April 1, 2019

A guide to ex gratia payments

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A guide to ex gratia payments

Updated: 8 February 2021

The word ex gratia means by favour.

And, in legal context it's a payment that is made without a legal obligation. 

In other words, someone did not have to pay a certain amount but they did anyway. 

So, below is what you need to know about ex gratia payments.

In a hurry? Jump ahead. 

Ex gratia offers 

You’ll most commonly see or hear the term ex gratia used when a solution for a legal dispute is being proposed. 

The words might first be used over an email or in person to let you know, there's an offer on the table and its a good will gesture: ‘'while we don’t have to pay you anything, we are going to because we want you to sign something.' is the key message. 

Given that ex gratia payments are usually mentioned around dispute settlements, you’ll likely find them in terms of settlement, a deed of release or a deed of settlement (all these terms simply mean - a legal agreement to summarise settlement terms for a dispute or even the terms for the end of a business relationship.

But, you may also find the term used long before any deeds or agreements are drafted. For example, if terms are set out for consideration in an email or formal legal letter.

Is it ex gratia?

First thing, you’ll want to know if what’s being labelled ex gratia is in fact ex gratia and not a legal entitlement.

Remember, ex gratia means by favour.  In other words, there’s no legal entitlement to the ex gratia payment. 

If someone is offering you an ex gratia payment but its really something they owe you because of law, then its not ex gratia. 

An example - an employer that has $10,000 outstanding wages but calls this ex gratia during settlement prompts these tips:

  • you don’t need to sign an agreement or deed so you can get paid something you are legally owed; 
  • the payment should not be called ex gratia; and 
  • you should get advice about the deed to see if you need to sign it at all, and if you do decide to sign, to check if the other terms in it are fair.

What to look for: 

  • time frame for the other party to pay the ex gratia payment to you; and
  • any conditions you need to meet to get the ex gratia payment e.g. return company property etc.

Negotiating ex gratia payments

We know the starting point from above - there’s no legal obligation to pay an ex gratia payment.

So how much should you ask for if you are negotiating an ex gratia payment?

As a starting point, you might want to consider covering your losses or a missed opportunity cost, depending on your situation.

Your losses 

Your losses could be payments you would have been paid right up to the point of negotiation; or

Payments lost up to the negotiation date and the time it will take you to find a similar opportunity. 

Employee Example 

A classic example is a worker that has been dismissed from an employer and is considering unfair dismissal action.

For an ex gratia payment, the employee could seek an ex gratia payment for the time they have been out of work and even the time it will take them to find another job. 

Ex gratia or formal proceedings?

The big motivator for formal legal proceedings is usually where someone feels they have suffered injustice even right up to the negotiation process (if any was attempted). 

The benefits of settling and accepting an ex gratia payment include saving the time and cost of running legal proceedings, protecting a business or personal reputation and of course, your quality of life - do you really want to spend your precious time settling a dispute or getting on with life?

So when should you commence formal legal proceedings?

Legal advice is a good idea to determine the strength of your case before you even consider formal legal proceedings.

You'll also want to know the likelihood of success before you start any legal action against someone.

Below are some tips before starting legal proceedings:

If you are negotiating a settlement and the other party is not making you an offer that covers your actual or projected loss you may consider formal legal proceedings.

But, you may also want to consider the cost of running the proceedings versus the likely financial gain.  

So, this means, you are running a cost-benefit analysis to see if its worth legal proceedings or not. 

Do you have any questions or experiences to share about ex gratia payments? feel free to share them in the comments below.

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, CPA and owner of a business consultancy, Vivian is well-positioned to advise Australia's top entrepreneurs. Entrepreneurs benefit from Vivian's commercially focussed legal advice, business experience, and commitment to deliver the best quality business legal services to entrepreneurs.

  • Hi Vivian – I have a letter from my employer dated 2010 detailing “preserving a termination payment (ex-gratia payment) of $xxx” and states I will be entitled to the payment “should my employment cease to continue at any time” once a deed of release is signed. There are no other terms or conditions detailed. Is this an enforceable undertaking? Are there any grounds on which my employer could withdraw or apply previously unknown and unspecificed conditions to the payment?
    Allan Webster

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