In disputes over unpaid debts, it is a common debtor strategy to send the creditor a cheque for less than the total amount claimed together with a letter saying that the amount tendered is in full and final settlement of the debt.
Can the creditor safely bank the cheque and still sue the debtor for the balance of the claim?
This issue has been considered recently by the NSW Supreme Court in JP Morgan Australia Limited v. Consolidated Minerals Limited  NSWSC 100 and by the Federal Court of Australia in Amos v Monsour Pty Ltd  FCA 741.
In JP Morgan the debtor sent a cheque for $20m to the creditor “in full and final settlement” of the creditor’s claim. The creditor banked the cheque but sent a letter that same day by courier to the debtor denying that the payment was accepted in full and final settlement and reserving the creditor’s right to seek payment of the full amount of the claim. The cheque cleared before the debtor received the creditor’s letter.
The court looked at whether the parties had entered into a binding agreement (an “accord and satisfaction”) where the creditor had agreed to take the debtor’s cheque in satisfaction of its existing claim.
In this case, Monsour obtained a costs order and made an offer to Amos to accept a fixed sum in satisfaction of the order. After the expiry of the time period for accepting the offer, Amos sent a letter to Monsour providing a cheque in the same amount as the earlier offer “in full and final payment” of Monsour’s costs. Monsour wrote back saying that the cheque would be banked but that it was not accepted as full and final payment.
Both Justice Hammerschlag in the NSW Supreme Court and Justice Reeves in the Federal Court said that the relevant principles for determining whether a binding agreement had been formed were identified by Justice Pincus in the Queensland decision of McMahon’s (Transport) Pty Ltd v. Ebbage  1 Qd R 185.
Those principles are as follows:
Whether a binding agreement has been formed is to be determined objectively, rather than by reference to the subjective intention of the parties.
- Whether a debtor’s offer has been accepted turns on whether a reasonable bystander would regard the conduct of the creditor as signalling to the debtor that the offer has been accepted; i.e. there must be an “external manifestation” of the creditor’s assent.
- Where a cheque is sent in full settlement of an existing liability, the mere retention of the cheque does not prove that an agreement has been formed. It is a question of fact as to what effect the retention of the cheque has in all the circumstances.
In both JP Morgan and Amos, the court found that the purported offer sent with the cheque was defective and did not constitute an offer capable of acceptance at all. However, even if the offer had been valid the debtors would have had difficulty establishing that accord and satisfaction had occurred.
In McMahon’s Transport the Queensland Court of Appeal said that the law does not allow for an agreement to be formed by one party stipulating to the other that specified conduct (other than express assent) will amount to acceptance of the first party’s offer. The banking of the cheque cannot, without more, mean that an agreement has been formed between a creditor and a debtor, even if the debtor sends the cheque on the express basis that it is only to be banked if the offer is accepted.
Implications for creditors
These cases confirm that a debtor cannot impose an obligation on a creditor by stipulating that if the creditor banks its cheque for part of the claim the rest of the claim is extinguished.
In both cases the relevant creditor also wrote to the debtor expressly rejecting the debtor’s proposal that accepting the cheque would compromise the original debt. Would the result be the same if the creditor had simply banked the cheque without replying to the debtor’s offer at all?
Are there risks in failing to respond?
The legal principle on which the cases were decided does not depend on the creditor communicating its rejection of the debtor’s offer, whether before banking the cheque or after (as in JP Morgan).
The law is clear enough: a debtor cannot stipulate that simply banking a cheque will amount to acceptance of the debtor’s offer.
This would seem to suggest that a creditor can safely bank a cheque paid to it by a debtor regardless of the terms on which the debtor purports to provide it. However, doing this overlooks the basic principle that it is the objective intention of the parties, not the subjective intention of one party or the other, which determines whether a contract has been formed.
If the creditor remains silent there is a risk that the acceptance of the cheque, taken together with some other conduct of the creditor (or one of the creditor’s employees, agents or officers, such as a salesperson to whom the cheque was actually delivered) could be enough to lead an objective observer to conclude that an agreement has been reached – even if the creditor had no actual intention to accept the debtor’s offer. Not responding also leaves room for an unscrupulous debtor to allege such conduct in the absence of documentary proof to the contrary.
The prudent creditor
A prudent creditor wanting to take a debtor’s tendered payment but reject an offer of accord and satisfaction should respond to the debtor in no uncertain terms rejecting the proposal and expressly reserving the creditor’s right to pursue the remainder of its claim after banking the cheque. It would also be wise to keep a copy of the response and retain evidence of having sent it.
However, the decision in JP Morgan suggests that the creditor does not need to wait until the debtor has received its response before banking the cheque. The crucial point is to make sure that there is objective evidence that the creditor refused the offer.