A party cannot invoke illegality based solely on non-compliance with Syariah principles if contractual obligations remain valid under the governing law.

Rohana Yusuf JCA:

Introduction

[1] The Appellant (plaintiff) appealed against the decision of the learned High Court Judge who refused to enter judgment after full trial for a claim of a breach of agreement pursuant to Islamic financial facility granted to the First Respondent (first defendant). The Second Respondent is the guarantor. The Respondents' counterclaim was also dismissed. There was also a cross appeal by the Respondents on the dismissal of the counterclaim.

[2] We heard the appeal on 19 May 2015 and we had unanimously allowed the appeal and dismissed the cross-appeal. We set out below the reasons for our decision.

[3] My learned brother, Abdul Aziz Abdul Rahim, JCA had seen this judgment in draft and had agreed with the same. My learned brother Hamid Sultan Abu Backer, JCA will be providing a supporting judgment.

Background Facts

[4] The background to this case started, by a letter of offer dated 31 July 2003 (First LO) when the Appellant granted the following Islamic banking facilities to the First Respondent in a total sum of RM14 million, consisting of:

i) an Islamic Term Loan (BBA) for RM2 million;

ii) Murabahah Overdraft Facility (MOD Facility) for RM3 million,

iii) Islamic Bank Guarantee (BG) for RM4 million; and

iv) Murabahah Overdraft against Progress Claim (MOD/PC) for RM5 million.

[5] The facilities were provided based on Murabahah financing principle. For that purpose the parties had executed Master Facility Agreement dated 15 December 2003, the Asset Purchase Agreement (APA) and the Asset Sale Agreement (ASA) of even dates. Under the APA and ASA the Appellant purchased the "rights, title, interest and benefit of the Customer as derived from Project 1 and Project 2" at Appellant's purchase price and sold the same to the First Respondent at the Appellant's selling price.

[6] The Islamic banking facilities were secured by legal charges over landed assets known as HSD No. 30498 Lot PT 34901, HSD No. 30499 Lot 34902, HSD No. 30500 Lot 34903 and HSD No. 30501 Lot 34904 Mukim Klang Selangor Darul Ehsan and two letters of Guarantee by the Second Respondent.

[7] The Respondents had settled all the outstanding due under the facilities, except for the Murabahah Overdraft Facility (MOD Facility). This is the subject matter of claim by the Appellant against the First and Second Respondents. The claim was for RM4,599,016.37 as at 28 February 2013.

[8] It was the Appellant's case that under the terms of the First LO the MOD Facility was for RM3 million but was later restructured to RM5 million. The restructuring was made vide a letter of offer dated 08 December 2004 (Second LO). It was also a term in the Second LO that the MOD Facility was to be settled in one lump sum payment within the agreed 12 months financing period and subject to yearly review. This MOD Facility can only be utilised subject to new APA and ASA.

[9] The restructuring of the MOD Facility was executed vide Facility Agreement dated 23 December 2004 and a new APA and ASA each also dated on 23 December 2004. The subject of sale under this APA and ASA was 4 parcels of land described as HSD No. 30498 Lot PT 34901, HSD No. 30499 Lot 34902, HSD No. 30500 Lot 34903 and HSD No. 30501 Lot 34904.

[10] Subsequently, the MOD Facility was reviewed when the third letter of offer (Third LO) from the Appellant dated 28 May 2009 had reduced the then existing limit of RM4.5 million (after annual reduction) to RM3.5 million. This was protested by the First Respondent via a letter dated 12 June 2009, counter proposing its own terms. The Appellant on that request of the First Res