Developments in contract: Part performance

Principles

• An offer to partly perform a contract, such as by paying less than an amount already due, cannot, in the absence of fresh consideration, create a binding compromise.

• Good consideration in these circumstances requires some added benefit to the creditor, however, a "practical benefit" does not amount to good consideration: Foakes v Beer.

• However, agreeing to forego a valuable right, such as not to pursue an arguable claim or defence, may amount to good consideration.

Recent Developments

• In Simantob v Shavleyan, the High Court considered whether a variation to a settlement agreement was supported by good consideration.

• Under the settlement agreement, Mr Shavleyan agreed to pay Mr Simantob $1.5m plus $1,000 penalty for every day’s delay in payment. Mr Shavleyan only paid some of the principal on time and therefore owed the outstanding principal and the penalty charges, which continued to accrue.

• Mr Simantob eventually agreed to vary the settlement agreement and accept $800,000 in final satisfaction of the principal and penalty charges owing. The Court then considered whether this variation agreement was supported by good consideration, and therefore binding on Mr Simantob, or whether he could still demand the payment of the amounts due under the settlement agreement.

• The Court dismissed arguments that Mr Simantob received good consideration in the form of prestige and standing in his local community for settling with Mr Shavleyan or through continued access to Mr Shavelyan’s expertise and contacts (as the parties continued to deal). Each constituted only a “practical benefit”, which is not good consideration.

• However, in varying the settlement agreement, Mr Shavleyan had agreed not to challenge the enforceability of the penalty clause in the settlement agreement. This agreement not to run an arguable defence was held to constitute good consideration and the variation was thus binding on Mr Simantob.

What this means

• When parties arrange to make part-payment of a debt or partial performance of a contract, they should consider and specify whether that agreement is intended to discharge the original obligations.

• Variations to the terms of a contract allowing part performance should be signed as a deed to avoid any ambiguity about whether there is good consideration.

• If the underlying contractual obligation is disputed, then it may be argued that an agreement to make part performance was supported by good consideration.

• This is an area of law to watch, as there is Court of Appeal authority for and against “practical benefit” being fresh consideration (see Williams v Roffey and the later Selectmove). The current trend is against this, as demonstrated by this case, but Lord Sumption has expressed the need for it to be considered by an enlarged panel of the Supreme Court when a suitable case arises.