James Foong JCA:

Introduction

[1] On 29 March 2007, we allowed this appeal with costs. We now give our reasons for doing so. We will commence with the brief background facts, followed by the pertinent ground relied on by the trial judge in his judgment and then our reasons for allowing this appeal.

Brief Background Facts

[2] The 1st respondent is a private limited company involved in the business of manufacturing plywood in East Malaysia. The appellants were at one time its directors and shareholders. When the appellants decided to sell their shareholdings in the 1st respondent to a third party, the 1st respondent by letter dated 28 August 1996 (exh. P1) confirmed that a sum of RM10,134,000 is due and owing to the appellants in the following proportion:

(a) to the 1st appellant a sum of RM5,134,000;

(b) to the 2nd appellant a sum of RM5,000,000.

[3] Simultaneous to the execution of the shares sale agreement between the appellants and the third party purchaser, the 1st respondent on 12 November 1996 issued a letter (exh. P2) to the appellants confirming the following:

1. acknowledging RM10,134,000 as the outstanding sum due to the appellants in the proportion listed above;

2. that interest on the outstanding sum at 11% per annum will be paid;

3. under para 2, "we shall sell and you shall purchase timber products manufactured by us ("the timber products") at a price consistent with the prevailing market price and costing the same amount as the Outstanding Sum plus the Agreed Interest ("the Timber Product Price") from us over a period of ten (10) months from today and to be delivered over four (4) shipments";

4. under para 3, "the Timber Products Price shall be deducted from and set-off against the Outstanding Sum and the Agreed Interest";

5. under para 4, "subject to item 5 hereinafter contained, the Outstanding Sum and the Agreed Interest shall be repaid by us to you only by way of deduction from and set-off against the Timber Products Price";

6. under para 5, "in the event that we shall fail, refuse and/or neglect to supply any of the Timber Products ordered by you or if any of the Timber Products supplied by us shall not be in accordance with the specifications stated in your purchase order(s), you shall be entitled, after giving us thirty (30) days' notice in writing to supply the Timber Products or replace the defective Timber Products and we have failed to do so, to cancel the order for such Timber Products or reject such Timber Products. Upon the order for such Timber Products being cancelled or such Timber Products being rejected and returned to us, we shall then pay cash in lieu of such Timber Products to you and such cash payment shall be deducted from and set-off against the Outstanding Sum and the Agreed Interest".

[4] Also on the same day (12 November 1996), the 2nd respondent gave a corporate guarantee to the appellants which says "in the event that the company (1st respondent) shall fail to pay you the Timber Products Price and/or The Agreed Interest in full by the time stipulated in the company's letter, we shall pay you the same or any balance thereof then outstanding within fourteen (14) days from our receipt of written notice from you to do so".

[5] Within the period of ten months stipulated in exh. P2, only one order by the appellants with the 1st respondent was concluded. The rest failed for the principal reason that the parties could not agree on the price of the products.

[6] On 15 September 1997, the appellants gave notice to the 1st respondent demanding payment of the balance outstanding sum of RM6,144,489 (after having set-off the amount debited under the one concluded transaction between the parties). They claimed that despite their numerous endeavours, the 1st respondent had ignored, refused or failed to pay them this amount. A demand on the 2nd respondent, as guarantor, was also made.

[7] When such demands were not met, the appellants filed this suit in the High Court requesting for RM6,223,