As the spotlight shines on mediated settlements with the signing of the Singapore Convention on Mediation on 7 August 2019, it is timely to recall that settlement agreements, like any other contract, are only as useful as they are enforceable. While parties may often feel that they have completed the hard work in reaching a negotiated settlement, it is crucial that the settlement is documented carefully to avoid subsequent disputes. Two recent decisions in the Malaysian courts are instructive examples of how ambiguity in settlement agreements can be the cause of further costly and time-consuming litigation rather than putting an end to it.
Peter Godwin, Nicholas Hoh, Daniel Chua and Rebecca Pang of our Kuala Lumpur office consider the decisions below.
On 24 September 2010, the High Court granted summary judgment against Reebok in the sum of:
- RM5,329,067,93 and interest due under CIMB Bank’s overdraft facilities; and
- RM589,074.67 and interest due under CIMB Bank’s term loan facilities
(together the Judgment Sum).
On 18 March 2011, the parties entered into a settlement agreement for the payment of the outstanding Judgment Sum, which included the following terms:
- That the amount of “RM4,990,000 as at 18 [March] 2011” be repaid in 71 monthly instalments of RM50,000 per month, and a final bullet payment of the balance of the total outstanding sum in the 72nd month.
- That CIMB Bank will proceed to execute the judgment of the High Court by foreclosing on Reebok’s property in the event of default of payment.
CIMB Bank attempted to foreclose on Reebok’s property in 2015, alleging that Reebok had failed to make timely payments. However, this action was discontinued when it was discovered that a competing creditor had already foreclosed on the property. In response, Reebok claimed against CIMB Bank that it had paid RM532,746.75 in excess of the agreed settlement amount of RM4,990,000, on the basis that the settlement agreement did not refer to interest on the principal sum of RM4,990,000.
Among the issues before both the High Court and the Court of Appeal were as follows:
- First, whether CIMB Bank was entitled to claim interest on the Judgment Sum when its repayment was subject to the terms of the settlement agreement
- Second, whether CIMB Bank must first terminate the settlement agreement before executing the judgment by commencing foreclosure proceedings
Both the High Court and Court of Appeal rejected Reebok’s claim for repayment, finding that:
- CIMB Bank was entitled to claim interest on the Judgment Sum as there were no express words in the Settlement Agreement stating that RM4,990,000 was a final sum. Instead, the Settlement Agreement expressed the Judgment Sum to be the amount “as at 18 [March] 2011”. This meant that the terms of the Settlement Agreement were sufficiently broad to include interest on the sums payable under it.
- There was no need to expressly terminate the Settlement Agreement prior to executing the judgment, given that the Settlement Agreement expressly provided that CIMB Bank could proceed to execute the judgment in the event of default upon any instalment payment. This fell squarely within the Court of Appeal’s requirement that, “[a] party who wishes to revive his original claim in the event of the other party’s inability to comply with his obligation under the terms of the settlement should incorporate such term in the settlement agreement to give effect”.
In 2009, the Appellants (consisting of Abdul Razak and Kamil Azman, amongst others) commenced proceedings against the Respondents (consisting of Amanah Raya Berhad (ARB), Amanah Raya Development Sdn Bhd (ARD) and Amanah Raya Capital Sdn Bhd (ARC) for breach of trust, alleging that the Respondents mismanaged a trust (Trust) settled by one of the Appellants. A consent judgment was recorded in 2010 to compromise the suit, on the following terms (Consent Judgment):
- The maturity of the loan facilities granted by ARC to both Abdul Razak and Kamil Azman respectively is extended to 27 July 2012 on an interest-free basis (Clauses 1 to 3).
- In the event that only part payment(s) of the amount(s) payable are made by the Abdul Razak and Kamil Azman on 27 July 2012, and subject only to the condition that the amount remaining outstanding as at 27 July 2012 from Abdul Razak and Kamil Azman do not exceed RM2,000,000, the parties shall within three months from 27 July 2012 (unless mutually extended by the parties) enter into negotiations to restructure their respective Loan Facilities which shall take into account the Abdul Razak’s 25% interest in the Joint-Venture Agreement referred to in Clause 9 of the Consent Judgment (below) and the assignment of the said interest to ARC towards the repayment of the outstanding sums under the Loan Facilities (Clause 5).
