PERFORMANCE BOND: CONDITIONAL OR UNCONDITIONAL 'AZIZAN BIN SUPARDI UNIVERSITI TEKNOLOGI MALAYSIA

Transcription

1 PERFORMANCE BOND: CONDITIONAL OR UNCONDITIONAL 'AZIZAN BIN SUPARDI UNIVERSITI TEKNOLOGI MALAYSIA

2 To my family for their love and support iii

3 ACKNOWLEDGEMENTS With high gratitude to Allah S.W.T. who gave me the ideas and physical strength in preparing this master project. This project would not have been completed without the support and encouragement from the various people involved. Because of that, I wish to express my deepest gratitude to these people who provided valuable cooperation in my carrying out of this final project. First of all, I would give my acknowledgement to my supervisor En Jamaluddin Yaakob for his guidance, support and giving the ideas in preparing of this master project. My appreciation also goes to all the lecturers for the course of Master of Science in Construction Contract Management, for their patient and kind advice during the process of completing the master project. I am also thankful to my parents, Hj Supardi Surtiman and Hjh Zamnah Abdul Hamid, my beloved wife, Noor Baini Abdullah, my three sons, Muhammad Haziq, Muhammad Hakim and Muhammad Hafiy, and a daughter, Nur Batrisyia for their great consideration and encouragement while preparing this master project. Lastly, I would like to thank my classmates for giving me the needed morale support and supplying me with the information on how to write a master project. Thank you to all the parties involved who have provided me with great cooperation that I really need in completing the master project. iv

4 ABSTRACT In construction contracts, a 'performance bond' is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor's default, repudiation or insolvency, as stated by Nigel M Robinson et. al. in his book, Construction Law in Singapore and Malaysia. He further added that there are two types of performance bonds: Conditional bond or default bond, whereby the surety accepts 'joint and several' responsibility for the performance of the contractor's obligations under the contract; and Unconditional bond or on-demand bond, which is a covenant by the surety (usually a bank) to indemnify the employer following contractor's default, subject to stated terms and up to a sum commonly 5% of the main contract sum. However, in Malaysia, for the past 20 years and since the famous case of Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 3 MLJ 449 to the recent Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 2 MLJ 762, the question of whether the performance bond in a construction contract is a conditional or an unconditional guarantees is still one of the issues relating to performance bond that has been discussed. Thus, in order to determine the types of performance bond applicable in a contract, a thorough understanding of the content of the bond is required. Therefore, the objective of this research is to determine the phrase(s) in the Performance Bond in a construction contract that determine whether the performance bond is a conditional or unconditional on demand guarantee. In order to achieve this objective, the research was conducted by analyzing relevant court cases. From the findings, it can be concluded that unless an undisputed meaning of the words in the performance bond to make the performance bond to be purely conditional or unconditional 'on-demand' bond, most court interpreted performance bond to be an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been breach of contract. v

5 ABSTRAK Di dalam kontrak pembinaan, sesuatu 'bon perlaksanaan' adalah satu bond yang diambil oleh kontraktor, selalunya dengan satu bank atau syarikat insuran (sebagai balasan kepada bayaran premium), untuk faedah dan atas permintaan majikan, mengikut jumlah liability maksimum yang dinyatakan dan dikuatkuasakan oleh majikan di dalam kejadian di mana kemungkiran, keengganan atau kebankrapan kontraktor, seperti dinyatakan oleh Nigel M Robinson et. al. di dalam bukunya, Construction Law in Singapore and Malaysia. Dia menambah bahawa terdapat dua jenis bon perlaksanaan: Conditional bond atau default bond, di mana penjamin menerima tanggungjawab 'bersama dan beberapa' untuk perlaksanaan obligasi kontraktor di bawah kontrak; dan Unconditional bond atau on-demand bond, iaitu permuafakatan oleh penjamin (selalunya bank) untuk menggantirugi majikan atas kemungkiran kontraktor, tertakluk kepada syarat-syarat dan kepada jumlah harga biasanya 5% daripada harga kontrak utama. Akan tetapi, di Malaysia, selama 20 tahun sejak kes Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 3 MLJ 449 kepada Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 2 MLJ 762, persoalan samada bon perlaksanaan di dalam kontrak pembinaan adalah jaminan bersyarat atau tidak, masih salah satu masalah yang diperbincangkan. Oleh itu, untuk menentukan jenis bon perlaksanaan yang digunakan di dalam kontrak, pengetahuan mendalam kandungan bon tersebut adalah diperlukan. Oleh sebab itu, objektif kajian ini adalah untuk menentukan frasa atau frasa-frasa dalam bon perlaksanaan di dalam kontrak pembinaan yang menentukan samada bon perlaksanaan tersebut adalah jaminan bersyarat atau tidak. Untuk mencapai objektif ini, kajian dijalankan dengan menganalisa kes-kes mahkamah yang relevan. Dari keputusannya, kesimpulan boleh dibuat bahawa kecuali makna perkataan-perkataan bon perlaksanaan adalah bersyarat tulen atau tidak bersyarat tulen, kebanyakan mahkamah mentafsir bon perlaksanaan adalah bon perlaksanaan tidak bersyarat di mana syaratnya hanyalah pada waris menuntut hak dengan mengemukakan tuntutan terhadap bon beralasan bahawa terdapat pelanggaran kontrak. vi

