In debt recovery contract law, it is a general rule that an agreement that a debtor make a part payment of a debt will not satisfy the obligation to repay the entire debt.
This is because there is no fresh consideration provided for the second agreement and is therefore not binding on the parties.
There is no fresh consideration because a promise to perform an existing legal obligation is not good consideration.
This is commonly called “the rule in Pinnel’s case” from an old English case – Pinnel’s Case (1602) 5 Co Rep 117), and has been built upon in subsequent years, both in the UK and in Australia.
There are of course a number of other factors to consider such as executing deeds of settlement and promissory estoppel.
This article will explain in more detail below.
Settlement of a debt obligation, including the part payment of a debt should be dealt with very carefully. It is vital that you contact a commercial litigation lawyer to negotiate on your behalf
What is Pinnel’s Case?
Pinnel’s Case (1602) 5 Co Rep 117) is a case from the English Court of Common Pleas.
Cole owed Pinnel £8 10s on 11 November 1600. Cole pleaded that Pinnel had agreed to accept £5 2s 6d on 1 October in full satisfaction of the debt. Pinnel then brough the action in Court.
The Court in Pinnel’s case said in obiter dictum:
Payment of a less sum on the day in satisfaction of a greater, cannot be any satisfaction for the whole. The gift of a horse, hawk, robe, etc. in satisfaction, is good.
Personally, I really enjoy reading these old English cases, but they can be difficult to understand.
This essentially says that the payment of a pre-existing obligation is not good consideration for a second alleged agreement to accept part-payment in satisfaction of the whole.
Whereas, if Cole had provided fresh consideration, such as the gift of a horse, hawk, robe then this second agreement may be legally binding.
What is Consideration?
Butterworths Concise Australian Legal Dictionary defines consideration as:
The price, detriment, or forbearance given as value for a promise
Also defined as:
A contract is generally binding if the promise is supported by consideration
Also defined as:
Expressed in terms of benefit and detriment, a valuable consideration may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or some responsibility given suffered or undertaken by the other.
So, consideration is essentially the value exchanged between the parties to a contract.
The legal concept of consideration is not the subject of this article, but typically if you buy something from a shop, the consideration from the purchaser is the money, and the consideration from the seller is the goods sold.
Forbearance as Consideration
In law, forbearance is consideration.
Forbearance to sue is the promise not to sue a party for a legal entitlement.
In Callisher v Bischoffsheim (1869–70) LR 5 QB 449 the Court said:
The authorities clearly establish that if an agreement is made to compromise a disputed claim, forbearance to sue in respect of that claim is a good consideration
Callisher above was followed in Queensland in Firearm Distributors P/L v Robert James Carson & Ors [2000] QSC 159 at [20] where Chesterman J said:
The promise to pay the agreed amount of compensation was, I think, supported by consideration moving from the plaintiff. It gave up its right to claim compensation in excess of the agreed sum. That this amounts in law to valuable consideration is clear.
In the context of debt recovery, the debtor has defaulted, and the creditor is legally entitled to commence legal action for breach of contract.
An agreement not to exercise that legal right is the creditor’s consideration in any new agreement in relation to compromise or repayment.
However, consideration must pass from both parties, as without valid consideration there cannot be a legally binding contract.
The law has evolved to establish a number of exceptions to the rule in Pinnel’s Case.
Exceptions to the Rule in Pinnel’s Case
The case law has evolved over the years to create a number of exceptions to the rule in Pinnel’s case.
The exceptions to the rule in Pinnel’s case include:
- Payment accompanied by fresh consideration;
- Prepayment of debt at the creditor’s request;
- Payment of a lesser sum at another place at the creditors request;
- A contract with creditors after insolvency of the debtor;
- The parties enter into a deed of release; and
- Promissory Estoppel.
These concepts will be explained in more detail below.
Payment Accompanied by Fresh Consideration
The rule in Pinnel’s case exists essentially because fresh consideration was not provided for the secondary agreement (the agreement to accept part-payment in satisfaction of the whole).
So, if the debtor provides some fresh consideration, that is consideration which does not form part of the original agreement, then this may constitute a legally binding agreement.
