D & C Builders v. Rees [1966] 2 QB 617, Court of Appeal

The plaintiffs, a small building company, carried out building work for the defendant. The defendant paid £250 on account and a balance of £482 13s. 1d. remained outstanding. The plaintiffs made several requests for payment but received no reply. By this time the plaintiff company was in ‘desperate financial straits’. The defendant’s wife offered to pay them £300 in settlement of the whole claim. The plaintiffs stated that they would accept £300 straight away and give the defendant a year to find the balance. The defendant’s wife refused to agree to this, stating that ‘we will never have enough money to pay the balance. £300 is better than nothing’. The plaintiffs stated that they had no choice but to accept. The defendant’s wife gave the plaintiffs a cheque for £300 and insisted that they give her a receipt which included the words ‘in completion of the account’. The plaintiffs then brought an action for the balance. The defendants relied on a defence of bad workmanship and also claimed that there had been a binding settlement of the claim. The latter issue was ordered to be tried as a preliminary issue. The judge decided that the alleged settlement was not binding on the plaintiffs. The defendant appealed to the Court of Appeal who dismissed the appeal and held that the purported settlement did not bar the plaintiff company from recovering the balance of the debt.

Lord Denning MR

This case is of some consequence: for it is a daily occurrence that a merchant or tradesman, who is owed a sum of money, is asked to take less. The debtor says he is in difficulties. He offers a lesser sum in settlement, cash down. He says he cannot pay more. The creditor is considerate. He accepts the proffered sum and forgives him the rest of the debt. The question arises: Is the settlement binding on the creditor? The answer is that, in point of law, the creditor is not bound by the settlement. He can the next day sue the debtor for the balance: and get judgment. The law was so stated in 1602 by Lord Coke in Pinnel’s Case (1602) 5 Co Rep 117a—and accepted in 1884 by the House of Lords in Foakes v. Beer (1884) 9 App Cas 605.

Now, suppose that the debtor, instead of paying the lesser sum in cash, pays it by cheque. He makes out a cheque for the amount. The creditor accepts the cheque and cashes it. Is the position any different? I think not. No sensible distinction can be taken between payment of a lesser sum by cash and payment of it by cheque. The cheque, when given, is conditional payment. When honoured, it is actual payment. It is then just the same as cash. If a creditor is not bound when he receives payment by cash, he should not be bound when he receives payment by cheque. This view is supported by the leading case of Cumber v. Wane (1721) 1 Stra 426 which has suffered many vicissitudes but was, I think, rightly decided in point of law . . .

In point of law payment of a lesser sum, whether by cash or by cheque, is no discharge of a greater sum.

This doctrine of the common law has come under heavy fi re. It was ridiculed by Sir George Jessel in Couldery v. Bartram (1881) 19 Ch D 394, 399. It was said to be mistaken by Lord Blackburn in Foakes v. Beer (1884) 9 App Cas 605. It was condemned by the Law Revision Committee (1945 Cmd. 5449), paras. 20 and 21. But a remedy has been found. The harshness of the common law has been relieved. Equity has stretched out a merciful hand to help the debtor. The courts have invoked the broad principle stated by Lord Cairns in Hughes v. Metropolitan Railway Co (1877) 2 App Cas 439, 448:

‘It is the first principle upon which all courts of equity proceed, that if parties, who have entered into definite and distinct terms involving certain legal results, afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them when it would be inequitable having regard to the deal[1]ings which have taken place between the parties.’

It is worth noticing that the principle may be applied, not only so as to suspend strict legal rights, but also so as to preclude the enforcement of them.

This principle has been applied to cases where a creditor agrees to accept a lesser sum in discharge of a greater. So much so that we can now say that, when a creditor and a debtor enter upon a course of negotiation, which leads the debtor to suppose that, on payment of the lesser sum, the creditor will not enforce payment of the balance, and on the faith thereof the debtor pays the lesser sum and the creditor accepts it as satisfaction: then the creditor will not be allowed to enforce payment of the balance when it would be inequitable to do so. This was well illustrated during the last war. Tenants went away to escape the bombs and left their houses unoccupied. The landlords accepted a reduced rent for the time they were empty. It was held that the landlords could not afterwards turn round and sue for the balance, see Central London Property Trust Ltd v. High Trees House Ltd [1947] 1 KB 130. This caused at the time some eyebrows to be raised in high places. But they have been lowered since. The solution was so obviously just that no one could well gainsay it.

In applying this principle, however, we must note the qualification: The creditor is only barred from his legal rights when it would be inequitable for him to insist upon them. Where there has been a true accord, under which the creditor voluntarily agrees to accept a lesser sum in satisfaction, and the debtor acts upon that accord by paying the lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist on the balance.

But he is not bound unless there has been truly an accord between them.

In the present case, on the facts as found by the judge, it seems to me that there was no true accord. The debtor’s wife held the creditor to ransom. The creditor was in need of money to meet his own commitments, and she knew it. When the creditor asked for payment of the £480 due to him, she said to him in effect: ‘We cannot pay you the £480. But we will pay you £300 if you will accept it in settlement. If you do not accept it on those terms, you will get nothing. £300 is better than nothing’. She had no right to say any such thing. She could properly have said: ‘We cannot pay you more than £300. Please accept it on account’. But she had no right to insist on his taking it in settlement. When she said: ‘We will pay you nothing unless you accept £300 in settlement’, she was putting undue pressure on the creditor.

