Article

Factual Summary: Contractor/Applicant provided a bank guarantee in the amount of RM 4,784,668.80 in favor of Owner/Beneficiary to assure its completion of a structural steel works contract. The bank guarantee provided that it "was to be valid until three months after expiry of the warranty period, which in turn was twelve months after the date of provisional acceptance of the works as certified by issue of a Provisional Acceptance Certificate." Contractor/Applicant claimed that Owner/Beneficiary had caused delays by its failure to provide necessary drawings in a timely manner and had reduced the scope of Contractor/Applicant's work, decreasing the value of the remaining contractual works to RM 13 million from the original RM 47 million, but the bank guarantee was not reduced. A dispute arose when Contractor/Applicant made two claims for unpaid monies upon completing work under a Provisional Acceptance Certificate issued by Owner/Beneficiary, and Owner/Beneficiary claimed back charges allegedly without having given notice of defects or an opportunity to cure them. Owner/Beneficiary then demanded payment on the bank guarantee. Claiming that the drawing was unconscionable, Contractor/Applicant sought an ex parte injunction, which the trial court granted. The intermediate appellate court reversed. On appeal, affirmed by the Federal Court.

Legal Analysis:

"If [Contractor/Applicant] shall in any respect fail to execute the CONTRACT or commit any breach of its obligations thereunder as certified by [Owner/Beneficiary], the GUARANTOR shall pay to [Owner/Beneficiary] on first notice and without any proof and conditions the sum of Ringgit Malaysia: Four Million Seven Hundred Eighty Four Thousand Six Hundred Sixty Eight and sent Eighty Only (RM 4,784,668.80) being 10% (ten percent) of the CONTRACT PRICE."

Relying on those "clear words", the trial court concluded that "the bank guarantee here was an on demand and unconditional bank guarantee." The intermediate appellate court also concluded that the bank guarantee "was an on-demand guarantee." Based on the "clear terms" of the quoted text, the Federal Court affirmed this characterization.

2. Unconscionability. Owner/Beneficiary argued that because "the bank guarantee was unconditional in nature and on-demand in character", it could only be restrained by "fraud which has been brought to the notice of the bank". Contractor/Applicant asserted that "'unconscionability' or unconscionable conduct is a separate and distinct exception to the accepted exception that only in the case of a fraud could the court grant a restraining order", citing as authority court decisions from Malaysia and Singapore.

The Federal Court opinion noted that traditionally fraud was the lone exception to the autonomy principle but that "unconscionability as an added and distinct exception to restrain payments on demand guarantees has lately made some inroad into some common law jurisdictions." Ultimately, the Federal Court ruled that the relevant case law supported the Court of Appeal's determination "recognizing unconscionability as a separate and distinct ground to restrain a beneficiary from making a call on a performance bond" when the party alleging unconscionability has provided "clear" evidence of unconscionability. The Federal Court also upheld the Court of Appeal's determination that to successfully claim unconscionability, the claiming party must provide enough facts to allow the court to find that unconscionability is the "only realistic inference", which the Court of Appeals described as "sufficient evidence before the court so as to enable the court to be satisfied, not necessarily beyond reasonable doubt, that a case of 'unconscionability' being committed by the beneficiary (the Appellant) has been established to an extent sufficient for the court to be minded to order injunction sought," adding that "'unconscionability' should only be allowed with circumspect where events or conduct are of such degree such as to prick the conscience of a reasonable and sensible man".

In the instant case, however, the Federal Court deferred to the factual determinations of the Court of Appeals, noting that "based on the materials before them, that unconscionability had not been proven to maintain the injunction granted below."

[JEB/vg/jdc]

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