In Hartley v Ponsonby [1857] EngR 605 the Court considered a case where a ship set sail from London to Australia, then it was contracted to leave and sail via China or India back to the UK. Upon reaching Australia, 16 of the crew decided not to continue with the voyage. The remaining crew were promised extra wages if they continued with the second leg or the voyage. Upon reaching the UK the ship company refused to pay stating they were doing what they had originally contracted to do. The Court said:
It appears that the captain, at the time when he made the contract, was striving to persuade the crew to undertake a risk which they were not bound to undertake: a sufficient consideration therefore arises from their undertaking it.
In Pinnel’s case they say that if the debtor were to also provide the creditor with the gift of a horse, hawk, robe, etc. then the agreement would be good, as it is supported by fresh consideration.
Fresh consideration from the debtor to the creditor, as defined above, can be some right, interest, profit, or benefit accruing to the one party.
The concept of legal consideration is sometimes difficult to understand so we would always advise speaking with a legal professional.
Pre-payment of Part Payment of a Debt at the Creditor’s Request
Prepayment of part of a debt prior to the date for payment may be fresh consideration if it provides a benefit to the creditor and has been made at the creditor’s request.
In fact, in Pinnel’s case the Court said:
[A]cceptance of parcel before the day in satisfaction of the whole, would be good satisfaction in regard of circumstances of time; for peradventure parcel of it before the day would be more beneficial to him than the whole at the day.
If the part payment of the debt is made early, as agreed between the creditor and the debtor, this this may form a fresh contract.
In Foakes v Beer [1884] UKHL 1 Lord Blackburn quoting Lord Coke in Littlejohn Co. Litt. 212 b the Court said:
[W]here the condition is for payment of £20, the obligor or feoffor cannot at the time appointed pay a lesser sum in satisfaction of the whole, because it is apparent that a lesser sum of money cannot be a satisfaction of a greater. … If the obligor or feoffor pay a lesser sum either before the day or at another place than is limited by the condition, and the obligee or feoffee receiveth it, this is a good satisfaction.
Lord Blackburn then went on to say:
[P]ayment before the day might be more beneficial, and consequently that the plea was in substance good, and this must have been decided in the case.
However, Foakes v Beer also said that payment at another place can be good consideration.
Payment of a Lesser Sum at Another Place at the Creditors Request
As above, the Court in Foakes v Beer said:
If the obligor or feoffor pay a lesser sum … at another place than is limited by the condition, and the obligee or feoffee receiveth it, this is a good satisfaction
This was also considered in Pinnel’s case when the Court said:
So if I am bound to pay you at Westminster and you request me to pay you at the day at York, and you will accept it in full satisfaction of the whole it is a good satisfaction for the whole for the expenses to pay it at York, is sufficient satisfaction
Again, this is a matter of consideration. If the creditor agrees to accept less if paid in another place other than stipulated in the initial agreement, then the detriment on the debtor to get to that second location may be consideration for the secondary agreement.
A Contract with Creditors after Insolvency of the Debtor
An agreement by a debtor and its/his/her creditors for payment to creditors in an insolvency appointment will discharge the balance of the debt.
This type of arrangement, either formal or informal, will usually be resolved by way of a deed of settlement and release, or a deed of company arrangement (“DOCA”).
The Parties Enter into a Deed of Release – Part Payment of a Debt
The difference between an agreement and a deed is that a deed does not require consideration for it to be binding on the parties.
Butterworths Concise Australian Legal Dictionary defines a deed as:
An instrument that has been signed, sealed, and delivered that passes an interest, right, or property, creates an obligation binding on some person, or is an affirmation or confirmation of something which passes an interest, right, or property.
There is no formal requirement to “seal” a deed anymore in Queensland. Section 45 of the Property Law Act 1974 (Qld) says:
An instrument expressed – (a) to be an indenture or a deed; or (b) to be sealed; shall, if it is signed and attested by at least 1 witness not being a party to the instrument, be deemed to be sealed and, subject to section 47 , to have been duly executed.
Therefore, because there is no need for fresh consideration, a duly executed deed of settlement is legally binding on parties, and if agreed, can allow for part payment of a debt.
Deeds are commonly used in debt recovery proceedings to settle the matters early outside of Court.
Please contact us if you need to have a settlement deed drafted.
As well as the above, a party may also be able to rely on the equitable doctrine of estoppel.
Promissory Estoppel
Promissory estoppel or can be relied upon when a party has relied upon a promise or representation made by another party, and then that party acts inconsistently to the detriment of the relying party.
