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IN THE HIGH COURT OF MALAYA AT KUALA LUMPUR

(COMMERCIAL DIVISION)

CIVIL SUIT NO: D22NCC-637-11/2013

BETWEEN
UNITED OVERSEAS BANK (MALAYSIA)

BERHAD ...PLAINTIFF

AND

1. SRI RAM a/l M.S. SARMA

2. LORRAINE CRESCENTIA XAVIER

3. NORIZAN BIN HAJI MOHD AMIN …DEFENDANTS

GROUNDS OF JUDGMENT

(Plaintiff’s summary judgment application)


A. Background


        1. The plaintiff bank (Plaintiff) gave the following banking facilities (Banking Facilities) to Benteng Timur Sdn. Bhd. (Borrower):

(a) overdraft facilities; and

(b) performance guarantee (PG) facility.


        1. In consideration of the Banking Facilities, among others, the following 3 guarantees (3 Guarantees) had been executed in the Plaintiff’s favour:

(a) a guarantee was signed on 11.11.1999 (1st Guarantee) by the first defendant (1st Defendant), second defendant (2nd Defendant) and third defendant (3rd Defendant);


(b) a guarantee was executed by the 1st and 2nd Defendants on 25.9.2007 (2nd Guarantee); and
(c) a guarantee was signed on 19.8.2008 by the 1st and 2nd Defendants (3rd Guarantee).


        1. The Borrower had utilized and subsequently defaulted on the Banking Facilities. Consequently, the Plaintiff filed Civil Suit No. 22 NCC-988-06/2012 in Kuala Lumpur High Court (1st Suit) to recover the outstanding sums due under the Banking Facilities against the –

(a) Borrower; and


(b) 1st to 3rd Defendants.


        1. By way of 2 letters dated 24.8.2012 and 13.9.2012 from the Plaintiff’s solicitors (Plaintiff’s Letters dated 24.8.2012 and 13.9.2012), the Plaintiff proposed for the Borrower to repay certain outstanding sums under the Banking Facilities subject to certain conditions imposed by the Plaintiff (Plaintiff’s Proposal).




        1. In the 1st Suit, the Borrower and all the 3 Defendants were represented by Messrs Rabinder Budiman & Associates (RBA).




        1. By way of a letter dated 13.9.2012 from RBA to the Plaintiff’s solicitors (RBA’s Letter dated 13.9.2012), all the defendants in the 1st Suit agreed to the Plaintiff’s Proposal (Settlement). Accordingly, on 25.9.2012 the Plaintiff discontinued the 1st Suit with liberty to file afresh and with costs of RM5,000 to be paid to the Plaintiff by the all the defendants in the 1st Suit.




        1. I allude to the 1st Suit and the Settlement as there are certain letters exchanged between the parties in respect of the 1st Suit and the Settlement which are relevant to this case. I will discuss the effect of these letters later in this judgment.




        1. The Borrower failed to comply with the terms of the Settlement and was subsequently wound up by the Kuala Lumpur High Court on a petition presented by a creditor of the Borrower.




        1. The Plaintiff’s solicitors demanded the payment of outstanding sums from –

(a) the 1st and 2nd Defendants by way of a letter dated 25.6.2013 (Plaintiff’s Demand); and


(b) the 3rd Defendant by way of a letter dated 25.6.2013.


        1. There was no reply to the above demands by the 1st to the 3rd Defendants. Hence, this action based on the 3 Guarantees (This Suit).




        1. In This Suit, the Plaintiff obtained judgment in default of appearance against the 3rd Defendant on 17.12.2013 (3rd Defendant’s Default Judgment).




        1. The Plaintiff by way of notice of application in court enclosure no. 31 applied for summary judgment against the 1st and 2nd Defendants for the outstanding sums due under the 3 Guarantees (This Application).


B. Principles applicable to summary judgment applications


        1. In This Application, it is not disputed by the 1st and 2nd Defendants that the following 3 matters (3 Conditions for Summary Judgment) required by Order 14 rules 1(1) and 2(1) Rules of Court 2012 (RC) have been satisfied:

(a) the statement of claim in this case (SOC) has been served on the 1st and 2nd Defendants;


(b) the 1st and 2nd Defendants have entered appearance; and
(c) the Plaintiff has affirmed an affidavit verifying the facts on which the SOC is based (Plaintiff’s 1st Affidavit) and the belief of the deponent of the Plaintiff’s 1st Affidavit that there is no defence to the SOC.


