Article

Note: In connection with a construction project Bank Islam (Bank/Beneficiary) extended a credit facility to Khidmat Makmur Sdn Bhd (Borrower) in the amount of RM 1,639,300 which included a bank guarantee facility of RM 7,541,000. The facility was guaranteed in what is described in the opinion as a "Letter of Guarantee" by Mustaffar bin Yacob & Anor (Guarantors) who were directors of Borrower.

When Borrower encountered financial difficulties and failed to make payments, it entered into negotiation with employees of Bank/Beneficiary. The possibility of a rescue of Borrower by a "White Knight" was discussed and the Bank/Beneficiary's employees allegedly promised that Guarantors would be released if a White Knight were obtained. Although a White Knight was obtained, the project faulted more than five years after the initial default and Bank/Beneficiary demanded payment from Guarantors. When payment was not made, Bank/Beneficiary sued Guarantors for reimbursement. The High Court (Kuala Lumpar), Mohd Zawawi, J. entered judgment for Bank/Beneficiary.

Guarantors argued that their agreement was modified by the subsequent oral agreement. The Judge stated, "the evidence of subsequent oral modification of the Guarantee Agreement(s), if any, must be of sufficient force to overcome the presumption that the complete agreement(s), which requires written consent modification, expresses the intent of the parties. The Court requires the provision of an alleged oral modification to prove that the terms of the written agreement were altered by the oral agreements by more than a simple preponderance of the evidence. The evidence of vague, indefinite, or ambiguous statements will not suffice. The Court concludes that the Defendants' evidence, taken in sum, is insufficient to warrant an inference that the parties had reached an oral agreement to modify the written agreement, i.e. Guarantee Agreement." (¶28)

Comment:

1. Classification: While the Judge avoids classification of the guarantee, the treatment afforded the obligation is that due a true guarantee rather than an independent one. Its use of "absolute, irrevocable, unconditional and continuing" did not transform the undertaking into one that is independent from the undertaken transaction.

2. Irrevocable: While the parties argued about the admissibility of parol evidence, the alleged oral agreement arguably modified the Guarantee after it was issued, making the parol evidence irrelevant. The real question is whether a contract that describes itself as "irrevocable" can be subsequently modified. Were it independent, it could not without the consent of the guarantor and the beneficiary. Presumably the same proposition would be true for a dependent undertaking. Because the judge did not find the evidence of an agreement to modify the undertaking to be credible, there was no need to consider whether there was an oral modification.

Text: The Letter of Guarantee included the following provisions:

Clause 4(1): "The obligations of the guarantor here under shall be absolute, irrevocable, unconditional, and continuing and in any and all circumstances shall not be prejudiced, released, discharged or otherwise affect by any one or more of the following (whether occurring with or without the consent of or notice of any person):-G) the insolvency winding up receivership administration official management, reconstruction, reorganization or amalgamation of the Customer...

Clause 18[e]: "No amendment modification termination or waiver of any provision of this Guarantee nor consent to any departure by the Guarantor therefrom shall be effective unless the same shall be in writing and duly signed or executed by the Bank and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose of which it was given..."

[JEB/dm]

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