Article

Note: When Kerajaan Negeri Sarawak (Seller) agreed to sell a timber license to Niah Native Logging Sdn Bhd (Buyer), Buyer secured the transaction with a Letter of Guarantee issued by Pacific Bank Bhd (Guarantor). Furthermore, a third party surety issued a Letter of Indemnity in favor of Guarantor. Both the Letter of Guarantee and the Letter of Indemnity specified that they would be effective from 25 April 1997 to 24 April 1998.

In particular, the Letter of Guarantee specified: "[Guarantor], hereby guarantee[s] to [Seller] the payment of all sums of money which may be due to the [Seller] for the payment of royalty or other sum due under License No. T/0169 for a period of one year from date hereof." The Letter of Guarantee additionally read: "All claim [sic], if any in respect of this guarantee shall be made during the guarantee period failing which it shall be deemed to have been discharged and released from all and any liability under this Guarantee."

By the end of the Letter of Guarantee's one year duration, Buyer had failed to pay Seller a total of RM 685,110.85 which was owed. On 20 October 1998, after the Letter of Guarantee had expired, Seller claimed RM 118,790.69 under the Guarantee. Guarantor rejected this claim on the ground that the Letter of Guarantee had expired and that it would be unable to reimburse itself by invoking the Letter of Indemnity, which had also expired. Seller subsequently sued Buyer in the High Court for failing to pay royalties and other payments under the timber license and Guarantor for refusal to honor the Guarantee. Guarantor requested the claim be struck out.

The Deputy Registrar struck out the application and Seller appealed. The High Court ordered that the only issue between Seller and Guarantor was "whether Section 29 of the Contracts Act 1950 is applicable to the terms and conditions stipulated in the said Letter of Guarantee that required all claims to be made during the one (1) year guarantee period" and, conceding that it did, reversed the Deputy Registrar's decision. Section 29 of the Malayan Contracts Act 1950 serves to limit which contracts may be enforced reads: "Every 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 he may thus enforce his rights, is void to that extent." Guarantor's subsequent appeal was dismissed by the Court of Appeal, but the Federal Court granted Guarantor leave to appeal in regards to the question: "Whether the terms and conditions in the Letter of Guarantee which limit the time or restrict the period for making the claim is void?" The Federal Court (Putrajaya), Zainun Ali FCJ, J., ruled in favor of Guarantor.

The Federal Court first acknowledged that "whether a prior demand is a condition precedent to the creation of liability in a guarantee, depends on the precise terms of the contract" and that "where the said clause only prescribes a time limit for a demand to be made before a cause of action can arise, so be it." The opinion emphasized the difference between agreements that limit the time during which a cause of action may arise and agreements that limit the time during which a party may sue. The Court stated "[i]n the instant appeal, the said clause therefore limits when a right to sue or cause of action will accrue to the [Seller]" and that "[i]n short, once the right to sue or cause of action accrues, it does not affect the 6 years limitation period within which the [Seller] may sue." It was specifically noted that "parties to a contract are entitled to regulate or modify their rights in the event of breach and the rights of accrual of any cause of action in any way they deem fit."

The Federal Court next referenced the old S 28 of the Indian Contracts Act because Section 29 of the Malayan Contracts Act is derived from it. The Indian Courts would not "invalidate agreements which determines when a right arises or the time when a right will arise." The Federal Court noted that the new S 28 of the Indian Contracts Act had been divided into two sections and that Section 28(b) would clearly invalidate the Letter of Guarantee, as it voids agreements which "extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period as to restrict any party from enforcing his rights". However, the Federal Court concluded that Section 29 of the Malayan Contracts act "contains no such provision".

The Federal Court stated that it was "clear that parties have expressly agreed that for liability on the part of the Appellant to arise, a claim (demand) must be made during the Guarantee period." Furthermore, the Federal Court emphasized that parties "can freely agree on the terms governing when and how their right of action will arise" and that it "[is] unable to see how the terms restrict the [Seller] from enforcing his rights by way of legal proceeding". In conclusion, the Federal Court determined that "[t]he word 'claims' which entails a demand for the payment when default occurs should be construed in its ordinary sense and meaning and thus the limitation paragraph does not amount to restricting one's right to enforce under Section 29."

[ABS/mjb]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.