        1. The 3 Conditions for Summary Judgment has been decided by our Federal Court in the following cases:




  1. Cempaka Finance Bhd v. Ho Lai Ying & Anor [2006] 3 CLJ 544, at 551-552; and




  1. National Company for Foreign Trade v Kayu Raya Sdn Bhd [1984] 1 CLJ (Rep) 283, at 285.




        1. As held in Cempaka Finance Bhd and National Company for Foreign Trade, once the 3 Conditions for Summary Judgment have been satisfied by the Plaintiff, the burden of proof then shifts to the 1st and 2nd Defendants to resist This Application by satisfying the court under Order 14 rule 3(1) RC that there is “an issue or question in dispute which ought to be tried”.




        1. Assuming the 1st and 2nd Defendants could not raise any triable issue, This Application may still be dismissed under Order 14 rule 3(1) RC if “there ought for some other reason to be a trial”, namely there are circumstances that ought to be investigated by this court – the Federal Court’s judgment in United Merchant Finance Bhd v Majlis Agama Islam Negeri Johor [1999] 1 MLJ 657, at 666-668 (“some other reason for trial”).

        2. Based on the above Federal Court judgments, I will first consider whether the 1st and 2nd Defendants have raised any triable issue and assuming that they are unable to do so, I will then determine whether there is “some other reason for trial


C. Contentions of 1st and 2nd Defendants


        1. Learned counsel for the 1st and 2nd Defendants, Mr. K. Mano, contended that the following matters should be tried in This Suit:

(a) whether the liability of the 1st and 2nd Defendants is contingent or conditional on the Plaintiff establishing the Borrower’s liability to the Plaintiff under the Banking Facilities. According to the 1st and 2nd Defendants, as the Plaintiff has failed to prove the Borrower’s liability to the Plaintiff under the Banking Facilities, there is a triable issue as to whether This Suit is pre-mature or otherwise;


(b) in view of the winding up of the Borrower, whether the Plaintiff should have filed a proof of debt (POD) with the Borrower’s liquidator in accordance with rule 92 of the Companies (Winding-up) Rules 1972;
(c) the Plaintiff could not rely on a certificate of the indebtedness of the 1st and 2nd Defendants given by the Plaintiff’s Senior Vice President (Plaintiff’s Certificate of Indebtedness) as the Plaintiff did not produce a statement of the Borrower’s bank accounts to evidence the Borrower’s indebtedness to the Plaintiff under the Banking Facilities;
(d) there are certain funds with the Plaintiff which could be used to set off the Borrower’s outstanding sums due to the Plaintiff under the Banking Facilities. The PG facility was given by the Plaintiff in respect of a contract awarded by the Government of Malaysia (Government Contract) to a joint venture company, “Hartajaya-Benteng Timur-AMR Jeli JV Sdn. Bhd.” (HBTA). HTBA sent a letter dated 27.6.2005 to the Plaintiff (HBTA’s Letter dated 27.6.2005) which –
(i) authorized the Plaintiff to debit HTBA’s current account with the Plaintiff so as to settle the Borrower’s liability under the Banking Facilities (HBTA’s Set-off);
(ii) allowed the Plaintiff to deduct RM200,000 from the proceeds of each progressive claim received in respect of the Government Contract to build up a sinking fund to a maximum of RM4 million (Sinking Fund); and
(iii) stated that the Borrower had a RM10 million fixed deposit (Borrower’s FD) with the Plaintiff to secure the PG facility.
The 1st Defendant had placed a fixed deposit of RM500,000 with the Plaintiff to secure the Borrower’s repayment of the Banking Facilities (1st Defendant’s FD).
The 1st and 2nd Defendants submitted that there was a triable issue as to whether the Borrower owed any sum to the Plaintiff under the Banking Facilities in view of –
(1) HBTA’s Set-off;
(2) funds in the Sinking Fund;
(3) the Borrower’s FD;
(4) the 1st Defendant’s FD;
(5) payment from proceeds from the Government Contract; and
(6) the interest earned by the Borrower and the 1st Defendant from the Plaintiff for the Borrower’s FD and 1st Defendant’s FD respectively (FD Interest)
(Alleged Set-off);

