Article

Prior History: Nam Fatt Corp. v. Petrodar Operating Co., [2011] 7 MLJ 305 [Malaysia], abstracted at 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE 475.

Note: Petrodar Operating Company (Owner) contracted with Nam Fatt Corporation, a publicly listed company on Bursa Malaysia and its subsidiary (Contractor) through a joint venture company (the JV) with an Italian company, Bentini SPA, to build a pumping station in the Melut Basin Oil Development Project in Sudan for USD 180 million. The contract contained an arbitration clause and stated that Sudanese law was to govern. As part of the contract, Contractor/Applicant obtained a performance guarantee in favor of Owner/Beneficiary in the amount for USD 18 million and issued in Kuala Lumpur by an off shore Malaysian bank in Labuan (Guarantor).

When a dispute arose between Owner/Beneficiary and the JV over refusal of certification or payment and alleged Owner/Beneficiary interference in the JV's completion of the contract, it was referred to arbitration pursuant to the contract. Contractor/Applicant alleged that Beneficiary made repeated "threats" to draw on the performance guarantee. In December of 2009, the JV sent a letter to the Guarantor stating allegedly to abuse it or make an unconscionable drawing "that any claim or demand under the guarantee made by the [Owner/Beneficiary] would be fraudulent, unconscionable and/or invalid and that the [Guarantor] should not accede to it." In February 2010, the JV, at the request of Owner/Beneficiary, asked that the guarantee be extended.

In March 2010, Applicant obtained an interim restraining order from the Shah Alem High Court in Malaysia restraining Owner/Beneficiary from drawing on the performance guarantee without the leave of the court. In April 2010, Owner/Beneficiary again sent individuals to the Guarantor with an extend or pay demand. After learning of this, the JV sent the Guarantor another letter stating "that the [Owner/Beneficiary]'s purported demand dated 8 April 2010 is fraudulent, unconscionable and/or invalid and the [Guarantor] should not accede to it and any payment the [Guarantor] would make after having been notified of the [Owner/Beneficiary]'s fraud in the demand would render such payment fraudulent and/or breach of contract or duty."

Contractor/Applicant applied for a permanent injunction preventing Owner/Beneficiary from making any more demands on the performance guarantee in Malaysian court claiming that Beneficiary's drawing and "threats" to draw were "made as a tool or means of oppression or vexation against the [Contractor/Applicant]". The trial court granted an injunction against Owner/Beneficiary. Owner/Beneficiary appealed, claiming that Malaysian Courts do not have jurisdiction over the claim or the Beneficiary, that Malaysia was the wrong forum, and that the injunction restraining Beneficiary's right to draw was improper. On two separate appeals, the Malaysian Court of Appeal, Putajaya, in an opinion by Aziza Ali, J., affirmed.

The appellate court recognized that Owner/Beneficiary did not submit to jurisdiction based on its behavior, i.e. making demands at the issuer in Kuala Lumpur, but rather because Malaysian case precedent and statute made Beneficiary's "fraudulent demands" a tort in Malaysia. The appellate court also agreed that even though Sudanese law governed the contract, Malaysian law could be applied to the case based on which form has the "most real and substantial connection." Furthermore, it noted that since both Sudanese and Malaysian law are based upon Shariah principles the law would be substantially the same.

The appellate court also upheld the lower court's decision to grant the injunction barring Beneficiary from drawing, citing the appellate court's recent case precedent allowing for injunctions barring Beneficiary's rights to draw on performance guarantees on the grounds of fraud and unconscionability. In the present case, the appellate court agreed with Contractor/Applicant that "the demand was made as a tool or means of oppression or vexation against the [Applicant] and that in the circumstances of this case, a demand or claim of the [Beneficiary] towards the guarantee would be fraudulent, unconscionable and/or invalid under the law."

Comment: The Malaysian court concluded that it had jurisdiction over a demand guarantee supporting a contract that was subject to the law of Sudan because under Malaysian law a fraudulent or unconscionable drawing is a tort. This analysis is puzzling. The guarantee was issued in Kuala Lumpur. That fact should determine the law applicable to the guarantee and confer jurisdiction on Malaysian courts unless the guarantee provides otherwise. The choice of Sudanese law for the underlying contract is irrelevant. To categorize a fraudulent or unconscionable drawing as a tort raises numerous collateral issues, including the measure of damages. There was no need for the court to go in that direction.

[JEB/kae]

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