Accord and satisfaction
Encyclopedia
Accord and satisfaction is a contract law concept about the purchase of the release from a debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 obligation. The payment is typically less than what is owed and is not paid by the actual performance of the original obligation. The accord is the agreement to discharge the obligation and the satisfaction is the legal "consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...

" which binds the parties to the agreement.

If a person is sued over an alleged debt, that person bears the burden of proving the affirmative defense
Affirmative defense
A defendant offers an affirmative defense when responding to a plaintiff's claim in common law jurisdictions, or, more familiarly, in criminal law. Essentially, the defendant affirms that the condition is occurring or has occurred but offers a defense that bars, or prevents, the plaintiff's claim. ...

 of accord and satisfaction.

Illustration

Accord and satisfaction is a settlement of an unliquidated debt. For example, a builder is contracted to build a homeowner a garage for $35,000. The contract called for $17,500 prior to starting construction, to disburse $10,000 during various stages of construction, and to make a final payment of $7,500 at completion. At completion, the homeowner complained about inferior work quality and refused to make the final payment. After a mutual settlement agreement, the builder accepted $4,000 as full payment. Thereby, a new contract was formed by offer, acceptance, and consideration. The consideration is that for a $3,500 savings, the homeowner gives up that which he is entitled, a well-constructed garage. The builder gives up his right to full price to avoid suit for inferior performance. When accord and settlement has occurred, the homeowner and builder have given up his right to sue for more money under this settlement agreement.

Another example would be where a lender agrees to loan $100,000 at 5.0% interest for 30 years, and at the closing the loan documents are all drawn up for a loan with a 6.0% interest rate. If the lender agrees to reduce the closing costs by an extra $1000 and the borrowers agree, then there has been an accord and satisfaction. If the borrowers later sue for breach of contract, the settlement (offer and acceptance of the $1000) constitutes an accord and satisfaction and is a valid defense to the borrowers law suit.

The accord agreement must be transacted on a new agreement. It must therefore have the essential terms of a contract, (parties, subject matter, time for performance, and consideration). If there is a breach of the accord there will be no "satisfaction" which will give rise to a breach of accord. In this instance the non-offending party has the right to sue under either the original contract or the accord agreement.

Consideration

In an accord contract it is typical that the consideration supplied is less than bargained for in the original contract. In accord contracts that require an amount of consideration that is less than the original, the consideration must be of a different type, i.e. instead of money, debtor offers a car or a boat.

Accord as an Equitable Defense

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.

See also

  • Foakes v. Beer
    Foakes v. Beer
    Foakes v Beer [1884] is an English contract law case, which applied the controversial Pre-existing Duty Rule in the context of part payments of debts. It is a leading case from the House of Lords on the legal concept of consideration. It established the rule that prevents parties from discharging...

    - an old leading case on the exception of accord and satisfaction
  • Part performance - related legal concept
  • Jacob & Young, Inc. v. Kent, 230 N.Y. 239, (N.Y. App. 1921).
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