When a payment dispute arises on a construction project, an often-used tactic by customers is to hand over a check for a lesser amount with “final payment” written in the memo line. At first glance, a contractor may just disregard the note, cash the check, and look to recoup the remaining balance.
However, caution should always be taken with these types of checks. For example, a recent case involving a Minnesota contractor held that by cashing the check, the contractor waived their right to collect the unpaid balance.
Accord and satisfaction
Accord and satisfaction is a legal concept defined as “an agreement (accord) between two contracting parties to accept alternate performance to discharge a preexisting duty between them and the subsequent performance (satisfaction) of that agreement.” Most states have incorporated this concept into their laws in some form or another.
In Minnesota, this can be found under Minn. Stat. §336.311(a):
“(a) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument…
(b)… the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”
So does “final payment” or “paid in full” on a check memo line constitute “accord and satisfaction?”
Well, as with most things in the legal realm, it depends on the circumstances.
A recent case out of the Minnesota Court of Appeals highlighted some of the factors that a contractor should consider before cashing one of these checks.
For a broader discussion on the topic, see: Are Checks with “Payment in Full” in Memo Lien Legally Binding? Do They Affect Mechanics Lien Rights?
Contractor cashes ‘final payment’ check with an outstanding balance
The case in question is Detailed by Design, LLC v. Langer.
- Owners: Linda & Stacey Langer (Langers)
- Represented by: Robert Shainess & Hannah Stein of Capstone Law, LLC
- Contractor: Detailed by Design, LLC (DBD)
- Represented by: Courtland Merrill & Lauren Schoeberl of Saul Erwing Arnstein & Lehr, LLP
DBD was hired by the Langers to perform renovation work on their summer home under a $40,975 contract. Half of the contract price was paid upfront, and a few months later DBD submitted an invoice for the remaining balance; including some adjustments.
However, the Langers were dissatisfied with the work performed. They responded to the invoice with a letter to that effect; which read as follows:
“My intention with this letter is to outline the remaining costs as communicated via your invoice, compare that with the work successfully completed, provide visibility to the partial damages we incurred, and communicate the final amount we are paying. My goal was to be as reasonable as possible in balancing the work your contractors completed with the damages we incurred based on the decisions you made.“
Below this, was a bulleted list with the heading “Details from invoice with some comments where the work was unacceptable.” This list detailed each line item of work invoiced along with comments regarding the quality of the work performed and any damages incurred. The letter ended with the following calculation:
- New Invoice Amount: $41,828
- Already Paid: $20,487.50
- Amount Remaining: $21,340.50
- Damage from water (partial): $5,384.50
- Final Payment: $15,956.07
Included in the envelope was a check for $15,956.07, with the words “Final payment” printed in the memo line; which DBD endorsed and cashed.
Shortly thereafter, DBD filed a breach of contract claim in small claims court (conciliation court) seeking the difference, $7,534.43. In response, the Langers counterclaimed seeking $15,791.83 to repair the alleged damages caused by DBD’s work.
The court ruled in favor of the Langers, and awarded them $6,083. On appeal, the Langers moved for summary judgment on the grounds that the claim was barred by accord and satisfaction.
The court granted the motion, and DBD again appealed.
Court holds that the letter and the check were binding as final payment against the contractor
DBD’s first argument was that the letter nor the memo line on the check weren’t “conspicuous” enough to justify an accord and satisfaction. The court disagreed.
A “conspicuous” term is one “so written, displayed, or presented that a reasonable person against which it is to operated ought to have noticed it.”
Here, DBD acknowledged receipt of the letter and check, the first sentence of the letter stated the purpose of the letter was to “communicate the final amount we are paying,” one portion specifically stated “I will not pay for this,” the letter ended with “Final Payment: $15,956.07,” and the check memo line itself had the words “Final Payment” printed clearly.
The court concluded that “no doubt that [DBD] ‘ought to have noticed’ the final-payment wording and affirm[ed] the district court’s determination that it was ‘conspicuous.'”
The second argument DBD set forth was that the language of the contract explicitly required that any changes to the price must be in writing and agreed upon by the parties. This argument was also rejected by the court.
“… an accord and satisfaction is not a contract modification, but a new contract that discharges all rights and duties under a previous one… The question of Detailed’s subjective understanding is not relevant to whether an accord and satisfaction has been established. Once the four elements… are proven, then, by operation of law, an accord and satisfaction has occurred and all rights and duties under the original contract are discharged… For that reason, ‘the creditor waives a cause of action relating to the original debt,’ regardless of the creditor’s subjective intent.”
Be very careful with ‘final payment’ checks
The overall quality of work performed on a construction project can often be a point of contention. And when parties can’t reach an agreement, a customer may try and end the discussion by handing over a check with “paid in full” or “final payment” on the memo line. A contractor who receives such a check should tread lightly — particularly if that check is accompanied by a letter stating the same.
On the one hand, it’s tempting to cash the check as soon as you can to get your subs and suppliers paid. On the other hand, cashing that check could result in waiving any rights to make a claim for the remaining amount due. Obviously maintaining cash flow is important, but ensuring you get paid what you’ve earned is even more so.