Chapter 7Introduction to the law of contracthas been shown. It should be noted that payment by
cheque rather than by cash does not necessarily release
a debtor from his obligation to pay the full amount.
3 A promise to accept a smaller sum in full satisfaction
will be binding on a creditor where the part payment is
made by a third party on condition that the debtor is
released from the obligation to pay the full amount
(Hirachand PunamchandvTemple(1911)).
4 The final exception is provided by equity. You will
remember from Chapter 1 that equity is a system of
law based on the idea of fairness and doing right accord-
ing to conscience. The rule about part payment would
seem an ideal candidate for intervention by equity. It
seems very unfair that a court will support a person who
has gone back on his word, especially where the agree-
ment to accept a lesser amount has been relied upon.
The equitable rule of promissory estoppel which was
developed by Denning J in the High Treescase may pro-
vide some assistance.219
Stour Valley Buildersv Stuart(1993)The claimants were a small firm of builders. They carried
out some work for Mr and Mrs Stuart. On completion
of the work, the claimants submitted a bill which, after
deductions for payments on account, came to £10,204.
Following a query by Mr Stuart, the bill was revised to
£10,163. Mr Stuart continued to dispute an amount of
£3,000 but made an offer to settle of £8,471. He wrote to
the claimants enclosing a cheque for £8,471 ‘in full and
final settlement’. The claimants paid the cheque in to
their bank account but, after seeking advice from their
solicitor the following day, contacted Mr Stuart to say
that they would not accept the cheque in full settlement.
The Court of Appeal held that although cashing in of a
cheque is strong evidence of agreement, if, as in this
case, the banking of the cheque was closely followed
by a rejection of the offer to settle, there could be no
‘accord and satisfaction’ so as to discharge the debt.
Comment. Another example of this principle can be
found in the decision of the High Court in Inland
Revenue CommissionersvFry(2001). Mrs Fry owed the
Inland Revenue £113,000. Her husband wrote to the
Revenue enclosing a cheque for £10,000. He stated that
if the Revenue presented the cheque for payment it
would be taken as acceptance of the offer of £10,000 in
full and final settlement of Mrs Fry’s liabilities. Unknown
to Mr Fry, the procedure in the Revenue’s post room was
to send all cheques to the cashier’s section for banking
and to send any correspondence to the appropriate
caseworker. As soon as Mr Fry’s letter reached the
caseworker, she telephoned Mr Fry to say that although
the cheque had been banked his offer to settle had not
been accepted. The High Court held that the encash-
ment of the cheque by the Revenue had not discharged
Mrs Fry from the obligation to pay the full amount.
As Jacob J put it: the ‘Cashing of a cheque gives rise to
no more than a rebuttable presumption of acceptance
of the accompanying letter. That presumption is fully
rebutted here’.2 The rule does not apply to a composition agreement.
This is where a debtor agrees with all his creditors to pay
so much in the £ of what he owes. Provided that the
debtor honours the agreement, a creditor cannot sue for
any outstanding sum.
Central London Property Trust Ltdv
High Trees House Ltd(1947)
In 1937 the claimants granted a 99-year lease on a block
of flats in London to the defendants at an annual rent of
£2,500. Owing to the outbreak of war in 1939, the defend-
ants found it very difficult to get tenants for the flats and
so in 1940 it was agreed that the rent should be reduced
to £1,250. By 1945 the flats were full again and the
claimants sued to recover the arrears of rent as fixed by
the 1937 agreement for the last two quarters of 1945.
Denning J held that they were entitled to recover this
money, but if they had sued for the arrears from 1940–
45, the 1940 agreement would have defeated their claim.
The defendants had relied upon the reduction in rent and
equity would require the claimants to honour the
promises contained in the 1940 agreement.Thus, it seems that if a person promises that he will
not insist on his strict legal rights, and the promise
is acted upon, then the law will require the promise to
be honoured even though it is not supported by
consideration.
The following points should be noted about promis-
sory estoppel:
1 The rule can only be used as a defence and not as
a cause of action. In the words of Birkett LJ in Combe
vCombe(1951), promissory estoppel must be ‘used as
a shield and not as a sword’. Consideration is still an
essential requirement for the formation of a contract.
The principle was confirmed in the following Court of
Appeal case.