Can a payment dispute be adjudicated after a settlement is reached?

As an adjudicator, I sometimes am called upon to adjudicate payment disputes where it is apparent that parties have reached a settlement with regard to the unpaid sums. My view is that a settlement extinguishes the original cause of action and that parties are no longer entitled to adjudicate on the payment disputes covered by the settlement. However, not all lawyers agree with this point of view, and some do not plead a settlement as a defence in an adjudication claim. Since I am bound to consider only the arguments raised by the respective lawyers or representatives, I therefore cannot consider the settlement as a defence.

The reason for my view is basic, and recently re-affirmed in the case of Pacific Sanctuary Holdings Sdn Bhd v Masaland Construction Sdn Bhd (2020). In this case, Masaland Construction Sdn Bhd [Masaland] is a judgement creditor of Pacific Sanctuary Holdings Sdn Bhd [PSH] to a sum in excess of RM10 million. Parties recorded a settlement agreement whereby PSH agreed to settle the judgement debt by way of cash and contra properties. There was dispute as to whether PSH fulfilled the terms of the settlement.

After a lapse of about six years, Masaland issued a notice of termination of the settlement agreement on the basis that the settlement had been breached by PSH. Masaland intended to enforce the original judgement it obtained against PSH, and applied to Court for leave to do so.

The Court of Appeal agreed with PSH that by reason of the settlement agreement, “there is no longer any pending judgement and/or order of the court to be enforced as the said orders and/or judgements have been suspended or extinguished by the settlement agreement”.

The Court of Appeal affirmed the position set out in Indian Overseas Bank v Motorcycle Industries [1973] Pte Ltd and Others (1992) to the effect that a “settlement or compromise constitutes a new and independent agreement between them made for good consideration” and that such settlement would be deemed “to supersede the original cause of action altogether”.

In fact, even if proceedings had commenced, “a settlement would put an end to the proceedings” (Sambu (M) Sdn Bhd v Stone World Sdn Bhd & Anor, 1996).

Perhaps the perspective will be very clear if considered another way. Assuming that adjudication proceedings are underway and parties then reach a settlement on the amounts in dispute, would such a settlement terminate the proceedings? Quite clearly so.

If that is the case, then surely a settlement reached before the commencement of proceedings must necessarily preclude proceedings from being undertaken. After all, the effect of the settlement is exactly the same.

Seeing that the same construction contract can be subject to multiple adjudication proceedings, a settlement need not definitively put an end to the entire construction contract. Instead, the settlement could be confined to specific payment certificates. Such a settlement would not preclude future adjudication on future payment certificates, but surely must put the dispute with regard to the present certificates that are settled to an end.

However, it would be important for the settlement to state very clearly that it is fully and finally settling the particular payment dispute, or at least that the same is settled as a compromise in lieu of adjudication until such time that the matter is resolved definitively by arbitration. This is to prevent a situation similar to Binastra Ablebuild Sdn Bhd v JPS Holdings Sdn Bhd & Another Case (2018) whereby the settlement was deemed to be not full and final, and not sufficient to preclude adjudication.

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Binastra Ablebuild Sdn Bhd v JPS Holdings Sdn Bhd & Another Case [2018] 2 CLJ 223
Indian Overseas Bank v Motorcycle Industries
[1992] 3 SLR (R) 841
Pacific Sanctuary Holdings Sdn Bhd v Masaland Construction Sdn Bhd
 [2020] 4 CLJ 490
Sambu (M) Sdn Bhd v Stone World Sdn Bhd & Anor [1996] 2 CLJ 523