Understanding "Account Stated" for Finances and Payment Procedures

"Account Stated" Defined

What is an account stated? Basically, an account stated is a theory of contract law that says that if you receive an invoice from a lower tier or other vendor and do not object to it, then you have tacitly agreed to it and should pay it. In the same vein, if you send an invoice or requisition to an upper tier and that upper tier does not object to it, then the upper tier has tacitly agreed to it and must pay it. The law considers that by its "silence," then the entity that receives the invoice—and does not object—has created a new and separate obligation to pay, as if there is a new, separate "implied contract" that was formed between the tiers with a separate agreement to pay the invoice.

Of course, it is not quite that simple, but the idea is that if an entity performing work or supplying materials on a project sends an invoice to an upper tier, then the upper tier has a duty to review the invoice "promptly" and object to it if there are problems or errors. If the upper tier receives the invoice and does not object "promptly," then the law typically considers that the upper tier does not have any issue with the invoice and should pay it. The law then says that an "account stated" was formed with the upper tier; the lower tier can then sue the upper tier in court—on the theory of "account stated"—and recover from the upper tier without having to prove that there was a breach of contract or go through extensive court proceedings.

If a legitimate account stated was formed, then the lower tier should be able to win on a "Motion for Summary Judgment" and be paid significantly quicker than if the lower tier has to go through never-ending court actions.

"Account Stated" Pros and Cons

How does this help you to get paid quicker? (Or, how is an account stated your "friend" in the IFF system?)

If you are performing work or supplying materials to an upper tier on a project—whether you are a supplier, subcontractor, or even prime contractor—then, typically, the mere fact that you have sent invoices or requisitions to the upper tier, and those invoices or requisitions were received and not disputed by the upper tier, creates this "account stated." That, in turn, should let you recover, if necessary, through court on a more expedited basis.

How can this theory of account stated hurt you? (Or, how is an account stated your "foe" in the IFF system?)

As you can imagine, this theory of account stated can come back to haunt you if a lower tier sends to you legitimate invoices or requisitions, and your staff does not review or challenge those invoices or requisitions "promptly." Therefore, if your company receives an invoice, say from a lower tier supplier, and holds onto it without disputing it, then the supplier likely has a valid basis to bring you to court and force you to pay quickly, claiming account stated, without proving anything else. In fact, attorneys who represent suppliers routinely rely on this theory of account stated as a way to get their supplier-clients paid more quickly.

Account Stated Solutions

There are a couple of solutions to account stated problems. First, when your company receives invoices from lower tiers or other vendors—whether for materials/supplies, equipment, services, or really anything else—be sure the invoices are reviewed timely and disputed if there are errors or problems. Obviously, make sure your company maintains a good paper trail showing the invoice was reviewed, errors were discovered, and the other party was notified promptly. Emails back and forth should be good.

Second, after your company performs work or supplies materials or equipment, make sure your company sends out the invoices or requisitions and obviously monitors to see if there is any pushback or dispute. If not, make an internal record showing there was no follow-up or dispute. As a result, an account stated probably has been formed with the other entity, giving you the right to recover more quickly if you are not paid.

Yes, it is counterintuitive; account stated is a bit of an anomaly. The reason I say that is because, normally, a contractor cannot become liable to pay anything just by silence.

For example, let's say you are negotiating a contract with a mechanical subcontractor on a project. The subcontractor says he "will perform the heating, ventilation, air-conditioning (HVAC) work for you for $500,000," and "if he does not hear from you, he will assume that you agree." Normally, your silence will not create a contract—since (again, normally) silence does not create legal obligations for a company. Account stated is an exception to that and does create liability by silence. (There are other exceptions, especially under the Uniform Commercial Code, some of which I wrote about in prior articles.)

Of course, as my old boss, Max E. Greenberg, a leading construction lawyer in New York City, used to say (borrowing from Porgy and Bess) "It ain't necessarily so." Sometimes it ain't so easy to recover on an account stated theory after all.

We have a case that we are litigating now where a lower tier supplier is trying to collect from our subcontractor client on an account stated theory. The supplier says that invoices were routinely sent to our client, and there were no objections, so this falls into the theory of account stated. Our client says that over the course of a 10-year business relationship, invoices were routinely discussed long after they were received. Adjustments were made to invoices on an ongoing basis when there were defects in materials, wrong counts, or back charges on projects—especially when the issues were not known until long after the invoices were received.

In addition, our client says that there was never an agreement that individual invoices would be paid after receipt but that lump sum payments would be made on an ongoing basis to pay down accruing amounts owed. Therefore, the silence that was heard after an invoice was received did not create some form of implicit acknowledgment that the invoice was correct or that payment of that specific invoice would be made promptly.

We are waiting for the court to decide the issue, and here is a snippet of our court argument asserting that the conditions to create an account stated were not met for a few reasons. First, the parties' conduct reflected that invoices would not be paid upon receipt or that merely receiving the invoice and not objecting created an "implied agreement to pay that invoice." Second, the parties had an ongoing relationship, and their conduct over that time proved that there was no "implied agreement" to pay invoices when received or to reject invoices promptly after receipt.

I made the following argument:

To prevail and recover on a claim of account stated, the moving party must show more than that a particular invoice was sent and received. The movant must establish that there was an implied agreement by the recipient that the invoice amount was correct and that the invoice would be paid. If the facts and circumstances reflect that there were no implied consent or implied agreement that the invoice amount was correct or that the recipient agreed to pay the invoice at issue, then a claim for account stated will not lie.

I quoted two New York court cases that discussed accounts stated in which the judges said the following:

1. As was stated nearly 100 years ago by Chief Judge Folger, "[a]n account stated is an account balanced and rendered, with an assent to the balance express or implied; so that the demand is essentially the same as if a promissory note had been given for the balance" … and in Newburger-Morris Co. v Talcott … Judge Cardozo wrote as follows: "the very meaning of an account stated is that the parties have come together and agreed upon the balance of indebtedness, insimul computassent, so that an action to recover the balance as upon an implied promise of payment may thenceforth be maintained."
2. "An account stated is an agreement, express or implied, between the parties to an account based upon prior transactions between them with respect to the correctness of account items and a specific balance due on them".… "An essential element of an account stated is that the parties came to an agreement with respect to the amount due".…

I also quoted from another case in which the judge discussed how parties to a contract can change the contract by their conduct and how a court should look to parties' conduct to see how the parties wanted the contract to be interpreted. The judge said as follows:

Once a contract is formed, the parties may of course change their agreement by another agreement, by course of performance, or by conduct amounting to a waiver or estoppel.…

Where a contract involves repeated occasions for performance and opportunity for objection "any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement" (UCC 2–208[1] ). "[S]uch course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance" (UCC 2–208[3] ). This section recognizes that the "parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was" (UCC 2–208, comment 1).

So, we will see if the court agrees.

Conclusion

Be mindful of conduct that can form an account stated and the results that can occur if an account stated is formed. While laws differ from state to state, I will suggest that the laws in most states concerning account stated are the same or similar to what I've mentioned throughout this article.

Silence may be golden in many circumstances, but beware, silence can cause issues and liability for you on your contracts and purchase orders under certain circumstances.