www.ipsofactoJ.com/appeal/index.htm [2000] Part 4 Case 13 [FCM]    

 

FEDERAL COURT OF MALAYSIA

Coram

Sime Bank Bhd

- vs -

C.L. Wu

WAN ADNAN CJ (MALAYA)

MOHAMED DZAIDDIN FCJ

ABU MANSOR ALI FCJ

7 NOVEMBER 2000

Judgment

Mohamed Dzaiddin FCJ

(delivering the judgment of the court)

  1. These two appeals which were heard together on September 30, 1999 and the subject of one judgment were from the decision of the Court of Appeal. They raised a single issue on whether the Court of Appeal was correct in holding that there was an arrangement between the parties which constituted a contract within the meaning of s 97 of the Contracts Act 1950 (the Act).

    BACKGROUND

  2. The background of this case is set out in full in the judgment of the Court of Appeal, reported in [1998] 2 AMR 2641, 2650-2. The appeal was from the decision of the High Court Kuala Lumpur dated November 16, 1994. The respondents were the directors of a company known as Cornwood Industries Sdn Bhd, the first defendant in the High Court. The respondents were sued by the appellant bank as guarantors of a loan that had been advanced to the company which they resisted on two grounds.

  3. The trial Judge found against the respondents on both grounds and entered judgment for the bank. In respect of the first ground relied upon as a defence, the learned Judge held that Soh had not been a director of the company at the material time. His Lordship therefore concluded that the failure of Soh to join in the guarantees executed by the respondents was irrelevant to the respondents' liability. As regards the second ground, the trial Judge held that the bank had sufficiently proved the sum due to it. Hence, the appeal.

    PROCEEDINGS IN THE COURT OF APPEAL

  4. The appeals were directed against the above findings of the High Court. The main issue was whether Soh was a director of the company and his failure to join in executing the guarantees had the effect of rendering the guarantees, P1 and P2 invalid. After hearing counsel, the court found in favour of the respondents and allowed the appeals with costs.

  5. On the question of whether Soh was a director of the company at the material time, the court found that this was essentially a question of fact. After reviewing the evidence, the court disagreed with the finding of the High Court and held by way of inference that Soh was a director at the material time.

  6. With respect to the validity of the guarantees, P1 and P2 as affecting the respondents, the court was in agreement with Mr. Goonting, counsel for the respondents, that s 97 of the Act applied. Section 97 of the Act states:

    Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

  7. In construing s 97, the court considered and reviewed the following authorities:

    1. A commentary in Sanjiva Row on Contracts and Law Relating to Tenders (9th Edn) Vol 3 on s 144 of the Indian Contract Act 1872, (identical with s 97 of the Act) p 2426:

      The section seems to be based on Evans v Bremridge (1855) 44 ER 327 and Bonsor v Cox (1841) 49 ER 385. A person who enters into an obligation of suretyship on the understanding and faith that another person would also enter into, has right to be relieved on the ground that the instrument has not been executed by the intended surety. In the above-noted case, the creditor prepared a deed in such a way as to show that it was intended to contain a joint and several covenant by two co-sureties and sent it in that form to be executed by one of them and never afterwards informed him that it had not been executed by the other surety, but on the contrary wrote to him as 'one of the surety', it was held in equity, the surety was entitled to be relieved of liability. For similar reason, a surety bond which after execution by three of the sureties is in a material respect altered by the fourth, when he executes it, is inoperative against all. It became inoperative against the three on account of alteration by the fourth, and against the fourth it was only a joint and several bond that he intended to execute. The rule of the section, however, will not apply to cases of joint and several obligation where the transaction is not really a guarantee, but a primary undertaking, though the word guarantee is used. A guarantee drawn up in plural number, but signed by one surety only, is binding on the surety who signed in the absence of proof that the person who signed the document was only to be bound in case his partner also joined.

    2. Ayyama v Veerabhadram AIR 1926 Mad 62, where Jackson J referred to a commentary by Cunningham & Shepherd, The Indian Contract Act, 11th Edn p 36.

    3. A commentary on s 144 of the Indian Contract Act from Pollock & Mulla on the Indian Contract and Specific Relief Acts (11th Edn), Vol II (p 995).

