This article has been written by Asmita Gaikwad pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho and edited by Shashwat Kaushik.

This article has been published by Shashwat Kaushik.

Introduction

The Indian Contract Act of 1872 defines the term “contract” under Section 2(h) as “an agreement enforceable by law.” Accordingly, a contract is an agreement between two parties where both parties should have given their consent. Contracts are the backbone of commercial and legal transactions in any society, providing a structured framework for parties to engage in economic activities. In India, contract law is governed by the Indian Contract Act, 1872, a comprehensive statute that lays down the principles and rules governing contracts. One intriguing aspect of contract law is the doctrine of accord, a legal principle that allows parties to a contract to mutually agree to substitute a new obligation for an existing one. This doctrine plays a crucial role in adapting contracts to changing circumstances and preserving the harmony of contractual relationships.

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What is the doctrine of accord and satisfaction

Accord and satisfaction refer to the agreement (accord) between two contracting parties to accept alternate performance to discharge a pre-existing duty between them and the subsequent performance (satisfaction) of that agreement. The new performance is called Accord. According to the doctrine of accord and satisfaction, the two parties who were in contract further agreed that they could make further changes (addition or deletion) to the existing contract. These changes are agreed  upon by both parties.  The agreement must be transferred to a new agreement. It must therefore have the essential terms of a contract (parties, subject matter, time for performance, and consideration). If there is a breach of the accord, there will be no “satisfaction,” which will give rise to a breach of the accord. In this instance, the non-offending party has the right to sue under either the original contract or the accord agreement.

63. Section– Promise may dispense with or remit performance of promise

Any party entitled to a promise has the authority to either entirely release or partially waive the performance committed under the said promise. Additionally, such a party holds the prerogative to extend the stipulated time for performance or opt for any satisfaction deemed appropriate.

Illustrations

Example: A commits to creating a painting for B. Subsequently, B prohibits the execution of the artwork. As a result, A is relieved of the obligation to fulfil the promise.

Illustration: A is indebted to B for 5,000 rupees. A tenders and B accepts 2,000 rupees as payment, satisfying the entire debt at the specified time and location originally set for the payment of 5,000 rupees.

Scenario: A owes B a sum of 5,000 rupees. C, a third party, tenders 1,000 rupees to B, and B consents to this amount as a settlement for the entirety of the claim against A. Consequently, this payment serves as a discharge for the entire claim.

Situation: A is obligated to pay B a sum of money under a contract, the exact amount of which remains undetermined. A, without specifying the amount, tenders 2,000 rupees to B, who accepts it as complete satisfaction for the debt, regardless of its undisclosed amount. This transaction results in the complete discharge of the debt.

Case: A owes B 2,000 rupees and has outstanding debts to other creditors. A negotiates an agreement with all creditors, including B, to settle their respective claims at a reduced rate of eight annas in the rupee. Consequently, the payment of 1,000 rupees to B constitutes a discharge of B’s claim in accordance with the agreed-upon composition.

Meaning accord and satisfaction in legal contract  

In a legal contract, two parties agree to discharge a tort claim, contract, or other liability for an amount based on terms that differ from the original amount of the contract or claim. Accord and satisfaction are also used to settle legal claims prior to bringing them to court. An accord and satisfaction is a legal agreement in which two parties settle a dispute by agreeing to new terms. The accord is the agreement on the new terms, and the satisfaction is the performance of those terms. When there is an accord and satisfaction, and the performance has been executed, all prior claims relating to the matter are ended.

There are a few key elements to an accord and satisfaction:

  • There must be a valid underlying debt or obligation.
  • The parties must agree to new terms that resolve the dispute.
  • The new terms must be supported by consideration.
  • The parties must perform their obligations under the accord.

If any of these elements are missing, then there is no accord or satisfaction.

An accord and satisfaction can be used to settle a variety of disputes, including:

  • Breach of contract
  • Personal injury claims
  • Property damage claims
  • Debt collection

An accord and satisfaction can be a very effective way to resolve a dispute, as it can provide a quick and inexpensive way to get the matter behind you. However, it is important to work with an experienced attorney to ensure that the accord and satisfaction are valid and enforceable.