6 TABLE OF CONTENTS PAGE TITLE DECLARATION DEDICATION ACKNOWLEDGEMENT ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF CASES LIST OF ABBREVIATIONS LIST OF FIGURES / TABLES i ii iii iv v vi vii ix xi xii CHAPTER 1 INTRODUCTION 1.1 Background of Topic Problem Statement Objective of Topic Previous Research Scope of Topic Significant of Topic Methodology and Research Process The organizational of research proposal 12 vii

7 PAGE CHAPTER 2 PERFORMANCE BOND 2.1 Introduction Definition Nature of Performance Bond Purpose of Performance Bond Performance Bond in Construction Contract Types of Performance Bond Construction of Performance Bond Summary 28 CHAPTER 3 COMPARATIVE ANALYSIS: CONDITIONAL VERSUS UNCONDITIONAL PERFORMANCE BOND 3.1 Introduction Law Cases held and cited to differentiate the Conditionality of the Performance Bond by its wordings Comparative Analysis of the Law Cases Summary 79 CHAPTER 4 CONCLUSION AND RECOMMENDATION 4.1 Introduction Conclusion Recommendation 89 REFERENCES 91 BIBLIOGRAPHY 93 viii

8 LIST OF CASES PAGE Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR Bocotra Construction Pte Ltd v Attorney General (No 2) [1995] 2 SLR , 77 China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 MLJ , 6, 24, 29, 33, 44, 46, 56, 85 Daewoo Engineering & Construction Co Ltd v The Titular Roman Catholic Archibishop of Kuala Lumpur [2004] 7 MLJ Damatar Paints (P) Ltd v Indian Oil Corp AIR 1982 Delhi Danaharta Managers Sdn Bhd v Huang Ee Hoe & Ors [2002] 2 MLJ Easal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep , 36, 39, 45, 49, 50, 52, 54, 55, 58, 71, 72, 74, 77, 78, 79, 87 Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB , 28, 52, 59, 68, 70, 76, 80, 84, 88 Esso Petroleum Malaysia Inc. v. Kago Petroleum Sdn. Bhd. [1995] 1 MLJ , 26, 29, 32, 37, 46, 55, 58, 61, 70, 73, 74, 75, 78, 80, 81, 86, 87, 89, 90 Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1994] 4 MLJ , 76, 80, 88 Government of Malaysia v South East Asia Insurance Bhd [2000] 3 MLJ , 35, 36 IE Contractors Ltd v Lloyd s Bank Plc and Rafidain Bank [1990] 2 Lloyd s Rep , 27, 29, 37, 50, 61, 62, 70, 71, 75, 80, 81, 86, 87, 89, 90 Jowitt v Callaghan (1938) 38 SR (NSW) ix

9 Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ , 64, 70 LEC Contractors (M) Sdn. Bhd. v Castle Inn Sdn Bhd [2000] 3 MLJ , 6, 32, 33, 41 Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd [1998] 7 MLJ , 28, 52, 85 Nik Sharifuddin Bin Nik Kadir v Mohaiyani Securities Sdn Bhd [1994] 3 MLJ Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anors [1989] 1 MLJ Pesticides India v State Chemicals & Pharmaeuticals Corp of India AIR 1982 Delhi Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998] 5 MLJ , 78, 81, 88 RD Harbottle (Merchantile) Ltd v National Westminster Bank Ltd [1978] 1 QB Re Conley [1938] 2 All ER Sime Engineering Sdn Bhd & Anor v Public Bank Berhad [2004] 7 MLJ Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd [2005] 2 MLJ , 31, 32 Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 3 MLJ , 5, 6, 18, 24, 27, 30, 32, 33, 42, 46, 50, 55, 69, 73, 75, 78, 80, 84, 86, 87 x

