Informal contracts, settlements, variations and part-payments: Understand the risks

24th October 2018

A recent dispute between long-standing business associates and friends has highlighted the risks that can arise with informal contracts, settlement, variations and part-payments. Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, offers her top tips for avoiding these common contractual traps for the unwary.

A common commercial scenario

Mr Simantob and Mr Shavleyan [1] had a long history of family, community and business ties, both having expertise and trading in antique Islamic, Persian and Turkish textiles.  When a number of claims arising out of their various business arrangements arose, Mr Simantob and Mr Shavleyan chose to resolve matters informally between themselves.  (Whilst the particular products and industry here are relatively specialised, the close relationship between the parties is common in many commercial cases.)

They entered into a settlement agreement and when Mr Shavleyan defaulted, another informal arrangement was reached between them. The latter involved payment of monthly instalments.  Unfortunately, after Mr Shavleyan had made, and Mr Simantob had accepted, several instalment payments, a dispute as to the nature of the latter arrangement arose.  Mr Shavleyan contended that the instalment arrangement had varied the original settlement agreement, reducing his full and final liability to a lesser sum; but Mr Simantob argued that it was merely a plan for payments to be made periodically on account of Mr Shavleyan’s liability for the full sum due under the original settlement agreement.

Purely on the particular facts, the High Court found that the instalment arrangement had varied the settlement agreement such that Mr Shavleyan had become liable only for the lesser sum. Legally speaking, however, the case could have gone either way.

Traps and tips

The case therefore highlights a number of issues of which all businesses should be aware:

• A contract, including any settlement agreement, is formed when all of the following key elements are present: offer; acceptance; consideration (i.e. money or money’s worth); intention to create legal relations; and certainty of terms. Crucially, there is no need for a contract to be in writing or for any other formalities to be present.
• A contract can therefore be made orally (face-to-face or via some communication medium such as the telephone), in which case it is important to note that it may then be difficult to establish the existence and/or the terms of an oral contract if and when a relationship breaks down and a dispute arises.
• A contract can also arise by conduct. Parties should not, therefore, act in any way that is inconsistent with their contractual intentions.
• In the same way that a contract can be formed without any formality, so too can it be varied without any formality [2].
• A valid contractual variation does, however, require the same fundamental elements for formation as do contracts generally (see our first bullet point above).
• Beware part-payments. Accepting part-payment of a debt can – unless it is very carefully thought through and accepted on suitable, clear, express terms – result in a creditor inadvertently reducing or extinguishing sums owed to it.
• Part-payment of a pre-existing debt does not, without more, amount to good consideration for the full discharge of a debtor’s liability…
• …BUT if a creditor obtains both part-payment and some other additional benefit [3], then the consideration requirement will be met and a debtor’s liability can be reduced or extinguished [4].

WM Comment

Remember the old adage: a stitch in time saves nine. In attempting to avoid legal proceedings, Mr Simantob and Mr Shavleyan got themselves repeatedly tangled in legal knots – and of course they ended up having to resolve the matter via litigation in the end anyway.  Taking the time to seek specialist advice, and to document business arrangements in formal, written contracts, can minimise the scope for dispute.

If you would like any further information or advice about these or any other commercial contract or dispute resolution issues, please do not hesitate to contact Gwendoline Davies or any member of the Commercial Dispute Resolution Team.

_____________________

[1] [2018] EWHC 2005
[2] Subject, potentially, to the existence and terms of any anti-variation provisions and/or the doctrine of estoppel – see our related briefing for further information
[3] which can be construed quite widely and could, for example and non-exhaustively, include some expectation of commercial advantage or some element of compromise or the minimising of a risk
[4] That is what happened in Simantob v Shavleyan: due to both the nature of the parties’ interrelated business and personal lives and to legal uncertainties within their informal commercial arrangements, the High Court held that the instalment payment arrangement represented a compromise to both parties and that there was therefore an element of additional benefit for Mr Simantob