Can Writing on a Check Create a New Contract? | Romano Law

Can Writing on a Check Create a New Contract?

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Can Writing on a Check Create a New Contract?

Have you ever wondered what to write on the “memo” line of your check?  That space can be a very useful tool.  For example, you hire a web developer to design a website for your business for $3,000.  They perform the service, but the quality of the site does not live up to your expectations, so you complain to the developer.  Instead of paying them the $3,000, you write a check for $2,000 and write “Payment in Full” on the memo line.  Does this mean that you are no longer on the hook to the developer for the remaining $1,000?

What to Write

Writing “Payment in Full”, “In Full Settlement”, or similar language on a check either on the memo line or in the endorsement area (in the back) may actually create a new agreement that supersedes the initial agreement.  This can be done through what’s known as Accord and Satisfaction.  By writing a check for a different amount than originally agreed upon and writing “Payment in Full” on the check, you are essentially making a new offer.  If the other side deposited the check, then they have accepted your new terms.  In this way, the original contract is replaced by a new one – the countersigned signed check.

In NY You Need Additional Evidence

Accord and Satisfaction is based on case law, but can also be found in the Uniform Commercial Code.  Many states recognize this principle, but interpretations vary from state to state.  In New York, a check that is marked “Payment in Full” does not create a new agreement on its own.  There needs to be additional evidence that each side intended to create a new agreement (e.g., an accompanying email, text or some other record).  It may not be enough to satisfy the Accord and Satisfaction principle in New York to simply write “Payment in Full” on the memo line, and have the other side deposit the check.

On the Receiving End

On the other side, how can you combat the “Payment in Full” tactic?  For one, if you’re the person cashing the check, you may want to write something like “Received Under Protest, Without Prejudice” in the endorsement area.  Depending on which state’s law applies, writing something like this could preserve your right to recoup the remainder owed to you under the initial deal.  In most states, the other side may be unable to go after you for the remainder of the money if you adopt this defensive tactic.  However, once again, New York is a special case.  Currently in New York, the rule is that if you write protest language on the check, then you can go after the remainder owed to you under the initial agreement.  However, New York recently adopted new sections to the UCC making it unclear whether this rule will continue.

Conclusion

Writing something like “Payment in Full” on checks may create a new binding agreement between two parties.  Still, it is important to be careful if you are relying on methods like these for settlement purposes. Differences in state law and the current uncertain status of “protest” checks in the state of New York (and elsewhere) make it difficult to determine if these methods are legally effective. The smartest option may be to enter into a settlement agreement in order to ensure protection and avoid costly litigation.  That said, electronic payments are emerging as a dominant form of commerce.  In light of this, will the courts even need to continue to address writing on checks, or will paper checks become a thing of the past?   Until then, read your checks carefully before you take them to the bank.

Notice

This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.

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