Part payment of a debt and consideration in Contract Law.

Question

Can the part payment of a debt amount to sufficient consideration in contract law and form a binding agreement?

Answer

Consideration is a key component of a legally binding contract, usually defined as a benefit to one party, and a detriment to the other.

The common law rule confirmed in in Foakes v Beer (1883) is that the part-payment of a debt will not amount to sufficient consideration. Take the following example:

Party A has contracted with Party B for the purchase of a car at the cost of £5,000. Party A offers to pay £4,000 instead, two weeks earlier than the due date of the £5,000. Party B agrees to take the £4,000 and will not demand the remaining £1,000.

Following Foakes v Beer, this promise is not enforceable, and Party B can demand the remaining £1,000 despite promising not to. The reason behind this position is to prevent the exploitation of parties in poor financial positions, as shown here:

Party A owes Party B £1,000, but is aware Party B is in dire financial need of £500. With this knowledge, Party A can offer £500 as part-payment of the debt if Party B waive the remaining £500, knowing that Party B have no choice but to accept the money.
The case which developed the rule, Pinnels Case (1602), established some limited exceptions:

1. Part-payment of a debt is valid if something else is exchanged along with/instead of money. For example, £1 and a pair of shoes could be valid consideration for a debt of £1,000. The presumption being the shoes may have some value which goes beyond the debt, even if in reality it does not.
2. Payment in a different form or at a different time. For example, if you are asked to pay via bank transfer, but are later asked to pay in person, the effort/expensive of travelling helps to amount to sufficient consideration.

References

Foakes v Beer [1884] UKHL 1

Pinnel’s Case [1602] 5 Co. Rep. 117a