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1985 The Accord and Satisfaction and 1-207 of the UCC Martin Frey

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Recommended Citation 56 Okla. B.J. 2551 (1985).

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Blue Ribbon Stables and Sunnydale Farms, a to discharge a prior obligation, begins with a tradi- thoroughbred horse breeding farm, enter into a con- tional offer, a promise for . In the of- tract for the sale of Handsome Charlie, a race horse. fer for the accord, the drawer promises to pay the Sunnydale fully performs by delivering Charlie. payee the amount stated on the check as full pay- Several weeks later, Sunnydale receives a check ment in exchange for the payee's promise to take from Blue Ribbon for $500,000, an amount substan- this stated amount as full payment for the drawer's tially less than the $1,000,000 price. The prior obligation. While this discussion presents the check carries the notation "payment in full." Should accord as a bilateral contract (a promise for a pro- Sunnydale: (a) deposit the check as is; (b) strike mise), an accord could be a unilateral contract (a "payment in full," add the notation "without pre- promise for a performance) if the consideration for judice," and deposit the check; or (c) return the the drawer's promise were not "the payee's promise check to Blue Ribbon and demand full payment? to take the stated amount as full payment of the drawer's obligation" but rather "the payee's taking If Blue Ribbon had sent the check to pay for a the stated amount as full payment of the drawer's stud fee, a service, rather than for Handsome obligation." Charlie, himself, would the same course of action as to the check be appropriate7 By promising to take the stated amount as full If Blue Ribbon had sent the check to compensate payment in exchange for the drawer's promise to Sunnydale for personal injury committed through pay the stated amount as full payment, the payee the negligence of a Blue Ribbon employee on the accepts the offer and forms the accord contract. The owner of Sunnydale Farms, would the same course payee's performance of his or her promise (exercis- of action be appropriate? ing dominion over the check by an act such as negotiating the check) is the satisfaction- In each transaction, Sunnydale either had fully satisfaction being no more than the performance of performed or had no duty to perform and Blue Rib- the accord contract. If the payee does not express- bon is attempting to discharge its duty to pay. If ly promise to take the stated amount as full pay- both Sunnydale and Blue Ribbon had outstanding ment, the payee's promise may be implied from the duties, Blue Ribbon's attempt to discharge its duty payee's performance (exercising dominion over the would not involve an accord and satisfaction but check). Thus when the payee negotiates the check, rather a modification or a substitute contract. This this exercise of dominion acts as both the acceptance article is limited to the potential accord and satisfac- of the offer for the accord and the satisfaction of tion situation, that is, where the payee has fully per- the accord. formed or had no duty to perform. Editor's Note: This article updates and revises an What Is an Accord and Satisfaction? earlier version that appeared in the December 1984 issue of the Tulsa Lawyer. The accord, a contract to pay a stated amount @1985 Frey

The Oklahoma Bar Journal 2551 If the existence or amount of the drawer's obliga- The accord and satisfaction promotes fairness by tion is disputed, the notation "payment in full" is protecting the bona fide expectations of the drawer significant. When the existence or amount of the who tenders payment on condition that it will be drawer's duty under the original contract is accepted as payment in full and provides a method disputed, the drawer's promise to pay a stated of settling disputes without litigation. amount as full payment, by not reaffirming a pre- existing duty, can be consideration for the payee's Does an Accord Exist When the Drawer's promise to take the stated amount as full payment. of the offer, an accord con- Obligation Is Neither Unliquidated nor in With this acceptance being. Performance of the accord Dispute? tract comes into contract, the payee's exercise of