Professional Documents
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A Primer On Accord and Satisfaction
A Primer On Accord and Satisfaction
Volume 47
Article 1
Issue 1 Winter 1986
January 1986
Recommended Citation
Scott J. Burnham, A Primer on Accord and Satisfaction, 47 Mont. L. Rev. (1986).
Available at: https://scholarship.law.umt.edu/mlr/vol47/iss1/1
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Burnham: A Primer on Accord and Satisfaction
ARTICLES
I. Introduction ..................................... 1
II. The Common Law Background.................... 2
A. Characterizing the Obligation ................ 2
1. Liquidated or Unliquidated ............... 2
2. Disputed or Undisputed .................. 4
B. The Pre-Existing Duty Rule ................. 4
1. Liquidated and Undisputed Obligations .... 5
2. Unliquidated or Disputed Obligations ..... 6
C. Accord and Satisfaction ...................... 7
D. Substituted Contract ........................ 8
III. Statutory Changes ............................... 11
A. Liquidated and Undisputed Obligations ....... 11
B. A Monkey Wrench in the Works: UCC Section
1-20 7 ...................................... 13
IV . Good F aith ...................................... 17
V . Conclusion ...................................... 19
"He is well paid that is well satisfied." Merchant of Venice,
IV, 1.
I. INTRODUCTION
Attorneys and lay persons use the principles of accord and sat-
isfaction every day. An understanding of these principles allows
disputes to be resolved in an efficient and economical manner. But
failure to grasp the principles can lead the unwary into a trap. Fur-
thermore, a statutory gloss on the principles developed by the
common law may allow lawyerly technicalities to undermine a
common sense result. This article examines these principles and
statutes as they have developed in Montana and proposes the
means by which courts can maintain the usefulness of this body of
*Associate Professor of Law, University of Montana School of Law; B.A., Williams Col-
lege, 1968; J.D., New York University, 1974; L.L.M., New York University, 1981.
A. Characterizingthe Obligation
The first step in analyzing an accord and satisfaction problem
is to determine (1) whether the obligation is liquidated or unliqui-
dated, and (2) whether it is disputed or undisputed.
1. Liquidated or Unliquidated
Liquidated means agreed upon by the parties or determined
by the legal process. For example, an agreement between attorney
and client that the attorney will perform services for a flat fee of
$1000 results in a liquidated obligation when the services have
been performed. On the other hand, if the agreement is that the
attorney will bill the client for the reasonable value of the services
and the attorney renders a bill for $1000, the obligation is unliqui-
dated.' In the latter case, the client did not agree to a fee of $1000.
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2. Disputed or Undisputed
To make an obligation disputed, the obligor must raise a de-
fense in good faith. The Uniform Commercial Code (UCC) 3 defini-
tion of "honesty in fact""' may serve to distinguish meritorious dis-
putes from those raised to chisel the creditor. Whether a dispute
exists is a question of fact. For example, in Jensen v. Cloud,15
plaintiff truck driver claimed defendant distributor had promised
wages of $5 per trip but paid only $4; defendant claimed there was
a dispute as to the agreed-upon wages. The jury found that there
was in fact no dispute.1 6 Similarly, in Sawyer v. Somers Lumber
Co.," defendant buyer disputed an obligation to plaintiff seller,
claiming the right to offset an amount it owed to a third party. The
court found that the claim was specious, so the obligation was not
disputed.1 8
An interesting issue raised in Sawyer involves the conse-
quences when the obligor disputes a portion of a debt. Defendant,
who owed plaintiff $835, offset the amount of $431 and paid plain-
tiff $404. Does payment of an undisputed portion of a debt permit
the obligor to treat the entire obligation as a disputed one? The
court followed the majority rule that it does.1 9 Even though defen-
dant admitted to owing $404, the dispute as to the $431 made the
entire $835 debt disputed.
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on Accord and Satisfaction
24. FARNSWORTH, supra note 1, § 2.11. The quaint references to peppercorns can be
traced back to Blackstone's COMMENTARIES (1766) and Coke's first INSTITUTE (1628).
25. See, e.g., Frye v. Hubbell, 74 N.H. 358, 374, 68 A. 325, 333 (1907):
If costs always equal the expense of litigation, if interest is always full recompense
for delayed payment, and if an execution is always equivalent to money in hand,
then a present part payment of a debt in cash is in fact never beneficial to the
creditor or detrimental to the debtor, and can never be a consideration for a dis-
charge of the balance. Whatever the conclusions of scholastic logic, as men having
some acquaintance with affairs judges are bound to know that none of these pro-
positions are always, if ever, true; and as they are not always all true, it cannot be
matter of law that in a particular case a part payment was not such a benefit to
the creditor or detriment to the debtor as to furnish a consideration for the credi-
tor's agreement of discharge.
The case is discussed in Burnham, Contract Damages in Montana Part I: Expectancy
Damages, 44 MONT. L. REV. 1, 2-3 (1983).
