There are some instances when a cheque sent in ‘full and final settlement’ will discharge a debt, cautions Barrister Rudi Klein. This article, of great interest to all contractors who’ve suffered payment problems, was originally published in Electrical Ti
This question has arisen in a number of cases and as recently as the case of Andrew Bracken and Ann Trickett v Graham Billinghurst [2003]. Billinghurst carried out work for a Mr.Bracken and a Ms.Trickett. Matters went to adjudication. Eventually Bracken and Ms. Trickett offered to settle for £6,000. Billinghurst sent a cheque made out by a third party - his building company, Advanced Technology Ltd - for £5,000 'in full and final settlement'. The cheque was banked three weeks after receipt. Subsequently Billinghurst was informed the offer of settlement was rejected and the clients were going to pursue the full claim. In the circumstances, said the court, Bracken and Ms. Trickett had accepted the £5,000 in full satisfaction.
The law:
A distinction has to be drawn between debts which are undisputed and those which are disputed. With regard to the former the law relating to part payment of debts was established over four hundred years ago in the case of Pinnel [1602]. Cole owed Pinnel £8-10s-0d (£8.50) due on 11 November. At Pinnel's request, Cole payed £5-2s-2d (£5.11) on 1 October, which Pinnel 'accepted' in full settlement of the debt. He then sued Cole for the balance. The court held that Pinnel would only be bound to accept the smaller sum if Cole had provided some benefit to Pinnel for this concession, or in legal parlance, consideration. In this case Cole had paid the money earlier and had therefore, provided consideration. Unfortunately he lost on a technicality.
A much more modern case is D&C Builders Ltd v Rees (1966). D&C Builders did some work for Mr & Mrs Rees. The work was done with no complaints. But, the builders did not receive the outstanding sum of £482. Months went by and the builders were experiencing financial difficulties. Eventually Mrs Rees offered £300 to settle the matter. The builders agreed to take the cheque for £300 which was honoured. They sued for the balance. Lord Denning in the Court of Appeal gave judgment for the builders. They were not bound to take the £300 in satisfaction of the whole debt because the Rees' had not given any consideration for the builders agreeing to forgo the balance.
Therefore if the amount of A's invoice of £100 is undisputed, B is bound to pay the balance of £50. A further point - the rule in Pinnel's case - that consideration is required for an agreement to accept part payment of an undisputed debt - sounds unduly harsh. Subsequently some exceptions were made. If part payment of the debt is made by a third party, a promise to accept a smaller sum in full satisfaction will be binding on the creditor (where the payment is made on the condition that the debtor is released from the obligation to pay the full amount). This is what occurred in Bracken case, the third party being Advanced Building Technology Ltd.
Amount disputed:
When a cheque is sent in 'full and final settlement' in a situation where the actual amount claimed is in dispute, it is in the interests of both sides to compromise their respective positions or, in legal parlance, achieve accord and satisfaction.
An example is Stour Valley Builders v Stuart (1992). Stour Valley Builders carried out work for Mr & Mrs Stuart. The builders sent a revised account of £10,163 after the Stuarts had disputed some of the items. Eventually the Stuarts sent a cheque for £8,471 in 'full and final settlement'. Two days after the cheque had been cleared the builders informed the Stuarts that the cheque was not accepted in full and final settlement. The builders sued to recover the outstanding balance.
It was argued in the Court of Appeal that the court should adopt the American rule that the banking of a cheque in these circumstances amounted to an acceptance that it was tendered in 'full and final settlement'. The Court refused to go along with this. Instead, it relied upon the Victorian case of Day v McLea: whether there is an agreement to accept a cheque in full and final settlement is dependent upon the creditor's conduct.
Did the creditor cause the debtor to believe that the money was taken in full satisfaction? In this case the builders had made clear, shortly after the cheque had been cleared, that it was not accepted in 'full and final settlement'. The outcome would have been different if there had been significant delay in informing the debtor. Therefore A must inform B, either at the time the cheque is presented (or shortly thereafter) that he does not accept it in 'full and final settlement'. If he fails to do this he will be regarded as having accepted the amount stated on the cheque.
Summary:
The circumstances in which you will be bound by a cheque made out in 'full and final settlement' are as follows:
- The cheque is offered in circumstances where there is a dispute about the amount owed.
- The offer in 'full and final settlement' of the dispute is made at the time the cheque is presented.
- You present the cheque in payment and it is duly honoured.
- At the time of presenting the cheque or within a short time thereafter you fail to inform the payer that the cheque is not accepted in 'full and final settlement'Number 4 in the above list is critical.
Otherwise, as the Court of Appeal explained in another case, Ferguson v Davis; '...paying in and clearance of the cheque [is] a clear and unequivocal acceptance...'
Furthermore, if you bank a cheque from a third party (as in the Bracken case) in "full and final settlement' of a sum (whether or not disputed) owed by your debtor you will have signified acceptance of it as discharge of the debt.
This article was originally published in Electrical Times magazine by Highbury Business Communications - a Voltimum UK Media Partner.
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