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2010 MarsdenLR 1412

COURT OF APPEAL PUTRAJAYA
BON CHONG HING & ANOR – Appellant
Versus
GAMA TRADING COMPANY (HONG KONG) LTD – Respondent
[Civil Appeal No: J-02(IM)-3119-2009]

Petitioner Advocates:Tee Yee Koon ,Respondent Advocate: Dr Clarence Edwin,R Paramanandan

Summary judgment can be granted when a contract's terms are clear and no triable issues exist, allowing courts to enforce profit guarantees even in cases of insolvency.

Headnote:(A) Rules of the High Court 1980 - Order 14 - Summary judgment application - A plaintiff may succeed in obtaining a summary judgment if the defendant's defense is clearly unsustainable, saving time and costs of a full trial. (Para 3)

(B) Contracts - Interpretation of profit guarantees - The absence of a referenced schedule in a contract does not negate the enforceability of a profit guarantee, provided its terms are clearly articulated. A profit guarantee’s objective is to secure the investor’s interests, and it survives the insolvency of the guaranteeing party. (Paras 4, 68, 69)

Facts of the case:
The respondent, a foreign company, invested in a Malaysian company under a shareholders' agreement guaranteeing a minimum profit. The Malaysian company became insolvent and failed to meet the profit guarantee, prompting the respondent to seek enforcement. The appellants alleged the guarantee could not be enforced due to technicalities in the agreement's execution and termination clauses.

Findings of Court:
The reference to a non-existent Seventh Schedule in the shareholders' agreement must be disregarded; the articulated clauses provided sufficient clarity that established a binding profit guarantee. The appellants’ defenses were rejected as misconceived and untenable.

Issues: Whether the profit guarantee was enforceable despite a referenced but non-existent Seventh Schedule, and whether it lapsed upon the company's insolvency.

Ratio Decidendi: The court concluded that the profit guarantee was valid and enforceable, based on the objective interpretation of the agreement, which included an intention to protect the respondent's investment despite the company's insolvency.

Result: Appeal dismissed with costs.

Judgement Key Points

Key Points: - Summary judgment can be granted when a contract's terms are clear and no triable issues exist (!) . - An Order 14 application is an effective procedure to dispose of an action where the defendant's defense is unsustainable (!) . - The court must critically evaluate facts presented through pleadings and affidavits, rejecting mere assertions or denials (!) . - The entire case revolved around the interpretation of the contract, with no disputed facts (!) . - A profit guarantee was provided by the appellants, guaranteeing a minimum profit for Top Alloy (!) . - The profit guarantee was housed in clause 4 of the shareholders' agreement, detailing the guaranteed profit and shortfall liability (!) (!) . - Top Alloy became insolvent and ceased operations, making it impossible to achieve the guaranteed profit (!) (!) . - The appellants' defenses included the non-execution of a referenced Seventh Schedule, termination of the agreement upon liquidation, release of the first appellant, and failure to ascertain the shortfall (!) . - The court applied a business common sense approach to contract interpretation, favoring a commercially sensible construction (!) (!) . - The reference to a non-existent Seventh Schedule was disregarded as superfluous, with clause 4 itself constituting the profit guarantee (!) (!) (!) . - The profit guarantee was intended to protect the respondent's investment and was enforceable despite the company's insolvency (!) (!) p_69 p_69. - Clause 21 of the agreement, concerning termination upon liquidation, was interpreted not to apply to the profit guarantee in clause 4 (!) (!) p_69. - The insolvency of Top Alloy triggered the profit guarantee, and the first appellant was not released from his guarantee (!) (!) . - The shortfall was calculated based on the guaranteed profit and the actual profit (or lack thereof due to insolvency), leading to the maximum liability of RM2.69 million (!) (!) (!) . - The appeal was dismissed with costs, affirming the High Court's decision (!) .

What is the enforceability of a profit guarantee in a contract when a referenced schedule is non-existent?

What is the effect of a company's insolvency on a profit guarantee?

How are contractual terms interpreted when a literal interpretation defies business common sense?

Table of Content
1. summary judgment procedure effectiveness. (Para 1 , 2 , 3 , 4)
2. affidavit scrutiny and undisputed facts. (Para 5 , 15 , 16 , 18)
3. entire case hinges on contract interpretation. (Para 6 , 12 , 14)
4. non-execution of seventh schedule argument refuted. (Para 36)
5. profit guarantee remains enforceable despite absence of schedule. (Para 38 , 41 , 45)
6. profit guarantee actionable upon insolvency. (Para 50 , 56 , 68)
7. appeal dismissed; judgment affirmed. (Para 69 , 70)

Abdul Malik Ishak JCA:

Introduction

[1] This was an appeal filed by both the appellants defendants from the decision of the learned Judicial Commissioner ("JC") of the Johor Bahru High Court who allowed the respondent plaintiff's application for summary judgment under O 14 of the Rules of the High 1980 ("RHC"). On 21.4.2010, this Court granted a stay of the learned JC's order pending the disposal of this appeal.

[2] An O 14 application is the best procedure in the RHC that allows the respondent plaintiff to dispose of an action where the appellants defendants' defence is clearly unsustainable in law or on the facts. In this way, the need for a full trial will be obviated and a lot of time and costs will be saved.

[3] While sitting on the High Court bench, Abdul Malik bin Ishak J (now JCA) had occasion to say in Rock Records (M) Sdn Bhd v. Audio One EntertainmentSdn Bhd, 2005 MarsdenLR 2247 , at pp 556 to 557 about the efficacy of the O 14 application:

"(3) The plaintiff is confident that it will succeed in its cause of action and so the plaintiff files the O 14 application. It is now trite law that a plaintiff may obtain a judgment against the defendant on the ground that the defendant has no cause of action.

(4) The plaintiff must establish its cause of action, that is, copyright infringement and that the defendant has not raised any defence to the plaintiff's claim of copyright infringement or any triable issue for that matter. Once the plaintiff succeeds in making out a prima facie case, the onus then shifts to the defendant to show to this Court as to why judgment should not be entered against it. "

[4] What this amounts to is this. That the Court must embark on a critical evaluation of the facts presented by the parties through their pleadings and affidavits bearing in mind that mere bare assertions or denials must be rejected. Indeed this was the approach adopted by the Supreme Court in Bank Negara Malaysia v. Mohd. Ismail Ali Johor & Ors. , 1992 MarsdenLR 286 , where Mohd Azmi SCJ speaking for the majority remarked at p 19 that:

"Under an O 14 application, the duty of a Judge does not end as soon as a fact is asserted by one party, and denied or disputed by the other on affidavit. Where such assertion, denial or dispute is equivocal, or lacking in precision or is inconsistent with undisputed contemporary documents or other statements by the same deponent or is inherently improbable in itself, then the Judge has a duty to reject such assertion or denial, thereby rendering the issue as not triable. In our opinion, unless this principle is adhered to, a Judge is in no position to exercise his discretion judicially under an O 14 application. Thus, apart from identifying the issues of fact or law, the Court must go one step further and determine whether they are triable. This principle is sometimes expressed by the statement that a complete defence need not be shown. The defence set up need only show that there is a triable issue. "

[5] In the present appeal, only three affidavits were filed in support of the summary judgment application, namely:

(a) the respondent plaintiff's affidavit in support;

(b) the appellants defendants' affidavit in reply; and

[6] We have scrutinised the three affidavits with a fine toothcomb and we found that there were no facts in dispute. In our judgment, the whole case revolves solely on questions arising from the interpretation of the contract between the parties.

The Facts

[7] The

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