Cheques in “Full and Final Settlement” – Creditors Beware

What are the consequences of cashing a cheque with “full and final settlement” written on it?  Does it have the effect of releasing the debtor from payment of the balance and barring the creditor from claiming said balance?

It has been established in case law that cashing a cheque with the inscription “full and final settlement” or similar words to the same effect, may in fact release the debtor from payment of the balance of its debt, even where such cheque is made out for an amount lower than what is due.

As a result, a creditor that finds itself in this situation cannot simply cash the cheque as a partial payment, and then expect to pursue the debtor for the balance of the debt. The cashing of a cheque received in full and final settlement creates a presumption that the creditor has accepted the debtor’s settlement offer and waived the balance of its claim. This presumption of final payment is, however, a question of fact left to the discretion of the Court.

Evidently, the most prudent option in such circumstances would be for the creditor to return the cheque to the debtor altogether, and advise the debtor that failure to make full payment will result in court proceedings being instituted against it. Nevertheless, case law suggests that if a creditor would like to cash the cheque as a partial payment and pursue the debtor for the balance thereafter without this being construed as an acceptance of the debtor’s settlement offer, it must, at minimum:

• advise the debtor that it refuses to consider the partial payment as being full and final, and intends on pursuing the debtor for the balance; and
• advise the debtor that failure to put a stop payment on the cheque will result in the cheque being cashed as a partial payment after a specified date, subject to the creditor’s right to claim the balance of the debt.

However, in doing so, the creditor must grant the debtor a reasonable delay, which affords it sufficient opportunity to object or withdraw its offer either by canceling the cheque or by submitting a new settlement offer to the creditor, as the case may be.

It therefore follows that creditors should exercise the utmost caution when deciding how to proceed after receiving a partial payment made in “full and final settlement” from a debtor.