April 19, 2022
Many contractors have experienced efforts by clients to limit their duty to pay invoices by making use of the memo line on checks. The notations can take many forms, such as “payment in full”, “final settlement” or “outstanding balance”. The wise contractor will not ignore these notations in Virginia. Depositing a check with such a notation will likely result in a contractor unintentionally releasing its claims. Even crossing out the notation before depositing the check will likely not prevent these disastrous effects. As explained below, the best course is to return the check and request payment without any notation.
The Virginia Supreme Court case Helton v. Phillip A. Glick, 277 Va. 352 (2009) confirmed the lay of the land in Virginia relating to memo line terms on checks. In Helton, the project owner Helton wrote “paid in full” on a check to the contractor, Glick. The check was for less than half the amount the contractor invoiced. Before providing the check, Helton complained verbally and in writing that the invoiced amount, which was billed on a time and materials basis, was too high because the contractor’s workers were “goofing off” and not working all the hours billed. Glick crossed out the notation of “paid in full”, wrote the remaining balance owed on the check, and then deposited the check. After the trial court held that this notation did not bar claims by the contractor for the remaining amount owed, the Virginia Supreme Court reversed that ruling and held that the check was a binding accord and satisfaction. Thus, as a result of depositing the check, the contractor waived its claims to any remaining balance owed.
In making this ruling, the Court held that the party writing the check must show three elements in order for a notation on a check to result in a binding waiver of claims: (1) the check was tendered in “good faith”; (2) there was a “bona fide” dispute about the amount owed; (3) the check was deposited. For owners, this is a relatively easy test to meet. As long as the owner wasn’t using the check to evade payment of an undisputed amount, the check memo strategy may very well succeed.
The lesson of Helton is simple: Contractors should never deposit checks with notations indicating payment in full is being made by the owner. If you find yourself in this situation you should seek legal advice first.
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