Ooi

- vs -

Citibank NA

Judgment

Lord Brightman

(delivering the judgment of the Board)

1. The principal question arising on this appeal is whether the terms of the Contracts Act 1950 of Malaysia are such that parties to a guarantee cannot contract out of certain sections of the Act which define circumstances in which a surety is discharged from his obligations to the creditor. Subsidiary questions winch arise are whether this issue is one which was proper to be decided by the High Court under the summary jurisdiction conferred by Ord.14 of the Rules of the Supreme Court; if not, whether the matter should now be dealt with, not on a final basis, but on the interlocutory basis of restoring the order of the High Court which gave the appellants unconditional leave to defend.

2. The appellants are three directors of a company called Leisure Industries Sdn Bhd. They hold 60% of the issued capital. There is no evidence whether they were the only directors. In March 1975 the appellants approached the Kuala Lumpur branch of the respondent, Citibank NA, for the grant of credit facilities to the company. In the result the Bank wrote a letter to the company dated 24 March 1975 confirming that it was prepared to make funds available “... substantially according to the terms and conditions outlined below...”. The letter then set out the amount and purpose of the loan, rate of interest, commitment fee, repayment dates and other details. The final repayment instalment was to be made on 1 July 1977.

   Against the side note “Security” there appeared the following:—

   (a)	A registered first fixed and floating charge stamped for M$600,000 over all fixed and current assets, both present and future.
   (b)	Joint and Several Guarantee for M$600,000 signed by [the appellants].

   Against the side note “Conditions of Disbursement” there appeared the following:—

   Conditional upon the following terms:— (a) Satisfactory completion of securities and documentation; (b) Letter of Undertaking signed by all shareholders not to divest their respective shareholdings without the Bank’s prior written consent and to inject additional capital into the company in the event of cash shortfall as long as the term loan is outstanding.

   The penultimate paragraph of the letter was as follows:—

   This commitment is conditional upon the preparation, execution and delivery of legal documentation in form and substance satisfactory to us and to our solicitors incorporating substantially the terms set forth above.

3. The company, by the signature of two of its directors, signified its acceptance of the terms of the letter. Their Lordships will refer to this letter as “the Letter of Agreement”.

   On the same day the appellants signed a guarantee in favour of the Bank. In consideration of the Bank giving credit to the company the appellants jointly and severally guaranteed payment on demand of all money owing by the company to the Bank together with interest, provided that the total sum recoverable should be limited to M$600,000 with interest.

   The guarantee contained terms commonly found in a bank guarantee, including the following:—

   7.

   The Bank may at all times without prejudice to this guarantee and without discharging or in any way affecting our liability hereunder and without notice to any of us ....  (5) deal with exchange release modify or abstain from perfecting or enforcing any securities or any other guarantees or rights which the Bank may now or hereafter have from or against the customer or any other person.

   8.

   The liability of any of us hereunder shall not be affected by any failure by the Bank to take any security... 16. Not one of us shall be discharged or released from this guarantee by any arrangement made after this guarantee or any dealing between the customer and the Bank without our knowledge or consent or by any variation or alteration without our knowledge or consent in the agreement between the customer and the Bank for the making of advances or otherwise giving credit or affording banking facilities to the customer by the Bank.

4. On 6 May 1975 the company granted a debenture in favour of the Bank. The debenture conferred on the Bank power to appoint a receiver and manager in case of default, but it did not empower the receiver and manager to realise the security. The Bank did not obtain from the shareholders, other than the appellants, a letter of undertaking “to inject additional capital into the company” as required by the Letter of Agreement.

