A payment of a part of a debt whose amount is liquidated and not in question is not a good consideration for a release of the entire debt; but any disadvantage in addition by the debtor constitutes a consideration; and the rule does not apply if the payment is other than by money or if the debt is unliquidated or its validity in dispute, or a compromise by a debtor with his creditors.
(a) Part payment of liquidated debt - General rule.
It was laid down in early cases 80 and has been generally adhered to since, that a part payment of a debt cannot possibly be a good consideration for an agreement to release the entire debt. The reason given was that in paying a part of his debt, the debtor was only doing what he was already under legal obligation to do, and the creditor was receiving no benefit except that to which he was already entitled; that therefore the promise of the creditor to release the balance had no consideration to support it and it was therefore unenforceable.81
78. Johnson's Adm'r v. Seller's Adm'r, 33 Ala. 265.
79. King v. Duluth, M. & N. Ry. Co., 61 Minn. 482.
80. Pinnell's Case, 5 Co. 117.
Example 44. A owes B $100, due and payable. A tells B he will pay him $75.00 if B will receive it in full of the debt. B agrees and gives A a receipt in full. B may nevertheless sue A for the balance despite his promise, on the theory that his promise was without consideration. B gave up no right or thing to which he was entitled and A got no advantage he was not otherwise entitled to.
This is an undesirable doctrine in our law inasmuch as it encourages bad faith on the part of creditors and is against sound morality. It has been repudiated in several states,82 has been deplored though enforced in nearly all jurisdictions83 and prediction has been made that the courts will in time abrogate the rule.84 This disfavor has led the courts to limit the rule strictly to the payment of a mature debt of a liquidated amount. The various situations that will prevent the operation of the rule are given below.
81. Gilman v. Cary, 198 Mass. 318, 84 N. E. 312.
82. Clayton v. Clark, 74 Miss. 499; Herman v. Schlessinger, 114 Wis. 382 (stating that the rule has been abolished by statute in Alabama, Georgia, Maine, North Carolina, Tennessee and Virginia and perhaps some other states).
83. Harper v. Graham, 20 Ohio 105.
84. Schlesinger v. Schlesinger, 39 Colo. 44.
(b) Any disadvantage in addition to part payment of debt.
If the debtor pays the part of the debt before it is due, or at another place than that at which he is bound to pay it, or suffer any other disadvantage, the agreement is supported by ample consideration and the creditor cannot sue for the balance.85
(c) Payment other than by money.
If the payment is other than by money the release is good.
If one gives his own promissory note in full payment for a liquidated debt of a larger amount, authorities differ whether there is any consideration for the agreement to discharge the balance. Clearly, if there is any change in the obligation, as to pay interest where none was payable before, or to pay a larger rate of interest, or by giving security, there is consideration.
(d) Debt unliquidated.
If the debt is unliquidated, any agreement to settle it is based upon a good consideration.
Example 46. G was tenant of S and made repairs. He claimed the landlord agreed to re-imburse him, but the landlord denied that he had agreed to do so, and claimed that he was under no obligation to make or pay for such repairs. The dispute was in good faith. The tenant sent a check for the month's rent with a deduction to re-imburse him for the repairs marking such check in full payment. The landlord retained the check protesting that he received it in full payment and brought suit for the balance. The court held that one must receive a check upon the condition upon which it is sent, and that the landlord's retention of the check was tantamount to an agreement by him to receive the check in full payment, that the amount being unliquidated such an agreement was supported by a good consideration.87
85. Harper v. Graham, supra.
86. Varney v. Conery, 77 Me. 527.
(e) Composition by debtor with creditors.
A composition by a debtor with his creditors or some of them is an arrangement whereby such creditors agree to take a percentage of their claim in full discharge thereof in order to enable the debtor to successfully weather a financial period of distress. The element is here introduced of the creditors agreeing with each other and with the debtor, and the releases of each of them is good consideration for the others. Such an arrangement is everywhere upheld as being upon good consideration.88
If the validity of a claim is disputed, any compromise thereof constitutes a good contract.
A promise to pay an amount of money to settle a disputed claim, is upon acceptance by the other side enforceable by either side. The waiver of the right to have the validity or invalidity tried out in Court constitutes the consideration. In such a case, the actual merits of the original controversy will not be inquired into, for it has been settled by the contract of the parties. If the party against whom the claim is made repudiates it, he may be sued upon the promise, or as he has not kept his promise, the claimant may also ignore it and sue on his original cause of action.
87. Snow v. Greisheimer, 220 111. 105.
88. Baxter v. Bell, 86 N. Y. 195.
It is essential to the validity of a compromise of a claim that the claimant make it in good faith, that is, believing he has a claim. Some courts also hold that there must also be a basis in fact justifying the belief, although it is never necessary that the claimant should have prevailed.
Example 47. A is struck by B's automobile. A threatens suit against B. B denies liability claiming that A was at fault in stepping in front of the car. B agrees however in order to avoid a law suit to pay A $200.00 and A accepts. A can enforce B's promise and the Court will not hear evidence as to the validity of A's original claim. B can also plead this promise in defense of any suit brought by A for the injury, unless B repudiated the promise or refused to perform it. In that case A may sue either on the promise or for the original injury.
A forbearance to sue for a definite time is a good consideration for a promise.
If a person deems he has a good cause of action and defers suit upon the same for a definite period, this will constitute a good consideration for a promise whereby the forbearance was secured.
Example 48. A threatens to sue B. B denies liability, and in hopes of a settlement or for other reasons prevails on A not to bring his suit for three months, B promising to pay him $50 for this delay. This is a good contract and B can enforce the promise to pay the $50 independent of his right to recover on the original cause of action, and without regard to the validity of the original cause of action.
A subscription made for purposes of donation, etc., is unenforceable until acted upon by incurring liability, or unless it is given in actual reliance on other subscriptions.
Where one subscribes to pay funds to a church, a charitable organization, or any institution, he is in reality only promising to make a gift. Such promise is therefore unenforceable.89 If, however, the promise is acted upon, as by incurring liability or expending money on the faith of it in the way it calls for, or by raising elsewhere a certain amount of money, if that is the condition of the gift, it becomes enforceable. So if there are mutual subscriptions and each is in fact a reliance on the others and not independent thereof, a consideration exists and the promise is enforceable.
89. Pratt v. Trustees, 93 111. 475