Accord and Satisfaction; Executory Accord; and Substituted Contract

Curtis A. Welch

503.972.2529

    The doctrine of accord and satisfaction is a common legal theory. However, there are two related legal doctrines--executory accord and substituted contract--that are less well known and less pled. The distinction among these three theories is important in litigation for purposes of proof, and also for determining whether there is a right to a jury for a defense or claim.

    This article discusses the distinctions among these three theories, and also discusses ORS 73.0311, an important statute governing accord and satisfaction in relation to negotiable instruments.

1. Accord and Satisfaction

    Oregon courts describe a valid accord and satisfaction as follows:

    ". . . what is given or agreed to be performed shall be offered as a satisfaction and extinction 
    of the original demand: that the debtor shall have intended [it] as a satisfaction of such 
    obligation, and that such intention shall be made known to the creditor in some 
    unmistakable manner. It is equally essential that the creditor shall have accepted it with the 
    intention that is should offer it as a satisfaction." Gen. Constr. Co. v. Ore. Fish Comm., 26 
    Or.App. 577, 582, 554 P.2d 185 (1977) (citing Lenchitksy v. W. J. Sandberg Co., 217 Or. 
    483, 343 P.2d 523 (1959)).

    General Construction involved a dispute between the State Fish Commission and the general contractor, General Construction, arising out of a project involving construction of a fish ladder at Willamette Falls on the Willamette River between West Linn and Oregon City.

    After General Construction had started construction of the fish ladder in July 1969, it discovered significant errors in the specifications and drawings provided by the Defendant Fish Commission. The errors required new surveying and engineering, as well as changes to work already done, which delayed construction significantly and at a greatly increased cost. The fish ladder was not complete in the fall of 1969, when water overtopped the dam and General Construction's work was damaged by the overflowing water.

    In March and April 1970, General Construction and the State Fish Commission signed a change order which increased the contract price, and specified certain changes in the plans. The change order did not state it was General Construction's exclusive remedy for all damages arising from the inaccurate specifications, nor did it state that General Construction reserved its right to collect further damages. 

    The State Fish Commission contended that the change order was an accord and satisfaction by which General Construction signed away all its rights of recovery for extra costs resulting from the State Fish Commission's mistakes in design and errors in specifications. General Construction argued that the sum paid under the change order was intended only to cover costs of the specific changes described in the change order, since at the time the change order was executed, the parties had no idea what other damages would result from the delay or from damage to General Construction's work by overflow of the river during the period of delay.

    The Court of Appeals rejected the State Fish Commission's argument and held that the change order (and a letter which accompanied the change order) did not make it known to General Construction "in some unmistakable manner that Change Order No. 1 was agreed or intended to be an accord and satisfaction for all damages resulting from the inaccurate specifications and consequent delay." General Construction, 26 Or. App. at 583.

2. Executory Accord and Substituted Contract

    An executory accord is "an agreement for the future discharge of an existing claim by a substituted performance." McDowell Welding & Pipefitting, Inc. v. U.S. Gypsum Co., 345 Or. 272, 281, 193 P.3d 9 (2008) (citing Arthur Linton Corbin, 6 Corbin on Contracts § 1268, 71, 2d ed. 1962)). The McDowell court stated that an executory accord is usually "a bilateral agreement; the debtor promises to pay an amount in return for the creditor's promise to release the underlying claim", and that the underlying claim is not discharged until the new agreement is performed. McDowell, 345 Or. at 281. Under an executory accord "the right to enforce the original claim is merely suspended and is revived by the debtor's breach of the new agreement." Id at 282 (citing Savelich Logging v. Preston Mill Co., 265 Or. 456, 462, 509 P.2d 1129 (1973)).

    A substituted contract, on the other hand, exists when the parties "agree to substitute the new agreement for the underlying obligation." McDowell, 345 Or. at 283. (citing 6 Corbin on Contracts § 1293 at 185)). The court stated that "[a] substituted contract differs from an executory accord in that the parties intend that entering into the new agreement will immediately discharge the underlying obligation." McDowell, 345 Or. at 283 (citing Eagle Industries, Inc. v. Thompson, 321 Or. 398, 408-12, 900 P.2d 475 (1995)).

    In McDowell, the plaintiff McDowell Welding & Pipefitting, Inc. ("McDowell") sued the general contractor BE & K Construction Co. ("BE & K") and the project owner United States Gypsum Co. ("U.S. Gypsum") alleging that the defendants failed to pay for work done by McDowell for a new plant constructed for U.S. Gypsum. Defendants alleged as an affirmative defense that McDowell had agreed to release its claims against defendants in return for payment of $896,000, and counterclaimed for specific performance of that settlement agreement.