Accord and satisfaction is a concept from contract law that usually applies to the purchase of a release from a debt obligation.

An accord and satisfaction may occur in debt negotiations. For example, Company A has a credit agreement with a bank that is putting pressure on its balance sheet. The bank works with Company A and the original credit agreement is revised. The new terms might allow Company A 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 A 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.

Features of accord and satisfaction

  1. When the two parties agree to discharge an accord and satisfaction, it means that the two parties have consented to a new agreement suspending the terms of an existing agreement because now they are into a new agreement. 
  2. When two parties consent to the accord on revised terms and conditions, it means that the parties are satisfied with the performance of those terms according to the agreement.
  3. The earlier agreement will remain suspended as long as the parties in the agreement and satisfaction remain in the revised agreement and follow the new terms and conditions. 
  4. In case one of the parties fails to follow the revised terms and conditions of the agreement and satisfaction, then the party may be imposed with more harsh terms and conditions than the earlier set off conditions.

Let’s understand these points with a hypothetical example.

An accord may occur in debt negotiation: We have two companies: Company A and Company B. Company A is a large multinational company with high revenues and profits. Company B is a small company  trying to meet its ends. The company is in high debt and is struggling to survive. The company has an agreement with Company A. According to the agreement, company B should give 10% returns to company A for the investment of amount X by Company A.

Since Company B is not making any profits, it is unable to give any returns to Company A. The company realises that Company B is running into losses and is not in any position to generate profits in the near future unless further financial aid is provided. Company A has already invested a huge amount in Company B and cannot afford to lose its investments in Company B. Company A decides to provide additional financial help to Company B so that it can recover its losses.

Now, companies A and B both agree to revise their existing terms and conditions and consent to accord and satisfaction.

Benefits of accord and satisfaction

Once both parties consent to the accord, it automatically terminates the old agreement. A new accord benefits both parties.

Let’s try to understand these benefits with the examples of companies A and B. When the companies get into an agreement, Company A can still receive some payment of the debt. At the same time, Company B can get a waiver from full payment of the debt. Instead, it can make a partial payment.

Had it been the older contract, then both companies would have been at a loss. The accord gives both companies a chance to revive their finances. Of course, Company A (the lender) is taking a bigger risk by reinvesting in Company B. With this risk, Company A can also have more control over the management and operations of Company B. Furthermore, according to the new accord company A can ask for a larger share of the profits.

For Company B, the accord can help them remain in the business without worrying about the finances in the bargain; the company might not have complete control over the company’s administrations and operations. These compromises can still be worth making as long as the company is running.

The above example suggests that the accord can be beneficial for both parties.

Legal requirements for accord and satisfaction

There are three prior essentials required for a valid discharge of an existing claim or duty by accord and satisfaction.

Existence of a claim or duty

According to contracts under Indian law, an accord can exist only when a prior claim or duty exists. The purpose of an accord is to revise the existing agreement or to cancel the existing agreement and create or adopt a new agreement.

Offer and acceptance of a substitute performance in full settlement

When an existing contract or agreement is not applicable anymore or the contract fails to discharge the duties or claims, an accord can be brought into effect. The accord must be created with the acceptance and agreement of both parties. The accord can be offered by any of the parties when the party believes or finds out that the existing contract is not sufficient to discharge duties or claim. An accord can also be offered when one party notices that the other party is not in full compliance with the existing contract.

Proper consideration

When both parties accept that the contract has not been honoured by one of the parties, then the other party can propose the accord. In this, both parties understand and accept that one of the parties has not fully adhered to the terms and conditions of the existing contract. In this case, both parties are ready to make certain compromises so that both parties can get certain benefits from the agreement. 

