Doctrine of Accord and Satisfaction
Accord and satisfaction is the purchase of the 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. The consideration may be executory.
Under English law, an accord without satisfaction is of no effect. In Indian law, an accord is an agreement, there must be consensus ad idem; its validity liable to be judged by the general law of contract quite apart from the provisions of sections 62 and 63 of the Indian Contract Act, 1872.
A liability arising out of breach of contract may be discharged by the doctrine of accord and satisfaction. An accord is an agreement made after breach whereby some consideration other than the legal remedy is to be accepted by the party not in fault, followed by the performance of the substituted consideration.
The question is, whether an arbitration clause in a contract survived despite the purported satisfaction of the terms of the contract. Normally, an accord and satisfaction by itself would not affect the arbitration clause for even rights and obligations of the parties are worked out, the contract does not come to an end. If the dispute is that the contract itself does not subsist, the question of invoking the arbitration clause may not arise. But in the event it be held that the contract survives, recourse to the arbitration clause may be taken.
The doctrine of accord and satisfaction has many underlying principles, including the acceptance of a lesser sum and acceptance of any satisfaction. The Privy Council gave its views on the doctrine in Payan Reena Saminathan v. Puna Lana Palaniappa [41 IA 142]. The doctrine and its usage in India have been derived from the American Common Law.
BACKGROUND OF THE DOCTRINE
Section 63 of the Indian Contract Act allows a party to a contract to dispense with the performance of the contract by the other party, or to extend the time of performance or to accept any other satisfaction instead of the performance.
According to Section 62 of the Indian Contract Act, on the other hand, every person who accepts a proposal may dispense with or remit wholly or in part, the performance of the proposal made to him which he has accepted, or may extend the time for such performance or may accept instead of it any satisfaction which he thinks fit.
In accordance with section 62 and section 63 of the Indian Contract Act, 1872, the party who has the right to demand the performance may:
(i) dispense with or remit the performance; or
(ii) extend the time for performance; or
(iii) accept any other satisfaction instead of performance.
The sections 63 and 62 must be construed so as to not overlap with each other. This can be done by holding that agreements referred to in section 62 are agreements which more or less affect the rights of both the parties to the contract discharged by such agreements. Those referred to in section 63 are such as to affect the right of only one of the parties.
The former case necessarily implies consideration, which may be either the mutual renunciation of right, or, in addition to this, the mutual undertaking of fresh obligations, or the renunciation of some right on the one side and the undertaking of some obligation on the other. It is only when the agreement to discharge affects the right of only one party that consideration might be found wanting. There alone the Indian law departs from the English law by making provisions for every such possible case in section 63. The result is that the agreement set up by the defendant which falls under section 63 is binding, though without consideration.
This section enables the defendant in a suit filed by the promise, dispensing or remitting performance or accepting satisfaction and subsequently trying to enforce, the promise made to him, to plead that he was relieved from performance that which the plaintiff told he need not do. It has been held, in the case of New Standard Bank Ltd. v. Probodh Chandra Chakravarty [AIR 1942 Cal 87], that an agreement made between the parties after the breach of contract may be enforced under this section.
Difference from the English Contract Law:
Under the English law, it is competent for both parties to an executor contract by mutual agreement, without any satisfaction, to discharge the obligation of that contract; in other words, reciprocal promises are a sufficient consideration for each other, so are reciprocal discharges. A contract rescinded by an agreement, stands completely discharged and cannot be revived.
But an executed contract cannot be discharged except by release under seal, or by performance of the obligation, as by payment where the obligation is to be performed by payment. Subject to that exception, ‘the new agreement in rescission or alteration of the prior contract must in general satisfy all the requirements of an independent contract’, and so must an agreement to accept satisfaction for a right of action which has arisen by breach of contract.
This section makes a wide departure from the English law, and the principles of that law cannot be relied upon to interpret the section. The intention of the present section to alter the rule of the common law is clear; and this has been recognised in several Indian cases.
Necessity of satisfaction in a contract:
In 1903, the High Court of Bombay had held (Abaji Sitaram Modak v. Trimbak Municipality) that a dispensation or remission under this section involved a promise as defined by section 2(b) or an agreement within section 2(e), so that ‘there must be a proposal of the dispensation or remission which is accepted’: in technical terms, that the effect of the section is only to allow an accord to be good without satisfaction.
Many jurists have continuously protested against this ruling and suggested that the words of the section ought to be construed according to their natural meaning and a promise could discharge the promise not only without consideration but without a new agreement.
Views of the Privy Council:
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 v. Puna Lana Palaniappa [41 IA 142] and UOI v. Kishorilal Gupta & Bros [AIR 1959 SC 1362].:
“The ‘receipt’ given by the appellants and 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 were their respective rights of the parties inter se 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.
ESSENTIAL ELEMENTS OF THE DOCTRINE
The doctrine of accord and satisfaction is merely 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 the satisfaction its execution or performance, and it is a new contract substituted for an old contract which is thereby discharged, or for an obligation or cause of action which is settled, and must have all of the elements of a valid contract.
To constitute an accord and satisfaction, there must have been a genuine dispute that is settled by a meeting of the minds with an intention 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. It can arise from a collision of motor vehicles, a failure to deliver oranges ordered and paid for, or a refusal to finish constructing an office building, etc.
An accord and satisfaction can be made only by persons who have the legal capacity to enter into a contract. A settlement is not binding on an insane person, for example; and an infant may have the right to disaffirm the contract. Therefore, a person, such as a guardian, acting on behalf of a person incapable of contracting for himself or herself may make an accord and satisfaction for the person committed to his or her charge, but the law may require that the guardian’s actions be supervised by a court.
An executor or administrator may bind an estate; a trustee can accept an accord and satisfaction for a trust; and an officer can negotiate a settlement for a corporation.
A third person may give something in satisfaction of a party’s debt. In such a case, an accord and satisfaction is effected if the creditor accepts the offer and the debtor authorizes, participates in, or later agrees to, the transaction.
For example, a widower has an automobile accident but is mentally unable to cope with a lawsuit because his wife has just died. He gratefully accepts the offer of a close family friend to talk to the other driver, who has been threatening a lawsuit. The friend convinces the other driver that both drivers are at fault to some extent. The friend offers to pay the other driver $500 in damages in exchange for a written statement that she will not make any claim against the widower for damages resulting from the accident. The family friend and the other driver each sign a copy of the statement for the other, and when the payment is made, the accord and satisfaction is complete. If the other driver then sues the widower for more money on account of the accident, the widower could show that he agreed to let his friend negotiate an accord and satisfaction, and the court would deny relief.
Most commonly, this is seen in situations where people lack the capacity to consent and negotiate legal agreements, and the person negotiating the contract may be supervised to confirm that the agreement is in the best interests of the person being represented. People can also reach accord and satisfaction on behalf of someone else more informally; for example, a parent may help an adult child settle a debt to a landlord, acting on behalf of the child to resolve the matter. However, the law may require that the guardian’s actions be supervised by a court. An executor or administrator may bind an estate; a trustee can accept an accord and satisfaction for a trust; and an officer can negotiate a settlement for a corporation.
An accord and satisfaction is a contract, and all the essential elements of a contract must be present. 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 …