The Bills of Exchange Act was passed in substantially its present form since 1877, it was modeled on the British Bills of Exchange Act, 1822, and repealed and superseded an earlier federal statute. Like its British precursor, the Act is designed as a code — reflecting the existing law in part and replacing it in part. As the Act expressly provides that the rules of the common law of England, including the law merchant, save insofar as they are inconsistent with the express provisions of the Act, continue to apply to bills, cheques and notes, many applicable principles of law remain uncodified. With the single exception of its extension of the provisions governing crossed cheques to divided warrants, the Act deals with only bills, cheques and notes, not negotiable instruments in general.

Yet bills, cheques and notes are species of negotiable instruments, sharing the significant characteristics thereof. While the statutory requirements of a valid bill, cheque or note are strict, the concern over the negotiable form of bills and notes is largely historical. Where the payee has no intention of negotiating the instrument except for the purposes of presentment and collection, inquiries into shades of meaning in the formal requisites of negotiability lose most, if not all, of their practical significance. Where the Act is silent, the consequences flowing from the characterization of the promise of payment that is contained in a bill or note may fall to be determined by common law. When wrongfully detained or parted with without the authority of the owner, the proper remedies for their return are the possessory remedies of conversion, detinue and replevin.

Under the Constitution, these are matters of legislative competence, and the only substantive provision of the Bills of Exchange Act on these matters merely serves to emphasize that point: “Nothing in this section enables a corporation to make itself liable as drawer, acceptor or endorser of a bill, unless it may do so under the law for the time being in force relating to that corporation. Under most of the modern rules governing civil procedure in the courts, summary judgment may be obtained where it appears on affidavit evidence that there is no genuine issue for trial. Thus, according to varying developments in the cases and statutes in the provinces, the capacity of infants, lunatics, convicts, drunkards, trade unions and municipal or business corporations may be restricted in some measure.

Thus, it was long accepted that knowledge by the holder that the consideration for the maker's promise was executory or that other promises in the sales contract were closely related to the obligation represented in the note was immaterial. Thus an instrument which recites that it is to stand as security only, or as collateral to another instrument, is not a note. This litigation appears largely to have stopped, probably for two reasons, the first being the proliferation of more modern forms of payment and credit. This is not to say that an occasional taxpayer may not be publicized remitting a valid shirt-back cheque, but it does in part explain the decrease in volume of litigation contesting points of formal validity. There is a conflict of authority as to whether the Crown is a “person” within the meaning of the Bills of Exchange Act.

There are, however, exceptions created by old case law which are continued in the Act, such as: the drawee may validly accept conditionally; and immaterial conditions may be added to endorsements and disregarded by the payer. The Supreme Court never accepted this doctrine, but held that matters of title retention to chattels sold and powers of repossession and resale in the payee, even when appearing on the same sheet of paper with the note, were capable of being construed as mere collateral matters not qualifying or conditioning the note's basic promise and not affecting the rights of subsequent holders of the instrument. The reference to the common law has not been strictly construed, and the courts have without comment or discrimination looked for guidance to the earlier decisions of their own and of the courts of the others and of other countries both in support of and to supplement the rule, as well in preference thereto.

The question whether the recitals in the conditional sales contract qualify the formally separate and unconditional promise of payment in the note has had a vexed history. The measure of damages when the instrument is not returned is its face amount, not the inconsequential value of the paper and ink. The characteristics which the law recognizes as distinguishing negotiable instruments are: when payable to bearer or endorsed in blank, the right to maintain action on them passes by simple delivery alone; and one taking such an instrument in good faith and for value acquires a title to it and that which it represents, as against the whole world. The Business Corporations Act deals with the issue in the opposite manner, giving priority to the Bills of Exchange Act where it conflicts with a provision of the investment securities régime.

The Bank Act, the Trust and Loan Companies Act and the Insurance Companies Act provide that debt instruments issued in negotiable form by banks, federal trust and loan companies and insurance companies respectively are primarily to be governed by the investment securities provisions of the respective Act, which expressly prevails over anything inconsistent in the Bills of Exchange Act. The Act contains an exhaustive definition of the necessary and sufficient formal elements of each of bills, cheques and notes. Some difficulties have appeared in determining the law governing promissory notes issued by various issuers into the money market. Secondly, the vast majority of instruments subject to the Act that still find commercial service are in printed standard form.

