As a creditor, recovering the full amount owed by a debtor is often a key priority. However, there are several legal principles you should consider before taking action. If a debtor has made a part payment, issues such as accord and satisfaction or promissory estoppel might come into play. Understanding these principles can help ensure you make informed decisions both now and in future business relationships.
Part Payment Does Not Automatically Satisfy the Full Debt
The general rule in England and Wales is that part payment of a debt does not automatically extinguish the full sum owed. A debtor’s partial payment is typically treated as an instalment or partial fulfilment of the debt, not a complete settlement, unless you, the creditor, agree to accept it as full and final payment.
If the debtor offers you a part payment, you are under no obligation to accept it as full settlement, and without such an agreement, in most circumstances you can still pursue the remainder of the debt. It is best to be as clear as possible when receiving any part payment as to why you are accepting it and what your intentions are as to the remaining sums owed.
Reaching a Binding Agreement
‘Accord and satisfaction’ is a legal principle that allows for a debt to be considered fully settled when there is a mutual agreement between the creditor and debtor that a part payment will discharge the full debt, i.e. if the debtor offers a reduced amount and you agree to accept it as final settlement, this arrangement will legally prevent you from demanding further payments.
Such agreement to receive some of the money owed to discharge the full amount is usually formalised in writing but may be construed by the parties’ conduct (e.g., creditor cashing a cheque marked “full and final settlement”). Before agreeing to such a settlement, be sure that you are comfortable with closing the debt entirely.
The general rule is that for an agreement to be binding on the creditor, unless it is entered into by deed, additional ‘consideration’ (i.e. something which the debtor provides to support their side of the bargain) is required over and above the obligations of the original contract to which the debt relates – although there are exceptions, such as where a third-party offers to settle the debt.
Promissory Estoppel: When a Promise Cannot Be Reneged Upon
It is important to be aware that in certain circumstances, even where no valid contract has come into play, the equitable doctrine of promissory estoppel may prevent you from pursuing the full amount of the debt if you have made a clear and distinct promise to the debtor which they have relied upon to their detriment. Typically, this occurs when a creditor informs the debtor that part payment will be accepted as full settlement, and the debtor then reasonably relies on that promise by paying the partial amount. If it was subsequently determined to be unjust to later demand the full sum, the Court could enforce the promise made.
Practical Steps for Creditors in Managing Part Payments
To avoid complications, as a creditor, you should take certain proactive steps to protect your interests:
• Communicate Clearly: Always specify the terms on which any part payment is being accepted, whether as full settlement or merely as an instalment of a greater sum. This can be done in writing, either in a formal agreement or through clear correspondence such as emails and letters.
• Avoid Implicit Agreements: If you do not intend to accept part payment as a final settlement, avoid taking actions that could imply otherwise, such as cashing a cheque marked as "full and final settlement" or remaining silent after receiving what you had deemed at the time to be an instalment.
• Consider Legal Advice: If there is any uncertainty about the debtor’s intentions or if you believe the debtor may be attempting to use assert a defence to you pursuing them for full settlement, it may be prudent to consult with a legal professional before taking further steps.
Conclusion
As a creditor, the key to managing part payments is clarity and caution. Always be mindful of the implications of accepting part payment and ensure that any agreement you enter into is carefully considered to avoid inadvertently relinquishing your right to the full debt.
In most cases, a creditor has six years in which to bring a claim (should this prove necessary!) for payment of a debt. However, section 29 of the Limitation Act 1980 provides that a part payment of a debt by a debtor will operate to restart the six-year limitation period, meaning the creditor has a fresh six years to pursue the debt from the date of such payment.
Get in touch
Our experienced team of solicitors can assist you in navigating the applicable law by assessing your individual circumstances in detail and providing tailored legal advice and support to ensure your rights as a creditor are protected. Contact us today to find out more.
Comments