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An Agreement To Give Up A Defence Without Merit Can Still Have Value

The recent Court of Appeal decision in Simantob v Shavleyan [2019] EWCA Civ 1105 demonstrates that a party’s agreement to give up a defence subsequently found to have no real prospect of success can still be considered valuable consideration for the purposes of a legally binding contract.

Background

Both parties were dealers in Islamic antiquities and business associates. Their relationship soured and Shavleyan ended up owing sums to Simantob. The parties entered into a Settlement Agreement on 1 May 2010 under which Shavleyan agreed to pay Simantob $1.5 million. This included a term that Shavleyan would pay $1,000 per day if Simantob did not receive full satisfaction by 21 May 2010 ( “$1,000 per day clause”).

Shavleyan did not provide the agreed sum by that date, but made a series of part payments between August 2010 and August 2013 totaling $1.1 million. His evidence was that he had objected to the $1,000 per day clause as a penalty from the outset of the Settlement Agreement.

At a meeting in Spring 2014, Shavleyan gave Simantob eight post-dated cheques for $100,000, which he claimed were accepted in full and final settlement of any outstanding debts under the Settlement Agreement. Simantob’s position was that the cheques were payments on account of sums already due.

The commercial relationship between the parties continued, although Simantob expressed concerns that Shavleyan did not have the funds to cover the post-dated cheques. These misgivings were justified and the post-dated cheques were then replaced by others, all for slightly increased sums. None of the substitute cheques could be honoured either, although Shavleyan did transfer $200,000 to Simantob in February 2016.

Shortly before the limitation period expired in April 2016, Simantob brought a claim for $2,454,000, of which all but $200,000 constituted sums owed under the $1,000 per day clause. In response, Shavleyan pleaded that the $1,000 per day clause was void as a penalty and that the Settlement Agreement had been varied in Spring 2014. That variation meant he was only liable for a maximum of $600,000, on the basis that Simantob had agreed to accept $800,000 less the $200,000.

Simantob was granted summary judgement on 17 October 2017 by Master McCloud for $600,000 (as an admitted debt) together with interest of $171,999 (based on a rate of 8% rather than $1,000 per day). In doing so, the Master rejected Shavleyan’s penalty clause defence. The issue of whether the Settlement Agreement had been varied was then decided by the High Court.

High Court decision

At trial, Kerr J found that the parties had “kissed and shaken hands” on a legally binding oral variation of the Settlement Agreement in the spring of 2014. Although the authorities - including Foakes v Beer [1884] 9 App Cas 605 - suggested that part payment of a debt could not satisfy the whole unless an additional benefit was conferred on the creditor, Shavleyan’s forbearance of his defence that the $1,000 per day clause was a penalty was such an additional benefit. This was so, even though the penalty argument had subsequently failed before the Master, because it might have succeeded or at least been found to be arguable.

The Court of Appeal decision 

The Court upheld the decision that forbearance of the penalty defence was good consideration for the variation, although for different reasons to Kerr J.

Simon LJ (delivering the leading judgement) distinguished between two situations:

  1. when a person threatens a claim or defence in which that person has no confidence at all 
  2. when a person intimates a claim or defence which, although doubtful, he or she believes in and intends to pursue if necessary.

The case fell “squarely” into the second category because Shavleyan had raised his concerns about the $1,000 per day clause, had intimated the penalty defence and plainly intended to raise it in any proceedings brought by Simantob. By entering into the variation agreement in Spring 2014, he agreed that he would no longer be able to raise that defence and the debt would be consolidated at $800,000. It was irrelevant that Master McCloud had subsequently found the defence to be without merit because the validity of the consideration had to be judged at the time the agreement was made.

He also observed that there was an important public policy of holding people to their commercial bargains. This acted as a limitation on the public policy of discouraging parties from threatening unreasonable claims or defences.

Finally, the Court found that the rule in Foakes v Beer was not engaged. The consideration provided was the forbearance to rely on a penalty clause, not the expectation of a commercial advantage as a result of accepting smaller payments. It was well established that the compromise of a doubtful claim was binding as a contract and, in this case, there was clearly genuine doubt as to whether the $1,000 a day clause was a penalty.

Comment

Although disputes over the validity of consideration are relatively unusual, this is an important reminder that the doctrine remains an important feature of English contract law. Where the adequacy of the consideration is doubtful, practitioners should ensure that the contract is executed as a deed.

Otherwise, the judgement is notable because it recognises that an agreement to give up a claim or defence, even if it is unlikely to succeed, is something of value, provided that there is a sincere belief in its validity. On that basis, parties should carefully consider the appropriate time to abandon arguments, even if, on the face of it, they are relatively weak.

Related Lawyers: Adam Jacobs
Related Practice Areas: Commercial Disputes