Recitals expressly or impliedly incorporating by reference the terms of another contract or requiring the trading of documents by the payee or the performance of any other act by the maker prior to payment invalidate the instrument as a note. Printed standard forms now predominate, but it is the substance of the instrument rather than its form which governs. On the other hand, knowledge by the holder that the obligation of the maker was expressly conditional when the entire documentation was considered is material. Of course, contemporaneous documents passed between the parties to the note may be referred to by the court only subject to the requirements of the parol evidence rule, but have been admitted to show that the obligation of the note was never intended to be unconditional when the terms of the note were ambiguous and required explanation rather than contradiction, or where the note and the contract could be viewed as constituting a single instrument or writing.

Nowadays a case in which a party's only hope for recovery is upon the instrument as a valid bill would be exceptional. It would, in the result, appear to be the wiser course to seek the true characteristics of such instruments only within the language of the Act and the cases interpreting it. It would seem that in any case where incapacity is raised as a defense the nature of the incapacity and its effect upon the expressed consent, as well as the state of knowledge and status of the plaintiff as holder for value or holder in due course, ought to be in issue. It is true that many negotiable instruments have such characteristics, and that bills, cheques and notes share them in some circumstances. It is said that a negotiable instrument must order the payment of money only, that it must be in writing and delivered and that the transferor must guarantee payment.

It is not whether a contingency has arisen which governs, but whether the note contemplates the possibility of a contingency or condition precedent upon payment. Increasingly, payments are being made by computer-based funds transfer — debts are “paid” by credit card. In part reflecting the fact that bills and notes are in many respects only highly specialized forms of contract, and in part as a result of the Act's explicit reference to and invocation of the rules of the common law, including the law merchant, the cases interpreting the Act continue to employ the concepts and reasoning processes of the common law. In contrast to practices still common when the Act was passed, it was until 1992 unlawful for any person to issue, make, draw or endorse any bill or instrument intending it to circulate as money.

In addition, the Appeal Division had previously reaffirmed that a note taken with a chattel mortgage could be endorsed separately, subject to the maker's legitimate defenses. In addition to their contractual aspects, bills, notes and cheques are also species of personal property. In 1975, the Supreme Court took advantage of an opportunity to reaffirm that a note does not lose its character of negotiability merely because of being attached to a conditional sales contract. This would not appear to give sufficient recognition to certain defenses available even as against holders in due course, and it omits all reference to the important characteristic of negotiation by endorsement of the holder. It may be established, the promise must be unconditional. In any dispute between such generalizations and the specific provisions of the Act, the latter is to govern.

If the promise to pay is not conditioned thereby, other recitals not prohibited by the Act may appear, such as a recital of the consideration given for the note, and a note is not invalid by reason only that it contains a pledge of collateral security with authority to sell or dispose of it. If an instrument fails to qualify under federal law, the effect it has under provincial law may be different from the effect it would be given under the Act. Any form of words engaging to repay or expressing a present intention to repay may be found to suffice on the true construction of the instrument by the court. Further evidence of their status as forms of property are the facts that in point of law they require a valid delivery in order to give effect to their terms, and that, once so delivered in bearer form, they are susceptible of a complete transfer by simple delivery.

For example, the liability of the executor of one among joint makers of a note is determined by statute, and the civil law of obligations has been held to apply in determine certain questions concerning the responsibility of surety endorsers. For example, a statute purporting to deprive unlicensed corporations of capacity to sue upon any contract made must be construed as having no application to contracts in the form of bills, cheques or notes. For example, a promissory note may be a debenture. Failed bills not infrequently provide a third party, not privy to the contract giving rise to the instrument, with a cause of action as a non-statutory assignee. Even where the defense is established and made available against a holder in due course, the Act preserves the validity of the instruments to the extent that payments received may be retained, and the liability of other parties, such as endorsers, may be enforced.

Even when a cheque is issued, it is rarely negotiated more often than the one or two times usually necessary to collect it for deposit. Even if a bill or note fails to take effect as a negotiable instrument, it remains written evidence of a contract to pay, and may assist the payee in enforcing it. Drunkenness is probably on the same footing as insanity, and with more justification, since contracts made by a person while incapable by reason of intoxication are voidable only, and may be affirmed by act or acquiescence. Considerable litigation in Canada, England and the United States has overlaid a heavy gloss of interpretation upon the spare language of the statute. Common law determining that notes executed to satisfy gaming debts are illegal consideration has been found to deal with a local matter of property and civil rights, and so was competent to render a note unenforceable.

