Watch Out for that Waiver!

PART 1

Credit professionals fight a daily battle with their customers to control their employers’ risk while also increasing the company’s ability to make sales. The conflict is manageable, but it often puts credit managers and other similarly situated employees in the difficult position of deciding how to resolve disputes with their customers.

Quite often, while striving to placate the customer, the credit manager may make decisions that ultimately are not the best for the company from a legal perspective. In part one of this article, we will discuss several legal concepts which come into play that credit managers should be aware of so that they continue to act in the company’s best interests.

The first of these concepts is “accord and satisfaction.” Although the term is not used much by the public or even by the legal community, the “accord” is the agreement. “Satisfaction” is the performance of that agreement.

Thus, the term “accord and satisfaction” is the agreement between the parties and the performance of that agreement to resolve the dispute. “Accord and satisfaction” is used as a defense against claims by one party that another party has breached a contract.

In order for an “accord and satisfaction” to come into play, there must first be a dispute between the parties. For example, homeowner enters into a contract with contractor to renovate a room in homeowner’s house.

The relationship breaks down with homeowner accusing contractor of failing to perform the contract on a timely basis and finishing the project in a manner that was different than homeowner requested. Contractor alleges that homeowner continually changed his mind thus delaying the project and that homeowner provided the finishes that contractor was expected to use.

Contractor would like to get paid what he believes he is owed under the contract. Homeowner wants to have the room completed to his satisfaction. In order to resolve their dispute, homeowner and contractor enter into an “accord” that contractor will repaint the room a different color and homeowner will, in exchange, pay contractor the remaining amounts owed under the contract.

Contractor subsequently performs the painting and homeowner pays contractor. Homeowner later decides that he still not happy and wants to sue contractor for the loss of use of the room and other damages homeowner believes that contractor caused. In the suit, contractor will assert that the parties entered into an “accord and satisfaction,” which resolved any outstanding issues between the parties.

The result of the “accord and satisfaction” is that the original contract is discharged once the new contract is entered into between the parties. It is no longer possible for homeowner to go back to the original contract and assert damages that may have arisen under that contract.

The “accord and satisfaction” settles the dispute. The new agreement is substituted for the old agreement. An “accord and satisfaction” is a type of settlement agreement.

The lesson of the “accord and satisfaction” is to be aware of what rights you are giving up by entering into a compromise agreement with a party. Unless you specifically preserve your full rights and assert that those rights can be exercised if the party defaults on the compromise, you have potentially lost those rights.

The terms “compromise and settlement” are often used by legal professionals to designate those agreements whereby the parties have agreed to resolve their disputes by some form of negotiated agreement.

An “accord and satisfaction” and a “compromise and settlement” are both contracts between the parties. Most times these new agreements supersede the old agreements. If that is not intended to be the case, you should seek the help of legal professional to preserve any rights that you may wish to exercise later if a default occurs.

The next concept is “waiver.” Both the “accord and satisfaction” and “compromise and settlement” are forms of waiver. Rights that a party has may be waived by not enforcing those rights or by not enforcing them on a timely basis.

You may also waive a party’s default by the failure to take some action upon default. “Waiver” is a voluntary relinquishment of a right. Waiver may be express, such as: “I agree not to sue you if you pay me $1,000.00.” Waiver may also be implied.

For example: homeowner hires party contractor to install new flooring in homeowner’s living room. Contractor arrives on the appointed day and time and installs the carpet. At the end of the installation, contractor advises homeowner that the carpet is not the exact brand that homeowner ordered, but is a higher quality carpet with a better warranty.

Homeowner inspects the carpet, says nothing more and pays contractor for the installation. Homeowner has given contractor an implied waiver of the obligation to install the exact carpet that homeowner originally ordered.

One of the more common phrases included in commercial contracts and other similar payment obligations is the following language: “No action or lack of action on the part of any Party at any time to execute any rights conferred upon it under this contract shall be a waiver of any of its rights or remedies hereunder.”

The purpose of such a clause is to preserve a party’s rights and to prevent the assertion of the defense of “waiver” should litigation occur. In the real world, the application of this language allows a creditor to continue to work with a debtor despite a default in payments. Otherwise, a creditor might be forced into litigation immediately upon the first default of a debtor; an undesirable result for most creditors.

Payment from one party to another is a form of conduct that may create a waiver, particularly if payment is the “satisfaction” of an “accord and satisfaction.” If a party asserts “payment” as a defense, they are arguing that you, as the creditor, cannot assert certain rights because you have already received payment.

This might sound simple to detect, but in a complex business relationship, it is not always apparent, particularly if the parties later modify their agreement from the original agreement.

The final concept is “estoppel.” Upon first blush, it may appear to some that “estoppel” and “waiver” are the same idea, but they are not.  A simple definition of “estoppel” is that a party is precluded from asserting rights when the conduct of that party renders the assertion of those rights inequitable.

For example, homeowner contracts with a real estate agent to show and sell homeowner’s home. The term of the contract is six months. After the contract has expired, the agent brings a buyer to the homeowner. The homeowner allows the agent to show the home, handle all of the closing formalities and ultimately sell the house.

Homeowner subsequently disputes that the agent is entitled a commission because the agent’s contract had expired. Homeowner is estopped from denying the agent’s commission because homeowner’s conduct in allowing the agent to perform all aspects of the sale led the agent to believe the contract was extended in its terms by the homeowner. Not allowing the agent a commission would be inequitable.

The conduct by the homeowner and the reliance on that conduct by the agent are at the heart of the facts that constitute an estoppel. Estoppel can also be thought of as one party taking a position that is inconsistent with an earlier position or course of conduct by that party. The change of that position harms the other party.

Each of the above concepts arises out of the relinquishment of rights by a party. There is no requirement that any of the above concepts be memorialized in writing.

However, if parties fail to properly document their agreement, they remain open to the assertion of these concepts in defense of attempts by a creditor to collect monies or assert other rights. For legal practitioners, these are affirmative defenses that should be asserted in a responsive pleading to a creditor’s lawsuit.

In part two of this article, we will explore methods and documents that parties can use to memorialize their agreement, preserve rights and surrender rights in exchange for payment.       

The foregoing is written for educational purposes only and should not be relied upon as legal advice. It should not be utilized as a substitute for the professional services of an attorney.  If legal advice is required, the services of a professional should be sought.  Please contact Kurtz Law, PLLC for assistance with legal matters.