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In the present "cash-strapped" economic climate, debtors may try to reduce the amount they owe to creditors by offering a cheque for only part of the debt but then express the payment to be in full and final settlement of the entire debt. The temptation may be to bank the cheque immediately to assist with cash-flow and then ask for the balance. However this may not always be the best course of action.

It is worth re-visiting the case of Cantor Index Limited v Robert Thompson decided earlier this year. The case raises the interesting question of how to respond when a debtor offers a cheque for say £150 but the debtor says in the covering letter that the cheque is tendered in full and final settlement of a debt for a higher sum. The natural instinct may be to bank the cheque and then ask for the balance believing that it will be paid at some point in the future. However, the Court in Cantor Index stated that by banking the cheque, that concluded the contract between the parties i.e. by making the offer in the letter (which was accepted by banking the cheque), the parties had settled the debt that was owing at the lower amount tendered.

To avoid this pit-fall and keep alive your wish to recover the full amount that you are owed, you should consider taking the following steps if you are not happy to accept a cheque in part-payment but which is expressed to settle the whole debt:-

1. Do not cash the cheque. Instead, send a letter immediately rejecting the offer to settle the whole debt for the value of the enclosed cheque. You should avoid any delay in notifying the debtor of your rejection in order to avoid the argument that owing to your delay in responding, a settlement has been reached.
   
2. If you do want to cash the cheque, consider the following: You should reply quickly by clearly stating that the cheque is not accepted in full and final settlement but will be accepted and applied in part-payment of the full debt if you do not hear from the debtor within a short period of time (say 5 days). Whilst not a guarantee that your actions will succeed in preventing the debtor from arguing that the whole debt has been settled by acceptance of the cheque, it will give you an argument against the debtor to say that you have banked the cheque but are still owed the balance.

For more information please contact John Aitken.

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