Make sure

In the construction context, accord and satisfaction often arises when a contractor offers a final payment to a subcontractor for less than the subcontractor claims is owed.

The legal doctrine of "accord and satisfaction" is triggered when two parties agree to accept a stipulated performance to settle a dispute. The agreement is known as the "accord" and the performance of the agreed-upon terms is known as the "satisfaction." In the construction context, accord and satisfaction often arises when a contractor offers a final payment to a subcontractor for less than the subcontractor claims is owed. If the contractor clearly and conspicuously declares (either in a letter on even on the check itself) that the reduced payment constitutes "final payment," the subcontractor has only two options: accept the reduced payment in final satisfaction of the debt, or refuse the reduced payment and reserve the right to pursue the full debt.

The case

In the case of Gelles & Sons General Contracting Inc. v. Jeffrey Stack Inc., 264 Va. 285 (2002), a contractor and subcontractor disputed the amount owed the subcontractor for final payment. When the subcontractor cashed the contractor's "final payment" for less than the amount it claimed to be owed, the subcontractor was barred from seeking any additional amounts.

In Gelles, a dispute arose when a masonry subcontractor submitted a final invoice for $26,175 and the contractor asserted the balance was only $13,580. After the subcontractor demanded full payment, the contractor sent a letter detailing deficiencies in the subcontractor's work and concluding that it would "stand by its final amounts as stated in the latest correspondence. ... Enclosed please find a check in the amount of $13,580 representing final payment on the contract."

The subcontractor cashed the check, then filed a lawsuit seeking the remaining balance. The contractor argued that the subcontractor's action was barred by an accord and satisfaction, namely the cashing of the check in light of the "representing final payment on the contract" language in the letter. To establish an accord and satisfaction, the contractor had to prove that (1) it tendered the amount in good faith and in complete satisfaction of the claim; (2) the amount of the claim was subject to a legitimate dispute; and (3) the subcontractor obtained payment (i.e. cashed the check). Because the contractor adequately established these facts, the subcontractor was barred from seeking additional amounts.

The court's decision

On appeal to the Supreme Court of Virginia, the subcontractor argued that the language in the contractor's letter failed to clearly inform the subcontractor that the check was being offered in full satisfaction of the claim. The court rejected the subcontractor's argument, holding that a "reasonable person" would have understood the check was offered in full satisfaction of all amounts owed.

It should be noted that most states, including Virginia, allow a party that cashes a "final payment" the opportunity to repay the payor within 90 days, and thereby to nullify any accord and satisfaction otherwise created by the cashing of the payment. But cashing the check with a reservation of rights, or after striking out the "final payment" language on the check, will not suffice. The subcontractor must accept or reject the tendered payment as it is tendered; the subcontractor may not modify the terms under which the payment is offered and seek the remaining amount claimed to be due.

People responsible for receiving and processing payments should review every payment and any accompanying correspondence for language asserting that the amount tendered serves as a final payment. Failure to do so may bar recovery of any additional claimed amounts. Contractors are advised to ensure that payments received do not claim to be final payments and to understand the consequences of accepting payment under such conditions.

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.