10 LIST OF ABBREVIATIONS AC All ER AMR App Cas Build LR CLJ EWCA Civ HL Lloyd s Rep LR MLJ PC QB SCR SLR WLR Law Reports: Appeal Cases All England Law Reports All Malaysia Reports Appeal Cases Building Law Reports Current Law Journal (Malaysia) Court of Appeal, Civil Division (England & Wales) House of Lords Lloyd s List Reports Law Reports Malayan Law Journal Privy Council Queen Bench Session Cases Report Singapore Law Report Weekly Law Report xi

11 LIST OF FIGURES / TABLES PAGE Figure 1.1: Relationship of Parties to a Bond and the Underlying Contract Figure 1.2: Time line indicating the validity period of the performance bond..3 Figure 1.3: Flowchart of the research methodology...11 Figure 2.1: The risk spectrum: some principal sources of risk Figure 2.2: The risk spectrum: some principal sources of risk xii

12 Performance Bond: Conditional or Unconditional INTRODUCTION

13 CHAPTER 1 INTRODUCTION 1.1 Background of Topic A performance bond is a bond giving security for the carrying out of a contract, where a bond is a deed by which one person (the obligator) commits himself to another (the obligee) to do something or refrain from doing something. 1 In construction contracts, a performance bond is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor s default, repudiation or insolvency. 2 These relationships can be illustrated in Figure 1.1. In Malaysia, most of the need of a performance bond is made through an agreement between the Government, the contractor and a third party (usually a bank or insurance company), whereby the third party agrees to pay a sum of money to the Government, in the event of non-performance of the construction contract by the 1 2 Elizabeth A. Martin (2003), A Dictionary of Law, 5 th Edition reissued with new covers, Oxford University Press, Oxford, p.53 Nigel M. Robinson et. al. (1996), Construction Law in Singapore and Malaysia, 2 nd Edition, Butterworths Asia, Singapore, p.205 1

14 contractor. 3 It is provided in Clause 37(a) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract that the Contractor shall either deposit with the Government a performance bond in cash or alternatively by way of a Treasury's Deposit or Banker's Draft or approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a condition precedent to the commencement of work. In other words, the Contractor is not permitted to carry out any work under the Contract unless and until the performance bond is given. The failure of the Contractor to give the performance bond may amount to a fundamental breach of contract entitling the Government to discharge the Contract and sue the Contractor for damages accordingly. 4 Bank Obligator Indemnity Contractor Assured Bond Contract Developer Obligee Figure 1.1: Relationships of Parties to a Bond and the Underlying Contract 5 The validity period of the performance bond is as indicated in Figure 1.2 below. By clause 37(b), the performance bond is required to be maintained for such period as provided in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability Khairuddin Abdul Rashid (2004), Guarantee Against Non-Performance of Construction Contract by the Contractor: Performance Guarantee Sum versus Performance Bond, Seminar, 1 st International Conference, Toronto Canada, May May , World of Construction Project Management, p. 5 Lim Chong Fong (2004), The Malaysian PWD Form of Construction Contract, Sweet & Maxwell Asia, Petaling Jaya, p. 76 Chow Kok Fong (2004), Law and Practice of Construction Contracts, 3 rd Edition, Sweet & Maxwell Asia, Singapore, p

15 Period stated in the Contract calculated from the date of completion of the Works or any authorized extension thereto or if the contract is determined, until one year after the date of determination. 6 Possession of site Practical completion Completion of making good defects Contractor informed about the bond during tender Construction Defects liability Validity period of the Performance Bond extends to 6 months after the expiry of the defects liability period Figure 1.2: Time line indicating the validity period of the performance bond 7 There are two types of performance bonds, as set out below. 8 Conditional bond or default bond. A default bond is a contract of guarantee whereby the surety accepts joint and several responsibility for the performance of the contractor s obligations under the building contract: the contractor remains primarily liable for his performance and not protected by the bond. Unconditional bond or on-demand bond. An on-demand bond is a covenant by the surety (usually a bank) to indemnify the employer following contractor s default, subject to stated terms and up to a sum commonly between 10 and 20% of the main contract sum. The contractor is not a party to this arrangement Lim Chong Fong (2004), p. 77 Khairuddin Abdul Rashid (2004), p. 6 Nigel M. Robinson et. al. (1996), p. 205 but under on-demand bond in Malaysia, subject to stated terms and up to a sum commonly 5% of the main contract sum. 3

