Accord and Satisfaction

What Is 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.

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 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 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 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 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 in order 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.