Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., Inc.

• Decision Date: 17 October 1985
• Citation: 488 N.E.2d 56,66 N.Y.2d 321,497 N.Y.S.2d 310
• Court: New York Court of Appeals Court of Appeals
• Parties: , 488 N.E.2d 56, 54 USLW 2241, 41 UCC Rep.Serv. 1591 HORN WATERPROOFING CORP., Appellant, v. BUSHWICK IRON & STEEL CO., INC., Respondent.

Page 310

497 N.Y.S.2d 310

66 N.Y.2d 321, 488 N.E.2d 56, 54 USLW

2241, 41 UCC Rep.Serv. 1591

HORN WATERPROOFING CORP., Appellant, v. BUSHWICK IRON & STEEL CO., INC., Respondent.

Court of Appeals of New York.

Oct. 17, 1985.

Martin Gallent for appellant.

Michael A. Rubin for respondent.

OPINION OF THE COURT

JASEN, Judge.

This appeal presents an issue of first impression: whether the common-law doctrine of accord and satisfaction has been superseded by operation of Uniform Commercial Code § 1-207 in situations involving the tender of a negotiable instrument as full payment of a disputed claim.

The relevant facts are uncomplicated. The parties entered into an oral agreement whereby plaintiff was to repair the leaking roof on defendant's building. After two days work, plaintiff concluded that a new roof was needed and submitted a bill for work already done. Defendant disputed the amount charged and plaintiff revised the bill downward from $1,241 to $1,080. Defendant remained unsatisfied with the charges and sent plaintiff a check for only $500. The check bore the following notation affixed on the reverse side: "This check is accepted in full payment, settlement, satisfaction, release and discharge of any and all claims and/or demands of whatsoever kind and nature." Directly thereunder, plaintiff printed the words "Under Protest", indorsed the check with its stamp, and deposited the $500 into its account.

Plaintiff then commenced this action in Civil Court seeking $580 as the balance due on its revised bill. Defendant moved for summary judgment on the ground that plaintiff's acceptance and negotiation of the check constituted an accord and satisfaction. The motion was denied and the Appellate Term affirmed. The court held that the Uniform Commercial Code (the Code) was applicable to the type of commercial transaction in which the parties were involved and that, under the provisions of section 1-207, plaintiff was entitled to reserve its right to demand the balance due.

On appeal by leave of the Appellate Term, the Appellate Division, 105 A.D.2d 684, 481 N.Y.S.2d 125, reversed, granted defendant's motion, and dismissed the complaint. The majority of that court held that the parties' agreement, being a contract for the performance of services, fell outside the scope of the Code. It was, therefore, concluded that the common law applied and that the doctrine of accord and satisfaction precluded plaintiff's recovery. In dissent, Justice Weinstein argued that application of the common-law doctrine to the facts of this case is inequitable and needlessly constricts the modernizing effect of the Code. We now reverse and hold that, under section 1-207 of the Code, a creditor may preserve his right to the balance of a disputed claim, by explicit reservation in his indorsement of a check tendered by the debtor as full payment.

The effect of Code § 1-207 upon the common-law doctrine of accord and satisfaction has been much debated. ¹ Indeed, the courts that have addressed the issue in this State have render conflicting decisions, ² and our sister state courts are likewise divided. ³ In our view, applying section 1-207 to a "full payment" check situation, to permit a creditor to reserve his rights and, thereby, preclude an accord and satisfaction, more nearly comports with the content and context of the statutory provision and with the legislative history and underlying purposes of the Code as well, and is a fairer policy in debtor-creditor transactions.

It has long been the general rule in this State that "if a debt or claim be disputed or contingent at the time of payment, the payment, when accepted, of a part of the whole debt is a good satisfaction and it matters not that there was no solid foundation for the dispute. The test in such cases is, Was the dispute honest or fraudulent? If honest, it affords the basis for an accord between the parties, which the law favors, the execution of which is the satisfaction." (Simons v. American Legion of Honor, 178 N.Y. 263, 265, 70 N.E. 776; see also, Nassoiy v. Tomlinson, 148 N.Y. 326, 42 N.E. 715.)

