KNM Process Systems Sdn Bhd v Ceca Gold Company Ltd & Ors [2023] 1 MLJ 814 (Court of Appeal)
The Court of Appeal allowed the appeal and granted an injunction to restrain the 1st Respondent from receiving the proceeds under an unconditional on demand bank guarantee. In reversing the earlier High Court decision, the Court of Appeal also granted a declaration that the demand made by the 1st Respondent was invalid and unlawful.
It is significant to note that the Court came to the conclusion that although Singapore law was stipulated as the governing law for the contract, the facts of the appeal and the justice of the case demanded and required the Malaysian law, specifically section 7 of the Temporary Measures for Reducing the Impact on Coronavirus Disease 2019 (Covid-19) Act 2020 (“Covid-19 Act”), to be applied and enforced instead.
Summary of the Grounds of Judgment by Abu Bakar Jais JCA
Background Facts
The 1st Respondent awarded the Appellant a lump sum turnkey contract for the engineering, procurement, tanking, storage and bottling facility in Myanmar (“EPC Contract”).
Pursuant to the EPC Contract, the Appellant provided a bank guarantee issued by the 2nd Respondent, to the 1st Respondent.
Due to disputes between the Appellant and the 1st Respondent regarding the performance of the EPC Contract, the 1st Respondent issued a notice to terminate the EPC Contract. However, prior to the notice of termination, the 1st Respondent made a call on the bank guarantee and demanded the 2nd Respondent to pay out the guarantee sum under the bank guarantee.
Hence, the Appellant filed the originating summons (“OS”) in the High Court for:
a) a declaration that the call for the bank guarantee by the 1st Respondent is invalid (‘Prayer 1’);
b) an injunction preventing the 1st Respondent from receiving proceeds from the bank guarantee (‘Prayer 2’); and
c) an injunction against the 2nd Respondent from paying the proceeds of the bank guarantee to the 1st Respondent (‘Prayer 3’).
The High Court dismissed the Appellant’s OS (KNM Process Systems Sdn Bhd v Ceca Gold Company Limited & Anor [2021] MLJU 2518).
In allowing the appeal, the Court of Appeal decided as follows.
Declaratory order can be issued
In respect of Prayer 1, the Court of Appeal disagreed with the High Court’s conclusion that only interim orders could be granted and not declaratory order, pursuant to section 11 of the Arbitration Act 2005 (“AA”). The Court referred to the following 2 authorities in support of this.
Firstly, the Court of Appeal case of KNM Process Systems Sdn Bhd v Lukoil Uzbekistan Operating Company LLC [2020] MLJU 85, whereby a declaration was in fact granted in restraining the call of the bank guarantees, under section 11 of AA for interim measures by the High Court pursuant to an arbitration agreement.
Secondly, the Court referred to the High Court case of Kining Exeton Sdn Bhd v Majlid Perbandaran Kuantan & Anor [2020] MLJU 343, where a similar declaratory order was also granted to declare the demand for the bank guarantee invalid, null and void.
2nd Respondent can be restrained
The High Court found that the 2nd Respondent cannot be restrained to honour the call because the 2nd Respondent is not a party to the arbitration agreement. The Court of Appeal disagreed.
The Court held that if the 2nd Respondent is not restrained, it will start processing the call and will accordingly make payment to the 1st Respondent. This will defeat the very purpose of requesting interim measures pending arbitration as provided by section 11 of AA.[1] The Court also went on to state that the 3 parties needed for a bank guarantee must certainly include the 2nd Respondent as the issuing bank, and thus, the 2nd Respondent is in a sense a necessary party involved and closely connected in the whole scheme of the grant for interim measures.
Appellant can be protected by s. 7 of Covid-19 Act
One of the main grounds submitted by the Appellant in support of its OS was that it was excused from performing its contractual obligation to the 1st Respondent by virtue of section 7 of Covid-19 Act.[2] The Appellant contended that the 1st Respondent must not call on the bank guarantee as the performance of the EPC contract was affected by Covid-19.
Although the project site under the EPC contract is in Myanmar, the documents show that a major part of the fabrication works is to be carried out in Malaysia. It is not disputed that Malaysia was affected by the spread of Covid-19, and there were various lockdowns imposed by the Malaysian Government since March 2020. In this regard, the movement control orders (“MCO”) had affected the performance of the EPC Contract.
