English law does not enforce gratuitous promises unless they are made by deed. Consideration has to be provided as the price of a promise. This is equally the case where a party promises to give up some existing rights that they have. Thus, at common law, if A owes B £10, but B agrees to accept £5 in full settlement of the debt, B’s promise to give up existing rights must be supported by consideration on the part of A. This principle, that a payment of a lesser sum cannot be any satisfaction for the whole, was originally stated in Pinnel’s case (1602), and reaffirmed in Foakes v Beer (1884).
This principle has been reconfirmed in the more recent case of Re Selectmove Ltd (1994). In this latter case, the company owed the Inland Revenue outstanding taxes. After some negotiation, the company agreed to pay off the debt by instalments. The company started paying but, before completion, it received a demand from the Revenue that the total be paid off immediately. The company relied on the authority of Williams v Roffey Bros (1990), which had established that the performance of an existing duty could, under particular circumstances, amount to valid consideration for a new promise. On that basis it was argued that its payment of the tax debt was sufficient consideration for the promise of the Revenue to accept it in instalments. The Court of Appeal held, however, that situations relating to the payment of debt were distinguishable from those relating to the supply of goods and services, and that in the case of the former the court was bound to follow the clear authority of the House of Lords in Foakes v Beer.
However, there are a number of situations in which the rule in Pinnel’s case does not apply. The following will operate to fully discharge an outstanding debt:
(i) payment in kind
Consideration can take the form of money or money’s worth. In other words, something or action may adequately support a promise, and A may clear an existing debt if B agrees to accept something else instead of money. It is important to note that payment by cheque is no longer treated as substitute payment in this respect (See D & C Builders Ltd v Rees (1966)).
(ii) payment of a lesser sum before the due date of payment
Such payment has of course to be acceptable to the party to whom the debt is owed.
(iii) payment of a lesser sum by a third party
Where a third party intervenes to pay off the existing debt, albeit with a lesser sum, then the original creditor is not allowed to break their agreement with that party by taking subsequent action against the original debtor (Welby v Drake (1825)).
(iv) a composition arrangement
This is an agreement between creditors to the effect that they will accept part-payment of their debts. As they have entered into a binding agreement to that effect, the individual creditors cannot subsequently seek to recover the unpaid element of the debt (Good v Cheesman (1831)).
(v) promissory estoppel
The equitable doctrine of promissory estoppel sometimes can be relied upon to prevent promisors from going back on their promises. The doctrine first appeared in Hughes v Metropolitan Railway Co (1877) and was revived by Lord Denning in the High Trees case (Central London Property Trust Ltd v High Trees House Ltd (1947)).
Applying the foregoing to the facts of the problem leads to the following results:
Bi
As Ari agreed to accept Bi’s offer to do his accounts as part payment of his outstanding debt there is nothing further he can do to recover any more money. By accepting payment in kind his situation is covered by exception (i) above to the rule in Pinnel’s case.
Cas
By accepting lesser payment from a third party, i.e. Cas’s father, Ari is covered by exception (iii) above to the rule in Pinnel’s case and he can take no further action against Cas.
Dex
Dex acted unilaterally and did nothing additional to compensate Ari for his part payment. Consequently Dex is covered by the general rule in Pinnel’s case and remains liable to pay Ari the remaining half of his bill (D & C Builders v Rees and Re Selectmove Ltd). |
