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Deeds of settlement - avoiding the risk of a default clause being classified as a penalty

SUMMARY

The decision of Lachlan v HP Mercantile Pty Limited [2014] NSWSC 356 is a warning to debtors of the importance of complying with time limits to avoid the impact of ‘balloon’ payments; an agreement which compromises the sum payable by the debtor but requires the debtor to pay a higher sum if the debtor defaults is enforceable. To achieve this result, the debtor must acknowledge (even if implicitly) the present entitlement of the creditor to the underlying debt for the higher amount.
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