Agreement to part pay a debt is not binding but there is some hope for the part-payer

16/01/2008

The Court of Appeal recently found that a creditor, who may have agreed to limit a debtor's liability to one third of a joint debt, could not be bound by any such agreement as there was no consideration. Six years previously, the creditor obtained judgment jointly against three partners, including Mr Collier, for the sum of £46,800. The partners agreed to jointly pay the debt off by way of £600 monthly instalments.

Mr Collier paid one-third of the debt but the other two partners were declared bankrupt before the debt was satisfied. Mr Collier sought to resist a statutory demand issued by the creditor for the balance of the debt on the grounds that he had agreed with the creditor to accept responsibility for a one-third share of the debt, and had no liability once he had paid this.

In rejecting this argument, the Court held that Mr Collier had not provided any consideration, which is required for a binding contract. He had simply agreed to do part of that which he was already required to do. This affirms the often criticised rule of English contract law, known as the rule in Pinnel's case, that: "payment of a lesser sum on the [due] day in satisfaction of a greater sum cannot be any satisfaction of the whole."

However, the Court did set aside the statutory demand by applying one of the established exceptions to the rule in Pinnel's case, relating to promissory estoppel. It was a "genuine triable issue" (the standard which must be met to set aside a demand) that:

1. with the intention that Mr Collier would rely on it;


2. the creditor may have promised not to enforce its strict legal rights against Mr Collier; and


3. Mr Collier did actually rely on that promise.

Mr Collier argued that he had relied on the alleged promise by not chasing the other partners for their contribution towards the debt.

Whether the promise was in fact made, and relied on by Mr Collier, was left to be decided at any substantive trial. However, this decision confirms the willingness of the courts to apply equitable principles to relieve any perceived harshness of contract law.

[i]Collier v P & M J Wright (Holdings) Ltd [2007] EWCA Civ 1329 (14 December 2007)

Contact: simonmunro@city-law.net

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