Accord and Satisfaction Affirmative Defense Explained

Key Takeaways

• The accord and satisfaction affirmative defense is used when a debtor and creditor resolve a disputed obligation with a new agreement.
• This defense requires clear evidence of mutual assent to the new terms and acceptance of substituted performance.
• Accord and satisfaction applies to disputed or unliquidated claims and must meet contract requirements like consideration and intent.
• Checks marked “payment in full” can trigger an accord and satisfaction, but courts examine intent and knowledge closely.
• State laws and judicial interpretations vary, so legal advice is essential for enforcement or defense.

What is accord and satisfaction affirmative defense? An accord and satisfaction is an agreement to solve a claim in which the parties to a contract agree on new terms which may be less stringent than the ones in the original contract. The party with a claim usually receives less than what is owed to settle the claim. Even after an accord and satisfaction agreement, it is still possible for one of the parties in the contract to take legal action for breach of the original contract. When used as an affirmative defense, it is the responsibility of the party being sued to prove that an accord and satisfaction agreement was actually done.

The Use of Accord and Satisfaction as a Defense in Breach of Contract Lawsuits

Accord and satisfaction agreements are cited by some entities in breach of contract lawsuits. Disagreements usually occur when one party claims that it has been given less than what they believe to be owed. This may prompt the creditor to file a breach of contract lawsuit.

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

• The person in good faith gave something to the creditor as full satisfaction of the debt
• The original amount of the debt was not liquidated or subject to a dispute
• The creditor got the payment
• The payment or accompanying written communication contains a “conspicuous statement” to the effect that the amount given will lead to full satisfaction of the original debt

But the settlement will not be valid in any of the following scenarios:

• If the debtor proves that before the amount was sent, the debtor was sent a conspicuous statement that informed him that any payment sent as full satisfaction is to be sent to a designated person, office, or place and the payment was not sent to that person, place, or office.
• If the creditor proves that he repaid the payment given to him as full payment within 90 days.

When Is Accord and Satisfaction a Valid Defense?

Accord and satisfaction is typically a valid affirmative defense in cases where there is a genuine dispute over the original obligation. Courts look for key elements such as:

• Existence of a Dispute: The debt must be disputed or unliquidated.
• Mutual Intent to Resolve the Dispute: Both parties must agree, explicitly or implicitly, to settle the dispute with different terms.
• Acceptance of Performance: The creditor must accept the alternative performance (often a reduced payment) knowingly and voluntarily.

It is not enough to merely claim that a lesser amount was paid; the party invoking the defense must prove that a new contract—the accord—was formed, and that it was fully executed—the satisfaction. If these elements are not clearly established, courts may reject the defense, especially in cases involving coercion, lack of consideration, or fraud​.

Requirements for Using the Accord and Satisfaction Defense

For an entity to use the accord and satisfaction defense in the courts, it must generally prove the following:

• That there is an agreement between the parties.
• That there is a dispute between the parties.
• Evidence of the fact that the parties intentionally agreed to solve an existing obligation with a lesser payment.
• That payment has been accepted.
• The creditor communicated to the debtor that acceptance of the lesser amount shows satisfaction with the previous agreement.
• Accepting the payment, if the payment is accompanied by a communication that the lesser amount settles the debt, may imply acceptance of the new terms of the agreement.

Elements and Legal Standards of Accord and Satisfaction

For the accord and satisfaction affirmative defense to hold in court, the following legal standards generally apply:

• Offer and Acceptance: There must be a new offer to settle the dispute, which is accepted by the other party.
• Consideration: The agreement must involve a compromise or exchange of value, even if less than originally owed.
• Clear Communication: The terms of the accord should be communicated in writing or by conduct sufficient to notify the parties of their intent.
• Intent to Be Bound: Courts often analyze whether both parties intended the new terms to discharge the original obligation.

These elements align with contract law principles. A mere partial payment without these legal indicators will not be sufficient for an accord and satisfaction defense​.

Accord and Satisfaction in Cases of Payment in Full Notations

Businesses that have contractors should carefully examine checks or drafts sent with the notation “payment in full.” This is because acceptance of such checks or drafts may be construed as accepting an accord and satisfaction agreement. In some cases, a creditor who cashes such a check may need to prove that his acceptance of the check did not constitute an accord and satisfaction agreement if: 

• The check was cashed without knowing about the notation.
• The creditor struck out or deleted the “payment in full” notation.

Risks of “Payment in Full” Checks

When a debtor writes "payment in full" on a check, this may trigger an accord and satisfaction if the creditor knowingly accepts the payment. However, courts scrutinize these cases closely:

• Awareness of the Notation: If the creditor is unaware of the "payment in full" language, the defense may not apply.
• Intent to Accept Settlement: Courts often ask whether the creditor accepted the check intending to resolve the dispute.
• Striking or Altering Notation: Simply striking the “payment in full” note may not prevent an accord and satisfaction if the creditor still deposits the check.

Businesses should implement clear policies for handling disputed payments and designating personnel to process checks to avoid unintended settlements​.

The H.L. “Brownie” Choate, Inc. V. Southland Drilling Co., Inc Case

Lawsuits can arise when there is a disagreement between the creditor and the debtor about what is enough to settle a dispute. For example, in the H.L. “Brownie” Choate, Inc. V. Southland Drilling Co., Inc case in San Antonio. The case went up to the Texas Supreme Court. 

When the drilling company damaged the supplier's drilling rig, the supplier settled the dispute by trying to deduct an amount equal to the value of the rig from the amount he owed the drilling company, as was the usual practice. Later the drilling company sent him a check which didn't cover the complete amount but with a notification that the payment has been made in full.

But "Brownie" sued to recover the remaining amount. The court ruled that the acceptance and cashing of the check which was offered in “full settlement” meant that "Brownie" constituted an accord and satisfaction of the debt.

The laws governing accord and satisfaction contracts vary from state to state. Consult a competent attorney in your state to help you to interpret your state's laws.

Common Pitfalls and How to Avoid Them

Missteps that often undermine the use of the accord and satisfaction affirmative defense include:

• Lack of Written Proof: Failing to document the terms of the new agreement can weaken the defense.
• Ambiguity in Communication: Vague or unclear language can lead to disputes about whether an accord was intended.
• Premature Legal Action: Creditors who file suit too quickly may inadvertently waive the chance to negotiate an accord.
• Improper Handling of Checks: Accepting a payment without internal procedures to flag disputed amounts can create enforceable accord and satisfaction claims.

To avoid these pitfalls, businesses should seek legal counsel before accepting or rejecting partial payments, especially when the dispute involves large sums or potential litigation​​.

Frequently Asked Questions

1. What is the purpose of the accord and satisfaction affirmative defense?
   It allows a defendant to argue that a disputed debt has already been resolved through a mutually agreed-upon alternative performance.
2. Can accord and satisfaction be oral or must it be written?
   It can be oral, but written agreements are preferred to prove the terms and the parties' intent.
3. Does cashing a check with “payment in full” always mean agreement?
   Not necessarily. Courts will evaluate whether the creditor knew of the notation and intended to settle the claim.
4. What types of claims are eligible for accord and satisfaction?
   It applies to contract-based claims, whether express or implied, particularly when the amount owed is disputed or unliquidated.
5. How does state law affect accord and satisfaction?
   State laws vary in how they interpret and apply this defense. Always consult a local attorney to assess your case under your state’s rules.

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