Part pay­ment of debts — should you deposit that cheque? 

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In Brief

Can a debtor make a part pay­ment of a debt and stip­u­late that by bank­ing the cheque, the cred­i­tor accepts that the debt has been paid in full?

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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, call Har­ry Snow to analyse the debtor’s let­ter and to dis­cuss 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, call Har­ry Snow.

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