Accord and Satisfaction, under contract law, refers to the process of purchasing a release order from contractual obligation through any consideration. It is the doctrine which honours the discharge of a contract and the obligations it defines by the way of forming a substituted contract. Accord refers to an agreement under which these terms are binding and the valuable consideration which is provided for discharge of the previous contract refers to as Satisfaction. In a simpler term, this doctrine can be explained as when one party fails to perform the contractual obligations but in return makes a purchase of and/or forms another contract which nullifies the older contracts and its obligations, takes form of an accord, and the valuable consideration which is paid in return of getting contractual obligations released takes form of Satisfaction.
This paper mainly focuses on providing insights on the matters related to the doctrine of accord and satisfaction and its application under the Indian Contracts Act, 1872.
Accord, in its literal sense, refers to an official agreement or a treaty made between two parties. This definition can be transformed under the contract law as an agreement between two parties to disqualify the legal obligations existing between them and to form a new legal relation which would honour the disqualification.
Satisfaction, on the other hand, means the payment of a debt or fulfilment of an obligation or a claim which when transformed under the rules of law under contract, would reflect towards the consideration of any kind in discussion in the agreement which is formed to free the parties from contractual terms and form a new set of terms between them (accord).
The Indian Contract Act, 1872, honours the doctrine of accord and satisfaction by providing due importance to this subject matter. Section 63 of the act includes these subjects, as it talks about the reasonable grounds which could be provided to the promisor for non-performance of the legally binding obligations as the contract dictates.
Accord and Satisfaction plays their roles synonymously to protect the parties from non-performance of a binding contract between them and lifts the legal burden from them. This conditional aspect, available as a resort with the parties of the contract, lifts the right to sue the other party for non-performance as the older contract, after this point, stands invalid, which provided the parties with the right to sue each other. However, the new agreement formed between the parties does provide them with the option to sue each other for non-performance of the contractual obligations
Doctrine of Accord and Satisfaction
The definition of the doctrine of accord and satisfaction can be described as ‘an agreement made after breach whereby some consideration other than his legal remedy is to be accepted by the party not at fault, followed by performance of the substituted consideration’[1]. This agreement between the parties formed due non-performance by a party, binds both the sides for not raising any legal objections, if any.
Under the laws, this doctrine may require 4 conditions for its fulfilment, which are:
1. Proper Subject Matter
2. Competent Parties
3. Meeting of minds of parties, and
4. Adequate Consideration
This doctrine, which facilitates the discharge of duties and avoids any legal charges, may either be implied or can be agreed upon by the parties, as the parties involved in the contract decides or the circumstances surrounding the transaction develops. Since, this doctrine is an affirmative defence in litigation, the party asserting it must plead it specifically and prove it to the satisfaction of trier of the fact.
The principle of accord and satisfaction usually refers to a debtor’s offer of payment and a creditor’s acceptance of a lesser sum than the creditor claimed. In most contracts, the consideration provided is less than what was negotiated for in the initial contract. The value paid in exchange for a promise is referred to as consideration. The consideration which is taken into account consists of 2 elements, which are- the parties must have agreed to or bargained-for trade, and the bargained-for transaction must hold some legal value.
Accord and Satisfaction under the Indian Contract Act
This doctrine has eventually been moulded into the Indian Jurisprudence. The contract act largely covers this under the realm of breach of contract. Section 63 of the Indian Contract Act, 1872, offers a detailed explanation of this doctrine, which mainly deals with the remittance of the performance or dispensing of the of the performance of promise.
The concept of accord and satisfaction has also been stated as the only way of contract discharge, not a means of contract abolition, but rather a method of making the contract's duty unenforceable. This principle is seen as a good defence when the legal obligations of the contract need to be rendered void. The defence is that the contract has not expired, but that its breach has been resolved by an accord and satisfaction, and so the plaintiff in the case is not entitled to the customary breach remedy.
The Contract Act administering the Indian laws jurisdiction, guides the functioning of this doctrine and how the treaty offering legal safety on non-compliance with the terms of the contract could be implemented. The privy council has used this doctrine in cases pertaining to matters where one party took the receipts of payments made in place for a settlement by the other party. The same situation arose in the famous case of Boghara Polyfab[2].
National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd:[3]
The aforementioned case deals with the question whether the said topic initiated the discharge of the contract, as the insured received the payment in full and final settlement in the discharge voucher which consisted of the amount less than what the insured applied for. The judgement made in this case by the High Court and eventually the Supreme Court, clearly established the fact that, even though the court didn’t accept the formulation of accord and satisfaction and the dispute was arbitrable, the appellant can use the defence of accord and satisfaction in arbitration. This case highlighted that discharge of the contract by performance referred to the fulfilment of the contractual obligations by performance, discharge through accord and satisfaction refers to the contract being discharged by the performance of the substituted obligation.
This case has set the benchmark for application of the section 62 and 63 under the Indian Contract Act, 1872 and its jurisdiction. This case has been applied in deriving the outcome of numerous judgments and is being cited as the foundation case for the principle of the accord and satisfaction.
