sent to a particular office. ACCORD AND SATISFACTION APPLIED TO CHANGE ORDERS Owners and general contractors have successfully argued that executed change orders amount to an accord and satisfaction of any and all claims related to any work covered under the change orders. Depending on the language of the change order, an accord and satisfaction will normally preclude the party receiving the increased compensation and time from recovering amounts beyond the amount stated in the change order. Roofing contractors should look out for language in change orders that purports to make the change order the final adjustment of any and all amounts due or to become due to them for the changes referred to in the change order. Other language to look out for includes language stating that executing the change order acts as a release of all claims for additional compensation under the contract. Yet other language to watch out for is language in a change order that seeks to have the roofing contractor waive his rights to - 5 -

6 Payment in Full?/6 additional compensation arising out of delays or disruptions that arose up to the date of the change order. Language like this can act as a waiver of his 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. CONCLUSION Before a check can create an 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. Roofing contractors must understand that endorsement of the checks constitutes a complete settlement of their claim though, under the UCC, a party may avoid an accord and satisfaction by returning the money within 90 days. A party s bid to prevent a satisfaction by accepting the check but scratching out the restrictive endorsement by adding words without prejudice is of no avail. Roofing contractors who have any questions about what they should do with checks that purport to act as an accord and satisfaction should contact their attorneys. # # # - 6 -