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