Future Business Leaders of America (FBLA) Business Law Practice Exam

What is the term for a legal method to resolve contractual disputes where one party accepts less than the owed amount?

1. Arbitration

2. Accord and satisfaction

3. Compromise agreement

4. Waiver

The correct answer is: Accord and satisfaction

The correct answer is "accord and satisfaction," which refers to a legal method for resolving contractual disputes in which one party agrees to accept a payment that is less than what is originally owed. This process involves two steps: the accord, which is an agreement in which one party agrees to settle the debt for a different amount or form of payment, and the satisfaction, which is the execution of that agreement. This mechanism is significant because it allows parties to find a mutually agreeable solution without resorting to litigation, which can be costly and time-consuming. By agreeing to a lesser amount, the creditor may prioritize immediate cash flow over the potential of collecting the full amount, especially if there are doubts about the debtor's ability to pay in full. The other options describe different concepts. Arbitration involves using a neutral third party to resolve disputes outside of court, which can differ from the context of resolving a specific debt issue. A compromise agreement generally refers to a broader resolution of a dispute but may not specifically involve the acceptance of a lesser payment. A waiver involves giving up a right, which does not align with the essence of a contractual modification through accord and satisfaction.