Tag Archives: contracts

Settlement without Penalty

Every day thousands of disputes are settled by agreement. Written Terms of Settlement are entered into by those who want to be sure they have a clear enforceable agreement in relation to the relevant issues.  Often the deal done is that one party to the Terms  of Settlement (A) will pay the other (B) a sum of money.  In order to encourage payment on time there is another provision that if A doesn’t pay that sum, then A needs to pay more.   In legal circles, it is known as the default provision – what is agreed to happen if A defaults in making the promised settlement payment.  Normally the default provision includes agreement to judgment being entered by consent for the larger amount if the lesser amount is not paid on time.

The way the default provision is drafted in the context of the Terms of Settlement makes all the difference to whether it is enforceable or not.

Any clause in a contract which includes a financial penalty for not making a payment in time which is held by a court not to be a “genuine pre-estimate” of the loss suffered by the payee because the payment does not make the payment, is void as a penalty.  It cannot be enforced.  So, for example, if A has agreed to pay B $100 for a box of items, and agrees to pay $200 if the payment is a day late, and that extra $100 payment is not what A and B genuinely think represents the loss to B of having to wait an extra day, then that agreement about the $200 payment will be unenforceable.

However, if A really owes B $200 but B agrees to accept $100 if it is paid by a certain day (and only if it is paid by then) it is not void as a penalty.  There is the same effect of encouraging A to pay the $100 on time or pay $200 if late – but the crucial difference is that in this scenario B has agreed to accept less than is in fact owing to him, only on condition of payment by a certain date.

One way to avoiding the default provision being void as a penalty in if A does not pay up on time is to ensure the Terms of Settlement include the concession by A that A owes B the larger amount ($200, in this example).  This should be set out upfront as part of what is agreed.  Another clause then needs to set out that B will accept payment of a lesser amount (in this example, $100) by a certain day, but that if A does not pay by then, B can obtain judgment for the $200.

There needs to be acknowledgement, either express or implicit, that A owes B the larger amount at the time of the Terms of Settlement.

See the recent Victorian Supreme Court case of Legal Practice Management (Vic)(In Liq) v Simms Corp Hotels & Leisure Pty. Ltd. [2013] VSC 734 for a helpful discussion of relevant cases on this issue, starting with the well known High Court decision of  O’Dea v Allstates Leasing Systems (W.A.) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359.


Drafting to Avoid Litigation

Recently I was asked to assist a client who had purchased a business for some millions of dollars, on the basis that the person he was paying the money to would not compete with him for five years.  The vendor had now set up in competition a year or so after the purchase. My client wanted to stop him, or be paid damages for the loss it was causing his business.

Unfortunately, the more I looked at the lengthy contract and its many annexures, the more obvious it became that my client had not purchased the protection from competition he had paid so much to obtain.

The contract was long, but it was missing crucial elements.  Someone had clearly copy-pasted from another contract of a similar type and then added in some further clauses in their own version of legalese…without stopping to check that the new clauses did not contradict the original ones or to make sure that definitions of key elements made sense when read in their new context.  Even worse, the original clauses had been added to, in ways that meant they no longer made sense.

What should have been a clear claim for breach of a restraint of trade clause became far more difficult as a result of the drafting of that contract.  On this occasion, happily there was another cause of action that could be relied on, and my client was able to obtain some relief for the losses he had suffered.  But it was not as much as he would have obtained if the contract had been thought through more in the first place. Frankly, his initial lawyer had let him down by not drafting the contract more carefully.

Drafting documents is not a topic that most of us get particularly excited about.  We do not tend to wake up in the morning and leap out of bed with joy: “Today I am going to settle a statement of claim!” Or, “I can’t wait to get stuck into that 80 page contract and make sure it protects my client every which way”! The reality is, though, that it is one of the most important things that we as lawyers can offer our clients.  Done correctly, our documents protect them at the outset of their business dealings, (offers and contracts), along the way (letters of demand), in the course of litigation (pleadings, emails and letters to opposing lawyers, written submissions), and at its conclusion (terms of settlement).  Done incorrectly, our documents can fail to protect and can set our clients up for further litigation and costs.

The longer I practise as a lawyer the more I realise how right Lord Denning was when he said:

“To succeed in the profession of the law you must seek to cultivate command of language. Words are the lawyer’s tools of trade. When you are called upon to address a judge, it is your words which count most. It is by them that you will hope to persuade the judge of the rightness of your cause. When you have to interpret a section in a Statute or a paragraph in a Regulation, you have to study the very words. You have to discover the meaning by analysing the words—one by one—to the very last syllable. When you have to draw up a will or a contract, you have to choose your words well. You have to look into the future—envisage all the contingencies that may come to pass—and then use the words to provide for them. On the words you use, your client’s future may depend”.  

(Lord Denning: The Discipline of Law, Butterworths, 1979, page 5).

“On the words you use, your client’s future may depend”.  Now there is a call to action, and an encouragement to keep working at making your communications as clear as possible.  Perhaps you even will start to leap out of bed with pleasure, knowing that today you will be drafting again….protecting and advancing the causes of your clients, who are relying on you.