Tan Chin Kim Sawmill & Factory Sdn Bhd

- vs -

Lindeteves-Jacoberg (M) Sdn Bhd

Judgment

Salleh Abas FJ

1. On 4, and 18 December 1973 the appellant placed four orders with the respondent for the supply of certain sawmill equipment. Payment for the equipment was stated in these orders to be by way of five year leasing arrangements with Credit Corp (M) Bhd (CCM). The equipment was subsequently delivered to the appellant for a total price of $454,428.00.

2. For the next eighteen months or so the respondent was looking for a financier to finance the leasing, arrangements in order to get paid the price of the equipment. In the meantime on 25 April 1975 the appellant and the respondent entered into a written agreement whereby in consideration of the respondent undertaking to complete leasing arrangements of the equipment with either CCM or Malaysian International Merchant Bankers Bhd (MIMB) and to guarantee payments by the appellant of all sums of money which would become payable to either CCM or MIMB up to a limit of $454,428.00, the appellant agreed to create second charges over its lands in favour of the respondent. The charges were duly executed on 15 April, 18 May and 20 July 1976.

3. Leasing, arrangements with CCM proved abortive and so the respondent turned to MIMB for finance. MIMB however, was prepared to enter into leasing arrangements provided that the terms stated in its letters dated 2 June 1975 were acceptable to both the appellant and the respondent. It was upon acceptance of these terms by both of them that a set of three legal instruments was finally executed on 19 June 1975. These instruments are

   • a lease agreement between MIMB and the appellant

   • a guarantee and indemnity undertaking given by the respondent to MIMB and

   • a sale agreement between the respondent and MIMB.

4. The basic features of the leasing arrangements are as follows:—

   1. To start with, MIMB bought the equipment from the respondent at the price of $454,428.00. This purchase was done on 13 September 1975.

   2. Having, purchased the equipment MIMB as owner Leased the equipment to the appellant for a period of 60 months (five years) at a monthly rental of $10,990.00. The rent was to be paid in advance on the first day of the month to which the rent related.

   3. During the lease period the appellant as hirer had no right to terminate the lease, but MIMB as owner had such right exercisable upon the happening of certain events, one of which was a default by the appellant to pay the rental due within seven days from the date on which it became due.

   4. The respondent was required to guarantee to MIMB for the due payment by the appellant of all sums of money which would become due and payable and also to indemnity MIMB against all losses damage costs and expenses incurred or suffered by MIMB. The guarantee and indemnity undertaking was subsequently given by the respondent, and

   5. To distinguish the lease from a normal hire-purchase agreement, the hirer, i.e. the appellant had no option to purchase the equipment either at the end of the lease or at its earlier termination. The option to purchase was given to the respondent at a price of $45,442.80, i.e. at 10% of original price irrespective of whether the purchase was at the end of the lease or at its earlier termination.

5. The lease commenced on 13 September 1975 the date when MIMB had fully paid up the price of the equipment to the respondent and thus became the owner.

6. From the start the appellant showed signs of its inability to keep up with its commitments under the lease agreement. The first monthly rental (October) was not paid on time but only on 23 October 1975 and even here the cheque sent for the rental was postdated to 31 October 1975. The appellant defaulted in the second monthly rental (November), and this was not paid until 7 January 1976. It further defaulted in the payments of the third (December), the fourth (January) and the fifth (February) monthly rentals. Finally on 3 March 1976 MIMB terminated the leasing under cl 8 of the General Conditions of the Leasing, which were incorporated as an integral part of the lease agreement. The sum owing to MIMB together with interest and other charges as on the date of termination was $35,321.38, of which $32,970.00 was the amount of rentals due.

