Tendering Payment: What Happens When a Creditor Refuses Your Money? — UCC §3-603

Imagine walking into a lender’s office with the full amount due on a note and being turned away. It feels as though the law ought to say something about that — and it does. Section 3-603 of the Uniform Commercial Code addresses tender of payment on negotiable instruments. A popular claim holds that a refused tender wipes out the debt entirely. The statute says something more limited and more useful.

The central question

What legal effect does an offer of payment — a tender — have on a negotiable instrument when the person entitled to enforce it refuses to accept?

The statute

UCC §3-603 (1990 revision) contains three subsections:

• (a) If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument, the effect of tender is governed by principles of law applicable to tender of payment under a simple contract.
• (b) If tender of payment of an obligation to pay an instrument is made to a person entitled to enforce the instrument and the tender is refused, there is discharge, to the extent of the amount of the tender, of the obligation of an indorser or accommodation party having a right of recourse with respect to the obligation to which the tender relates.
• (c) If tender of payment of an amount due on an instrument is made to a person entitled to enforce the instrument, the obligation of the obligor to pay interest after the due date on the amount tendered is discharged. If presentment is required with respect to an instrument and the obligor is able and ready to pay on the due date at every place of payment stated in the instrument, the obligor is deemed to have made tender of payment on the due date to the person entitled to enforce the instrument.

Each state has enacted this section in its own commercial code, sometimes with small variations.

Plain-English reading

What counts as a tender

Subsection (a) sends us to general contract law. Under those principles, a valid tender is generally an unconditional offer of the full amount then due, made by someone ready, willing and able to pay, in a form the creditor is obliged to accept or does not object to. A partial payment is ordinarily not a tender of the obligation. An offer conditioned on the creditor giving something up — signing a release of unrelated claims, for example — is ordinarily not a valid tender. And an “offer” to pay with something other than money, such as a self-drafted bond, is not a tender of money.

Federal law makes United States coins and currency legal tender for debts (31 U.S.C. §5103), but a creditor is not generally required to accept a personal check, and the parties’ contract may specify how and where payment must be made.

Effect one: interest stops

Under subsection (c), once a proper tender of an amount due is made to the person entitled to enforce, the obligor’s duty to pay interest after the due date on the amount tendered is discharged. The creditor who refuses cannot keep charging interest on money it could have had.

The second sentence of subsection (c) deals with instruments that require presentment — for example, a note payable at a stated bank. If the obligor is able and ready to pay on the due date at every place of payment the instrument names, the law treats that readiness as a tender on the due date, even if the holder never shows up to collect. The obligor need not chase down a holder who fails to present.

Effect two: sureties are protected

Under subsection (b), indorsers and accommodation parties with a right of recourse — people who signed to back someone else’s obligation — are discharged to the extent of the refused tender. The law will not let a creditor refuse payment from the principal and then pursue the guarantor for the same amount.

What does not happen

Nothing in §3-603 discharges the obligor’s duty to pay the principal amount. The tendering party still owes the money, and the creditor can still collect it — just without the post-due-date interest on the tendered amount. Courts applying general tender principles have also often required that the tender be kept good: the debtor should remain ready to pay, and some courts require the amount to be paid into court in later litigation to preserve the benefit.

A hypothetical

Ruth’s small business owes $25,000 on a promissory note that matures on 1 June, with interest at 8 percent and a higher default rate after maturity. Her business partner, Theo, signed the note as an accommodation party.

On 1 June, Ruth brings a cashier’s check for the full $25,000 plus accrued interest to the lender’s office, which is the place of payment stated in the note. The lender, hoping to declare a default under a separate line of credit and to collect default interest, refuses the check.

• Ruth still owes $25,000 plus interest accrued to 1 June.
• Under §3-603(c), she owes no interest after 1 June on the amount tendered, so long as her tender was proper.
• Under §3-603(b), Theo is discharged to the extent of $25,000 of the tendered obligation.
• If Ruth spends the money elsewhere and is later unable to pay, the lender may argue her tender was not kept good. Keeping the funds available and documenting the tender protects her position.

Change one fact: Ruth offers $20,000 and calls it full payment. That is a partial tender of an undisputed amount and generally has none of these effects. If the amount were genuinely in dispute, a different provision — §3-311 on accord and satisfaction — might come into play.

Limitations and misconceptions

• “A refused tender cancels the debt.” The statute discharges post-due-date interest on the amount tendered and certain secondary obligations. It does not discharge the principal.
• “Any tender will do.” A tender must be of the amount due, unconditional, and made to the person entitled to enforce in an acceptable manner.
• “A tender of a homemade instrument is a tender of money.” An offer of a self-drafted note or bond is not payment in money and does not trigger §3-603’s effects. See Using Negotiable Instruments to Satisfy Debt.
• Tender is not the same as redemption. Mortgage reinstatement and redemption rights are governed by the security instrument and state foreclosure law, which have their own requirements.

Questions readers can investigate

• Was the amount offered the full amount actually due on that date?
• Was the offer made to the person entitled to enforce, at the place of payment stated in the instrument?
• Was the offer conditioned on anything?
• In what form was payment offered, and does the contract specify acceptable forms?
• Has the tendering party remained ready to pay?
• Are there indorsers or accommodation parties whose liability is affected?

Records worth preserving

• The instrument, showing its due date and place of payment.
• A dated copy of the tendered check or proof of available funds.
• Written correspondence offering payment and any written refusal.
• Names of witnesses present when tender was made.
• A payoff statement, if one was requested, showing the amount the creditor claimed was due.

Related authorities

UCC §§3-301 (person entitled to enforce), 3-414 and 3-415 (obligations of drawer and indorser), 3-419 (accommodation parties), 3-501 (presentment), 3-601, 3-605; 31 U.S.C. §5103 (legal tender); state contract-law principles of tender. See the overview Discharging Debt Under UCC Article 3.

Sources

• Uniform Commercial Code §3-603 and Official Comment, via Legal Information Institute, Cornell Law School (law.cornell.edu/ucc/3/3-603).
• 31 U.S.C. §5103.
• Restatement (Second) of Contracts, general principles of performance and tender, as background.

This article is published for educational and research purposes. It is legal information, not legal advice. Tender rules depend on state law, the instrument’s terms and the facts of the offer. Consult a licensed attorney before relying on a tender in any dispute.