Terms of legal accord and satisfaction

The terms of a legal accord and satisfaction must be clear, unambiguous, and agreed upon by both parties. Here are some key terms that are commonly found in accord and satisfaction agreements: 

  1. Description of the dispute: The agreement should clearly describe the dispute or disagreement that is being resolved. This description may include the terms of the original contract, the amount owed, or the performance of contractual obligations.
  2. Amount of payment: The agreement should specify the amount of payment that is being made to settle the dispute. This payment may be a lump sum, a series of payments, or other form of consideration. 
  3. Payment terms: The agreement should specify the terms and conditions of payment, including the method of payment, the due date, and any late payment penalties. 
  4. Release of claims: The agreement should specify that the parties are releasing each other from any further claims arising from the dispute. This means that the parties cannot sue each other for the same issue in the future.
  5. Confidentiality: The agreement may include provisions requiring the parties to keep the terms of the agreement confidential. This is often used to protect sensitive business information or trade secrets.
  6. Governing law: The agreement should specify the governing law that will be used to interpret the terms of the agreement. This is important in the event of a dispute, as the governing law will determine which court has jurisdiction and which laws apply. 
  7. Entire agreement: The agreement should include a clause stating that the accord and satisfaction agreement constitutes the entire agreement between the parties and supersedes any prior agreements or understandings.

These are just some of the key terms that are commonly found in accord and satisfaction agreements. It is important to work with an attorney to ensure that the terms of your accord and satisfaction agreement are legally binding and enforceable.

Situations where accord and satisfaction may be beneficial 

The following are some common situations where accord and satisfaction can be particularly beneficial: 

  1. Debt collection: Accord and satisfaction can be used in debt collection cases to resolve disputes between creditors and debtors. 
  2. Contract disputes: Accord and satisfaction can be used in contract disputes to resolve disputes over the terms of an agreement or the performance of a contract.  
  3. Personal injury cases: Accord and satisfaction can be used in personal injury cases to resolve disputes over the amount of damages owed to a plaintiff. 
  4. Estate planning: Accord and satisfaction can also be used in estate planning to resolve disputes over the distribution of assets, the payment of debts, or other issues related to the administration of an estate.

What is a waiver

A waiver is a legally binding provision where either party in a contract agrees to voluntarily forfeit a claim without the other party being liable. Waivers are commonly seen during settlement talks, when one party may be willing to pay out a slightly higher award as long as the other person, often a claimant, agrees to sign a waiver relinquishing their right to further legal action.

Key takeaways:

  1. A waiver is a legally binding provision where either party in a contract agrees to voluntarily forfeit a claim without the other party being liable.
  2. Waivers can either be in written form or in some form of action.
  3. Examples of waivers include the waiving of parental rights, waiving liability, tangible goods waivers, and waivers for grounds of inadmissibility.
  4. Waivers are common when finalising lawsuits, as one party does not want the other to pursue them after a settlement is transferred.
  5. Waivers are signed in order to mitigate exposure to risk.

Understanding Waivers

In contract law, a waiver can be used to excuse a party from performing a contractual obligation. For example, a contract may require a party to pay rent on time. If the party fails to pay rent on time, the other party may be able to sue for breach of contract. However, if the other party agrees to waive the late payment, the party will no longer be able to sue for breach of contract.

In tort law, a waiver can be used to release a party from liability for their actions. For example, a person may sign a waiver before participating in an activity that involves a risk of injury. If the person is injured during the activity, the person who organised the activity may not be liable for the injury.

In property law, a waiver can be used to give up a right to property. For example, a person may sign a waiver of their right to inherit property. If the person dies, their heirs will not be able to claim the property.

It is important to note that waivers are only valid if they are voluntary. A person cannot be forced to waive their rights. Additionally, waivers must be specific. A person cannot waive their rights in general terms. They must specifically state what rights they are waiving.

Waivers can be a useful tool for businesses and individuals. They can help to avoid disputes and liability. However, it is important to understand the implications of a waiver before signing one.

Essentially, a waiver removes a real or potential liability for the other party in the agreement. For example, in a settlement between two parties, one party might, by means of a waiver, relinquish its right to pursue any further legal action once the settlement is finalised.

Since the party signing the waiver is surrendering a claim that they are entitled to, it stands to reason that they will, usually, only do so if they are receiving some added benefit.

