The phrase, “payment in full”, is most commonly thought of in respect of seeing this clause in the memo section of a check. What does it mean and what is its legal effect?Such language is referred to as an accord and satisfaction under the law. In an accord and satisfaction the parties agree to give and accept something in settlement of a claim. The performance of the new agreement is the accord and satisfaction. Separately, an accord refers to an agreement and satisfaction refers to the performance. The accord and satisfaction is the new contract substituted for the old one which is thereby discharged.
An accord and satisfaction must have the elements of a valid contract: offer, acceptance and consideration. If these elements are present, upon cashing or depositing a check with the language “payment in full” conspicuously noted, the payee cannot thereafter prevail in a lawsuit over the balance even if he crosses out the language and/or adds “under protest”.
This law comes from the Uniform Commercial Code which has been adopted in Michigan with the passage of 1962 PA 174, which became effective January 1, 1964. The Michigan UCC is codified at MCL 440.1101 et seq. A debtor who uses the “payment in full” language must prove that they tendered, in good faith, an instrument to the claimant as full satisfaction of the claim; that the amount of the claim was unliquidated or a bona fide dispute existed; and that the creditor cashed or deposited the instrument. If this test is met, in general, the claim is discharged. There are situations where the creditor has inadvertently cashed or deposited the instrument and then realizes that a mistake has been made. The courts will attempt to avoid such inadvertent accords as where the creditor returns the instrument or money back in a timely manner.
The court will consider the facts and circumstances of each particular case. It will attempt to do what is fair and reasonable. The language “payment in full” can be used to resolve a debt. As a foundational matter, debtors who plan to use this language would do well to dispute the debt in writing prior to tendering the offer of settlement.