PKFZ Bailout? Legal Bullshit.

PKFZ: Govt's hand forced in bailout

The Sun reported that: [Quote]"The government has to bail out the Port Klang Free Zone (PKFZ) because the Transport Ministry had given undertakings it was not authorised to do so.

The ministry issued "letters of support" which were used by the turnkey contractor - Kuala Dimensi Sdn Bhd (KDSB) - to raise bonds and get an AAA rating from the Malaysia Rating Corporation Bhd."[Unquote]

According to The Sun, [Quote]"The four letters were issued between 2003 and 2006 for the issuance of bonds for the RM4.6 billion cost of the project. Ministry sources argue that they merely "supported" the applications but bankers contacted by The Sun said that in effect, they were letters of guarantee which only the Treasury can issue.

This is because the letters from the ministry committed the government to ensure that at all times, the Port Klang Authority (PKA) will fulfil all its financial obligations to KDSB.

"So, the government was left with little choice but to salvage the situation," said an industry source.

"When you give such undertaking for that kind of money, common sense dictates that proper advice must be sought because such letters bind the government.[Unquote]

Remarks

Is it true that the government had no choice and that such letter of support was binding between the bankers and the government?

Answer: It depends. But unlikely.

Letters of Support or Letter of Comfort may have legal effect even though it is not a guarantee. The question in each case is to determine the legal effect of the terms of the letter.

The Kleinwort Case

Klientwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 WLR 379

MMC Metal was a wholly owned subsidiary of the MMC Bhd and the letter of comfort was in relation to an acceptance credit and multi-currency cash loan facility to a limit of [sterling]5 million, later increased to [sterling]10m. The tin market collapsed in October of 1985 and MMC Metals collapsed with it. The plaintiff called upon the defendant to repay the outstanding loan, but the defendant refused on the basis that the letter did not impose any binding obligation on the defendant to support MMC Metal. The defendant noted that the circumstances had changed materially and that they had reviewed and changed their policy as a consequence.

The form of the contested paragraph in the English case was of the intermediate type. It read:

"It is our policy to ensure that the business of MMC Metals Limited is at all times in a position to meet its liabilities to you under the above arrangements."

The court at first instance held that the paragraph constituted a contractual promise and that the promise included an undertaking that the policy would not change during the lifetime of the loan agreement. The Court of Appeal could not agree with this conclusion, holding that the paragraph was merely a representation by the defendants about their existing policy and not a promise about future conduct.

The decision in Kleinwort Benson was the first in which a UK superior court considered the enforceability of a letter of comfort. The Court held that a letter of comfort expressed only a moral obligation unless the terms of the letter were decidedly promissory. The Court did not address the issue of why commercial men and women would devote so much time and money to expressing unenforceable obligations.

The Banque Brussels Case

In Banque Brussels Lambert S A v Australian National Industries Ltd, Rogers J considered the effect of a letter of comfort. The defendant argued that the letter did not create a binding contract, basing its argument on the decision of the English Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corp Bhd.

The basic facts of the Banque Brussels case were similar. The defendant held 45% of the issued capital of the holding company that owned 100% of the borrower. The bank required the letter of comfort, in a form satisfactory to it, as a condition of the loan. The defendant had previously refused to give a guarantee. The disputed letter of comfort was the negotiated compromise.

The second disputed paragraph, the third paragraph of the letter, was in the following terms:[5]

"We take this opportunity to confirm that it is our practice to ensure that our affiliate [the borrower] will at all times be in a position to meet its financial obligations as they fall due. These financial obligations include repayment of all outstanding loans within thirty (30) days."

Rogers J noted that there were two closely related questions. Was there an intention to create legal obligations and, if so, were the terms of the letter of a sufficiently promissory nature to be held to be contractual?


Rogers J held that:

"There should be no room in the proper flow of commerce for some purgatory where statements made by businessmen, after hard bargaining and made to induce another business person to enter into a business transaction would, without any express statement to that effect, reside in a twilight zone of merely honourable engagement."

This is very close to the analysis of Hirst J at first instance in the Kleinwort case. The Court of Appeal, however, held that the Skyways principle could not apply unless the words were clearly promissory.

Promissory Estoppel

As already noted, the Court of Appeal in Kleinwort held that the words were not promissory. They reached their conclusion by "...subject[ing] the letters to minute textual analysis."

Rogers J acknowledged that the words used are important, but thought that:

"...it is inimical to the effective administration of justice in commercial disputes that a court should use a finely tuned linguistic fork."

With this approach, it is not surprising that Rogers J found both the disputed paragraphs to be promissory. The clear aim of the second paragraph was to devise "a carefully crafted trigger to allow for recovery" and Rogers J was prepared to find at least the second part of the paragraph to be promissory. He also thought the first part to be promissory even though it was slightly weaker than the (non-disputed) paragraph in the Kleinwort letter.

Concerning the third paragraph, Rogers J found that it was promissory by the simple expedient of rewording it. If the paragraph is read as:

"it is our practice to ensure that [the borrower] is at all times in a position to repay all loans made to it by your Bank"

then it is more obviously promissory.

The plaintiff also succeeded in claiming that the defendant was estopped from denying the truth of the statements in the letter of comfort and from asserting that the promises were not a binding legal obligation. Rogers J found that the evidence established that the defendants knew that the plaintiff regarded the obligations as binding. It was, in the circumstances, unconscionable for the defendant to fail to disabuse the plaintiff of the incorrect perception.

Summary

It would be possible to reconcile Kleinwort and Bank Brussels in the traditional manner by attributing the difference in outcome to differences in wording and pleadings. To do so would be to overlook the differences in approach used by the two courts. The Court of Appeal adopted a traditional analytical approach whereas Rogers J used a functional analysis.

So, is our Minister and the govt as a whole acted as assholes? Didn't we have the Attorney-General's Chamber and a platoon of super lawyers paid by the govt using taxpayers' monies?