26. This statute, MONT. CODE ANN. § 28-1-1403 (1985), is analyzed infra, Part III.A.
27. FARNSWORTH, supra note 1, § 4.23.
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ACCORD
D. Substituted Contract
A fruitful source of difficulty is the failure of the parties to
distinguish between an accord and satisfaction and a substituted
contract. When parties enter an accord, the obligee agrees to
forego part of the obligation in exchange for some consideration
from the obligor. They usually intend that consideration to be per-
formance of the obligor's new promise. The old agreement hovers
until the performance is complete and can be revived if perform-
ance is not completed.
But parties may at any time rescind their original contract
and form a new contract.4 0 They mutually discharge the duties
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under the old contract and accept new promises. Each promise in
the new contract is good consideration for the other.4 1 The old con-
tract does not hover, but is extinguished as soon as the new, sub-
stituted contract is made. In compromising an obligation by enter-
ing a substituted contract, an obligee settles for the promise of
performance, not performance itself.
Under a substituted contract, therefore, if the obligor does not
perform, the obligee is stuck with enforcing the new promise.4 2 An
obligee may claim an accord was intended, but since courts mea-
sure intention objectively, careless expression can lead to an unin-
tended result. For example, A has a $10,000 tort claim against B.4 a
After negotiations, A promises to release B in exchange for B's
promise to pay A $5000 within 30 days. B does not pay. A, think-
ing an accord has been breached, revives the tort claim. B raises
the affirmative defense of accord and satisfaction.4 4 B's defense is a
good one. A originally had an unliquidated claim and B had a po-
tential liability. The parties discharged this claim and agreed to
new obligations: A's promise to release B and B's promise to pay
the liquidated amount of $5000. A valid substituted contract has
been formed. 45 B has breached that contract; A's remedy is to sue
for $5,000.46
The prudent attorney should protect the client against an un-
secured promise by stipulating a remedy for its breach. For exam-
ple, in this situation the stipulation and order of dismissal could
provide that if B does not pay the $5,000 in 30 days, A may enter
judgment for the full amount of the claim, less payments made. If
the promise is for a substantial future performance, as in a struc-
tured settlement, the payment should be secured. Obtaining a
promissory note is not sufficient. The note is merely a promise to
pay. If a creditor accepts a note in satisfaction and the note is un-
paid, the creditor may sue on the note but may not revive the orig-
47
inal claim.
If the parties do not express their intention, determining that
intent becomes, as with any contract, a question of interpreta-
tion.48 In determining whether the parties intended the promise or
the performance to discharge the obligation, courts consider: (1)
whether the parties formed the new contract before any breach of
the original; (2) if after breach, whether the breach was disputed;
(3) if after breach, whether the amount of the claim for breach was
liquidated. In case (1) it looks more like substituted contract; in
(2) and (3), more like accord and satisfaction. 9
In the example of the attorney who has an unliquidated claim
for $600 worth of services, it could be fatal for the attorney to bill
the client for $500 after the accord is reached. If the client
breaches the accord, the attorney wishes to revive the original $600
claim. The bill for $500, however, is strong evidence that a substi-
tuted contract was formed. In the new contract, the attorney's
agreement to accept $500 is consideration for the client's promise
to pay that liquidated amount. Following the wiser course, an at-
torney should make express the intention to form an accord by
sending a bill for $600 with a notation on the bill that it may be
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53. For an example of its misapplication, see Kelly v. David D. Bohannon Org., 119
Cal. App. 2d 787, -, 260 P.2d 646, 649-50 (1953), which cites the corresponding Califor-
nia statute, CAL. CIV. CODE § 1524, and states "[a]n accord and satisfaction must be predi-
cated upon a bona fide dispute, a real dispute."
54. Sawyer v. Somers Lumber Co., 86 Mont. 169, 177, 282 P. 852, 854 (1929).
55. See supra notes 37-38 and accompanying text.
56. See Consolidated Edison Co. v. Arroll, 66 Misc. 2d 816, 322 N.Y.S.2d 420 (Civ. Ct.
N.Y. Co. 1971), in which the court rejected a claim by plaintiff, a large utility, that the
"nature and volume of its operations does not allow for an examination of each and every
check it receives for language written thereon which could bind it to an accord and satisfac-
tion." Under the facts, defendant was not relying on the statute but on a dispute clearly
communicated in a separate writing.
The facts of Arroll form the basis for the proof of an accord and satisfaction offered in
Annot., 35 POF2d 735, 754-61 (1983).
57. MONT.CODE ANN. § 28-1-1403 (1985) (emphasis added).
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58. Blumer v. Madden, 128 Cal. App. 22, 16 P.2d 319 (1932).
59. Id. at -, 16 P.2d at 321.
60. See supra notes 3-5 and accompanying text.
61. The many cases on this topic are collected at Annot., 37 A.L.R.4th 358 (1985). Law
review citations may be found in Flambeau Prods. Corp. v. Honeywell Inf. Systems, Inc.,
116 Wis. 2d 95, -, 341 N.W.2d 655, 659 n.4 (1984). See also McLaughlin, supra note 1,
and WHITE AND SUMMERS, supra note 1, §13-21.
62. 247 N.W.2d 490 (S.D. 1976).