The theory underlying this common-law rule of accord and satisfaction is that the parties have thus entered into a new contract displacing all or part of their original one. (Merrill Lynch Realty v. Skinner, 63 N.Y.2d 590, 596, 483 N.Y.S.2d 979, 473 N.E.2d 229.) Although the creditor might have been confronted with an "embarrassing * * * choice" upon the debtor's presentment to him of partial payment (Hudson v. Yonkers Fruit Co., 258 N.Y. 168, 172, 179 N.E. 373), such as in the case of a "full payment" or "conditional" check, nevertheless, the rule of accord and satisfaction has generally been accepted as a legitimate and expeditious means of settling contract disputes. (See, Merrill Lynch Realty v. Skinner, supra; Post v. Thomas, 212 NY 264, 106 N.E. 69; 6 Corbin, Contracts § 1276 et seq. [2d ed.]; Restatement [Second] of Contracts § 281.) As this court stated more than 70 years ago: "The law wisely favors settlements, and where there is a real and genuine contest between the parties and a settlement is had without fraud or misrepresentation for an amount determined upon as a compromise between the conflicting claims such settlement should be upheld, although such amount is materially less than the amount claimed by the person to whom it is paid." (Post v. Thomas, supra, at pp. 273, 274, 106 N.E. 264.)

Still, where the creditor is presented with partial payment as satisfaction in full, but, nevertheless, wishes to preserve his claim to the balance left unpaid, it cannot be gainsaid that conflicting considerations of policy and fairness are implicated. This is particularly so in the case of a full payment check. On the one hand, the debtor, as the master of his offer, has reason to expect that his offer will either be accepted or his check returned. At the same time, however, the creditor has good cause to believe that he is fully entitled to retain the partial payment that is rightfully his and presently in his possession, without having to forfeit entitlement to whatever else is his due.

In dismissing these latter considerations with specific regard to the applicability of Code § 1-207 to a check tendered as "full payment", one commentary argued that: "Besides operating as an unnecessary destruction of a valuable common law doctrin the expansive interpretation of U.C.C. § 1-207 * * * conflicts with another basic principle of the Uniform Commercial Code, the duty of good faith imposed by § 1-203, certainly the more fundamental concept * * * It is unfair to the party who writes the check thinking that he will be spending his money only if the whole dispute will be over, to allow the other party, knowing of that reasonable expectation, to weasel around the deal by putting his own markings on the other person's checks. There is no reason why § 1-207 should be interpreted as being an exception to the basic duty of good faith, when it is possible to interpret the two sections consistently. The academic writers who support this result offer no analysis, to the current knowledge of this treatise, which would justify licensing the recipient of the check to so deceive the drawer." (Corbin, Contracts § 1279, at 473 [Kaufman Supp., 1984].)

However, an entirely different conclusion is reached in another commentary which explains that:

"Offering a check for less than the contract amount, but 'in full settlement' inflicts an exquisite form of commercial torture on the payee. If the offer is reasonable it creates a marvelous anxiety in some recipients: 'Shall I risk the loss of $9,000 for the additional $1,000 that the bloke really owes me?' In general the law has authorized such drawer behavior by regarding such a check as an offer of accord and satisfaction which the payee accepts if he cashes the check. Traditionally the payee could write all manner of disclaimers over his indorsement without avail; by cashing the check he was held to have accepted the offer on the drawer's terms. Even if he scratched out the drawer's notation or indorsed it under protest he was deemed to have accepted subject to the conditions under which the drawer offered it.

* * *

"However, we believe * * * that 1-207 authorizes the payee to indorse under protest and accept the amount of the check without entering an accord and satisfaction or otherwise forsaking his claim to any additional sum allegedly due him." (White and Summers, Uniform Commercial Code § 13-21, at 544-547 [2d ed.].)

We concur with the latter view. Indeed, the common-law doctrine of accord and satisfaction creates a cruel dilemma for the good-faith creditor in possession of a full payment check. Under that rule, the creditor would have no other choice but to surrender the partial payment or forfeit his right to the remainder. (See generally, Note, Role of the Check in Accord and Satisfaction: Weapon of the Overreaching Debtor, 97 U.Pa.L.Rev. 99.) We are persuaded, however, that the common law was changed with the adoption of section 1-207 pursuant to which a fairer rule now prevails.

Section 1-207 provides: "A party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as 'without prejudice', 'under protest' or the like are sufficient." The plain language of the provision, "without much stretching", ⁴ would seem applicable to a full payment check. ⁵ A fortiori, if liberally construed, as the Code's provisions are explicitly intended to be, ⁶ it seems clear that the reach of section 1-207 is sufficiently extensive to alter the doctrine of accord and satisfaction by permitting a creditor to reserve his rights though accepting the debtor's check.

The Comment prepared by the National Conference of Commissioners on Uniform State Laws and the American Law Institute is fairly subject...