Accord and satisfaction is a contract law concept about the purchase of the release from a debt obligation. It is one of the methods by which parties to a contract may terminate their agreement. The release is completed by the transfer of valuable consideration that must not be the actual performance of the obligation itself. The accord is the agreement to discharge the obligation and the satisfaction is the legal “consideration” which binds the parties to the agreement. A valid accord does not discharge the prior contract; instead it suspends the right to enforce it in accordance with the terms of the accord contract, in which satisfaction, or performance of the contract will discharge both contracts (the original and the accord). If the creditor breaches the accord, then the debtor will be able to bring up the existence of the accord in order to enjoin any action against him.
Accord and satisfaction is normally a matter of state law and is usually defined as an agreement to discharge a claim in which the parties agree to give and accept different performance which is usually less than what is required or owed. Any claim based on an express or implied contract may be the subject matter of an accord and satisfaction. See our article on Contracts. Since an accord agreement is considered a new agreement substituting the old one, accord and satisfaction must have all essential elements of a contract.
Under most state law, a valid accord and satisfaction requires four elements as a minimum, usually,
(1) proper subject matter,
(2) competent parties,
(3) meeting of the minds of the parties and
(4) adequate consideration. See our contracts article for the usual additional requirements for a binding agreement in California.
An accord can be either an express agreement or may be implied, based on the circumstances surrounding the transaction. In litigation, since accord and satisfaction is an affirmative defense, the party raising accord and satisfaction must specifically plead it and prove it to the satisfaction of the Trier of Fact.
Usually, accord and satisfaction deals with a debtor’s offer of payment and a creditor’s acceptance of a lesser amount than the creditor originally claimed to be owed. It is a method of discharging a claim by settlement of the claim and performing the new agreement. The accord is the agreement and the satisfaction its execution or performance. A new contract is substituted for an old contract thereby discharging an obligation or cause of action, which is settled, and must have all of the elements of a valid contract.
In an accord contract it is typical that the consideration supplied is less than bargained for in the original contract. Consideration is the value given in return for a promise. It has two elements:
(1) there must be a bargained-for exchange between the parties
(2) what is bargained for must have legal value.
Something legally sufficient must be given in exchange for a promise. It may be a return promise, such as not to file bankruptcy and/or provide security for the new obligation. If it is performance, that performance may be an act or forbearance. Whatever it is, it must be either legally detrimental to the promise or legally beneficial to the promisor. Legally detrimental is not always economically detrimental. A person can incur legal detriment by doing or promising to do something that he or she had no prior legal duty to do or refraining from or promising to refrain from doing something that he or she had no prior legal duty to refrain from doing.
Accord and Satisfaction Versus Novation, Release and Payment
The essential difference between an accord and a novation rests on the intention of the contracting parties. See Paramount Aviation Corp. v. Agusta, 178 F.3d 132 (3d Cir. N.J. 1999). An accord and satisfaction is a substitute contract for settlement of a debt by some alternative other than full payment. The consideration for an accord is often the resolution of a disputed claim. While in a novation, the new promise itself satisfies the preexisting claims, in an accord it is the performance of the new promise that satisfies the preexisting duty. The distinctive feature of an accord and satisfaction is that the obligee does not intend to discharge the existing claim merely upon the making of the accord. She or he can do so only upon performance or satisfaction. If the satisfaction is not tendered, the obligee may sue under the original claim or for breach of the accord. On the other hand, novation bars revival of the preexisting duty. Burden of proving the extinguishment of preexisting duty is upon the party asserting a novation.
If the parties may intend that a new agreement, though only executory, will immediately discharge the existing obligation, such an agreement is called a substituted agreement. In situations where, “…the full performance of the revised contract terms is necessary to extinguish or discharge claims arising under an old contract, the revised contract is called an executory accord and performance is called a satisfaction, while in cases where mutual promises in a revised contract are held by themselves to discharge all claims arising under the earlier contract, the revised contract is called a substituted contract. Community Builders v. Indian Motorcycle Assocs., 44 Mass. App. Ct. 537 (Mass. App. Ct. 1998).
Payment is the discharge of a pecuniary obligation by the debtor by delivering a specific sum of money or the equivalent of a specific sum. The delivery can be actual or constructive and is made for the purpose of extinguishing an obligation. Payment requires delivery by the debtor and acceptance by the creditor, both with common purpose. Parnell v. Sherman, 899 S.W.2d 900 (Mo. Ct. App. S.D. 1995)
In opposition to payment or novation, an accord and satisfaction is generally defined as an agreement to discharge a debt or claim by some performance other than that which was originally due. Accord and satisfaction is contractual in nature, and hence the joint intent of the parties is necessary. Thus, a transaction will constitute an accord and satisfaction of a claim only where both parties both intend it. Absent such intent, a claim for a specific sum of money cannot be satisfied by partial payment. When a payment of less than what is claimed is offered and accepted, it will not constitute an accord and satisfaction of the entire claim unless it can be demonstrated that the creditor intended to accept it as full satisfaction.
According to California Civil Code § 1521, an accord is an agreement to accept, in extinction of an obligation, something different from or less than that to which the person agreeing to accept is entitled. Cal Civ Code § 1522 states that since the parties to an accord are bound to actually execute it, it does not extinguish the obligation until it is fully executed.
