Accord and Satisfaction

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This is an Australian Court of Appeal decision whereby the issue of Accord and Satisfaction (settlement) was considered. The builder performed residential building work for the principal pursuant to a building contract in 1994. A dispute arose. The builder said he was owed money. 

The principal complained about the quality of the works he had performed. The builder, relying upon a provision in the building contract, sought to recover the monies said to be owing to him by using the arbitration procedure available under the contract. 

The principal brought a cross-claim alleging that the builder’s work was defective. Both parties had legal representation. The arbitration proceeded partially in June 1997, but after some evidence was taken the arbitrator was informed by the builder’s solicitor that the matter had settled. 

The terms of settlement were collated into a document entitled “Terms of Settlement”, and stated: 

1 Each party, without admission, withdraws their respective claims and cross claims against the other party. 

2 Each party is to bear its own costs of the arbitration. 

3 Each party is to bear equally the costs of the arbitrator. 

Both parties executed this document in June 1997. However, somewhat surprisingly, the principal made an insurance claim in respect of the builder’s allegedly defective work. The builder relied upon the “Terms of Settlement” document to defend this claim. 

At the first instance, the builder succeeded in defeating the claim using the settlement as its actual defence. District Court proceedings were then brought by the builder against the principal for monies allegedly owing under the building contact, in December 2000. A defence was filed and served, but the defence did not refer to the “Terms of Settlement”. 

Eventually the builder obtained judgment against the principal for the monies owing under the building contract, despite the prior settlement. However, this was appealed by the principal. The key issue on appeal was, in fact, whether the “Terms of Settlement” amounted to “Accord and Satisfaction” — that is, that the issues as between the principal and the builder had been settled in their entirety. 

At paragraph 48 the court stated that: “The essence of Accord and Satisfaction is the acceptance by the plaintiff of something in place of his cause of action, the Accord is the agreement or consent to accept the Satisfaction upon provision of the Satisfaction, there is a discharge which extinguishes the cause of action . . .” 

The court went on to state that where there is an agreement to accept a promise in Satisfaction of the cause of action, “the original cause of action is discharged from the date when the promise is made”. The effect of this is that the agreement for compromise is enforceable by the parties; however, the original contract is discharged. 

So the compromise agreement replaces the former one. The only modification to this rule is where the compromise agreement specifically preserves the enforceability of the original agreement where there is a default on the compromise agreement. 

This is often a term a solicitor will labour to have introduced into the compromise agreement. The court went on to state that it is a question of fact for the court to decide whether there has been an Accord and Satisfaction. 

The question is ultimately to be resolved by a consideration of the parties’ intention in the circumstances of each case. At paragraph 66 the court concludes: In this case, in my view, there is an available inference that the parties’ intention was to walk away from the arbitration and any claims they had against each other. 

The court ruled that the principal had an arguable case that the “Terms of Settlement” amounted to Accord and Satisfaction.