Can forbearance to rely on a defence to a claim constitute good consideration if the defence is later held to be unarguable?
The parties were long-standing business associates and, owing to some difficulties arising in the course of their association, sums became payable from the Respondent to the Appellant. By a Settlement Agreement entered into on 1 May 2010, the parties agreed that the Respondent would pay the Appellant US$1,500,000 in full and final settlement of all claims between them. Under the terms of the Settlement Agreement, in the event of non-payment by the due date, the Respondent was to pay in addition ‘1,000 dollars… for each extra day as a penalty’ (‘the $1,000 per day clause’).
It was common ground that the sum became due on 21 May 2010 and was not paid. The $1,000 per day clause therefore became operative on 22 May 2010 at an annual rate of interest of 24.333% which, although high, was accepted as not unusual in the market in which the parties did business.
When the Respondent made a part payment of $500,000 on 9 August 2010, the effect of the $1,000 per day clause was such that interest continued to accrue at the same rate, without any abatement to take into account of the fact that one third of the principal had been paid. It was the Respondent’s evidence, accepted in the High Court, that he had always considered the $1,000 per day clause unfair and unconscionable; nor did he consider it was binding on him until the present litigation.
In Spring 2014, the parties concluded a business transaction, which the Respondent asserted represented an agreement to modify the Settlement Agreement. Under this new agreement, the Appellant would accept $800,000 in full and final settlement of the debt (‘the Variation Agreement’).
This was denied by the Appellant, who brought proceedings claiming $2,454,000 as the sum outstanding under the Settlement Agreement. Of this, all but $200,000 represented the interest due under the $1,000 per day clause, and the Appellant further claimed continuing interest at this rate of $1,000 per day. In response, the Respondent pleaded, inter alia, that the $1,000 clause was void as a penalty.
The Appellant was granted summary judgment by Master McCloud on 17 October 2017, who found that the Respondent had no arguable defence to a claim based on the $1,000 per day clause. Directions were given for the trial of the remaining issues, which came on for hearing before Kerr J.
The High Court
Kerr J approached the issues in three parts, of which only the first two were pursued in the Court of Appeal: first, whether there was a variation which provided for a full discharge of the respondent’s obligations under the Settlement Agreement; second, whether that variation was supported by good consideration.
On the first issue, Kerr J found that the parties had orally concluded the Variation Agreement some time in Spring 2014 and intended to be bound by its terms. This was further held to be legally enforceable: although the authorities clearly held that part-payment of a debt cannot satisfy the whole unless some additional benefit is conferred on the creditor, Kerr J distinguished the present case on the basis that additional benefit had been so conferred upon the Appellant in the form of the Respondent’s forbearance to run the defences that the $1,000 per day clause was void. Although that defence ultimately failed before Master McCloud, the Respondent had genuinely objected to the clause since 2011 and the defence might have succeeded or at least have been found to be arguable.
The Court of Appeal
The key legal question was whether Kerr J had been right to hold that the Respondent’s forbearance to such defence constituted good consideration for the Variation Agreement, given that it had failed.
Simon LJ (for the Court) considered that whether Master McCloud’s decision was right or wrong was immaterial; the question of the validity of the consideration for the Variation Agreement had to be judged at the time that it was made, i.e., in Spring 2014.
Having reviewed the authorities, Simon LJ distinguished between two categories of cases: (i) where a person threatens a claim or defence in which that person has no confidence at all; and (ii) where a person intimates a claim or defence which, whilst the person recognises that it raises a doubtful or undecided point, also believes in and intends to pursue it in court if necessary. In respect of the first category, the authorities clearly held that forbearance would not constitute good consideration on grounds of public policy.
On Kerr J’s findings, however, this case fell squarely into the second category: the Respondent 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 the Appellant. By entering into the Variation Agreement, the Respondent agreed that he would forego that defence and the debt would be consolidated at $800,000.
Simon LJ also referred to additional considerations within which the question needed to be contextualised:
- the public policy in favour of holding people to their commercial bargains, which provides a limitation on the public policy discouraging parties from threatening unreasonable claims or defences;
- that the suggestion the $1,000 per day clause was a penalty was made at a time when there was considerable uncertainty in the law, and before the Supreme Court ruled in Cavendish Square Holding BV v Makdessi  UKSC 67;
- academic commentary stating that, in the modern law, in cases of promises to forego legal claims or defences, the consideration is said to be the surrender, not of a legal right, which may or may not exist and whose existence, at the time of the compromise remains untested, but of the claim to such a right.
The case was, therefore, clearly distinguished from the ‘part-payment of a debt’ cases established by Foakes v Beer (1884) 9 App Cas 605. It could not seriously be suggested that there was not genuine doubt as to whether the $1,000 per day clause was or was not a penalty, when that clause could have resulted in the Respondent paying $1,000 per day in interest, even if only $1 remained outstanding by way of principal. Forbearance to rely on this valid penalty defence was clearly good consideration, and the appeal was therefore dismissed.
Cases on consideration are increasingly rare, however, this case neatly demonstrates how the older doctrines of consideration, part-payment of debts, contractual variation, and forbearance on legal rights remain relevant to modern contract law. In particular, the case confirms that the right to claim genuine legal rights before the courts remains something of value capable of supporting contractual promises.
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