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Repayment Clauses in Compromise Agreements

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The Court of Appeal has handed down an important decision in CMC Group plc v Zhang.

Mr Zhang signed a contract (not strictly a compromise agreement, but that does not matter) settling his claim against CMC for $40,000. It contained a clause, common in compromise agreements, that the full $40,000 would be immediately repayable if Mr Zhang broke any terms in the agreement (namely, non-harassment / derogatory remarks clauses).

CMC Group alleged that Mr Zhang broke his side of the deal, and issued proceedings for the return of the $40,000. They obtained default judgment, with damages to be assessed. Mr Zhang appealed.

The issue for the Court of Appeal was whether the repayment clause was valid, or whether it amounted to a penalty clause.

The Court of Appeal noted that the other provisions in the agreement (such as Mr Zhang not being able to bring further claims) remained enforceable. They considered that fixed damages for breach of the non-derogratory statement clause of $40,000 were plainly excessive, when the damages flowing from a derogatory statement might only be nominal.

Accordingly the repayment clause was a penalty and, whilst CMC Group was free to bring a claim for the damages it had actually incurred, it could not recover the $40,000 without proving it had incurred that amount of loss.

The Court of Appeal has granted permission to appeal to the House of Lords.

CMC Group v Zhang

[Thanks to Julian Yew of Stephenson Harwood, amongst others, for telling me of this decision]