7. On the same date MIMB appointed the respondent to be its agent for the purpose of re-possessing and subsequent sale of the equipment, and by letters dated 22 March 1976 it informed the appellant and the respondent that the cash price of the equipment for settlement on 1 April 1976 was $83,244.43 and that if the settlement was to be made on 1 April 1977 the cash price was $533,985.10. It further informed the respondent that in the event of the appellant’s inability to make the settlement on 1 April 1976 the respondent was offered back the equipment at these prices. The respondent accepted the second price and on 11 February 1977 the respondent paid MIMB $527,039.37, a lesser amount presumably because of the rebate granted on account of accelerated payment.

8. As the leasing arrangements were terminated, the appellant and the respondent were back to their original positions before the leasing. The respondent as the supplier was requiring payment for the equipment and the appellant was to look for finance elsewhere to pay for this equipment. After some correspondence between them, the appellant made an offer on 1 July 1976 to the respondent to pay for the equipment in the following terms:—

   $  35,000.00	:	by the end of July 1976
   $100,000.00	:	by the end of September 1976
   $100,000.00	:	by the end of December 1976 and
   the balance	:	by the end of March 1977.

9. The appellant failed to keep up with this offer. The equipment was finally repossessed and sold by the respondent for $277,128.00

10. Finally on 31 March 1977 the appellant took out a writ against the respondent and MIMB asking for damages cost and other relief on the ground that the leasing arrangements with MIMB and the charges which it executed in favour of the respondent were both null and void. The respondent and MIMB resisted the suit and in addition thereto, the respondent counterclaimed from the appellant a net amount of $415,572.10, being the amount of money which the respondent had paid to MIMB under the guarantee agreement and damages and loss which it itself had suffered as a result of the appellant’s failure to perform the lease agreement.

11. The learned judge dismissed the appellant’s suit but upheld the counterclaim of the respondent in the sum of $403,048.75. The appellant therefore now appeals to us against the decision of the learned judge and the appeal is in respect of the counterclaim only.

12. The counterclaim consisted of

    1. an amount which the respondent paid under its guarantee and indemnity undertaking to MIMB as representing the losses and damages costs and expenses which MIMB had suffered and incurred; and

    2. an amount representing losses, damages, costs and expenses which the respondent itself had suffered and incurred as a result of the appellant’s failure to perform its obligation under the lease agreement.

    The first amount was $527,039.37 and the second was $165,660.73. The aggregate of these two amounts was reduced by a sum of $277,128.00 realised from the sale of the equipment thus giving the net counterclaim of $415,572.10. At the trial there was a further reduction of $12,523.35.00 in respect of interest which counsel for the respondent said was wrongly brought into computation. The resulting figure allowed by the learned judge was $403,048.75.

13. Counsel for the appellant submitted that the respondent should not have paid up the first amount of $527,039.37 to MIMB as it was under no obligation to do so on the ground that

    • firstly upon termination of the lease agreement for non-payment of rentals due, only the rental amounts due up to the date of the termination were payable and no more and that 

    • secondly the guarantee undertaking given by the respondent to MIMB did not entitle the latter to recover damages and losses beyond the rentals which had fallen in arrears and 

    • thirdly MIMB should have acted under its sale agreement by asking the respondent to purchase back the equipment at an agreed price of $45,442.80.

14. As regards the first ground, counsel for the appellant relied upon Financings Ltd v Baldock [1963] 2 QB 104 in which it is held that in an agreement of hiring an owner who terminates the agreement for non-payment of rentals by the hirer cannot recover damages and losses other than the rentals which have fallen in arrears, unless the hirer had evinced an intention to repudiate the agreement. Although the Financing case deals with a hire-purchase agreement, the language of Denning LJ in that case seems wide enough to cover cases of other hiring, such as leasing in which the hirer is not given any option to acquire the hired object. 

15. But in the circumstances of the case before us we are of the view that the principle established in Financing has no application because of a number of reasons.