She was making a threat to break the contract (by paying nothing) and she was doing it so as to compel the creditor to do what he was unwilling to do (to accept £300 in settlement): and she succeeded. He complied with her demand. That was on recent authority a case of intimidation: see Rookes v. Barnard [1964] AC 1129 and Stratford (J T) & Son Ltd v. Lindley [1965] AC 269, 283, 284. In these circumstances there was no true accord so as to found a defence of accord and satisfaction: see Day v. McLea (1889) 22 QBD 610. There is also no equity in the defendant to warrant any departure from the due course of law. No person can insist on a settlement procured by intimidation.

In my opinion there is no reason in law or equity why the creditor should not enforce the full amount of the debt due to him. I would, therefore, dismiss this appeal.

Danckwerts LJ

I agree with the judgment of the Master of the Rolls. Foakes v. Beer (1884) 9 App Cas 605, applying the decision in Pinnel’s Case (1602) 5 Co Rep 117a settled definitely the rule of law that payment of a lesser sum than the amount of a debt due cannot be a satisfaction of the debt, unless there is some benefit to the creditor added so that there is an accord and satisfaction.

In Foakes v. Beer Lord Selborne, while approving Cumber v. Wane (1721) 1 Stra 426, did not overrule the cases which appear to differ from Cumber v. Wane, saying:

‘All the authorities subsequent to Cumber v. Wane, which were relied upon by the appellant at your Lordships’ Bar (such as Sibree v. Tripp, 15 M & W 23, Curlewis v. Clark (1849) 3 Exch 375 and Goddard v. O’Brien 9 QBD 37) have proceeded upon the distinction, that, by giving negotiable paper or otherwise there had been some new consideration for a new agreement, distinct from mere money payments in or towards discharge of the original liability.’

Lord Selborne was distinguishing those cases from the case before the House.

But the giving of a cheque of the debtor for a smaller amount than the sum due is very different from ‘the gift of a horse, hawk, or robe, etc.’ mentioned in Pinnel’s Case. I accept that the cheque of some other person than the debtor, in appropriate circumstances, may be the basis of an accord and satisfaction, but I cannot see how in the year 1965 the debtor’s own cheque for a smaller sum can be better than payment of the whole amount of the debt in cash. The cheque is only conditional payment, it may be difficult to cash, or it may be returned by the bank with the letters ‘R.D.’ upon it, unpaid . . .

I agree also that, in the circumstances of the present case, there was no true accord. The Rees really behaved very badly. They knew of the plaintiffs’ financial difficulties and used their awkward situation to intimidate them. The plaintiffs did not wish to accept the sum of £300 in discharge of the debt of £482, but were desperate to get some money. It would appear also that the defendant and his wife misled the plaintiffs as to their own financial position. Rees, in his evidence, said: ‘In June (1964) I could have paid £700 odd. I could have settled the whole bill.’ There is no evidence that by August, or even by November, their financial situation had deteriorated so that they could not pay the £482. Nor does it appear that their position was altered to their detriment by reason of the receipt given by the plaintiffs. The receipt was given on November 14, 1964. On November 23, 1964, the plaintiffs’ solicitors wrote a letter making it clear that the payment of £300 was being treated as a payment on account. I cannot see any ground in this case for treating the payment as a satisfaction on equitable principles.

In my view the county court judge was right in applying the rule in Foakes v. Beer, and I would dismiss the appeal.

Winn LJ

The question to be decided may be stated thus: Did the defendant’s agreement to give his own cheque for £300 in full settlement of his existing debt to the plaintiffs of £482 and the plaintiff’s agreement to accept it in full payment of that debt, followed by delivery and due payment of such a cheque, constitute a valid accord and satisfaction discharging the debt in law? . . .

In my judgment it is an essential element of a valid accord and satisfaction that the agreement which constitutes the accord should itself be binding in law, and I do not think that any such agreement can be so binding unless it is either made under seal or supported by consideration. Satisfaction, viz., performance, of an agreement of accord, does not provide retro[1]active validity to the accord, but depends for its effect upon the legal validity of the accord as a binding contract at the time when it is made: this I think is apparent when it is remembered that, albeit rarely, existing obligations of debt may be replaced effectively by a contractually binding substitution of a new obligation.

In my judgment this court should now decline to follow the decision in Goddard v. O’Brien 9 QBD 37 and should hold that where a debtor’s own cheque for a lesser amount than he indisputably owes to his creditor is accepted by the creditor in full satisfaction of the debt, the creditor is to be regarded, in any case where he has not required the payment to be made by cheque rather than in cash, as having received the cheque merely as conditional payment of part of what he was entitled to receive: he is free in law, if not in good commercial con[1]science, to insist upon payment of the balance of the amount due to him from the debtor.

I would dismiss this appeal.