5. On 26 August 1977, by which date the whole of the loan should have been repaid, the Bank formally demanded the outstanding principal and interest from the company. The company defaulted. In September the Bank called upon the appellants to make good the company’s default pursuant to the guarantee. The appellants denied liability. In December the Bank issued a writ against the appellants. The outstanding loan and interest calculated to 31 October amounted to M$331,731.32. In January 1978 the Bank issued a summons for summary judgment under Ord.14 of the Supreme Court Rules on the footing that there was no defence to the action. The Bank also appointed receivers and managers under the power contained in the debenture, who applied in March for an order for sale of the property thereby charged. The appellants contested the Ord.14 application and sought unconditional leave to defend on the ground that they were discharged from their guarantee because the Bank had failed to obtain a debenture which conferred on a receiver a power of sale thus necessitating an application to the court, and had also failed to secure from the other shareholders an undertaking to inject further capital into the company in the event of a cash shortfall. This argument was maintained despite the presence of cll 7, 8 and 16 in the guarantee, whereby the appellants had agreed that they should not be discharged from liability by reason of the Bank’s dealings with the company. It was said by the appellants that such clauses were void by virtue of certain sections of the Contracts Act 1950 to which their Lordships will now refer.

6. The Contracts Act 1950 is described in the long title simply as “An Act relating to contracts”. It is not expressed to be a consolidating or amending statute. It is, however, clearly intended to codify the law of contract as regards those aspects of contract law which are grouped under the Act’s nine definitive headings. It is modelled on the Indian Contracts Act 1872, many of the sections being in identical language.

7. Part I of the Act has the cross-heading “Preliminary”. This is the only part of the Act that has a cross-heading which is not definitive of some aspect of the law of contract.

   Section 1 reads as follows:—

   1.	(1)	This Act may be cited as the Contracts Act, 1950.
   	(2)	Nothing herein contained shall affect any written law or any usage or custom of trade, or any incident of any contract, not inconsistent with this Act.

8. Section 2, which is the only other section in Pt I, is an interpretation section which explains what is meant by certain words in common use in the field of contract. The only two explanations to which it is relevant to refer are: —

   2.	(e)	every promise and every set of promises, forming the consideration for each other, is an agreement;
   	.... (g)	an agreement not enforceable by law is said to be void.

9. Part VIII is headed “Of Indemnity and Guarantee”. It runs from s 77 to s 100. The appellants rely on three sections: —

   86.	Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.
   92.	If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is hereby impaired, the surety is discharged.
   94.	A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses or, without the consent of the surety, parts with the security, the surety is discharged to the extent of the value of the security.

10. The argument on behalf of the appellants is that the Bank’s omission to obtain a debenture in the usual form, that is to say, containing a power of sale, and the Bank’s omission to secure from the other shareholders the undertaking for which the Letter of Agreement provided, were variances made without the appellants’ specific consent in the terms of the contracts between the company and the Bank, thereby discharging the appellants under s 86; that such omissions were contrary to the duty owed by the Bank to the appellants, whereby the eventual remedy of the appellants against the company might be impaired, thereby discharging the appellants under s 92; that the omission to obtain the undertakings deprived the appellants of the benefit of a security which the Bank had against the company thereby discharging the sureties under s 94; that cll 7(5), 8 and 16 of the guarantee were inconsistent with those sections and therefore void because the parties were not entitled to contract out of ss 86, 92 and 94.

11. The Ord.14 summons came before the Senior Assistant Registrar in May 1978. He rejected the appellants’ arguments and decided that there was no bona fide triable issue which entitled the appellants to have the summons dismissed. He entered judgment for the Bank accordingly. The appellants appealed to the judge, who reversed the decision of the Assistant Registrar and gave the appellants unconditional leave to defend the action. The Bank appealed. The matter came before the Federal Court in July 1980, who allowed the appeal and gave the Bank leave to sign final judgment against the appellants. [See Citibank NA v Ooi @www.ipsofactoJ.com/index.htm [1980] Part 5 Case 10 [FCM].]

12. The appellants’ counsel conceded, rightly, that in the absence of the Contracts Act 1950, cll 7(5), 8 and 16 of the guarantee would prevent the appellants being discharged from liability by the omissions of which they complain. Two questions therefore arise, first whether those clauses of the guarantee are valid, or whether they are void because parties cannot contract out of the sections of the Act upon which the appellants rely; secondly, if parties cannot contract out, whether such omissions on the part of the Bank were matters which discharged the appellants from their liabilities upon the true construction of any of the sections referred to. Their Lordships will consider the contracting out question first. If that is answered in favour of the Bank, the second question will not arise.

