Malaysia: Disputes over terms of settlement underscore the importance of robustly drafted settlement agreements

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.

Reebok (M) Sdn Bhd  v CIMB Bank Berhad (Civil Appeal No. W-02(NCVC)(W)-2459/2017)

On 24 September 2010, the High Court granted summary judgment against Reebok in the sum of:

  1. RM5,329,067,93 and interest due under CIMB Bank’s overdraft facilities; and
  2. 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”.

Kamil Azman bin Abdul Razak & Ors  v Amanah Raya Berhad & Ors (Civil Appeal No. 02(f)-110-10/2017(W))

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.”

Comment

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”.

Peter Godwin
Peter Godwin
Regional Head of Practice - Dispute Resolution Asia and Managing Partner, Kuala Lumpur
+60 3 2777 5104
Nicholas Hoh
Nicholas Hoh
Senior Associate, Kuala Lumpur
+60 3 2777 5106
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101

Rebecca Pang
Rebecca Pang
Associate, Kuala Lumpur
+60 3 277 75111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer

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.

 

46 countries sign the new Singapore Convention on mediated settlements

The Singapore Convention, more formally known as the United Nations Convention on International Settlement Agreements Resulting from Mediation, was signed today in Singapore by 46 countries – a record number of first-day signatories for a UN trade convention.

While not including the UK or any EU countries, the signatories do include the world’s two largest economies, China and the US.  (A full list of signatories is at the end of this post).

The aim of the Convention is to implement an international regime for the enforcement of settlement agreements reached through mediation, broadly akin to the 1958 New York Convention for the enforcement of arbitral awards.

The new Convention clearly has the potential to increase the attraction of mediation for international parties and to solidify its role as a reliable option for resolving cross-border commercial disputes, which courts around the world will recognise.   Many hope that it will achieve for mediation what the New York Convention has done for international arbitration.

Mediation and enforcement

The initiative stems from a concern that the use of mediation to resolve international disputes has been impeded by the fact that, unless a settlement reached via mediation is in the context of a pending arbitration and can be converted into an arbitral award,  parties can only enforce it in the same way as any other contract. That will usually involve bringing fresh proceedings for breach of contract.  In an international context, this can involve potentially difficult (and usually lengthy) processes to obtain a court judgment and then enforce it in a foreign jurisdiction.

In practice, enforcement of mediated settlements is rarely an issue (at least compared to litigation and arbitration) given that the terms are the result of a negotiated resolution reached through a voluntary process.  Having negotiated and documented a resolution through a formal process, commercial parties do for the most part tend to stick to it. Nevertheless, it does appear that the potential for difficulty if enforcement is required may account for at least some for the patchiness with which mediation has been embraced across different jurisdictions globally.

This is supported by our analysis of the data collected at the recent Global Pound Conference series. That project sought the views of thousands of dispute resolution stakeholders across the globe on various issues, including as to what would most improve commercial dispute resolution. In Asian jurisdictions, nearly two thirds of respondents said that the development that would be of most benefit would be  legislation to aid enforcement of settlement agreements, including those reached through mediation.  In other regions, this was seen as less pressing than other factors but still received substantial support.  The new Convention directly meets this call for regulation and certainty.

Accordingly, regardless of how many mediated settlements actually need to enforced under the Convention, simply the existence of such a global enforcement regime may provide the long-awaited boost to the global adoption of mediation by assuaging parties’ reservations in this regard – particularly in jurisdictions where commercial parties are currently less familiar with the process.

Considering the overall dispute resolution landscape, the Hague Convention on Choice of Court Agreements and the new Hague Judgments Convention are designed to assist enforcement of court judgments internationally (although their practical impact to date has been limited). The New York Convention has of course hugely benefited international arbitration, with enforcement regarded as arbitration’s trump card.  In many ways, the Singapore Convention is the missing piece in the enforcement jigsaw.

When will the Singapore Convention apply?

The Convention applies to settlement agreements resulting from mediations resolving international commercial disputes. It seeks to give mediated settlement agreements bite by requiring member states to enforce such agreements if they meet the following criteria:

  1. The settlement agreement is “international” – meaning either: (i) at least two parties have their place of business in different countries or (ii) the country where the settlement agreement is to be performed, or the country with which the agreement is most closely connected, is different to the parties’ place of business
  2. The agreement is signed by the parties and “resulted from mediation”. Mediation is defined broadly as “a process, irrespective of the expression used or the basis upon which the process was carried out, whereby the parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (the “mediator”) lacking the authority to impose a solution upon the parties to the dispute”
  3. The agreement does not fall within the excluded category of settlement agreements (which includes agreements relating to consumer disputes, family, inheritance or employment law)
  4. None of the (limited) listed grounds to refuse enforcement applies

If a settlement agreement meets these criteria, each signatory state to the Convention (and its courts) must recognise and enforce the agreement in accordance with its own rules, without substantive review or fresh litigation.

This will aid enforcement against assets located in the signatory state and also the discharge of other remedies like specific performance or injunctions.  Conversely, if a dispute arises in a signatory state and a party claims it was already resolved by the agreement, the settlement agreement can be invoked to prove that the matter has already been resolved on those terms. That is, the Convention can be relied on as either a sword or a shield.