16. In its letter to the appellant dated 2 June 1975 MIMB spelt out the terms upon which it was prepared to enter in the leasing arrangements one of which is set out as follows:—

    In consideration of MIMB agreeing to enter into the lease agreement with the Company in respect of the said machinery, LJ shall guarantee the due payment to MIMB of all sums of money as shall from time to time become due and payable by the Company and shall also indemnify MIMB against all losses, damages costs and expenses incurred or suffered by MIMB. LJ also undertake to purchase the said machinery from MIMB upon premature termination of the agreement.

17. The references to “the company” and to “LJ” are references to the appellant and the respondent respectively. This term was accepted by the appellant on 9 June 1975 and by the respondent on 5 June 1975 and was thereafter incorporated in cl 6, 9 and 12 of the General Conditions of Leasing which were annexed as an integral part of the lease agreement signed by the appellant and MIMB. 

18. Clause 6 provides that:

    The hirer shall indemnify the owner against all claims made and proceedings brought against the owner and all liability losses damages costs and expenses incurred or sustained by the owner arising out of or consequent upon any nonobservance or breach by the hirer of any obligations...

    The references to the hirer and the owner are references to the appellant and MIMB respectively.

19. Clause 9 provides that:—

    Upon the expiration or earlier termination of the agreement the hirer shall, if required by the owner deliver up the equipment to the owner .... PROVIDED that nothing herein contained shall prejudice the right of the owner in the event of termination of the hiring by the owner under cl 9 hereof to recover from the hirer all rent and any other moneys payable hereunder due at the date of such termination and all damages which the owner shall have suffered by reason of or arising out of such termination.

20. Clause 12 provides that:—

    The owner shall be entitled to recover from the hirer all costs charges and expenses incurred by the owner in connection with or in consequence of termination of the hiring by the owner under cl 9 hereof or any default by the hirer in performing or observing these terms or those of the agreement.

21. The reference to termination under cl 9 referred to in the proviso to cl 9 and in cl 12 is clearly a misdescription, because neither of these two clauses deal with termination of the lease agreement. Clause 9 deals with the delivery and taking possession of the leased equipment upon termination of the agreement and both the proviso to cl 9 and cl 12 deal with the right of MIMB to recover losses damages costs and other expenses in the event of such termination. The only clause dealing with termination is cl 8. Thus the reference to termination under cl 9 referred to in the proviso and in cl 12 must and should properly be referred to the termination under cl 8.

22. However, be as it may, it is clear from these three clauses and from the terms contained in MIMB’s letter dated 2 June 1975, which terms were accepted by both the appellant and the respondent that the intention of the parties was that MIMB was to be compensated not only for all sums of money which would become due and payable by the appellant but also for “all losses, damages costs and expenses” suffered by MIMB. The letter and these three clauses by stipulating that sums other than rentals due are recoverable therefore make the Financing case inapplicable to the case under the present appeal, and as such the amount of $527,039.37 which the respondent paid as a cash price settlement for the equipment on 11 February 1977 was in fact the amount which the appellant itself was bound to pay under the lease agreement. In fact the appellant was informed of this fact by MIMB in its letter to the appellant dated 22 March 1976 and the respondent was offered back the equipment on the stated cash price settlement only in the event that the appellant was unable to pay MIMB the said cash price settlement by 1 April 1976.

23. Counsel for the appellant further submitted that under its guarantee undertaking to MIMB the respondent was not bound to pay the sum which it finally paid. Consequently the respondent had no right of recoupment of this amount against the appellant except a sum representing four months’ rentals which had fallen in arrears before the termination of the lease agreement. Counsel argued that the respondent’s undertaking to MIMB was not a contract of indemnity but one of guarantee. 

24. In our view there is no force in this argument because it is clear from MIMB’s letter spelling out the terms of the proposed leasing arrangements and also from the lease agreement and the respondent’s undertaking executed subsequently that these three parties intended that MIMB should have recourse against the respondent not only as regards non-payment of rentals by the appellant but also as regards all losses damages costs and other expenses which MIMB had incurred or suffered as a result of termination of the leasing. Further the undertaking given by the respondent makes it clear that it consists of

    1. a guarantee and

    2. an indemnity.

