A variation on a theme of settlement

"The Moving Finger writes; and, having writ, Moves on: nor all thy Piety nor Wit Shall lure it back to cancel half a Line, Nor all thy Tears wash out a Word of it," wrote the 11th century Persian mathematician and poet Omar Khayyám, in the celebrated translation by Edward Fitzgerald of the Rubáiyát. Fortunately for the Persian art dealer, Yacob Shavleyan, the same was not true of a written settlement agreement.[1]

The original dispute

The two Persian art dealers, Dan Simantob (based in Los Angeles) and Yacob Shavleyan (trading at Yacob's Gallery in Mayfair), have a long history of family connections and business relations going back over 20 years. 

In 2008, Mr Simantob acquired 10 pieces of tiraz (inscribed medieval Islamic textiles), together with five pieces of Safavid (17th century Persian) and Turkish textiles (the Antiques) for €10,000, or so he told Mr Shavleyan.  The parties disagreed as to what happened next.  Mr Shavleyan claimed that he purchased the Antiques from Mr Simantob outright for £226,000.  Mr Simantob claimed that he consigned them to Mr Shavleyan to sell in return for a percentage of the sale proceeds. 

In any event, Mr Shavleyan placed the Antiques for auction with Sotheby's and they were sold for £1.2 million, net of Sotheby's commission, far exceeding the estimate.  On Mr Simantob's case, Mr Shavleyan was entitled only to a percentage of the sale proceeds; on Mr Shavelyan's case, Mr Shavleyan was entitled to all the sale proceeds, less £226,000.     

Settlement agreement

The parties met in May 2010 to resolve the matter.  Indeed, the relationship between the two parties was long-standing and mutually beneficial: Mr Simantob received access to Mr Shavleyan's expertise in Islamic art and the London market, whilst Mr Simantob was a useful source of business for Mr Shavleyan.  As the Judge commented, "It was in neither's interests to fall out and they shared close community and family ties".

A settlement agreement (the Agreement) in Farsi was signed by both parties.  The Agreement provided for payment of US$1.5 million by Mr Shavleyan to Mr Simantob by 21 May 2010 in full and final settlement of all claims between the parties (both the Sotheby's proceeds and other matters).  Significantly, the Agreement also provided that if payment in full was not made by the due date, US$1,000 a day would be payable as a penalty.  As Khayyám the mathematician could no doubt instantly observe, that is equivalent to an interest rate of 24.3%pa while the whole sum was outstanding, but 36,500,000%pa if just US$1 was left unpaid.  It was agreed that the former rate was not unusual in this market.   

Part payments and post-dated cheques

Mr Shavleyan did not pay by the due date.  Later in 2010 and again in 2011 Mr Shavleyan made payments totalling US$1m.  Of the principal, therefore, US$500,000 remained due, but "interest" continued to accrue at US$1,000 a day (then equivalent to 73%pa).  By 21 May 2012, the penalty payments alone amounted to US$731,000.  

In late 2012, Mr Shavleyan gave Mr Simantob a post-dated cheque for US$800,000 towards the sums due, which he asked Mr Simantob not to present for payment.  These were succeeded in March 2013 by two post-dated cheques for US$100,000 and US$800,000.  The first of these was presented in August 2013, leaving Mr Shavleyan owing US$400,000 and some US$1.16m in "interest". 

Variation to the settlement agreement?

In late spring 2014, Mr Simantob and Mr Shavleyan met at Yacob's Gallery in Mayfair and Mr Shavleyan gave Mr Simantob eight post-dated cheques totalling US$800,000.  What exactly happened at this meeting was contested.  Mr Shavleyan asserted that Mr Simantob agreed to accept US$800,000 to discharge all of Mr Shavleyan's liabilities under the Agreement (the Variation).  Mr Simantob said he had done no such thing.  The only written record was in a consignment agreement between the two a few months later for some 13th century Moroccan (Merinid) inscribed wooden beams and two Arabic wooden lattice screens (Masherabiya), which included a note that it had "nothing to do with a separate settlement agreement…and any unfulfilled obligation remaining from that settlement which specifically as of June 2014 is an amount of 800,000 $ paid in 8 checks of 100,000 $ each to be deposited as agreed every month, until all paid".

