ACCORD AND SATISFACTION

INTRODUCTION:

The Doctrine of Accord and Satisfaction means discharge of one's contractual

obligations by way of performing substituted obligations. Accord and satisfaction is

a contract law concept. It is one of the methods by which parties to a contract may

terminate their agreement. The accord is the agreement to discharge the obligation and the

satisfaction is the legal "consideration" which binds the parties to the agreement. A valid

accord does not discharge the prior contract; instead it suspends the right to enforce it in

accordance with the terms of the accord contract, in which satisfaction or performance of the

contract will discharge both contracts.

DEFINITION:

A method of discharging a claim whereby the parties agree to give and accept something in

 settlement of the claim and perform the agreement, the accord being the agreement and th

e satisfaction its execution or performance, and it is a new contract substituted for an old c

ontract which is thereby discharged, or for an obligation or for a cause of action

which is settled, and must have all of the elements of a valid contract.

MEANING:

An accord and satisfaction in a new agreement that suspends the terms of an existing

agreement in favour of a new one. As long as the parties in an accord and satisfaction meet

the new terms, the previous agreement remains suspended If a party fails to live up to the new

agreement's terms, they may ultimately be liable for the more stringent terms of the original

contract.

The accord is the agreement on the new terms of the contract, and the satisfaction is the

performance of those terms according to the agreement. When there is an accord and

satisfaction, and the performance (or satisfaction) has been executed, all prior claims

relating to the matter are extinguished.

ESSENTIALS FOR A VALID ACCORD AND SATISFACTION:

Accord and Satisfaction is based on contract principles. An accord and satisfaction should

have all the elements of a contract namely, offer, acceptance, and consideration. Thus, the

burden of proving accord and satisfaction is simply the burden of proving a contract.

An accord and satisfaction is a contract and thus requires a meeting of the minds of the two

parties before it is valid and binding.  Accord and satisfaction occurs where the parties, “by

a subsequent agreement, have satisfied the former agreement, and the latter agreement has

been executed.”

A valid accord and satisfaction requires four elements, which include

 Proper subject matter;

 Competent parties;

 A meeting of the minds of the parties; and

 Consideration.

 There must have been a genuine dispute that is settled by a meeting of

two minds with intent to compromise.

 Where there is an actual controversy, an accord and satisfaction may

be used to settle it

 The controversy may be founded on contract or TORT

The agreement must include a definite offer of settlement and an unconditional acceptance

of the offer according to its terms. It must be final and definite, closing the matter it covers

and leaving nothing unsettled or open to question. The agreement may call for full payment

or some compromise and it need not be based on an earlier agreement of the parties. It does

not necessarily have to be in writing unless it comes within the statute of frauds.

Unless there are matters intentionally left outside the accord and satisfaction, it settles the

entire controversy between the parties. It extinguishes all the obligations arising out of the

underlying contract or tort. Where only one of two or more parties on one side settles, this

ordinarily operates to discharge all of them. The reason for this is the rule that there should be

only one satisfaction for a single injury or wrong. This rule does not apply where the

satisfaction is neither given nor accepted with the intention that it settles the entire matter.

An accord without satisfaction generally means nothing. With a full satisfaction, the

accord can be used to defeat any further claims by either party unless it was reached by

fraud duress, or mutual mistake.

ILLUSTRATION:

 A builder is contracted to build a homeowner a modular kitchen for $35,000. The

contract called for $17,500 prior to starting construction, to disburse $10,000

during various stages of construction, and to make a final payment of $7,500 at

completion. At completion, the homeowner complained about inferior work quality

and refused to make the final payment. After a mutual settlement agreement, the

builder accepted $4,000 as full payment. Thereby, a new contract was formed by

offer, acceptance, and consideration. The consideration is that for a $3,500 savings,

the homeowner gives up that which he is entitled, a well-constructed modular

kitchen. The builder gives up his right to full price to avoid suit for inferior

performance. When accord and satisfaction has occurred, the homeowner has

given up his right to sue for inferior performance, and the builder has given up his

right to sue for the full $7,500 due under the original contract.

 Company xyz has a credit agreement with the bank that is putting pressure on its

balance sheet. The bank works with Company xyz and the original credit agreement

is revised. The new terms might allow Company xyz to make a larger number of

smaller payments, to repay the debt at a lower interest rate, to repay an amount less

than the original obligation, or some other arrangement. If, for some reason,

Company xyz does not deliver on the new terms, it may be liable for the original

contract because it did not satisfy the terms of the accord. An accord and

satisfaction does not replace the original contract; rather, it suspends that

contract’s ability to be enforced, provided that the terms of the accord are satisfied

as agreed upon.

REQUIREMENTS FOR USING THE ACCORD AND SATISFACTION AS

DEFENSE:

For an entity to use the accord and satisfaction defence 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.

