Tuesday, April 27, 2010

accord and satisfaction

It may sound like an archaic maneuver from The Three Musketeers, but accord and satisfaction is actually a relatively simple contract principle: The parties can always agree to modify the terms of the contract. When one party agrees to accept something other than what‘s promised in the contract—for example, the seller of a car agrees to accept less money because the brakes need to be replaced—then the parties have reached an “accord.” When the buyer pays the lesser amount and the seller accepts it, that’s “satisfaction.” So, an accord and satisfaction is when the parties agree to an alternative way to perform the deal. An accord and satisfaction often involves the payment of a debt. For example, a creditor who loaned money to a failing business and wants to cuts his losses might agree to accept less than the full amount due.

How is it done? In an accord and satisfaction, one agreement (the new arrangement) is substituted for another (the original contract). The new agreement (sometimes referred to as a “Discharge of Debt,” or a “Mutual Settlement and Release of Debt”) spells out the accord and satisfaction and terminates the old agreement.

What about accepting checks that say ‘payment in full?’ Let’s say you borrow money from a friend and then have a dispute as to how much is owed—you say $500; she says $1,000. What happens if you send a check for $750 that states “payment in full”? Your friend says she is going to cash it but she thinks you still owe her $250, so she crosses out “payment in full” on the check. Can she go after you for the rest of the money if she cashes the check? Not according to most court rulings. As one judge put it, “What is said is overridden by what is done.” This rule applies only if there is a dispute over how much is owed, however. If you and the other party agree on what you owe, you can’t try to scratch out a better deal by writing “paid in full” on your check for half the amount. Finally, if there is a dispute but the check is cashed inadvertently, the rule may not apply (courts are split on that issue.)

[i] Hudson v. Yonkers Fruit, Co. 258 N.Y. 168 (1932).

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