BEWARE OF CHECKS, AND COVER LETTERS ENCLOSING CHECKS, INDICATING "FINAL PAYMENT"
Many issues should come to mind when you are tendered a check marked as FINAL PAYMENT, or a letter describing an enclosed check as FINAL PAYMENT, and whether your endorsement of that check prevents you from seeking further compensation on that account or project. Based on a recently published Michigan Supreme Court case, the answer is YES. You must be very aware of conspicuous language in cover letters and on checks which can be construed to indicate full satisfaction of an account.
In Hoerstman General Contracting, Inc. v Hahn, the Michigan Supreme Court prevented a residential remodeling contractor from seeking further payment from homeowners on an account because of an "accord and satisfaction." When the contractor incurred delays and cost overruns on the project, the homeowners instructed the contractor to complete the work no matter what the expense. Even though the contractor performed significant alterations and additional work to the original project design, the homeowners refused to agree in writing to any changes to the existing contract but assured the contractor that he would be compensated.
The homeowners recognized an amount due more than the original bid price and paid the contractor $125,000.00. But the contractor sought an additional $32,750.00. The contractor sent a letter to the homeowners indicating it would accept $16,910.79 and provide a lien waiver and close the account in exchange for the amount requested. Instead, the homeowners replied with another letter in which they enclosed a check for $5,144.79 marked with the words FINAL PAYMENT on the check. In addition, the letter enclosing the check detailed the accounting and reasoning behind the final amount and stated "If we send you a check for $5,144.79 we will consider this account closed." The contractor sought legal advice, and crossed out the words "final payment" and deposited the check. The contractor then initiated legal action against the homeowners seeking further payment on the account.
The Michigan Supreme Court held the contractor’s cause of action was barred by the homeowners’ affirmative defense of "accord and satisfaction." Article III of Michigan’s version of the Uniform Commercial Code comprehensively deals with negotiable instruments. A check is a negotiable instrument entered into between the maker and payee. The Court found that MCL § 440.3311 controlled the outcome of this dispute in favor of the homeowners. A copy of which is attached for your review.
All three elements of an accord and satisfaction existed when the court found the homeowners exhibited good faith because they offered the contractor what they thought was a fair deal and the detailed cover letter enclosing the check included clear explanations of their reasoning. The Court also found that "because the cost of the changes and overruns were left unspecified and are in dispute, the claim for them was unliquidated," and that the claimant obtained payment of the instrument when the contractor deposited the check. The claim was discharged because the contractor knew the homeowners’ intent when they tendered the check and letter marked as final payment.
You must be careful. Your endorsement and deposit of a check marked with conspicuous language indicating satisfaction of a claim, or your endorsement and deposit of a check included with a cover letter indicating final payment, may bar your right to seek further payment on the account or project. The crossing out of "final payment" on the check is irrelevant. Even though the contractor could prove additional damages in the Hoerstman case, the court barred further recovery based on an "accord and satisfaction."
