Accord and satisfaction deals with a debtors offer of payment and a creditors acceptance
of a lesser amount than the creditor originally purported to be owed. It is a method of discharging a claim by settlement of the claim and performing the agreement. The accord is the agreement and the satisfaction its execution or performance. A new contract is substituted for an old contract thereby discharging an obligation or cause of action, which is settled, and must have all of the elements of a valid contract.
In an accord contract it is typical that the consideration supplied is less than bargained for in the original contract. In accord contracts that require an amount of consideration that is less than the original, the consideration must be of a different type, i.e. instead of money, debtor offers something in kind. Consideration is the value given in return for a promise. It has two elements: (1) there must be a bargained-for exchange between the parties (2) what is bargained for must have legal value.
Accord and satisfaction is a settlement of an unliquidated debt. In an unliquidated debt consideration, when the amount of the debt is in dispute, acceptance of a lesser sum discharges the debt. Consideration is given by the parties by giving up a legal right to contest the amount of debt. Whereas, in a liquidated debt, acceptance of less than the entire amount of a liquidated debt is not satisfaction, and the balance of the debt is still owed. No consideration is given by the debtor, because the debtor has a preexisting obligation to pay the entire debt.
For example, a builder is contracted to build a homeowner a garage for $35,000. The contract called for $17,500 prior to starting construction, to disburse $10,000 during various stages of construction, and to make a final payment of $7,500 at completion. At completion, the homeowner complained about inferior work quality and refused to make the final payment. After a mutual settlement agreement, the builder accepted $4,000 as full payment. Thereby, a new contract was formed by offer, acceptance, and consideration. The consideration is that for a $3,500 savings, the homeowner gives up that which he is entitled, a well-constructed garage. The builder gives up his right to full price to avoid suit for inferior performance. When accord and settlement has occurred, the homeowner and builder have given up his right to sue for more money under this settlement agreement.