Accord and satisfaction is a compromise between a debtor and a creditor to release the debtor from the original debt obligation in exchange for a new payment. Typically, the new payment is less than the full amount owed and does not satisfy the original debt but is accepted in place of the original agreement.

Rather than being viewed as a separate agreement, the new agreement is often considered a modification to the original agreement.

Accords and Satisfaction Agreements: Why Businesses Do Them

An accord and satisfaction agreement may be useful for resolving disputes that would otherwise have to go to court. Accords and satisfactions should contain all the elements of a contract.
There may be a long waiting period for a creditor to recover all of the money owed by a debtor.

As a result, the creditor may decide to accept a lesser amount if the payment is sent promptly. Some companies may believe a debtor might not be able to pay the full amount, so they settle for a lower amount to salvage something rather than losing everything.

An Overview of Common Accords and Satisfaction Scenarios

  • Accord and satisfaction agreements are common in business and personal relationships. Each time a person accepts a lesser form of compensation, it is an accord and satisfaction.
  • A financial institution also signs accords and satisfaction agreements when it decides to change the terms of an existing loan. In this case, the interest rate can be lowered, or the borrower can pay over a longer period of time.
  • In most cases, companies send checks with a note that the payment fully settles the claim. By cashing the check, the other party has accepted the agreement.

Accords & Satisfaction Agreements in Law

In cases where the parties to an agreement did not meet formally to negotiate, according to the Uniform Commercial Code (UCC), for an accord and satisfaction agreement to be legally binding, the following conditions must be met:

  • In order to fully satisfy the claimant, the claimant must be given something in good faith
  • A dispute must exist about the exact amount of the claim
  • Payment should have been made to the claimant
  • A creditor must demonstrate that the compensation or accompanying communication contains a “conspicuous statement” that states that the compensation is intended to fully satisfy the claim

There can be misunderstandings about the intentions and understanding of the parties involved with an accord and satisfaction agreement due to the conditions for legal satisfaction. Claimants rarely realize that they are parties to an accord and satisfaction agreement by receiving and accepting payment.

An accord and satisfaction agreement is invalid in the following situations:

  • The claimant may prove that they had sent a “conspicuous statement” to the debtor before the compensation was sent, informing them that any communication about the disputed compensation must go to a designated office, person, or place. If such communication was not sent to the designated person, location, or office, the claimant must prove it.
  • The claimant must prove that they repaid the compensation in full within 90 days after receiving the compensation. If the debtor proves that they repaid the compensation within 90 days, then this condition may be waived. The claimant or an agent representing must have known the compensation given would fully settle the claim before it was sent.

Can the Creditor Enforce the Original Debt?

The original obligation is discharged if a new agreement is made to purchase a release. In other words, the debtor no longer owes the original debt. However, the new agreement must have consideration to be a binding contract. In most cases, this is satisfied by the execution of the new agreement since both the creditor and debtor are receiving something of value, the freedom from the original debt and the present payment.

Accord and satisfaction constitute an affirmative defense, so it is the debtor’s responsibility to prove that the original debt was discharged in the event that a creditor attempts to enforce it.

What Are Debtor’s Rights?

A debtor’s rights are the rights guaranteed by debtor laws to individuals who borrow money. Whether an individual is buying a home, a vehicle, or using the funds for personal use, these laws apply.

There are both federal and state laws that protect debtors from unfair treatment by creditors, including the Truth in Lending Act (TILA) and the Fair Credit Billing Act (FCBA). The TILA applies to certain creditors and requires them to provide consumers with certain information, including the amount lent and the rate of interest.

If a creditor has a dispute regarding a credit card bill, the FCBA provides guidelines for the steps they must take. Consumers also have rights when there is an error on their credit card bill.

Using Accord and Satisfaction as a Defense in Breach of Contract Lawsuits

Accords and satisfaction agreements are cited as evidence of a breach of contract by some entities. Disagreements usually occur when one party claims that it has been given less than what they believe to be owed. In this case, the creditor might sue for breach of contract.

The Uniform Commercial Code (UCC) lists the following conditions for satisfaction of an accord and satisfaction agreement:

  • In good faith, the person gave the creditor something as full payment for the debt
  • The original amount of the debt was not disputed or liquidated
  • The creditor received the payment
  • In the payment or accompanying written communication, it is clearly stated that the amount of the payment will fully satisfy the original debt

In the following scenarios, however, the settlement will not be valid:

  • It is possible for the debtor to prove that before the amount was sent, they were sent a statement informing them that any payment sent as full satisfaction has to be sent to a particular person, place, or office, and the payment was not sent there.
  • A creditor must prove that they repaid the full amount given to them within 90 days.

Criteria for Using the Accord and Satisfaction Defense

In order for an entity to use the accord and satisfaction defense in court, it must generally prove the following:

  • The parties are in agreement.
  • There is a dispute between the parties.
  • The parties intentionally agreed to settle an existing obligation with a lesser payment.
  • Payment has been accepted.
  • By accepting the lesser amount, the creditor indicated satisfaction with the previous agreement.
  • Accepting the payment accompanied by communication that the lesser amount settles the debt may imply accepting the new terms of the agreement.

Agreement and Satisfaction in Full Payment Cases

A business that has contractors should carefully examine checks or drafts marked “payment in full.” This is because accepting such checks or drafts may be construed as accepting an accord and satisfaction contract. Creditors who cash such a check may have to prove that their acceptance does not constitute an accord and satisfaction agreement if:

  • The check was cashed without being aware of the notation.
  • The creditor purged or removed the “payment in full” notation.

Why Would a Creditor Agree to Settle For Less Than the Original Debt?

Creditors might agree to the purchase of the debt for less for several reasons, including:

  • A complaint about the quality of the item or service provided by the creditor, resulting in a settlement for a smaller payment;
  • Payment in one lump sum rather than several smaller installments; and
  • Payment from a high-risk debtor for less instead of risking having the debtor default.

Should I Hire a Lawyer?

Debt payment and collection can be very confusing. A financial lawyer can advise you of your rights and assist in creating an agreement for the payment of a debt. Lawyers can also represent you in court.