Note: To assure payment for the sale of cable related to the installation of a low voltage electrical project, Brunsfield Communications (Applicant/ Purchaser) arranged with Hong Kong Bank Malaysia (Issuer) to issue an "unconditional or 'on-demand' bank guarantee" [¶7] equal to the purchase price, RM400,000 in favor of Syarikat See Wide Letrik (Beneficiary/Supplier). The contractual award provided that "payment for the equipment shall be made by the [Applicant/Purchaser] to the [Beneficiary/Supplier] 90 days from the date for delivery and that payment shall be guaranteed by a mutually agreed bankers guarantee". [¶7] Beneficiary/Supplier was to deliver the cable in three separate shipments but was unable to do so because Applicant/Purchaser continuously deferred the date of delivery of the goods. Considering Applicant/ Purchaser to be in breach for failure to accept the goods which it had tendered, Beneficiary/Supplier drew on the bank guarantee and Applicant/Purchaser sued Beneficiary/Supplier for fraudulently drawing without having delivered the goods and for declaratory relief preventing payment of the bank guarantee.

The trial judge ruled that Beneficiary/Supplier had fraudulently drawn on the bank guarantee, because it was not payable until the goods were delivered. The Court of Appeal, Zahari, Ali, & Ibrahim, J.J., reversed this decision, ruling that the trial judge erred in considering the evidence.

Applicant/Purchaser "contended that the bank guarantee is conditional and not otherwise" [¶19] because "the bank's liability thereunder is contingent upon the appellant showing that there are sums owing to it and the total amount of the said sums." [¶19] The appellate court concluded that "it is our view that it was intended to be an 'on-demand guarantee'". [¶41]

The appellate court found that the underlying contract did not permit Applicant/Purchaser to change the delivery date and its doing so constituted a breach of the contract. The appellate court accepted evidence from Beneficiary/Supplier that the delivery delays resulted in high storage and interest costs and found no evidence supporting Applicant/Purchaser's claim of fraud.

The appellate court found that the bank guarantee was set to expire soon after Applicant/Purchaser's repeated postponements in its willingness to take delivery. The appellate court also found that Applicant/Purchaser was no longer able to use the cable and that the delays were merely an attempt to prevent Beneficiary/Supplier from drawing on the bank guarantee by letting it expire. Based on these findings, the appellate court ruled that Applicant/ Purchaser had failed to prove beyond a reasonable doubt that Beneficiary/Supplier had committed fraud when drawing on the bank guarantee. The appellate court allowed Beneficiary/Supplier to draw on the bank guarantee.



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.