A pre-incorporation contract cannot bind a newly formed entity unless there is a proper novation and established contractual relationship between the parties involved.

Rohana Yusuf PCA:

Introduction

[1] There are two appeals before us. Both appeals are lodged by the appellant, Dae Hanguru Infra Sdn Bhd (Plaintiff). Civil Appeal No: 01(f)32-11-2020(D) (Appeal 32) is against the decision by the Court of Appeal in favour of Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd. In Civil Appeal No: 01(f)32-11/2020(D) (Appeal 33), the appellant is appealing against the decision of the Court of Appeal in favour of the Perbadanan Menteri Besar Kelantan.

[2] Since Appeal 33 is dependent on the outcome of Appeal 32, we agreed and allowed an oral application made by the learned counsel for the respondent therein to proceed with Appeal 32 first. We then deferred the hearing of Appeal 33.

[3] In this judgment, parties will be referred to as they were in the High Court.

The Background Facts

[4] The Kelantan State Government was interested to construct, finance, design and building a highway road from Kota Bharu to Kuala Krai (the Project). In the year 2012, the State Government issued an open proposal to implement it as a State Project. It was to be implemented through the subsidiary of Perbadanan Menteri Besar (2nd defendant). The subsidiary company incorporated as a special vehicle for the Project is Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd (1st defendant).

[5] Responding to the invitation, Consortium Daelim JV (CDJV) expressed interest to bid for the Project. CDJV was a consortium led by Daelim Industrial Co Ltd. The consortium constituted 13 members as evidenced from their presentations and proposals on the Project to the State Government in October 2012.

[6] A series of discussions were held between CDJV with the officers in the State Government including the representatives of the 1st defendant. During these discussions, the State Government had indicated its willingness to award the Project to CDJV. In one of the Minutes of the meeting, CDJV requested the State Government to issue a letter of intent to enable CDJV to arrange financing with banks in Korea.

[7] Following that request, the 1st defendant issued a Letter of Intent dated 8 October 2012 (LOI) to CDJV purportedly appointing CDJV as a Turnkey Contractor. In the same letter, CDJV was instructed to nominate or incorporate a company acceptable to the 1st defendant as the Turnkey Contractor to implement the Project. Various other terms were also stated.

[8] Two days later CDJV indicated its acceptance of the terms and conditions contained in the LOI. The 1st defendant issued a further letter described as Letter of Acceptance dated 31 October 2012 (LOA) which contained more terms including requiring a guarantee that the maximum provisional contract price was to be at RM1.8 billion.

[9] In the LOA, CDJV was also required to provide evidence of incorporation of a Turnkey Contractor acceptable to the 1st defendant. In addition, the 1st defendant reiterated that the terms in the LOA would form part of a contract to be formalised in an agreement premised on the FIDIC Conditions of Contract.

[10] CDJV indicated its acceptance of the further terms of the LOA, three weeks after that. Then two weeks later on 05 December 2012, CDJV notified the 1st defendant that a legal entity or Turnkey Contractor responsible for the implementation of the Project would be Dae Hanguru Infra Sdn Bhd (Plaintiff), which was incorporated on 03 December 2012. Despite the formation of the plaintiff, CDJV about two weeks after that, on 17 December 2012 met with the State Government to discuss the possibility of a financial guarantee by the State. The request was declined by the State Government. More discussions took place between CDJV and the 1st defendant thereafter.

[11] Meanwhile, the 1st defendant appointed Jurutera Perunding Zakie (JPZ) as its Project Management Consultant. JPZ focused on finalising arrangements with CDJV. JPZ requested CDJV's financial status, company profile, and proposals of work, with the purpose of trying to prepare a contract document between the 1st defenda