An accord and satisfaction is an agreement in which a party to a pre-existing contract accepts a smaller form of compensation to settle a claim. In this case, the initial contract is the accord and the compensation is the satisfaction. This type of agreement is normally done when one of the parties to the agreement who has a claim believes that he might not get the compensation in full at the desired time. The arrangement enables contracting parties to settle claims promptly. The system can be abused and may allow wealth debtors to take advantage of their creditors who have fallen on hard times.

Why Businesses Do Accord and Satisfaction Agreements

An accord and satisfaction agreement may help to settle disputes which would otherwise necessitate court battles. Like other contracts, an accord and satisfaction should have all the elements of a contract.

A creditor may realize that it may take a long time for him to recover the complete amount owed by the debtor. So the creditor may decide to settle for a lesser amount, provided the payment is sent promptly. Other businesses might have reason to believe that a debtor may not be able to pay the full amount so they settle for a less amount to salvage something instead of losing out on the entire claim.

Common Accord and Satisfaction Scenarios

  • Accord and satisfaction agreements are common in personal and business dealings. In fact, every time a person accepts a lesser form of compensation to settle a pre-agreed claim, the arrangement is an accord and satisfaction.
  • Accord and satisfaction agreements are also signed when a financial institution agrees to change the terms of an existing loan. This may be by reducing the interest rate or allowing the borrower to pay over a longer period of time.
  • Businesses normally send checks with a note that the payment fully settles the claim. In this case, cashing the check by the other party means that the other party has accepted the agreement.

Legal Requirements for Accord and Satisfaction Agreements

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:

  • The claimant must in good faith be given something to fully satisfy his claim
  • The exact amount of the claim must be unsettled or must be subject to a dispute
  • The claimant should have received the payment
  • The creditor must prove that the compensation, or an accompanying communication, contained a “conspicuous statement” that states that the compensation was given to fully satisfy the claim 

The conditions for legal satisfaction of an accord and satisfaction agreement mean that there can be misunderstandings about the intentions and understanding of the parties involved. Many claimants do not realize that by receiving and accepting a payment, they are being parties to an accord and satisfaction agreement.

An accord and satisfaction agreement will not be valid in any of the following situations:

  • If the claimant proves that before the compensation was sent, he had sent a “conspicuous statement” to the debtor informing him that any communication about the disputed compensation must be sent to a designated person, office, or place. In this case, the claimant must prove that no such communication was sent to the designated person, place, or office.
  • If the claimant proves that he repaid the compensation amount in full within 90 days of receiving the compensation. This condition can be waived if the debtor proves that before the compensation was sent, the claimant or an agent representing him knew that the compensation given would fully settle the claim.

Advantages of Accord and Satisfaction Agreements

  • Accord and satisfaction agreements may enable disputes to be settled affordably without involving courts
  • These types of agreements may be useful to a claimant who urgently needs cash and would be adversely affected if the settlement is delayed

Disadvantages of Accord and Satisfaction Agreements

  • These agreements are prone to disputes because claimants may be tricked into making accord and satisfaction agreements since no formal negotiations are required for these agreements. In some cases, all that is required for the agreement to be valid is some form of compensation to be sent along with a note that states the payment has been made in full.
  • Such agreements may enable wealthy entities to take advantage of claimants who are facing financial problems to make settlements they may later regret.

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