What Does Accord and Satisfaction Mean in a Legal Contract
What Does Accord and Satisfaction Mean in a Legal Contract?
What Is Accord and Satisfaction?
An accord and satisfaction is a legal contract where two parties agree to discharge a tort claim, contract, or other liability for an amount based on terms that differ from the original amount. It is also used to settle legal claims prior to bringing them to court.
Key Takeaways
– Accord and satisfaction is a new agreement that suspends the terms of an existing agreement.
– The accord is the agreement on the new terms of the contract, and the satisfaction is the performance of those terms.
– As long as the parties meet the new terms, the previous agreement remains suspended.
– If a party fails to live up to the new terms, they may be liable for the more stringent terms of the original contract.
Understanding Accord and Satisfaction
The accord is the agreement on the new terms of the contract, and the satisfaction is the performance of those terms. When there is an accord and satisfaction, and the performance has been executed, all prior claims are extinguished.
Accord and satisfaction is a concept from contract law that usually applies to the purchase of a release from a debt obligation.
An accord and satisfaction may occur in debt negotiations. For example, Company A has a credit agreement with a bank and the original credit agreement is revised. The new terms might allow Company A to make a larger number of smaller payments, repay the debt at a lower interest rate, 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.
Benefits of 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. When an accord and satisfaction is reached to discharge a debt, the creditor still receives some payment, while the debtor benefits from not being held to the full obligation.
This can apply to everyday life as well as corporate finance. For example, a homeowner hires a contractor to renovate their kitchen for $30,000. The contract requires a $12,000 down payment, $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 is paying $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 contractor is paying $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.
