If you own a small business, you may have run into the following scenario in which a client or customer owes you a significant amount of money, goes radio silent and then lo and behold a check appears for significantly less. Don’t cash that check before determining if the check is what the law calls an ‘accord and satisfaction.’
Understanding accord and satisfaction
What is an accord and satisfaction? Put plainly, it is a settlement. If the person owing the money tenders a check reflecting a lesser amount and it conspicuously states that it is to settle some bona fide dispute, then depositing the check may act as a bar to additional recovery.
Example of an accidental settlement
A relatively recent federal case in Virginia illustrates the point. Middleburg Vol. Fire Dep’t, Inc. v. McNeil & Co., Inc., et al. is an insurance coverage dispute involving an embezzling employee at a fire department. Before the fire department files suit, the insurance company issues a check to the fire department for $50,000. Accompanying the check is a letter stating that the check was for the “policy limits.” There is even a note on the check: “payment of the limits of the policy for money stolen by an employee.” Case No. 1:14-458 (E.D. Va. 2014) at 10. The fire department either cashes or deposits the check and later sues the insurance coverage for more.
Having properly alleged an accord and satisfaction, the insurance company had met its initial burden. It was the fire department’s turn to overcome the presumption that an accord and satisfaction likely occurred. The fire department argued that the words “full settlement or payment” were not used. It further argued that cashing the check was due to a change in attorneys and not a reflection of the mutual assent needed to constitute acceptance of an offer. Applying the nearly universal reasonable person standard, the court was unpersuaded by the fire department’s arguments. It concluded that a reasonable person would have understood that cashing or depositing the check with its accompanying statements constituted acceptance.
Pause before accepting any partial payments
Not every deposit or cashing of a check for a lesser amount will constitute an accord and satisfaction, but the Middleburg case is a good example of how easily a settlement can occur.
If your business is facing this situation, schedule a consultation with Jabaly Law. An experienced business and collections attorney can help you understand the steps you should take.
