Part payment of debts – should you deposit that cheque?

June 2010 by Harry Snow, Partner, Swaab

what happens when a debtor makes a part payment of a debt and stipulate that by banking the cheque, the creditor accepts that the debt has been paid in full?

Cheques for partial payment of debts

Sometimes, our clients who provide goods and services receive cheques for less than the amount owed.

On occasions, thankfully rare, the payments come with a letter stating that the payment is tendered in full and final settlement of the entire debt. Other letters may say that by banking the cheque the creditor accepts the payment in full and final settlement of the debt. If the cheque is banked, does the law allow the creditor to sue for the balance?

JP Morgan and Consolidated Minerals

This question was one of the issues considered by Hammerschlag J in a Supreme Court of NSW case decided in March 2010, JP Morgan Australia Limited v Consolidated Minerals Limited.

JP Morgan claimed it was owed almost $51 million in fees pursuant to an engagement letter from Consolidated Minerals.

Before the Court proceedings were commenced, Consolidated Minerals wrote to JP Morgan stating:

We have reviewed the engagement letter and we consider that an appropriate payment is $20 million. Accordingly, we are pleased to enclose a cheque for $20 million in full and final settlement of this matter. We trust that this brings this issue to a close.

JP Morgan banked the cheque and, on the same day, wrote to Consolidated Minerals saying:

JP Morgan does not accept the Cheque in full and final settlement of the matter. We remind you that JP Morgan is owed the amount of $50,818,436.08 . Nevertheless, JP Morgan will retain and bank the Cheque and deduct the amount of $20 million from the amount owing to it by Consolidated Minerals .

The cheque had been banked by the time Consolidated Minerals had received the letter.

Was JP Morgan entitled to sue for the remaining $30,818,436.08 it claimed was owed?

NSW precedent – signed receipt in full settlement of claims

In a 1931 New South Wales Supreme Court case an employee sued his employer to recover damages for wrongful dismissal. The employer gave the employee a cheque and required the employee to sign a receipt for the cheque which was in lieu of notice and in full settlement of all claims against [the employer] .

The employee signed the receipt but added received under protest . The Court held that by signing the receipt in full settlement of all claims against the [employer] it is manifest that he accepted the situation and acquiesced in what was done.

In relation to the claim that the employee took the money under protest , the Court 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 rights to assert further claims ?

Contractual basis for determining whether the creditor can sue

Sixty years later, in 1995, the Queensland Supreme Court said that the question, as to whether the creditor could sue for the balance of the debt, is to be determined on a contractual basis. That is, whether the person who chooses to keep and bank the cheque, which was given to him on stipulated terms, is bound, by contract, to those terms whilst rejecting them.

The Queensland Supreme Court went on to say The basis on which it is said that one party [the debtor] may effectively force an agreement on another [the creditor] by telling [the creditor] that a certain sort of action [other than agreeing to the proposal] will be taken to be assent to the terms of the proposed agreement, is unclear. A distinction is drawn between the case in which the contract when made imposes no obligations on [the creditor] and that in which it is sought to impose an obligation on [the creditor], the obligation coming into existence because [the creditor] has performed an act stipulated by [the debtor].

Summary of the JP Morgan case

After dealing with the earlier cases, the court in the JP Morgan case summarised the issues as whether the Consolidated Minerals 6 February 2008 letter constituted an offer, a condition of which was that JP Morgan gave up its claim in consideration of Consolidated Minerals paying $20 million and if so, whether JP Morgan accepted the offer by banking the cheque.

JP Morgan argued that first, the letter tendering the cheque was not an offer but simply said this is what we are prepared to pay, take it . Secondly, according to JP Morgan, the letter did not stipulate the cheque was tendered on the basis that if accepted, there was a binding agreement under which JP Morgan gave up its claims. Thirdly, the state of the law was that banking the cheque did not, on its own, release Consolidated Minerals from its obligation to pay the entire amount outstanding. Finally, the company argued that if the letter was an offer, JP Morgan 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 demanded payment of the balance.

Findings in the JP Morgan case

Hammerschlag J held that, on an objective basis, the 6 February 2008 letter was not an offer. The Judge found that the letter did not contain a condition to the effect that if [JP Morgan] kept the cheque it was giving up any further claim. Rather, by it [Consolidated Minerals] informed [JP Morgan] 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. The Judge went on to say:

If contrary to what I have found, the letter was an offer, it stipulated no mode of acceptance. Objectively viewed, [JP Morgan s] conduct in banking the cheque did not amount to acceptance of the offer, because at the same time it despatched a letter making it clear that this was not so even if upon its proper construction, the 6 February 2008 letter purported to impose a binding condition under which if it banked the cheque [JP Morgan] gave up its rights, the attempt to do so was ineffective because the general law does not so allow.

Creation of a contractual obligation

The Courts generally do not allow a contractual obligation to be created by a party seeking to impose an obligation stipulating that if the other person takes a particular step, or does nothing, the obligation is imposed. A contractual obligation is only created if the other person expressly agrees to the terms proposed.

But, as Hammerschlag J said: Undoubtedly, each case must be considered on its own facts.

However, what the Courts in these types of cases have not addressed is whether the property in the cheque passed, as it was proffered on a condition which the [person accepting the cheque] would not accept; that issue has not been raised, the lawfulness of the banking of the cheque being unchallenged. [McMahon s (Transport) Pty Limited v Ebbage] 1995 1QdR185.

What you should do if you are the creditor

Therefore, if you are the creditor and you want to bank the cheque without giving away your rights to sue for the balance, you should discuss with your commercial lawyer the steps you should take. You should do this before you deposit the cheque.

What you should do if you are the debtor

If you are the debtor, and you want to impose a condition that acceptance of your payment brings the creditor s debt to an end, your letter needs to be worded in such a way that an agreement is created. Again, discuss it first with your commercial lawyer.

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