Settlement as Substituted Contract or Accord–Lane House Construction

Lane House Construction, Inc. v. Ogrowsky, 2013 WL 5775046 (Mo. App. E.D.), presents the question whether a settlement, in the form of a promise to pay a sum, operates as an accord or a substituted contract.  The important distinction here is that if the payment is not made:

  • If the settlement is an accord, the failure to satisfy the accord allows the party owed payment to sue on the original obligation.
  • If the settlement produces a substituted contract, the failure to perform the substituted contract does not allow the payee to seek recovery under the original contract.

See Restatement (Second) of Contracts §§ 279, 281.

In a dispute concerning installation of a roof, the parties apparently agreed to settle the dispute with the homeowner to pay a portion of the amount sought by the contractor.  There was it appears not payment under the settlement.  So, the question, of course, is whether the settlement was for a substituted contract or an accord.

Appellant’s (customer’s) brief recites:

The case was set for a bench trial on May 3, 2012. On that day, May 3, 2012, Plaintiff Lane House Construction and Defendant Ogrowsky met at the courthouse and after some discussion, it was agreed that Defendant would pay Plaintiff $2,000.00 and the lawsuit would be settled. LF 64. Accordingly, the parties announced that the matter could be passed for settlement. LF 14. The “passed for settlement Order” was signed by the attorneys for Plaintiff Lane House and Defendant Ogrowsky, endorsed by the Judge in Division 42W, and filed by the Clerk. Id.

Plaintiff Lane House and Defendant Ogrowsky, through their attorneys, agreed to ask for a continuance from the May 11, 2012 date the Court set for disposition of the lawsuit. LF 15-16, 64. There also were discussions about the contents of a settlement agreement or release; whether or not a mutual dismissal with prejudice would serve as a complete and adequate settlement agreement; and whether Defendant Ogrowsky would pay the $2,000.00 before or after the fully-executed mutual dismissal with prejudice would be filed with the Court. Id. There is no record that the May 11, 2012 court date was continued or that any appearance was made on that day. In any event, the trial court dismissed all claims for failure to prosecute June 4, 2012, on its own motion. LF 17.

The appellant references Wenneker v. Frager, 448 S.W.2d 932 (Mo. App. 1969), which states:

These two cases lead us to conclude that an open court agreement to settle a pending lawsuit, accompanied by a stipulation that the cause be passed for settlement, terminates the cause of action and creates a new obligation warranting a judgment in accordance with the terms of settlement. In Farmer v. Arnold, Mo., 371 S.W.2d 265(3) the court said ‘a compromise and settlement ‘operates as a merger of, and bars all right to recover on, the claim or right of action included therein“, citing 11 Am.Jur., Compromise and Settlement, ss 23—24, p. 271.

On the other hand, the contractor, now seeking to recover on the original contract, references assorted authority treating the settlement as an accord.

A Question of Interpretation

More after the break ….

A Not-Very-Thougthful Way to Proceed

What we have here is a question of contract interpretation–what does the settlement mean?  In that kind of circumstance, it is frankly not very thoughtful to simply recite citations to some other cases that hold a settlement is an accord or a substituted contract.  Why?  Well, the context matters.  So, let’s see what some treatises say.

What Is the Bias?

Murray on Contracts § 145 states, “Doubtful cases are resolved in favor of an intention to create an accord since an obligee is less likely to accept a mere promise in satisfaction of the original duty.”  A more nuanced, albeit not directly on-point discussion, is in the comments in the Restatement, which indicate a preference for an accord where the original promise is definite and the accord is not.  That seems reasonably odd as a choice for an illustration, because one would expect the more typical case to be one where the import of the original agreement is not clear, and the subsequent settlement is clear.

Here’s Corbin on Contract’s,  § 71.1 (footnotes omitted), take on the subject:

It is frequently difficult to determine whether a new agreement is a substituted contract operating as an immediate discharge or is an executory accord requiring the performance of the agreed promise before the future discharge occurs. The question is wholly one of intention, to be determined by the usual processes of interpretation, implication, and construction, gleaned from the expressions of the parties. Most compromise agreements are executory accords because of the contemplated timing of the discharge of the original claim. However, a compromise may be a substituted contract, especially if the agreement is a compromise of a disputed, unliquidated, or doubtful claim. “This is because it is assumed that the creditor enters into the new agreement to obtain the certainty of a promise rather than the uncertainty of an unliquidated claim.” Likewise, the Restatement (Second) of Contracts takes the position that when interpreting the agreement of the parties, if the claim or duty is unliquidated or doubtful, the compromise agreement is more likely to be declared by the court to be a substituted contract and if the duty is undisputed, liquidated and mature, it is more likely to be declared an executory accord. The goal of interpretation is to ascertain the intent of the parties from the evidence.

Applying the Thoughtful Authority

What does this tell us?  A court should not simply state that in some other deal something was or was not treated as an accord, and do the same in this case.  Rather, a thoughtful court would need to reference the nature of the agreement.

It appears the consumer initially claimed that the performance was inadequate and should not be responsible for the full price.  So, here we have something that liquidates a disputed claim.  So, one cannot reject out-of-hand that this is the type of arrangement Corbin indicates should be treated as giving rise to a substituted contract.

Provide a Public, Thoughtful Answer

I regret to say I would not be surprised for the court to elide the fine nuance, and simply treat a settlement as inherently giving rise to an accord.

In the course of reviewing decided cases over the last few months, there does seem to be repeating pattern in which cases presenting material issues are the subject memoranda that are not widely released.  This case presents an important issue, and I hope the court will favor the bar with thoughtful discussion that is reported in the ordinary public venues (not the subject of a private memorandum).