The Rule in Day v McLea: Take the money and run

Can you bank a cheque that covers only part of the final account without forfeiting money still owed?

An important lesson arises when scrutinising the practical law applicable to tendering cheques in purported final settlement. Can you take a part-payment offered as final? Can you retain the right to claim the full sum?

It is not uncommon for an employer to seek to pay his contractor less than the full contract sum if there is a dispute as to compliance with the contract. If each party accepts such an unsatisfactory situation, its original legal rights may be released by a process known as accord and satisfaction. In such a situation, there must be consideration - a quid pro quo - for something promised or done.

Thus, if Stan Laurel, a contractor, agrees his window installation is not up to the contract tolerances, and Oliver Hardy is prepared to accept such inferior works, then their agreement to conclude their mutual obligations on payment of a lesser sum by Hardy would be a perfectly good accord and satisfaction and would release each party from the contract. But the agreement will not be binding per se; there must be an agreement under seal or supported by fresh consideration, for example an abatement in price.

This principle can be traced back as far as 1602. In construction, the principle was aired before the Court of Appeal 30 years ago in the case of D&C Builders v Rees (1966). The plaintiff carried out work worth £482 for the defendant. The plaintiff pressed for payment for months. Finally, the defendant's wife, who knew the plaintiff was in financial difficulties, offered £300 to settle the debt, saying that if the offer was not accepted, nothing would be paid. The plaintiff accepted a cheque for £300 and gave a receipt "in completion of the account". It later sued for the balance and the question arose whether the action was barred by accord and satisfaction. The court ruled that the plaintiff was not barred from recovering the balance as there was no accord. The plaintiff's consent had been obtained under pressure.The defendant argued unsuccessfully that the principle of equitable estoppel applied to make the plaintiffs "acceptance" binding.

This principle has been applied to cases where a creditor agrees to accept a lesser sum in discharge of a greater sum. But there is a qualification to applying this principle. The creditor is barred from asserting his rights only when it would be inequitable for him to insist on them. Where the creditor agrees to accept a lesser sum, and the debtor pays the lesser sum, it is then inequitable for the creditor to insist on the balance.

In the D&C Builders case there was found to be no true accord. The debtor's wife held the builder to ransom. The builder was in need of money to meet his own commitments, as the debtor knew.

In Day v McLea (1889), a similar point arose. A defendant sent a cheque for a lesser sum than that claimed for breach of contract "in full of all demands" and enclosed a receipt in that form for signature. The creditor instead sent a receipt "on account" and banked the cheque. The Court of Appeal held that there was no accord to bar the claim.

More recently, the Court of Appeal has again approved the doctrine in the context of an open offer sought to be made by a defendant in "full and final" payment of a larger debt. ⁽¹⁾

So, there are at least three bases on which the claimant may be able to pursue a claim for the balance if he has banked the cheque. First, if there was no dispute about liability for the sum that was paid, then there can be no consideration to support any contract by way of accord and satisfaction in respect of the balance.

Second, even if the defendant has put all of his liability into dispute, then it seems that the plaintiff can bank the cheque and write to the defendant saying he is accepting the cheque, not in full and final satisfaction, but on account.

Further, if the cheque was banked by an employee of the plaintiff company with authority to bank cheques but without authority to compromise claims, then again there can be no binding contract of accord and satisfaction.

1. Ferguson v Davies (1996) CILL 1208