Next steps

It is understood that further states are planning to sign the Convention in the near future.  It will formally come into effect once the second formal step of ratification has been completed by at least three signatory states.

Its full impact, and in particular whether it will be as significant as the New York Convention, remains to be seen.  But the strong early uptake is a very promising indicator.    .

You can find our guidance on incorporating mediation into dispute resolution clauses, dispute avoidance and improving conflict management here.   And for guidance on preparing for and conducting mediations, see our series of ADR Practical Guides, here.

 

UPDATES:

  • For commentary on some of the Convention’s more interesting features,  see also the article by Jan O’Neill (Professional Support Lawyer, London)  published on the Practical Law Dispute Resolution Blog here.  This includes discussion of the ‘Article 8 reservation‘ which allows a state to join the Convention on the more limited basis that it will only enforce settlement agreements where the settling parties have specifically agreed that the Convention will apply. We understand (informally) that 2 of the 46 initial signatory states intend to exercise this reservation, although it can be exercised at any time by existing signatories.
  • Full list of signatories as at 7 August 2019: Afghanistan, Belarus, Benin, Brunei, Chile, China, Colombia, Congo, Democratic Republic of Congo, Eswatini, Fiji, Georgia, Grenada, Haiti, Honduras, India, Iran, Israel, Jamaica, Jordan, Kazakhstan, Laos, Malaysia, Maldives, Mauritius, Montenegro, Nigeria, North Macedonia, Palau, Paraguay, Philippines, Qatar, Republic of Korea, Samoa, Saudi Arabia, Serbia, Sierra Leone, Singapore, Sri Lanka, Timor-Leste, Turkey, Uganda, Ukraine, USA, Uruguay, Venezuela.

 

Jan O'Neill
Jan O'Neill
Professional Support Lawyer, London
+44 20 7466 2202

Brexit: UK unwinds implementation of EU ADR laws

Jan O’Neill
Professional Support Lawyer, London

 

The UK Government has published legislation to effectively revoke the implementation of the EU Mediation Directive (2008/52/EC) after Brexit.

The Cross-Border Mediation (EU Directive) (EU Exit) Regulations 2019 (the Regulations) were made on 1 March 2019 and will come into effect on exit day, whenever that occurs.

Why?

The development is part of a wider policy decision by the Government to revoke/repeal UK domestic legislation that implemented EU law in instances where that law is based on reciprocity between EU Member States. Continue reading

A new international Convention for the enforcement of mediated settlements

We are soon to have a new international regime for the enforcement of mediated settlement agreements.

The UN Convention on International Settlement Agreements Resulting from Mediation, which will be known as the Singapore Convention, was approved in June 2018 by UNCITRAL (the United Nations Commission on International Trade Law).  It is expected to be open for signature from 1 August 2019 and will come into force upon ratification by at least three contracting States.

The Convention will oblige contracting States (except in specified limited circumstances) to recognise international settlement agreements resulting from mediation in commercial disputes, either to enforce the agreement or allow it to be invoked as a defence to a claim (that is, either as a sword or a shield).

It is hoped that the Singapore Convention will achieve for mediation what the New York Convention has for international arbitration, encouraging a greater global acceptance of mediation as a credible and reliable dispute resolution mechanism in international commerce.

For more detail on the Convention, and commentary on how likely it is to achieve that aim, see the article by Jan O’Neill (Professional Support Lawyer, London) recently published on the Practical Law Dispute Resolution Blog, here.

Jan O'Neill
Jan O'Neill
Professional Support Lawyer, London
+44 20 7466 2202

 

Singapore Convention on enforcement of mediated settlement agreements published

Further to our earlier post, the Singapore Convention has now been published. It will be signed in Singapore on 7 August 2019 and will come into effect six months after at least three states have ratified it.

The drafters’ goal is for the Singapore Convention to be for mediation what the New York Convention is for arbitration.  That the Convention is potentially significant in terms of enforcement is clear. But it is also important in terms of elevating the status of international commercial mediation and lending greater credibility to the process. Much will depend on uptake, but with the New York Convention as a blueprint, the goal is to secure numerous signatory states at the outset.

The Convention will aid enforcement of mediated settlement agreements relating to international commercial disputes, being those where:

  • at least two parties to the settlement agreement operate in different contracting states; or
  • the state where the substantial part of the settlement agreement is to be performed is different to where the parties to the settlement conduct business; or
  • the state where the settlement agreement is most closely connected is different to where the parties to the settlement conduct business.

The Convention carves out consumer, personal, household, family, inheritance and employment disputes from its jurisdiction.

There are various procedural requirements for the underlying settlement agreement to qualify for enforcement under the Convention. There are also grounds for refusing to grant relief listed in the Convention. These include the incapacity of the parties, invalidity of the settlement agreement, serious breach of mediator standards, mediator bias and public policy.

 

UPDATE:  For more detail on the Convention, and commentary on some of its more interesting features, see the article by Jan O’Neill (Professional Support Lawyer, London) published on the Practical Law Dispute Resolution Blog, here.

