The Business of Construction: Payment Disputes

By Paul Whitt | January 13, 2017

The construction industry includes not only completing the project, or fulfilling an order, but also handling the “business” side of the industry. Oftentimes, this “business” side involves payment disputes, including disputes over invoices or payments. One common payment dispute situation involves a party disputing an invoice attempting to satisfy the obligation with a payment for less than the amount shown on the face of the invoice. In this instance, the party that is disputing the invoice may submit a payment with the notation “paid in full” or a similar phrase. The intent of this type of notation is to place the burden on the receiving party to either accept or deny the payment as full satisfaction of the outstanding account. This legal principle is known as “accord and satisfaction.”

Recently, the Tennessee Court of Appeals addressed this issue in the context of a construction dispute in the case of Pendergrass v. Ingram, No. E2015-01990-COA-R3-CV, 2016 Tenn. App. LEXIS 440 (Tenn. Ct. App. June 29, 2016). The property owner, Ingram, contacted Pendergrass Construction and requested Pendergrass perform certain work Ingram wanted done on his property, including preparing the site for a modular home, clearing the driveway, and clearing an area for a septic tank and field line using their rigging services, for a flat fee of $2,500.00. The work commenced, and Pendergrass requested a partial payment of $1,000.00 from Ingram, who promptly paid that amount. The parties then discussed additional work that Ingram wanted performed, and despite the fact that the parties never discussed specific payment terms for this additional work, Pendergrass completed this additional work as requested by Ingram. Once the work was completed, Pendergrass sent Ingram an invoice showing the total cost of the work performed as $9,073.00. Ingram disputed this amount, and notified Pendergrass that he would not pay Ingram anything more than the total amount of $2,500.00. After certain attempts to resolve this dispute, Ingram sent Pendergrass a cashier’s check for the amount of $1,500.00. Importantly, however, Ingram included on this cashier’s check the notation of “pd in full” in the remitter line. Ingram also included a letter with this check which specifically stated that the enclosed check was for “services paid in full in the amount of $2,500.00 as agreed between you and myself at the time the job was accepted by you.”

Pendergrass, after consultation with their attorney, proceeded to cash this check, while marking through the “pd in full” notation on the check. Pendergrass’s attorney also sent a letter to Ingram demanding payment of the remaining $8,073.00, and disputing any attempt at accord and satisfaction due to the notation in the remittance line.

Ultimately, a lawsuit was filed by Pendergrass seeking the total amount he claimed was due. After a trial, the court entered a judgment in favor of Pendergrass for the total amount of $8,073.00. Ingram appealed.

On appeal, one of the main issues before the court was whether the depositing of the check by Pendergrass was sufficient to constitute accord and satisfaction of the disputed debt, despite Pendergrass’s striking through the “pd in full” notation. The court noted that accord and satisfaction is a type of separate contract that is governed by the law of contracts. The court also noted that, “When a debtor clearly indicates that a check is offered upon a condition of satisfaction of a debt, the creditor’s endorsement and collection on the check generally operate as an accord and satisfaction.” The court cited Tennessee Code Annotated Section 47‑3‑311, which defines accord and satisfaction, in pertinent part, as follows:

  • (a) If a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument, the following subsections apply.
  • (b) […T]he claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.

The court noted that this statute also provides that, “[a] claim is not discharged under subsection (b) if ‘[t]he claimant … proves that within (90) days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted.’” Id. § 47‑3‑311(c)(2).

After discussing the decisions of other Tennessee courts on similar issues, the court ultimately held that Pendergrass’s decision to endorse and deposit the check, despite his attempt to eliminate the “pd in full” notation, was sufficient to constitute accord and satisfaction of the disputed debt between Pendergrass and Ingram. The court noted that the question of whether or not a payment tendered as “pd in full” constitutes accord and satisfaction often turns on the intent of the parties. When a payment is tendered with such a notation, with the intent to constitute an accord and satisfaction of the account, the receiving party is “bound to receive the check that way or not at all.” As a result, the court reversed the decision of the trial court, and held that Ingram’s submission of the check with the “pd in full” notation, was sufficient to constitute an accord and satisfaction of the disputed debt with Pendergrass. This meant that Ingram owed Pendergrass no more for the work performed for Mr. Ingram.

So what does this mean for the construction industry, including specialties like a trenching company? When an account is subject to a “bona fide dispute,” a contractor, supplier or a vendor with an open accounts receivable from the disputing party should pay specific attention to any payment submitted on that account. If there is any notation on the face of the instrument constituting the payment that may suggest that the client or customer is attempting to pay less than the full amount as an accord and satisfaction, the instrument should not be deposited. Otherwise, under the holding in Pendergrass, the account will be considered “paid in full” despite any efforts to mark through or eliminate the “paid in full” language on the face of the instrument.

As with many aspects of the construction industry, vigilance and attention to detail are important in the case of a disputed account or other payment disputes. While it may be enticing to accept and deposit the payment with an objection to the language contained on the payment, any contractor, supplier or vendor doing so will likely do so at their own peril, and will likely face a claim of “paid in full.”

Photo: Steven Depolo

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