Part Payment as Good Consideration

From Pinnel’s Case (1606) to Collier v P & M J Wright (2007), the issue of whether part payment of a debt should amount to good consideration in contract law has been a continuous reason for debate – indeed, the debate will shortly be 411 years-old. This article will be concerning itself with a brief overview of the major cases on part payment of a debt and when this could, or – in the author’s opinion – when it should – amount to valid consideration.

The cornerstone of the principle that solely full payment of a debt can amount to consideration is Pinnel’s Case (1606). The often-quoted judgment by Sir Edward Coke asserts that “Payment of a less sum on the day in satisfaction of a greater, cannot be any satisfaction of the whole. The gift of a horse, hawk, robe etc. in satisfaction, is good.” Since the said judgment, the general approach in the English courts has been that there would have to be something additional – such as the benefit of being paid in advance – provided by the debtor to the creditor, to convert the part payment of a debt into good consideration. It is clear, however, that there will be circumstances when part payment will be desirable – circumstances when the two parties have reached an agreement “by their own act or with their own consent” – and when it could, therefore, be justly regarded as consideration.

A DESIRABLE APPROACH

The more recent case of Collier v P & M J Wright appears to be commending such a line of reasoning. In the 2007 Court of Appeal case, a debtor who was held jointly liable with two others to pay a debt by installments, was promised by the creditor to be regarded as severally liable – in light of the insolvency of the other two parties. It was held that the debtor had a reasonable case of promissory estoppel – and so, that it would be inequitable for the creditor to refuse to acknowledge the promise. The basis of the decision was the “brilliant dictum” by Denning J in the High Court High Trees (1947) case, when promissory estoppel was first explained, to deal with part payment.

Another important case is that of D & C Builders v Rees (1965), which shows that there must be true accord between the parties to the initial contract if the creditor is to forgo part of the payment owed. In this case, Mrs Rees, the wife of the defendant, resorted to threats to induce the plaintiffs to accept a smaller payment of the remainder owed to them for their work. The plaintiffs were allowed to recover the full payment owed to them; this decision was based both on the lack of consideration and on the lack of accord, since the agreement was, as stated by Lord Denning, a “settlement procured by intimidation”. It is submitted that, while, in this instance, Pinnel’s Case appears to provide the protection needed by the plaintiffs, because it disregards part payment as consideration – it is likely that, had there been true accord between the parties, such a result might not have been the most desirable one. Lack of accord – as opposed to lack of consideration – seems to be the reason that a just conclusion was reached.

High Trees (1947), the High Court decision which brought about Collier, concerned the letting of a block of flats during wartime. There was an agreement that the flats would be let for half the usual price whilst they remained substantially empty – as they were during the war. It was deemed by Denning J that in the case of a debt which B owes to A, if A has made a promise which is intended to be relied upon by B and if A is aware that B will rely upon it – and B does, in fact rely upon it – then it would be inequitable for A to resile from the promise. The case in question was decided in favour of the plaintiff – who had asked for full payment of the rent from June 1945 onwards – however, the obiter dictum explained that the result would have been very different had the plaintiff asked for full rent for the entire period.

WHERE DOES THE PROBLEM ORIGINATE FROM?

The courts are reluctant to apply promissory estoppel, as used in High Trees, because it would mean avoiding the application of the binding case of Foakes v Beer. The 1884 judgment, however, when viewed in full, does express numerous hesitations in obiter – especially by Lord Blackburn – before concluding that part payment is not consideration. Towards the end of his judgment, he states: “What principally weighs with me in thinking that Lord Coke made a mistake of fact is my conviction that all men of business, whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this often is so.”

It is also telling that Lord Fitzgerald, who pursued a different line of reasoning from Lord Blackburn, still admitted that “I concur with my noble and learned friend that it would have been wiser and better if the resolution in Pinnel's Case had never been come to.”

The firm ratio in Pinnel’s case, it is submitted, should not be viewed in isolation from the lines that follow in Sir Edward Coke’s judgment. When one finds that “The payment of part ought to be pleaded to be paid in full satisfaction: it is not sufficient to aver that it was accepted in full satisfaction”, it becomes a little clearer that, perhaps, an entirely rigid view on the concept of part payment consideration was not the one held by the speaker. Rather, it is submitted, it seems that, had there been a clear statement to “plead” that the payment was to be received in full satisfaction, then perhaps the conclusion of the case might have been different. Foakes v Beer seems to echo this part of the judgment; Lord Fitzgerald also asserts that there has been no statement from the debtor that only part payment is to be expected on his part from the creditor: “Dr. Foakes did not ask for any remission, he asked for time and for time alone.” This seems to reinforce the position that, had there been a clearer statement from the debtor that the lesser sum should have been accepted as full satisfaction, the interpretation of the facts might have been different.

The debate could be extinguished with relative ease by a new ruling by the Supreme Court, which could establish the precise circumstances under which part payment is acceptable as consideration – and, indeed, if promissory estoppel should be regarded as a possibility of avoiding an inequitable result by the courts. Further developments in relation to this question remain to be seen.