Article

Note: At the request of Pembalakan Jerajat (Principal), Affin Bank Berhad (Guarantor) issued four letters of guarantee in the amount MYR44,788,368 in favor of Yayasan Pahang (Beneficiary) for the "extraction and purchase of timbers". To induce Guarantor to issue the Guarantees, Sim Ah Hee @ Lee Ah Hee and Anor (Indemnitors) issued four letters of indemnity. The Indemnitors "agreed to indemnify the respondent against all losses which the respondent might incur by reason of honouring the payment of the LGs".

The letters of indemnity also provided: "[Indemnitors] agree that any request upon [Guarantor] by [Beneficiary] for the payment of any sum of money in pursuance of the said guarantee shall be sufficient authority to [Guarantor] for making any such payment and it shall not be incumbent upon [Guarantor] to enquire whether any such amount is in fact due".

When Guarantor honored the guarantees, however, Indemnitors failed to reimburse it. Guarantor then sued Indemnitors for reimbursement. The trial court entered judgment in favor of the Guarantor. On appeal, the Court of Appeal (Putrajaya), Mahmud, JCA., affirmed.

Indemnitors claimed that Beneficiary's drawings on the Guarantees were wrongfully honored in that each was linked by the underlying contract to logging of specific areas and that only one of the four areas had been logged. It appeared that the Guarantees improperly reflected the transaction of the parties and Guarantor's employee admitted that payment had been made notwithstanding a provision of the Guarantees.

The Judge decided that the terms of the letters of indemnity explicitly provided for reimbursement on the sole condition that Guarantor issue the Guarantees on behalf of the Principal, and that Guarantor was not required to ascertain if payment to Beneficiary was in fact due. Affirming, the appellate court stated that "if the contract is reduced into a document it must be read within its four corners" and refused to admit the testimony or consider the Guarantees, instead focusing solely on the indemnity. The appellate court noted, additionally, that the evidence in any event indicated that payment on the Guarantee was not improper. The Appellate court noted that "when the meaning of a contract was clear there could be no resort to other documents to give another meaning to it. And it is trite that it is not legitimate to use as an aid in the construction of a contract anything which the parties said or did after it was made".

Comment:

This decision appears to treat an indemnity as independent on the basis of contract law and presumably the parole evidence rule. One wonders if the "four corners" approach would still be invoked if fraud by the Guarantor had been alleged.

[JEB/sdc]

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