Part-payment cheques in full and final settlement of debts

Update, 24 July 2019: See now Simantob v Shavleyan [2019] EWCA Civ 1105, with an emphasis on the requirements for good consideration where part-payment is to be accepted in full satisfaction of a debt, well analysed here: http://bit.ly/2SDEqT4.

Update, 26 February 2011: For the decision in the appeal from the case originally the subject of this post, see J P Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3.

Updates, 3 August 2010: For an application of these principles in the context of an offer of compromise made in a dispute about party party costs, see Amos v Monsour Pty Ltd (formerly Monsour Legal Costs Pty Ltd) [2010] FCA 741.  For a Victorian authority of high pedigree on the subject, see the old decision of the in F T Jeffrey Pty Ltd.v. Evington Holdings Pty Ltd, unreported, Full Court of the Supreme Court of Victoria, 24 November 1977 (Young CJ, Lush and Fullagar JJ), a decision favoured by Richard Manly SC who brought it to my attention.

Original post: I have never really known what to do when a cheque in part-payment of a debt is received under cover of a letter which says that if the recipient banks it, it will be taken to be in full and final settlement of the debt.  Had I been asked urgently to advise, I would probably have said the client should bank it and sue for the difference.  The issue arose recently in JP Morgan Australia Limited v Consolidated Minerals Limited [2010] NSWSC 100 where the debt was for $50 million and the cheque for $20 million.  Justice Hammerschlag said the law is — it all depends:

‘141 Where a cheque is sent in full settlement of existing liabilities, the mere retention is not conclusive of an accord. It is a question of fact as to what the terms upon which the cheque is retained are: Day v McLea (1889) LR 22 QBD 610; Bagnall v National Tobacco Corporation of Australia Ltd (1934) 34 SR (NSW) 421; Wiseman v MQH Developments (Supreme Court of Victoria, Chernov J, 19 May 1997, unreported).

142 Instances where acceptance of a cheque in full and final settlement has been found to have brought about an accord and satisfaction include Wicks v First National Picture (Australasia) Ltd (1931) 31 SR (NSW) 427 and Homeguard Products v Kiwi Packaging [1981] 2 NZLR 322.’

The full reasoning in relation to this point is set out below.  It contains a handy precis of the law of accord and satsifaction, which is res judicata’s equivalent where a dispute is resolved by agreement rather than adjudication.

‘ACCORD AND SATISFACTION

The law

138 In McDermott v Black [1940] HCA 4; (1940) 63 CLR 161 at 183-4 Dixon J said:

The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised.

139 The question is whether the parties entered into a binding agreement under which the plaintiff agreed to take the defendant’s cheque in satisfaction of its existing claim: Osborn v McDermott [1998] 3 VR 1 at 10; Illawong Village Pty Limited v State Bank of New South Wales [2004] NSWSC 18 at [261]– [264]. The plaintiff must show “a concurrence of minds, a consensus”: FT Jeffrey v Evington Holdings Pty Ltd (Receiver and Manager Appointed) (Supreme Court of Victoria, Full Court, 24 November 1977, unreported) per Fullagar J at 135.

140 Whether an agreement has been entered into is to be objectively assessed: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at 105 [25]; Franklins Pty Limited v Metcash Trading Ltd [2009] NSWCA 407 at [4]; McMahon’s (Transport) Pty Ltd v Ebbage [1995] 1 Qd R 185 at 195. The objective theory of contract requires an external manifestation of assent to an offer. Whether there has been such an assent turns on whether a reasonable bystander would regard the conduct of the offeree as signalling to the offeror that his offer has been accepted: Empirnall Holdings Pty Limited v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 534-5.

141 Where a cheque is sent in full settlement of existing liabilities, the mere retention is not conclusive of an accord. It is a question of fact as to what the terms upon which the cheque is retained are: Day v McLea (1889) LR 22 QBD 610; Bagnall v National Tobacco Corporation of Australia Ltd (1934) 34 SR (NSW) 421; Wiseman v MQH Developments (Supreme Court of Victoria, Chernov J, 19 May 1997, unreported).

142 Instances where acceptance of a cheque in full and final settlement has been found to have brought about an accord and satisfaction include Wicks v First National Picture (Australasia) Ltd (1931) 31 SR (NSW) 427 and Homeguard Products v Kiwi Packaging [1981] 2 NZLR 322.

