Article

Factual Summary: As a condition of a contract to design, build and complete the construction of a store complex, Contractor/Applicant obtained a performance guarantee from Guarantor in the amount of RM517,062 in favor of Owner/Beneficiary. The guarantee provided that it was callable should the Applicant fail "to perform and observe all terms, provisions, conditions and stipulations of the contract on the [Applicant's] part to be performed and observed according to the true purport intent and meaning thereof or if in default by the contractor."

When the project was completed, Owner/ Beneficiary refused to accept delivery of the site or issue a Certificate of Practical Completion until more than a year after a due date for completion. Owner/ Beneficiary made a call on the Performance Bond, which it withdrew after the Applicant extended the due date, but soon afterwards made a "fresh call" for RM517,036, the amount which allegedly was due to it for completion of the works. Contractor/ Applicant then applied for an injunction restraining the Beneficiary from calling on a Performance Bond which was granted.

Legal Analysis:

1. Demand Guarantee; Classification: The Court stated: "I accept the position in law that a bank's obligation is to pay on demand in bonds which by their nature are immediate and unconditional save and except in cases where fraud is alleged. However, I am of the view there is a need to examine the bond in question." Despite the "demand flavour" of the bond, his honour expressed concern regarding the qualifying words "true purport, intent and meaning thereof". This opened the door for the argument that the bond not unconditional.

2. Unconscionable Conduct: Fraud was not pleaded. Nevertheless the Court, after looking at "all the surrounding circumstances" stated: "the interest of justice calls for the intervention of this court." The Court relied in part of the 1966 English Court of Appeal decision of Elian and Rabbath v Matsas [1966] 2 Lloyds R 495. This case goes against the mainstream of English cases regarding gross fraud as the sole ground for restraining a payment or call under letters of credit and independent undertakings such as unconditional performance bonds. In that case Lord Denning stated the circumstances were a "special case", whilst Danckwerts LJ stated "it seems to me this is an instance where the Court should interfere and prevent what might be an irretrievable injustice being done".

The Court also referred to Malaysian precedent Radio & General Trading Co Sdn Bhd v Wayss & Freytag (M) Sdn Bhd [1997] 1 LNS 400, where the High Court accepted unconscionability as grounds for issuing its restraining order on a performance bond.

Beneficiary had raised the issue of cracks and other defects in the complete work. However, the Beneficiary only engaged an independent consultant after it had made its first call, which the Court described as "rushed." The Court questioned what would have happened if the independent report said that all defects were rectified. Ultimately the Court concluded: "the rush to make a call on the bond shortly after it had been renewed by Applicant at the request of Beneficiary is conduct that could be construed as unconscionable." The Court expressed great concern that the call would put the Applicant in financial jeopardy and its reputation would suffer. It granted the restraining order "to preserve the status quo and to prevent irretrievable injustice". This last expression is taken directly from the judgment of Danckwerts LJ in Elian's case.

Comment:

The decision was based on a line of Malaysian authorities accepting unconscionability as grounds for issuing a restraining order on Performance Bonds, and on a relatively obscure English Court of Appeal decision that has not been followed by the English courts. This is another decision where the courts have fashioned a remedy where fraud is not pleaded, and the Beneficiary has abused its position. The "unconscionability exception" to the independence principle is becoming somewhat entrenched in Australia, Singapore and now Malaysia.

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