Glossary
Settlement and Accord and Satisfaction
Accord and satisfaction is a legal doctrine under which a creditor and debtor agree to settle a claim for a different payment, and the debt is discharged once that payment is made.
Many commercial collection cases end in settlement rather than full payment or a court judgment. In legal terms, the agreement to accept something different from what was originally owed is the accord, and performing that agreement, usually by paying the agreed amount, is the satisfaction. Once both happen, the original claim is generally discharged. A written settlement agreement that states the amount, payment dates, what happens on default, and what claims are released is the cleanest way to do this.
Accord and satisfaction can also happen less deliberately. Under Section 3-311 of the Uniform Commercial Code, as adopted by most states, if a debtor in good faith sends a check for less than the full amount of a claim that is subject to a bona fide dispute, with a conspicuous statement that it is tendered in full satisfaction, and the creditor cashes it, the claim may be discharged. There are exceptions. For example, an organization can designate a specific person or address for such communications, and in some cases a creditor can avoid the result by repaying the amount within 90 days. The details vary by state, and the rules generally do not apply where there was no genuine dispute about the amount.
Here is a fictional example. An IT services firm, Bluepeak Networks, bills a client $18,000, and the client disputes part of the work. The client mails a $12,000 check marked 'payment in full for all services through March,' with a cover letter explaining the dispute. Before depositing it, Bluepeak's controller consults counsel, because cashing the check could end the claim for the remaining $6,000. Bluepeak instead negotiates a written settlement for $14,500.
Understanding accord and satisfaction matters to a creditor because a settlement can be the most efficient outcome, but an accidental one can cost money. Creditors should train staff to flag restrictive checks and to put settlements in writing.
Example
Bluepeak Networks receives a $12,000 'payment in full' check on a disputed $18,000 bill. It holds the check, consults counsel, and negotiates a written $14,500 settlement instead.