TREATMENT OF THE DOCTRINE OF ACCORD AND

SATISFACTION BY THE INDIAN JUDICIARY:

In the Boghara Polyfab Case, the Supreme Court of India has explained the Doctrine as

follows:

“While discharge of contract by performance refers to fulfilment of the contract by

performance of all the obligations in terms of the original contract, discharge by “accord

and satisfaction” refers to the contract being discharged by reason of performance of

certain substituted obligations. The agreement by which the original obligation is

discharged is the accord, and the discharge of the substituted obligation is

the satisfaction.” A contract can be discharged by the same process which created it, that

is, by mutual agreement.”

In the aforesaid matter, the Supreme Court has further explained that as the discharge of

contract is also done by mutual consent, such discharge can happen either by performing

modified obligations or by entering into a whole new contract in substitution of the original

contract. Essentially, the discharge of one's contractual obligations by way of performing the

original terms of the contract is substituted by either a whole new contract or a new set of

obligations within the same contract.

APPLICABILITY OF THE DOCTRINE:

The Doctrine has gradually taken shape under the Indian Jurisprudence. The Privy

Council has applied the said Doctrine in a matter where one party had accepted the receipt

of payment made in lieu of a settlement by the other party. The Supreme Court has also

relied on the said judgment while adjudicating on the Boghara Polyfab Case.

Even though the Doctrine is wholly applicable to transactions governed by the Indian

Contract Act 1872 , it has been mostly elaborated upon by the Supreme Court while dealing

with cases related to the existence of an arbitrable dispute between the parties. The

elaboration on the Doctrine by the Supreme Court in Boghara Polyfab Case was also done

on the subject matter pertaining to the existence of an arbitrable dispute for the purpose of

appointing an arbitrator by the Court.

Before the Arbitration and Conciliation Act, 1996 came into existence, matters have been

adjudicated by the Supreme Court on the existence of an arbitration dispute as per the

provisions of the older Arbitration and Conciliation Act, 1940 and the Doctrine have been

squarely applied by the courts for adjudicating issues related to making reference to an

arbitrator. It was only after the Mayavati Trading Case, that the Supreme Court adjudicated

that the appointment of an arbitrator under Section 11 of the Arbitration Act has to be done

institutionally and all the preliminary issues related to the existence of an arbitration

agreement with the parties, which inter alia includes the plea of the said Doctrine, will be

determined by the arbitrator itself. It may be noted that the Mayavati Trading Case only

ousted the plea of Doctrine being entertained by the Court at the stage of reference under

Section 11 of the Arbitration Act and did not negate the Doctrine itself. Meaning thereby,

such a Doctrine, like any other legal plea, can still be raised before an arbitrator for the

purpose of ascertaining the existence of an arbitration agreement between the parties.

According to Calcutta High Court, the principle of discharge by way of ‘accord and

satisfaction' is embodied in Section 63 of the Contract Act. While referring to the Boghara

Polyfab Case, the Calcutta High Court determined that the Appellant had discharged its

obligations against the Bank i.e. the Respondent, by way of ‘accord and satisfaction' as the

Bank had already accepted certain payments made by the Appellant in lieu of discharge of

the Appellant's obligations

CASES RELATED TO ACCORD AND SATISFACTION:

BHARAT HEAVY ELECTRICALS LTD RANIPUR V. AMAR NATH BHAN

PRAKASH:

CASE NO: Civil appeals nos.233-34 of 1974

DECIDED ON: September 12 1980

JUDGES: P.N Bhagwati and S.Murtaza Fazal Ali, JJ

NATIONAL INSURANCE CO. LTD VS M/S. BOGHARA POLYFAB PVT.LTD:

CASE NO: Civil appeals nos. 5733 OF 2008

DECIDED ON: September 18, 2008

JUDGES:R.V RaveendraN and L.S Panta, JJ

DAMODAR VALLEY CORPORATION VS K. K. KAR:

CASE NO: Civil appeals nos. 851of 1972

DECIDED ON: November 12, 1973

JUDGES: P. Jaganmohan Reddy and S.NDwivedi, JJ

UNION OF INDIA (UOI) AND ORS V. ONKAR NATH:

CASE NO: Civil appeals nos.2622 of 2009

DECIDED ON: April 17, 2009

JUDGES: Tarun chatterjee and H.LDattu, JJ

CONCLUSION:

There is a tension in the doctrine of accord and satisfaction. On the one hand, the principles

permit inexpensive and informal resolution of disputes outside of court. On the other hand, a

chiseler can easily raise a phony dispute in order to escape the full extent of an obligation.

This concern has engendered a number of criticisms of the doctrine. It can be said that the

said Doctrine has been applicable for a considerable period of time and therefore, is

sacrosanct to the principles of contract. Even though there has been limited deliberation, it

can still be said that the Doctrine is embedded in law of contract and applies to today's

complex contractual relations. In fact, this Doctrine can prove to be a helping hand in

situations that involves spontaneous alterations in contractual terms due to exigencies

REFERENCE:

https://www.investopedia.com

https://legal-dictionary.thefreedictionary.com

https://www.stimmel-law.com

https://www.mondaq.com

https://indiankanoon.org

https://www.casemine.com

credit: jothika venugopal