California Civil Code § 1523 defines satisfaction as acceptance, by the creditor, of the consideration of an accord. Satisfaction extinguishes the obligation. Moreover, Cal Civ Code § 1524 explains that part performance of an obligation extinguishes the obligation, if performed either before or after a breach thereof, but only where expressly accepted by the creditor in writing, in satisfaction, or rendered in pursuance of an agreement in writing, though without any new consideration.
“Payment in Full” on the check:
According to Cal Civ Code § 1526, where a claim is disputed or unliquidated and a check or draft is tendered by the debtor in settlement thereof in full discharge of the claim, and the words “payment in full” or similar words are notated on the check or draft, the acceptance of the check or draft does not constitute an accord and satisfaction if the creditor protests against accepting the tender in full payment by striking out or deleting that notation, or if the acceptance of the check or draft was inadvertent or without knowledge of the notation.
However, the acceptance of a check or draft constitutes an accord and satisfaction, if a check or draft is tendered pursuant to a composition or extension agreement between a debtor and its creditors, all creditors of the same class are accorded similar treatment, and the creditor receives the check or draft with knowledge of the restriction.
In the absence of such intent, the partial payment will operate as a discharge of only the amount paid, and the creditor will be entitled to maintain an action to recover the balance of his claim. To determine the intent of the parties, it is necessary to examine the language of the order of satisfaction and release in light of the circumstances existing at the time of the transaction.
Release versus Accord and Satisfaction:
An accord and satisfaction is distinguishable from release. A release is a abandonment of a right, which may be given gratuitously (for free) or for inadequate consideration, while an accord and satisfaction is the discharge of a debt or claim by the acceptance of some payment which is agreed to constitute full satisfaction Holman v. Simborg, 152 Ill. App. 3d 453, 456 (Ill. App. Ct. 1st Dist. 1987). Thus, consideration is not a required element for a release but is for accord and satisfaction.
An accord and satisfaction has the same effect as that of a release in its impact on third persons. Since there can be but a single satisfaction for an injury or wrong, an accord and satisfaction made by one of two or more joint tort feasors will operate to discharge the others. However, where a payment made by one joint tort feasor is not intended to constitute satisfaction in full, it will not result in a discharge of the others, although it will operate as a partial satisfaction to be credited to any recovery against the remaining tort feasors.
Off Sets and Counterclaims
Controversy can arise as to settlement of claim on the basis of accord and satisfaction where a counterclaim or set-off is claimed as a part payment of the liquidated and undisputed debt. An initially liquidated claim becomes unliquidated when, by reason of a counterclaim or setoff, the actual amount due on the balance has been put in doubt between the parties. Under such circumstances, an accord and satisfaction may result from the payment of a lesser sum than the creditor’s claim, even a sum not in excess of the balance concededly due. Thus, a liquidated claim due a creditor is rendered unliquidated, “…when the debtor in good faith asserts a disputed counter-claim or set-off, and in such a case an accord and satisfaction may result from the payment by the debtor of an amount less than the creditor’s claim and no greater than the amount which the debtor concedes to be due. In H.L. “Brownie” Choate, Inc. v. Southland Drilling Co., Inc., 441 S.W.2d 672 (Tex. Civ. App. San Antonio 1969), plaintiff creditor, who was the service provider to the defendant debtor caused damage to defendant’s drilling rig. In accordance with their past practice, defendant recovered the damage amount by deducting it from the amount it owed to plaintiff for services rendered. Plaintiff filed suit to recover the deducted amount. The court held that, “…when the amount due was in dispute, and the debtor tendered a check for less than the amount claimed by the creditor while expressing his intention that the check was offered in full settlement, the retention and cashing of the check by the creditor was regarded as an acceptance of the offer, and such action on the part of the creditor operated as a full satisfaction.” The court found that plaintiff’s acceptance of a lesser amount constituted an accord and satisfaction of the debt. A majority of jurisdictions follow this view although there is authority to the contrary. See B. Mifflin Hood Co. v. Lichter, 106 F. Supp. 220, 231 (D. Tenn. 1950). (A counter or additional claim in dispute does not render the principal obligation unliquidated where such principal obligation is itself not in dispute. An accord and satisfaction in such cases would not be applicable.) The law of your own particular state will have to be reviewed by competent counsel to determine what would apply.UCC and Accord and Satisfaction
See our article on the UCC before reading further.
According to the Uniform Commercial Code, U.C.C. § 3-311, if a person against whom a claim is asserted proves that:
- that person in good faith tendered an instrument to the claimant as full satisfaction of the claim;
- the amount of the claim was unliquidated or subject to a bona fide dispute; and
- the claimant obtained payment of the instrument
then under U.C.C. § 3-311(b), unless other law applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.
However, a claim is not discharged if either:
- the claimant, if an organization, proves that within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place, and the instrument or accompanying communication was not received by that designated person, office, or place; or
- the claimant, whether or not an organization, proves that within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted.
Furthermore, a claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant, or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim.
Accords and satisfactions occur both in business and in daily life far more often that usually realized. Every time you accept less than owed, even informally, you have adopted an accord and satisfaction if and when the new obligation is performed. When economic times are difficult, such resolutions of dispute are common. What is often mistaken for accord and satisfaction, (releases and settlements and novations) require quite different criteria and documentation and that is where most people get into trouble.
And, of course, the omnipresent “payment in full” written on partial payment checks are a constant source of dispute as creditors and debtors argue as to whether an accord and satisfaction resulted. The law of the particular state rules such issues (often the UCC when between merchants) and the wise creditor or debtor will learn the particular law before issuing or cashing such a check.