Full and final settlement: what should creditors be aware of when receiving a payment?

Year Published: 2018

A debtor may sometimes try to settle a debt for less than the full amount that is due by informing the creditor that the payment is made “in full and final settlement”.

This can often put a creditor somewhere between a rock and a hard place – does the creditor keep the part payment and pursue payment for the balance, but in the fear that retaining the payment may result in them losing the right to claim more?

This blog sets out the key points for a creditor to bear in mind when a debtor submits a payment in full and final settlement of a debt.

How might a creditor lose their claim to the full balance of the debt?

Natalie Donaldson, Dispute Resolution Solicitor at SAS Daniels

Natalie Donaldson, Dispute Resolution Solicitor

A creditor may lose their right to claim the balance of a debt depending on the words and actions it uses after an offer is put forward.

It is therefore important that a creditor acts quickly to protect its position.

For example, a debtor may make an offer for a lower amount, and may state that the offer is being made “in full and final settlement”. Sometimes a debtor may follow this up by sending a cheque and/or arranging for a bank transfer for the offered amount. Depending on which method the debtor uses, it will affect how a creditor should deal with the funds and whether the payment can be construed as having been accepted in “full and final settlement”. Creditors need to ensure they are aware of outcomes and potential pitfalls when receiving money through different payment methods.

Payments by cheque:

If the creditor presents a cheque to their bank for payment, then, unless it states that the payment is accepted in part payment, it will be deemed to have accepted the payment in full and final settlement of the debt. This principle was established in the case of Bell v Galynski [1974].

Creditors also need to bear in mind that whilst keeping a cheque, but not cashing it, is not indicative of acceptance, the Court may construe this as evidence of acceptance as was the case in Stour Valley Builders v Stuart [2003].

As a creditor, if you don’t want to accept the cheque as full and final settlement of the dispute then it would be better to undertake either of the following tasks:

  1. Write to the debtor rejecting the cheque in full and final settlement of the debt, and avoid banking the cheque.
  1. Write to the debtor stating that the cheque is accepted in part payment of the outstanding debt, and that the creditor considers the balance of the debt to be outstanding.

Payments by bank transfer:

Whilst cheques can be cancelled, unfortunately this luxury does not apply to bank transfers. There is little that can be done to avoid receiving a bank transfer once it has been processed by the bank.

In Beechwood House Publishing v Guardian Products Ltd [2010], a debtor, that already had the creditor’s bank details, transferred a payment straight into the creditor’s account, and informed the creditor that this payment had been made in full and final settlement of all sums owing. The creditor kept this money on account, i.e. did not return it. It was held by the Court that, because the creditor had not asked for the payment, or provided the debtor with its account details, it had not accepted the settlement offer. However, the outcome could have been very different and the creditor risked losing the right to claim the full balance.

In these circumstances, if you are not happy to accept the payment in full and final settlement, then as the creditor you should carry out one of the following steps:

  1. Write to the debtor informing them that the offer is rejected and that the monies will be returned.
  1. Write to the debtor informing them that the payment is accepted in part satisfaction, with the balance outstanding.

Taking legal advice upon receipt of a part payment can help to ensure that a creditor’s position is fully protected, including the right to recover the full balance, through Court proceedings, if so desired.

Contact our dispute resolution team for advice on full and final settlement payments:

For more information and advice on payments submitted in full and final settlement, and in which circumstances acceptance of the payment will preclude a creditor from recovering the full balance, please contact Natalie Donaldson in our Dispute Resolution team on 0161 475 1224.

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