63. Id. at 493.
64. For example, in a letter to the National Law Journal, December 10, 1985, a Chi-
cago attorney recommended that the debtor use this language:
Payment in full. Upon cashing this check the creditor agrees to fully discharge the
debtor from liability arising out of (specified obligation) and further agrees not to
reserve any rights with respect to that obligation and waives his right to use Sec-
tion 1-207 of the Uniform Commercial Code. The return or destruction of this
check shall mean that the creditor has rejected these conditions, but the act of
cashing it shall be deemed to be conclusive evidence that he has accepted them.
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phisticated attorneys.
As long as we must live with the statute, the proper question
is not whether use of it to defeat an accord and satisfaction is de-
sirable, but whether the legislature intended it. In rejecting appli-
cation of this statute to the common law doctrine of accord and
satisfaction in FlambeauProducts Corp. v. Honeywell Information
Systems, Inc.,65 the Supreme Court of Wisconsin looked to the Of-
ficial Comments to the UCC, the legislative history, and rules of
construction. The Official Comments make no reference to the
statute's applicability to accord and satisfaction. The Comments
suggest that the statute did not change common law, but clarified a
party's rights during a continuing course of performance.66 For ex-
ample, in the famous "chicken" case, buyer, who was shipped stew-
ing chickens when it expected fryers, sent seller a cable stating
that it was accepting the shipment without prejudice to its rights
to recover damages and to receive frying chickens in future deliv-
eries.6 While the court in Flambeau based its reasoning on the
Comments, a trial court in Pennsylvania strengthened this analysis
with reference to the text of the UCC. a This court based its con-
clusion that the statute is inapplicable to accord and satisfaction
on the fact that section 1-207 "refers only to performance and does
not mention payment."6 9 The court observed that where the UCC
intends a statute to apply to payment, as in section 1-208, it men-
tions both performance and payment."'
The study of Wisconsin legislative history in Flambeau
showed that an earlier draft of Article 3 included a codification of
common law accord and satisfaction. The drafters later dropped
this provision. The court inferred that the presence of the two sec-
tions in the same draft suggested that each addressed a different
need. Therefore, section 1-207 could not address accord and satis-
faction. 7' Turning to rules of construction, the court noted that the
UCC states in section 1-102(1) that it "shall be liberally construed
and applied to promote its underlying purposes and policies," one
of which is to "simplify, clarify, and modernize the law governing
72. Id. at -, 341 N.W.2d at 661-62. See also Connecticut Printers, Inc. v. Gus
Kroesen, Inc., 134 Cal. App. 3d 54, 184 Cal. Rptr. 436 (1982).
73. REPORT OF THE COMMISSION ON UNIFORM STATE LAWS TO THE LEGISLATURE OF THE
STATE OF N.Y. 19-20 (1961), incorporated as New York Annotations in N.Y. U.C.C. § 1-207
(McKinney 1964).
74. Braun v. C.E.P.C. Distribs., Inc., 77 A.D.2d 358, 433 N.Y.S.2d 447 (1st Dep't 1980).
75. WITE AND SUMMERS, supra note 1, § 2-2. In Geelan Mech. Corp. v. Dembar Con-
str. Corp., 97 A.D.2d 810, 468 N.Y.S.2d (1983), the court first had to resolve whether a
construction subcontract was a UCC transaction; determining that it was not, the court then
held that the statute was not effective.
76. Gimby v. Frost, 84 A.D.2d 806, 444 N.Y.S.2d 143 (2d Dep't 1981) (sale of real
property; statute not effective); Ayer v. Sky Club, Inc., 70 A.D.2d 863, 418 N.Y.S.2d 57 (1st
Dep't 1979), appeal dismissed, 48 N.Y.2d 705, 397 N.E.2d 758, 422 N.Y.S.2d 68 (1979) (sale
of services; statute effective).
77. Official Comment 1 states:
This section provides machinery for the continuation of performance along the
lines contemplated by the contract despite a pending dispute, by adopting the
mercantile device of going ahead with delivery, acceptance, or payment "without
prejudice," "under protest," "under reserve," "with reservation of all our rights,"
and the like.
(Emphasis added).
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because I have got to have the money, and I cannot wait for it. If I fail to get the
money to-day, I shall probably be ruined financially, because I have made no
other arrangement to get the money only on this particular matter." Finally he
took the note and gave the receipt, because at the time he could do nothing better,
and in the belief that he would be financially ruined unless he had immediately
the money that was offered him, or paper by means of which the money might be
obtained.
After two trips to the Michigan Supreme Court, Headley obtained judgment for the full
amount.
82. MONT. CODE ANN. § 30-1-207 (1985). See Summers, "Good Faith" in General Con-
tract Law and the Sales Provisions of the Uniform Commercial Code, 54 VA. L. REV. 195
(1968).
83. Seaman's Direct Buying Serv., Inc. v. Standard Oil Co. of Cal., 36 Cal. 3d 752, 686
P.2d 1158, 206 Cal. Rptr. 354 (1984).
84. Id. at 770-71, 686 P.2d at 1167, 206 Cal. Rptr. at 363 (citations omitted).
85. Id. at 769, 686 P.2d at 1166, 206 Cal. Rptr. at 362.
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V. CONCLUSION
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