Mountain Law: The law of ‘Accord and Satisfaction’
Similar situations to this arise in business all the time: Debbie and Charles have an agreement for her to supply him with widgets at a certain price. She ships him some widgets and then provides an invoice for the agreed price of $500. Not long later, Charles calls Debbie and says: “Some of the widgets were defective. Would you accept $200 as payment?” Debbie does not believe the widgets were defective, so she declines his proposal. She then receives a check from Charles for $200, which states on the back: “Payment in Full.” Debbie really needs the money, so she writes “Under Protest” on the check and cashes it. This article discusses whether Debbie is still entitled to an additional $300 for the widgets.
There is an old legal doctrine known by the fancy name “accord and satisfaction.” In legal terms, an accord is not a car made by Honda; it’s a new agreement between a creditor and debtor for payment in an amount less than was originally agreed. In the above example, if Debbie had agreed to accept $200 when Charles called her on the phone, this would be an accord.
Satisfaction means payment. If an accord is satisfied – such as if Charles had paid the $200 after the parties agreed to this reduced amount – then the original agreement is no longer enforceable (and Debbie could not claim the extra $300). However, if, like Mick Jagger, an accord is not satisfied, then the original agreement remains in effect.
The delivery of a check for less than the full amount claimed by a creditor is a common potential accord and satisfaction. Here are some general rules that govern this situation:
>If the check (or a document accompanying it) is conspicuously marked “payment in full” or words to that effect and the check is cashed by the creditor, this is considered accord and satisfaction.
>It is not considered accord and satisfaction if the check (or accompanying document) does not state “payment in full” or words to that effect. This is simply payment toward the balance due on the account.
>It is not considered accord and satisfaction if a creditor advises the debtor that the check will not be accepted … attempts to communicate with the debtor about accepting the check only as partial payment on the account … and ultimately returns the check to the debtor.
>A creditor cannot avoid accord and satisfaction by writing “under protest” or similar words on the check before cashing it or crossing out the words written on the check by the debtor.
>A debt must actually be in dispute before it can be changed by accord and satisfaction, and an accord must be pursued in good faith. If there was nothing wrong with the widgets in our example, Charles cannot avoid payment through accord and satisfaction.
>A creditor like Debbie can avoid accord and satisfaction on a check by offering to repay the amount of the check within 90 days after cashing it.
Whether or not two parties reached an accord is often disputed. Like with all contracts, it’s best to get an accord in writing. A court will typically presume that an accord and satisfaction settles all accounts between the parties unless there is strong evidence otherwise. There may be statutes that prevent accord and satisfaction from occurring in certain circumstances. For example, organizations are permitted to require communications about disputed debts be sent to a designated person, office, or place; failure to follow this procedure will prevent an accord.
Returning to our example, as you can see from the fourth bullet above, there was accord and satisfaction when Debbie cashed the check even though she indicated that she was cashing it “under protest.” However, as per the final bullet, she can get out of the accord and satisfaction (and still insist on full payment) by offering to repay Charles his $200 within 90 days. Otherwise, she will no longer have a claim to the extra $300.
Noah Klug is principal of The Klug Law Firm, LLC, a general law practice in Summit County emphasizing real estate, litigation and business law. He may be reached at (970)468-4953 or Noah@TheKlugLawFirm.com.
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