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Note: To assure installation of fire rated steel structures at Sungai Buloh Hospital and the College of Allied Health Sciences Sungai Buloh, Rushoe Enterprises (Subcontractor/Applicant) obtained a performance demand guarantee in favor of M. 10 Builders (Contractor/Beneficiary) in the amount of MYR92,500.

The materials for the fire rated steel structure were paid for by a commercial letter of credit issued at the request of Contractor/Beneficiary, but Subcontractor/Applicant was responsible for ordering them. When the goods were imported, however, Subcontractor/Applicant undervalued them due to an error in separately filed invoices for the commercial letters of credit and customs documents. A customs investigation against Contractor/Beneficiary resulted in charges and a fine.

After several inspections and the project's completion, Contractor/Beneficiary failed to pay Subcontractor/Applicant for the work that was done. Separately, Tunas Selatan Consortium (General Contractor) issued a certificate of the building's completion, but General Contractor failed to pay Contractor/Beneficiary. Although Subcontractor/ Applicant had completed the work, Contractor/ Beneficiary drew on the demand guarantee provided by Subcontractor/Applicant and was paid.

When Subcontractor/Applicant claimed payment of MYR446,268.70 for the job and MYR92,500 for improper drawing on the demand guarantee, Contractor/Beneficiary continued to refuse to pay Contractor/Beneficiary, claiming that Subcontractor/ Applicant's account was wrong, and that it was entitled to retain the proceeds of the demand guarantee and set off the customs charges and fines assessed against it.

Subcontractor/Applicant then sued Contractor/ Beneficiary for payment. Malaysian High Court, Dato' Balia Yusof Bin Haji Wahi, J., entered judgment in favor of Subcontractor/Applicant for MYR446,268.70 plus interest as payment and refund of the demand guarantee, with an allowance of MYR173,444.76 for Contractor/Beneficiary's expenses from the customs investigation.

Regarding the propriety of the demand guarantee, the Judge stated:

On the forfeiture of the bank guarantee, I find there is no justification for the defendant to do so. The work has been completed. The bank guarantee was to ensure the due performance and completion of the work and for a duration covering the works period and the defect liability period (Para 5 of the Letter of Award) Exhibit P3 dated 25.5.2004 must be construed that by that date the work has been completed. At the same time there is no evidence at all to suggest what the defect liability period is and there is no allegation of any breach on the part of the plaintiff in that respect.

Since Subcontractor/Applicant was responsible for ordering the fireproofing materials, the Judge ruled that Subcontractor/Applicant was also responsible for all of Contractor/Beneficiary's expenditures associated with the customs investigation.

[JEB/kmw]

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