Legal Blog

Let’s Make a Deal

A deal is made. Someone is going to take less than is deserved and, in consideration, another person is going to perform certain obligations. This scenario pops up all the time. It is most prevalent in creditor-debtor relationships but can arise elsewhere (e.g. landlord and tenant arrangements). What happens when the person, who has received the benefit of the reduced obligations, defaults on the deal?

Nice try

This question was answered in Gyro Capital Inc. v. Franzke, an unreported 1997 decision of the Ontario Court (General Division). The defendant purchased shares for cash and a promissory note for $150,000 due September 15. The note was not paid on its due date. The parties then agreed that the defendant would discount the note by $50,000, that $60,000 would be paid immediately, and that the remaining $40,000 would be paid in accordance with a schedule of payments. The defendant made some of the payments but ultimately missed the last few for an total owed of $9,000. The plaintiff sued for $59,000, the aggregate of the $50,000 discount and the unpaid $9,000. With interest, that amount skyrocketed to $113,270.

The trial judge stated:

“The problem with the defendant’s submission that there was a new agreement lies, in part, in the defendant’s failure to provide any real consideration for the plaintiff’s promise to accept less than the amount due under the promissory note. On the facts here, the plaintiff is left with not only less than the amount originally due, but incomplete performance of the promise to satisfy the debt by paying the lower amount. Had the defendant paid the lesser amount as promised, then the plaintiff would have had some benefit in having the lesser amount at that time without having to litigate”.

The trial judge held that the waiver of the $50,000 was conditional on the payment of the lesser sum. Absent full performance of that payment, the plaintiff could demand full payment on the original promissory note.

Moral

The conclusion to which the court came was not surprising. However, this matter should not have had to be litigated. The agreement should have been drafted to make it obvious that if any payment was missed, the deal was off and the plaintiff was entitled to the original debt in full, less payments actually made.