Over the past two plus decades of my business litigation practice, I have repeatedly been asked the question from puzzled clients, “should I cash the check or not?”
This situation usually arises when the client is owed $2,000 (for example) and the customer mails the client a check for $1,500 with a notation “payment in full” written on the check. Should you cash the check and send a follow-up invoice and/or bill for the remaining $500 balance. Can you legally do this?
Cashing a check marked “payment in full” will likely discharge the debtor’s obligation entirely, under the legal doctrine of “accord and satisfaction.” Tendering of a check marked “payment in full” or “paid in full” is an offer to settle the debt of an amount different than what the parties’ contract says. Cashing the check is considered to be acceptance of the offer and extinguishes the debt. In order to be effective, however, the words must be clear and conspicuous on the check. There must be no doubt that the debtor intends the check to settle the debt entirely.
The safest avenue (if you are faced with a situation similar to the above example) is to cash the check, only if you agree to accept the lesser amount as payment in full. Otherwise, return the check to the sender along with an explanation of why you didn’t cash the check.
The legal analysis of whether you can simply strike out the “payment in full” language and cash the check and seek the balance owed under the contract is murky. Civil Code section 1526 provides that a creditor can render the “payment in full” language ineffective by striking it out. However, Commercial Code section 3311 provides that the “payment in full” language is binding regardless of whether the creditor strikes it out. The safe bet, if you like to play it safe, is to not strike out the language and just return the check to the sender uncashed if you do not agree to accept the lesser amount as payment in full.
As in many areas of the law, sometimes there exists ambiguity or what appears to be conflicting code provisions that make doing business frustrating and complicated without the assistance of a good business attorney. Reid & Hellyer has extensive experience in assisting business clients in a wide range of legal issues they may encounter.