dominion over the check, is the satisfaction. Upon satisfaction, the Since the accord is merely a contract, the tradi- original contractual duties are discharged . tional rules of , including the rules of consideration, apply. For an offer to exist When a dispute exists, classical contract law under classical contract law, there must be con- precludes the payee from rejecting the offer for the sideration for the drawer's promise. The considera- accord by altering the notation on the check.' The tion for "the drawer's promise to pay the stated payee, however, may negotiate the check without amount as full payment" would be "the payee's new discharging the drawer if an accord cannot be promise to take the lesser amount as full payment." proven, or the payee does not see the obscure "pay- Thus an offer would be made. For an acceptance ment in full" notation.6 A pleading oversight by the to exist, there must be consideration for the payee's drawer's attorney also may benefit the payee, since promise. The consideration for "the payee's promise the accord and satisfaction is an to take the lesser amount as full payment" would to a claim on the original contract and must be have to be, under the , "the alleged ii the drawer's answer to the petition. drawer's promise to pay the lesser amount as full Failure to do so constitutes a waiver.' payment." If neither the existence nor the amount of the drawer's obligation is disputed, the drawer Does UCC 1-207 Provide the Creditor with a has a pre-existing contractual duty to pay the un- Method for Accepting the Drawer's Check disputed higher amount. A promise to pay only a without the Accord? part of that undisputed amount cannot be new con- sideration for the payee's promise and thus is not an acceptance of the accord offer. Without an ac- Concern has been expressed that section 1-207 of ceptance and thus without an accord contract, the the alters the classical drawer's notation on the check, "payment in full," accord and satisfaction doctrine." Section 1-207, en- is irrelevant and the payee may exercise dominion titled "Performance or Acceptance Under Reserva- over the check without losing his or her right to en- tion of Rights," provides: force the drawer's original promise to pay.' A party who with explicit reservation of rights performs or promises performance or Even if the drawer's obligation is neither unli- assents to performance in a manner demanded quidated nor in dispute, new consideration for the or offered by the other party does not thereby payee's promise can be manufactured if the payee prejudice the rights reserved. Such words as requires the drawer to promise to do something that "without prejudice", "under protest" or the like the drawer was not legally obligated to already do. are sufficient.' For example, if the payee required the drawer to promise to pay a day or even an hour before the It should be noted that since 1-207 is located in debt is due, pay at a different place, pay a third per- article one it has broad application, that is, it ap- son, or pay in personal property or anything other plies to all subsequent articles. Had 1-207 not been than money, then the drawer's promise would be located in article one but rather in one of the subse- consideration for the payee's promise to -take -the quent articles (two through nine), its application lesser amount as full payment. 2 would have been limited to the scope of that article.1o But while section 1-207 should not be Does an Accord Exist When the Drawer's limited to article two transactions, that is, transac- Obligation Is Either Unliquidated or in Dispute? tions in goods, courts have not agreed upon its

2552 Vol. 56-No. 41 MARTIN A. FREY, Professor of Law at the University of Tulsa College of Law, teaches and . He earned a B.S.M.E. from Northwestern University, a J.D. from Washington University, and a LL.M. from George Washington University's National Law Center, He is a member of the Oklahoma, Missouri and Tulsa County Bar Associations and is a Law School Inspector for the Accredition Committee of the ABA.

