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We hereby irrevocably guarantee payment to [Guarantors] if [Subcontractor/Applicant] fail to effect payment wholly or partially within the time stipulated in the Contract and we guarantee to make such payment within 14 working days upon receipt of your written demand and shall be conclusive evidence that the sums claimed are due to you under this Guarantee.

We shall make payment on first demand without restriction or condition and notwithstanding any objection by [Subcontractor/Applicant]. We shall not require [Guarantors] to justify the breach indicated in its demand for payment.

The matter was submitted to arbitration and Arbitration Tribunal dismissed Contractor/Beneficiary's claim and awarded costs to Guarantors. The Arbitration Tribunal found that Contractor/Beneficiary had made a premature demand less than 30 days after issuance of the tax invoice. Subsequently, Contractor/Beneficiary sued Guarantors to set aside the Arbitration award under error of law on the claim that the Guarantors' refused to honor a presentation demand guarantee for RM 16,000,000.00 for the account of Applicant. The High Court (Kuala Lumpur) Hasnah Binti Dato' Mohammed Hashim, J., dismissed Contractor/Beneficiary's action, finding no reason to set aside the Arbitration Tribunal's award to Guarantors.

The court noted that an arbitrational decision can only be set aside "if it appears on the face of the award that the Arbitrator has proceeded illegally, as, for instance, by deciding on evidence which was not admissible, or on principles of construction which the law does not countenance, there is error in law which may be ground for setting aside the award", quoting Halsbury's Laws of England.

The court noted the Arbitration Award stated that it was "of the view that the Bank Guarantee is an on demand guarantee as it states quit clearly that the obligation of the [Contractor/Beneficiary] is to irrevocably guarantee payment within the time stipulated in the Contract and it is to be made within 14 working days upon receipt of the written demand." The Arbitrational Tribunal concluded that the Tax Invoice was not due until 17 December 2008. The court ruled that the correct legal principles were applied.

Contractor/Beneficiary argued that Grantor was obligated "to irrevocably guarantee payment within the time stipulated in the Contract and it is to be made within 14 working days upon receipt of the written demand". The Judge found that "Section 79 of the [Contract Act of 1950] would be applicable and the liability for payment would only arise in the event of default and that the default must be on the part of the principal debtor."

Comment: The references to default and to the Contract Act are troubling. Under a demand guarantee, there need only be a default if its terms so provide. And determination of the default is not the court's problem except where there is LC fraud or abuse. Here, for example, the drawing did not comply because on its face it was premature. While it could be said that there was no "default", i.e. the tax invoice was not overdue, it is clearer to say that the drawing did not satisfy the terms of the undertaking.

[JEB/agj]

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