At one time, a promissory note containing any provisions implementing a form of conditional sales agreement was termed a “lien note” and rendered non-negotiable without further inquiry as to whether the promise of payment was in fact conditioned thereby. At common law, infancy is a defense against a holder in due course, but it is said that insanity is not, being available as a defense only where the holder knew of it or failed to act in good faith in taking the instrument. As well, a completed bill, being intrinsically valuable, may be bartered in trade for other goods and chattels. As the government has exclusive legislative jurisdiction with respect to bills of exchange and promissory notes, otherwise competent legislation may be inapplicable to the extent that it is found to interfere with the rights granted by the federal statute.

As bills and notes are in many instances properly regarded as highly formalized and specialized forms of contract, it is appropriate that the capacity to incur liability as a party to a bill or note is coextensive with the capacity to make any other commercial contract. Any quasi-contractual or restitutionary liability of the person with the defense of incapacity can be better established and enforced in a separate litigation brought for that purpose. An order to pay out of a particular fund, or an order which may be construed as being conditional upon the sufficiency of a particular fund, is not “unconditional”, whether a sufficient fund is in existence or not, but a bill is “unconditional” if it contains an unqualified order to pay and also indicates either a particular fund or source from which the drawee may seek reimbursal or a statement of the transactions which gives rise to the bills.

An official languages statute may not validly apply to the language in which bills and notes are written. An instrument originally expressed to be payable upon a contingency, such as the completion of a building under construction, is not a bill, and the fulfillment of the condition does not cure the defect. Although a bill of exchange must be an unconditional order addressed to the person required to pay, the use of “words of courtesy” will not render the document a mere request, and such wording will suffice if the meaning is clear. Admittedly, the property characteristics of bills are not so numerous or significant as the contractual characteristics, but both were necessary to enable bills to fulfill their role as a part of the currency of domestic and international trade for many centuries, and both must be regarded in order to understand the present law of bills, notes and cheques correctly.

Accordingly, cheques and other instruments drawn by the Crown or ministries of the Crown are not governed by the Act unless the Crown invokes it or agrees to be bound by it. A statute requiring disclosure of the cost of borrowing may not prevent action on a promissory note payable to the lender, whether or not the stipulated disclosure was made. A promissory note must contain an unconditional promise to pay, which need not be expressed, if it can fairly be implied from the language used. A promise to pay a specific sum with interest from a date that cannot be determined other than by reference to some fact external to the instrument, such as the completion date of a construction project, has been held to disqualify an instrument from taking effect as a promissory note within the meaning of the Act.

A mere implication that payment may be made is insufficient, as is an acknowledgment of indebtedness standing alone or an acknowledgment that an oral promise of repayment has been made. A legislative scheme requiring the license of a debt adjustment board or leave of a judicial officer as a condition precedent to the commencement of an action in the courts of the province for the recovery of a debt is incapable of affecting the rights of parties to bills of exchange. A common use of promissory notes is and has been in conjunction with conditional sales contracts, being given by the buyer in further assurance of the contractual promise to pay the installments as they fall due. If the defense of incapacity is established according to the applicable local standard, the instrument ought logically to be unenforceable in every case against the party making that defense, but the authorities distinguish between causes of incapacity.

Where such a bill conforms in points of formal validity with the Act, it may be treated as valid for the purposes of enforcing payment thereof between all persons who negotiate, hold or become parties to it. Where a bill drawn in one country is negotiated, accepted or payable in another, the validity of the bill as regards requisites in form is determined by the law of the place of issue; similarly, the formal validity of the supervening contracts, such as acceptance, acceptance under protest or endorsement, is determined by the law of the place where each contract was made. Thus, if no time of payment is recited, the Act provides for payment on demand. This provision of the Act varies the common law, by which the debt, suspended with the issue of the original bill, remained unenforceable while the bill remained outstanding and not dishonored. These conflicts rules apply only to instruments whose resolution involves the laws of more than one country.

