IMSML Website Article 16/2024: Malayan Banking Bhd v Government of Malaysia [2023] MLJU 2015 - Enforcement of a Collateral Contract for Ship Building Against a Party Unjustly Enriched

This case was heard at the High Court of Kuala Lumpur before Khadijah Idris J. The Plaintiff was a financial institution (ie a licensed bank) in a contractual relationship with NGV Tech Sdn Bhd (NGVT), a shipbuilder, to provide banking facilities. Under this original financing facility, the P provided RM884,330,000 to NGVT. In return, consideration provided by NGVT was in the form of various 'Debentures' in favour of the P, see Para [3].

On 21 February 2012, NGVT entered into a shipbuilding contract with the D through Ministry of Defence (MINDEF). The subject-matter of this contract was the fitting out of two (2) training vessels, Gagah Samudera and Teguh Samudera for a total sum of RM294,000,000.00, see Para [4].

NGVT experienced commercial difficulties and defaulted on the re-payment of sums owed under the banking facilities with the P. On 20 March 2013, the P issued a notice of crystallisation causing all floating charges over NGVT's assets to crystallised into a a fixed charge, see Para [5].

On 3 April 2013, the P appointed a Receiver and Manager (R&M) to oversee NGVT. A few days later on 9 April 2013, R&M, as well as the representatives of the P and NGVT, met with the Secretary General of MINDEF. It was made known to MINDEF at this meeting that R&M had been appointed by the P to oversee NGVT, which was now insolvent, see Para [6].

On 14 May 2013, NGVT was wound up pursuant to a petition presented by Nordic International Ltd, see Para [7]. R&M notified the D via a letter on 4 July 2013 that NGVT had been wound up, see Para [8]. Under the contractual documents governing the Banking Facility provided to NGVT, the P was entitled to terminate the banking facility contract it had with NGVT, see Para [9].

However, the P agreed to continue funding NGVT's construction of the two Vessels pursuant to the D's representations which the P argued amounted to a collateral contract. The representations made by the D to the P contained the following at Para [9]:

[1] The Vessels were a part of a project of national interest;

[2] The D would waive liquidated damages entirely and unconditionally, subject to Ministry of Finance (MOF) approval;

[3] Written confirmation of all the waivers in [2] above would be given and forthcoming;

[4] The D, through MINDEF, would secure the written confirmation of the waiver;

[5] The D would not seek to set off the balance of progress payment payable to NGVT (approximately RM40 million for work done by NGVT) against any liquidated damages (ie worth approx RM40 million).

Premised on the D's representations and inducement, the P agreed to provide post-receivership funding amounting to RM20,208,151.67. This sum went towards construction costs of the two Vessels. RM15,389,726.41 was provided by the P pursuant to a performance bond issued in favour of D towards completion of the Vessels, see Para [10]. However, the D refused to provide written confirmation of the waivers, despite numerous reminders, see Para [11].

Subsequently, via a letter dated 27 January 2014, the D terminated the shipbuilding contract with NGVT. The D justified this on the basis that NGVT had been wound up and R&M  appointed over NGVT. The D then made the following demands:

[1] The delivery of the two Vessels to the D;

[2] Payment of liquidated damages due to delay;

[3] No outstanding amount is owed by the D under the ship building contract.

In response, the P made the following contentions at Para [13]:

[1] The D's representations had induced the P into a collateral contract to provide banking facilities during the post-receivership period;

[2] The D had breached the terms of the collateral contract;

[3] There was unjust enrichment of the D as it had obtained the benefit of continued construction and ownership of the two Vessels at the expense of the P without having to make any balance progress payment to the P.

The D countered that:

[1] There was no direct dealing between the P and D. It was R&M who applied for the liquidated damages to be waived. The D had forwarded this to MOF for consideration and approval. However, left it to MINDEF to decide on the fate of this application, see Para [15];

[2] The port-receivership funding was provided by the P to NGVT, and not to the D, see Para [17];

[3] The D terminated the shipbuilding contract because NGVT stopped work on 1 November 2013 and failed to continue construction work, see Para [18];

[4] A new shipbuilder, Grade One Marine Shipyard, was appointed to complete the Vessels for a sum of RM85,549,000.00, see Para [20];

[5] There was no unjust enrichment or benefit obtained from the possession of the Vessels as the both ships were constructed for national interest, ie training and patrolling Malaysian waters, see Para [21].

