By cashing this check, you consider it to be paid in full.?

Question

Here is a legal scenario I wonder if is legal and enforceable as a contract in the State of Ohio, and other States.

Joe owes a legal debt of $1000 to Tim. Joe can’t afford the full amount of the debt, so he issues a check to Tim for $200. On the back of the check is fine print, which says:

Payee, Tim, agrees that by cashing, endorsing or signing considers this debt of one thousand to be paid in full.

Tim cashes the check, but ignored the fine print and later refuses to consider the amount paid in full. How would this play out in court? Your best educated guess. Is there any case law on this?

If you don’t have a J.D. after your name, or working on one, or don’t know what the letters stand for, please give your fingers a rest and sit this one out.

Answer 1

Here's how it would play out in court: Judgment for Tim, and against Joe, in the amount of $800.

This is governed by Uniform Commercial Code § 3-311 ("Accord and Satisfaction by Use of Insturment"). You can read it for yourself at the link below, but the jist of it is that marking a check "Paid in Full" will only work if: 1. There was a bona fide dispute as to how much Joe actually owed to Tim (your fact pattern does not mention one); and 2. The check either contained, or was accompanied by a CONSPICOUS statement that it is being tendered in full satisfaction of the claim (you said it was in "fine print.")

Answer 2

Amusingly enough, this was basically the same fact pattern as the Thursday Performance Test on the California Bar last week.

As numerous other posters have already said, the concept is called accord and satisfaction. Under common law, the agreement on the back of the check constitutes an accord, being a contractual agreement to resolve the debt and dispute, and cashing it provides the satisfaction (consideration and execution) to make the contract binding.

However, there is also the problem of the pre-existing duty rule. The payor already had a duty to pay the payee, at least that amount (and more). Thus, a new contract cannot be formed where both sides are not supplying new consideration. To be binding (and thus operate as an accord), the check would have to offer some new consideration -- either difference in payment terms (cash as opposed to barter), or waiver of statute of limitations on the claim by payee, or waiver of a counter-claim by payor, etc. Absent, the additional consideration, the pre-existing duty rule prevents the partial payment from forming a new contract.

Yes, there is case law on this, in various states. Some states have also enacted statutes that set greater requirements on accord and satisfaction. The most common additional requirement is that the amount in controversy must actually be disputed in good faith, which is also in UCC §3-311. In other words, if both parties agree that $1000 is owed, then there is not a good faith dispute in the amount due, and (under those statutes) it doesn't count as an accord and satisfaction, and the payee may sue for the remainder.

As always, laws vary by state. Bill Smith's UCC quote is correct, but applicable only in those states which have adopted §3-311 of the UCC. (see second link)

Answer 3

"Accord and Satisfaction" contracts, like the one at issue in your scenario have to be in the open. You can't just stick it in the fine print in the back or the court will likely find the other party did not have proper notice of the modification and therefore no mutual assent to the new term ever took place.

If the term was on the front of the check in the note section a court would likely find that the party had notice and by cashing the check accepted the new term. Therefore, mutual assent to the modification of the debt contract had taken place.

Of course it is always jurisdiction specific and you would have to investigate the case law of your jurisdiction to see where the court will make the distinction, but my guess is that fine print in the back of the check would not be sufficient for an enforceable accord and satisfaction contract.

Answer 4

According to my business law book... anything written on a check can be legally binding. In court, a judge would rule that this debt has been settled by the endorsment of the check.

This has been frequently used on things like getting out of debts, unknowingly signing people up for services, etc. Point is that Tim should have looked everything over and not signed the check. He would have needed to make Joe re-issue the check and then endorse it "with recourse" written on it. Without that phrase he could lose regardless.

Answer 5

in a legal contract both parties have to sign and affirm the understand the terms of said contract.

you'd need both sig's plus the dates each signed.

Answer 6

I absolutely concur with Bill Smith's answer.

There must be a bona fide dispute, though, as he says.

Answer 7

GOOD MAN BILL SMITH.

ALL STATES USE THE UCC.