(e) whether the Plaintiff’s Certificate of Indebtedness contained manifest errors as the Plaintiff’s Certificate of Indebtedness did not state anything about the Alleged Set-off; and


(f) it was unconscionable for the Plaintiff to obtain summary judgment against the 1st and 2nd Defendants in view of the Alleged Set-off.
D. Legal effect and interpretation of 3 Guarantees


        1. Firstly, ss 91 and 92 of the Evidence Act 1950 (EA) provide that no evidence can be adduced by the Plaintiff, 1st and 2nd Defendants to contradict, vary, add to or subtract from the terms and conditions of the 3 Guarantees. On this point, suffices for me to cite the Federal Court’s judgment in Tindok Besar Estate Sdn Bhd v Tinjar Co [1979] 2 MLJ 229, at 227-228.




        1. In Moschi v Lep Air Services Ltd & Anor [1972] 2 All ER 393 –

(a) Lord Reid held as follows at p. 399 -


I go by the terms of the appellant’s contract. I find nothing in the authorities which in any way prevents me from reaching what appears to me to be the natural meaning and effect of this contract. It seems never to have been necessary to make a full analysis of the position in a contract of this kind, and I shall not refer in detail to such indications as there are in the cases, beyond saying that there is no magic in the word guarantee but that the authorities appear to recognise that at least most contracts of guarantee are of this nature.
(emphasis added); and

(b) Lord Diplock stated at p. 402 -


Whether any particular contractual promise is to be classified as a guarantee so as to attract all or any of the legal consequences to which I have referred depends on the words in which the parties have expressed the promise. Even the use of the word ‘guarantee’ is not in itself conclusive. It is often used loosely in ordinary commercial dealings to mean an ordinary warranty. It is sometimes used to misdescribe what is in law a contract of indemnity and not of guarantee. Where the contractual promise can be correctly classified as a guarantee, it is open to the parties to expressly exclude or vary any of their mutual rights or obligations which would otherwise result from its being classifiable as a guarantee. Every case must depend on the true construction of the actual words in which the promise is expressed.
(emphasis added).


        1. In Razshah Enterprise Sdn Bhd v Arab Malaysian Finance Bhd [2009] 2 MLJ 102, at 122, the Court of Appeal stated as follows:

It is quite easy to ascertain whether a contract is one of guarantee or otherwise. Firstly, just look at the natural meaning to be attached to the words employed in the contract (Pearson v Goldsbrough Mort & Co Ltd [1931] SASR 320 at p 327; Edwards v Lennon [1866] 6 SCR (NSW) Eq 18; and AA Davison Pty Ltd v Seabrook (1931) 37 ALR 156). Secondly, one must look at the substantial character of the contract itself (Seaton v Heath, Seaton v Burnand [1899] 1 QB 782, (CA)). Thirdly, the need to look at the nature of the transaction between the parties (Re Sudell; Ex p Simpson [1834] 3 Dea & Ch 792).



There is no set formula to create a guarantee (Welford v Beazely (1747) 3 Atk 504; 26 ER 1090; and Bradley Bros Ltd v Scott [1923] NZLR 1050, (SC)).

Words like, 'You can tell C or anyone that will supply him with hay, that I will accept C's order payable in the Spring' (Colwell v Hatfield And Another [1832] 1 NBR 282, (SC)), are sufficient to create a guarantee. But the words employed must not be equivocal (Ulster Banking Co v Mahaffy (1881) 15 ILT 94; and Bancroft v Milligan (1913) 16 DLR 648, (SC)).
(emphasis added).


        1. Based on the above authorities, it is clear that the nature and extent of the parties’ rights and obligations of the 3 Guarantees depend solely on the natural and ordinary meaning of the words used in the 3 Guarantees. There is no magic in the term “guarantee”. Nor is there any significance in using the word “indemnity”. It is solely a question of construction of the clauses in the 3 Guarantees. The substance of the 3 Guarantees is more important than their label and form. As decided by the Court of Appeal in Sia Siew Hong & Anor v Lim Gim Chian & Anor [1996] 3 CLJ 26, at 32, the court is not bound by the labels that parties choose to affix on the particular document.




