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