25. The terms of this undertaking are set out as follows:—

    We hereby guarantee the due payment of rentals and all other sums of money which may become payable by hirer under the said lease and the due performance and observance of the said terms and conditions by the hirer therein contained and undertake to indemnify you against all losses damages costs and expenses which you may sustain or pay by reason of the neglect or further by the hirer to observe or perform any of the said terms and conditions.

    “The references to “we”, “you” and “the hirer” are references to the respondent, MIMB and the appellant respectively. 

26. As the undertaking consists of 

    1. a guarantee for the payment of rentals and

    2. an indemnity against all losses damages costs and expenses,

    we fail to see how the respondent could not be bound to pay MIMB sums of money other than an amount of four months rentals which had fallen due before the termination. It is all the more difficult to understand counsel’s argument because the terms of this undertaking were accepted and consented to by the appellant, whatever the juridical differences between a guarantee and an indemnity may be. Further these terms were the ones upon which MIMB was only prepared to enter into leasing arrangements without which leasing arrangements would have aborted.

27. It is true that this undertaking went beyond the guarantee contemplated by the appellant and the respondent in their agreement of 25 April 1975 and the subsequent charges of the appellant’s lands to the respondent executed pursuant to the agreement in that the undertaking finally given was without any financial limit whereas the guarantee contemplated by the agreement and the charges set up the limit of the guarantee to be $454,428.00 and that further the guarantee contemplated by the agreement and the charges made no reference to any indemnity at all. It is only a guarantee for non-payment of rentals pure and simple.

28. The answer to this argument in our view is very simple. The agreement of 25 April 1975 and the subsequent charges were executed by the parties before MIMB spelt out its terms of its willingness to enter into the leasing arrangements. The leasing arrangements were a three-party agreement, whereas the agreement of 25 April 1975 and the charges were bilateral. Thus when the appellant and the respondent subsequently accepted the terms so spelt out by MIMB and the legal leasing instruments were executed, the guarantee contemplated by the agreement of 25 April 1975 and the charges must be regarded as having been varied by the addition thereto of an indemnity in favour of MIMB against all losses damages costs and expenses which it suffered or incurred. 

29. This is in fact the very basis upon which MIMB entered into the leasing arrangements. Thus the financial limit set and the guarantee contemplated by the agreement of 25 April 1975 and the subsequent charges executed pursuant thereto must give way to or be superseded by the guarantee and indemnity undertaking given by the respondent on 19 September 1975 in pursuance of the agreed leasing arrangements. That being the case, we fail to see how the respondent should be bound to pay MIMB an amount of four months’ rentals only. We therefore agree with the learned judge below that the amount of $527,039.37 paid by the respondent to MIMB was legally due under its guarantee and indemnity undertaking in pursuance of the leasing arrangements. Section 93 of the Contracts Act is an additional authority for this decision.

30. Counsel for the appellant next submitted that MIMB should not have recalled its finance by requiring the respondent to pay the amount of cash price of the equipment but should have asked the respondent to repurchase the equipment under the sale agreement of 19 September 1975 which it entered into between itself and the respondent. It is recalled that one of the features of the leasing arrangements was that the appellant as a hirer was given no option to acquire the hired equipment at all. This option was given by MIMB in the sale agreement to the respondent who should purchase the equipment either at the end of the leasing period or at its earlier termination. The price of the option was stated to be $45,442.80 — i.e. 10% of the original price, irrespective of whether the option was exercisable at the expiration of the lease agreement or at its earlier termination.

31. Clause 1 of the agreement states:

    The seller agrees to sell to the buyer and the buyer agrees to buy from the seller the equipment upon the owner determining the leasing of the equipment or upon the expiry of effluxion of time of the term of hiring. under the lease.