13. Counsel for the appellants put his argument in two ways. He relied first upon s 1(2) of the Act, stating that “nothing herein contained shall affect ... any incident of any contract, not inconsistent with this Act”. A term of a contract is an incident of that contract. So nothing in the Act is to affect any term of a contract which is not inconsistent with the Act. It follows, per contra, that the Act is to affect a term of a contract which is inconsistent with the Act. Therefore the Act renders void any term of a contract inconsistent with the Act; cll 7(5), 8 and 16 of the guarantee are inconsistent with ss 86, 92 and 94 of the Act; particularly, such clauses are inconsistent with s 86.

14. The second way in which counsel put his argument was based on a comparison between the form of ss 86, 92 and 94 of the Act and the form of certain other sections which expressly envisage the parties otherwise contracting. For example, s 38(2) provides that a promise is binding upon the estate of the promisor, but the parties. may otherwise contract:—

    Promises bind the representatives of the promisors in case of the death of the promisors before performance, unless a contrary intention appears from the contract.

15. Section 44(1) provides that a promise may require any one of joint promisors to perform the whole of the promise “... in the absence of express agreement to the contrary...”. There are 16 other like examples in the Act of sections which incorporate such words as these, although the precise formulation differs from time to time. The implication, says counsel, is that where the Act intends contracting out to be permissible, it says so. Sections 86, 92 and 94 do not expressly provide for contracting out. Therefore, by implication, contracting out is unlawful and cll 7(5), 8 and 16 of the guarantee are void.

16. It is correct to say that judicial views have been expressed on the Indian Contracts Act 1872 which support the submission of counsel; see Sheikh Mahamad Ravuther v British India Steam Navigation Co Ltd (1908) 32 ILR Madras 95, KR Chitguppi & Co v Vinayak Kashinath Khadilkar AIR 1921 Bom 164. But such pronouncements do not stand unchallenged; see Lakhaji Dollaji & Co v Boorugu AIR 1939 BOM 101 to the opposite effect.

17. Their Lordships reject the argument based upon s 1(2). An incident of a contract is to be distinguished from a term of the contract agreed by the parties. By an “incident” of a contract is meant a legal consequence of the contract which flows from the existence of the contract although the parties have not in terms expressly provided for it and may not have addressed their minds to it. For example, if X for good consideration promises to pay £100 to Y at a future date, it is an incident of that contract that, if X dies before the date for payment, his personal representatives are liable in his place to the extent of the available assets of his estate though the contract does not so provide. Or if X employs Y to be his agent in money matters, it is an incident of the contract that Y must account to X for his dealings with such money though the contract does not so state. But all such incidents of a contract, the legal consequences which flow from the contract at common law, can be overridden by the agreed terms of the contract unless a statute or the common law otherwise provides. In the first example, the contract may provide that X’s estate is not to be liable if X dies before the date of payment. In the second example, the contract may provide that X is not entitled to require Y to account for dealings which took place more than two years ago.

18. All that s 1(2) of the Contracts Act is saying is that the legal consequences of a contract which ensue at common law are to continue to apply unless some different legal consequences are spelt out by the Act. The sub-section does not say that the contracting parties are unable by agreement to vary the legal consequences spelt out by the Act. Section 1(2) has no effect on the freedom of contracting parties to decide upon what terms they desire to contract. It would indeed be surprising if so devastating an inroad into the common law right of freedom of contract were introduced by the legislature in a section which is primarily devoted to expressing the short title to the Act and which moreover appears in a part of the Act which is merely headed “Preliminary”. In an early case before the Board concerning the Indian Contracts Act 1872, the expression “incident of the contract” was used precisely in the sense which their Lordships have indicated. See Irrawaddy Flotilla Co v Bugwandass (1890) 18 IA 121.

