The Accord and Satisfaction and of the UCC

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1 University of Tulsa College of Law TU Law Digital Commons Articles, Chapters in Books and Other Contributions to Scholarly Works 1985 The Accord and Satisfaction and of the UCC Martin Frey Follow this and additional works at: Part of the Law Commons Recommended Citation 56 Okla. B.J (1985). This Article is brought to you for free and open access by TU Law Digital Commons. It has been accepted for inclusion in Articles, Chapters in Books and Other Contributions to Scholarly Works by an authorized administrator of TU Law Digital Commons. For more information, please contact

2 The Accord And Satisfaction And Of The UCC By Martin A. Frey Blue Ribbon Stables and Sunnydale Farms, a thoroughbred horse breeding farm, enter into a contract for the sale of Handsome Charlie, a race horse. Sunnydale fully performs by delivering Charlie. Several weeks later, Sunnydale receives a check from Blue Ribbon for $500,000, an amount substantially less than the $1,000,000 contract price. The check carries the notation "payment in full." Should Sunnydale: (a) deposit the check as is; (b) strike "payment in full," add the notation "without prejudice," and deposit the check; or (c) return the check to Blue Ribbon and demand full payment? If Blue Ribbon had sent the check to pay for a stud fee, a service, rather than for Handsome Charlie, himself, would the same course of action as to the check be appropriate7 If Blue Ribbon had sent the check to compensate Sunnydale for personal injury committed through the negligence of a Blue Ribbon employee on the owner of Sunnydale Farms, would the same course of action be appropriate? In each transaction, Sunnydale either had fully performed or had no duty to perform and Blue Ribbon is attempting to discharge its duty to pay. If both Sunnydale and Blue Ribbon had outstanding duties, Blue Ribbon's attempt to discharge its duty would not involve an accord and satisfaction but rather a modification or a substitute contract. This article is limited to the potential accord and satisfaction situation, that is, where the payee has fully performed or had no duty to perform. What Is an Accord and Satisfaction? The accord, a contract to pay a stated amount to discharge a prior obligation, begins with a traditional offer, a promise for consideration. In the offer for the accord, the drawer promises to pay the payee the amount stated on the check as full payment in exchange for the payee's promise to take this stated amount as full payment for the drawer's prior obligation. While this discussion presents the accord as a bilateral contract (a promise for a promise), an accord could be a unilateral contract (a promise for a performance) if the consideration for the drawer's promise were not "the payee's promise to take the stated amount as full payment of the drawer's obligation" but rather "the payee's taking the stated amount as full payment of the drawer's obligation." By promising to take the stated amount as full payment in exchange for the drawer's promise to pay the stated amount as full payment, the payee accepts the offer and forms the accord contract. The payee's performance of his or her promise (exercising dominion over the check by an act such as negotiating the check) is the satisfactionsatisfaction being no more than the performance of the accord contract. If the payee does not expressly promise to take the stated amount as full payment, the payee's promise may be implied from the payee's performance (exercising dominion over the check). Thus when the payee negotiates the check, this exercise of dominion acts as both the acceptance of the offer for the accord and the satisfaction of the accord. Editor's Note: This article updates and revises an earlier version that appeared in the December 1984 issue of the Tulsa Frey The Oklahoma Bar Journal 2551