Another widely acclaimed judgement pertaining to this doctrine is of P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation[4], which reflects on how once accord and satisfaction has come into play, the dispute cannot be raised by any party for getting above what was accepted in full and final settlement.
P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation[5]:
In this cited case, the issue before the court was that the appellant sought further funds after the work was completed. It was recognised that the appellant accepted the final measurement, which by extension was an agreement to full and final settlement, despite the respondent's pledge to act out of the claim by way of Clause 57 of the contract that bound the two.
The amount was received unconditionally because the entire and final satisfaction was acknowledged by admission through the receipt produced in writing. As a result, there is agreement and satisfaction as a result of the claim settlements.
The final decision stated that no issue could be directed to arbitration if the whole amount of a claim was accepted in full settlement.
This principle has such wide-ranging and far-reaching applications that, even though having so many cases under references, there can be so many inferences which could be drawn from these cases. However, the validity of the doctrine of accord and satisfaction should only be judged through the critical lens of general laws present under the contract act. The principle of accord and satisfaction and its effects being presented through one of the decisions of the Privy Council would substantiate this point further.
Payana Reena Layana Saminathan Chetty v. Pana Lana Pana Lana Palaniappa Chetty[6]:
This case shows how the receipt given by the appellants, accepted by the respondents, and acted on by both indicates indisputably that all of the parties consented to the plan stated in the 'receipt' to settle all of their existing problems. It's a clear example of what used to be known as 'accord and satisfaction by a substituted agreement' in Common Law pleading. Whatever the parties' individual rights may have been, they are waived in exchange for everyone's approval of a new agreement. As a result, earlier rights of the parties are terminated when such an agreement and satisfaction is reached. They have, in reality, been supplanted by the new rights; and the new agreement becomes a new departure, fully representing the rights of all parties.
The doctrine is put to test every time a new non-performance of contractual obligation arises. One of such cases was of S.C. Konda Reddy v. Union of India and Anr[7], which raised a question in relation to the principle which was necessary to be answered for its application.
S.C. Konda Reddy v Union of India and Anr.[8]:
The question before the court was whether payment of the final bill may be used to demonstrate that an agreement existed, that satisfaction was provided, and that, as a result, the agreement was terminated and the arbitration clause was thus terminated. The court recognised the position of agreement and satisfaction as means for fulfilling a contract and as a defence against a breach of contract action. It would, however, have no influence on the contract's termination.
The principle of accord and satisfaction is not only based on the belief that the since, due to non-performance of the contract, the promise has to receive a sum lesser than the original promise due to its application, but also, he may accept something which is much more valuable and beneficial for him under the new agreement. A similar case was visible in the Saraswat Trading Agency v. Union of India[9], where the court held that the debtor could not insist that his payment be recorded as full satisfaction of all claims if the creditor agreed that if the debtor paid a lesser sum than due before the specified date, it would be accepted as full satisfaction of all claims, but the debtor paid a still lesser sum before the specified date.
Saraswat Trading Agency v. Union of India[10] :
The facts of this case concern an application to the court to set aside a reward order, after the defendants in a previous case attempted to induce the plaintiff to accept a lower award.
Using this scenario, a few parameters for accord and satisfaction were drawn. A person who is entitled to benefit from the fulfilment of a promise may accept anything that is more beneficial than the original promise, according to the law of accord and satisfaction. It's worth noting that the law doesn't specify the size of such transactions. As a result, an accord is essentially a unique agreement built on the foundation of a previous agreement. Satisfaction, on the other hand, is defined as ‘the fulfilment of a different promise in accordance with a new agreement of accord and the promisee acceptance of that promise.’ The Supreme Court had taken the position, while explaining, that concord and satisfaction vary from case to case, and that the court must determine whether the promisee has accepted the lesser or different performance in complete satisfaction or not.
Adding to the definition of accord and satisfaction, this case provided a different angle as to how the non-performance of the contractual obligation can sometimes lead to benefit the parties involved in the contract.
Other Cases:
Many other landmark judgments have also highlighted various aspects of the principle of accord and satisfaction which holds their own importance.
Union of India v. Kishorilal Gupta and Bros[11] raised the question whether the principle of accord and satisfaction were in relation to the existence of the liability. Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah[12] raised an important aspect regarding the acceptance of the sum in full satisfaction and discharge of promissory note when some initial protest is shown. Snow View Properties Ltd. v. Punjab & Sind Bank[13], which saw how the bank filed for a lawsuit against the borrower, but it was dropped if the borrower paid a specified amount of money. The borrower agreed and paid the agreed-upon sum. The bank's suit was settled through agreement and satisfaction. The court ordered the bank to return the borrower's mortgage and hypothecation paperwork to him. Also, illegal contracts cannot be based for accord and satisfaction, as reflected through the Union Carbide Corpn v. Union of India[14].
These cases show how wide-ranging the subject of accord and satisfaction is and how the Indian Contracts Act puts it into effect in case of breach of contract. The highlighted cases throw light on the various aspects of the doctrine and how the Indian judicial system moulds it to derive the outcome from the cases.