There is support for the approach that refers to the “acceptor” or the “certifying bank” and interprets the section as intending to refer to the maker, in the case of a note. There has been considerable difference of judicial opinion on this point, it having been held variously that they are not cheques, not being payable on demand, and even that they are not negotiable instruments, being issued with a condition expressly qualifying the promise of payment. The statute is particular in referring to the “drawer” in this respect. The duties of the holder with respect to presentment for acceptance or payment and the necessity for or sufficiency of a protest are determined by the law of the place where the act is done or the bill is dishonoured. The authorities are divided on the choice of law to govern the capacity to make a bill or note. The Act provides, however, that at the holder's option they may be treated as either bills or promissory notes.

The Act provides that, where a bill has been lost before it is overdue, the person who was the holder of it may apply to the drawer to provide another bill of the same tenor, giving security if required, to indemnify the drawer against all persons if the original bill is found again. The Act provides that the interpretation of the drawing, acceptance, endorsement or acceptance supra protest of a bill is to be determined by the law of the place where each such contract was made, except that, where an inland bill is endorsed in a foreign country, the endorsement, as regards the payer, is to be interpreted according to the law of the land. The Act provides that a bill issued outside is not invalid by reason only that it is not stamped in accordance with the law of the place of issue. The Act contains five sections specifically dealing with conflict of laws. Some argue for the application of the law of the “place of contracting”, which must mean the “place of signing”.

Questions of jurisdiction arising between Courts as a result of diversity of residence of parties are resolved by the Rules of Court. Prior to 1980 there was some difficulty concerning “cheque-like” instruments drawn on“near-banks”. Pre-Act authority tends to favour the latter approach insofar as it tends to refer many more questions concerning the scope and legal effect of the parties' obligations to the law of the place of payment as the prima facie “proper” law of the obligations. Others favour the proper law of the contract that was made on or in respect of the bill by the party whose capacity is in issue. On the other hand, where a bill has been stolen and paid over a forged endorsement, the sections have no application. It may be that further confusion could be avoided if the expression“post-dated cheque” were reserved for instruments in the form of cheques bearing a single date which has not yet arrived at the time of their issue. It is not intended to discuss these at any length in this Title.

It has been stated that the term “interpretation” embraces the obligations created by the acts of drawing, endorsing and accepting a bill. It has been remarked judicially that these provisions, if inconsistent with the developing “ordinary” rules of conflicts, must nevertheless continue to govern, but they are not exhaustive, and recourse must be had to the body of conflicts rules as need arises. It has been held to mean “the legal effect” of the bill and to embrace the incidents of the parties' obligations, but it is also argued that properly it extends only to the construction or meaning of the words used. Instruments in the form of cheques drawn by one branch of a bank upon another branch of the same bank are not cheques, since they are not drawn by one “person” upon another. In the case of a demand instrument, or one that is past maturity, it is in the discretion of the court, which will not make an order if the likelihood of potential liability on the instrument is small.

In providing simply that a bill is “not invalid” by reason only that it is post-dated, the Act leaves uncertain many questions concerning the rights of the parties to post-dated cheques. In providing expressly that the due date of a bill drawn in one country and payable in another is to be determined“according to the law of the place where it is payable”, the intention of the Act would also seem to be in accord. In both cases, only lost instruments are affected, but it has been held recently that a note destroyed by fire is “lost” within the meaning of the sections. In 1967 a new section was added to the Act expanding the definition of “bank” in Pt. III, the provisions of the Act applicable to bills of exchange payable on demand previously discussed in this title apply to cheques to include every member of the National Payments Association and every local cooperative credit society that is a member of a central that is a member of that association.

If the instrument bears two material dates, or expressly contains some suspensive condition upon its negotiability before a designated date, there is admittedly more difficulty in supporting an argument that it ought to be regarded as an unconditional instrument payable on demand. If the drawer, on request, refuses to give the holder a duplicate bill, he or she may be compelled to do so, presumably by litigation. While referral to the drawer is appropriate in the case of a draft or cheque, it is not appropriate if the draft has been accepted or the cheque certified, since the drawer is no longer primarily liable on such instruments. There is disagreement concerning the meaning of“interpretation” in this context. The prevailing opinion appears to be that post-dated cheques are fully negotiable from the moment of their issue until after a reasonable time for presentment following their ostensible date has passed. For greater certainty, the Act now expressly provides that, in any action or proceeding upon a bill, the court or a judge may order that the loss of the instrument not be set up if an indemnity is given to the satisfaction of the court against the claims of any other person upon the instrument in question.