More post-dated cheques

By late 2014, none of the eight post-dated cheques had been deposited (which Mr Simantob said was at the request of Mr Shavleyan).  Mr Shavleyan provided four replacement cheques (all post-dated) in late 2014, but this time totalling US$860,000.  Replacement post-dated cheques were again provided by Mr Shavleyan in mid-2015, but then totalling US$900,000.  As the Judge later commented, the cheques were used "as a form of currency combined with an element of security and comfort" and this pattern "became an agreed method of doing business between the two men".

Eventually, in October 2015, Mr Simantob deposited one of the cheques.  It promptly bounced.  Mr Simantob demanded payment from Mr Shavleyan, who transferred US$200,000 in February 2016 to Mr Simantob and, Mr Simantob alleged, requested that the remaining cheques were not cashed.

Judgment Part 1

With an eye on the six year limitation period, Mr Simantob issued proceedings in April 2016 and applied for summary judgment in respect of US$600,000 (ie US$800,000 that Mr Shavleyan had acknowledged he owed in July 2014 less US$200,000 paid in February 2016).  Judgment was granted in that sum in October 2017, plus interest calculated at the judgment rate of 8%pa from mid-March 2014 (the presumed date of the Variation).  The Master who heard the application appears to have decided that the US$1,000-a-day clause was not void as an unlawful penalty.  

Judgment Part 2

If the Variation was effective, as Mr Shavleyan claimed, that was the end of matter.  If it was not, Mr Simantob was entitled to receive a further sum in excess of US$2m (the penalty payments or "interest" accrued under the Agreement).

This boiled down to two primary questions: had the Variation been agreed in fact and if so, was it effective in law? 

Variation in fact?

As a matter of fact, the Judge recognised that the Variation, if there was one, was, like the Agreement, "the product of a climate in which good business relations are prized, unseemly fallings out strongly discouraged and rifts healed by the application of robust third party intervention and pressure".  By enforcing the US$1,000-a-day penalty clause in the Agreement, Mr Simantob would lose the appreciation of his community and risk bankrupting Mr Shavleyan, on whose expertise and market contacts Mr Simantob depended on for his own trading.  Strict enforcement of the clause would have had the effect of driving Mr Shavleyan "towards ever increasing indebtedness which he could never satisfy" and "endanger Mr Simantob's standing in his business community and among his compatriots". 

Against that background, and with evidence given by two third parties present at the 2014 meeting, the Judge found that the parties had agreed to cap Mr Shavleyan's liability at US$800,000 in 2014.  The fact that later post-dated cheques provided to Mr Simantob amounted to more than US$800,000 represented Mr Shavleyan's 'rough and ready' conception of interest, intended to reward for Mr Simantob's patience and to persuade him to exercise forbearance for a little while longer.

Variation in law?

Was, however, that Variation effective in law?  English law has long held that it is not possible to compromise a debt by payment only of a lesser sum (the rule in Foakes v Beer (1884)).  For the Variation to bind the parties, Mr Shavleyan would have had to give some additional consideration. 

The Judge recognised that Mr Simantob would gain the approval of his peers if he accepted the Variation and continued access to Mr Shavleyan's expertise and contacts.  He did not believe that such "cultural" or "commercial" benefits could, however, be considered good consideration under English law.^[2]  Instead, the Judge identified the relevant consideration as Mr Shavleyan agreeing to give up his claims that the Agreement was invalid on the basis that it was procured by duress, and that the US$1,000-a-day "interest" provision was void under English law as an unlawful penalty.^[3]  The Judge held that that was good consideration and accordingly Mr Simantob was bound by the Variation and entitled to nothing further.

Conclusion

On the face of the judgment, it is hard to see that Mr Shavleyan did agree to give up his rights to dispute the Agreement in 2014.  He did not claim that the US$1,000-a-day clause was an unlawful penalty until after he had consulted his lawyers in 2015 and he had no hesitation in contesting the Agreement in the summary judgment hearing, albeit unsuccessfully.  One has a sneaking suspicion that the Judge at trial disagreed with the Master on the summary judgment application and thought that the US$1,000-a-day clause was an unlawful penalty, but, prevented from making a decision on that issue, sought to limit Mr Simantob's recovery by alternative means.