What is an Accord and Satisfaction?
An accord and satisfaction is a legal contract whereby two parties agree to discharge a tort claim, contract, or other liability for an amount based on terms that differ from the original amount of the contract or claim. Accord and satisfaction is also used to settle legal claims prior to bringing them to court.
- An accord and satisfaction in a new agreement that suspends the terms of an existing agreement in favor of a new one.
- As long as the parties in an accord and satisfaction meet the new terms, the previous agreement remains suspended.
- If a party fails to live up to the new agreement's terms, they may ultimately be liable for the more stringent terms of the original contract.
Understanding an Accord and Satisfaction
The accord is the agreement on the new terms of the contract, and the satisfaction 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.
Accord and Satisfaction in the Discharge of Debt Obligations
Accord and satisfaction is a concept from contract law that usually applies to the purchase of a release from debt obligation. An accord and satisfaction may occur in debt negotiations. Consider the bank and Company A, for example. Company A has a credit agreement with the 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.
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 for whatever reason. When an accord and satisfaction is reached to discharge a debt, the creditor still receives some payment of the debt, 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 his or her 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; he or she is getting a discount on the price of the kitchen in return for having a shoddily constructed kitchen, and gives up his right to sue. The contractor is paying $5,000 in order to avoid being sued by the homeowner, and gives his right to sue for the full $8,000. Both parties give something up to limit their downside liability.