scope. The Wyoming Supreme Court in Jahn v. Maine, New Jersey, North Carolina, Oregon, Utah, Burns limited 1-207 to "commercial" transactions Washington, Wisconsin and Wyoming), however, and would not apply 1-207 to non-commercial tran- refuse to apply 1-207 to the classical accord and sactions such as a check arising out of a claim. satisfaction." The Wisconsin Supreme Court in A Texas Court of Appeals in Hixson v. Cox held Flambeau Products Corp. best summarized the that 1-207 would not apply to a check sent to pay reasons why 1-207 does not apply to the accord and for engineering and related services since the tran- satisfaction. The court found that although the saction did not involve a sale of goods.12 language of 1-207 could be read to apply to the ac- cord, the words of 1-207 do not compel this con- This view requires the payee, upon receiving a clusion. Moreover, if the drafters had intended to check marked "payment in full," to determine change the accord and satisfaction doctrine in such whether the underlying transaction was a sale of a significant way, the change would have been goods or not. If the transaction were a sale of goods, noted in the comment, and none so appears. In fact it would come within the scope of article two and the comments to 1-207 suggest that 1-207 was in- 1-207 would apply. The payee then could write on tended to apply to ongoing contracts and not to full the check "without prejudice" or "under protest," payment checks that terminate the contractual ar- negotiate the check, and avoid an accord and rangement. Also, applying 1-207 to the accord and satisfaction. If the transaction were not a sale of satisfaction would not necessarily serve to goods, the payee's notation on the check would be "simplify," or "clarify," or "modernize the law of no avail and the payee would be bound by an governing commercial transactions" as dictated by accord and satisfaction. Whether a transaction is 1-102(2)(a) or promote these purposes and policies a sale of goods is not always simple, especially in of the Code as directed by section 1-102(2)(b). The those hybrid transactions that are part sale of goods comment to 1-102(2) advises that "the text of each and part service. This view, which creates an un- section should be read in the light of the purpose necessary dilemma for the payee, has not been em- and policy of the rule or principle in question." braced by most courts. 4 Since the purpose of the accord and satisfaction is the resolution of disputes fairly and informally Several state courts (Alabama, Missouri, New without litigation, the application of 1-207, which York, and South Dakota) have held that section would permit the payee to disregard the drawer's 1-207 negates the accord if the payee adds his or known intent and conditions, would seem unfair her notation to the check.- Under this view the and violative of the obligation of 1-203." payee could strike out the drawer's statement, write on the check the words "without prejudice" or Several states have discussed the 1-207 problem "under protest," and negotiate the check without and still face interesting dilenmas. The Florida losing his or her rights for the balance in dispute.'1 District Courts of Appeal are split in their treatment of the accord. The Second District in Miller v. lung, The majority of state courts having 1-207 opi- held 1-207 applicable so that a payee's notation nions (Alaska, Arkansas, California, Colorado, could negate the accord;20 the Fourth District in

The Oklahoma Bar Journal 2553 Eder v. Yvett B. Gervey Interiors, Inc., held 1-207 the obligee to accept the performance in satisfaction. inapplicable;21 and the Third District in Yelen v. If there is such a breach, the obligee may enforce Cindy's Inc., resolved the case without discussing either the original duty or any duty under the accord. 1-207.22 Even in New York, the various intermediate (3) Breach of the accord by the obligee does not 23 discharge the original duty, but the obligor may courts do not resolve the 1-207 issue uniformly. maintain a suit for of the ac- The Michigan Supreme Court has yet to resolve the cord, in addition to any claim for damages for par- 1-207 issue although in Fritz v. Marantette, the tial breach. court discussed the applicability of 1-207 while fin- 4. Wilmeth v. Lee, 316 P.2d 614 (Okla. 1957). ding an accord through the obsolete "meeting of the 5. Schumate v. Prague Nat'l Bank, 367 P.2d 720 minds" doctrine.24 The Connecticut Supreme Court (Okla. 1961). 6. Kibler v. Frank L. Garrett & Sons, 73 Wash. 2d also discussed 1-207 but refused to resolve its 523, 439 P.2d 416 (1968). applicability.25 7. 