Article

Note: In order to obtain a credit facility from AmBank (Bank) for Tecnoelectrik Services Sdn Bhd (Borrower), Luqman Kamil bin Mohd Don (Surety), as director of Borrower, jointly and severally executed a letter of guarantee in the amount of RM 1,000,000 in favor of Bank. When Surety resigned from Borrower, he gave Bank three months' notice of his discontinuance as guarantor pursuant to the terms of the guarantee.

Pursuant to the line of credit, Bank issued a commercial LC on 22 June 1998 for RM 805,795 in favor of Microfus (Beneficiary/Seller). When Beneficiary/Seller drew on the LC, Bank paid, and with the consent of Bank, Borrower took possession of the documents and executed a trust receipt to repay Bank within 90 days instead of repaying Bank immediately.

When Borrower failed to satisfy its debt, Bank sued Surety to recover the outstanding amount. The Malayan Federal Court (Putrajaya) in an opinion by Maarop, F.J.C., dismissed Bank's appeal from the judgment of the court of appeals which had affirmed the decision of the High Court that dismissed Bank's claim with costs.

Bank argued that a contingent liability was created on 22 June 1998, three days before Surety's letter of revocation went into effect. Bank also argued that since LCs are treated as an equivalent to cash, the liability was created when the trust receipt was created and, thus, Surety was liable for the debt incurred. The appellate court ruled that there was no contingent liability created when the LC was issued, but only when it was drawn on. The court of appeals stated, "When [Bank] issued the letter of credit to the [Beneficiary/Seller] on 22 June 1998, no contingent liability was immediately created that would have bound [Surety] by virtue . . . of the letter of guarantee. It is not disputed that no monies had been [paid] by the [Surety] on or before 25 June 1998. If any contingent liability was indeed created under the letter of guarantee it was so created on the 3 . . . July 1998 when [Bank] released the monies related to the letter of credit to the [Beneficiary/Seller]." The trial court had noted that, "when the contract of sale stipulates for payment to be made by confirmed irrevocable letter of credit, then, when the letter of credit is issued and accepted by the seller, it operates as conditional payment of the price. It does not operate as absolute payment."

The Malayan Federal Court ruled that the basis of Bank's claim for recovery of funds from Surety was the trust receipt between Applicant and Beneficiary/Seller, not the LC. The court said, "In our view, the contingent liability created by the issuance [of] the letter of credit (and its acceptance by [Beneficiary/Seller]) was different from the liability created when [Borrower] executed the trust receipt...". Since Bank did not actually plead under the LC, but rather under the trust receipt, the opinion concluded that there was no liability for Surety under the trust receipt either, observing that liability created by the LC was not pleaded properly and could not be brought up later in the appeal.

[JEB/kae/sls]

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