A settlement agreement between two dealers in Islamic antiquities provided that, if the principal sum was not paid in full by a specified date, a daily rate of $1000 dollars must be paid "as a penalty", irrespective of any part payments. The principal sum was not paid in full by the specified date and substantial interest accrued under the penalty clause. Subsequently, as the court found, there was a variation agreement under which the receiving party agreed to accept a fixed sum of $800,000 in full and final settlement of the paying party's far greater liability under the settlement agreement. The Court of Appeal then had to decide if the paying party had provided good consideration for the variation agreement by giving up its argument that the $1,000 a day clause was a penalty. That argument had failed before the High Court Master but could it, at the date of the variation agreement, have been good consideration?
The Court noted that threatening a claim or defence in which a person has no confidence at all is quite different from intimating a claim or defence that raises a point which they recognise raises a doubtful or undecided point, but also believe in and intend to pursue in court, if necessary. This
case fell squarely into the second category. The paying party raised their concerns about the $1,000 a day clause, intimated the penalty defence and plainly intended to raise it in any proceedings brought by the receiving party. By entering into the variation agreement, they agreed they would no longer be able to raise that defence and the debt would be consolidated at the $800,000. The question of the validity of the consideration for the variation agreement must be judged at the time that it was made. The suggestion that the $1,000 a day clause was a penalty was made when there was considerable uncertainty in the law, and before the Supreme Court's judgment in Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis.
Another countervailing public policy to be taken into account was that of holding people to their commercial bargains, which provides a limitation on the public policy of discouraging parties from threatening unreasonable claims or defences. There cannot be any sensible public policy against encouraging parties to raise claims or defences that they reasonably believe may succeed, even if they eventually turn out to fail.