Stop Work Orders and Debts Owed Under Back-To-Back Charters in TM Global Marine Sdn Bhd (formerly known as Smart Work Co-Ordinating Sdn Bhd) v Thermatek Sdn Bhd [2022] 9 MLJ 641 (High Court, Kuala Lumpur) per Atan Mustaffa JC

This case is about a back-to-back charterparty arrangement involving three parties. The Plaintiff originally time chartered the vessel to the Defendant, ie via the TM Global-Thermatek Charterparty. In turn, the Defendant subsequently sub-chartered the vessel to a third party, KP Port Services (KPPS), ie via the Thermatek-KPPS Charterparty. When charter hire owed under the original charter reached a hefty sum of RM1,960,178.76, the Plaintiff met with both the Defendant and the third party, KPPS, to sort out the matter. It was agreed that KPPS would settle the sums owed to the Defendant. This would enable the Defendant to then pay the Plaintiff. However, it was also agreed at this meeting that when the sub-charter between the Defendant and KPPS expired, KPPS would deal directly with the Plaintiff for the supply of the vessel. This meant that KPPS, would in the future, charter the ship directly from the Plaintiff, bypassing the Defendant.

The dispute really snowballed when KPPS failed to settled the debt owed to the Defendant. This had a knock on effect of the Defendant also not being able to pay the Plaintiff. Therefore, the Plaintiff took action by issuing a ’stop-work’ order on the vessels. KPPS proposed a solution for the matter in order to expedite the lifting of the ‘stop-work’ order. KPPS would pay the Plaintiff directly, for debts which the Defendant still owed to the plaintiff. KPPS divided this debt into 2 separate sums owed. RM1,694,593.85 was paid by KPPS directly to the Plaintiff. The cheque for this first larger sum was collected and accepted by the Plaintiff. The remaining RM265,584.91 was paid by way of a cheque to the Defendant. However, the Defendant did not collect this cheque.

At the High Court (Kuala Lumpur), the Defendant argued that it did not agree to this split payment system. Under the contractual arrangements, the Defendant argued that it was entitled to the whole sum which KPPS owed. KPPS did not have the right to unilaterally assess the sum owed and apportion it. When the Plaintiff came to know that the Defendant objected to the payment in this manner, it returned the payment to KPPS. At this point in time, KPPS used the returned sum to fully settle its debt owed to the Defendant. However, the Defendant had in turn, not proceeded to settle its own debt owed to the Plaintiff, ie RM1,608,301.29.

This is the submission put forward by the Defendant as to why it was resisting the Plaintiff’s demand for the monies owed. First, by accepting the earlier payment from KPPS, the debt owed by the Defendant to the Plaintiff had been fully discharged, see Section 42 of the Contracts Act 1950. The Defendant relied Chinn Swee Onn v Puchong Realty Sdn Bhd [1990] 1 MLJ 108 (SC) for the proposition that a party cannot enforce its claim against another when a third party had agreed to pay the judgment debt. Note that the Defendant also cited Haji Nik Ishak bin Haji Nik Daud v Nik Zainab binti Jaafar [1975] 2 MLJ 82 (FC) and Punj Lloyd Sdn Bhd v Ramo Industries Sdn Bhd & Anor and another case [2019] 11 MLJ 574 .

Second, the refund made by the Plaintiff to KPPS was without the knowledge of the Defendant. Therefore, there could not be a revival of the debt owed by the Defendant to the Plaintiff. The Defendant cited Amusu Properties Sdn Bhd v Muruchadayah s/o AMS Pillay [1989] 1 MLJ 451 (HC). If attack is the best form of defence, the Defendant certainly took this to heart, and filed a counter claim. The Defendant alleged that the Plaintiff had conspired with KPPS (in particular with Wong, the CEO of KPPS) in order to injure the Defendant by lawful means. The Defendant elaborated that under this plan, a scenario would be engineered where the Defendant would default on its payments to the Plaintiff, thus giving the Plaintiff the right to withdraw from the charterparty agreements. This enable the Plaintiff to deal directly with KPPS in future transactions, thus cutting the Defendant out of the picture.