        1. It is trite law that interpretation of a contract is a question of law to be decided by the court and not by witnesses through their oral evidence – the Court of Appeal’s judgment in NVJ Menon v The Great Eastern Life Assurance Company Ltd [2004] 3 CLJ 96, at 103-104. Accordingly, the construction of the clauses in the 3 Guarantees does not depend on affidavit evidence.


E. 3 Guarantees are payable on demand


        1. The contents of the 3 Guarantees are identical.




        1. The following clauses in the 3 Guarantees showed that the 3 Guarantees are payable on demand by the Plaintiff:

In consideration of [the Plaintiff’s] granting or continuing to make available [Banking Facilities] … to [the Borrower] … at [1st and 2nd Defendants] request, in such manner, to such extent and for as long as [the Plaintiff] may at [the Plaintiff’s] sole discretion deem fit, [the 1st and 2nd Defendants], the undersigned hereby agree with and guarantee [the Plaintiff] as follows:-


1. [1st and 2nd Defendants] will on demand pay to [the Plaintiff] all the monies and discharge all obligations liabilities whether actual or contingent now or hereafter due owing and incurred to [the Plaintiff] by the [Borrower] in any manner whatsoever (… whether as principal or surety) including all liabilities … from time to time entered into by [the Plaintiff] for or at the request of the [Borrower] together with interest (as well after as before any demand or judgment and irrespective of whether or not the banker and customer relationship between the [Borrower] and [the Plaintiff] has ceased or been terminated) to date of payment at such rates and upon such terms as may from time to time be payable by the [Borrower] (or which would have been so payable but for the liquidation or other incapacity of the [Borrower]) … or obtaining or seeking to obtain payment of all or any part of the monies or amounts hereby guaranteed on a full indemnity basis (Clause 1). …
11. Until the ultimate balance owing by [Borrower] to [Plaintiff] has been paid or satisfied in full:-
[11.1] [Plaintiff] shall be entitled forthwith without prior notice after an event of default or in making demand to combine or consolidate all or any of [1st and 2nd Defendants] then existing accounts wheresoever situate with [1st and 2nd Defendants’] liabilities to [Plaintiff] and set-off or transfer any sum standing to the credit of any such accounts (“the Credit Balances”) in or towards satisfaction of [1st and 2nd Defendants’] liabilities to [Plaintiff] under this Guarantee whether such liabilities be present future actual contingent primary collateral several or joint (Clause 11.1)
[11.4] in the event that [1st and 2nd Defendants] shall fail to discharge [1st and 2nd Defendants’] liabilities to [Plaintiff] under this Guarantee on demand [Plaintiff] shall be entitled without further notice or consent from [1st and 2nd Defendants] to sell assign transfer negotiate or otherwise dispose of the Assets referred to in Clause 11.3 (Clause 11.4)
13. Any demand for payment or any other demand or notice under this Guarantee may be made by [Plaintiff’s] manager or any one of [Plaintiff’s] officers or by any person or firm for the time being acting as [Plaintiff’s] solicitor (Clause 13)
18. As a separate and independent stipulation, [1st and 2nd Defendants] agree that any sum or sums of money which may not be recoverable from [1st and 2nd Defendants] on the footing of a guarantee whether by reason of any defect in or want of powers of the [Borrower] or irregular exercise thereof or lack of authority by any person purporting to act on behalf of the [Borrower] or any legal or other limitation disability or incapacity on or of the [Borrower] or by any other fact or circumstance and whether known to [Plaintiff] or not shall nevertheless be recoverable from [1st and 2nd Defendants] as sole or principal debtor and shall be paid by [1st and 2nd Defendants] on demand. [1st and 2nd Defendants] hereby irrevocably and unconditionally undertake to indemnify [Plaintiff] in full and keep [Plaintiff] fully indemnified against all loss damage liabilities costs and expenses whatsoever which [Plaintiff] may sustain or incur as a result of or arising from the Banking Facilities which [Plaintiff] may now or hereafter grant to the [Borrower] (Clause 18)”
(emphasis added).