12 O.S. §2008(c) (Supp. 1984); RST Serv. Mfg., Inc. v. Musselwhite, 628 P.2d 366 (Okla. 1981) (summary The Bottom Line-Should the Check Be judgment); French v. Sotheby & Co., 470 P.2d 318 (Okla. Returned or Negotiated? 1970); L. C. Jones Trucking Co. v. Jenkins, 313 P.2d 530 (Okla. 1957); R. J. Bearings Corp. v. Warr, 192 Okla. 133, 134 P.2d 355 (1943) (exception to the waiver rule); Although the earlier Code cases hold that 1-207 Hodges v. Anderson Drilling Co., 465 P.2d 784 (Okla. authorizes a payee to negate the ac- Ct. App. 1969). cord and satisfaction doctrine by striking "payment 8. J. White & R. Summers, "Handbook of the Law in full" and adding the notation "without prejudice," Under the Uniform Commercial Code" §13-21, at 547 (2d the more recent cases disagree. Therefore with the ed. 1980). national trend preserving the common law accord 9. 12A O.S. §1-207 (1981). and satisfaction doctrine and with no reported 10. The 1950 draft of the Code did include a statement concerning the accord in article three. U.C.C. §3-702(3) Oklahoma cases to the contrary, an Oklahoma at- and comment 6 (1950). This statement did not appear in torney would be well advised to inform his or her the 1958 draft of the Code. client to return the check to the drawer if indeed 11. 593 P.2d 828 (Wyo. 1979). the amount is disputed and the client does not want 12.633 S.W.2d 330 (Tex. Ct. App. 1982). Accord Horn to settle the drawer's obligation for the amount Waterproofing Corp. v. Bushwick Iron & Steel Co., 105 stated on the check. Only if the amount is un- A.D.2d 684 (N.Y. 1984) (1-207 does not apply to checks in payment for services); Blotiner, Derrico, Weiss & Hoff- disputed should a check for a lesser amount with man, P.C. v. Fier, 101 Misc. 2d 371, 420 N.Y.S.2d 999 the notation "payment in full" be negotiated. (Civ. Ct. 1979) (1-207 does not apply to checks in pay- ment for services). 13. Horn Waterproofing Corp. v. Bushwick Iron & 1. Metropolitan Life Ins. Co. v. Richter, 173 Okla. Steel Co., 105 A.D.2d 684 (N.Y. 1984), discussed whether 489, 49 P.2d 94 (1935); Gasperv. Mayer, 171 Okla. 457, a contract to perform roofing repair, that ultimately led 43 P.2d 467 (1935); Polin v. American PetrofinaCo., 589 to a new roof, was a sale of goods. P.2d 240 (Okla. Ct. App. 1978). 14. American Food Purveyors, Inc. v. Lindsay Meats, 2. In re Zerodec Mega Corp., 47 Bankr. 304 (E.D. Pa. Inc., 153 Ga. App. 383, 265 S.E.2d 325 (1980); Brown 1985). v. Coastal Truckways, Inc., 44 N.C. App. 454, 261 3. L. C. Jones Trucking Co. v. Jenkins, 313 P.2d 530 S.E.2d 266 (1980) (1-207 applies to checks in payment for (Okla. 1957); Gasper v. Mayer, 171 Okla. 457, 43 P.2d services). 467 (1935); Hodges v. Anderson Drilling Co., 465 P.2d 15. Alabama: Bivins v. White Dairy, 378 So. 2d 1122 784 (Okla. Ct. App. 1969); see Sooner Freight Lines v. (Ala. Civ. App. 1979), cert. denied, 378 So. 2d 1125 Lester, 199 Okla. 321, 185 P.2d 469 (1947) (retaining (1980) (dictum) ("without recourse" was not an explicit check without indorsement or presentment to establish reservation of rights as required by 1-207). promisor's liability was not acceptance of the accord of- Missouri:Majestic Bldg. Material Corp. v. Gateway fer); see also Kelly v. Kowalsky, 186 Conn. 618, 442 A.2d Plumbing, Inc., 694 S.W. 2d 762 (Mo. Ct. App. 1985). 1355 (1982). The Court distinguished Milgram Food Stores, Inc. v. The "Restatement (Second) of Contracts" §281 (1979) Gelco Corp., 550 F. Supp. 992 (W.D. Mo. 1982) (the con- makes the following statement as to the accord and tinued validity of the common law doctrine without satisfaction: reference to 1-207 implied that 1-207 was inapplicable). (1) An accord is a contract under which an obligee New York: United States v. ConsolidatedEdison Co., 590 promises to accept a stated performance as satisfac- F. Supp. 266 (S.D.N.Y. 1984); Braun v. C.E.P.C. tion of the obligor's existing duty. Performance of Distributors, Inc., 77 A.D.2d 358, 433 N.Y.S.2d 447 the accord discharges the original duty. (1980), amended, 80 A.D.2d 505, 435 N.Y.S.2d 289, ap- (2) Until performance of the accord, the original duty peal denied, 52 N.Y.2d 704, 437 N.Y.S.2d 1027, 418 is suspended unless there is such a breach of the ac- N.E.2d 1328 (1981); Ayer v. Sky Club, Inc., 70 A.D.2d cord by the obligor as discharges the new duty of 863, 418 N.Y.S.2d 57, appeal dismissed, 48 N.Y.2d 705,