The test for promissory estoppel was provided in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 where the Court essentially said that promissory estoppel requires the following elements:
- an unequivocal promise by words or conduct;
- evidence that there is a change in position of the promisee as a result of the promise (reliance but not necessarily to their detriment);
- inequity if the promisor were to go back on the promise.
In the High Court case of Legione v Hateley (1983) 152 CLR 406 Mason and Deane JJ said:
[T]here is strong authority in equity for a limited doctrine of promissory estoppel – representations (or promises) as to future conduct – restricted to precluding departure from a representation by a person in a pre-existing contractual relationship that he will not enforce his strict contractual rights
In Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 quoting Ajayi v. R.T. Briscoe (Nigeria) Limited Brennan J said at [31]:
… when one party to a contract in the absence of fresh consideration agrees not to enforce his rights an equity will be raised in favour of the other party. This equity is, however, subject to the qualifications (1) that the other party has altered his position, (2) that the promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position, (3) the promise only becomes final and irrevocable if the promisee cannot resume his position.
So, in relation to part payment of a debt, if the creditor agrees to accept a part payment in satisfaction of the entire debt, outside of the exceptions above, and then after payment seeks to recover the balance (because of lack of a binding agreement) – then the debtor may seek to rely on promissory estoppel, and seek to estop the creditor from denying the promise.
Part Payment of a Debt in Queensland
The principles above have been considered in a large number of cases in Queensland and have been given some scrutiny.
In Cheshire Contractors Pty Lt v Everett [2018] QSC 228 Henry J said:
Another argument advanced was that the December 2011 promise was binding as a contract. How could that be? The rule in Foakes v Beer, that the consideration for discharging an indebtedness cannot consist of a promise to pay later, remains good law in Queensland.
In Terrblance v Jewell [2012] QDC 362 McGill SC DCJ said:
Ordinarily payment of a lesser sum in discharge of a larger obligation is not conclusive, because no consideration is given for the promise to accept payment of the lesser amount. However, in circumstances where there is something additional about the payment, such as the timing of it, or where the payment is made to resolve a bona fide dispute between the parties, the agreement to accept the lesser sum will be enforceable.
In Equuscorp Pty Ltd & Anor v Glengallan Investments Pty Ltd & Ors [2006] QCA 194 McPherson JA said:
In the ordinary way, the enforcement of a promise to that effect might be expected to meet with the decision in Foakes v Beer … holding that a promise to pay, or the payment of, a lesser sum does not in law discharge an existing indebtedness for a larger amount.
In Mitchell v Pacific Dawn P/L [2003] QSC 86 B W Ambrose J said:
It has long been the rule that, without more, a debtor may not rely upon the agreement of a creditor to accept in full discharge of a debt owed to him a sum less than that owed. The rule, known as the rule in Pinnel’s case, is founded upon the lack of any consideration passing from the debtor to the creditor in such a case. The rule was confirmed in Foakes v Beer
In Amos v Citibank Ltd [1996] QCA 129 Davies J.A. said with McPherson J.A. and Ambrose J. agreeing:
A decision to that effect means that it is not strictly necessary to consider a further matter argued by the appellant, which is that the compromise or “settlement” of a valid indebtedness is capable of being effected by payment of less than the full amount of the debt … Bereft of that support for it, the appellant is confronted by the decision in Foakes v. Beer … holding that in law the consideration for discharging an indebtedness in a particular sum cannot consist of a promise to pay, or the payment of, a lesser amount of money
In Pennisi, M. v Wilkinson, R. [2007] QCCTB 19 Mr B Butler AM SC said:
There is a longstanding rule of English law that a promise by a debtor to pay part of the debt or the payment of part of the debt is no satisfaction for the whole debt. This rule was given expression in contract law in the decision of the House of Lords in Foakes v Beer which held that payment of a lesser sum than that owed cannot be consideration for discharging the whole of the debt.
So, save for a few exceptions, the rule in Pinnel’s case, supported by Foakes v Beer has been followed and distinguished a number of times in Australia and in Queensland Courts.
Part Payment of a Debt – The Rule in Pinnel’s Case
Part payment of a debt will not satisfy the obligation to repay the entire debt, except in a few circumstances or if drafted in a duly executed deed of settlement.
Sometimes, there are circumstances which require the part payment of a debt. In those circumstances it is vital that you get suitably qualified legal advice.
Settlement of a debt obligation, including the part payment of a debt should be dealt with very carefully. It is vital that you contact a commercial litigation lawyer to negotiate on your behalf
