Once an agreement is reached, it is critical to ensure that the agreement not only encompasses the terms upon which that agreement is reached but that the terminology is such to ensure that full recovery of the outstanding debt is maintained notwithstanding differing circumstances that may arise during the currency of the agreement.Very often the agreement may be the payment of a lesser sum with a term of the agreement being that should the lesser sum not be paid that the higher sum (or claimed amount) be recovered.
The first element to be considered is whether the agreement discharges the original cause of action. Obviously it would be important to ensure that the existing course of action is not discharged so that a further option is available to you should you require.
In this regard the agreement of one party to accept a payment or promises made under an agreement in substitution of their rights in respect of the existing cause of action will discharge the existing cause of action once entry into the settlement agreement occurs. “The essence of accord and satisfaction is the acceptance of the Plaintiff of something in place of his cause of action.” Dixon J McDermott v Black [1940] HCA 4.
To avoid this principle of accord and satisfaction it is essential to ensure that the agreement is not in satisfaction of the original cause of action, but is a proposal to resolve the original cause of action should the terms be satisfied. Accordingly excluding words such as “in full satisfaction” or “in final completion” would be appropriate. It would be necessary to ensure that the agreement is simply a proposal and that if its terms are completed then the cause of action will then extinguish (see Powell v Comfrey Constructions Pty Ltd and anor (2006) QDC 73). The terms should provide that only upon payment of the settlement sum is the cause of action satisfied and if not then there is a right to reinstate the earlier proceedings. (see Blue Moon Grill v Yorkeys Knob Boating Club Inc [2005] QSC 251.
The deed must be drafted so that there must be no discharge of the existing cause of action unless and until the terms of the agreement have been performed (Bloomer and Grill Pty Ltd v Yorkeys Knob Boating Club Inc (2006) QCA 253).
The next matter to be considered in the agreement is where the agreement allows (or the terms of which are of a lesser value) judgment for a higher amount should the agreed amount (which is a lower amount) not be complied with and will that represent a penalty.
If the higher amount is characterised as a penalty, equity will restrain the enforcement of that amount (see Ring Row Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656).
If the agreement is one in which the parties have established their obligations and the agreement would normally require the payment of an amount of money or an element of conduct and if that element of conduct or amount is not completed or paid a greater amount is sought which oppressive or unconscionable this will amount to a penalty.
“Equity in common law have long maintained a supervisory jurisdiction ….. to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and ….. (includes) ………. the degree of disproportion between (the two figures) …….. (2) the nature of the relationship between the contracting parties. ……. the courts strike a balance between the competing interests of freedom of contract and protection of week contracting parties.”
AMEV –UDC Finance Limited –v- Austin [1986] HCA 63 Mason and Wilson JJ at P193-4.
Further it has been held that where a creditor is willing to allow a debtor certain advantages or deductions from the debt as well as extending time for payment and if adequate and proper security in the mind of the creditor has been afforded to him then it is competent for the creditor to set out in the agreement that if payment of the settlement amount is not made, the original debt reverts. The court in Re Neil [1881] 16 CHD 675 accepted that as subject to the whole debt being plainly recited and being treated as an existing debt then the payment of the original debt is able to be enforced by the creditor.
His Honour Judge McGill in Van Vuuren v Van Nickerk [2009] QDC 155 has identified the current position as being “that there can be a settlement agreement under which a party is to pay X dollars in a particular way but if it is not paid that party will be liable to pay Y dollars only if the liability to pay Y dollars has already been established by a judgment or was not disputed or is expressly or impliedly agreed or admitted by the settlement agreement to have been payable otherwise the provision for the liability to pay Y will unenforceable as a penalty. Alternatively if under a settlement a party is to pay Y dollars but if X dollars is paid it will be accepted in satisfaction of the obligation to pay Y is not a penalty.”