    4. City Bank v Reynolds (1889) Vol 4 (NSW) 64, where according to the Court of Appeal, the facts were much akin to the present case. The bank brought an action against five of the seven directors of the Sydney Mining Club and Exchange Company Ltd upon a guarantee given by them to secure to the bank the repayment of moneys advanced to the company. The defence was on equitable grounds that there being seven directors of the company, it was agreed that all should sign the guarantee before any money should be advanced and that the bank had advanced money to the company although only five of the seven directors had signed the guarantee. Evidence was given on behalf of the bank that they advanced the money at the express request of the defendants to do so before obtaining the signatures of the other directors. The defendants denied, but the jury found for the bank. In the case of Reynolds, one of the defendants, he was not present when the request to pay before all signatures were obtained were made to the bank, he having, in fact, signed the guarantee first and when no other defendants were present. Therefore, his liability would depend upon the contract which was in the first instance entered into between the bank and the directors of the company. The court therefore found it necessary to examine the contract which was originated by a letter dated April 20, 1887 written by the company's secretary to the bank's manager applying for an overdraft not exceeding £500 to be secured to the bank by a guarantee to be signed by all the seven directors including Reynolds, who were the first board appointed. On April 22, 1887, the manager replied stating that the application for an overdraft had been granted upon the joint and several guarantees of the directors and upon their calling at the bank and signing the guarantee, the money would be placed at the company's disposal.

      Based on the letters, the court found that the bank was asked to make an advance upon a guarantee signed by seven persons and it was informed that these seven persons were the first board of directors of the company. The bank undertook to place the money at the disposal of the company upon the seven persons forming the board calling at the bank and signing the joint and several guarantee. The court found Reynolds not liable as it was clear that when Reynolds called at the bank and signed the guarantee before any of the other directors did so, he must have done so on the faith and understanding that no money would be advanced except on the terms mentioned in the bank's letter dated April 22, 1887.

    5. Stramit Industries Ltd v Reinhardt (1985) 1 Qd R 562 which reviewed several authorities including Evans v Bremridge and Renolds, supra.

  8. Based on the above authorities, the Court of Appeal enunciated five propositions on s 97.

  9. Applying the above propositions, the Court of Appeal found as follows (at p 2670):

    The present instance is not a case where the issue under consideration is one that turns upon credibility of oral testimony. It is truly a case where the issue that calls for resolution depends upon drawing the proper inferences from the totality of the evidence.

    We have earlier in this judgment adverted to the several pieces of oral and documentary evidence in connection with the first issue. Some, if not all, of these are equally relevant to the second issue, in particular, the oral testimony of the respondent's witness (PW3). In our judgment, the only reasonable and probable inference that is admitted by the evidence when taken as a whole, including the respondent's letter to the company dated January 12, 1977, is that there was a contract between the parties that Soh shall join the guarantees. Since he did not do so, the guarantees in the present case are, according to the terms of s 97, invalid. The judge should have so found. He erred in not so holding'.

  10. The court concluded thus wise:

    To sum-up, the second and third appellants have sufficiently demonstrated that:

    (i)

    Soh was a director of the company at all relevant times and that the trial Judge was wrong in holding to the contrary;

    (ii)

    there was in existence at the material time an arrangement between the parties that Soh shall join in the guarantees upon which the instant appellants were sued and that the trial Judge ought therefore to have dismissed the respondent's suit.

    Accordingly, both these questions must be resolved in their favour.

    APPEAL TO THIS COURT

  11. Before us the main submission of Mr. Naban, counsel for the appellant, was that there was no contract between the bank and the respondents within the meaning of s 97 of the Act. The section employs the word "contract" which should be given the interpretation and construction as required under s 2. He stressed that under s 97 a person must give a guarantee upon a contract. It is a conditional guarantee or a condition precedent. Therefore, before s 97 could be invoked there must exist a condition precedent that a creditor would not act on the guarantee until the other co-sureties have joined in. He relied on Byblos Bank SAL v Al-Khudhairy (1987) BCLR 232, where he said the facts are similar to the facts in the instant case. Counsel also relied on a passage in Phillips & O'Donovan, The Modern Contract of Guarantees, 2nd Edn, (at p 83):

    What is required before the burden is satisfied is a clear understanding that the contract of guarantee is to be executed by particular guarantors.

  12. Both Mr. Goonting and Mr. Alex Anthony for the respondents, supported the judgment of the Court of Appeal. Mr. Goonting contended that the guarantees, P1 and P2 are not the only documents to look at to establish a contract under s 97, but the contract can also be inferred from the letters exchanged between the bank and the company, at pp 159, 160, 161 of the AR. Counsel relied on Taubmans Pty Ltd v Loakes (1991) 2Qd R 109 for the proposition that the content of a document is not the only place to discover the intention of the parties, evidence from other sources is also admissible. We shall discuss Taubmans shortly.

    THE CONTRACT POINT

  13. In reaching its conclusion that there was a contract under s 97 between the parties that Soh would join in the guarantees, the Court of Appeal applied one of the propositions which it formulated, viz, the words "upon a contract" in s 97 did not confine the parties to the guarantee but included an arrangement between them, collateral to the main contract, whereby it was contemplated that more than one person would execute the guarantee. Therefore, from the evidence which the court termed as the "several pieces of oral and documentary evidence", including oral testimonies of PW3 and D10, it drew a reasonable and probable inference that there was in existence at the material time an arrangement which constituted a contract under s 97 between the parties that Soh would join in the guarantees.