Except as otherwise specifically provided in Pt. Cheques drawn by a corporation in a city, payable at a foreign agency of an oversea bank, are “foreign bills” within the meaning of the Act. Certification may be defined as the marking of a cheque by the drawee bank to show that it was drawn by the person purporting to draw it upon an existing account with the drawee, upon funds or credit sufficient to meet it. As certification is not expressly provided for in the original English legislation, being unknown in England except as a practice binding only among bankers for certain clearing house purposes, and has not been recognized by any amendment to the Bills of Exchange Act, despite the common practice in using certified cheques, there is no authoritative statement setting out the proper procedure, but it has been suggested judicially that merely having a cheque initialled by the drawee branch's manager is not sufficient formality without evidence of a local custom to that effect, and the better practice appears to be for the bank to rubber-stamp or perforate the cheque with the word “certified” or “accepted” and to withdraw the sum payable from the account of the drawer at that time.

As “bank” was defined by the Act to include only incorporated banks or savings banks carrying on business, instruments in the form of cheques drawn on trust companies or financial institutions other than federally-chartered banks or savings banks were not “cheques” within the meaning of the Act, although there was some authority to the effect that they might qualify as “common law” cheques, or simply demand drafts having many characteristics in common with cheques. Any statements on the face of the instrument purporting to impose conditions upon the order for payment deprive it of negotiable effect, except that an unqualified order to pay coupled with an account number to be debited or a statement of the transaction giving rise to the cheque is permissible. The foregoing discussions may seem abstract; the following subsections will provide the application level of the Bills of Exchange Act in the context of partial payment of debt (a cheque is a bill of exchange drawn on a bank, payable on demand):


Handling checks for ‘Partial Payment’


When a debtor submits a check for less than the total amount due and marks it as "payment in full" should the check be accepted or returned to the debtor? Does the creditor lose the right to pursue the balance due if the check is deposited? What’s the best way to handle these kinds of checks?

When a check for payment arrives with a notation on either the front or back of the check that it is being submitted as payment in full, you have the options of:

  1. Return the check to the debtor with documentation that makes it clear that the amount is not acceptable as full payment of the account. However, many account receivable managers are reluctant to adopt this policy since a payment in any amount is more preferable than receiving no payment at all. In some cases, this may be the only attempt at payment the debtor intends to make.
  2. Allow acceptance of the payment while preserving the creditor’s right to pursue payment of the remaining balance. This involves the creditor making an appropriate notation on the check before it is deposited. In preparation for depositing the check make the following notation on the back: “This check is deposited under protest, without prejudice, and with preservation of all rights of the payee against the drawer of this check.” Place your bank endorsement beneath this statement and photocopy both sides of the check (as evidence to substantiate your notation). You may then deposit the check. Caution: by depositing the check without this notation, the creditor will lose the right to pursue payment for the balance due.


How to avoid accepting “Partial Payments” from insurance providers


Some insurance providers put the words “payment in full” on reimbursement checks that are made out for less than the full amount of the claims — and that should concern you because if you deposit a check like this, you legally relinquish your right to get paid the full claim.

To avoid getting into any unnecessary legal dispute, implement these steps:

  1. Often, the insurance providers will send the check directly to the CFOs office, so inform your CFO and other staff of the possibility that insurance providers could try to use this legal tactic and ask them to carefully inspect and review any check they may receive.
  2. Create and distribute check-depositing procedures. Make sure that you have and implement check-depositing procedures at your facility or office within your organization. These will protect you against accord and satisfaction. For instance, you should require that all checks be routed through the claims department, so that payments can be identified and processed as part of day-to-day operations and the amount compared to what the claims department expected for that claim.
  3. Formally notify the insurance providers to whom it should send partial payments. To stop an insurance provider from using “accord and satisfaction” against you, notify the insurance provider by ‘registered mail’ that any communication about payment disputes, including checks with the full payment language (such as, “Payment In Full”) on them, must be sent to a designated representative for reviews and further considerations. If the insurance provider later still sends a check in partial payment to a person other than your designee, the “accord and satisfaction” doctrine won’t apply to that incidence. If the insurance provider sends a partial payment to the CFO after you’ve formally informed the insurance provider of who your designated representative is—and it’s someone other than the CFO—and it’s accidentally deposited, you’ll be able to deposit the check and still have the rights to go after that insurance provider for the remaining balance.