    Clause 2 continues:

    The price of the equipment shall be Malaysian Dollars Forty Five Thousand Four Hundred and Forty Two and cents eighty ($45,442.80) only and shall be payable by the buyer to the seller on the day following the date on which the owner shall determine the lease or the expiry date of the term of hiring under the lease. Upon payment of the said price in the manner aforesaid property and risk in the equipment shall pass from the seller to the buyer.

    The references to “the seller” and “the owner” are references to MIMB and the reference to “the buyer” is a reference to the respondent. Counsel for the appellant made full use of this agreement arguing that if at all, the appellant should only be liable to the extent of the agreed sale price of $45,442.80 as this was the amount which the respondent itself was bound to pay MIMB to acquire back the equipment. The learned judge rejected this submission and we respectfully agree with his decision.

32. In this case the leasing arrangements consisted of 

    1. the terms which must be agreed to by all three parties and

    2. those which are between two parties only.

    The tripartite terms are those that deal with the payment of rentals, the performance of obligations under this lease agreement and the guarantee and indemnity undertaking, whilst the bilateral term, inter alia, is the option to dispose of the equipment by MIMB at the end of the leasing or at its earlier termination. Disposal of the equipment is thus only a matter between MIMB and the respondent; the appellant as a hirer having no option to acquire the equipment at all. Thus if MIMB upon termination of the lease agreement elected not to act upon the sale agreement, we cannot see how the appellant could complain as it obviously had a right of recalling the finance under the lease agreement and the undertaking. In fact in the computation of cash price of the equipment, the value of the option was taken into consideration. 

33. Further if the equipment was sold back to the respondent at the price of $45,442.80 to the end of five months’ leasing, MIMB having paid for the equipment a sum of $454,428.00 would have incurred losses by our simple computation, exclusive of loss of profit, at least in the sum of $408,985.20. This figure is arrived at by subtracting the value of the option ($45,442.80) from the original purchase price of the equipment ($454,428.00) paid by MIMB at the start of the leasing. If we add to this amount the sum of four months rentals which had fallen in arrears and penalty interest thereon, the loss incurred by MIMB would have been $454,579.25 exclusive of elements of loss of profit. As it can be seen, the figure which we calculated is not far from the cash price computed by MIMB, which was $483,244.43 if settled on 1 April 1976 and $533,985.10 if settled on 1 April 1977. 

34. In the circumstances we cannot see how MIMB’s right to recover losses from the respondent should only be limited to $45,442.80 as this was now here near the actual losses that it suffered. In our view the so called sale price of $45,442.80 fixed by the sale agreement is not the agreed loss to which MIMB’s right to recover is limited so that it is precluded from recovering a higher sum. Further if we read the sale agreement, the lease agreement and the guarantee and indemnity undertaking together as one instrument we would find nothing in them which would justify us to conclude that MIMB could only recover $45,442.80. In our view the submission therefore fails.

35. Consequently we agree with the learned judge that the respondent is entitled to the recoupment of the first amount of $527,039.37 representing the losses damages costs and expenses suffered or incurred by MIMB, which the respondent in turn had paid MIMB.

36. As regards the second amount of $165,660.73 representing the respondent’s own losses damages costs and expenses, this amount consisted of 

    1. interest paid in respect of a loan taken in order to pay the first amount to MIMB

    2. repossession expenses

    3. fire insurance premium

    4. store rentals

    5. transportation of the repossessed equipment

    6. legal fees, and

    7. advertisement for sale of the equipment.

    These are all losses which flowed from the default of the appellant in paying the rentals, which eventually led to the termination of the lease agreement. We thus agree with the learned judge that the respondent was entitled to recover these losses from the appellant under s 74 of the Contracts Act, 1950.

37. The appeal is therefore dismissed with costs. The deposit is to be paid to the respondent on account of taxed costs.

Cases

Financings Ltd v Baldock [1963] 2 QB 104

Representations

NT Rajah for the appellant.

P Mooney for the respondent.