Settlement Traps: Accord and Satisfaction

Imagine you’re owed $80,000 for work performed on a construction project. You’re still owed this money because your customer has raised issues with your performance. What now?

Substantial completion of your work was delayed, for example, and the customer claims that delayed completion caused them losses. You finally get a check for $20,000 of the $80,000 owed. But the other $60,000 is not coming. Your customer now argues that you accepted the $20,000 as a full and final compromise of your claim, and it is settled – and they’re right.

How the heck did this happen? This is a story about “accord and satisfaction” (blog article, actually), and it happens in construction a lot.

“Accord and satisfaction” is a legal concept that goes back to English common law. It allows a creditor (you) and debtor (your customer) to effectively rewrite a previous agreement in order to settle a dispute without legal intervention. An “accord” is an agreement where one party agrees to accept something different from the amount believed owed in order to settle a disputed claim. The “satisfaction” is the execution or acceptance of this agreement, and once satisfaction occurs, the previous contract is gone. “Accord and satisfaction” is often used as an affirmative defense in a breach of contract case. In Ohio, there is also a statute for “accord and satisfaction” in certain cases.

This shows up in construction in a few different forms. One form is the $20,000 check you deposited: it had “Full and final payment” written in the memo line of the check. Your customer’s note on the check is essentially an offer for you to accept $20,000 as payment in full for the total $80,000 claim – even if you never discussed such a concept before and there’s never been any suggestion you’d consider $20,000 as a settlement. They want to pay you only $20,000, so they give it a try. When you endorse and deposit that check, even if you cross out the “Full and final payment” note on the check, you legally accepted the offer and your claim is settled at a 75% discount.

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Another form is through certain lien waivers. Many lien waivers are simply receipts of payment and a waiver of lien rights for only the work performed that is being paid at that moment. That’s the way it should be. However many lien waivers are loaded with land mines intended to cause the contractor to waive as many claims and rights as possible. That’s not an overstatement. For example, the following is language from a recent partial waiver of lien that was presented to a Firm client (slightly modified):

… [Subcontractor] waives and releases any and all mechanic’s lien claims, … and all other claims of whatever nature or description against Contractor, Owner… Subcontractor acknowledges and represents that the current payment represents full and final payment for all work performed (including extra work and impact claims) through the Progress Billing Period and that no additional sum is or will hereafter be claimed… except earned and unpaid retainage…

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Returning to our example, if that $20,000 check is accompanied by this lien waiver, and the $80,000 worth of work was performed during or leading up to the Progress Billing Period, you arguably waive your right to the other $60,000 you think you’re entitled to. Tweaking our example slightly, let’s say that during the Progress Billing Period, you performed $20,000 in base contract work and $60,000 of extra work that your customer’s superintendent directed and observed but for which no change order was issued – and your subcontract agreement requires a change order in order to be paid for any changed or additional work. Even though there’s no question between you and your superintendent about that $60,000 in extras if you sign this lien waiver in exchange for the $20,000 base contract payment, you’ve given your customer an “accord and satisfaction” defense by agreeing in the lien waiver that the $20,000 is “full and final payment for all work performed (including extra work and impact claims) through the Progress Billing Period…”

The takeaway here is that contractors and subcontractors must be vigilant during the billing and payment progress to avoid prematurely settling disputes and/or unintentionally waiving claims. Most contractors and owners are good people who want to do the right thing. But there are certainly some that will take advantage of you, especially if you let them.

Our team at the Truax Law Group offers elite legal services, trusted advice, and strategic guidance to the construction industry and small business owners in Northern Ohio and throughout the state. Have questions or concerns around your contracts? Feel free to give us a call or send us an email here >> and a team member will be touch!