Restrictive notations on Partial Payment Checks


Sometimes, customers or debtors will remit checks that contain "restrictive notations" on the back or in the memo portion. Restrictive notations include language such as "in full payment of account", "full and final settlement", "payment in full", or other language denoting that depositing the check will operate as a release of all claims against the customer or debtor. The exact wording of the restrictive language is not significant. However, depositing a check bearing such restrictive language would likely result in a loss of the creditor’s right to pursue the customer or debtor for the remaining balance.

The creditor cannot cancel the effect of restrictive language merely by ignoring it or crossing it out. The courts have also held that creditors cannot trump the customer’s restrictive language by placing "reservation of rights" language in the endorsement portion of the check, such as "under protest", "without prejudice", or "with reservation of rights."

A check bearing a restrictive notation or endorsement is a time bomb. Turning down any payment, especially on an account that is severely overdue, is difficult to do. By depositing the check, it is likely that you will either have to write off the remainder of the account or expend additional legal fees litigating whether this is an "accord and satisfaction."

Some courts have ruled that a creditor receiving a check purporting to be payment in full must return it promptly or risk having a presumption arise that the creditor’s retention of the check is in satisfaction of the entire obligation. Accordingly, if a decision is made not to deposit a check, it should be immediately returned to the customer or debtor.

The period of retention is the most significant factor in determining whether an “accord and satisfaction” has resulted. Therefore, if the creditor is going to hold on to a check while negotiating further payments, make sure to put in writing that the holding of such a check is merely for a short period to negotiate a good faith resolution. Once negotiations have failed, return the check immediately.

No check bearing restrictive language should be accepted unless: (i) it is a significant portion of the total amount owing, or (ii) the account is otherwise going to be written off.


Debt Settlement – tendering Partial Payment Checks


Suppose one of your loyal customers is rumored to be nearing the brink of insolvency. You're relieved to finally receive a check from that customer for the latest shipment of goods and other services--until you notice it's for less than half the amount owed. On the back of that check, it was marked "payment in full." What can you do?

A decade ago, according to common law, the creditor could endorse the check with the phrase "under protest." Then the creditor could cash it and still have the right to pursue the customer for the balance owed, in court if necessary. However, that practice, has been disallowed. Now if you cash the check, you've accepted that amount to settle the debt. If you're not willing to accept that amount, you have to send the check back.

"Honestly, I think it's a good law," says Douglas W. Campbell, a corporate attorney and in-house counsel for Dynamics Research Institute. Campbell, who reports that many of his private-practice clients encounter this situation, acknowledges that it's irritating for business owners to be faced with a decision: Accept a lesser amount or send the check back. "Under the old law, the creditor could accept the money as payment on the account and reserve the right to seek additional payments," Campbell says.

Under the old law, if you wrote a check for $1,500 and marked it "payment in full" for an original debt of $2,000; the creditor could cash the check and then turn the remaining debt over to its collection agencies. The whole matter would drag on and might end up in a lawsuit--hardly a cost-effective way to settle a relatively small amount of debt. Under the new law, the creditor has the partial payment in hand and can take it or send it back and pursue full payment--at the risk of getting even less. If the creditor cashes the check, legally that's the end of the matter. "If a respectable amount is tendered, many creditors cash the check and accept it as full payment," Campbell says. The dispute is then settled and both sides can get back to business.

PLAY BY THE RULES What if you accidentally cash a check marked "payment in full"? Under the new law, you have 90 days to repay the debtor. Then you can pursue full payment as before.

If you're the creditor, receiving a "payment in full" check that isn't for the full amount can not only put you in an uncomfortable position but one that requires careful thinking. "Creditors can no longer accept payment-in-full checks and anticipate bringing collection action for the remaining amount due," Campbell says. "Instead, they must carefully consider the ramifications of endorsing such a check, even under protest." Under these circumstances, is this the best you can expect? Is it worth the time and expense to return the check and pursue collection or even legal action, knowing you may end up with even less money? Sometimes it's just as well to cash the check, discharge the debt and get on with your business.


Avoid compromising your rights on accepting Partial Payment Checks


Almost everyone in business eventually has to collect an overdue account. Sometimes, checks will be received for less than the full amount. Aside from dealing with the aggravation of partial payment, in these situations, creditors need to be attentive to avoid compromising their right to collect the remaining balance.

