Contractor who crossed out

Settlements of disputes are commonplace in the construction industry.

Gerald I. Katz

Settlements of disputes are commonplace in the construction industry. As demonstrated in Hoerstman General Contracting, Inc. v. Hahn, the binding effect of a settlement often depends not only on how it is offered but also how it is accepted.

The case
In Hoerstman, homeowners hired a contractor to remodel their residence. When significant delays and cost overruns occurred, combined with contractor's failure to meet the scheduled completion date, the homeowners directed the contractor to finish the work regardless of the expense. The contractor agreed so long as the homeowners paid the extra costs; the homeowners concurred.

Upon completion, the homeowners acknowledged that they owed more than the original bid price and paid the contractor $125,000; however, the contractor claimed that he was owed an additional $32,750. In an attempt to settle the dispute, the contractor offered to accept $16,910.79 in lieu of the claimed amount. In a letter to the contractor, the homeowners replied that only a $5,144.79 balance was due. Included with their letter was a check for the same amount. The home¬owners also wrote the words "final payment" on the check and indicated in their letter that they believed that such payment closed their account. On advice of counsel, the contractor crossed out the words "final payment" and deposited the check. When the homeowners made no additional payments, the contractor brought suit. In their answer to the complaint, the homeowners asserted the affirmative defense of "accord and satisfaction" based on the depositing of the check representing final payment.

The decision
The trial court held for the contractor without explicitly ruling on the issue of accord and satisfaction. On appeal, the appellate court ruled that the words "final payment" were not sufficient to inform the contractor that acceptance of the check discharged the entire claim.

On further appeal, the state supreme court analyzed this accord and satisfaction issue. First, the court noted that two lines of cases had developed regarding this legal principle. The first line of cases held that the question of whether there was a "meeting of the minds" sufficient for an accord and satisfaction is a question for the jury. The second line held that the required meeting of the minds is implied as a matter of law simply by the acceptance of an offer, and the fact that the recipient altered or crossed out text setting forth the offer is irrelevant. In addition, the supreme court found that the state legislature subsequently adopted the uniform commercial code ("UCC"), which followed the second line of cases. The court concluded that the UCC is intended to apply to nearly every situation involving negotiable instruments, like checks, including accord and satisfaction scenarios. Therefore, the court held that the UCC, not the common law, applies to an accord and satisfaction involving a negotiable instrument such as a check.

Under the UCC, the first requirement of an accord and satisfaction is a good-faith offer to a claimant to fully satisfy its claim. The Michigan Supreme Court found that the homeowners made what they thought was a fair offer and provided comprehensive explanation and support for the offered amount. As such, the court concluded that the homeowners' offer was made in good faith as required by the UCC.

The second requirement of an accord and satisfaction involving a negotiable instrument under the UCC is that the claim be "unliquidated" (i.e., liability for the claim and/or the amount of the claim is in dispute). The Supreme Court determined that the contractor's claim was unliquidated because the contractor performed extra work without an agreement regarding the amount to be paid, and the cost of the contractor's changes and overruns were left unspecified and in dispute.

Finally, for an accord and satisfaction, the UCC requires that the claimant obtain payment via a negotiable instrument. The requirement was satisfied here because the contractor deposited the homeowners' check.

Having found that the UCC's requirements for an accord and satisfaction were satisfied by the homeowners' check, the Supreme Court concluded that the contractor's claim was discharged by its depositing of the check. Under the UCC, there are two ways to discharge a claim by a negotiable instrument: (a) if the instrument, or an accompanying written communication, contains a conspicuous statement that it is being offered in full satisfaction of the claim, or (b) if the claimant knew that the instrument was offered to fully satisfy the claim.

The state Supreme Court found that the contractor knew that the homeowners intended the check as a final payment, but deposited it anyway due to incorrect legal advice that the depositing would have no effect under Michigan law. Moreover, the court noted that both the check and the accompanying letter contained a conspicuous statement which demonstrated that the check was offered by the homeowners in full satisfaction of the claim. Accordingly, the Supreme Court ruled that there was an accord and satisfaction and the contractor's claim had been discharged by his depositing of the homeowners' check.

Parties to a construction dispute must be very careful how they entertain settlement offers from the other party. As Hoerstman shows, rejecting an offer to fully resolve your claim for a lower payment may be ineffective if you accept that lower payment. Further, the payee cannot unilaterally change a restrictive endorsement such as "final payment."

Gerald I. Katz is an attorney specializing in construction law throughout the United States with Katz & Stone LLP, Suite 600, 8230 Leesburg Pike, VA 22182