Waivers can either be in written form or in some form of action. A waiver carried out by an action might be based on whether a party in an agreement acts on a right, such as the right to terminate the deal in the first year of the contract. If it does not terminate the deal, which would be the act of “absence of action,” before the first year, that party waives its right to do so in the future.

Examples of waivers

Waiving of parental rights

In cases involving the custody of a child, a biological parent may choose to waive their legal rights as a parent, making that person ineligible to make determinations regarding the child’s upbringing. This also allows a guardian who is not a biological parent to attempt to assert their right over a child through actions such as adoption.

Waivers of liability

Before participating in an activity that could lead to injury or death, a person may be required to sign a waiver as a form of expressed consent to the risks that exist, due to the inherent nature of the activity. This waiver would release the company facilitating the activity from liability should the participant be injured or killed during their participation. Such waivers may be used prior to participating in extreme sports, such as BMX racing, or other activities, such as skydiving.

Waivers and tangible goods

In the case of most tangible goods or personal property, a person may waive the right to continue to make a claim on the item. This can apply to goods that are sold to a new buyer or donated to a particular entity. A transfer of vehicle ownership functions as a waiver of any claim to the item by the seller, and it gives the right to the buyer as the new owner.

Waiver for grounds of inadmissibility

If a person who is not a citizen of the United States wishes to gain entry, they may be required to complete Form I-601, “Application for Waiver of Grounds of Inadmissibility.” This waiver seeks to change the status of the person seeking entry, allowing them the ability to enter the United States legally.

Case laws

P.K. Ramaiah and Company vs. Chairman and Managing Director, National Thermal Power Corporation (1944)

 In the case of P.K. Ramaiah and Company v. CMD, National Thermal Power Corp. (1994), when the creditor accepted the final measurements of the work completed and issued a receipt stating that the amount had been received in full and final settlement, there was accord and satisfaction and the creditor was not entitled to claim the balance. Once any dispute is settled in this manner, no arbitral dispute remains, and the arbitration clause cannot be invoked. If a check for a smaller amount than the debt due is sent to the creditor in full satisfaction, it does not discharge the debt if the latter does not accept it as such. It depends on the intention of the parties as expressed in the correspondence and the character of the transaction. 

Payana Reena Layana Saminathan Chetty vs. Pana Lana Pana Lana Palaniappa Chetty (1913)

The principle of accord and satisfaction has been stated by the Privy Council as a principle of substituted agreement; thus, in the cases of Reena Saminathan vs. Puna Lana Palaniappa and The Union of India vs. Kishorilal Gupta & Bros (1959), “the’receipt’  given by the appellants, accepted by the respondent, and acted upon by both parties proves conclusively that all the parties agreed to a settlement of all their existing disputes by the arrangement formulated in the ‘receipt’. It is a clear example of what used to be well-known in common law pleading as ‘accord and satisfaction by a substituted agreement’. No matter what the respective rights of the parties are, they are abandoned in consideration of acceptance by all of a new agreement. The consequence is that when such an accord or satisfaction takes place, the prior rights of the parties are extinguished. They have, in fact, been extinguished by the new rights, and the new agreement becomes a new departure and the rights of all the parties are fully represented by it.” There have been two interpretations of this doctrine till date, the situation in which the party, not at fault, accepts any satisfaction in place of the original consideration and most importantly, when he or she accepts a lesser sum as satisfaction until the previous contract is discharged.

Conclusion

According to all the above concepts, contracts and the doctrine of the accord in Indian law are very important because they let the parties revise their terms and conditions and get into a new contract, which is called an accord. Accord and satisfaction, under contract law, refers to the process of purchasing a release order from contractual obligation through any consideration. It is the doctrine that honours the discharge of a contract and the obligations it defines by way of forming a substituted contract. Accord refers to an agreement under which these terms are binding and the valuable consideration that is provided for the discharge of the previous contract is referred to as satisfaction. In a simpler term, this doctrine can be explained as when one party fails to perform the contractual obligations but, in return, makes a purchase of and/or forms another contract that nullifies the older contracts and their obligations, takes the form of an accord, and the valuable consideration that is paid in return for getting contractual obligations released takes the form of satisfaction.

References

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