Having reviewed all the evidence and documents, Khadijah Idris J ruled that there was indeed a collateral contract between the P and D to continue funding the construction of the two Vessels under the shipbuilding contract. Her Ladyship also held that the D was unjustly enriched as it had obtained the benefit of continued construction and ownership of the Vessels, see Para [22] and [23].

Reasons Why There Was a Collateral Contract

On 9 April 2013, R&M met with representatives of the P, NGVT and the D (represented by the Secretary General of MINDEF). R&M made it known to MINDEF that although the P had the right to stop funding the construction of the Vessels, the P would continue with the funding of the Vessels if the D waived the liquidated damages for the  delay in the delivery of the Vessels, see Para [24] and [25]. At that meeting, the D had impressed on the P bank that the Vessels must be completed, and the D did not give any indication that it intended to terminate the contract due to the receivership oner NGVT, see Para [26]. This evidence of R&M was not challenged, even during cross-examination, see Para [27].

On 9 April 2013, the D became aware that NGVT was under receivership, see Para [28]. By July 2013, the D was fully aware that NGVT was in liquidation due to a winding up order made against it by another creditor, Nordic International Ltd, see Para [29]. Under the shipbuilding contract's Clause 22, the D had the contractual right to terminate the contract, if the shipbuilder NGVT went under receivership or is subjected to winding up, see Para [30]. The D, orally and by conduct, displayed a clear and unequivocal intention not to exercise this contractual right to terminate the shipbuilding contract, see Para [31].

The P's reaction to this was not what a bank usually did. Under the banking facility agreement, the P had the right to terminate banking facilities for NGVT. Surprisingly, the P made a special exception in this case with respect to the D's shipbuilding contract with NGVT and decided to continue funding the construction of both Vessels, see Para [32]. The P reached this decision because based on the representations made by the D that liquidated damages would be waived, and that the D would not make a claim against NVGT, it was cost effective for the D to continue the funding post-receivership, see Para [33]. What the P did here was exceptional as there were significant overruns in the shipbuilding project for both Vessels, and NGVT had failed to service the interest and loan, aggregating an amount approximately RM800 million, see Para [34].

On 2 October 2013, during a meeting chaired by the DSG of MINDEF, involving all the parties, MINDEF took the following positions:

[1] The shipbuilding contract should be continued, see Para [45];

[2] Waiver of liquidated damages would be considered after the Vessels are completed, see Para [45];

[3] No deductions will be made on the remaining progress payments, ie payment will be made in full to NGVT, see Para [45];

On 16 October 2013, the D (through MINDEF) 'took the persistent and consistent stand that the implementation of the shipbuilding contract must continue. The D supported R&M's application for liquidated damages to be waived, see Para [49]. The D also guaranteed that sufficient budget had been allocated for payment of the construction fees for the Vessels until completion without deductions, see Para [49]. MINDEF then made a u-Turn to its earlier position and normal practice. It now strongly supported the request to waive liquidated damages, even though the Vessels had yet to be completed, see Para [49].

On 8 October 2013, R&M sent a letter to MINDEF detailing the following at Para [51]:

[1] The P will withhold issuing notice to NGVT to cease work on the Vessels provided MINDEF issue a letter with 3 business days. This should be sufficient time for MINDEF to seek the necessary approvals to give written confirmation to unconditionally waive all liquidated damages;

[2] Pursuant to a telephone conversation, MINDEF had conveyed to the P's representative that MINDEF was confident of securing the necessary approval for the waiver;

[3] Over 2014, four progress payments totalling RM44.10 million will be remitted to NGVT;

[4] R&M emphasised that it would not be commercially feasible for the Vessel to be completed unless all the liquidated damages are waived;

[5] R&M explained in detail why NGVT was facing challenges that led to the delay in delivery of the Vessels;

[6] The P will not fund the costs to complete the Vessels unless MINDEF confirms to unconditionally waive all liquidated damages for the delay;

[7] The P was not obligated to fund the completion of the Vessels as NGVT was under receivership and wound up. However the P was doing so as an exception as the Vessels were a project of national interest.

The assurance that the D had given to both the P as well as R&M, can be inferred from reading two letters together, one from 8 October 2013, together with another dated 16 October 2013 at para [52]:

[1] The application for a waiver of the liquidated damages would be treated favourably;

[2] The D was confident of securing the necessary approvals for a waiver of the liquidated damages;

[3] The D had sufficient budget for payment of works done by NGVT on the Vessels, ie to be paid in four progress payments totalling RM44.10 million;

[4] No deductions will be made from the payment for the work done, ie for liquidated damages which MINDEF could technically have claimed from NGVT.