143 In Wicks v First National Picture (Australasia) Ltd (1931) 31 SR (NSW) 427 the plaintiff sued to recover damages for wrongful dismissal. He was handed a cheque and asked to sign an acknowledgement of the receipt of the sum “in lieu of notice and in full settlement of all claims against the company”. He signed, adding the words “received under protest” and collected for his own use the amount for which it was drawn. He then brought his action. Street CJ, giving the judgment of the Full Court, said:

On the plaintiff’s own account of what took place, and on the documents which he signed, it is manifest that he was being dismissed from his service with the defendant company and that he was being paid four weeks’ salary in lieu of notice: and by his receipt of the money in full settlement of all claims against the defendant company it is manifest that he accepted the situation and acquiesced in what was done. I think that by his acquiescence he has cut the ground from under his feet.

144 With respect to the plaintiff’s contention that he had received the money “under protest”, Street CJ held:

How can a person who receives money in such circumstances be heard to say at the same time ‘Although I take this money in full settlement of all claims I still reserve my right to assert further claims.’

145 In Homeguard Products v Kiwi Packaging [1981] 2 NZLR 322 a cheque was sent in “full settlement of our account” which was disputed. The offeree made no reply to that communication but instead banked the cheque some days later. The offeree later wrote asserting a right to payment of the higher amount. The Court held that the inevitable inference was that the banking of the cheque was done “in conformity with the condition by which it was accompanied”, that is, in full settlement of the account. The Court held that the offeree had only two choices: either to accept the payment (giving rise to an accord and satisfaction) or to return the cheque. The offeree was precluded from disclaiming the condition on which the cheque was tendered and treating the cheque as payment towards the original amount, “for it could only adopt that course by committing against the appellant the tort of conversion”.

146 However, in McMahon’s (Transport) Pty Ltd v Ebbage [1995] 1 Qd R 185 at 195 Pincus JA said:

The principal argument put forward on behalf of the receivers, challenging the primary judge’s view that there was no accord, was that stated in the New Zealand case of Homeguard Products v. Kiwi Packaging [1981] 2 N.Z.L.R. 322 at 331, where it was said in effect that in this sort of situation the creditor’s retaining and banking the cheque —

“… is conclusive evidence of his assent to the conditions upon which the cheque was sent. So what really matters, irrespective of his intent, is the conduct of the creditor.”

Counsel referred to the “objective theory of contract”, by which was meant that the intention of a party negotiating a contract is in law that which would be reasonably deduced by the other party, not the subjective intention.

But objectivity does not assist the receivers much here; no-one reading the landlord’s responses to the receipt of the cheque could have read them as accepting the condition on which the cheque was proffered. The question, so far as contract is concerned, is whether an offeree who chooses to retain or to dispose of property which has been obtained by him on stipulated terms, while purporting to reject those terms, is bound by them. Here, the problem arises in relation to payment of a cheque, but the same principle is involved if one postulates that some other sort of property — say, cash — is sent on the basis that if the person to whom it is sent keeps it or spends it, he is to be taken to be bound by certain stipulations, as a matter of contract.

The basis on which it is said that one party may effectively force an agreement on another, by telling that other that a certain sort of action (other than assent to the proposal) will be taken to be assent to the terms of the proposed agreement, is unclear. One can understand why, in this area, a distinction is drawn between the case in which the contract when made imposes no obligations on the offeree, as in Carlill v. Carbolic Smoke Ball Co. [1893] 1 Q.B. 256, and that in which it is sought to impose an obligation on the offeree, the obligation coming into existence because the offeree has performed an act stipulated by the offeror — such as, to take Corbin’s example (Vol. 1 p. 310), hanging out a flag on Washington’s birthday.

The question is obviously not merely one of fact, but involves matters of legal principle, such as those just alluded to. The cases on conditional tender of payment, although numerous, give no clear guidance. I, like the primary judge, prefer to follow those in which the Court has rejected the offeror’s assertion that there has been an accord; I do so on the basis that the question is whether there is a contract and that the answer to that question is that there is none, because in general the law does not allow the imposition of an obligation in contract to be achieved by a stipulation that it shall be deemed to be imposed if the prospective obligor performs a stipulated act (other than one by way of express assent to the terms proposed), or does nothing as in Felthouse v. Bindley [1862] EngR 931; (1862) 11 C.B.(N.S.) 869;142 E.R. 1037. Since writing the above, I have noticed the decision of this Court in Citibank Ltd v. Amos (App. 243/1994; 10 May 1996, unreported); the views there expressed are consistent with my conclusion: see pp. 5, 7 of the principal judgment.

I should add that there may be another question, namely whether the property in the cheque passed, as it was proffered on a condition which the profferee would not accept; but that issue has not been raised, the lawfulness of the banking of the cheque being unchallenged.

