DEJAVU – The court of appeal revisits The Mae Perkayuan Case

Bumiputra-Commerce Bank Bhd, Kuala Terengganu v. Chendering Development Sdn Bhd [2004] 1 CLJ 781

 

In 1993, the Supreme Court in Bank Bumiputra Malaysia Berhad, Kuala Terengganu v Mae Perkayuan Sdn Bhd [1993] 2 CLJ 495 ("Mae Perkayuan Case") upheld the decision of the High Court that the bank had breached the contract with the borrower in recalling a loan on the ground that the borrower had failed to service interest. The Supreme Court awarded damages of RM5,394,722 to the borrower as loss of profit which the borrower would have earned if the housing development project had been completed.

 

In Bumiputra-Commerce Bank Bhd, Kuala Terengganu v Chendering Development Sdn Bhd [2004] 1 CLJ 781, the bank granted an overdraft facility to the borrower for specific purposes. Firstly, to finance the purchase the purchase of land. Secondly, to pay fees for conversion and subdivision of the land into lots for building houses for sale to the public. Thirdly, to help finance the construction, infrastructure and management costs. When the borrower failed to service interest during the pre-construction period, the bank recalled the facility.

 

Arising from legal proceedings between the parties, the High Court held that the bank had breached the contract by recalling the overdraft facility and awarded damages of RM29,279,017.58 in favour of the borrower.

 

The bank appealed against the trial judge's decision on various grounds including the following:-

  • Whether the trial judge had erred in his finding that the bank was in breach of contract;
  • Whether the judge had applied the correct legal principles in assessing damages.

 

 

Whether the bank was in breach of contract

On evidence adduced before him, the learned trial judge was satisfied that it was a term of the agreement that the interest due on the facility during the pre-construction period would be capitalised. A representative of the bank testified that the reason for capitalisation of interest during the pre-construction period was that the borrower would not have any income until the houses were sold. Another of the bank's witnesses confirmed that the facility had been recalled for failure to service interest.

 

The judge held that the bank was not entitled to recall the facility for non-payment of interest during the pre-construction period. He further held that the demand on the borrower to service interest and the subsequent recall of the facility for non-payment of interest was unlawful and improper.

 

The Court of Appeal, having carefully scrutinised the grounds of judgment, held that there was no basis to interfere with the findings by the learned trial judge. The Court of Appeal also ruled that in the light of the factual similarity between the agreement in the proceedings and that in the Mae Perkayuan Case and the findings of the Supreme Court, the bank was precluded from arguing otherwise. Accordingly this ground of appeal was rejected.

 

 

Whether the judge applied the correct principles in assessing damages

Counsel for the bank submitted that the damages to be awarded to the borrower should be the normal measure of damages under section 74(1) of the Contracts Act 1950, that is the difference between the cost of a substitute loan in the market and the cost of the facility.

 

The Court of Appeal rejected this contention. According to the Court, this was not a simple contract to lend money, but a contract for a definite purpose. The purpose was clearly within the knowledge of the parties when they entered into the contract and the consequence of its breach must have been within their contemplation. Therefore all losses claimed by the borrower which arose out of the transaction arose naturally from the bank's breach and were within the contemplation of the parties as being likely to arise from such a breach.

 

The Court of Appeal further held that the learned trial judge was correct in holding that once it was shown that the kind of damages claimed is foreseeable, the guilty party is liable to the full extent of it so long as the extent of damages had been shown on the balance of probabilities.

 

The appeal court was therefore satisfied that the trial judge had correctly assessed damages upon a consideration of the legal principles and also upon an analysis of the similarity in facts between those in the case under appeal and in the Mae Perkayuan Case.

 

 

Conclusions

The principles laid down by the Supreme Court in the Mae Perkayuan Case have been revisited and affirmed by the Court of Appeal in Bumiputra-Commerce Bank Bhd, Kuala Terengganu v Chendering Development Sdn Bhd.

 

The Court of Appeal's decision is a timely reminder to banks that a contractual right to recall credit facilities upon demand may be circumscribed by the facts of a particular case.

 

 

KOK CHEE KHEONG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

14 April 2004

 
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