On 25 October 2013, MINDEF sent a letter to MOF expressing its unequivocal intention to continue with the shipbuilding contract for the two Vessels with NGVT. In this letter, MINDEF expressed its support for liquidated damages against NGVT be waived. MINDEF recommended to MOF to support and approve this position, see Para [53]. This letter of support to MOF was issued by MINDEF even though it knew that NGVT was an insolvent company and in liquidation, see Para [55].

MINDEF explained that if the shipbuilding contract were to be terminated, MINDEF would incur additional costs as another white knight contractor would have to be appointed, see Para [55]. The only commitment by the P in this case was the additional costs of delay as the new completion dates for the Vessels were 31 October 2013 and 31 March 2014 respectively, see Para [55]. MINDEF's critical concern was to secure the completion of the Vessels without any additional costs, and they had no concern with R&M as well as the P's request for the liquidated damages to be waived, see Para [56].

Based on these facts, Khadijah Idris J held that:

[1] The issuance of the letter of support is evidence that MINDEF was determined to ensure the completion of the Vessels by bending the rules, see Para [57];

[2] MINDEF's bold recommendation to MOF was a clear indication that MINDEF was committed to allow NGVT to continue the shipbuilding contract, see Para [57];

[3] MINDEF was confident of securing the approval from MOF, see Para [57];

[4] MINDEF had represented to R&M and the P, that the funding of NGVT should continue, see Para [57];

[5] The waiver of liquidated damages for the shipbuilding contract was an exception to the usual practice in government contract, see Para [58]. This was not an afterthought, see Para [59].

On 31 October 2013, the D had still failed to provide written confirmation of the waiver for liquidated damages for delay in delivery of the Vessels. On 1 November 2013, the D sent a letter to R&M explaining that MOF was still considering MINDEF's recommendation for a written waiver. This was probably an effort to stop R&M from issuing a direction to stop work on the two Vessels, see Para [60]. Khadijah Idris J held that this was consistent with MINDEF's assurance to R&M and to the P that MOF will approved the waiver of the liquidated damages, as an attempt to persuade the P to continue with the funding of the construction of the Vessels post-receivership, see Para [62].

Also on 1 November 2013, R&M acted on its deadline. Since there was no written confirmation from MINDEF to unconditionally waive all liquidated damages again NGVT, R&M issued a letters to the sub-contractors to cease work on the Vessels, see Para [63].

Khadijah Idris J held that the funding provided by the P to NGVT is for the benefit of the D, is an undisputed fact, see Para [66]. Further, the D had consented to assignment of payment to NGVT under the shipbuilding contract, to the P. Therefore all payments were made by the D for the work done  to the Vessels, to the P, see Para [66]. Her Ladyship held that the evidence shows that although the main shipbuilding contract was between the D and NGVT, there was a collateral contract between the P and D for continued funding of the ship building contract, subject to, critically, a wavier of the liquidated damages, see Para [69].

Khadijah Idris J explained that this collateral contract existed as a supplementary contract to the main contract which was already in existence. Here, one of the parties to the main contract, was a party to the collateral contract. Although it was common for the main contract and the collateral contract to be between the same parties, this was not always the case, such as the facts in dispute before the court, see Para [68]. In support of this finding, her Ladyship cited with approval the Singapore case of Hiap Huat Pottery (S) Pte Ltd v TV Media Pte Ltd [1999] 1 SLR 14. Hence, the D's contention that the P is not a party to the shipbuilding contract is 'immaterial and irrelevant', see Para [70].

In a construction contract, such as shipbuilding contracts, claims for payment involve verification and certification at various stages, see Para [72]. This would normally take time. Khadijah Idris J pointed to the fact that the D did not raise any issues on payments to be made to the P (as overseen by R&M) for the purposes of continued funding after NGVT went into liquidation, see Para [73]. The D's conduct inevitably led the P as well as R&M that the D will waive all liquidated damages and provide written confirmation of this. Her Ladyship said it led to the P act on the D's representations by extending post-receivership funding to the sum of RM20,208,151.67, see Para [74].

In particular, Khadijah Idris J held that at all material times, MINDEF was aware and recognised that the construction of the Vessels can only be continued, subject to funding from the P, subject to liquidated damages being waived. Her Ladyship continued that MINDEF knew thar it cannot expect the P to continue funding the construction of the Vessels without being able to recoup all the funding extended to NGVT. That is why MINDEF assured that liquidated damages will be waived and therefore recommended to MOF for liquidated damages to be waived, see Para [75].

