Agreement to pay contested debt was effective variation

Mr Justice Kerr was required as part of his judgment to consider whether Yacob Shavleyan, a dealer in Persian art and owner of a gallery in London, had provided business partner Dan Simantob with consideration over and above his payment to settle the debt. Under English law, a debt cannot be satisfied by paying less than the amount due "unless there is some benefit to the creditor added so that there is an accord and satisfaction".

Shavleyan and Simantob have a long-standing business relationship and family connections as part of London's close-knit Persian business community. Relations between the two men became strained in 2010, in connection with the sale of valuable Islamic, Persian and Turkish textiles originally acquired by Simantob through an auction house in London. Shavleyan claimed that he had purchased the pieces outright for £226,000, meaning he was entitled to the full proceeds from the auction, while Simantob claimed he had consigned them to Shavleyan for sale in return for a share of the profits.

The parties entered into a settlement agreement in 2010, under which Shavleyan made various payments to Simantob. However, he did not pay all that he owed. The men then disputed whether the settlement agreement was varied in 2014 in a way which limited the amount of Shavleyan's liability, or whether part of the debt was still outstanding under the 2010 settlement agreement.

After hearing arguments from both parties, Mr Justice Kerr found that "on the balance of probabilities" the settlement agreement had been orally varied in 2014, in a way which was intended to be legally binding. The intended effect of the variation was that Shavleyan would pay the $400,000 outstanding under the settlement agreement plus an additional $400,000, in lieu of a clause in the 2010 agreement which charged 'interest' at a rate of $1,000 while any money remained outstanding.

The judge then had to decide whether Shavleyan had provided sufficient consideration in order for the variation to be legally effective. He first considered whether the "prestige and standing" Simantob gained with his peers in a local business community which was averse to conflict should be considered sufficient consideration. He ultimately concluded that this was only a "cultural benefit"; something which previous case law had ruled out as being sufficient consideration.

The judge also rejected an argument, put forward by Shavleyan, that making payments to Simantob in the form of post-dated cheques which Simantob was asked not to deposit provided consideration in the form of "security for a pre-existing debt". He said that he "doubt[ed] whether providing the cheques added anything of substance to the promise to pay in monthly instalments the total sum of $800,000 they represented". Neither was the fact that Simantob retained access to Shavleyan's expertise and contacts in the London market sufficient consideration, he said.

However, the judge ultimately ruled that agreement to pay $800,000 in order to fully discharge the debt was good consideration, as Shavleyan "did not merely promise to pay a pre-existing debt". Shavleyan had continually disputed the validity of the 2010 agreement, both on the grounds that he had been coerced to enter into it and that the daily $1,000 charge for late payment was an unenforceable 'penalty' clause, he said.

"Mr Shavleyan maintained, albeit unsuccessfully, those arguments in the summary judgment proceedings," the judge said.

"While the arguments subsequently failed, they might – the penalty argument in particular – have succeeded or at least been found arguable. If the $1,000 a day clause had been struck down, Mr Simantob would have been entitled under the settlement agreement only to the $400,000 outstanding principal due instead of the $800,000 to which he became entitled under the settlement agreement as varied. I therefore conclude that this was not a case of a promise to pay part only of a pre-existing debt," he said.

"This case provides an insight into the legal dealings of the Persian art dealing community in London which, as the judge noted, usually prefers its disputes to be dealt with in-house," said litigation expert Sinéad Esler of Pinsent Masons, the law firm behind Out-Law.com. "Here, an elaborate course of dealings between the parties effectively boiled down to two events: the settlement agreement entered into in 2010, and a variation to that agreement in 2014."

"The case is a reminder of how a verbal variation to a written contract is valid in law, as long as good consideration is given and the variation is intended to have legal effect. What constitutes 'good consideration' is to some extent open to argument, and one feels that the judge here may have applied a more generous interpretation to avoid upholding an interest clause that should arguably have been found void as a penalty," she said.

"Nonetheless, it is risky to assume that the court will always be in a position to wade in with a common sense solution. Parties are well advised to document their agreements in writing wherever possible, to avoid later reliance on stale and competing recollections and - of particular importance to those who prioritise privacy and discretion – having to thrash out their disputes in the London courts," she said.