Little did Mick Jagger know that if only he had added a few words to this rock classic he would have been singing about a classic doctrine in contract law: accord and satisfaction. This doctrine may elicit a "so what," but if you operate a business that invoices and receives payments from customers, you need to know about this doctrine - or face the real potential of economic loss. So bear with me.
Accord and satisfaction is roughly equivalent to a compromise and settlement. In contract law, according to Professor Garner in his Dictionary of Legal Usage (3rd ed.), "an accord is an agreement to substitute for an existing debt or obligation some alternative form of discharging that debt; a satisfaction is the actual discharge of the debt by substituted means."
Accord and satisfaction issues commonly arise where a debtor tries to pay less than the amount invoiced for goods or services by a notation on the debtor's check that it's tendered in full payment. For example, Able and Baker agree that Able will sell widgets to Baker for $10K. Baker receives the widgets but then decides that they weren't worth $10K. So Baker writes Able a check for $8K and writes payment in full on the front of the check or on the back. Able decides that partial payment is better than nothing, so he cashes Baker's check and sues Baker for the remaining $2K. Baker argues that Able's acceptance of the $8K check discharged the entire obligation. Who wins?
Under Michigan law, Baker wins because its check to Able contained a conspicuous statement (payment in full) to the effect that it was tendered as full satisfaction of the claim. But here's a twist. What if Able, on the advice of his lawyer, simply crossed out the payment in full notation and then proceeded to cash the check? Does Baker's argument that there was an accord and satisfaction still prevail? In Michigan, he does, according to established case law. As John Trentacosta cautions in his Michigan Contract Law (2d ed.) treatise, this result "is obviously a trap for the unwary, and attorneys should take steps to make sure that the client is aware of it."
But other courts see it differently. In a recent case involving Uber decided in California (TSI USA LLC v. Uber Technologies, Inc.), Uber tendered a $200K check to TSI in payment of TSI invoices amounting to $1.4M. A termination notice from Uber accompanied its check that stated "by executing below you acknowledge and agree that such payment constitutes full and final payment," followed by a signature line labeled "[TSI] Chief Executive Officer." TSI cashed the check and sued Uber for the $1.2M difference. Uber defended with accord and satisfaction, i.e., that TSI's acceptance of the $200K operated to fully discharge the debt.
But like Mick, Uber couldn't get its (accord and) satisfaction. TSI argued that it thought the signature of its CEO was required for the payment to satisfy the debt, and although TSI cashed the check, it wasn't endorsed by its CEO. The court agreed with TSI that the language was not so "explicit and unequivocal as a matter of law so as to preclude TSI" from suing Uber for the remaining $1.2M balance. Another factor in the case was the huge difference between the $200K tendered and the $1.4M total invoiced amount.
The lesson from these cases is simple. If your Accounts Payable Department receives a check for less than the amount invoiced with some sort of full payment notation either on the check or in a letter enclosing the check, don't cash that check until you receive expert legal advice about whether you are entering into an accord and satisfaction with your customer!