3 The accord and satisfaction promotes fairness by protecting the bona fide expectations of the drawer who tenders payment on condition that it will be accepted as payment in full and provides a method of settling disputes without litigation. Does an Accord Exist When the Drawer's Obligation Is Neither Unliquidated nor in Dispute? Since the accord is merely a contract, the traditional rules of offer and acceptance, including the rules of consideration, apply. For an offer to exist under classical contract law, there must be consideration for the drawer's promise. The consideration for "the drawer's promise to pay the stated amount as full payment" would be "the payee's new promise to take the lesser amount as full payment." Thus an offer would be made. For an acceptance to exist, there must be consideration for the payee's promise. The consideration for "the payee's promise to take the lesser amount as full payment" would have to be, under the mirror image rule, "the drawer's promise to pay the lesser amount as full payment." If neither the existence nor the amount of the drawer's obligation is disputed, the drawer has a pre-existing contractual duty to pay the undisputed higher amount. A promise to pay only a part of that undisputed amount cannot be new consideration for the payee's promise and thus is not an acceptance of the accord offer. Without an acceptance and thus without an accord contract, the drawer's notation on the check, "payment in full," is irrelevant and the payee may exercise dominion over the check without losing his or her right to enforce the drawer's original promise to pay.' Even if the drawer's obligation is neither unliquidated nor in dispute, new consideration for the payee's promise can be manufactured if the payee requires the drawer to promise to do something that the drawer was not legally obligated to already do. For example, if the payee required the drawer to promise to pay a day or even an hour before the debt is due, pay at a different place, pay a third person, or pay in personal property or anything other than money, then the drawer's promise would be consideration for the payee's promise to -take -the lesser amount as full payment. 2 Does an Accord Exist When the Drawer's Obligation Is Either Unliquidated or in Dispute? 2552 If the existence or amount of the drawer's obligation is disputed, the notation "payment in full" is significant. When the existence or amount of the drawer's duty under the original contract is disputed, the drawer's promise to pay a stated amount as full payment, by not reaffirming a preexisting duty, can be consideration for the payee's promise to take the stated amount as full payment. With this acceptance of the offer, an accord contract comes into being. Performance of the accord contract, the payee's exercise of dominion over the check, is the satisfaction. Upon satisfaction, the original contractual duties are discharged. When a dispute exists, classical contract law precludes the payee from rejecting the offer for the accord by altering the notation on the check.' The payee, however, may negotiate the check without discharging the drawer if an accord cannot be proven, or the payee does not see the obscure "payment in full" notation. 6 A pleading oversight by the drawer's attorney also may benefit the payee, since the accord and satisfaction is an affirmative defense to a claim on the original contract and must be alleged ii the drawer's answer to the petition. Failure to do so constitutes a waiver.' Does UCC Provide the Creditor with a Method for Accepting the Drawer's Check without the Accord? Concern has been expressed that section of the Uniform Commercial Code alters the classical accord and satisfaction doctrine." Section 1-207, entitled "Performance or Acceptance Under Reservation of Rights," provides: A party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice", "under protest" or the like are sufficient.' It should be noted that since is located in article one it has broad application, that is, it applies to all subsequent articles. Had not been located in article one but rather in one of the subsequent articles (two through nine), its application would have been limited to the scope of that article.1o But while section should not be limited to article two transactions, that is, transactions in goods, courts have not agreed upon its Vol. 56-No. 41

