An old chestnut: full and final settlement or payment on account?

It is a question that has been around almost as long as money itself: if a debtor offers a smaller sum in settlement of a larger debt, will the creditor settle his claim if he takes the money?

If the question sounds familiar, then the answer may do too: “it all depends on the facts”. More specifically, and hopefully more helpfully, if the money is kept, it will come down to the terms on which it is kept.

If the creditor and debtor agree expressly that the lesser sum will settle the full amount, then that is likely to be the end of the claim. Similarly, if the recipient causes the paying party to believe that the money has been accepted in satisfaction of the claim, and the paying party acts in reliance upon that belief, that too is likely to be the end of the claim.

The question of what the paying party has been caused to believe will be interpreted on an objective basis. In other words, it will be the recipient’s actions that are relevant, not his subjective intention.

If the recipient banks the cheque but informs the debtor at the same time that he is not accepting the debtor’s conditions, the money is likely to be treated as a payment on account. Alternatively, if the cheque is banked and the recipient says nothing, or leaves it more than a day or two to speak up, there is a good chance the claim will be settled.

If you receive a cheque in these circumstances, the most certain way not to settle your claim is to send the cheque back without cashing it. If you decide to keep the money, you need to make it clear that you still intend to pursue the debtor for the balance.

There are some other things to watch out for. If, for example, a debtor offers a smaller sum in full and final settlement, with payment to be made before the contractual due date, then that is much more likely to settle the overall claim if it is accepted. A payment from a third party, for example from an individual director on behalf of a corporate debtor, is also more likely to create a binding settlement.

PLEASE NOTE: this briefing note contains information about current legal issues and is only intended as a general statement of the law – it does not give legal advice. No action should be taken in reliance on this note without specific legal advice.

For further information please contact:

ben horack Ben Horack
Partner, Litigation