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Note: TL MAC Motorsport (Dealer/Applicant) and Mitsubishi Motors Malaysia (Distributor/Beneficiary) entered into a two-year Dealer Sales and Service Agreement (DSSA) under which Dealer/Applicant was required to purchase 141 vehicles and to provide a RM 500,000.00 Bank Guarantee issued by AmBank in favor of Distributor/Beneficiary as a "security deposit for the purchase of Mitsubishi Passenger Car[s] from" Distributor/Beneficiary that would "be forfeited against [Dealer/Applicant's] failure to make payment of any amount due to [Distributor/Beneficiary] by the due date of such payment or to take delivery of any Goods from [Distributor/Beneficiary] in a timely manner."

When Dealer/Applicant placed several orders to Distributor/Beneficiary on which it failed to make payment, Distributor/Beneficiary redistributed the orders to other dealers without drawing on the Bank Guarantee. On 16 December 2008, Distributor/Beneficiary refused Dealer/Applicant's request to downgrade its status only to a service and spare parts center. On 23 December 2008, eight days before the Bank Guarantee was to expire Distributor/Beneficiary issued to Dealer/Applicant a Proforma Invoice that was due within three days for 80 vehicles, knowing that failure to pay would entitle Distributor/Beneficiary to draw on the Bank Guarantee for the vehicles that had already been redistributed to other dealerships.

When Dealer/Applicant did not pay the invoice, Distributor/Beneficiary drew on the Bank Guarantee and was paid. When Distributor/Beneficiary failed to return the proceeds or redeliver the vehicles, Dealer/Applicant sued Distributor/Beneficiary for wrongful drawing and Distributor/Beneficiary counterclaimed. The High Court of Malaysia, Kuala Lumpur, Swee Seng, J., entered judgment in favor of Dealer/Applicant.

The Judge ruled that Distributor/Beneficiary unlawfully and unconscionably drew upon the Bank Guarantee because the DSSA had been modified when Distributor/Beneficiary had previously redistributed the other orders that Applicant made without invoicing Dealer/Applicant.

The Judge found that Dealer/Applicant had been "lulled into the comfortableness of reckoning that each time it did not pay within 7 days of the Proforma Invoice... the vehicles will be released into the open market with no consequence to" them. Further, the Judge found that the Distributor/Beneficiary drawing on the Bank Guarantee was "wrong and unlawful because... [t]he Proforma Invoices for the 80 vehicles... were not genuine orders by [Dealer/Applicant] and/or were in fact orders retrieved from previous[ly] cancelled orders... The 80 vehicles could not be attributed in any manner to any particular Contracts of Sale." The Judge awarded to the Dealer/Applicant the amount of the Bank Guarantee plus interest.

Text: The clause of The Sales Contract regarding security provided:

"The [Dealer/Applicant] shall establish a Security Deposit amounting to 10% of the total value of the order or establish RM 500,000.00 Bank Guarantee in favour of [Distributor/Beneficiary]. This Security Deposit or Bank Guarantee shall be forfeited against the [Dealer/Applicant's] failure to make payment of any amount due to the [Distributor/Beneficiary] by the due date of such payment or to take delivery of any Goods from the [Distributor/Beneficiary] in a timely manner. [Distributor/Beneficiary] reserves the right to change the terms and conditions of the security to be provided by [Dealer/Applicant] ".

[JEB/kae/agj]

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