4 MARTIN A. FREY, Professor of Law at the University of Tulsa College of Law, teaches Contracts and Commercial Law. He earned a B.S.M.E. from Northwestern University, a J.D. from Washington University, and a LL.M. from George Washington University's National Law Center, He is a member of the Oklahoma, Missouri and Tulsa County Bar Associations and is a Law School Inspector for the Accredition Committee of the ABA. scope. The Wyoming Supreme Court in Jahn v. Burns limited to "commercial" transactions and would not apply to non-commercial transactions such as a check arising out of a tort claim. A Texas Court of Appeals in Hixson v. Cox held that would not apply to a check sent to pay for engineering and related services since the transaction did not involve a sale of goods. 1 2 This view requires the payee, upon receiving a check marked "payment in full," to determine whether the underlying transaction was a sale of goods or not. If the transaction were a sale of goods, it would come within the scope of article two and would apply. The payee then could write on the check "without prejudice" or "under protest," negotiate the check, and avoid an accord and satisfaction. If the transaction were not a sale of goods, the payee's notation on the check would be of no avail and the payee would be bound by an accord and satisfaction. Whether a transaction is a sale of goods is not always simple, especially in those hybrid transactions that are part sale of goods and part service. This view, which creates an unnecessary dilemma for the payee, has not been embraced by most courts. 4 Several state courts (Alabama, Missouri, New York, and South Dakota) have held that section negates the accord if the payee adds his or her notation to the check.- Under this view the payee could strike out the drawer's statement, write on the check the words "without prejudice" or "under protest," and negotiate the check without losing his or her rights for the balance in dispute.'1 The majority of state courts having opinions (Alaska, Arkansas, California, Colorado, Maine, New Jersey, North Carolina, Oregon, Utah, Washington, Wisconsin and Wyoming), however, refuse to apply to the classical accord and satisfaction." The Wisconsin Supreme Court in Flambeau Products Corp. best summarized the reasons why does not apply to the accord and satisfaction. The court found that although the language of could be read to apply to the accord, the words of do not compel this conclusion. Moreover, if the drafters had intended to change the accord and satisfaction doctrine in such a significant way, the change would have been noted in the comment, and none so appears. In fact the comments to suggest that was intended to apply to ongoing contracts and not to full payment checks that terminate the contractual arrangement. Also, applying to the accord and satisfaction would not necessarily serve to "simplify," or "clarify," or "modernize the law governing commercial transactions" as dictated by 1-102(2)(a) or promote these purposes and policies of the Code as directed by section 1-102(2)(b). The comment to 1-102(2) advises that "the text of each section should be read in the light of the purpose and policy of the rule or principle in question." Since the purpose of the accord and satisfaction is the resolution of disputes fairly and informally without litigation, the application of 1-207, which would permit the payee to disregard the drawer's known intent and conditions, would seem unfair and violative of the good faith obligation of " Several states have discussed the problem and still face interesting dilenmas. The Florida District Courts of Appeal are split in their treatment of the accord. The Second District in Miller v. lung, held applicable so that a payee's notation could negate the accord;20 the Fourth District in The Oklahoma Bar Journal 2553

5 Eder v. Yvett B. Gervey Interiors, Inc., held inapplicable; 2 1 and the Third District in Yelen v. Cindy's Inc., resolved the case without discussing Even in New York, the various intermediate courts do not resolve the issue uniformly. 23 The Michigan Supreme Court has yet to resolve the issue although in Fritz v. Marantette, the court discussed the applicability of while finding an accord through the obsolete "meeting of the minds" doctrine. 2 4 The Connecticut Supreme Court also discussed but refused to resolve its applicability.25 The Bottom Line-Should the Check Be Returned or Negotiated? Although the earlier Code cases hold that authorizes a payee to negate the common law accord and satisfaction doctrine by striking "payment in full" and adding the notation "without prejudice," the more recent cases disagree. Therefore with the national trend preserving the common law accord and satisfaction doctrine and with no reported Oklahoma cases to the contrary, an Oklahoma attorney would be well advised to inform his or her client to return the check to the drawer if indeed the amount is disputed and the client does not want to settle the drawer's obligation for the amount stated on the check. Only if the amount is undisputed should a check for a lesser amount with the notation "payment in full" be negotiated. 