    Defendant BE & K filed a motion asking the trial court to bifurcate proceedings and try its counterclaim for specific performance before trying McDowell's claims for breach of the construction contract. BE & K also argued that because its counterclaim sought specific performance, the court, rather than a jury, should resolve the factual issues that the counterclaim raised. The trial court granted BE & K's motion. The trial court also granted BE & K's motion to strike McDowell's subsequent demand for a jury.

    The trial court, sitting as trier of fact, found that McDowell had accepted defendants' offer to settle its claims in return for the defendants' promise to pay plaintiff $800,000. (Even though defendants had alleged they promised to pay $896,000, the defendants proved and the trial court found that the promise was to pay only $800,000). The trial court entered a limited judgment directing defendants to tender $800,000 to the court clerk, and directing McDowell, following defendants' tender, to execute a release of its claims against defendants. The trial court then granted defendants' motion for summary judgment dismissing McDowell's breach of contract claim arising out of the parties' construction contract.

    On appeal, McDowell argued, among other things, that the trial court had erred in denying its jury demand on the question of whether it had accepted the defendants' settlement offer. The Supreme Court analyzed the issue in terms of whether McDowell had a right to a jury trial on the counterclaim for specific performance, and if there was not a right to a jury trial on that counterclaim, whether McDowell had a right to a jury trial on defendants' affirmative defense, which was also based on the settlement agreement. The Court also stated that it needed to determine, if in fact there was a right to a jury trial on the affirmative defense, whether the trial on that defense should have occurred before trial on the defendants' counterclaim for specific performance.

    The Supreme Court analyzed whether defendants had pled an executory accord, an accord and satisfaction, or a substituted contract. The Court held that the defendants had not alleged an accord and satisfaction because defendants had not alleged "that they had paid plaintiff the promised sum—an allegation necessary for an accord and satisfaction." McDowell, 348 Or. at 283 (citing Harding v. Bell, 265 Or. 202, 210, 508 P.2d 216 (1973).

    Further, the Court stated that defendants had not alleged a substituted contract, because defendants did not "allege that, by entering into the settlement agreement, they extinguished the underlying obligation—an allegation necessary to allege a substituted contract." McDowell, 348 Or. at 283-84 (citing Abrahamso v. Brett, 143 Or. 14, 24, 21 P.2d 229 (1933)).

    The Court concluded that defendants had alleged an executory accord, because "defendants alleged that plaintiff agreed to release its claims only after defendants made the promised payment." McDowell, 348 Or. at 284. The Court held that since the substance of defendants' counterclaim and affirmative defense alleged an executory accord, the counterclaim and affirmative defense were equitable, and therefore the Court held that the trial court did not error in striking McDowell's jury demand. Id. at 286-87.

    The Court also noted that, in contrast to an executory accord, the theories of accord and satisfaction and substituted contract are legal, not equitable, theories.

3. ORS 73.0311

    ORS 73.0311 provides as follows:

    "The negotiation of an instrument marked ‘paid in full', ‘payment in full', ‘full payment of a 
    claim' or words of a similar meaning, or the negotiation of an instrument accompanied by a 
    statement containing such words or words of similar meaning, does not establish an accord 
    and satisfaction that binds the payee or prevents the collection of any remaining amount 
    owed upon the underlying obligation unless the payee personally, or by an officer or 
    employee with actual authority to settle claims, agrees in writing to accept the amount 
    stated in the instrument as full payment of the obligation."

    The statute obviously restricts a debtor's attempts to settle unliquidated claims by unilateral conduct. Regardless, a creditor should proceed cautiously if it receives a check or other negotiable instrument for a reduced sum, with language on it or on an accompanying letter to the effect that endorsement or deposit of the check or instrument constitutes an agreement by the creditor to accept the check in full settlement of claims. In analyzing such a fact pattern, a creditor or debtor will have little guidance from Oregon case law, because there is a scarcity of Oregon case law interpreting the current version of ORS 73.0311, amended in 1997.

Conclusion

    In the practice of construction contract law, where parties (and clients) may often act and enter into agreements first and seek legal counsel second, a prudent practitioner should always consider and evaluate all three of the above contract theories. The theories should be considered in any case involving a client's resolution of (or attempt to resolve) claims on a construction project, as well as in relation to other creditor/debtor disputes. The distinctions among the three theories of accord and satisfaction, executory accord, and substituted contract can significantly affect a client's procedural and substantive rights at trial.

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