Given that extension of time was granted to the Appellant until April and May 2020 for the delivery of the first and second LPG tanks under the EPC Contract, and the Covid-19 Act is given retrospective effect from 18.3.2020, the works for the EPC Contract are covered under the Covid-10 Act. Whilst the issue of whether the Appellant’s ability to perform the EPC Contract is an issue to be decided in arbitration, at this stage, the Court was of the view that the Appellant is at liberty to seek for interim measures on the calling of the bank guarantee.
Further, the Court found that as section 7 of Covid-19 Act is applicable to the Appellant, it is of no consequence that the bank guarantee is payable on demand. The Court explained that the Act is enacted to deal with the non-performance of contracts, such as the EPC Contract, and the Appellant as a Malaysian company should not be prevented to seek refuge under the terms of section 7 of Covid-19 Act.
1st Respondent’s action was unreasonable and unconscionable in calling the bank guarantee
The Court of Appeal took the position that the issue of whether the termination of the EPC Contract by the 1st Respondent was correct and justifiable, is an issue to be decided in the arbitration.
However, the EPC Contract provides that in the event of a ‘major performance default’ on the part of the Appellant, then the Appellant is to furnish the 1st Respondent a corrective action plan. On this, the Court found that the issue on this corrective plan was a matter under active discussion between the Appellant and the 1st Respondent prior to the termination of the EPC Contract. Under that circumstances, the Court held that it was unreasonable for the 1st Respondent to spring a surprise by calling the bank guarantee. It was also unconscionable as the parties were negotiating and discussing how best to resolve the issue of delay because of Covid-19 when the call was made by the 1st Respondent.
Applicability of the Malaysian statutory provision in view of the Singapore law applicable
The EPC Contract expressly provides that the contract shall be governed and construed in accordance with the laws of Singapore (without giving effect to the principles thereof relating to conflicts of law).
At the High Court, the learned Judge found the 1st Respondent’s call on the bank guarantee was valid under Singapore law and is not nullified by the Singapore Covid-19 (Temporary Measures) Act 2020.
Whilst the Court of Appeal acknowledged the applicability of Singapore laws, the Court found that that still do not address the fact that the EPC Contract could not be performance due to the acute situation in Malaysia in times of Covid-19. It is also a fact that a major part of the fabrication works is to be carried out in Malaysia. Thus, the Court took the view that section 7 of Covid-19 Act could not simply be ignored, and this provision applies for the Appellant for it to be excused in not performing the fabrication works in time.
Conflict of laws and extra-territorial application
Next, the Court held that the laws of a particular country not so mentioned could still be applicable depending on the justice and facts of the case.
The Court drew support from the Federal Court case of Scandinavian Bunkering (Singapore) Pte Ltd v MISC Bhd [2015] 3 MLJ 753, where the Court applied lex fori, Malaysian law instead of English law as agreed by the parties for the contract.
Likewise, the Court in this appeal found that although Singapore law is stipulated as the governing law for the EPC Contract, the facts of the case and the justice of the case, demand and require the Malaysia law, i.e. section 7 of Covid-19 Act to be applied and enforced instead.
As for the question on whether section 7 of Covid-19 Act have extra-territorial application, the Court recognised the general principle that a statute is confined only within its limited jurisdiction unless there is clear express language specifying otherwise.
However, the Court found that this question is immaterial as the construction of the LPG Tanks in Malaysia has been affected by Covid-19. Therefore, section 7 of Covid-19 Act indeed applies to the Appellant, and there was no need for the statute to be applied beyond territorial jurisdiction.
Commentary
The purpose and intent of the Covid-19 Act as stated in the preamble to the Act reads as follows:
“An Act to provide for temporary measures to reduce the impact of Coronavirus Disease 2019 (COVID-19 …”
This case demonstrates the Courts readiness to allow a party to seek refuge under the terms of the Covid-19 Act, so as to give effect to the very purpose and intent of the Act.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
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Amy Hiew Kar Yi
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[1] It is however interesting to note that in the High Court case of Padda Gurtaj Singh and others v Axiata Group Berhad and others [2022] MLJU 526, Ong Chee Kwan JC (as His Lordship then was) made a distinction between sections 11 and 19J of AA. The learned JC held that section 11(1) is applicable only when an application is made by a party to the arbitration agreement seeking from the High Court interim measures against another party to the arbitration agreement. On the other hand, section 19J(1) gives the High Court the powers to grant interim measures as long as the interim measures are ‘in relation to arbitration proceedings’.
[2] Read together with items 1 and 2 of the Schedule.