1. Metropolitan Life Ins. Co. v. Richter, 173 Okla. 489, 49 P.2d 94 (1935); Gasper v. Mayer, 171 Okla. 457, 43 P.2d 467 (1935); Polin v. American Petrofina Co., 589 P.2d 240 (Okla. Ct. App. 1978). 2. In re Zerodec Mega Corp., 47 Bankr. 304 (E.D. Pa. 1985). 3. L. C. Jones Trucking Co. v. Jenkins, 313 P.2d 530 (Okla. 1957); Gasper v. Mayer, 171 Okla. 457, 43 P.2d 467 (1935); Hodges v. Anderson Drilling Co., 465 P.2d 784 (Okla. Ct. App. 1969); see Sooner Freight Lines v. Lester, 199 Okla. 321, 185 P.2d 469 (1947) (retaining check without indorsement or presentment to establish promisor's liability was not acceptance of the accord offer); see also Kelly v. Kowalsky, 186 Conn. 618, 442 A.2d 1355 (1982). The "Restatement (Second) of Contracts" 281 (1979) makes the following statement as to the accord and satisfaction: (1) An accord is a contract under which an obligee promises to accept a stated performance as satisfaction of the obligor's existing duty. Performance of the accord discharges the original duty. (2) Until performance of the accord, the original duty is suspended unless there is such a breach of the accord by the obligor as discharges the new duty of 2554 the obligee to accept the performance in satisfaction. If there is such a breach, the obligee may enforce either the original duty or any duty under the accord. (3) Breach of the accord by the obligee does not discharge the original duty, but the obligor may maintain a suit for specific performance of the accord, in addition to any claim for damages for partial breach. 4. Wilmeth v. Lee, 316 P.2d 614 (Okla. 1957). 5. Schumate v. Prague Nat'l Bank, 367 P.2d 720 (Okla. 1961). 6. Kibler v. Frank L. Garrett & Sons, 73 Wash. 2d 523, 439 P.2d 416 (1968) O.S. 2008(c) (Supp. 1984); RST Serv. Mfg., Inc. v. Musselwhite, 628 P.2d 366 (Okla. 1981) (summary judgment); French v. Sotheby & Co., 470 P.2d 318 (Okla. 1970); L. C. Jones Trucking Co. v. Jenkins, 313 P.2d 530 (Okla. 1957); R. J. Bearings Corp. v. Warr, 192 Okla. 133, 134 P.2d 355 (1943) (exception to the waiver rule); Hodges v. Anderson Drilling Co., 465 P.2d 784 (Okla. Ct. App. 1969). 8. J. White & R. Summers, "Handbook of the Law Under the Uniform Commercial Code" 13-21, at 547 (2d ed. 1980) A O.S (1981). 10. The 1950 draft of the Code did include a statement concerning the accord in article three. U.C.C (3) and comment 6 (1950). This statement did not appear in the 1958 draft of the Code P.2d 828 (Wyo. 1979) S.W.2d 330 (Tex. Ct. App. 1982). Accord Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 105 A.D.2d 684 (N.Y. 1984) (1-207 does not apply to checks in payment for services); Blotiner, Derrico, Weiss & Hoffman, P.C. v. Fier, 101 Misc. 2d 371, 420 N.Y.S.2d 999 (Civ. Ct. 1979) (1-207 does not apply to checks in payment for services). 13. Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 105 A.D.2d 684 (N.Y. 1984), discussed whether a contract to perform roofing repair, that ultimately led to a new roof, was a sale of goods. 14. American Food Purveyors, Inc. v. Lindsay Meats, Inc., 153 Ga. App. 383, 265 S.E.2d 325 (1980); Brown v. Coastal Truckways, Inc., 44 N.C. App. 454, 261 S.E.2d 266 (1980) (1-207 applies to checks in payment for services). 15. Alabama: Bivins v. White Dairy, 378 So. 2d 1122 (Ala. Civ. App. 1979), cert. denied, 378 So. 2d 1125 (1980) (dictum) ("without recourse" was not an explicit reservation of rights as required by 1-207). Missouri:Majestic Bldg. Material Corp. v. Gateway Plumbing, Inc., 694 S.W. 2d 762 (Mo. Ct. App. 1985). The Court distinguished Milgram Food Stores, Inc. v. Gelco Corp., 550 F. Supp. 992 (W.D. Mo. 1982) (the continued validity of the common law doctrine without reference to implied that was inapplicable). New York: United States v. Consolidated Edison Co., 590 F. Supp. 266 (S.D.N.Y. 1984); Braun v. C.E.P.C. Distributors, Inc., 77 A.D.2d 358, 433 N.Y.S.2d 447 (1980), amended, 80 A.D.2d 505, 435 N.Y.S.2d 289, appeal denied, 52 N.Y.2d 704, 437 N.Y.S.2d 1027, 418 N.E.2d 1328 (1981); Ayer v. Sky Club, Inc., 70 A.D.2d 863, 418 N.Y.S.2d 57, appeal dismissed, 48 N.Y.2d 705, Vol. 56-No. 41

