Imagine you are a supplier of goods or services and have a customer who remits a check for an invoice, which is less than the amount of the invoice, and included on the check is wording to the effect “this check is payment in full and in full and final satisfaction of all claims.” What should you do with the check? What your customer may be attempting is called an “accord and satisfaction.” This article explains the issues surrounding accord and satisfaction under Missouri law.

Accord and satisfaction is an informal method of dispute resolution. An “accord and satisfaction” is merely an assertion that a dispute has been settled and that full performance under the settlement agreement has been made. It usually presupposes the existence of a prior contract and a legitimate dispute over the amount owed. The “accord” is the settlement agreed upon by the parties, while the “satisfaction” is performance of the settlement. Unlike a setoff, an accord and satisfaction is a contract, which must include the elements of offer, acceptance and consideration. If a party has made a payment which is claimed to be in full settlement of the disputed amount, then accord and satisfaction can be used as an affirmative defense in any subsequent action.

Under Missouri common law, in order to establish the defense of accord and satisfaction a debtor had to prove that there existed a good faith dispute as to the amount of the debt owing and the acceptance by the creditor of a partial payment, as payment in full. The Uniform Commercial Code (“U.C.C.”), Article 3, Negotiable Instruments, as enacted by the state of Missouri, has codified the common law, with minor variations. Under the U.C.C., if a person against whom a claim is asserted proves that (1) such person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (2) the amount of the claim was unliquidated or a bona fide dispute exists, and (3) the creditor obtained payment of the instrument, then the general rule of accord and satisfaction is that the claim is discharged if the person against whom the claim is asserted also proves that the instrument or accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered in full satisfaction of the claim.

There are two exceptions to the general rule of accord and satisfaction to provide protection against inadvertent accord and satisfaction. The first exception applies if an organizational claimant proves that within a reasonable time before the instrument was tendered, the organization sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including instruments tendered as full satisfaction of a debt, are to be sent to a designated person, office or place, and the instrument or accompanying communication was not received by that designated person, office or place. The second exception applies if the claimant, whether or not an organization, proves that within 90 days after payment of the instrument the claimant tendered repayment to the person against whom the claim is asserted. Organizational claimants must choose between the two exceptions and cannot attempt to avail themselves of both exceptions as a precaution against an inadvertent accord and satisfaction. Finally, these two exceptions are inapplicable if the person against whom a claim is asserted can prove that, within a reasonable time before collection of the instrument was initiated, the claimant or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim. This provision is generally applicable to the case of a collection agency or a specific division within an organization having taken over the collection of the debt.

Prior to the 1992 revisions to the U.C.C., there was split of judicial authority, as to whether a claimant could strike out any wording on an instrument which stated that the instrument was for payment in full and final satisfaction of the debt. According to some courts in Missouri, the striking out of the “full payment” language allowed a claimant to accept the payment under reservation of rights. In Majestic Building Materials Corporation vs. Gateway Plumbing, Inc., the court reached this conclusion based upon the reading of Section 1-207 of the U.C.C., performance or acceptance under reservation of rights. However, the revisions to the U.C.C. now make it perfectly clear that section 1-207 does not apply to accord and satisfaction, meaning that striking out the “full payment” language will not prevent an accord and satisfaction. However, as shown below, judges still vary widely in their application of accord and satisfaction, even after the revisions to the U.C.C.

In Frank, et. al. vs. Sandy Rothschild & Associates, Inc., the Franks were the landlord of Sandy Rothschild & Associates, Inc. (hereinafter respectively “Landlord” and “Tenant”). The lease terms required Tenant to pay a stated amount of monthly rent; however, Landlord agreed to abate the rent due for the final four months of the lease term so long as Tenant was not in default under the lease at that time. The Landlord was required under the lease to furnish air conditioning to the premises, but was absolved from any failure to provide air conditioning when the failure was due to circumstances beyond its reasonable control. In June 1994, Union Electric cut off power to the premises and after the electrical service was restored, the air conditioning for the premises malfunctioned causing there to be no or inadequate air conditioning to the premises for several days. In July 1994, Tenant delivered a letter to Landlord’s office requesting a partial abatement of the June rent for the time Landlord failed to provide adequate air conditioning. Receiving no response, Tenant delivered a check to Landlord reflecting a deduction for the period of time Landlord failed to provide air conditioning. The check was accompanied by a letter explaining the reason for the deduction and that the check was tendered as “payment in full.” Landlord received and deposited the check. Landlord sent a letter to Tenant demanding the remaining amount due for July rent to which Tenant responded that it considered the issue of July rent closed and that all payments due under the lease were current. Tenant never paid the amount deducted from the July rent and because Landlord considered Tenant delinquent in its rent obligations at the end of the lease term, Landlord demanded the rent for the final four months. Tenant refused to pay and Landlord filed the action against Tenant. Tenant asserted the defense of accord and satisfaction and following a bench trial, the Court rendered a judgment in favor of Landlord, which Tenant appealed.