Aspects of the Principle of Accord and Satisfaction under ICA
Relation between Accord and Satisfaction
The principle of accord and satisfaction also depends upon whether the obligation, under the contract, is disputed or not. In following the principle, the non-performance of the act leads to formation of a new contract supplemented with the new obligations.
However, for contractual obligations to be disputed, a defence needs to be raised by the obligator as a prerequisite.
Accord is an agreement which is formed between the parties after the promise fails to achieve the contractual terms. It is formed after deliberation from both sides. However, what actually matters between the parties is the satisfaction which succeeds the accord. It is something which guides the contract as it is the substituted obligations which is decided after agreeing for an accord.
The accord is guided by the same laws as exists in the Indian Contracts Act as it treats the initial agreement. However, the Satisfaction differentiates the new agreement from the older agreement. When the topic of satisfaction is addressed, it is important to remember that a prior responsibility cannot be used as a factor since it is something that the court would judge to be part of an individual's typical behaviour and therefore not a fair inducement for a party to modify their position on an issue.
Accord without any satisfaction is rendered useless as it would not differentiate from the non-performance of the contract. The satisfaction discharges the liability of legal action which could be taken within the realm of the contract laws existing for the land. When satisfaction is delivered and acknowledged is the time when the transaction is considered complete and the principle to have taken place.
Principle of Accord and Satisfaction and Principle of ‘Waiver’
The section 63 specifies how one can fulfil one's duties, such as by completing substituted obligations or by waiving specific contract restrictions. In the context of contractual duties, Section 63 of the Contract Act might be interpreted to mean that both "waiver" of contractual obligations and "accord and satisfaction" discharge are covered. However, the doctrine of waiver and doctrine of accord and satisfaction, covered under the same section, are different from each other based upon various aspects which are-
i. The principle of waiver means full desertion of the contractual obligations arising out of the contract and non-performance of the deed by mutual consent. However, on the other hand, accord and satisfaction does not mean complete abandonment of the contract but a substituted contractual obligation being performed in place of the existing obligations.
ii. The contract, when waiver, is applied comes to an end completely and does not require any consideration. Accord and Satisfaction, on the other hand, results in formation of a whole new contract with substituted considerations or contractual obligations.
iii. The principle of Accord and Satisfaction is a method of discharging contractual responsibilities, contradicting the Waiver of Contractual Rights, which solely covers a person's right to let go of specific duties regardless of whether or not the remaining obligations have been met.
Both the conditions, in the end, result in discharging of the contractual obligations binding both the parties and forms an essential part of the section 63. However, accord and satisfaction, taking a step ahead, also includes change in arrangement between the parties. It may not be wrong in stating that, in contrast to the doctrine of Waiver which merely allows a person to let go of their portion of a contract's responsibilities, the doctrine of accord and satisfaction incorporates endorsement of changes in contractual obligations with a subsequent mandate for execution of such new set of obligations.
Conclusion
Accord and Satisfaction, thus can be defined as a principle which finds the common grounds between both the parties by having some other set of obligations being performed, different from the existing ones. As Pollock and Mulla defines ‘The principle of accord and Satisfaction has been described as the only method of discharge of a contract, as not annihilating the contract, but only making the obligation arising from it unenforceable’[15], the doctrine forms a major part under the Indian Contracts Act and its application in the real-life world.
On the basis of the above explanation, it may be concluded that the doctrine of accord and satisfaction has been in use for a long period of time, and thus, it is a fundamental part of contract law. Despite the fact that there has only been a limited amount of discussion, this doctrine may nonetheless be claimed to be incorporated in laws and judicial systems and to apply to today’s complicated contractual situations. Indeed, this doctrine may come in handy when the terms of a contract must be spontaneously altered owing to unforeseen circumstances. This doctrine’s potential abuse has also been curtailed by the Supreme Court’s decision to apply it uniformly in situations involving contractual obligations.
[1] Avtar Singh, Law of Contract & Specific Relief (12th edn. 2019) [2] National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd., (2008) SLP [C] No.12056 of 2007 [3] National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd., (2008) SLP [C] No.12056 of 2007 [4] P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation, (1944) (1) SCALE 1, 1994Supp (3) SCC 126 [5] P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation, (1944) (1) SCALE 1, 1994Supp (3) SCC 126 [6] Payana Reena Layana Saminathan Chetty v Pana Lana Pana Lana Palaniappa Chetty, (1913-14) 41 lA 142: 18 CWN 617, 619-20 (PC). [7] S.C. Konda Reddy v. Union of India and Anr, (1982) AIR 1982 Kant 50 [8] S.C. Konda Reddy v. Union of India and Anr, (1982) AIR 1982 Kant 50 [9] Saraswat Trading Agency v. union of India (2002), AIR 2002Cal 51 [10] Saraswat Trading Agency v. union of India (2002), AIR 2002Cal 51 [11] Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362 [12] Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, AIR 1963 SC 250; (1963) 2SCR 168 [13] Snow View Properties Ltd. v. Punjab & Sind Bank, AIR 2010 Cal 94 [14] Union Carbide Corpn v. Union of India (1991) 4 SCC 584; AIR 1992 SC 317 [15] Pollock & Mulla, The Indian Contract and Specific Relief Acts (16th edn. 2019)
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