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Review Your SQE 1 Practice Records

Examination Timing: 00H00M02S

A debtor owes an unsecured creditor £5,000 due to be repaid today. The debtor tells the creditor that he can only repay £4,000 and asks that the creditor agree to this being in full and final settlement of the whole amount. Fearing that the debtor, who also has other unsecured creditors, is about to be made bankrupt, the creditor agrees. 

Can the creditor enforce the payment of the remaining £1,000?

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Under contract law, an agreement to accept less than the full amount owed is not binding unless the debtor provides new consideration in return for the creditor’s promise to accept a lesser sum. In this case, the debtor provided no new consideration for the creditor’s agreement to accept £4,000 instead of £5,000. Therefore, the creditor can enforce the payment of the remaining £1,000. 

Key Point: Consideration is a fundamental element in contract modification. A promise to accept less than what is owed requires new consideration to be binding, ensuring that both parties receive something of value in exchange.

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