        1. The following 2 Supreme Court decisions held that on the construction of the guarantees in those cases, a demand against the guarantors in question constituted a condition precedent for establishing liability against those guarantors:

(a) Mok Hin Wah & Ors v United Malayan Banking Corp Bhd [1987] 2 MLJ 610, at 610-611; and


(b) Orang Kaya Menteri Paduka Wan Ahmad Isa Shukri bin Wan Rashid v Kwong Yik Bank Berhad [1989] 3 MLJ 155, at 156-157.


        1. It is my considered view that Clauses 1, 11.1, 11.4, 13, 17 and 18 clearly showed that the 3 Guarantees are payable on the Plaintiff’s Demand. As the Plaintiff’s Demand has been served on the 1st and 2nd Defendants on 25.6.2013 and there has been a failure on the part of the 1st and 2nd Defendants to pay the sums demanded in the Plaintiff’s Demand (Default of 1st and 2nd Defendants), the Plaintiff’s cause of action based on the 3 Guarantees against the 1st and 2nd Defendants has accrued upon the Default of 1st and 2nd Defendants. I also hold that in view of the Default of 1st and 2nd Defendants, This Suit is not pre-mature.


F. Does Contracts Act 1950 (CA) affect parties’ freedom to make a guarantee?

        1. At this juncture, I refer to s 79 CA which reads as follows:

A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of which default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.




        1. I am of the view that the definition of “guarantee” in s 79 CA does not affect the freedom of the parties in this case to make the 3 Guarantees. In an appeal from Malaysia to the Privy Council in Ooi Boon Leong & Ors v Citibank NA [1984] 1 MLJ 222, it was argued by the appellants that parties to a guarantee could not contract out of CA and among others, s 1(2) CA was cited in support of that argument. Section 1(2) CA states –

Nothing herein contained shall affect any written law or any usage or custom or trade, or any incident of any contract, not inconsistent with [CA].




        1. In Ooi Boon Leong, at 225-226, the Privy Council rejected the contention that parties to a guarantee cannot contract out of CA -

Their Lordships reject the argument based upon section 1(2) [CA]. An incident of a contract is to be distinguished from a term of the contract agreed by the parties. By an "incident" of a contract is meant a legal consequence of the contract which flows from the existence of the contract although the parties have not in terms expressly provided for it and may not have addressed their minds to it. For example, if X for good consideration promises to pay £100 to Y at a future date, it is an incident of that contract that, if X dies before the date for payment, his personal representatives are liable in his place to the extent of the available assets of his estate though the contract does not so provide. Or if X employs Y to be his agent in money matters, it is an incident of the contract that Y must account to X for his dealings with such money though the contract does not so state. But all such incidents of a contract, the legal consequences which flow from the contract at common law, can be overridden by the agreed terms of the contract unless a statute or the common law otherwise provides. In the first example, the contract may provide that X's estate is not to be liable if X dies before the date of payment. In the second example, the contract may provide that X is not entitled to require Y to account for dealings which took place more than two years ago.

All that section 1(2) [CA] is saying is that the legal consequences of a contract which ensue at common law are to continue to apply unless some different legal consequences are spelt out by [CA]. The sub-section does not say that the contracting parties are unable by agreement to vary the legal consequences spelt out by [CA]. Section 1(2) has no effect on the freedom of contracting parties to decide upon what terms they desire to contract. It would indeed be surprising if so devastating an inroad into the common law right of freedom of contract were introduced by the legislature in a section which is primarily devoted to expressing the short title to the Act and which moreover appears in a part of the Act which is merely headed "Preliminary". In an early case before the Board concerning the Indian Contracts Act 1872, the expression "incident of the contract" was used precisely in the sense which their Lordships have indicated. See Irrawaddy Flotilla Company v Bugwandass (1890) 18 IA 121.
(emphasis added).


        1. Based on the decision of our then apex court in Ooi Boon Leong, the parties in this case have the freedom to contract and have indeed agreed to make the 3 Guarantees payable on the Plaintiff’s Demand.



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