Tenant argued upon appeal that there existed a good faith dispute as to the amount of rent owed in that Landlord breached the lease provision requiring Landlord to provide air conditioning. Moreover, that Tenant’s partial rent payment in July 1994 served as accord and satisfaction when cashed by Landlord. The Court affirmed the lower court’s ruling and in doing so stated that “where the underlying debt is settled and undisputed in amount, the debtor’s unilateral action in claiming a set-off or reduction does not serve to modify the original agreement as to the settled amount due and owing.” Under the facts of the case, the Court found that the underlying debt was liquidated in amount. The lease specifically required a set monthly amount and only the amount of the reduction, due to the no or inadequate air conditioning, was disputed; therefore no accord and satisfaction occurred upon Landlord’s acceptance of Tenant’s partial payment of the rent.

A case holding somewhat opposite is McKee Construction Company vs. Stanley Plumbing & Heating Company. In McKee, Plaintiff was a construction company hired by Stanley to do excavation work. As Plaintiff worked on the project, disputes arose between Plaintiff and Defendant as to whether Plaintiff’s work was being done properly. After Plaintiff finished its work, a dispute arose as to whether the work was actually finished and because of these disputes there was a disagreement over the amount Plaintiff was to be paid for the work. Defendant’s attorney sent Plaintiff a letter with an enclosed check, the letter stated that the check was given in full payment of all claims and that acceptance and negotiation of the check would be considered a full and final release of all claims. Plaintiff endorsed the check, adding the restrictive endorsement “ Under protest and with full reservation of rights to collect the balance owing.” After cashing the check Plaintiff brought suit for the balance of the contract price allegedly due. Defendant filed its motion for summary judgment based upon accord and satisfaction, which was granted, and Plaintiff appealed. The appellate court affirmed the lower court’s ruling stating that “an accord and satisfaction is a contract for the settlement of a disputed or unliquidated claim for an amount less than that claimed by the creditor. “ Further, where a check is tendered in payment of an account on express condition that acceptance thereof shall be deemed satisfaction in full, an accord and satisfaction results notwithstanding protests on the creditor’s part. The Court stated that the “interests of fairness dictate that a creditor who cashes a check offered in full payment should be bound by the terms of the offer. The debtor’s intent is known, and allowing the creditor to keep the money disregarding the debtor’s conditions seems unfair and violative of the obligation good faith.”

The above cited cases can be reconciled by looking at the issue of bona fide dispute. In McKee, the Court found there was a bona fide dispute as to the amount owing under the contract; however, the Frank Court did not find a dispute as the rent due and owing under the lease. This factual issue as to a dispute is usually what causes a court to rule one way or another. Therefore, whether you are a creditor confronted with a full-payment check or a debtor wanting to resolve a payment issue, your analysis must concentrate on what is really at dispute: Is it the amount owed under the contract, or some other issue such as quality or timeliness of performance. If the latter, then accord and satisfaction may not lie.

In conclusion, in order to have an accord and satisfaction there must be a bona fide dispute concerning the amount owed. Further, there must be accompanying language that the check is being tendered as full and final payment. The issue of a bona fide dispute is always a question of fact which differs from case to case. The creditor faced with this situation has two options, cash the check and be able to overcome the affirmative defense of accord and satisfaction or return the check to the debtor. From a debtor’s point of view the best way to handle this type of situation is to get the settlement agreement in writing prior to paying any amount, thus avoiding the possibility of future litigation.