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Note: To assure payment of royalties under a timber license, Niah Native Logging Sdn Bhd (Licensee/Applicant) provided Kerajaan Negeri Sarawak (Licensor/Beneficiary) with a "letter of guarantee" (Guarantee) issued by The Pacific Bank BHD (Guarantor) in the amount of RM 100,000. The guarantee contained the following clauses:

"This guarantee is effective from 25th April 1997 and shall expire on 24th April 1998.

All claims, if any, in respect of this guarantee shall be made during the guarantee period failing which we shall be deemed to have been discharged and released from all and any liability under this guarantee."

"On notice in writing of any default ... in the payment of royalty or other sum under the said licence given to us, within seven days from receipt of such notice we undertake to pay the government of Sarawak all sums then due under this guarantee."

As of January 1998, Licensee/Applicant owed RM 118,790.69 as Licensee and was in default. The total amount of royalties owed was RM 685,110.85. By a letter to Guarantor dated 20 October 1998, Licensor/Beneficiary demanded payment of RM 100,000 on the Guarantee. According to the court opinion, Guarantor "refused to honour the guarantee as the guarantee had expired on 24 April 1998 and the demand was made outside the validity period of the guarantee." Licensor/Beneficiary then sued Guarantor for wrongful dishonor. The High Court of Miri summarily ruled in favor of Licensor/Beneficiary as a matter of law, granting it judgment for RM 100,000. On appeal, the Court of Appeal, Putrajaya, in an opinion by Abu Samah Nordin, JCA, with which Azhar Haji Ma'ah, JCA, concurred, dismissed the appeal. Hishamudin Mohd Yunus, JCA, dissented and would have allowed the appeal.

Licensor/Beneficiary argued that the clause in the Guarantee providing that claims must be made during the guarantee period violated Section 29 of the Contracts Act of 1950 which provided that "[e]very 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." The trial judge had concluded that this clause "has the effect of limiting the period within which the respondent may enforce its right against the appellant and was therefore void to that extent by virtue of s. 29 of the Act."

Guarantor argued that "[t]he word 'claims' in the letter of guarantee means a letter of demand...and not filing a writ. It only contravenes s. 29 of the Act if the said term in the letter of guarantee limits the respondent's right to file an action to a period of less than six years, which is the period provided under the Limitation Ordinance of Sarawak."

Licensor/Beneficiary, however, contended that the term "enforce" in the statute is not limited to filing a court action but encompasses making a demand under the Guarantee.

The Majority Opinion concluded that "the fact that the claim by the respondent was made outside the guarantee period, does not render such claim bad and invalid." It reasoned that:

"It is a trite law that a notice of demand is a condition precedent to filing a writ of action. It is thus obvious to me that the term in the letter of guarantee had the effect of limiting the respondent to enforce its rights to make a claim within the one year guarantee period when the limitation period of six years under the Limitation Ordinance, Sarawak had not expired."

In a carefully reasoned Dissent, Yunus, JCA, stated that the clause in the Guarantee

"is not concerned with [Licensor's/Beneficiary's] right to enforce the claim once a claim has been made within the prescribed time limit; whereas s. 29, on the other hand, is not concerned with time limitation as to the making of a claim. Section 29 is only concerned with time limitation as to the enforcement of a right. Making a claim and enforcing a right are two different things. Enforcing a right only arises once a valid claim has been made. One must not confuse between 'making a claim' and 'enforcing a right'. Making a claim is only the preliminary step; whereas enforcing a right only arises once this preliminary step has been taken - provided it is validly taken and the claim or demand remains unsatisfied. In other words, the making of a claim precedes the enforcement of a right. But it must be appreciated that the making of a claim does not necessarily result in the enforcement of a right; for the party against whom the claim is made may very well satisfy the claim, and if this happens then the matter will just end there: the question of the enforcement of a right then does not arise. Further, the making of a claim does not involve a judicial proceeding action ie, a court action. It merely entails the making of a demand - a demand following a breach... But enforcing a right involves a court action."

The Dissenting Judge also emphasized the reference in the Guarantee to the claim being "received" which refers to a claim being received by the Guarantor and not being filed in court.

Comment: The Majority is wrong in its interpretation of the demand guarantee and under demand guarantee law. The terms of the demand guarantee refer to the expiration of a claim being made under the demand guarantee and not the limitation period for a claim embodied in a legal action. The expiration of the demand guarantee does not impede the six year limitation period for filing an action for wrongful dishonor of the demand. What it does is to limit the time under which a demand must be made under the demand guarantee.

It is in this regard that the real mischief of the Majority Opinion lies. It is universally understood in LC law and practice that an independent undertaking ceases to be available after it has expired. This decision turns that rule on its head.

For the appellate court to interpret the Malaysian Contract Act unnecessarily and over broadly will do serious damage to Malaysian banking and commerce both domestically and internationally. If Malaysian courts will not give effect to expiration dates, the cost of demand guarantees will increase significantly for Malaysian companies that apply for them because their banks must hold collateral for the entire six year limitations period. These companies will pay higher prices or alternatively forego business opportunities. Internationally, banks will be unwilling to act on Malaysian demand guarantees.

If this pernicious doctrine is also applied to commercial LCs - and on its face there is no reason it should not - Malaysian commercial LCs will be unwelcome absent confirmation and no rational bank would confirm them except on a six year basis, thereby tying up the Malaysian issuing bank's credit line.

The Dissenting Judge has taken the commercially rational approach to the statute and the text of the demand guarantee which will, hopefully, persuade other Malaysian courts.

[JEB/mlm]

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