According to the rule on Pinnel’s case (1602), if a debtor pays a lesser sum of his debt to the creditor in exchange for the creditor’s promise to accept the part payment and cease to demand the remainder, then if, in addition to the part payment, the debtor gives something else, the creditor is receiving some benefit and the debtor some detriment and this will suffice to constitute consideration for the creditors’ promise to forgo his debts. This same position was held in the cases of Foakes v Beer (1884).
Exceptions to the rule
Disputed Claims: The above rule does not apply if there is a genuine dispute about whether the debt is actually owed, or about the amount owed. In such circumstances, a partial payment by the debtor will be considered a promise not to enforce the rest of the alleged debt.
Unliquidated Claims: A liquidated claim is one for a fixed amount – a sum of money lent, for example, or the agreed price of goods or services supplied. Where the amount of a claim is uncertain, as in a claim for damages, or in connection with a contract specifying ‘reasonable remuneration’, it is said to be unliquidated. In such circumstances, the rule in Pinnel’s case does not apply. This is because the value of the claim is not known.
Composition Agreements: A debtor who owes money to several different people, and cannot pay, may offer to pay each one a percentage of their claim, which is often expressed as so much in the pound, and known as a dividend. The courts have long held such an agreement to be binding so that none of the creditors can later sue for the full amount although it is hard to see what in the arrangement could amount to consideration.
Payment by a third party: A creditor who accepts part-payment from a third party, in full settlement of the debtor’s liability, cannot then sue for the outstanding amount.
Promissory estoppel: This is the doctrine that a party may recover on the basis of a promise made when the party’s reliance on that promise was reasonable, and the party attempting to recover detrimentally relied on the promise.