2554 Vol. 56-No. 41 422 N.Y.S.2d 68, 397 N.E.2d 758 (1979); Kroulee Corp. S.E.2d 85 (1969) (dictum) (distinguishable because claim v. A. Klein & Co., 103 Misc. 2d 441, 426 N.Y.S.2d 206 fully liquidated). (Sup. Ct. 1980); Lange-Finn Constr. Co. v. Albany Steel Oregon: Les Schwab Tire Centers, Inc. v. Ivory-Ranch, & Iron Supply Co., 94 Misc. 2d 15, 403 N.Y.S.2d 1012 Inc., 63 Or. App. 364, 664 P.2d 419 (1983); but cf (Sup. Ct. 1978); cf. Continental Information Sys. Corp. Kilander v. Blickle Co., 280 Or. 425, 571 P.2d 503 (1977) v. Mutual Life Ins. Co., 77 A.D.2d 316, 432 N.Y.S.2d (dictum). Utah: Marton Remodeling v. Jensen, No. 18400 952 (1980). Contra Horn Waterproofing Corp. v. (Utah Sept. 17, 1985) (available Oct. 14, 1985, on Bushwick Iron & Steel Co., 105 A.D.2d 684 (N.Y. 1984). WESTLAW, ALLSTATES database). South Dakota: Scholl v. Tallman, 247 N.W.2d 490 (S.D. Washington: State Dep't of Fisheries v. J-Z Sales Corp., 1976); accord Simpson v. Norevesco, Inc., 442 F. Supp. 25 Wash. App. 671, 610 P.2d 390 (1980). 1102, 1107 (D.S.D. 1977). Wisconsin: Flambeau Prods. Corp. v. Honeywell Infor- 16. See also J. Calamari & J. Perillo, "Contracts" 197 mation Sys., Inc., 116 Wis. 2d 95, 341 N.W.2d 655 (1984). (2d ed. 1977); J. White & R. Summers, "Handbook of Wyoming: Jahn v. Burns, 593 P.2d 828 (Wyo. 1979). the Law Under the Uniform Commercial Code" §13-21 See also 6 A. Corbin, "Contracts" §1279 (Supp. 1982, (2d ed. 1980). The Georgia Court of Appeals in American pt. 2); "Restatement (Second) Contracts" §281, comment Food Purveyors, Inc. v. Lindsay Meats, Inc., 153 Ga. d, at 384 (1979); Gross & Groggin, "Accord and Satisfac- App. 383, 265 S.E.2d 325 (1980), questioned, as a mat- tion and the 1-207 Dilemma," 89 Comm. L.J. 537 (1984); ter of legal theory, the continued adherence to the ac- Hawkland, "The Effect of U.C.C. §1-207 on the Doctrine cord and satisfaction doctrine, but held precedent (Ander- of Accord and Satisfaction by Conditional Check," 74 son v. Shelby Mutual Ins. Co., 237 Ga. 687, 229 S.E.2d Comm. L.J. 329 (1969); Rosenthal, "Discord and 462 (1976)) precluded determining whether 1-207 altered Dissatisfaction: Section 1-207 of the Uniform Commer- the common law. cial Code," 78 Colum. L. Rev. 48 (1978). 17. Alaska: Air Van Lines, Inc. v. Buster, 673 P.2d 774 For a collection of cases, see Annot., 37 A.L.R.4th 358 (Alaska 1983). (1985). Arkansas: Pillow v. Thermogas Co., 6 Ark. App. 402, 18. 116 Wis. 2d 95, 341 N.W. 2d 655 (1984). 644 S.W.2d 292 (1982). 19. For an extensive discussion of these issues, see California: Connecticut Printers, Inc. v. Gus Kroesen, Rosenthal, "Discord and Dissatisfaction: Section 1-207 Inc., 134 Cal. App. 3d 54, 184 Cal. Rptr. 436 (1982). of the Uniform Commercial Code," 78 Colum. L. Rev. Colorado: R. A. Reither Constr., Inc. v. Wheatland Rural 48 (1978). Elec. Ass'n, 680 P.2d 1342 (Colo. Ct. App. 1984). 20. 361 So. 2d 788 (Fla. Dist. Ct. App. 1978). Maine: Stultz Elec. Works v. Marine Hydraulic Eng'g Co., 21. 407 So. 2d 312 (Fla. Dist. Ct. App. 1981). 484 A.2d S308 (Me. 1984). 22. 386 So. 2d 1234 (Fla. Dist. Ct. App. 1980). New Jersey: Chancellor,Inc. v. Hamilton Appliance Co., 23. In Horn Waterproofing Corp. v. Bushwick Iron & 175 N.J. Super. 345, 418 A.2d 1326 (1980). For a discus- Steel Co., 105 A.D.2d 684 (N.Y. 1984), the Second sion of Chancellor, see Caraballo, "The Tender Trap: Judicial Department declined to follow the First Judicial U.C.C. 1-207 and Its Applicability to an Attempted Ac- Department's decision in Ayer v. Sky Club, Inc., 70 cord and Satisfaction by Tendering a Check in a Dispute A.D.2d 863, 418 N.Y.S.2d 57 (1979). Arising from a Sale of Goods," 1-1 Seton Hall L. Rev. 445 24. 404 Mich. 329, 273 N.W.2d 425 (1978). For a (1981). discussion of Michigan law, see Casenote, "Commercial North Carolina: Brown v. Coastal Truckways, Inc., 44 Transactions-Michigan Rejects UCC and Adopts N.C. App. 454, 261 S.E.2d 266 (1980); cf. Baillie Lumber Minority Common Law Standard for Conditional Check Co. v. Kincaid Carolina Corp., 4 N.C. App. 342, 167 Accord and Satisfaction," 26 Wayne L. Rev. 1067 (1980). 25. Kelly v. Kowalsky, 186 Conn. 618, 442 A.2d 1355 (1982).

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