19. The argument founded on a comparison between (i) ss 86, 92 and 94 and (ii) certain other sections of the Act which are expressed to be “subject to a contrary intention” or the like also fails. Random recognition in certain sections of the Act of the fundamental principle that contracting parties are at liberty to express their intentions in their contracts as they please is quite insufficient to support the contrary proposition that the absence of such recognition in another section implies the absence of freedom to contract. If freedom to contract is to be curtailed in relation to a particular subject matter, their Lordships would expect the prohibition to be expressed in the statute, and not left by the legislature to be picked up by the reader as an implication based upon sections dealing with different subject matters. Furthermore, it may be noticed that when the Contracts Act intends to render an agreement void, it says so in express terms; see ss 25 to 31 under the cross-heading “Void Agreements”, read with the definitions in s 2(e) and (g).

20. A few illustrations are sufficient to demonstrate the improbability of the appellants’ submission. Section 74 provides that:—

    When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby...

21. On the appellants’ argument, if a person enters into a contract of services on the express terms that his liability for loss or damage shall be limited to a certain sum (against which perhaps he has insured), that agreed limitation of liability which is common enough in some commercial contexts would be void.

22. Section 91 provides that:—

    Where there are co-sureties, a release by the creditor of one of them does not discharge the others ...

23. If the appellants are correct, an express agreement by a creditor that his release of one co-surety shall release the others from their liability would for some inscrutable reason be void.

24. Section 104 provides that:—

    In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.

25. The owner of a car asks his friend if he can leave it in his friend’s drive while both are away on holiday; the bailee agrees, but at the sole risk of the bailor. The appellants’ proposition would invalidate that agreement.

26. A consideration of the terms of the Act, and of the bizarre consequences of the appellants’ interpretation, leads inevitably to the conclusion that that interpretation is incorrect.

27. In the result, it becomes unnecessary to decide whether the appellants would have been discharged under all or any of the sections of the Act relied upon by them, assuming that the clauses of the Guarantee relied upon by the Bank are void. Their Lordships do, however, feel considerable doubt whether it can properly be said that the omission from the debenture of a power to sell out of court was a “variance” of the agreement by the company to grant a fixed and floating charge within the meaning of s 86, which was the section upon which the appellants principally relied; and whether, in the terms of the Act, the appellants would have been discharged by the omission of the Bank to obtain the undertakings called for by the Letter of Agreement.

28. Although it is clear to their Lordships that the appellants have no defence to the Bank’s claim, they feel bound to observe that the action was not in their opinion suitable for summary disposal under Ord.14, since the defence did raise matters for serious argument. The issues could more appropriately have been decided, without the expense of a full trial with witnesses, by way of the hearing of a preliminary issue if, as their Lordships assume, there is a provision for such an issue to be tried, as in the rules of the Supreme Court applicable to the English High Court. Nevertheless it would not be appropriate for the appellants now to be given leave to defend the action, because their Lordships have reached a decision on the merits of the defence and nothing remains to be tried.

29. Their Lordships will advise His Majesty the Yang di-Pertuan Agong that the appeal ought to be dismissed. The appellants must pay the costs of the appeal.

Cases

Sheikh Mahamad Ravuther v British India Steam Navigation Co Ltd [1908] 32 ILR Madras 95; KR Chitguppi & Co v Vinayak Kashinath Khadilkar AIR [1921] Bom 164; Lakhaji Dollaji & Co v Boorugu AIR [1939] Bom 101; Irrawaddy Flotilla Co v Bugwandass [1890] 18 IA 121

Legislations

Contracts Act 1950: s. 1(2), s. 2, s. 86, s. 92, s.94

RSC 1957: Ord. 14

Representation

TLG Cullen QC (Miss YH Choi with him) for the appellants (instructed by Douglas Goldberg & Co)

Robert Alexander QC (Cecil Abraham with him) for the respondents (instructed by Coward Chance)