USING A CHECK TO SETTLE A DISPUTE
There is a lot of misinformation circulating about when a check that indicates that it is payment is full can be used to finally resolve a dispute. The Uniform Commercial Code, which governs the payment of checks, sets forth some pretty clear rules when this can and cannot be done. Let’s start with an example.
Suppose you have work done at your home and are pleased with most of the work but there is a part which you now believe was improperly completed. You have a dispute with the contractor. The contractor believes he is owed $2,000. You believe the actual amount is $1,750. So, you write a check made payable to the contractor for $1,750 and mark it “paid in full”. If the contractor cashes the check, is the dispute finally settled?
The settlement of this type of dispute is technically referred to as an “accord and satisfaction”. The Uniform Commercial Code says that a check may act as an accord and satisfaction only if the following conditions are met. First, the check must clearly indicate it is in full satisfaction of the particular obligation. Second, the check must be a good faith attempt to resolve the dispute and not be issued as a trap for an inattentive creditor. Third, the debt must actually be unliquidated (which means the exact amount owed is not clear) or subject to a bonified dispute. Finally, the check must be cashed.
Even if these conditions are met, the person who receives the check can reject the settlement within 90 days by returning the amount paid.
So, what can we safely say about the application of these rules? First of all, it will do no good to write “paid in full” on your next mortgage payment. Even if the bank cashes the check, you will still owe the mortgage because the sum owed was not incapable of being calculated, your action was not in good faith, and there was no genuine dispute about the balance owed. We can also learn that if you are the recipient of such a check, you should carefully consider whether or not you wish to accept the amount tendered as a full satisfaction of the underlying obligation. Since some of the tests are a bit subjective, it is not wise to count on being able to collect the remaining balance you believe is owed, even if all the criteria required by the Uniform Commercial Code are not met.
There are clearly better ways to settle a dispute. Obtaining a legal release, or at least a document signed by both parties acknowledging the dispute has been settled, is the best way to remove the uncertainty.