Accord and Satisfaction (Contract) - Explained
What is an Accord and Satisfaction of a Contract Obligation?
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What is an Accord and Satisfaction?
An accord and satisfaction is a legal agreement between two parties to a contract that intends to discharge the original claim by settling for new contract terms and/or a payment amount that typically differs from the payment amount specified in the original contract or claim. Such an agreement consists of two components - the accord, which is the agreement to discharge the original claim or contract, and the satisfaction, which is the execution or performance of the substitute claim or contract. An accord and satisfaction agreement usually precedes a lawsuit and as such, it must incorporate all essential elements of a legal contract.
A Little More on What is an Accord and Satisfaction?
An accord and satisfaction involves the release of one of the parties to a bilateral contract from its original contractual obligations by the other party (that has a legal claim) in exchange for new contractual obligations. Accord and satisfaction is, typically, a state law subject and the validity of such an agreement revolves around the fulfilment of the following four minimum conditions:
- The agreement must have a proper subject matter, i.e it should have clearly-defined terms and conditions in order to be considered legally binding. All accord and satisfaction agreements are based on the doctrine of equity, irrespective of whether the accord involves monetary settlements of debts/liabilities or settlements that do not involve an exchange of funds.
- The agreement must be made between two competent parties, i.e the two parties involved in the contract must be mentally as well as legally capable of entering into legal agreements.
- There should be a meeting of the minds, i.e. the agreement must be formed by mutual agreement by the two parties that possess a common understanding.
- There should be adequate consideration, i.e. there must be an equivalence in the exchange of value. Value can refer to cash, goods or services.
Previously, courts only entertained an accord and satisfaction arrangement when there was no disagreement over the amount involved in the dispute. In all other cases, disputes had to be settled through a Compromise and Settlement arrangement. However, at present, an accord and satisfaction agreement does encompass any compromises pertaining to the amount involved in the dispute. In its current form, an accord and satisfaction allows for a complete revision of the original agreement between the parties involved. However, such an agreement never seeks to replace the original contract; rather, it prevents the enforcement of the contract, as long as the terms of the accord are satisfied as negotiated. An accord and satisfaction often provides one of the parties the option to make smaller and more frequent payments at a lower rate of interest. However, any violation of the accord will, most certainly, result in a lawsuit revolving around the original contract.
Explaining Accord and Satisfaction with an Example
Let us consider an example of a hotel hiring a contractor to replace the plumbing of the bathrooms in the property. Suppose both parties agreed on a sum of $50,000 for the entire job, with $20,000 to be paid as a down payment, $15,000 payable during the repair process and the remaining $15,000 to be paid upon completion of the plumbing job. However, once the job is complete, the management of the hotel finds the repair work unsatisfactory and withholds payment of the final $15,000. In this instance, the two parties involved can agree on an accord and satisfaction, whereby the hotel agrees to pay $5,000 of the remaining $15,000. This essentially means that the hotel gets a discount of $10,000 for the unsatisfactory plumbing work done on its bathrooms in lieu of foregoing its right to sue the contractor. Conversely, the contractor is paying $10,000 to avoid a lawsuit, while at the same time, foregoing his right to sue the hotel for the full payment of $15,000.
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