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Case Update: Can settlement agreement be deemed as constructive trust?

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CONTRACT
Parties – Intention – Employees residents of estate and former employees of owner of estate – Owner sold estate to company – Employment of employees terminated – Company and owner of estate entered into settlement agreement – Settlement agreement contained clause for termination and lay-off benefits and for services rendered as former employees – Whether settlement agreement constructive trust – Whether employees stranger to settlement agreement

Abdul Razak Jundar Khan & Ors v Mustapha Mohammed & Ors
[2020] 2 CLJ 769, Court of Appeal
- see the grounds of judgment here

Facts The appellants were residents of Padang Meiha Estate (‘PME’) and former employees of East Asiatic Company (M) Bhd (‘EACM’), the owners of PME. By way of a sale and purchase agreement (‘SPA’), EACM sold and MBF Holdings Bhd (‘the fourth respondent’) purchased the estate. Consequently, the appellants’ employments with EACM were terminated. PME was duly transferred and registered in the second respondent’s name. In accordance with the terms of the SPA, the second respondent offered employment to the former workers of PME but only 19 of them accepted the offer. At the High Court, the fourth respondent commenced an action against EACM for vacant possession of the estate (‘the suit’). The suit was amicably settled by way of a settlement agreement (‘SA’). The appellants later claimed against the respondents for breach of trust of the settlement agreement, specifically on the clause for the termination and lay-off benefits (“clause (11)1(ii)”) amounting to a total sum of more than MYR3 million. The trial judge dismissed the appellants’ claim on the grounds that (i) having read the terms in isolation without regard to the recitals of the SA, the appellants were strangers to the SA; (ii) the fourth respondent was the incoming purchaser of lands occupied by the appellants and, as such, there was no justification for the fourth respondent to owe fiduciary duties or otherwise, as the appellants were strangers to the SA; and (iii) proviso to clause (11)1(ii) made it clear that there had been no intent on the part of EACM for there to be a trust over any part of the settlement sum. Hence, the present appeal.

Issues The main issue is whether the settlement agreement can be construed as a constructive trust and whether the employees are strangers to the settlement agreement?

Held In allowing the appeal, the Court of Appeal held that view of the clear and unambiguous express intention of the parties as covenanted and the entitlement of the appellants to the sums stated in clause (11)1(ii) which was equally clear and unambiguous, the appellants could not be treated as strangers to the SA. Clearly, they were the rightful beneficiaries of the SA. Under the prevailing circumstances, there could be no doubt that the respondents were holding the said sums as trustees or stakeholders on behalf of the appellants prior to its distribution/disbursal to the appellants. The facts and evidence adduced and the expressed intention of the parties, invariably led to the fair inference that a constructive trust was created in respect of the sums provided in clause (11)1(ii) in favour of the appellants.

ZUL RAFIQUE & partners
{15 April 2020}