Pinnel's Case Revisited

The other week, I wrote a post which arose mainly from noticing two new decisions in which Pinnel's Case was cited. The English case ("Collier")was the more interesting and I quoted a long-ish passage from the speech of Arden LJ which purports to set out concisely and authoritatively the law on promissory estoppel as it now stands.

While I think that it probably does so, it is necessary to lay out a few caveats:

1. The judgment was, effectively, an interlocutory one on whether the claim of promissory estoppel being made was "stateable". It was not a final decision on whether the claim would actually succeed or not. This somewhat diminishes its authority;
2. Determining what was really said by each side to the other will be crucial where this kind of problem arises. The situation set out at paragraphs 10-19 of Collier is, I suggest, fairly typical;
3. It would appear likely that the debtor seeking to "get away with" paying less will need to show that s/he changed their position on the faith of the promise made by the creditor
4. Pinnel's Case is still good law in the straightforward circumstances where a debtor seeks to have the payment of a lesser sum treated as binding satisfaction of an undisputed liability of a larger sum, without more complicating elements. If I owe you $500 and send you a cheque for $400, you are quite entitled to pursue me for the other $100.
5. One of the earliest recognised complicating elements is if the debtor gives something else with the lesser sum - the older texts spoke of a hawk or a horse. The probable reason for this is that the law requires consideration for a contract to apply, but is usually unconcerned about whether the bargain is a fair one: a single peppercorn in return for writing-off $100 might be OK. It must be clear that the peppercorn is taking the place of the $100 by agreement; to obviate difficulties with that, it may be advisable to do better than a peppercorn, or even the traditional horse or hawk. The lottery winner postulated here might offer an original work of art (such as a Bill Griffinpainting, perhaps !)

Debtors often protest that, in the example above, the $400 was "meant" to be a final settling of accounts, that the creditor shared that understanding and cynically decided later to go back for more. This may be true on occasion. Cynicism, however, is not confined to creditors: the $400 is often tendered by debtors on the basis of a cynical calculation that the creditor will not enforce his or her entitlement.

These clashes generally come down to disputes over factual issues: what was said by each party to the other, and sometimes it becomes necessary to examine the surrounding matrix of circumstances. Collier is a reasonably good example of this. Collier was one of three partners who owed an undisputed debt to a company. The partnership broke up, but this did not change the legal liability of each partner for the full amount of the debt. One of the partners went bankrupt and nothing could be recovered from him. The second partner was not a "mark" either (and later became bankrupt as well). Collier alone of the three made substantial payments and over a period, by arrangement with the creditor, paid one-third of the debt.

The creditor company wanted more and in due course moved to bankrupt Collier, who sought to have the proceedings dismissed on the basis that the company was no longer entitled to anything beyond the one-third it had accepted pursuant to the arrangement which Collier had entered, he says, on the basis that if he complied with it, it would be a full and final settlement.

It will be interesting to see how Collier finally works out. In the meantime, be careful out there !

Happy Ever After: Pinnel's Case Clarified Again

Let's say that I am facing bankruptcy. My debts are $1m (all owed to The Bank) and The Bank is insisting on payment, as I have missed the last six instalments. In a last desperate attempt to forestall the inevitable, I buy $100 in lottery tickets. Amazingly, I win $750,000.

I promised myself that I would use any winnings to try to get The Bank "off my back" and, equally amazingly, I keep that promise. I contact The Bank and rather than just bring my payments up to date, I offer to hand over the total prize in full and final settlement of the loan obligations. The Bank takes my money, I learn to live within my income and we all live happily ever after.

Well ... no. The Bank is soon writing to me looking for the rest of its money.

"What deal ?", the official asks when I meet him. "You owed us $1m, you only gave us some of it back. Any agreement to let you off - which of course we deny there was - would not have any contractual effect. For a legal contract, there has to be a two-way benefit. This "contract" was all in your favour; what did we get out of it ?"

In legal terms, the official's stance is that there was no contract because there was no consideration.

Many lawyers would say that the bank official is right. ("There's a surprise!" I hear the cynics sarcastically say). Since Pinnel's Case in 1603, confirmed by the English House of Lords decision of Foakes v. Beer (1883-4) LR 9 App Cas 605 in the last second-last century, the law is that an agreement to accept less than 100% of an undisputed debt without getting something in return is not enforceable.

Is this justice ?

Well, many (other) lawyers have worried that it is not. At least one of the judges in Foakes shared that unhappiness. The problem is that the legitimate expectations of the parties are frustrated.

It was not until the 1940s that in Central London Property Trust v. High Trees House Ltd [1947] 1 KB 130 the courts (in the person of - who else ? - Denning J., as he then was) found a way to deal with the potential for injustice, developing the equitable concept of promissory estoppel. (Intriguingly, he found authority of a sort in an early 19th century decision which was not cited in Foakes).

