What is your legal position if a debtor electronically transfers a part payment to your account and sends you an email, which you do not appropriately register, stating it is in ‘full and final settlement’ of their debt?
What is Accord and Satisfaction?
In English common law, the relevant principle is ‘accord and satisfaction’, which is defined in one of the standard works on Contract Law:
‘Accord and satisfaction is the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.’
(Chitty on Contracts (32nd edition, Sweet & Maxwell, Volume 1 at paragraph 22-012.)
Understanding Accord and Satisfaction
Accord and satisfaction may sound complex in legal terms, but it is simple when applied to the real world. For example:
I owe you £10,000, which you have been chasing without success for a couple of months. Your cash flow is now poor.
I say I can pay you £7,000 tomorrow, which I want you to accept in full and final settlement of my debt.
You agree and receive my payment.
The ‘accord’ is the new agreement between us.
The ‘satisfaction’ is your receipt and acceptance of the lesser amount.
Benefits of Accord and Satisfaction
Accord and satisfaction allow debtors and creditors to compromise on a debt so that both parties benefit. It provides immediate part payment to settle the debt, preventing costly court action to resolve the issue.
Let’s say you are a building contractor renovating my kitchen for £10,000. I pay you £5,000 upfront and agree to pay the outstanding £5,000 once the work is complete.
However, when completed, I believe the work is of poor quality and refuse to pay the whole amount. We could set up a new accord saying I will pay £2,000 in full and final settlement.
I receive a discounted price due to the poor quality of work, and you avoid lengthy legal proceedings.
Cheques
Before electronic payments, if you cashed a cheque which arrived with an accompanying letter saying it was in full and final settlement of a larger debt without raising any objection, that would be strong evidence (not conclusive) you had agreed to the new accord and were satisfied.
But if you had cashed the cheque and at the same time written back saying you do not accept it in a full and final settlement, that would be strong evidence suggesting there was no accord and satisfaction.
In the case of Joinery Plus Ltd (In Administration) v Laing [2003] EWHC 3513 (TCC), the judge stated:
‘A party does not, merely by accepting a cheque, accept that the debt, obligation or dispute underlying the payment of that cheque has been discharged or settled. Whether or not a discharge or settlement results will depend on the intention of the party accepting the cheque, as determined objectively from the surrounding circumstances of that acceptance. If the acceptance is intended to be qualified so that the payment is accepted generally on account of that party’s entitlement to payment, and it is clear from the surrounding circumstances objectively determined that the acceptance of the cheque was qualified in that way, the accepting party will not be taken to have fully and finally accepted or approbated or settled the underlying obligation or the situation giving rise to that obligation.’
In another case called Stour Valley Builders v Stuart (unreported, 21 December 1992), the judge said:
‘Cashing the cheque is always strong evidence of acceptance, especially if it is not accompanied by immediate rejection of the offer. Retention of the cheque without rejection is also strong evidence of acceptance depending on the length of the delay. But neither of these factors are conclusive; and it would, I think, be artificial to draw a hard and fast line between cases where the payment is accompanied by immediate rejection of the offer and cases where objection comes within a day or within a few days.’
Electronic Payments
What is the legal situation if your debtor sends an electronic part payment and an email simultaneously, saying said payment is in the full and final settlement?
In my view, you are in a better position than if you received a cheque.
As stated in the case of “Stour” above, cashing the cheque might imply you accepted the offer. Crucially, if the money is paid electronically directly into your account, you do not have to act to receive it.
Therefore, if you email back immediately saying you only accept the payment as a part payment and not in satisfaction of the debt, your debtor may struggle to argue there was an agreement, as you did not act in a way that suggests one was present.
What if your debtor says something like – if you do not accept the money in the final settlement of the debt, you must send it back?
Again, in my opinion, this is analogous to the letter accompanying the cheque.
You are owed money. Some of it has been paid to you.
Your debtor must show ‘accord and satisfaction’ to escape – they cannot simply impose an agreement onto you.
If you write back and say you are keeping the money as it is owed to you but do not accept it in settlement, you should be okay.
But we cannot give you any guarantee; these disputes turn on their particular facts, and it will be up to the court at the end of the day.
If something like this example ever happens to you, your options are:
- Keep the money and email back immediately saying you accept it on account – you take the risk the court will find an agreement
- Send the money back
- Contact Witan Solicitors
Contact Witan Solicitors
If you are in this situation and require help, Witan Solicitors can advise on Dispute Resolution and Debt Recovery. For more information, please contact our Debt Recovery and Contract Disputes solicitors today.
FAQ
What does accord and satisfaction mean?
Accord and satisfaction is a legal principle that releases a party of their contractual obligation by forming a new ‘accord’. The ‘satisfaction’ is the other party’s agreement. It can be used to settle disputes without court hearings.
What does accord and satisfaction look like?
In the real world, accord and satisfaction may be accepting a partial payment of a debt as a full and final settlement.
What are the four legal requirements of valid accord and satisfaction?
A valid accord and satisfaction must have four demonstrable elements:
- A clear, proper subject
- Competent parties
- An agreement
- Appropriate consideration
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