When a bad defence is good enough: The Court of Appeal of England & Wales on consideration

The law of consideration is again in the limelight, not long after the English Supreme Court’s decision in Rock Advertising and Lord Sumption’s complaint that modern litigation rarely raises fundamental issues in the law of contract. This time, the Court of Appeal has held in Simantob v Shavleyan that agreeing to give up a defence to a claim can be good consideration, even when that defence is later deployed and found to have no real prospect of success. The decision is of particular relevance to parties entering or varying settlement agreements for less than the full amount owed – where there may be practical benefits in accepting less but little that has traditionally been regarded as consideration in law. It demonstrates the courts’ desire to hold parties to their commercial bargains wherever possible.

The parties in this case were both dealers in Islamic antiquities. They had entered a settlement agreement which provided that Mr Shavleyan would pay “1000 dollars... for each extra day as a penalty” on the balance outstanding after the agreed payment date. Over the next few years (and after the agreed payment date), Mr Shavleyan presented a collection of post-dated cheques to Mr Simantob as part payments of the amount outstanding, and in the meantime the parties resumed their commercial relationship. At one important meeting, they shook hands, and on Mr Shavleyan’s evidence, agreed to a lower settlement sum than specified in the settlement agreement.  However, this lower amount was still not paid in full and Mr Simantob eventually applied for summary judgment of the full amount, as well as the additional daily rate. 

Mr Shavleyan contended (among other things) that the additional daily rate was a penalty and therefore void. The High Court confirmed the validity of the settlement agreement, including the clause for the additional daily rate, but held that the settlement amount had been varied to the lower sum. The consideration for that variation was Mr Shavleyan’s forbearance at the time to challenge the additional daily rate described as a penalty, given part of the agreed lower sum related to those amounts.    

The key question for the Court of Appeal was whether the giving up of the penalty defence could amount to good consideration, in circumstances where it was ultimately found to have no prospect of success. In concluding that there was good consideration, the Court of Appeal noted that:

• Mr Shavleyan believed in the penalty defence and intended to pursue it in court if necessary (it was not a case of a person threatening a claim or defence in which they had no confidence);
• The public policy in favour of holding people to their commercial bargains limits the countervailing public policy discouraging parties from threatening unreasonable claims or defences; and
• There is no public policy against encouraging parties to raise claims or defences they reasonably believe may succeed, even if they eventually turn out to fail.  The law on penalty clauses was uncertain at the time of the agreement.

The fact that the defence was later deployed in breach of the forbearance was irrelevant, as the question of whether there is consideration must be answered at the date of the contract. 

Simantob v Shavleyan is a good reminder for parties to take care in concluding and implementing settlement agreements, especially when commercial dealings continue in parallel, and to be alive to the fact that courts will try to give effect to subsequent (and less formal) agreements and variations wherever possible.