An agreement of compromise is the settlement of disputed obligations by agreement.
A compromise exists where parties agree to settle previously disputed or uncertain obligations. Like any other agreement, a compromise is based on the contractual rules of offer and acceptance, with each party conceding something, either by diminishing their alleged claim or by conceding or increasing their liability.
Where a claim is settled and a compromise is reached, it is necessary to be certain that a clear offer to compromise and a clear acceptance of the settlement offer exists, otherwise a claimant can then still demand payment of the balance of the debt in dispute, despite any payment made by the creditor. The wording of an offer to settle a dispute by way of an offer to compromise must therefore be clear and unambiguous.
In order to deal with any possible ambiguity regarding whether an offer of settlement can be considered a compromise, most payments are made by the debtor on the condition that the payment is made “in full and final settlement” of the dispute. If the real purpose of the payment is to settle the whole dispute by way of an agreement to compromise, an offer of compromise must be intended and not the mere discharge of an acknowledged liability.
In the Absa case, the court emphasised that the phrase “in full and final settlement” is not inherently ambiguous because it always serves to do no more, legally speaking, than import the condition that on acceptance of the offer the creditor has no further claim to any balance of the debt. However the question of fact which must be considered is whether the payment made is intended to effect a compromise or to pay an admitted liability. In the former situation the condition is binding if the offer is accepted. If the offer is rejected the money should be returned. In the case of a payment of an admitted liability, the “full and final” condition is not binding. The creditor may then keep the money and sue for the balance – a less than ideal outcome for a debtor who believes they have settled a claim by way of an agreement of compromise.
The first enquiry to determine whether a compromise has been reached between two parties is to consider whether:
- There is an existing dispute;
- An intended offer of compromise exists; or
- Did the debtor merely intend to make payment towards an undisputed liability.
In order to determine whether an offer exists at all, it must be considered whether the offer or proposal, objectively construed, is intended to create binding legal relations and it must have so appeared to the offeree.
Although, generally, a contract is founded on actual consensus, contractual liability can also be incurred in circumstances where there is no real agreement between the parties but one of them is reasonably entitled to assume from the words or conduct of the other that they intended to enter into the transaction.
If an offer to compromise exists, the second stage of the enquiry is whether or not acceptance of the said offer has been effected. Of course the most solid proof would be express acceptance of the offer of compromise, correctly worded, in writing.
Acceptance may also be inferred from the retention of the money accompanying the offer. On a number of occasions it has been held by the courts that where a creditor receives payment offered in full settlement and keeps the money, such retention is enough to constitute acceptance and to bar proceedings for any balance of the claim despite the creditor’s efforts to qualify the acceptance.
In every case, the question of whether there is acceptance of an offer of compromise must be a question of fact depending on all the circumstances. Acceptance can also be inferred if a reasonable person in the same circumstances as the parties would interpret the retention of the payment or other conduct to signify acceptance.
If the debtor’s payment constitutes a valid offer to compromise which the creditor accepts, the creditor generally cannot make any further claim against the debtor in respect of the particular dispute. The reason for this, as discussed above, is that the offer to compromise made in full and final settlement is generally accepted by the offeree on the implied (if not express) condition that the creditor abandons the balance of their claim and the dispute has been settled completely.