The concept has been developed and confirmed and it now means that if:

1) a debtor offers to pay part only of the amount he owes;

(2) the creditor voluntarily accepts that offer, and

(3) in reliance on the creditor's acceptance the debtor pays that part of the amount he owes in full,

the creditor will, by virtue of the doctrine of promissory estoppel, be bound to accept that sum in full and final satisfaction of the whole debt. For him to resile will of itself be inequitable. In addition, in these circumstances, the promissory estoppel has the effect of extinguishing the creditor's right to the balance of the debt. This part of our law originated in the brilliant obiter dictum of Denning J, as he was, in the High Trees case.

Note that this does not help people to welsh on their debts willy-nilly:

The doctrine of promissory estoppel only applies when it is inequitable for the creditor (or other representor) to insist on his full rights: see D & C Builders v Rees [1966] 2 QB 617.

The quotes are from Arden LJ in Collier v P & M. J. Wright(Holdings) Ltda recent decision from the Court of Appeal of England & Wales.

Co-incidentally, a recent Irish case also featured a brief discussion of these issues. The plaintiff sought the benefit of the rule in Pinnel's Case claiming that his agreement to forgo part of a debt was obtained under duress. As well as holding that there was a lack of relevant duress, O'Neill J. found that the fact that the debt was strenuously disputed took the case out of the scope of Pinnel's Case.

Update on Thursday, January 10, 2008 at 03:28PM by Fergus O'Rourke

On re-reading this, it seems to me that I have raised at least as many questions as I have given answers. I promise to re-visit the subject and address some of the issues soon

Putting Revised Contract Terms on Website

Hooray !

I learn from Euclid Managers Insurance Blogthat the U.S. Court of Appeals for the Ninth Circuit (it covers California) has confirmed that the answer to the question of whether a service provider may change the terms of its service contract by merely posting a revised contract on its website is NO. Let me repeat that: NO.

This result, I would have thought, is the only one consistent with established principles of contract law (which do not differ across the English-speaking world), but as always some clients can find lawyers to agree to defy logic on their behalf.

The Ninth Circuit inter alia noted that the customer:

... could only have learned of the new contract terms by going to the company’s website and examining the contract for changes. Without notice, a party wouldn’t know when to check a website and might have to do it as often as daily. And a person would have to compare every word of the original contract with the posted contract in a search for changes

Then the court addressed concepts of contract law: parties to a contract are not obligated to check the terms to learn whether they have been changed by the other side. A party can’t by itself change the terms of an agreement; it must first obtain the other party’s consent. A “revised contract” put forth by one party is nothing more than an offer that is not binding until accepted by the other party. And generally an offeree cannot actually consent to an offer unless he knows it exists....

The growing use of websites to disseminate information and terms to customers and visitors, whether through pages addressing Privacy and Terms of Use or through click-through agreements, may lead some parties to go too far. Specifically, website owners may place too much faith in protection that is perceived to be afforded by simply placing information and/or changed terms on their website and pay too little attention to fundamental contract principles.

The above quotations are extracted from T. R. Franklin's article on Euclid Managers Insurance Blog, which I encourage you to read and, indeed, to which a subscription would be a good idea.

Are You Sure That You Do Not Have Cancer ?

"Life is a congenital condition", someone once said,"and it is terminal". If this were taken to a logical extreme, health and life insurance would become impossible. Sometimes, though, insurers like to test the logic.

Imagine it: you are in good health as far as you know, confirmed by the recent opinion of your own GP, and someone persuades you, as they do, that you need to buy some life insurance. So, you fill in the forms as diligently and honestly as you can, and the insurance company asks you to undergo a medical examination, which turns up nothing adverse. The policy is issued, but within weeks you have abdominal pains and before long you die of advanced pancreatic cancer.

"Wow, here is a great insurance coverage story" says Boston lawyer Stephen D. Rosenberg(from whom I learned of this case), and who would disagree ?

The life insurance policy contained a term - described as a condition precedent - under which the coverage only applied if the policyholder was in good health at the time of issuance. It was not in dispute that a)the policyholder did not know of his cancer and b) the cancer must have been present at the time of issuance. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

Mr Rosenberg hits it right on the head:

... what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill ?

The Massachusetts court agreed, but apparently had to discard precedent to do so, which is strange. It apparently invoked the "legitimate expectations of the insured" to do so, which is stranger still to a common-lawyer on this side of the Atlantic: over here, "legitimate expectations" has no place in contract law.

I doubt if the insurer would have succeeded over here, either, but to get the legal analysis right might pose problems.

Suggestions welcome !

E-mail guarantee binding on (Alleged) Guarantor ?

The English High Court has considered the issue of whether a guarantee given by e-mail is enforceable. In the case of Nilesh Mehta v J Pereira Fernandes SA [2006] EWHC 813 (Ch) (you will find it at www.bailii.org), the court decided that it was not enforceable. On the basis of my reading of the note on the decision by CMS Cameron McKenna LLP, from which my entire knowledge of it so far comes, the result seems uncontroversial. Neither the alleged guarantor's name nor even his e-mail address was on the face of the message.

For any contract, this would create a difficulty; guarantees are rightly deemed  to need a higher standard of proof, as the person being held to account is not the primary debtor.