Default provisions of settlement agreements must be reasonable: Baron

A case successfully argued in Ontario’s Superior Court by Toronto civil, corporate and commercial litigator, Bruce Baron, gives new guidance on drafting default clauses within settlement agreements.

The case, Nikolai Chilikoff v West Capital Placer Inc. 2016 ONSC 6354 (CanLII), began in 2014 when Baron’s client filed a statement of claim against the principals of West Capital Placer alleging they had misrepresented an investment opportunity that resulted in a net loss to his clients in the amount of $325,000, he tells

“Facing the prospect of collecting against insolvent defendants outside the jurisdiction of Ontario, the plaintiffs agreed to settled for $75,000 at mediation,” Baron points out.

The minutes of settlement stipulated the defendants would pay the plaintiffs in four installments over a period of several months and that in the event of default by the defendants, the plaintiffs would be entitled to take out a judgment against the defendants in the amount of $150,000, he adds.

“The first two payments were made, but the defendants defaulted on the third and fourth payments, so we brought a motion to enforce judgment against the defendants for $150,000 in accordance with the settlement agreement,” explains Baron, principal of Gaertner Baron Professional Corporation.

The defendants resisted the motion and argued that the plaintiffs were not entitled to judgment on the basis that the default provisions within the settlement agreement amount to an unenforceable penalty clause, he says. The defendants also claimed they were entitled to “Relief from Forfeiture” pursuant to s. 98 of the Courts of Justice Act.

“Plaintiffs should be aware that the courts will often allow a defaulting defendant extra time — known as Relief from Forfeiture — to come up with a missed payment,” Baron says. “It is also important to note the courts may carefully scrutinize settlement agreements to determine whether or not their default provisions amount to a penalty.”

Baron points out that the courts will not enforce unconscionable penalty clauses, and at issue in this action was whether the default provisions within the minutes of settlement amounted to a penalty.

“In her ruling, Madam Justice Freya Kristjanson emphasized the importance of settlement agreements in the context of litigation and held that where parties enter into minutes of settlement, they are generally required to honour that settlement, and are not permitted to resile from the terms of their settlement absent demonstration of vitiating factors such as duress or unconscionability,” Baron notes.

The judge determined the default provisions were not a penalty and enforced the settlement, awarding judgment for the plaintiffs in the amount of $150,000, he adds.

“She found the default provisions were well within the plaintiff’s actual loss, that they were not unconscionable, and that the minutes of settlement were negotiated by all parties and represented by counsel,” Baron says.

For lawyers drafting client settlement agreements, he says the key takeaway is to ensure the default provisions don’t serve to compensate the plaintiff for an amount in excess of their arguable losses.

“If they do, the settlement agreement may be in jeopardy of being deemed invalid.”

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