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Time to Pay

Posted on April 1, 2020 | Posted in Collections

A creditor and debtor hammer out a deal as to how much the debtor is going to pay. This could be done through negotiation or at mediation or pre-trial. The debtor and creditor paper that deal, but do not discuss what happens if the debtor then defaults. Big mistake. As in every agreement, the party who is getting a benefit from another’s actions in the future should always consider what happens in the event of a default.

An empty wallet held open.

For example, assume that the claim is $50,000. The creditor agrees to accept $20,000. If the agreement is silent as to default, then, if the debtor does not pay all or part of the $20,000, what are the creditor’s remedies? The creditor can certainly bring a motion for judgment based on the settlement and probably obtain a judgment for $20,000. However, a judgment is not payment and when the creditor made the deal to accept less than the amount originally claimed, no doubt the creditor probably wanted to be paid the reduced amount, not just receive a judgment for it. Depending on the wording of the agreement, the creditor might be able to ignore the deal and bring or continue an action based on the original claim – but that outcome is not guaranteed.

Normally, a creditor would insist on a provision, which stated that if the debtor defaulted in payment, then the creditor would be entitled to judgment for an amount (on which the parties would agree) greater than the settlement amount and the debtor would receive credit for anything paid pursuant to the settlement. This gives a major incentive to the debtor to pay the agreed settlement payments on time and gives the creditor comfort that, if the debtor does not, then the creditor will receive a judgment that would be somewhat close to the amount being claimed in the action. Using our example set out above, the parties might agree that the judgment would be for $40,000 (less anything paid under the settlement) if the debtor failed to pay the full $20,000.

The creditor in Haas v. Viscardi, a 2019 Ontario Court of Appeal decision, well understood the need to anticipate default in a settlement agreement.


The creditor brought an action against the debtor seeking $200,000 in damages for fraudulent misrepresentation. The defendant, ultimately the debtor, and the creditor negotiated an agreement settling the action. The creditor would dismiss the action and the debtor would pay three $10,000 payments on the 2nd, 4th, and 6th months after the settlement. The debtor honoured the agreement by paying the first $10,000 payment on time, but defaulted in making the 2nd payment and failed to cure the default within the cure period set out in the agreement.

If the agreement had been silent regarding default, the creditor might have been stuck with obtaining a judgment for $20,000 or, depending upon the interpretation of the agreement, could have continued on with his action and apply the $10,000 to the amount being claimed.

However, the agreement was not silent. It contained an unusual provision:

“If (debtor) fails to make the payment contemplated in paragraph 1(b), fails to cure any default within the cure period and/or fails to sign any documents required to be signed […] he shall be liable to the plaintiff for, and shall immediately pay to the plaintiff, the liquidated amount of $60,000 inclusive of damages, costs, taxes and interest for breach of this settlement agreement, which amount the parties agree is a fair and accurate assessment of the plaintiff’s damages attributable to (debtor’s) several liability or proportionate share of joint liability claimed by the plaintiff in the action …”

The creditor brought a motion for judgment against the debtor in the amount of $60,000, relying on that provision. The creditor claimed that amount  in addition to the $10,000 that the debtor had already paid. Indeed, if the debtor had paid $20,000 (of the $30,000 settlement amount), the creditor would still have brought a motion for judgment for the full $60,000.

The debtor had been represented at the time that he entered into the settlement agreement, but was unrepresented at the time of the summary judgment motion.


The debtor claimed that the provision was a penalty clause and therefore should not be enforced. The traditional common law rule allows a liquidated damages clause to be enforced if it is indeed a genuine pre-estimate of the loss arising from the breach of the contract. However, if it is not and represents an amount that is extravagant and unconscionable in comparison to the greatest loss that could conceivably be proven to have followed the breach, it will be considered an unenforceable penalty.

The motion judge noted that, in the settlement, the creditor gave up a $200,000 damage claim in return for the certainty of the debtor’s payment. The judge held that $60,000 was a more than fair estimate of the creditor’s damages arising out of the debtor’s breach of the agreement.

The judge also noted that a finding of unconscionability required a finding of inequality of bargaining power and a finding that the terms of an agreement have a high degree of unfairness. In order to establish unconscionability, a defendant must establish a grossly unfair and improvident transaction; a lack of independent legal advice; an overwhelming imbalance in bargaining power; and the other party knowingly taking advantage of the defendant’s vulnerability.

The judge held that the debtor did not meet any of the elements of unconscionability:

  • The transaction was not grossly unfair and improvident. It arose after lengthy negotiations, which brought the debtor resolution in a costly fraud action in which the creditor sought $200,000 plus costs.
  • The debtor did not suffer from a lack of independent legal advice. He had been represented by a lawyer and well knew the result that would flow from his default.
  • The debtor provided no evidence that he was vulnerable in his bargaining power. He appeared to be a sophisticated business person.
  • The debtor provided no evidence that he was vulnerable in general or that the creditor took advantage of any vulnerability.

Accordingly, the judge held that that the provision was not a penalty clause because it was neither unconscionable nor extravagant, nor was the manner in which the agreement reached oppressive.

Equitable Relief

The debtor contended that the judge could and should grant relief, under s. 98 of the Courts of Justice Act, against penalties and forfeiture on any terms as to compensation or otherwise as the judge felt just. The judge declined to order that relief. She had already decided that the provision was not unconscionable or extravagant and the debtor had provided no evidence that it would be unconscionable, at the time of the motion, to enforce the provision.


If nothing else, the debtor was persistent. He hired legal counsel and appealed the motion judge’s decision. In reasons for decision that took up two paragraphs, the Court of Appeal dismissed the appeal, indicating that the motion judge did not err in her analysis. The Court of Appeal awarded the creditor $12,000 in costs. No doubt the debtor had to pay the creditor’s costs of the motion itself, but, because we saw no reported costs decision, we assume that the debtor and creditor had agreed upon that amount.


Image courtesy of Chronomarchie.

Jonathan Speigel


Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.


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