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Cite as: May 2011 85(5) LIJ, p.61

Construction of settlement agreement

Talacko v Talacko & Ors [2001] VSCA 71 (unreported, 18 March 2011, S APCI 2010 0002, Neave, Harper and Tate JJA).

The appellant appealed judgments given in favour of his sister and the estate of his deceased brother. He had been ordered to pay 4,740,830 euros and 296,079 euros interest to his sister and the same sum to his late brother’s estate.

The judgments arose from proceedings brought to enforce a settlement reached in February 2001 (the settlement in fact was reached in relation to the proceeding before the Court of Appeal; the proceeding had been reinstated on application of the plaintiffs/respondents who sought to argue that the appellant had breached the terms of settlement).

Under clause 1 of the terms of settlement, the appellant was to transfer certain properties in the former Czechoslovakia and Dresden in Germany to the respondents. Those properties and other property, owned by the late parents of the parties, had been the subject of claims for restitution by the appellant which he alone could pursue by virtue of residency in the Czech Republic.

It was argued by the respondents at first instance and accepted that the appellant had failed to transfer the Dresden properties to the respondents or their nominees. The appellant argued that the obligation to transfer expired after one year and relied on a further term of the settlement agreement (clause 3) which provided for sale. It was held at first instance that the appellant had breached clause 1 of the agreement.

Clause 3 was in the following terms:

“If by reason of applicable law, or some other cause, paragraph 1, or any part thereof, cannot be given effect to within 12 months of the date of these terms in respect of a particular property or properties, the defendant shall, at the direction of the plaintiffs and at their cost, take all reasonable steps to sell such property or properties at best market value and shall pay the net proceeds of such sale, after the deductions of all expenses, to the plaintiffs or at their direction”.

The appellant argued that, consequent on the failure to transfer to the respondents or their nominees, clause 3 was invoked. This argument was rejected at first instance and on appeal. It was held that the words “cannot be given effect to within 12 months of the date of these terms” must be confined to frustration by reason of factors external to the parties. The clause could not be used by the appellant in circumstances where the terms could not be given effect to by virtue of his breach of duty.

The respondents then relied on clause 6 of the terms of settlement which provided that in the event of breach, they would be entitled to equitable compensation for breach of fiduciary duty in respect of each of the properties recovered or obtained by the appellant. The appellant argued that this clause gave rise to a penalty and was therefore unenforceable.

In the opinion of the Court of Appeal, the argument failed to deal with the fact that the appellant had received property his title to which was no better than that of his siblings. Reference was made to the decision of the Court of Appeal in Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108. That case concerned a judgment debt. The judgment debtor had agreed to pay a lesser sum by instalments. In default of payment of an instalment, the judgment debtor agreed to judgment for the amount of the claim. The judgment debtor failed to pay one of the instalments. The Court held that the terms of settlement did not give rise to a penalty. That case could be distinguished from the decision of the Court of Appeal of the Supreme Court of Queensland in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114, where the stipulated sum was not presently due. A penalty will not arise in circumstances where there is an admission, express or implied, that the stipulated sum is due and owing.

The Court in Talacko said (at [74]-[75]):

“As we understand these judgments [in Cameron], they draw a distinction between, on the one hand, a provision intended ‘merely to induce or compel compliance’ with a contractual obligation and, on the other, a provision central to the purpose of the main agreement. A concession that a debt is owed or an obligation is due will, if the clause alleged to constitute a penalty provides for its discharge, point strongly if not conclusively to the conclusion that that clause is not a penalty. If other indicia point likewise to that clause being central to the main purpose of the bargain, because, for instance, it is central to the consideration offered by one party for the participation of the other in the contractual arrangements, then an argument that it does not amount to a penalty would be strengthened.

“That, in our opinion, is the position in this case. The respondents bargained for the transfer to them of the properties identified in clause 1 of the settlement agreement. If a transfer were not possible, they were prepared to accept the value of those properties on their sale. These were ends which the appellant promised to effect; and he also promised, should he fail to fulfil any of the obligations placed upon him by those terms, to revert to an alternative basis for securing to the respondents that which was due to them – that is, to pay to them the monetary value, assessed on the basis that it was equitable compensation, of their interest in so much of the land as was returned to the family following the reversal of the decision to expropriate it from the siblings’ parents”.

There was no penalty.

The appeal was dismissed.

PROFESSOR GREG REINHARDT is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at


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