  14. With respect, we disagree with the above conclusion.

  15. In any contract of guarantee, it may be contemplated that more than one guarantor shall execute the guarantee where such term may be implied from the form of guarantee (Marston v Charles Griffin & Co Pty Ltd [1985] NWSLR 294, at 300-301). Section 97 of the Act deals with a condition precedent to the operation of a guarantee, i.e. that the guarantee be signed by co-sureties. To found such a condition precedent, it must have been the intention of the parties that the guarantee binds only if all the sureties sign; it is insufficient that the surety merely thought that others will sign. See: Low Kee Yong, The Law of Guarantees in Singapore and Malaysia (1992) p 118. In our view, the condition precedent is predicated on a contract made between the person who gives the guarantee and the creditor and in the context of s 97 the contract means an understanding between the person who gives a guarantee i.e. the guarantor or surety and the creditor that the guarantee is only valid if all the guarantors sign. For this proposition, we would rely on the following authorities:

    1. In Evans v Bremridge (supra), as was known to Evans, the creditor required a guarantee from two responsible persons. The debtor requested Evans to be one of the two, and named the person who would be the other. On that basis Evans placed his signature on the document, believing that the second signature would be duly obtained. In fact it was not. The court held that Evans was not liable. In the view of Knight Bruce LJ the creditor was seeking to enforce a contract into which the surety had not entered. Turner LJ agreed with that observation and went onto say at 109; 331:

      I concur in thinking that as the plaintiff entered into the obligation upon the understanding and faith that another person would also enter into it, he has a right in equity to be relieved, on the ground that the instrument has not been executed by the intended co-surety.

    2. In City Bank v Reynolds (supra), a case relied on by the Court of Appeal, it may be recalled that evidence accepted at the trial established that the creditor advanced the money at the express request of four of the seven directors of the debtor company before obtaining the signatures of the other directors. The jury found four directors were liable. In the case of Reynolds, the court found that he was not present when the request to pay before all signatures were obtained, he having signed the guarantee first. Therefore, his liability depended on the contract entered into between the bank and the directors of the debtor company. The learned Chief Justice approached the contract point as follows (at p 64):

      If that contract was that the guarantee was not to be effective until signed by all, and that when he signed alone he did so on this condition - if, in fact, he signed the contract on the faith and understanding that all the others must sign, and this was known to the plaintiffs, then he is not liable.

      [emphasis added]

      Based on a letter from the company's secretary to the bank and a reply from the bank's manager, his Lordship found Reynolds not liable for the following reasons (at p 65):

      When Reynolds called at the bank and signed the guarantee before any of the others did so, he must have done so on the faith and understanding that no money would be advanced except on the terms mentioned in the letter, from the plaintiffs manager. We think therefore the case falls within the authority of Evans v Bremridge.

    3. The case of Taubmans was not considered by the Court of Appeal. Perhaps, it was not referred to by counsel. The respondent brought an action in the District Court against the appellant claiming for the sum of $26,024.40 with interest and costs. The action was brought on a guarantee allegedly given by the appellant. The court granted summary judgment against the appellant. On appeal to the Supreme court of Queensland, the point taken was that on its face the instrument of guarantee was intended to create joint and several liability in the appellant and one Rumble and that as the instrument was not signed by Rumble it was not binding on the appellant.

      The court considered Evans v Bremridge, Reynolds and Stramit. Dismissing the appeal, the Full Court found (per McPherson J) that on the evidence before the District Court, the respondent plaintiff had successfully discharged any onus that might be supposed to lie upon it of showing that the contract of guarantee was intended and known by the appellant to be intended to bind him as soon as he had signed it, irrespective of whether or not Rumble also signed it. The Full Court held that there is no rule of law that where an instrument of guarantee is in a form or in terms that imply it is to be executed by more than one guarantor who are to be jointly and severally liable, all must sign the instrument before any is bound. Each case is to be decided in accordance with common intention of the parties as appearing in the evidence.

  16. Williams J, in a separate judgment analysed Evans v Bremridge and made the following observation with respect to the word "understanding" used by Turner LJ (at p 116):

    The use of the word "understanding" is, in my view, significant. On the facts it appears clear that the "understanding" to which the surety was a party involved not only the debtor but also the creditor; it was generally the understanding of all parties that the loan would only be forthcoming if two responsible persons became sureties.

  17. His Lordship made a similar observation when considering Reynolds (at p 117):

    Again in my view, it is significant that the word 'understanding' was used. In the context that clearly meant an understanding between the surety and the creditor.