147 Undoubtedly, each case must be considered on its own facts.

The issues
148 The two issues which arise for determination (both of which are to be determined objectively) are:

(a)  whether the defendant’s letter of 6 February 2008 constituted an offer, a condition of which was that the plaintiff gave up its claim in consideration of the defendant paying $20 million; and

(b)  if so, whether the plaintiff accepted the offer by banking the cheque which the letter enclosed.

The parties’ contentions
149 The defendant puts that:

(a) by 6 February 2008 the parties were at odds with respect to the fee to which the plaintiff was entitled;

(b) its 6 February 2008 letter, objectively construed against the surrounding circumstances known to the parties, was an offer on terms that if the plaintiff banked the cheque it gave up any further claim to fees;

(c) no reasonable person reading the letter could have been in any doubt that it constituted the making of an offer by the defendant to settle the fee dispute;

(d) by banking the cheque, the plaintiff accepted the offer;

(e) the plaintiff’s letter of 12 February 2008 had no effect because it was sent by overnight courier and came after the plaintiff had banked the cheque and at a time when the defendant could no longer countermand payment; and

(f) the plaintiff had no title to the cheque except on the limited terms on which it had been tendered, that is, as part of an offer to settle the dispute between the parties. On the hypothesis that the plaintiff was rejecting the offer, it had no title to the cheque and was bound to return it.

150 In support of its submission that the 6 February 2008 letter was an offer, the defendant sought to rely on a concession by Mr Gidney under cross-examination that by 12 February 2008 he understood that it and the cheque accompanying it amounted to an offer. It also relied on the fact that before the cheque was banked the plaintiff had undertaken calculations of its entitlement on different bases, one of which indicated that its fees might be as low as $18,335,603.

151 The plaintiff puts that:

(a)  the 6 February 2008 letter was not an offer but that it simply said “this is what we are prepared to pay, take it”;

(b)  the letter did not say the cheque was being tendered on the basis that if it was accepted, there was a binding agreement under which the plaintiff gave up its claims;

(c)  on established authority, its banking the cheque did not on its own establish an accord and satisfaction; and

(d)  if the 6 February 2008 letter was an offer, the plaintiff did not accept it because it immediately wrote its 12 February 2008 letter in which it made clear that it did not accept the cheque in full and final settlement and called for the prompt payment of what it asserted was the outstanding balance.

Consideration
152 There is no doubt that as at 12 February 2008 the parties were in disagreement as to the extent of the plaintiff’s entitlements, although there was no dispute that some money was owed. On 5 February 2008, Mr Abbott on behalf of the defendant told Mr Gidney that there was approval for $20 million against the plaintiff’s invoice. Mr Gidney said the plaintiff would need to think about it and get back to the defendant. Before that happened, the defendant sent the 6 February 2008 letter.’

153 In my opinion, objectively viewed, the defendant’s 6 February 2008 letter was not an offer at all, let alone one which articulated a condition to the effect that if the plaintiff kept the cheque it was giving up any further claim. Rather, by it the defendant informed the plaintiff how much it thought it should pay under the Engagement and that it was paying that amount in discharge of what it considered to be its obligations. Far from stipulating a condition that taking the cheque would end the matter, the letter left the matter open by concluding with a statement of “trust” that the payment would bring the matter to a close.

154 On the assumption that Mr Gidney’s concession that he understood the letter and cheque to be an offer was an admission which might bind the plaintiff (which I doubt – see Bond Media Ltd v John Fairfax Group Pty Ltd (1988) 16 NSWLR 82), it does not assist the defendant because the objective theory of contract applies. Moreover, the concession did not extend to Mr Gidney accepting that it was an offer which, on acceptance meant the end of any further claims by the plaintiff.

155 If, contrary to what I have found, the letter was an offer, it stipulated no mode of acceptance. Objectively viewed, the plaintiff’s conduct in banking the cheque did not amount to acceptance of the offer, because at the same time it dispatched a letter making it clear that this was not so.

156 In addition, and adopting the analysis of the Queensland Court of Appeal in McMahon’s (Transport) Pty Ltd v Ebbage [1995] 1 Qd R 185, even if upon its proper construction, the 6 February 2008 letter purported to impose on the plaintiff a binding condition under which if it banked the cheque it gave up its rights, the attempt to do so was ineffective because the general law does not so allow.

157 It follows that I would not uphold the defendant’s plea of accord and satisfaction so that if the plaintiff were entitled to more than the amount paid, the acceptance of the cheque would amount to part payment and the plaintiff would be entitled to pursue its rights.’