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2020 MarsdenLR 976
COURT OF APPEAL PUTRAJAYA
BANK PEMBANGUNAN MALAYSIA BERHAD – Appellant
Versus
SPRING HILL BIOVENTURES SDN BHD – Respondent
[Civil Appeal No: W-02(NCC)(W)-1721-08-2017]
Letters of undertaking evaluated as guarantees, not indemnities, leading to discharge of surety due to unauthorized variations in loan agreements as per the Contracts Act.
Headnote:(A) Contracts Act 1950 – Sections 77, 79, 86, and 88 – Dispute regarding the nature of letters of undertaking – High Court concluded the letters were guarantees, not indemnities – Respondent's liability discharged due to variations in loan agreements without consent – Notification obligations determined – Key finding that respondent was discharged from liability under the contracts. (Paras 17, 18, 50, 64)
Facts of the case:
Appellant provided loan facilities to Alpha Biologics, secured by letters of undertaking from the respondent. Alpha Biologics was subsequently wound up, and claims against the respondent were based on these letters.
Findings of Court:
Discharged due to variations made without the respondent's consent, confirming liability under the Contracts Act.
Issues
: Validity of letters as guarantees vs. indemnity, notice obligations to the surety, and discharge of liability due to variations.
Ratio Decidendi:
Court upheld that guarantees require notification of default and the respondent's discharge due to unauthorized variations in terms.
Result:
Appeal allowed in part, confirming discharge from liabilities under the First Term Loan and amended orders. (Paras 17, 50, 64)
Introduction
[1] The appellant, Bank Pembangunan Malaysia Berhad, the creditor in this case brought a claim against the 1st defendant Alpha Biologics Sdn Bhd as principal debtor/borrower for two term loan facilities given by the appellant to the principal debtor and a claim against the respondent/2nd defendant, Spring Hill Bioventures Sdn Bhd for two letters of undertaking executed by them and given to the appellant for the two term loan facilities taken by Alpha Biologics Sdn Bhd. Alpha Biologics Sdn Bhd was wound up on 16 May 2016 and did not defend against the claim. The trial then proceeded with the appellant's claim against the respondent/2nd defendant which rests principally on the true nature of the two letters of undertaking: whether the two letters of undertaking constitute letters of indemnity or whether they are in fact letters of guarantee. At the end of a full trial, on 1 August 2017, the High Court held that the two letters of undertaking were in fact letters of guarantee and consequently dismissed the appellant's claim against the respondent for RM35,741,572.65 under the First Term Loan facility and dismissed part of the appellant's claim for RM1,940,567.86 under the Second Term Loan facility. The appellant, dissatisfied with the High Court's decision, now appeals to us. For ease of reference we will call Bank Pembangunan Malaysia Berhad as the appellant creditor, the 1st defendant as Alpha Biologics or borrower and Spring Hill Bioventures Sdn Bhd as the respondent surety and the two letters of undertaking as the impugned letters.
Background Facts
[2] The appellant is a financial institution incorporated in Malaysia. Alpha Biologics and the respondent are both private limited companies incorporated in Malaysia. The appellant creditor gave two term loan facilities to the borrower Alpha Biologics and the respondent surety gave two letters of undertaking ("impugned letters") to the appellant for the two term loan facilities taken by Alpha Biologics.
First Term Loan Facility
[3] The First Term Loan Facility in the amount of RM20 million was granted to Alpha Biologics pursuant to letters of offer dated 6 December 2005, 30 May 2006, 16 June 2006 and a First Term Loan Agreement dated 25 July 2006.
[4] As one of the securities pursuant to cl 17 of the letter of offer dated 6 December 2005 ("6 December 2005 Letter of Offer"), the appellant creditor had initially requested for a "Letter of Awareness Comfort with assurance that the project is viable throughout the tenure of the loan from the ultimate shareholders, namely Khazanah Nasional Berhad, Great Eastern Life Assurance (M) Berhad, Pacificmas Fidelity Sdn Bhd and TH Group Berhad".
[5] The 6 December 2005 Letter of Offer also made reference to a condition precedent in cl 19 (viii) that the appellant creditor "BPMB shall have received undertakings from the existing ultimate shareholders that they shall not divest their investment in the company until full settlement of the Bank's loan, in the form satisfactory to BPMB".
[6] The security in cl 17 of the 6 December 2005 Letter of Offer was subsequently amended in the letter of offer dated 30 May 2006 ("30 May 2006 Letter of Offer"), where the appellant creditor had then requested for a letter of undertaking from the respondent surety to cover any shortfall for the company during the tenure of the Facility and to meet all repayments under the Facility in the event that Alpha Biologics is unable to meet its debt obligations under the Facility Agreement.
[7] In compliance with the appellant creditor's requirement, the respondent surety had issued a letter of undertaking (the First Impugned Letter) to the appellant as security for the First Term Loan Facility granted to the Alpha Biologics. The First Impugned Letter provides as follows:
"In consideration of your granting or continuing to make available the Term Loan Facility of Ringgit Malaysia Twenty Million (RM20,000,000.00) only ("the Term Loan") or any oth
