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Show me the money: offers made in full and final settlement


It is commonly thought that a person is more likely to accept an offer in settlement if the money is put in front of them and they are given the chance to walk away with it. Psychologically speaking there may be some truth in this. Chris Tarrant is a keen proponent of this theory as evidenced by his continual waving of the cheque in the direction of the sweating contestant.

But whilst it may make thrilling television, does it make commercial sense when entering into settlement negotiations?

Certainly if there are elements of a claim that are admitted, a payment can be made in satisfaction of only those elements, rather than the amount being treated by the receiving party as a payment on account for all of the elements making up the entire claim (Croft v Lumley (1). However, one might wish to attempt to force the other side to accept an offer, which is lower than the amount claimed, in full satisfaction of the claim. This is where problems can arise. Where a cheque for an amount lower than that being claimed is sent out under the cover of a letter that explains that the amount is proffered in full and final settlement, does the retention or cashing of that cheque amount to acceptance of the amount in full and final settlement?

The case law does not point to a hard and fast rule, rather each case is decided on its facts, and the party offering the lower figure must prove that there was accord and satisfaction. Authority on this point stems from Day v McLea (2). This was supported by the unanimous decision of the Court of Appeal in Stour Valley Builders v Stuart (3). The decision of the Court of Appeal was followed by a further case reported in 2001 (4) and applied by a further two cases in 2003 (5). The principle therefore looks at least to have been decided, even if it is not one whose application it is easy to predict. Precise issues of timing play a part and you may be required to respond quickly.

In the United States all doubt has been removed from such settlement offers. If the receiving party banks a cheque that is offered in full and final settlement, agreement to the terms of settlement is imputed as an inference of law (6). This approach, whilst straightforward, was criticised in Stour Valley as it ignores the actual intention of the receiving party. If there is to be accord and satisfaction the debtor must prove that there was agreement between the parties as to settlement. This requirement for 'agreement' is overridden somewhat once time has passed. Lloyd LJ stated that , "what matters is not what the creditor himself intends, but what, by his words and conduct, he has led the [debtor] to believe" (7).

In Stour Valley there was some disagreement over the amount outstanding after some building works had been carried out. The customer decided to send a cheque for a lower amount than that claimed by the builders and stated in his letter that the amount was in full and final settlement of all claims. The cheque arrived on day 1. The builders cashed the cheque and it cleared on day 5. On day 7 the builders spoke to the customer and told him that the amount could not be accepted in full and final settlement. This delay of seven days was not considered fatal and it was held that the builders were entitled to treat the cheque as a payment on account.

Lloyd LJ considered that cashing the cheque would always be strong evidence of acceptance, especially where an immediate rejection of the offer is not forthcoming. As far as a creditor is concerned, therefore, the communication of the rejection must occur "within a few days" for it to be valid. In this case a delay of one week fell within this band. In another case a delay of seven weeks (8) was found to be too long and accord and satisfaction was established. It appears, therefore, that the correct question to ask is whether the creditor's conduct caused the debtor to think that the money was accepted in satisfaction. I consider two recent cases below to show the opposite results that can occur.

In The Commissioners of Inland Revenue v Fry, Mrs Fry owed the Inland Revenue over £100,000. She had no assets or other means to pay this amount. Mr Fry wished that his wife avoided bankruptcy proceedings and so in May 1998 offered the Inland Revenue £10,000 in settlement of its claim. This was rejected by the Revenue in September 1998. However, no proceedings were brought and in May 1999 Mr Fry sent a cheque for £10,000 to the Revenue in full and final settlement. At the Inland Revenue, the procedure for dealing with all correspondence was that any enclosed cheques went one way to be banked and the letters went another way to be read. The cheque was therefore banked immediately. The letter was dealt with some four days later at which point the rejection of the offer was communicated to Mr and Mrs Fry. The Inland Revenue were still entitled to claim the full amount from Mrs Fry and treat the amount received as a payment on account.

In Bracken v Billinghurst an employer who had been awarded £45,000 as the result of an adjudication, told the building contractor on the other side that it would accept just £6,000 in settlement of this award. The other side decided to send a cheque to the employer for £5,000 in full and final settlement. However, in this case the covering letter stated that if the offer was not accepted the employer should return the cheque.

Timing was key in this case as two weeks passed before the employer cashed the cheque and wrote to the contractor rejecting the offer in settlement and furthermore stated that it would pursue them for the total award. The court held that this was too long a period for it to have held the cheque and not informed the contractor of its intentions. This delay, combined with the clear terms set out in the contractor's letter, meant that there had been accord and satisfaction (i.e. the debt had been settled at only £5,000).

This last case highlights the dangers present in this area and the importance of acting quickly. One cannot treat a sum received as a payment on account without informing the other party of this intention sufficiently quickly. Where you are the party making the lower offer you should be as clear as possible about the terms on which the cheque may be cashed. Nevertheless as can be seen from the cases mentioned above, the other side may still be able to accept the cheque as a payment on account as long as it responds swiftly. If this treatment of the offered amount is unacceptable to you then it may be prudent not to make the offer in this manner.

Finally, if such an offer is to be made directly by you, the client, rather than through lawyers, it is important to understand the significance of the terms on which the offer is made. In a recent case a dispute arose between a company, and a contractor who regularly provided services to the company. The company ordinarily paid the worker's fees by electronic transfer and subsequently, when advised to send a cheque in offer of full and final settlement, the company transferred the amount direct into the worker's bank account using its ordinary method of electronic transfer. Such a transfer did not require the other party to do anything to accept the money; indeed it would have required them to have actively transferred the funds back out in order to reject it. This would undoubtedly weaken any subsequent claim that the worker had accepted the sum in full and final settlement.

Please refer to Addleshaw Goddard Contentious Department if you have any queries about this article.

1 (1858) 6 HLCas 672

2 [1889] 22 QB 610

3 Times, 22 February 1993

4 The Commissioners of Inland Revenue v Fry [2001] STC 1715

5 Joinery Plus Ltd v Laing Ltd [2003] EWHC 3513 and Bracken v Billinghurst [2003] EWHC 1333
 Hudson v Yonkers Fruit Company 258 NY 168

7 On this point see also Bell v Galynski [1974] 2 Lloyd's Rep. 13

8 Upfield v Marshall (Unreported, 29 March 1976)

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