What Does Accord and Satisfaction Mean in a Legal Contract?

What Is Accord and Satisfaction?

The term accord and satisfaction refers to a legal contract whereby two parties agree to discharge a tort claim, contract, or other liability for a different amount than the original amount of the contract. This legal term is the combination of two concepts—an accord or the new agreement, and the satisfaction of that new agreement. An accord and satisfaction also helps settle legal claims before they are brought to court.

Understanding Accord and Satisfaction

An accord and satisfaction replaces a contract to settle a debt between two parties. The accord portion is the agreement of the new contract terms while the satisfaction portion is the performance of those terms according to the agreement. When there is an accord and satisfaction, and the performance (or satisfaction) has been executed, all prior claims relating to the matter are extinguished. The amount paid may be less than what is originally owed.

Several elements must exist for an accord and satisfaction to be in force:

1. There must be a sufficient claim on a contract. This means that both parties must agree that there is an outstanding issue or liability.
2. Both parties must come to a settlement agreement.
3. The claimant and defendant must follow through and ensure the agreement is kept.

An accord and satisfaction may occur in debt negotiations. For example, Company A has a credit agreement with a bank that is putting pressure on its balance sheet. The bank works with Company A and the original credit agreement is revised. The new terms might allow Company A to make a larger number of smaller payments, to repay the debt at a lower interest rate, to repay an amount less than the original obligation, or some other arrangement.

If, for some reason, Company A does not deliver on the new terms, it may be liable for the original contract because it did not satisfy the terms of the accord. An accord and satisfaction does not replace the original contract; rather, it suspends that contract’s ability to be enforced, provided that the terms of the accord are satisfied as agreed upon.

Advantages and Disadvantages of an Accord and Satisfaction

An accord and satisfaction can be used as a form of compromise that benefits both parties when the original terms of a contract cannot be upheld for whatever reason. But, there are benefits and drawbacks to this legal concept, which are discussed below.

Advantages

The creditor or complainant benefits from an accord and satisfaction by resolving the outstanding issue. It provides a speedy resolution for parties who can't afford or don't want to spend the time and money to litigate the matter. Although it isn't the full amount, they can collect some of the money that is owed to them.

The debtor or defendant of the claim benefits from an accord and satisfaction by not being held to the full obligation. This eliminates the potential for an unfavorable judgment against this party.

Disadvantages

The amount of the settlement may be more than the defendant would pay or less than what the claimant is owed. This tends to happen when the process is rushed and parties try to settle disputes on their own without any legal counsel.

By agreeing to a settlement, the claimant usually agrees not to bring forth any future claims against the defendant. This means if work is done and more problems are discovered down the road, the claimant cannot seek any monetary or legal remedies in the future. Keep in mind that if the debt isn't satisfied, the terms of the original contract may be enforceable.

Example of Accord and Satisfaction

Here's a hypothetical example to show how this concept works. Let's say a homeowner hires a contractor to renovate their kitchen for $30,000. The contract requires a down payment of $12,000, $10,000 paid during the renovation process and the remaining $8,000 to be paid upon completion of the kitchen. However, when the kitchen is complete, the homeowner finds the work shoddy and refuses to pay.

An accord and satisfaction can be reached whereby the homeowner agrees to pay $3,000. Essentially, they are getting a discount on the price of the shoddily constructed kitchen in return for giving up their right to sue. The contractor pays $5,000 to avoid being sued by the homeowner and gives up their right to sue for the full $8,000. Both parties give something up to limit their downside liability.

The Bottom Line

Contract disputes can be costly, time-consuming, and messy. You may be able to come to a suitable agreement if you and the other party can sit down and discuss an accord and settlement. This is a legal concept that eliminates the need for litigation, moving you to a speedy outcome. In most cases, you may have to settle the debt for less than what was originally owed. But before you do, make sure you don't rush through the process and seek legal advice on how to proceed. You don't want to sell yourself short and lose even more in the end than you already have.