In reply, the plaintiff put forward several counter arguments. First, Section 42 of the Contracts Act 1950 had no application in this matter as the Defendant never agreed to the ‘split payment arrangement’, citing Scott & English (Malaysia) Sdn Bhd v Foo Thor Lombong Bijih Sdn Bhd & Anor [1985] 1 MLJ 73. Second, the Plaintiff accepted the payment from KPPS in good faith, honestly believing that the Defendant was agreeable to it. The split payment had been intended to be a convenient arrangement to resolve the impasse for KPPS and allow the vessels to continue shipping operations without any further legal disputes. Third, there was never any intention on the part of the Plaintiff that acceptance of the payment from KPPS was to alter the positions of the parties under the charterparty agreements or to prejudice the rights of the parties. Therefore, the debt owed by the Defendant to the Plaintiff still subsisted and was unaffected by the temporary acceptance of the payment from KPPS. Fourth, the Plaintiff denied any form of conspiracy with KPPS.

At the Hight Court of Kuala Lumpur, Atan Mustaffa JC allowed the Plaintiff’s claims against the Defendant for debts owed, and also dismissed the Defendant’s counter claim. The first point his Lordship dealt with was whether Section 42 of the Contracts Act 1950 was applicable. Atan Mustafa JC held that there was no basis for the application of Section 42. There was thus, no question of a revival of a debt that was not discharged pursuant to Section 42. The debt that KPPS had, was owed to the Defendant. KPPS could not substitute the Defendant to pay the debts owed to the Plaintiff.

Second, ratification (whether express or implied) was neither pleaded, nor alluded to, by the Defendant’s witness. There was not evidence from the Defendant’s witness that it remonstrated with KPPS after the Plaintiff had accepted the payment. This was inconsistent with the Defendant’s contention that it objected to the split payment.

Third, the return of the sum paid by KPPS, was a genuine refund and not made for any other reason. It was returned with the genuine expectation that after KPPS settled its debt with the Defendant, the Defendant would in turn, settle its debt with the Plaintiff. There was however a delay of 8 months in making the refund to KPPS. This was due to the Defendant commencing arbitration proceedings against KPPS for full payment of its debt owed.

Fourth, the acceptance of the payment from KPPS did not raise an estoppel against the Plaintiff that barred it from suing the Defendant for its debts. The Defendant did not satisfy the pre-requisites within the scope of estoppel under Section 115 of the Evidence Act 1950. In particular, the Defendant did not agree to the split payment arrangement, and neither believed, nor relied upon that arrangement to act in a manner that is prejudicial or detrimental.

Fifth, no adverse inference would be drawn against the Plaintiff for not calling Wong and Dato’ Tan of KPPS as witnesses to prove its claim and defend the Defendant’s counter claim. The reason why the KPPS payment was made, had been explained fully by another witness, Captain Malim. The Defendant had the burden of proving the allegations made in its counter claim. It had the duty of calling the relevant witnesses to prove its case. The non-calling of both Wong and Dato’ Tan by the Plaintiff, could not be taken as the withholding of unfavourable evidence under Section 114(g) of the Evidence Act 1950. There was scant circumstantial evidence from the Defendant, and this was insufficient for the court to infer that there was conspiracy.

Sixth, the Defendant’s contention that there was delay in the Plaintiff prosecuting its claim and was thus barred by laches was unacceptable. This contention was never pleaded and there was no allusion t it in either the Defendant’s evidence or the cross-examination of the Plaintiff’s witnesses.

In conclusion, this case is a lesson that debts should be settled under the respective contracts under which they arose. Any attempts at trying to engineer an outcome that could be more convenient may open the door for an opportunistic debtor to argue that the debt has been satisfied, where it had been paid by a third party. In the future, shipowners like the Plaintiff, may want to insert lien clauses in their charterparty which authorise the interception of any freight earned by third party sub-charterers.

Thank you for reading IMSML Website Article 24/2022

Stay tuned for the next IMSML Website Article 25/2022:

Malaysian Shipping Notice MSN 10/2021 (PART 1): Resolution MEPC.328 (76) - Amendment to MARPOL Convention, 2021 Revised MARPOL Annex VI.

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.); 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

5 November 2022

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