When there’s an existing dispute regarding an amount due and the parties mutually intend to settle that dispute by accepting a certain payment amount (such as a check marked “payment in full”) then that payment will result in the discharge of the prior disputed obligation (an accord and satisfaction in legal terms).
As an example, one court found that a contractor’s claim for additional payment wouldn’t be allowed when the owner explicitly wrote “payment in full” on the check. That said, a customer cannot simply claim that partial payment of an invoice constitutes payment in full half way through the job and expect the contractor to fully perform the balance of the contract.
The lesson is clear: when a dispute arises with a customer and that customer marks a check “paid in full”, especially when the check is accompanied by a letter or note explaining why the check is to constitute full payment, the best practice is to avoid cashing the check and attempt to resolve the dispute directly for the correct amount or an agreed on lesser amount. Simply cashing the check and expecting you can argue about it later would be a mistake – a big mistake.