Article

Factual Summary: Applicant, a company carrying on the business of air cargo transportation and handling of consignment, entered into a sales agency agreement ("Agreement") with Beneficiary, an airline and cargo transport company, under which Applicant used Beneficiary's air cargo transportation services to transport Applicant's customers' goods. To assist this use of its transportation services, Beneficiary provided blank air waybills to Applicant, which would then obtain bookings from customers, complete the waybills, and return them to Beneficiary. At Beneficiary's request, Applicant obtained a conditional bank guarantee (Guarantee) from Issuer in favor of Beneficiary to secure payment for the waybills that it used. The Guarantee stipulated four main conditions:

"(a) that the Bank guarantees the liability of the plaintiff upon the terms and conditions as stipulated in the Bank Guarantee;

(b) that the Bank Guarantee shall be a continuing guarantee and not exceeding the sum of RM150,000.00;

(c) that the Bank is to pay upon demand all monies and liabilities payable by the plaintiff under the term of the sales agency agreement; and

(d) that the Bank Guarantee shall extend and be applicable to all debts and liabilities payable by the plaintiff under the sales agency agreement."

Beneficiary called on the guarantee, stating that debts related to a separate business transaction between the parties' affiliates qualified as a breach under the guarantee and allowed for them to draw on the guarantee. After Issuer honored the presentation, Applicant sued Beneficiary for calling on the guarantee absent any breach by Applicant. The High Court of Malaysia dismissed Applicant's claim with costs, having "pierced the corporate veil" and determined that the same director was in charge of both Applicant and Applicant's Affiliate. On appeal, the Court of appeal (Putrajaya), Ishak, Albert and Abd Razhim, J.J., reversed the High Court's dismissal.

Legal Analysis:

Piercing the Corporate Veil: The appellate court determined that the trial had improperly lifted the corporate veil because a court may only pierce the corporate veil in circumstances such as "actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity".

Bank Guarantee: The Judge found that the High Court failed to consider Beneficiary's failure to prove the amount claimed under the Guarantee, and ruled that the Beneficiary was not entitled to draw on the Guarantee because its letter of demand did not refer to any breach of the Agreement by Applicant.

The Judge found that because the terms of the Guarantee stated that it was conditional, Beneficiary could demand payment if Applicant committed a breach under the Agreement and triggered on of the stated conditions, similar to a performance bond. The Judge noted that the burden of showing such a breach rested with Beneficiary, and found that it failed to meet that burden in its letter of demand, which merely stated: "[Applicant] has failed to honour their obligations and liabilities to [Beneficiary]. In consideration of you agreeing the liabilities of the abovenamed, we hereby wish to claim the abovesaid bank guarantee with immediate effect." Because the letter made no reference to the Agreement, the court ruled that it was invalid.

The Judge further noted that even had Beneficiary referred to the Agreement, its claim was not for monies owed under it. Beneficiary's admitted that its demand was for rentals and electricity charges under the tenancy agreement and rental for the Facility from Applicant's Affiliate, not Applicant. However, it was undisputed that Applicant and Applicant's Affiliate, despite having common directors or shareholders, were both separate legal entities. Beneficiary's attempts to recover the rental charges by way of a Writ of Distress further showed that the rental and electricity charges could not be due from Applicant. The chairman of the Airfreight Forwarders Association of Malaysia confirmed that the Facility was provided by Beneficiary's Affiliate, a separate entity from Beneficiary. Beneficiary failed to produce any invoice for the rental or electricity bills to prove that the payments were due from Applicant, or an invoice for the Facility.

Comment: It is not clear from the opinion what is a "conditional" bank guarantee (since all guarantees are conditional) but the court treats it as if it were dependent. One wonders, however, what was the point of a guarantee of the debt of another if it could not be called on to cover that debt.

[KCM]

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