Article

Factual Summary: Developer entered into an agreement with Contractor for construction of 9 blocks of five story low cost apartments in Taman Candana, Malaysia. Under the terms of the agreement, Contractor provided Developer with a "Performance Guarantee" issued by Guarantor to assure completion of its obligations under the agreement. The court's translation from Malay of the relevant provision of the performance guarantee states:

[Guarantor] shall pay damages to [Developer] a sum not exceeding RM485,939.32 within three months upon receipt of a written notice demanding that [Guarantor] pay to [Developer] for any breach of [Contractor's] obligations under the contract, provided always that the amount payable shall not exceed the amount stipulated in this paragraph.

Due to delays in construction, Developer granted Contractor seven extensions to the original completion deadline, totaling two years and five months. Contractor requested and obtained from Guarantor seven extensions of the performance guarantee to correspond with the extension of the completion date.

One month before the next pending extension deadline, Developer terminated its agreement with Contractor. Since the work remained incomplete, Developer demanded payment from Guarantor on the Performance Guarantee. When Guarantor refused payment, Developer sued it for the amount of the guarantee plus interest and costs. The Malaysian High Court, Vernon Ong, J., entered judgment in favor of Developer.

Legal Analysis:

1. Demand Guarantee; Independent Guarantee; Guarantee, Complying Demand; Demand, Basis. The Judge construed the performance guarantee to be an "an unconditional bond or an on demand bond. All that [Developer] is required to do to activate the bond is to issue a written demand to [Guarantor]." Developer is not required "to prove any default by [Contractor] in performance of the principal contract."

Guarantor argued that the Performance Guarantee was conditional and only payable once Developer asserted Contractor's breach. It contended that the demand did not comply in that it failed to assert that Developer had failed to perform. The Judge ruled that: "In making the demand, [Developer] is required to state the breach of [Contractor's] obligations under the Agreement." The demand, as translated, stated:

With reference to the above matter, the contract has been terminated as per enclose copy of our letter reference (7) JLB/KTR/A16-1/98.

In this connection, you are required to pay us damages amounting to RM485,939.32.

Since the demand did not assert breach, the Judge looked to the termination letter, which was also presented to Guarantor. It stated:

The assertion is that a winding up order has been made against [Contractor] and on that premise [Developer] terminated the Agreement. The inability of [Contractor] to continue with its obligations under the Agreement is a breach which entitled [Developer] to terminate the Agreement. As the letter of termination was also enclosed with the demand letter it is reasonable to conclude that the demand letter contained an assertion that [Contractor] failed to perform the Agreement.

2. Demand, Proof of Loss; Independence. The Judge asked:

"...whether clause 2 of the Performance Guarantee requires anything more than a demand asserting the breach without [Developer] proving the loss. Reading the demand letter as a whole it is reasonable to conclude that it complies with clause 2 of the Performance Guarantee as the amount specified in the demand letter is the amount which [Guarantor] is required to pay as damages for [Contractor's] breach of the Agreement. Accordingly the Court finds that [Developer's] notice of demand was a sufficient demand on the Performance Guarantee.

Comments:

1. The Judge referred to this passage from The Modern Law of Guarantees by O'Donovan & Phillips (2nd Ed.):

In China Airlines [v. Maltran Air Corporation & Anor [1996] 2 MLJ 517 FC], supra the Federal Court quoting The Modern Law of Guarantees by O'Donovan & Phillips (2nd Ed) stated that there are two types of performance bond. The first type is a conditional bond whereby the guarantor becomes liable upon proof of a breach of the terms of the principal contract by the builder and the proprietor sustaining loss as a result of such breach. The second type is an unconditional or 'on-demand' performance bond which is so drafted that the guarantor will become liable merely when demand is made upon the guarantor by the proprietor with no necessity for the proprietor to prove any default by the principle in performance of the principal contract.

2. Statement of Breach. The translation of the demand guarantee required a written demand for payment for any breach of Contractor's obligations.

The Judge apparently concluded that this term required that the Developer/Beneficiary "state the breach of...obligations" which presumably meant more than stating that there was a breach.

What is unclear from the opinion is whether this requirement is to be implied in any demand, even a simple one, as in URDG 758 Article 15(a) (Requirement for Demand), or only where there is a reference to breach. If the translation of the demand bond's terms is correct, the term is ambiguous and that ambiguity should have been construed against the Guarantor.

3. Distinctions. Here we have another distinction, between a "conditional" and an "unconditional" bond. The "unconditional" bond, however, is subject to a condition, albeit one that is documentary. Perhaps it could be called "semi-conditional"?

[JEB/kmw]

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