- Abdul Razak, Kamil Azman, and their nominated entity (the Trust) shall enter into a Joint Venture Agreement (JV Agreement), in form and substance as pre-agreed between the Appellants and ARD by 11 August 2010 (Clause 9).
- The parties agree that they shall have no further claims against each other and undertake not to raise the allegations raised in this action in the future (Clause 10).
Two years after the Consent Judgment was recorded, no JV Agreement had been concluded in light of disagreements between the parties as to the legal capacity of the Trust to be a party to the intended JV Agreement. Nor was any payment on the Loan Facilities made. As a result, the Appellants and Respondents commenced a series of cross-claims against each other. The Appellants sought, amongst other claims, specific performance of the JV Agreement, whereas the Respondent sought, amongst claims, a declaration that ARB was released from any obligation to enter into the JV Agreement, and that Abdul Razak and Kamil Azman repay the loan facilities with interest.
The High Court and Court of Appeal held that:
- The Respondents were released from their obligation to conclude the JV Agreement.
- The Appellants were to repay the Respondents the loan amount with interest.
On appeal to the Federal Court, the critical issue for determination was whether the Consent Judgment consisted of mutual promises and obligations which were dependent upon each other, to the effect that the performance of one (the repayment of the loan facilities) was dependent upon the fulfilment of the other (the conclusion of the JV Agreement between the parties). In support of this, the Appellants argued:
- First, that the Consent Judgment created mutual obligations on the basis that (i) the parties agreed to extend the loan repayment date to post-date the envisaged signing of the JV Agreement, and (ii) Clause 5 of the Consent Judgment envisages the restructuring of the loan facilities would include Abdul Razak’s 25% interest in the JV Agreement as some form of collateral.
- Second, that the clauses in the Consent Judgment depict a particular order of performance so as to enable the court to either apply section 53 of the Contracts Act 1950 (Act), or to employ a common sense order of precedence set out in section 55 of the Act. These provisions read as follows:
“53. Order of performance of reciprocal promises
Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and, where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires.
55. Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises
When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, the promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which the other party may sustain by the non-performance of the contract.”
The Federal Court dismissed the appeal, finding “nothing from all these clauses that can be construed to say that the performance of one condition (such as repayment of loan) may be subject to a pre-condition that the JV Agreement.” In particular, the Federal Court observed that “the Consent Judgment does not say that the repayment of loans would be made from the proceeds of the Joint Venture”. As a result, there was no express or implied order of performance under sections 53 and 55 of the Act, which meant that Abdul Razak and Kamil Azman’s obligation to repay the loan was not conditional upon the conclusion of the JV Agreement. Tellingly, the Federal Court opined that “the appellants had woven some legal intrigues, bereft of credible facts and legal findings by the Court below, in characterising the Consent Judgment as they did”.
As regards the release of the Respondent’s obligation to enter into the JV Agreement, the Federal Court considered the declaration of release as consistent with the principle “that, where one party refuses to perform an agreement, the counterparty may treat himself as discharged”. This was on the basis that the Appellants insistence on nominating the Trust as party to the JV Agreement, which was found to be legally impossible given the Trust’s absence of any legal capacity.
The Federal Court also affirmed the principle that a settlement agreement recorded as a judgment:
“… must be construed as a commercial instrument. The aim is to ascertain the contextual meaning of the relevant contractual language. It must be done objectively as to what a reasonable person, circumstanced as the actual parties in a commercial environment were, would have understood it to mean. This must be gathered from the language used and its relevant contextual sense.”
Notably, Article 1(3) of the recently inked Singapore Convention (which Malaysia signed as one of 46 day-one signatories) excludes the Singapore Convention’s application to settlement agreements: (i) that are approved by a court or concluded in the course of proceedings and are enforceable as a judgment in the state of that court; or (iii) that are recorded and enforceable as an arbitral award. The rationale for this carve out is the existence of other international instruments such as The Hague Convention on Choice of Court Agreements and the New York Convention, which govern the enforceability of some court judgments and of arbitral awards respectively (the former of which Malaysia is not a signatory). However, this does not diminish the importance of ensuring that settlement agreements, whether concluded before or during the course of formal proceedings, are properly negotiated and drafted. These cases stand as a reminder of the risks of protracted and costly disputes arising from vague terms of a settlement agreement. These can be avoided through effective settlement advocacy in negotiating and concluding a clear and unambiguous settlement agreement. As the adage goes, “nothing is agreed until everything is agreed”.
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.