What Is Accord and Satisfaction?

Accord and satisfaction is a contract law doctrine that allows parties to settle a disputed obligation by agreeing to accept different performance than what was originally required. The "accord" is the new agreement between the parties, and the "satisfaction" is the performance of that new agreement. Once the satisfaction is complete, the original obligation is discharged. This doctrine provides a practical mechanism for resolving disputes without litigation, making it an essential concept for paralegals working in contracts, collections, and dispute resolution.

For example, imagine a contractor who completes a renovation project, but the homeowner disputes the quality of the work and refuses to pay the full $50,000 owed. The contractor and homeowner negotiate and agree that the homeowner will pay $35,000 in full settlement. The agreement to accept $35,000 is the accord; the actual payment of $35,000 is the satisfaction. Once the homeowner pays, the original $50,000 obligation is discharged.

Elements of Accord and Satisfaction

What Must Be Proven for a Valid Accord and Satisfaction?

To establish a valid accord and satisfaction, the following elements must generally be proven:

A bona fide dispute: There must be a genuine dispute between the parties about the amount owed or the nature of the obligation. Accord and satisfaction does not work for undisputed, liquidated debts (debts of a known, fixed amount)
An offer to settle: One party must offer to perform a different obligation in place of the original one, typically offering a lesser payment in full settlement of the dispute
Acceptance of the offer: The other party must accept the offer. Acceptance can be express (a written agreement) or implied (cashing a check tendered as "payment in full")
Performance of the accord: The new obligation must actually be performed. The accord itself does not discharge the original obligation; only the satisfaction (performance) does
Consideration: There must be consideration supporting the accord. In cases involving disputed debts, the compromise itself provides the consideration because each party gives up the right to litigate the dispute

The Disputed Debt Requirement

Why Must the Debt Be Disputed?

The requirement of a bona fide dispute is critical because it relates to the consideration requirement. Under the preexisting duty rule, a promise to accept less than what is already owed lacks consideration because the debtor is not providing anything new. However, when the debt is genuinely disputed, the compromise itself provides consideration because both parties are surrendering their right to litigate the matter.

A dispute can be over the amount owed (the homeowner believes the work was worth only $35,000, while the contractor says it is worth $50,000) or over whether any obligation exists at all (the homeowner claims the contract was breached and nothing is owed). The dispute must be genuine and in good faith; a debtor cannot manufacture a frivolous dispute simply to take advantage of accord and satisfaction.

What About Undisputed Debts?

When a debt is undisputed and liquidated (the exact amount is known and agreed upon), accord and satisfaction generally does not apply. If a debtor owes $10,000 and sends a check for $7,000 marked "payment in full," the creditor can typically cash the check and still pursue the remaining $3,000 because there was no genuine dispute to provide consideration for the accord.

However, under the UCC (Section 3-311), the rules change when a negotiable instrument (such as a check) is used. Even with an undisputed debt, cashing a check that clearly states it is tendered in full satisfaction may operate as an accord and satisfaction if the claimant obtains payment of the instrument. Organizations must establish procedures to identify and handle such checks properly.

The "Payment in Full" Check

What Happens When You Cash a Check Marked "Payment in Full"?

One of the most common practical issues involving accord and satisfaction is the "payment in full" check. When a debtor sends a check for less than the claimed amount with a notation such as "payment in full," "full and final settlement," or similar language, cashing the check may constitute acceptance of the accord and satisfaction, discharging the remaining balance.

Courts generally hold that if the debt is genuinely disputed, the check is conspicuously marked as full payment, and the creditor cashes the check, the creditor has accepted the accord and is bound by the satisfaction. The creditor cannot cross out the "payment in full" notation and cash the check while reserving the right to claim the balance; doing so is generally ineffective.

UCC Section 3-311 provides an exception for organizations. If the organization has sent the claimant a conspicuous statement directing that communications about disputed debts be sent to a specific person or office, and the check was not sent to that designated person or office, the organization may cash the check without creating an accord and satisfaction, provided it returns the payment within 90 days.

Accord vs. Novation

How Does Accord and Satisfaction Differ from Novation?

Accord and satisfaction and novation are often confused but are distinct concepts:

Timing of discharge: In accord and satisfaction, the original obligation is not discharged until the accord is performed (satisfaction). In novation, the original obligation is discharged immediately when the new agreement is formed
Breach consequences: If the debtor breaches the accord before satisfaction, the creditor can pursue either the original obligation or the accord. In novation, the original obligation is extinguished, so the creditor can only pursue the new agreement
Parties: Novation often involves substituting a new party for an original party, while accord and satisfaction typically involves the same parties agreeing to different terms

Practical Considerations for Paralegals

How Do Paralegals Handle Accord and Satisfaction Issues?

Paralegals encounter accord and satisfaction issues in several contexts:

Collections: Reviewing settlement offers and ensuring that any payment accepted is properly documented as either a partial payment or full settlement
Accounts receivable: Identifying "payment in full" checks and alerting attorneys before the checks are deposited
Settlement negotiations: Drafting settlement agreements that clearly state the terms of the accord, including what constitutes satisfaction
UCC compliance: Ensuring that the organization has proper procedures for handling restricted checks, including designated addresses for disputed debt communications
Litigation support: Researching whether an accord and satisfaction defense applies in contract disputes

When handling these matters, paralegals should always document all communications related to the dispute and settlement negotiations, ensure that checks marked "payment in full" are reviewed by an attorney before being deposited, and maintain records of all payments received and their characterization (partial payment vs. full settlement).

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Drafting Accord and Satisfaction Agreements

When parties reach an accord, it is best practice to memorialize the agreement in writing. A well-drafted accord and satisfaction agreement should include a clear description of the original dispute, the terms of the accord (the new obligation), a statement that performance of the accord will discharge the original obligation, a timeline for performance, a release of claims provision, and signatures of all parties.

CP Exam Preparation

Accord and satisfaction is a testable topic on the NALA CP exam within the contracts section. Key concepts to master include the elements of accord and satisfaction, the disputed debt requirement and its relationship to consideration, the effect of "payment in full" checks, the distinction between accord and satisfaction and novation, and UCC Section 3-311 protections for organizations. Sign up for your free account to practice with contract law questions. Visit our pricing page for full access to all exam preparation resources.

Key Takeaways

Accord is the new agreement; satisfaction is the performance of that agreement
A bona fide dispute is required for accord and satisfaction to apply to a reduced payment
Cashing a "payment in full" check on a disputed debt generally creates an accord and satisfaction
The original obligation is discharged only upon satisfaction, not upon formation of the accord
UCC Section 3-311 provides special rules for organizations handling restricted checks

Understanding Accord and Satisfaction: A Contract Law Guide for Paralegals