Contractors are accustomed to being paid by check, often in amounts less than the full amount owed. Additional work orders or changes to the scope of a project often change the cost of a job, meaning additional monies than those stated in the original contract are due. What’s more, it’s not uncommon for an owner to pay a contractor as each phase of a project is complete.
But what happens when they’re’s a dispute about the amount due? Can a contractor accept partial payment even if the check says “Final Payment” or “Paid in Full?” Or does cashing such an instrument mean the contractor has agreed to the lower price, even if he notifies the owner that the amount is incorrect?
Recently, an appeals court in Mississippi heard Triangle Construction Co. v. Fouches and Assoc, a case in which a contractor sued the owner and engineer on a project for failing to compensate it for its increased construction costs. The contractor claimed the engineer had failed to obtain the proper permits and easements, resulting in significant delays. It also alleged that the engineer and owner had increased the scope of the project after work had begun, and had agreed verbally to compensate it for any increased cost. However, the contractor failed to get the change orders in writing, and at the end of the project the owner and engineer disputed the amount due.
According to court records, the contractor notified both the engineer and the project owner repeatedly that the amount owed was in dispute. Nevertheless, the engineer mailed the contractor a check marked “Final Payment,” which the contractor cashed, assuming that its prior notifications made it clear that there was still money owed. Unfortunately for the contractor, the court did not agree.
Accord in Satisfaction
According to the court’s decision, accepting a check marked “Final Payment” or “Paid in Full” constitutes “accord and satisfaction.” That’s a legal term that means that the parties in a contract agree to settle a dispute by creating a new contract with different terms (an accord.) If both parties then meet the terms of the new contract, the accord is satisfied and the original contract no longer applies.
In this case, despite claiming that the project owner/engineer still owed it money, the contractor, by cashing a check marked “Final Payment” agreed to accept the payment as satisfaction of the debt. Once he did so, at least according to Mississippi law, he and the other parties had reached a new agreement, and the money owed was now paid in full.
If you’re new to the contracting industry, or even if you’re not, it’s important to be aware of contract law in your state or have an attorney review your contracts and give you advice. In the above claim, the contractor may well have received the additional monies due if it had simply understood that the notation on the check was a legally binding agreement. Instead, it lost out.
About The Carmoon Group
At the Carmoon Group, we are experts in helping construction contractors manage risk. While we’re not lawyers, we can help you understand where you may be legally vulnerable and when contacting an attorney is a good idea. That said, when it comes to finding you the insurance coverage and surety bonds you need, our work is unsurpassed. Give us a call now to set up an appointment for an insurance review. Or if you prefer, reach out online and we’ll contact you at a convenient time.