By way of a letter dated 27 January 2014 to NGVT, MINDEF terminated the shipbuilding contract for the two Vessels. MINDEF argued that the reason for termination was that NGVT had been wound up, and that R&M has been appointed as receiver to oversee NGVT. MINDEF asserted that no outstanding payment was payable to NGVT. Khadijah Idris J held that these actions by MINDEF was a breach of the collateral contract, see Para [76]. Her Ladyship described this action by MINDEF as 'mind boggling'. On the basis of the terms of the collateral contract, estoppel can be invoked by the P against the D, ie the D is estopped from terminating the shipbuilding contract and claiming liquidated damages, see Para [80].

The Application of Estoppel to the Collateral Contract

Khadijah Idris J at Para [80] cited the Federal Court case of Bousted Trading (1985) Sdn Bhd v Arab-Malaysian Merchant Bank Berhad [1995] 3 MLJ 331 in support of the application of the doctrine of estoppel against the D. According to the Federal Court, this doctrine was of wide utility and can be resorted to in varying fact patterns to achieve justice. The Federal Court went so far as to say that 'the circumstances in which the doctrine may operate are endless'.

Khadijah Idris J held that it was unfair and unjust for the D to terminate the Shipbuilding Contract on the basis that NGVT was under receivership and being wound up for the following reasons:

[1] The D had been aware of NGVT's status for the last 6 months, see Para [81];

[2] Even after the letter of termination, the D demonstrated its clear intention to continue with the Shipbuilding Contract with NGVT. This induced the P to continue to provide funding for the Vessels even after NGVT was put under receivership and wound up, see Para [81];

[3] Not a shred of evidence was produced by the D to support its allegation that NGVT failed to take the necessary effort to continue with the shipbuilding work on the Vessels, see Para [83];

[4] Even when MOF allowed MINDEF to make the decision on its own to waive the right to claim liquidated damages, MINDEF made a U-Turn on its position to support a waiver, see Para [86];

[5] Invoking Clause 22 under the Shipbuilding Contract is untenable and smacks of bad faith. The D's termination of the shipbuilding contract was done recklessly and done with bad intention to evade payment of the post-receivership funding amounting to RM20,208,151.67, see Para [88];

[6] MINDEF (its staff) suddenly suffered memory loss as to what happened after MOF gave the green light for MOF to make the decision on whether to grant the waiver of liquidated damages, see Para [89];

[7] No contemporaneous evidence was adduced by the D to show that it had disputed or objected to the contents recorded in letters sent by R&M. This means that the D admitted the contents of those letters, in particular the representation and assurances made by it, see Para [96] citing the cases of David Wong Hon Leong v Noorazman bin Adnan [1995] 4 CLJ 155 and Jetara Sdn Bhd v Maju Holding Sdn Bhd [2007] 3 CLJ 41

Was there Unjust Enrichment of the D?

RM249,000,000.00 was the price for the shipbuilding contract between NGVT and the D. If the P did not continue to provide funding until 31 October 2013, with a post-receivership funding of RM20,208,151.67, work could not have progressed on the two Vessels, see Para [100] to [103]. As a result of P's continued funding, there was improvement done to the Vessels and increase in percentage of completion to the Vessels of around 11.33 percent. This translates to a sum of around RM33,310,200.00, see Para [104].

The progress work done to the Vessel was not disputed by the D. Khadijah Idris J held that the D is therefore taken to have admitted that the post-receivership funding by the P had improved the monetary value of Vessel, see Para [107], citing Aik Ming (M) Sdn Bhd and Ors v Chang Ching Chuen and Ors and Another Appeal [1952] 2 MLJ 770 (CA). It would be unfair to allow the D to retain the benefit of post-receivership funding, but reneged on the waiver for liquidated damages, see Para [115]. The D's contention that there is no unjust enrichment because the project is for a national interest is unsupported by the authorities. The D could not show any legislation which required the P to confer the benefit of post-receivership funding on the D simply on the basis that the construction of both Vessels was in the national interest, see Para [116].

Thank you for reading IMSML Website Article 16/2024

Stay tuned for the next IMSML Website Article 17/2024: The Owners and/or Demise Charterers of the Ship or Vessel ‘Edzard Schulte’ v The Owners and/or Demise Charterers of the Ship or Vessel ‘Setia Budi’ [2023] 12 MLJ 53

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.)(Glamorgan); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

Thursday,  22 February 2024

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my