Clearly the higher amount must be clearly detailed specifically in the agreement and the agreement to pay that amount must be identified in the agreement to ensure that there is no accord and satisfaction and that the seeking of the higher amount is not to be taken as a penalty.
Of course for it to be penalty there must be a significant difference between the agreed amount and the higher amount.
To ensure that the greater amount does not become a penalty, it is necessary to recite in plan terms the whole of the debt that is sought to be recovered should the agreement not be performed. In that regard the difficulty in referring to the higher figure as the claim, costs and interest is that there is no identification as to what these amounts are. It would then be open for the creditor party to argue that its position is that the unknown figure amounts to a penalty and could not have been foreseen at the time of the agreement.
The debt and amount that is payable must be identified as being the amounts that are sought if the terms of the agreement are not complied with and that the acceptance of the lower amount is only made on a condition that if the payment is not made or agreement not fulfilled the obligation to pay the higher amount that is sought revives and is sought to be claimed.
Whilst it is not only the terminology it is the intent in the document that is needed to be identified. It would be important to ensure that the existing cause of action is not discharged/discontinued until the terms of the settlement agreement have been finalised. It would also be important to have a form of acknowledgement of the debt or of the claim by the debtor being in detail the amounts or terms upon which the original claim is based (see Ford & Anor v La Forrest & POrs [2001] QSC 261).
It is essential to ensure that in the settlement agreement the liability to pay the original amount is established in the agreement and is agreed to be payable and is being not sought should the terms of the agreement be honored.
The next matter to consider in settlement agreement is where a lump sum figure is then offered during the course of the agreement and it is delivered to the creditor in full and final settlement of the amount sought under the agreement.
Of course it is arguable depending on the terminology used whether that is in full and final settlement of the amount claimed, being the original amount or alternatively full and final settlement of the amount sought in the agreement. The construction of the deed is critical in this regard to avoid this type of payment being accepted.
The deed should identify that there are no variations or amendments to the settlement agreement except as are contained in writing and signed by all parties involved. Further it would be necessary to incorporate that the agreement is not affected by any variation or indulgence given by the creditor to the debtor and that the remainder of the terms and the requirements of the deed are not affected by such an indulgence or variation.
If a creditor receives this type of payment the expected course of action would be to return the payment.
If however the creditor has banked the payment which is represented in full and final settlement there then becomes an agreement or contract within the settlement agreement. The debtor has put forward a proposal that an amount be paid in lieu of the balance amount outstanding under a settlement agreement and the expected consideration passing would be that this amount is received at an earlier time than that which would be expected to be received under the settlement agreement.
Accordingly the consideration that has passed has been the earlier receipt of monies that would otherwise not have been received except over a period of time. I of course am assuming that the full and final settlement amount is lower than the balance amount outstanding under the settlement agreement.
It is then open for the debtor to argue that there has been a variation to the agreement, the variation has been agreed to and accepted by the creditor’s action in banking or negotiating payment and the consideration that has been passed or offered to the creditor by the debtor has been that an amount has been paid earlier than under the agreement and the creditor has had the opportunity to invest or accept those monies at an earlier time.
Accordingly the opposing submissions by the creditor would be as follows (if available):-
- The payment is of no greater consideration than the installments required to be paid under the agreement (there is no consideration passing except which is given under the settlement agreement);
- There is a limited difference to the full and final settlement amount and the balance amount outstanding under the agreement and therefore the consideration passing is in effect no consideration;
- The parties have agreed that any variation or agreement must in writing and signed by all parties;
- If applicable, the creditor has notified the debtor that the payment has been made in part-payment and will be accepted as part-payment and is not accepted in satisfaction of the terms of the agreement.
- That there was no intention to conclude the bargain and that it (the payment )was accepted with a reservation of rights thereby altering the nature of the payment.
- That upon consideration of the text the surrounding circumstance and the purpose and object of the payment that a reasonable person would have understood the payment was not in satisfaction of the agreed amount or of the cause of action.
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