Settlement agreements form an essential part of commercial debt repayments. By acting as a recording of the agreed terms of the repayment, such agreements are meant to provide certainty as to the intention of the parties. It is for this very reason that the terms of settlement agreements should always be in writing and be set out carefully to ensure that no disputes later arise.
To effectively cater to the negative consequences that may arise out of such agreements, it is advisable to include the following terms in a settlement agreement:
Payment of capital, interest and costs
Settlement agreements often arise as a result of legal steps having been taken. By this point legal costs will inevitably accrue to the debt. If summons has already been served by the time settlement has been negotiated, interest would have commenced as well. It is therefore vitally important to ensure that a settlement agreement confirms that repayment of not only the capital balance of the debt but also interest and legal costs are payable too. Where the creditor has granted an indulgence to accept a reduced amount, the wording of such agreement needs to be adhered to even more carefully to ensure that the exact scope of the indulgence is recorded in a manner that is not subject to ambiguous interpretation.
As settlement agreements often cater to payment of a debt over an extended period by instalments, such agreements should always cater for the eventuality of a default in payment. If an indulgence has been granted for a lower amount to be repaid, such clause becomes doubly important as it may also operate as a means of reserving the creditor’s right to once again demand repayment of the full amount owing.
To complement the breach clause, an acceleration clause is always advisable to ensure that individual demands for each missed payment need not be made separately as such clauses operate to make the entire debt, inclusive of interest and costs payable immediately in the event of default.
This type of clause operates to ensure that the debtor’s obligations under the original cause of action are not deemed to have been extinguished or replaced by the settlement agreement.
Parole Evidence Rule
Including a clause to confirm that this rule is applicable to an agreement is useful to ensure that extrinsic factors may not be relied upon in the event of a dispute. It should however be noted that this rule is applicable in general to contracts whether expressed or not, however, as discussed below, it should not be relied upon as a certainty as circumstances may justify grounds for exceptions to the rule.
Other useful clauses that should be included in settlement agreements are domicilium clauses (to confirm the chosen addresses for the serving of legal notices in the event of a dispute). Non-variation clauses protect the agreement from being changed, varied or altered unless such changes are agreed upon by both parties and reduced to writing.
The wording of settlement agreements should always be chosen carefully without the slavish use of precedents as the circumstances may call for unique clauses or wording otherwise not catered for by the precedent.
It is therefore always advisable to seek the assistance of a professional when putting together such agreements as their interpretations can turn on the meaning of even a single word and lead to unintended consequences.
The Nedbank case
In the recent case of Stopforth and Others v Nedbank Limited (HCAA20/2019)  ZALMPPHC 95 a full bench of the Limpopo High Court was confronted with a dispute over the terms of a settlement agreement. In brief, the facts were as follows:
(i) The Appellants had bound themselves jointly and severally as sureties and co-principal debtors for the debts of the principal debtor, a company in liquidation, owed to the Respondent, Nedbank;
(ii) The defendants entered into a deed of settlement, the terms of which provided for a payment of R800 000.00 “towards” the debt;
(iii) The issue in dispute was whether or not such payment was in full and final settlement of the principal debtor’s total indebtedness of R1 269 715, 58 (as contended by the Appellant) or merely an interim payment, pending repayment of the balance at a later stage (as contended by the Respondent);
In the court below, judgment was handed down in favour of the bank. The court, having given credence to the Parole Evidence Rule, looked at external factors and held that communications between the parties representatives during settlement negotiations indicated that there was an expectation that the balance of total debt would be repaid at a later stage.
The court further held that should the payment have been “in full and final settlement” of the debt, this should have been clearly endorsed in the settlement agreement instead of the word indicating the payment was made “towards” the debt.
On appeal, the full bench disagreed and held that, being a major financial institution, Nedbank could not have intended the exact date and details for payment of the balance to have been left unconfirmed in the agreement. As such, it was clear that no further payments were ever expected or contemplated and the payment that had been made was deemed to be in full and final settlement of the entire debt.
At paragraph 29, the court therefore stated that,
“The plaintiff, as the author of the deed of settlement, could without any difficulty and with ease included a clause in the deed that payment of R800 000.00 is considered as part payment towards the total indebtedness of the defendants, if that was intended. The construction placed on the deed of settlement by the plaintiff that its purpose was to make provision for part payment of the total indebtedness cannot be accepted. The contents of the deed of settlement considered as a whole does not support such a contention. No provision is made when the balance will be paid and the conditions in terms whereof future payments are to be made. It is improbable that a prominent financial institution, like the plaintiff, will simply allow the balance outstanding to remain unresolved when the plaintiff which bargaining from a position of strength could have included terms and conditions pertaining to future payment of the outstanding balance in the deed. The plaintiff, notwithstanding such knowledge, included clause 4.6 in the deed of settlement, the compliance of which was an incentive to the defendants to pay R800 000.00 on or before the due date, which would effectively have relieved the defendants from their obligation to pay and at the same time would have put paid to the right of the plaintiff to enforce any claim based on the indebtedness of the defendants. The proposition that the provisions of clause 4.6 of the deed of settlement are no bar to the claim instituted for the balance outstanding, must firmly be rejected.”
The Nedbank case acts as a stark reminder that settlement agreements, if utilised carelessly, are not always the security they are intended to be. The content and wording of such agreements must therefore be handled carefully and deliberately to ensure that the true intention of the parties are duly recorded in a manner that is not ambiguous or capable of unintended consequences.
We suggest, that while an invaluable tool to aid in the collection of commercial debts, settlement agreements should be utilised in conjunction with properly drafted acknowledgments of debt and confessions to judgment. As the ultimate goal of such agreements should be to secure debts, such complementary documentation are always useful to curb protracted and unnecessary litigation in the event of defaults in repayment.