'Accord and satisfaction' as a mode of discharge of contract

Introduction

Discharge of contract occurs in various ways. If both Parties to a Contract have performed their respective obligations agreed by them, the Contract is discharged by performance.  A Contract can also be discharged by mutual agreement between the Parties by novation, recession or alteration.  The promisee may also dispense with or remit wholly or in part, the performance of the promise made to him.  This involves application of the principle of 'accord and satisfaction'. While discharge of contract by performance refers to fulfillment of the contract by performance of all the obligations in terms of the original contract, discharge by `accord and satisfaction' refers to the contract being discharged by reason of performance of certain substituted obligations. The agreement by which the original obligation is discharged is the accord, and the discharge of the substituted obligation is the satisfaction[1].

The Privy Council explaining the principle of `accord and satisfaction' stated [2]:

'The `receipt' given by the appellants and accepted by the respondent, and acted on 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 as common law pleading as `accord and satisfaction by a substituted agreement'. No matter what were the respective rights of the parties inter se they are abandoned in consideration of the acceptance by all of a new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights; and the new agreement becomes a new departure, and the rights of all the parties are fully represented by it.”

Thus when a lesser amount is accepted in full and final satisfaction of dues under the Contract, the contract is discharged by application of principle of 'accord and satisfaction'[3]. 

Utility accord and satisfaction

A plea that a Contract is discharged by 'accord and satisfaction' is raised to curtail a Party to a Contract from approaching the courts of law to seek any relief based on contract including specific performance of the Contract; recovering unpaid dues under a Contract; realizing damages; or injunctive reliefs.​

Establishing accord and satisfaction

Mere assertion by one of the Parties to the Contract that payment of lesser amount has been accepted by the other Party as full and final settlement, unless proved may not be sufficient to hold the Agreement as having discharged / satisfied.  For instance, an employer may insist that the contractor issues a No Demand certificate as a pre-condition for release of payments due under the contract. In cases where Contractor makes huge investments in executing works, he may not be in a position to risk realization of amounts due under the contract for reasons like liability to lenders etc. and therefore may issue No Demand Certificate under duress[4]. If the Party who executed the discharge agreement acknowledging full and final receipt alleges that execution of said discharge agreement was on account of fraud, coercion or undue influence practiced by the other Party and is able to establish the same, the discharge of Contract by such Agreement is rendered void and cannot be acted upon[5].  A plea that coercion was exercised to secure an agreement to accept lesser amount requires adjudication at trial and without such adjudication a Party alleging coercion may not be precluded from approaching the competent court of law seeking reliefs based on contract[6].

A clause in a Contract requiring the Contractor to submit a No Claim Certificate once the works are finally measured up, may not be an absolute bar to a Contractor raising genuine claims, even after submission of such No Claim Certificate, particularly in a case where it is shown that work is yet to be completed and there is no proof that the works as undertaken by the Contractor are finally measured and on the basis of the same the No Objection Certificate had been issued[7].

Summary

While plea of 'accord and satisfaction' is good defense to claims based on contract, the same requires to be proved by evidence. The plea could be negated if 'accord and satisfaction' is shown to be brought about by fraud, coercion etc.  

• [1] National Insurance Co. Ltd. vs. Boghara Polyfab Pvt. Ltd. MANU/SC/4056/2008

• [2] Payana Reena Saminathan v. Pana Lana Palaniappa 41 IA 142

• [3] P.K. Ramaiah and Company vs. Chairman and Managing Director, National Thermal Power Corpn. MANU/SC/1150/1994

• [4] Chairman and Managing Director, NTPC Ltd., v. Reshmi Constructions, Builders and Contractors (2004) 2 SCC 663

• [5] National Insurance Co. Ltd., v. Boghara Poly Fab Pvt. Ltd., MANU/SC/4056/2008

• [6] National Insurance Co. Ltd., v. Sehtia Shoes MANU/SC/7211/2008

• [7] Ambika Constructions v. Union of India MANU /SC/5180/2006