6 422 N.Y.S.2d 68, 397 N.E.2d 758 (1979); Kroulee Corp. v. A. Klein & Co., 103 Misc. 2d 441, 426 N.Y.S.2d 206 (Sup. Ct. 1980); Lange-Finn Constr. Co. v. Albany Steel & Iron Supply Co., 94 Misc. 2d 15, 403 N.Y.S.2d 1012 (Sup. Ct. 1978); cf. Continental Information Sys. Corp. v. Mutual Life Ins. Co., 77 A.D.2d 316, 432 N.Y.S.2d 952 (1980). Contra Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 105 A.D.2d 684 (N.Y. 1984). South Dakota: Scholl v. Tallman, 247 N.W.2d 490 (S.D. 1976); accord Simpson v. Norevesco, Inc., 442 F. Supp. 1102, 1107 (D.S.D. 1977). 16. See also J. Calamari & J. Perillo, "Contracts" 197 (2d ed. 1977); J. White & R. Summers, "Handbook of the Law Under the Uniform Commercial Code" (2d ed. 1980). The Georgia Court of Appeals in American Food Purveyors, Inc. v. Lindsay Meats, Inc., 153 Ga. App. 383, 265 S.E.2d 325 (1980), questioned, as a matter of legal theory, the continued adherence to the accord and satisfaction doctrine, but held precedent (Anderson v. Shelby Mutual Ins. Co., 237 Ga. 687, 229 S.E.2d 462 (1976)) precluded determining whether altered the common law. 17. Alaska: Air Van Lines, Inc. v. Buster, 673 P.2d 774 (Alaska 1983). Arkansas: Pillow v. Thermogas Co., 6 Ark. App. 402, 644 S.W.2d 292 (1982). California: Connecticut Printers, Inc. v. Gus Kroesen, Inc., 134 Cal. App. 3d 54, 184 Cal. Rptr. 436 (1982). Colorado: R. A. Reither Constr., Inc. v. Wheatland Rural Elec. Ass'n, 680 P.2d 1342 (Colo. Ct. App. 1984). Maine: Stultz Elec. Works v. Marine Hydraulic Eng'g Co., 484 A.2d S308 (Me. 1984). New Jersey: Chancellor, Inc. v. Hamilton Appliance Co., 175 N.J. Super. 345, 418 A.2d 1326 (1980). For a discussion of Chancellor, see Caraballo, "The Tender Trap: U.C.C and Its Applicability to an Attempted Accord and Satisfaction by Tendering a Check in a Dispute Arising from a Sale of Goods," 1-1 Seton Hall L. Rev. 445 (1981). North Carolina: Brown v. Coastal Truckways, Inc., 44 N.C. App. 454, 261 S.E.2d 266 (1980); cf. Baillie Lumber Co. v. Kincaid Carolina Corp., 4 N.C. App. 342, 167 S.E.2d 85 (1969) (dictum) (distinguishable because claim fully liquidated). Oregon: Les Schwab Tire Centers, Inc. v. Ivory-Ranch, Inc., 63 Or. App. 364, 664 P.2d 419 (1983); but cf Kilander v. Blickle Co., 280 Or. 425, 571 P.2d 503 (1977) (dictum). Utah: Marton Remodeling v. Jensen, No (Utah Sept. 17, 1985) (available Oct. 14, 1985, on WESTLAW, ALLSTATES database). Washington: State Dep't of Fisheries v. J-Z Sales Corp., 25 Wash. App. 671, 610 P.2d 390 (1980). Wisconsin: Flambeau Prods. Corp. v. Honeywell Information Sys., Inc., 116 Wis. 2d 95, 341 N.W.2d 655 (1984). Wyoming: Jahn v. Burns, 593 P.2d 828 (Wyo. 1979). See also 6 A. Corbin, "Contracts" 1279 (Supp. 1982, pt. 2); "Restatement (Second) Contracts" 281, comment d, at 384 (1979); Gross & Groggin, "Accord and Satisfaction and the Dilemma," 89 Comm. L.J. 537 (1984); Hawkland, "The Effect of U.C.C on the Doctrine of Accord and Satisfaction by Conditional Check," 74 Comm. L.J. 329 (1969); Rosenthal, "Discord and Dissatisfaction: Section of the Uniform Commercial Code," 78 Colum. L. Rev. 48 (1978). For a collection of cases, see Annot., 37 A.L.R.4th 358 (1985) Wis. 2d 95, 341 N.W. 2d 655 (1984). 19. For an extensive discussion of these issues, see Rosenthal, "Discord and Dissatisfaction: Section of the Uniform Commercial Code," 78 Colum. L. Rev. 48 (1978) So. 2d 788 (Fla. Dist. Ct. App. 1978) So. 2d 312 (Fla. Dist. Ct. App. 1981) So. 2d 1234 (Fla. Dist. Ct. App. 1980). 23. In Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 105 A.D.2d 684 (N.Y. 1984), the Second Judicial Department declined to follow the First Judicial Department's decision in Ayer v. Sky Club, Inc., 70 A.D.2d 863, 418 N.Y.S.2d 57 (1979) Mich. 329, 273 N.W.2d 425 (1978). For a discussion of Michigan law, see Casenote, "Commercial Transactions-Michigan Rejects UCC and Adopts Minority Common Law Standard for Conditional Check Accord and Satisfaction," 26 Wayne L. Rev (1980). 25. Kelly v. Kowalsky, 186 Conn. 618, 442 A.2d 1355 (1982). YOU'RE CHANGING YOUR ADDRESS! Please let us know so that we may have a current address for mailing your DUES STATEMENTS, BAR JOURNAL and other correspondence. Return this form along with your address label from the back cover to: Oklahoma Bar Association Computer Department P. 0. Box Oklahoma City, OK Bar I.D. Number Name Old Address City/State New Address City/State Phone No.( ) 7ip Zip The Oklahoma Bar Journal 2555