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23 July 2019
According to the Court of Appeal, giving up a right which a debtor does not even know it has is sufficient consideration for settling a debt. However, the vexed question of what amounts to 'good' consideration remains uncertain enough for those entering into a contract to always consider whether good consideration has been given. If in doubt, pay a nominal amount.(1)
Dan Simantob (based in Los Angeles) and Yacob Shavleyan (based in London) were both dealers in Islamic antiquities. In 2008 Simantob acquired various textiles that were eventually auctioned at Sotheby's by Shavleyan for £1.2 million. Simantob claimed that, prior to the auction, he had consigned the textiles to Shavleyan to sell in return for a cut of the sale proceeds; however, Shavleyan claimed that he had purchased them outright from Simantob. The parties had a long history of working together and decided to enter into a settlement agreement.
Under the terms of that agreement, Shavleyan was to pay Simantob $1.5 million by 21 May 2010 in full and final settlement of all claims between the parties. If the payment was not made by the deadline, a penalty payment of $1,000 per day would become payable, no matter the amount then outstanding. No payment was made by the deadline and interest began accruing. The timeline of events is as follows:
The master hearing the application awarded summary judgment on the principal amount owed of $600,000 (being the $800,000 that Shavleyan had acknowledged he owed at the meeting in April/May 2014 minus the $200,000 payment made in February 2016). The master found that the $1,000 a day penalty payment clause was not an unlawful penalty (even though it was referred to as a penalty and would result in an interest rate of 1000% per day if there was only $1 of debt outstanding). The remaining issues of whether the parties had agreed to vary the 2010 settlement agreement in 2014 and whether good consideration had been given for the variation were to be decided 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 Shavleyan's liability at $800,000, with no further interest falling due.
The judge found that he was bound by authority to find that a party cannot pay a lesser sum to fulfil a debt without giving some consideration.(2) Therefore, for the variation to be binding it was necessary to identify some consideration passing from Shavleyan (as debtor) to Simantob (as creditor). It was held that the additional consideration provided to Simantob was Shavleyan relinquishing his claims that the $1,000 a day penalty payment had been an unlawful penalty and that the settlement agreement had been invalid. The judge also commented on the commercial advantages that the variation offered Simantob, including the approval of his colleagues and continued access to Shavleyan's expertise in Islamic art and the London market. However, he did not consider these commercial advantages to amount to good consideration.
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 judge at the summary judgment hearing had found that the $1,000 a day rate of interest had not been an unlawful penalty.(3)
The Court of Appeal upheld the first-instance decision, finding that there is a difference between a defence (or claim) which a party knows or believes to be invalid and one which may be doubtful but it believes in and pursues. The court found that the latter applied in 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 Shavleyan as to the merits of his defence when the variation was agreed (ie, in 2014). The court noted that 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 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".
It is trite law, familiar to English law students, that for a contract to be binding under English law, each party must receive good consideration. Yet what qualifies as '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 Shavleyan was him relinquishing his right to bring a claim that the penalty payment clause was void is particularly interesting given that Shavleyan appears to have been unaware of that right until 2015, after the alleged variation agreement, and had no hesitation in asserting that claim when 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 master's findings at the summary judgment hearing (which Shavleyan had not appealed).
In practical terms, until the issue is determined by the Supreme Court, the case reminds parties to document any agreement (or variation to an agreement) to avoid the validity of the agreement being challenged further down the line. Parties should also carefully consider whether good consideration has been provided and, if there is any doubt, pay the contractual counterparty a nominal amount (eg, £1).(7)
For further information on this topic please contact Davina Given or Laura Evans at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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