Consider the following common business practice: a regular customer, often purchases old furniture from a local antique store. One day, the account becomes $5,000 overdue and the antique store owner and the customer argue about the amount owing. Subsequently, the customer sends a check for $4,500 with the words “payment in full” on the ‘memo line’ of his check, and the store owner accepts and cashes it. When the customer refuses to pay the remaining $500, the antique store owner takes him to court for the remaining balance. In court, the customer tells the judge, the antique store owner’s acceptance of my “payment in full” check represented an accord and satisfaction, right? The judge thinks a minute and says, you’re right! You win this case. The antique store owner scratches his head, wonders what happened, and wonders if he could have done anything to stop this before hand.

The law provides that when a debtor tenders payment of a disputed claim in good faith and the payment is accepted by the creditor, it constitutes an “accord and satisfaction”. In plain English, this means the debtor and creditor have reached a new agreement (accord) and the agreement has been fulfilled (satisfaction). This leaves the creditor without further remedy. The courts have held that a memo line notation of “payment in full” is sufficiently conspicuous (noticeable) to draw the attention to the creditors regarding partial payments. The important question then is what creditors can do to protect themselves. Some fairly simple steps can be implemented:

  1. The first protection applies only to organizations (corporations, LLPs, etc.). The “accord and satisfaction” rule does not apply to an organization that sends a conspicuous statement requiring that any communications regarding a disputed debt be directed to a specific person within the organization. This means that as soon as an organization recognizes it has a disputed account on its hands, it should send a simple letter to the debtor stating that any communication about the debt should be directed to a specific person. This person should then be instructed to be very attentive to any payment that is made to make sure that no payment in full language (such as, payment in full) is included. If these steps are followed and a payment in full check comes to anyone but the designated person and is cashed, there is no accord and satisfaction.
  2. The second protection applies to everyone. Within 90 days from the date the payment is received, the creditor can tender repayment (reject and return the original check) of the amount received to the debtor; in this instance, creditors have a 90 day right to initialize a reversal. You should also carefully evaluate the circumstances of the debt and debtor to determine whether you are likely to recover more or just to incur collection effort or even legal costs.

The creditor's nightmare of an unintended accord and satisfaction is something everyone in business is likely to face at some point. Unfortunately, it is also something that is easy to miss at the time only to regret that lapse in attention later. Fortunately, once you are aware of the problem, it is easier to guard against it, and there are some relatively easy steps you can take to protect yourself in advance.



Businesses should be aware their accounts receivable procedures and staff could be waiving claims for outstanding debt without knowing it. While most businesses are conscious of the fact that they may be sued on account of their employees’ actions, what many fail to realize is that they may also lose the option to recover monies owed them when clients dispute their debts. This occurs under the legal doctrine of “accord and satisfaction”. An accord and satisfaction is a contractual method of discharging debts or claims between the parties to such an agreement. The accord is the agreement between the parties, while the satisfaction is its execution or performance. Businesses that accept “Payment-in-full” checks in payment of debts should be made aware of this legal concept by which the full amount of a debt may be discharged through the creditor’s acceptance of payment of a lesser amount.

In this context, a check is clearly "accepted" if it is processed for payment. It is insufficient for the creditor to object to the final settlement language and cash the check. The creditor must either accept the payment with the condition or refuse it, and it makes no difference that the creditor protests or states that he does not accept the amount proffered in full satisfaction. Under these conditions, a creditor has no right to cash the check and thereby obtain the benefit of such an offer without its accompanying burden of compromise.

While it is important to understand the requirements of an accord and satisfaction, when counseling a business client it is equally important that the client understand how to avoid inadvertent accord and satisfaction to ensure that a disputed sum is not improperly discharged. It is important to point out that inadvertent accord and satisfaction could result in a violation of the Fair Debt and Collections Practices if the creditor subsequently attempts to collect the full debt.

Creditors are allowed to protect themselves by advising customers by a prominent statement that communications regarding disputed debts must be sent to a particular person, office, or place. The creditor must provide this information to the customer within a reasonable time before the tender is made. By advising the customer by a prominent statement that full satisfaction checks must be mailed to a particular person, office or place, it segregates these checks from normal payments, thus allowing them to be individually reviewed before endorsement.

