Factual Summary: "[A]s security for proper and due performance of works", Contractor/Applicant provided a bank guarantee in the amount of RM 10,475,000 in favor of Owner/Beneficiary. When a dispute arose and Contractor/Applicant terminated its work, Owner/Beneficiary initiated arbitration proceedings and demanded payment on the bank guarantee. Contractor/Applicant then sued Owner/ Beneficiary in the Malaysian High Court to enjoin Owner from receiving payment under the bank guarantee pending the outcome of the arbitration proceedings. The Judge denied Contractor/ Applicant's request for an injunction.

Legal Analysis:

1. Independence; Injunction

Contractor/Applicant argued that an injunction was appropriate because the bank guarantee was intended to secure Contractor/Applicant's performance, and whether or not Contractor/ Applicant had failed to perform under the contract was yet to be determined in the pending arbitration proceedings.

The Judge ruled that the bank guarantee was not a "conditional bond" because it had not incorporated the terms of the building contract. The Judge observed that the only condition was that a demand had to be made. Quoting from the terms of the bank guarantee, the Judge stated that "the terms of the guarantee clearly stipulates [sic] that the bankers must release payment on [Owner/ Beneficiary's] demand notwithstanding any contestation or protest by [Contractor/Applicant] or the guarantor or any third party".

Noting that there was no LC Fraud, the Judge stated that Contractor/Applicant "is not seeking an injunction in relation to the arbitration proceedings [i.e. to enjoin a civil suit] and the [Owner/ Beneficiary's] right arises from the terms of the Performance Bond", distinguishing this case from a claim based on a statute permitting injunctions in aid of arbitration.

Text: The following excerpt from the bank guarantee was quoted in the opinion:

If the [Contractor/Applicant] (unless relieved from the performance by any clause of the Contract or by statute or by the decision of a tribunal of competent jurisdiction) shall in any respect fail to execute the Contract or commit any breach of his obligations thereunder then the [Bank/Issuer] shall pay to the [Owner/Beneficiary] up to and not exceeding the sum of Malaysia Ringgit: Four Million, Three Hundred Sixty Three Thousand Four Hundred Thirty Seven And Sen Ninety Only RM4,363,437- 90, representing 5% of the Contract value or such part thereof, on the [Owner/Beneficiary's] demand notwithstanding any contestation or protest by the [Contractor/Applicant] or by the [Bank/Issuer] or by any other third party. Provided always that the total of all partial demands so made shall not exceed the sum of RM4,363,437-90 and that the [Bank/Issuer's] liability to pay the [Owner/Beneficiary] as aforesaid shall correspondingly be reduced proportionate to any partial demand having been made as aforesaid.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.