 

Jan O'Neill
Jan O'Neill
Professional Support Lawyer, London
+44 20 7466 2202

 

New convention on the enforcement of mediation settlement agreements approved

On 26 June, at the 51st session of UNCITRAL, final drafts for a Convention on the Enforcement of Mediation Settlements and corresponding Model Law were approved. This paves the way for adoption by UNCITRAL’s Commission later this year. It is understood that the Convention will be called the Singapore Mediation Convention and will be signed at a ceremony in Singapore in 2019. The Convention must then be ratified by at least three member states to come into force.

Approval of the drafts represents the culmination of several years’ work by UNCITRAL Working Group II. Its aim has been to implement an international regime for the enforcement of mediated settlements broadly akin to the 1958 New York Convention for the enforcement of arbitral awards. This will increase the attraction of mediation for international parties, with all its well-known cost efficiencies and other potential benefits.

The initiative stems from a concern that the use of mediation to resolve international disputes has been impeded by the fact that, unless a  settlement reached via mediation is in the context of a pending arbitration and can be converted into an arbitral award,  parties can only enforce it in the same way as any other contract. In an international context, this can involve potentially difficult (and usually lengthy) processes to obtain a court judgment and then enforce it in a foreign jurisdiction.

Whilst problems of enforcement of mediated settlements have been sparse in practice (certainly compared to court judgments or arbitral awards), the Convention will no doubt add credibility to mediation as an international dispute resolution process. It will also make mediation particularly well suited to cross-border disputes.  At the Global Pound Conference series, delegates in Asia, Africa, the Middle East and Latin America all revealed a desire for legislation or conventions to promote the recognition and enforcement of settlements. This may reflect the varied and complex legal and political frameworks in these regions. Many of those surveyed manage businesses and disputes across several borders, where legal regimes can vary from stable, tested and familiar to those that are only a decade old. The call for regulation and certainty is even more critical as the pace of development intensifies through new trade treaties and investment, and massive initiatives such as the Belt and Road. The Convention and Model Law look set to respond well to this demand and may hail an inflection point for the use of mediation in these developing regions.

Materials approved on 26 June have not yet been made available on the relevant UNCITRAL webpage.  However they will in due course be posted on this page, which currently contains the most recent drafts (from February 2018) together with other details of the initiative.

An international convention on the enforcement of mediated settlements – UNCITRAL moves one step closer

The UNCITRAL working group that has for several years now been considering the potential for an international enforcement regime for international mediation has now completed its work and produced draft instruments.

At its most recent meeting in New York, the UNCITRAL Working Group II (Dispute Settlement – formerly Arbitration and Conciliation) approved a draft convention and a draft amended Model Law on international settlement agreements resulting from mediation. Continue reading

EU Parliament Resolution on the implementation of the Mediation Directive

The EU Parliament has adopted a Resolution on the implementation of the EU Mediation Directive (2008/52/EC), containing recommendations aimed at increasing the use of mediation in civil and commercial disputes throughout the EU.

The Resolution follows a 2016 report by the EU Commission which concluded that, overall, the Mediation Directive had added value, particularly by prompting significant legislative changes in several Member States. No revision of the Directive itself was recommended. However, the report noted continuing difficulties with the functioning of many of the national mediation systems in practice. These were attributed principally to the lack of a “mediation culture” in many Member States, insufficient knowledge of how to deal with cross-border cases, the low level of awareness of mediation, the functioning of quality control mechanisms for mediators and a reluctance by courts to propose mediation.

In response, Parliament has made the following recommendations:

  • EU Member States should step up their efforts to encourage the use of mediation in civil and commercial disputes, such as through information campaigns, improved cooperation between legal professionals and an exchange of best practices.
  • The Commission should assess the need to develop EU-wide quality standards for the provision of mediation services.
  • The Commission should assess the need for member states to establish national registers of mediated proceedings. (subject to data protection rules).
  • The Commission should undertake a detailed study on the obstacles to the free circulation of foreign mediation agreements across the EU, and on options to promote the use of mediation.
  • The Commission should find solutions to extend the scope of mediation to other civil or administrative matters.

We will report on any steps to implement these recommendations in due course.

Public consultation on mediation in the EU

The EU Commission has launched a consultation to gather views on the extent to which the EU Mediation Directive (2008/52/EC) has achieved its objectives and to consider whether any changes to the Directive are appropriate.

Responses to the consultation will inform a report the Commission is required to submit to the EU legislative bodies by May 2016, assessing the development of mediation throughout the EU and the impact of the Directive.  The report may, if appropriate, be accompanied by proposals to adapt the Directive. Continue reading

ADR Practical Guide No. 8: Resolving disputes with HMRC

We are pleased to publish the eighth guide in our series of ADR Practical Guides, designed to provide clients with practical guidance on various processes falling under the banner of alternative dispute resolution, with a particular focus on mediation.

Guide No. 8: ‘Resolving disputes with HMRC’ examines when and how mediation and other forms of ADR can be used to resolve disputes with the UK’s tax regulator, HMRC.

Previous guides in the series can be found on our ADR webpage, including: