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The Art of the (Settlement) Deal

26 July 2019. Published by Laura Evans, Associate and Davina Given, Partner

According to the English Court of Appeal, giving up a right which the debtor does not even know he has is sufficient consideration for settling a debt. But the vexed question of what amounts to "good" consideration remains uncertain enough for those entering into a contract always to consider whether good consideration has been given. If in doubt, pay a nominal amount.[1]

The facts

Mr Dan Simantob (based in Los Angeles) and Mr Yacob Shavleyan (based in London) were both dealers in Islamic antiquities.  In 2008, Mr Simantob acquired various textiles that ended up being auctioned at Sotheby's by Mr Shavleyan for £1.2 million.  Mr Simantob claimed that, prior to the auction, he had consigned the textiles to Mr Shavleyan to sell in return for a cut of the sale proceeds but Mr Shavleyan claims that he purchased them outright from Mr Simantob.  The parties had a long history of working together and decided to enter into a settlement agreement.

Under the terms of that agreement, Mr Shavleyan was to pay Mr Simantob US$1.5 million by 21 May 2010 in full and final settlement of all claims between the parties.  In the event that payment was not made by the deadline, a penalty payment of US$1,000 per day would become payable, no matter the amount then outstanding.  No payment was made by the deadline and "interest" began accruing.

  • End of 2011 - US$1 million paid.
  • 21 May 2012 - US$731,000 in "interest" owed (in addition to US$500,000 of the outstanding principal).
  • August 2013 – US$100,000 paid.
  • April/May 2014 - Mr Shavleyan presented Mr Simantob with eight post-dated cheques (from June 2014 to January 2015) each for US$100,000.  Mr Shavleyan's position was that the cheques represented a varied agreement whereby Mr Simantob accepted US$800,000 in full and final settlement of all claims under the settlement agreement.  Mr Simantob's position was that the cheques were payments under the settlement agreement towards the outstanding sums due.  The eight cheques were never presented for payment but were replaced with other post-dated cheques (in increased sums) at various points. 
  • February 2016 - Mr Shavleyan transferred a further US$200,000 to Mr Simantob.
  • April 2016 - Mr Simantob issued proceedings for US$2,378,000 (US$2,178,000 of which was "interest") and applied for summary judgment.  In response, Mr Shavleyan contested the original settlement agreement, having received advice from his lawyers that the US$1,000 per day penalty payment clause might be an unlawful penalty.

US$1000 per day not a penalty - outcome of the summary judgment application

The master (judge) hearing the application awarded summary judgment on the principal amount owed of US$600,000 (being the US$800,000 Mr Shavleyan had acknowledged he owed at the meeting in April/May 2014 less the US$200,000 payment made in February 2016).  The master found that the US$1,000 a day penalty payment clause was not an unlawful penalty (even though it was referred to as a penalty and it would result in an interest rate of 1000% per day if there was only US$1 of debt outstanding).  The remaining issues of whether (i) the parties had agreed to vary the 2010 settlement agreement in 2014; and (ii) good consideration had been given for the variation, were to be decided at trial.

The judgment at trial

At trial, the judge found that there had been a binding oral agreement in spring 2014 to vary the settlement agreement and that the parties had therefore agreed to cap Mr Shavleyan's liability at US$800,000, with no further "interest" falling due. 

The judge found that he was bound by authority to find that a party is not able to pay a lesser sum to fulfil a debt without giving some consideration.[2]  For the variation to be binding, therefore, it was necessary to identify some consideration passing from Mr Shavleyan (as debtor) to Mr Simantob (as creditor).  It was held that the additional consideration provided to Mr Simantob was Mr Shavleyan relinquishing his claims that the US$1,000 a day penalty payment was an unlawful penalty and that the settlement agreement was invalid.  The judge also commented on the commercial advantages that the variation offered Mr Simantob, including the approval of his colleagues and continued access to Mr Shavleyan's expertise in Islamic art and the London market.  However, he did not consider these commercial advantages to amount to good consideration.

Mr Simantob appealed the court's decision on the grounds that there had been no good consideration for the variation of the settlement agreement because the master at the summary judgment hearing had found that the US$ 1,000 a day rate of "interest" was not an unlawful penalty.[3]

 

Click here for our post on the High Court decision.

 

Judgment of the Court of Appeal

The Court of Appeal upheld the first instance decision, finding that there is a difference between a defence (or claim) which a party knows to be invalid or believes not to be valid, and one which may be doubtful but it believes in and pursues.  The court found that the latter applied in Mr Shavleyan's case and that there had therefore been good consideration.  The fact that the penalty payment clause had been found by the master at first instance to be lawful was immaterial to whether there was genuine doubt on behalf of Mr Shavleyan as to the merits of his defence when the variation was agreed (i.e. in 2014).  The court noted that Mr Shavleyan's defence in the summary judgment hearing had been based around the penalty payment clause and that he plainly intended to raise it in any proceedings brought by Mr Simantob.  The court was also mindful of public policy considerations around encouraging parties to settle disputes amongst themselves and "holding people to their commercial bargains".

Comments

It is trite law, familiar to every student of English law, that for a contract to be binding under English law, each party must receive "good" consideration.  Yet what can be "good" consideration has been the focus of fluctuating case law.  In 1884, the House of Lords held that the practical benefit of receiving part payment of a debt more quickly than receiving the full amount was not good consideration.[4]  In 1991, the Court of Appeal held that practical benefits could be sufficient consideration where performance of an existing obligation was offered in return for additional
payment.[5]   In 1993, the Court of Appeal held that that did not apply to part payment of debts.[6]  In this case, the Court of Appeal seems to be straining again to find good consideration for part payment of a debt.  

The court's finding that the consideration provided by Mr Shavleyan was his relinquishing his right to bring a claim that the penalty payment clause was void is particularly interesting given that Mr Shavleyan appears to not have even been aware of that right until 2015, after the alleged variation agreement, and had no hesitation in asserting that claim when Mr Simantob started proceedings.  It may well be that the court was looking to achieve a fair result in terms of the penalty payment clause but was bound by the findings of the master at the summary judgment hearing (which had not been appealed by Mr Shavleyan).

In practical terms, until the issue is determined by the Supreme Court, the case acts as a reminder to parties to document any agreement (or variation to an agreement) to avoid the validity of the agreement being challenged down the line.  Parties should also carefully consider whether good consideration has been provided and, if there is any doubt, make a payment to the contractual counterparty of a nominal amount (e.g. £1).[7]

 

[1] Simantob v Shavleyan [2019] EWCA Civ 1105

[2] Foakes v Beer (1884) 9 App Cas 605; Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 (CA)

[3] Cook v Wright (1861) 1 B & S 559

[4] Foakes v Beer (1884) 9 App Cas 605

[5] Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 (CA)

[6] Re Selectmove [1995] 1 WLR 473

[7] Or a non-monetary item in the case of releasing a debt.