Article

Note: To assure performance of certain agricultural projects at a 195 acre palm oil estate in Felcra Bukit Panjang, Setiu, Trengganu, MBf Insurans Sdn Bhd (Guarantor/Insurer) provided a guarantee payable by demand in the sum of RM 22,017.00 in favor of FELCRA (Beneficiary/Owner) for the account of Haza Enterprise (Contractor). The guarantee was initially available from 15 June 1989 until 14 June 1990, and was extended by endorsement to 14 June 1991. The endorsement read: "This guarantee will expire on 14 June 1991. Claims if any must be received on or before this date." When Contractor/Applicant failed to perform, Beneficiary/Owner wrote a letter on 21 June 1991 demanding payment from Guarantor/Insurer. Guarantor/Insurer refused to pay because the demand was made after expiry.

Beneficiary/Owner then sued Guarantor/Insurer in the Magistrate Court for failing to honor the demand, and sought the amount of the guarantee. The Magistrate Court dismissed Beneficiary/Owner's suit because Beneficiary/Owner made a demand on the guarantee after the expiry date, which according to the endorsement, rendered any suit related to the demand futile. Beneficiary/Owner then appealed to the High Court which reversed, ruling that the endorsement was contrary to Section 29 of the Contracts Act of 1950 because it unduly limited Beneficiary/Owner's rights. Guarantor/Insurer then appealed to the Court of Appeal, Malaysia where Gopal Sri Ram, Suriyadi Ahmad, and Hasan Lah, JJ., affirmed in three different opinions.

Guarantor/Insurer argued that "that [Beneficiary/Owner] had six years to file a suit but subject to a claim having been made within the validity of the security guarantee. As [Beneficiary/Owner] had failed to comply with the provisions, in relation to the filing of the claim within the shelf-life of the security guarantee, the suit thus must fail, as it had failed to establish a cause of action." Beneficiary/Owner argued that it was entitled to enforce its right with the six year statute of limitations running from the time of breach.

Judge Gopal Sri Ram offered three different interpretations of the endorsement: 1) that Beneficiary/Owner must sue Guarantor/Insurer before the expiry; 2) Beneficiary/Owner is only entitled to draw on the guarantee on or before the expiry day and a breach occurred on or before the expiry day; or 3) that the guarantee covers events during the life of the guarantee, and could be drawn on even after the expiry date. Furthermore, the Judge interpreted "[c]laims" to mean a demand for payment under the guarantee.

Judge Gopal Sri Ram ruled that the first two interpretations resulted in absurd outcomes, and cannot have been the intent of the parties. The first interpretation cannot hold because an event giving rise to liability could occur the day before expiry, leaving very little time to file suit. Similarly, the second interpretation cannot hold because Beneficiary/Owner could discover the occurrence of an event that would have entitled a drawing after the expiry date. The Judge ruled that the third interpretation was the most commercially reasonable, and since the endorsement is ambiguous, it must be construed against Guarantor/Insurer who seeks to rely on its terms to defeat Beneficiary/Owner's claims. Therefore, since the breach took place during the life of the guarantee, Beneficiary/Owner's demand on 21 June 1991 was proper.

Judge Suriyadi Ahmad reached the same conclusion, but for different reasons. He agreed with Judge Gopal Sri Ram regarding the meaning of "[c]laims" and ruled that the endorsement unduly limited Beneficiary/Owner's ability to enforce its rights, contravening Section 29 of the Contract Act of 1950. Section 29 of the Contract Act of 1950 provides that:

"Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent."

Since the breach took place before the expiry date and the endorsement was void, Beneficiary/Owner's demand on the guarantee was timely. Judge Suriyadi Ahmad ruled that the endorsement was void, affirming the High Court's decision. Judge Hasan Lah agreed and ruled similarly.

Text: Clause A of Guarantee:

"The said sum of RM22,017 shall be paid by us forthwith on demand by you in writing without your having to assign any reason whatsoever for such demand."

Text: Clause C of Guarantee:

"This guarantee is effective from 15 June 1989 to 14 June 1990."

Text: Clause D of Guarantee:

"The giving of time to the said contractor or the neglect or forbearance by you (the authority) in requiring or enforcing payment of the said sum of RM 22,017 .... shall not .... release or absolve us from our liability under this guarantee."

Text: Subsequent Endorsement of Guarantee:

"This guarantee will expire on 14 June 1991. Claim, if any, must be received on or before this date."

[JEB/rs]

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