Many businesses or consumers seek to avoid litigation, despite a dispute over a debt, by making payment with a check that includes language that the check is tendered "in full payment" or "in full satisfaction" of all claims. This situation may arise when a consumer contends that the goods she purchased are not satisfactory and she offers to pay only part of the purchase price. Similarly, an insurance company may seek to resolve a claim by a policyholder by paying less than the policy limits due to a dispute over coverage or the extent of the injury or damage. If the restrictive language on the "full settlement check" is legally binding, the creditor is precluded from further recovery for the remaining balance in subsequent legal action.
Payment in Full
Two developments in Maine law have assured the continued vitality of full settlement checks as an informal dispute resolution mechanism. In Herrick v. The Maine Wild Blueberry Company, 670 A.2d 944 (1996), the Maine Supreme Judicial Court held that the plaintiff could not obtain a further recovery from the defendant because the plaintiff had cashed a check from defendant which was accompanied by a letter that specified the payment represented "final settlement."
The legal principals relied upon by the Court were also recently enacted by the Maine Legislature upon passage of the revised Uniform Commercial Code - Negotiable Instruments. See 11 M.R.S.A. § 3-1311 (1995). If these principals are properly understood, businesses and consumers may continue to use the "full payment check" to settle disputes. Conversely, the creditor may be able to avoid the impact of these rules if certain actions are taken to resist the full settlement language.
Accord and Satisfaction
The basic legal principal providing the foundation for the full settlement check is the doctrine of "accord and satisfaction." Simply put, an accord is a contract in which the creditor accepts a substituted performance, ie. payment, in satisfaction of the original contract. Satisfaction occurs when the creditor cashes the check. Maine case law has consistently held that an accord and satisfaction occurs, as a matter of law (meaning that no trial is necessary), if the creditor cashes a check with language that the check is tendered as "full and final payment," "in full satisfaction of all claims" or similar language. As the Maine Wild Blueberry case illustrates, the language may be included on the actual check or in an accompanying cover letter.
Before the passage of 11 M.R.S.A. § 3-1311, a business or other creditor which received a full settlement check faced a dilemma: either cash the check and waive any claim for the balance or return the check and then sue for the full balance. Because the full settlement check is enforceable and will preclude a suit for the balance, the creditor could not delete the restrictive language on its own. Furthermore, the creditor could not silently intend to sue for the full amount; the law will instead look to its objective action in cashing the check.
Protections for the Creditor
While Section 3-1311 still allows the creditor to return the check and to sue for the balance, it also provides some protection against an inadvertent accord and satisfaction. Recognizing that many businesses deposit large volumes of checks without analyzing the restrictive endorsements that may appear on the checks, the drafters of the Commercial Code created two possible methods to allow full recovery even if the full settlement check had been cashed.
First, the business could specify that any disputed debts or full settlement checks must be sent to a designated person, office or place; full settlement checks sent to undesignated locations would not preclude a suit for the balance unless the person receiving the check had direct knowledge of the dispute and knew that the check was tendered in full satisfaction. A conspicuous statement on the original bill or invoice specifying the necessary person or location satisfies this requirement.
Second, any creditor could repay the amount of the original check to the debtor within 90 days after the full settlement check had been cashed. However, this method is likewise not available if the person receiving the check had direct knowledge of the dispute and knew that the check was tendered in full satisfaction.
Summary
In summary, any business or creditor must adopt methods to handle "full settlement" checks. If the check is cashed, there is an honest dispute between the parties and the full settlement language is used, no further recovery will be permitted unless one of the two exceptions discussed above have been satisfied. Conversely, a business or individual who owes money to another may successfully avoid liability for the full balance if a full settlement check has been cashed by the creditor when an honest dispute exists.