Accord and Satisfaction: To Release, or Not Release? That is the Question.

Generally, an “accord and satisfaction” is an agreement between two or more contracting parties to accept an alternate agreement and performance in lieu of a preexisting contractual duty between the parties.  The new agreement is the “accord,” and the subsequent performance of the new agreement is the “satisfaction.”  The main difference between an accord and satisfaction and a contract modification is that a contract modification immediately discharges the preexisting contractual duty upon execution of the modification, while an accord and satisfaction only discharges the preexisting contractual duty when the alternate performance is completed.

The defense of accord and satisfaction is one that often arises during construction projects in the context of disputes concerning amounts owed.  The defense of accord and satisfaction provides that the party receiving monies (or alternate performance) is doing so in full satisfaction of a disputed claim. An accord and satisfaction oftentimes uses language that operates as a release, such as “this payment (or alternate performance) is in full satisfaction of the obligations under the contract.”  As such, the language used in an accord and satisfaction is critical to determine the extent to which claims are being released or satisfied.

An example of the application of the affirmative defense of accord and satisfaction is found in Harry Pepper & Assocs., Inc., which was a case recently decided before the Armed Services Board of Contract Appeals (“ASBCA”).  There, the prime contractor had a $36.5 million contract with the government for the restoration of a test stand at the John C. Stennis Space Center in Mississippi.  During construction, the prime contractor encountered differing conditions related to the testing of the welding work at the site that led the prime contractor to submit requests for information (RFI) seeking a change to the testing of the welding work.    The government responded to the RFIs by issuing instructions on how to proceed with the proposed testing and omitting certain testing. The prime contractor submitted a field change request (FCR) that captured the change in the testing work and credited the government for the omitted testing.  The government issued a bilateral contract modification that accepted the FCR and also contained language releasing the government “from any and all liability under this contract for further equitable adjustments attribute to the above change.” As the project progressed, the prime contractor encountered additional differing conditions related to the actual welding work itself and submitted claims for equitable adjustment related to those conditions—which the government denied. The prime contractor proceeded to submit certified claims, which were denied by the contracting officer in their entirety, and the prime contractor appealed.

On appeal, the government moved for summary judgment based on its affirmative defense of accord and satisfaction and the prime contractor cross-moved for partial summary judgment against the government’s affirmative defense of accord and satisfaction.  The government argued that the work at issue in the requests for equitable adjustment was incorporated into the bilateral contract modification.  The government further argued that “[t]he modification contained a release of future claims for equitable adjustment” and as such, barred the claims asserted by the prime contractor.  The prime contractor argued that because the RFIs only concerned the testing of the welding work, there was no meeting of the minds to release any and all claims related to welding work.

The ASBCA denied the government’s motion for summary judgment stating that the language in the bilateral modification only released the government from “any and all liability under this contract for further equitable adjustments attributable to the above change.”  The “above change” was only related to a small portion of work, the testing of the welding work, and did not encompass the actual welding work itself which was at issue in the equitable adjustment claims.  As such, the ASBCA held that the release language did not affect the equitable adjustment claims and denied the government’s motion for summary judgment and granted the prime contractor’s cross-motion for partial summary judgment against the government’s defense of accord and satisfaction.

As this case demonstrates, an accord and satisfaction must be narrowly tailored to serve the needs of the parties and must unambiguously release the obligation in question to operate as a defense to future claims.  It is critical for owners, prime contractors, and subcontractors to define, address and preserve claims precisely, so that they do not find themselves releasing (or not releasing) claims that they did not intend to.  Without doing so, a party may release (or not release) unintended claims and find themselves on the hook for substantial unanticipated costs.