Article

Note: Swasta Holdings (Beneficiary) hired Seng Seng Construction (Principal) to build a condominium for MYR60,847,561. Principal provided Beneficiary with two conditional performance guarantees, the terms of which supplemented the main construction contract, issued by Southern Bank Berhad (Guarantor) in the amounts of MYR900,000 and MYR621,189. Guarantor undertook to honor Beneficiary's demands for any payment resulting from Principal's failure to complete performance under the contract, provided the Principal had not been relieved from performance. Paragraph 1 of the Guarantees stipulated that Principal could only be relieved from performance by a "clause of the contract or by statute or by the decision of a tribunal of competent jurisdiction".

Principal claimed that Beneficiary had repeatedly breached the contract through late payments and obstruction of Principal's work, resulting in Principal rescinding and terminating the main contract. Beneficiary then made a demand on the Guarantees, which Guarantor honored, debiting Principal's accounts. Principal filed suit against Guarantor for reimbursement of the Guarantees it claimed were wrongly honored. The High Court (Kuala Lumpur), Selventhiranathan, J., dismissed the suit.

Principal claimed that Beneficiary's breach released Principal from the performance on which the Guarantees were conditioned. Principal further claimed that because the Guarantees were issued after the principal contract, they superceded the principal contract, and Principal was therefore not bound by the original terms. Principal argued that Beneficiary's demand did not comply with the conditions in the Guarantees and therefore should not have been honored.

Guarantor claimed that "the bank guarantees were absolute and unconditional" and that the mere breach of the contract by Principal was enough to require Guarantor to honor the demand. Guarantor argued that the principal contract was not superceded by the guarantees but that it should be read together with the Guarantees.

The Judge found that Principal was not released from performance, and that the sole condition of the Guarantees, namely that Principal fail to complete performance, was met. The Judge found that "the [G]uarantor had to pay [Beneficiary] the said sums on demand notwithstanding any contestation or protest by [Principal] or by [Guarantor] or any other third party." The Judge also found that Beneficiary's demands were in compliance, since Beneficiary was only required to assert the basis of a claim, namely Principal's failure to perform. Accordingly, the Judge concluded that Guarantor was obligated to honor Beneficiary's demand.

There was a dispute regarding whether the Application superseded the terms of the Guarantees. The Judge did not address this point. If the demand complied, it is likely that the Application would have required the Principal to reimburse Guarantor.

[JEB/jsc]

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