    [emphasis added]

  18. Therefore, the crucial question here is: Did the respondents and the directors of the respondent company sign the guarantees on an understanding that all directors shall sign the guarantees and if one of them did not sign, the guarantees would be invalid and this was known to the bank?

  19. Considering the evidence of PW1, PW2, PW3 and DW3 as a whole, we draw a reasonable inference that there was no such understanding between the respondents and the bank.

  20. DW1, the Managing Director of the company testified that he was the first person to sign the guarantees, P1 and P2. He did not know the person who witnessed his signatures as he did not sign in front of a witness. After signing, he left P1 and P2 to his clerk for him to get other directors to sign. After the other directors had signed, he passed P1 and P2 to Paul Soh, who undertook to sign. He was under the impression that all directors would sign and he had no reason to believe that Paul Soh would not sign.

  21. DW2, the Executive Director, testified that he signed the guarantees because the company needed extra fund for expansion. He stated that had he known that not all directors would sign, he would not have signed. Under cross-examination, he said he signed the guarantees without a witness. Later he said he did not know who witnessed his signatures. He expected DW1 to get the signatures of all the directors.

  22. DW3 stated that only six directors signed the guarantees. Paul Soh's signature was missing. He said he would not have signed had he known Paul Soh was not going to sign. Pausing here, it is to be noted that this assertion is different from saying: "I sign on condition all directors sign." Under cross, he stated that he was aware that if the directors did not sign the guarantees the company would not get the extra loan. He also stated that he did not take steps to see if all the directors had signed since he expected DW1, the managing director to do it.

  23. From the above evidence, first, it seems probable to us that the respondents were not concerned whether all the directors signed the guarantees. What they were interested was to get the extra facility released quickly. The evidence disclosed that if the directors did not join in signing the guarantees, the company would not be able to obtain the loan. According to PW3, the bank manager, the facility was disbursed to the company despite six out of seven directors signed the guarantees. From this an inference could be drawn that the intention of the parties was for the directors to sign P1 and P2 quickly and there was no intention on their part that they signed the guarantees on condition that all the directors signed.

  24. Secondly, PW3 testified that there was no such thing that if one of the directors did not sign none would be liable. He stated that if the directors who signed had said this to him or made it known to the bank at the material time he would reply that the loan would not be given to them. From this, we draw a reasonable inference that there was no understanding on the part of the bank that the guarantees would only be valid if signed by all directors. To constitute a contract within the meaning of s 97 the understanding in our view must be clear and known to the bank (Reynolds, supra). Therefore, at the very least, we venture, to say that there is only a unilateral understanding on the part of the respondents and the directors of the company that all shall sign the guarantees, otherwise they are invalid.

    CONCLUSION

  25. For the above reasons, we disagree with the Court of Appeal's interpretation of the word contract in s 97 of the Act and its conclusion that there was indeed a contract between the parties that Soh would join in executing the guarantees and since he did not do so, the guarantees in the present case were invalid. In our judgment, there is no understanding between the appellant and the guarantors which constitutes a contract within the meaning of s 97 of the Act that all directors of the company shall sign the guarantees and since one of them did not sign, the guarantees P1 and P2 are invalid.

  26. Accordingly, we allow these appeals with costs here and below and restore the orders of the High Court. Deposits shall be refunded to the appellant bank.

Cases

City Bank v Reynolds (1889) Vol 4 (NSW) 64; Evans v Bremidge [1855] 44 ER 327; Stramit Industries Ltd v Reinhardt (1985) 1 Qd R 562; Taubmans Pty Ltd v Loakes (1991) 2 Qd R 109; Ayyanna v Veerabhadram AIR 1926 Mad 62; Byblos Bank SAL v Al-Khudhairy (1987) BCLR 232; Marston v Charles Griffin & Co Pty Ltd [1985] NWSLR 294.

Legislations

Malaysia

Contracts Act 1950: s.97

India

Contract Act 1872: s.144

Authors and other references

Cunningham & Shepherd, The Indian Contract Act, 11th Edn

Low Kee Yong, The Law of Guarantees in Singapore and Malaysia, 1992

Phillips & O'Donovan, The Modern Contract of Guarantees, 2nd Edn

Pollock & Mulla, Indian Contract and Specific Relief Act, 11th Edn, Vol II

Sanjiva Row, Contracts and Law Relating to Tenders, 9th Edn, Vol 3

Representations

Civil Appeal No 02-3-99(W)

DP Naban and B.H. Yap (Lee Hishammuddin) for Appellant

Franklin Goonting and Marina Netto (Lim Soh & Goonting) for Respondent

Civil Appal No 02-4-99(W)

DP Naban and B.H. Yap (Lee Hishammuddin) for Appellant

Alex Anthony (Anthony, Chew & Lim) for Respondent

Notes:-

This decision is also reported at [2000] 4 AMR 4739.

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