If the creditor learns that it has unknowingly endorses or inadvertently deposited a full satisfaction check, it may prevent an accord and satisfaction if, within 90 days of the payment of the check, the creditor tenders ‘repayment’ of the amount of the check to the debtor. The creditor’s failure to follow this step could result in any claim for the larger amount being barred.

The Court upheld a long line of common-law precedent when it ruled that the cashing of a check marked "payment in full" barred a claim for a larger amount based on accord and satisfaction. The Court stated that “where there is an honest dispute as to the amount owed and due between the parties and the debtor tenders an amount with the understanding that it is full payment of all demands, the creditor’s acceptance of that amount constitutes an accord and satisfaction and thereby the whole debt would be discharged.”


Appellate law and advocacy - “Partial Payment” represents Full Payment?


When one agrees to accept a payment as one "in full", does it really mean "payment in full?" According to the Supreme Court, the answer is virtually ‘yes’ with consensus.

In previous court decision on Parnell v. Adventist Health System, the Court held that when a hospital treats an injured patient and then accepts the contractually-agreed upon reduced rate from the patient's medical insurance provider as "payment in full," the hospital cannot then assert a ‘lien’ under the Hospital Lien Act against the patient's damage recovery from the third-party tortfeasor. The Court reasons that acceptance of the payment in full from the patient's insurance carrier extinguishes the patient's obligation to the hospital and, thus, removes any basis for the assertion of the lien. This opinion is remarkable for its 23-page dissertation on why "payment in full" really means full payment.

In MKL Electronics v. LCL Supply, after the cancellation of a distributorship agreement, MKL Electronics demanded $26,453.31 from LCL Supply. LCL sent a letter to MKL, objecting to the amount alleged in the demand and insisting that the amount due totaled only $2,392.16. A check in the amount of $2,392.16 marked "Payment In Full" in the memo portion. MKL’s receivable manager received and cashed the check. Then, MKL sued for the balance of $24,756.84 plus court costs, legal fees, and interest. LCL filed a ‘motion to dismiss’ pursuant to the Code of Civil Procedure contending that the check and subsequent deposit thereof by MKL constituted an “accord and satisfaction” and thereby the entire debt had been fully discharged. The Court consented and granted the motion to dismiss the proceeding.

The Court went on to state that, the tender of the check by LCL and its subsequent deposit by MKL constituted consideration and execution. Thus, the only remaining issue was the shared mutual intent by the parties to compromise the claims between them. The Court observed that "Intent can be inferred from conduct; the act of knowingly accepting and depositing a check upon which conditional language has been added indicates the existence of an accord and satisfaction. Where creditor takes and keeps a debtor’s reduced payment with actual or constructive knowledge of the condition, the creditor has accepted the debtor’s offer, and the original debt is settled for the reduced amount". Based on the foregoing reasoning, the Court found that the "Payment In Full" notation on the check tendered by LCL clearly exhibited an explicit understanding on its part that the check constituted full payment of all sums owed to MKL. The fact that the check represented full payment either came to MKL’s attention or should have been brought to MKL’s attention had MKL exercised due diligence. Based on the additional finding of the Court, it was apparent from the record that MKL failed to exercise due diligence in many other instances. Since MKL did not refuse the check. MKL’s endorsement and deposit of the check could only be construed as acceptance through negotiation. In the subsequent appeal of MKL, the Appellate Court reaffirmed the original judgment of the previous court.

Other Appellate Court decisions on "payment in full" check

  • In Nelson v. Fire Insurance Exchange, insureds understood that check tendered by insurer was for full settlement of claim, and cashing the check constituted an “accord and satisfaction,” and that even if the provision of the other statutes applied to modify common-law doctrine of accord and satisfaction in the setting of full payment check, insureds were nonetheless not entitled to further payment where they merely struck out the conditional language on the check but did not write any language regarding their reservation of rights.
  • In Bankers Leasing Association, Inc. v. Pranno, the court upheld that “accord and satisfaction” occurred when lessor tendered check stating it was full satisfaction of claim and broker cashed the check despite his knowledge of the dispute over the amount owed under an arbitration award.
  • In Koules v. Euro-Arbitrage, Inc., the court upheld the employer’s acceptance of offer of $100,000 severance payment, and employee’s acceptance of such an offer constituted an “accord and satisfaction” of a guaranteed salary dispute.

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