UK: Court Of Appeal Finds Defendant Gave Good Consideration For Varied Settlement In Agreeing To Give Up Defence That Was Later Found To Be Without Merit

Last Updated: 26 July 2019
Article by Anna Pertoldi, Maura McIntosh and Jan O'Neill

The Court of Appeal has recently upheld a first instance decision that there was a binding agreement to vary a settlement agreement: Simantob v Shavleyan [2019] EWCA Civ 1105.

The claimant argued that there was a lack of consideration for the variation, as the defence which the defendant had agreed not to pursue was without merit and therefore the defendant had not given up anything of value. The court rejected that argument. It drew a distinction between, on the one hand, a claim or defence which a party knows to be invalid or does not believe to be valid and, on the other, one which may be doubtful but the party believes in and intends to pursue. In the latter case, an agreement not to pursue the claim or defence will be good consideration, even if the court later finds the point to be without merit. This serves the public policy aim of encouraging settlement.

As a practical matter, however, where the only consideration for an agreement (or the variation of an agreement) is a party's agreement not to pursue a particular claim or defence, and there is any scope for doubt as to whether the claim or defence is believed to be valid, it would be advisable to document the agreement (or variation) by deed or provide some additional consideration (eg a token payment of £1).

The decision is also of interest in that the defence in question in this case, which the defendant had agreed to give up, was an argument that the $1,000 per day interest provision in the original settlement agreement was void as a penalty. The Master found that the provision was not penal, even though it was referred to as a penalty and even though (as the Court of Appeal noted) it could have resulted in the defendant paying $1,000 per day in interest even if only $1 remained outstanding by way of principal. The Court of Appeal did not comment on the correctness of the Master's decision, saying that whether she was right or wrong was immaterial. What mattered was that there was clearly genuine doubt on the point at the time the variation was agreed.

Background

The claimant and defendant are both dealers in Islamic antiquities. A dispute arose between them regarding sums due from the defendant to the claimant. On 1 May 2010 the parties entered into a settlement agreement in which the defendant agreed to pay the claimant US$1,500,000 in full and final settlement of all claims between them. The agreement provided that, if the settlement sum was not paid when due (on 21 May 2010) the defendant would pay $1,000 for each extra day "as a penalty".

The defendant did not pay the settlement sum when due but made various part payments ($500,000 in August 2010, $500,000 in June 2011, and $100,000 in August 2013). Under the terms of the settlement agreement, however, none of these payments reduced the amount payable under the $1,000 per day clause.

At a meeting sometime in April/May 2014, the defendant presented the claimant with eight post-dated cheques for $100,000, one for each month from June 2014 to January 2015. The claimant's case was that these represented payments on account of sums due under the settlement agreement. The defendant's case was that they represented a varied agreement whereby the sum of $800,0000 would be accepted in full and final settlement of the defendant's liability under the settlement agreement.

These cheques were never presented for payment, but were replaced with other post-dated cheques at various points, and in slightly increased sums (to reward the claimant's forbearance in waiting to present the cheques for payment). In February 2016 the defendant transferred a further $200,000 to the claimant.

The claimant issued proceedings in April 2016 seeking a total of $2,378,000, of which all but $200,000 represented interest under the $1,000 per day clause. The defendant argued that the claim for interest was void as a penalty, and that in any event the settlement agreement had been varied at the April/May 2014 meeting so that he could not be liable for more than a principal sum of $600,000 (ie the $800,000 agreed at the April/May 2014 meeting less the subsequent $200,000 payment).

On the claimant's application for summary judgment, Master McCloud rejected the penalty defence and awarded summary judgment for the $600,000 plus interest of $171,999 (based on a rate of 8% rather than the $1,000 per day clause).

The remaining issues came on for trial before Kerr J, who found that there had been a binding oral agreement to vary the settlement agreement at the April/May meeting. Kerr J accepted that he was bound by authority to find that part payment of a debt is not good consideration for an agreement to accept less than the full amount due, unless there is some added benefit to the creditor. However, he found that the defendant had provided good consideration for the varied agreement in that he had agreed to give up his argument that the $1,000 per day clause was an unenforceable penalty. Although that argument had subsequently failed before the Master, it "might have succeeded or at least have been found to be arguable".

The defendant appealed, including on the basis that the there was no good consideration for the variation because the Master had found that the penalty defence was unarguable; therefore the defendant had not given up anything of value.

Decision

The Court of Appeal dismissed the appeal (the Chancellor of the High Court, Simon and Henderson LJJ, with Simon LJ giving the judgment of the court).

The court referred to the claimant's argument that, as a matter of public policy, the forbearance of a defence that is later held to have no real prospect of success cannot amount to good consideration. The claimant referred the court to Cook v Wright (1861) 1 B & S 559, where it was held that, "unless there was a reasonable claim on the one side, which it was bona fide intended to pursue" there would be no consideration provided by the forbearance of such a claim. The claimant also relied on certain passages in Chitty on Contracts (33rd edition), including (at 4-051):

"A compromise of a claim which is legally invalid and which is either known by the party asserting it to be invalid or not believed by that party to be valid is not contractually binding. This rule can be explained either on the ground that merely making or performing a promise to give up a worthless claim cannot constitute consideration for the counter-promise, or (preferably) on grounds of public policy..."

The Court of Appeal noted that the claimant's public policy point was somewhat different from that suggested by Chitty, saying:

"It is one thing for a person to threaten a claim or defence in which that person has no confidence at all. It is a quite different thing for a person to intimate a claim or defence which, whilst the person recognises that it raises a doubtful or undecided point, he or she also believes in and intends to pursue it in court if necessary."

On the judge's findings, the court said, this case fell squarely into the second category. The defendant had intimated the penalty defence and clearly intended to raise it in any proceedings. By entering into the April/May 2014 agreement, he agreed that he would no longer be able to raise that defence and the debt would be consolidated at $800,000.

There was a further public policy that had to be taken into account, the court said, namely the public policy in favour of holding people to their commercial bargains and encouraging reasonable settlements. The correctness or otherwise of the decision of Master McCloud on the penalty point was immaterial. The validity of the consideration for the April/May 2014 variation agreement had to be judged at the time it was made. At that time, there clearly was genuine doubt as to whether £1,000 per day clause was or was not a penalty.

Finally, the court noted that the uncertainty alluded to in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24 (considered here) as to the correctness or otherwise of the rule in Foakes v Beer (1884) 9 App Cas 605 did not arise here. In that case Lord Sumption commented that the rule (which provides that part payment of a debt is good consideration for the release of the whole) is "probably ripe for reconsideration". In the present case, however, the consideration alleged was the forbearance to rely on a penalty defence, not the expectation of some commercial advantage as a result of accepting less than the full sum due. The rule in Foakes v Beer therefore was not engaged.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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