16 Thus, in order to determine the types of performance bond applicable in a contract, a thorough understanding of the content of the bond is required. The Court of Appeal in the famous Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 9 held that: Therefore a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need only to look at the written bond itself to determine what are the terms and conditions agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself. 1.2 Problem Statement As discussed above, there are two types of performance bond. The distinction between conditional and unconditional 'on demand' guarantee is also been discussed in the case of China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996] 10 and later is agreed upon in the case of Government of Malaysia v South East Asia Insurance Bhd [2000] 11. In the former case, the court cited that: A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a result of the principal's default. 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 him by the beneficiary [1995] 3 MLJ 449 [1996] 2 MLJ 517 [2000] 3 MLJ 625 4

17 with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. However, in Malaysia, for the past 20 years and since the famous Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 12 to the recent Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 13, the question of whether the performance bond in a construction contract is a conditional or an unconditional guarantees is still one of the issues relating to performance bond that been discussed. In Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 14, Abdul Wahab Said Ahmad JC stated that: A performance bond or guarantee is in fact a written contract to guarantee due performance in the event of breach or non performance of the contract. In determining whether it is conditional or otherwise, the court is concerned with the contractual construction or interpretation of the bond or guarantee itself. A great deal depends on the wording of the guarantee itself to discover the intention of the parties. The defendant contended that the terms of the guarantee is conditional and cited Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 MLJ 449 whilst the plaintiff relied on LEC Contractors (M) Sdn Bhd (formerly known as Lotterworld Engineering & Construction Sdn Bhd) v Castle Inn Sdn Bhd & Anor [2000] 3 MLJ 339. In both the cases the terms of the bond are similar to that in the case before me. The Court of Appeal in Teknik Cekap Sdn Bhd held the bond to be conditional but in LEC Contractors (M) Sdn Bhd held it is an on demand bond [1995] 3 MLJ 449 [2005] 2 MLJ 762 ibid 5

18 In LEC Contractors (M) Sdn Bhd Mokhtar Sidin JCA distinguished the case of Teknik Cekap and at p 358 said: That is the position of an on demand performance bond. It is clear to us that the bank guarantee in the present appeal is a performance bond. From the wordings of the guarantee it is clear to us that it is 'on demand' performance bond as stated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd: 'All that was required to trigger them was a demand in writing'; or in the words of Mohamed Dzaidin FCJ in the case of China Airlines Ltd v Maltran AirCorp Sdn Bhd: 'the guarantor will become liable merely when demand is made upon the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract'. The appellant claimed that the bank guarantee is a conditional bond. To support this contention learned counsel for the appellant referred to the case of Teknik Cekap, a decision of this court where the court held that a performance bond was a conditional bond. It was held by the court that because the bond began the words: 'If the subcontractor shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay'. Apparently this is the case in Malaysia where similar wordings has been used where the court has held that it was a conditional bond. From the above case, therefore, it is important to determine the content of the performance bond: whether the client can call upon the bond in the case of nonperformance of the contractor or can the bank restraint the client from calling the bond among other. So, the phrase(s) in the bond shall be the issue of discussion. 6

19 This phrase(s) should also be in written form. A clear written phrase(s) that make up the content of the performance bond can clear the distinction between conditional and unconditional on demand guarantee. Hence it is important and necessary to understand the circumstances in performance bond, which will be available to the parties to a building contract. And from that, the parties involved will clearly defined their rights and liability against bonds and guarantee to assist the respective party in construction contract Objective of Topic As such, this Masters Project has the objective to determine the phrase(s) in the Performance Bond in a construction contract that determine whether the performance bond is a conditional or an unconditional on demand guarantee. By clearing this issue, it is hoped that no more dispute will arise under the interpretation of the content of the Performance Bond especially in a construction contract. 1.4 Previous Research There is quite a number of similar research have been done previously. The first was by Dr Khairuddin Abdul Rashid called Guarantee against Non-performance of Construction Contract by the Contractor: Performance Guarantee Sum versus Performance Bond. This research was presented at the 1 st International Conference at Toronto, Canada on May to May organized by the World of 15 Nur'Ain Ismail (2007), Performance Bond and An Injunction, Master's Project Report (Dissertation), Universiti Teknologi Malaysia, p. 6. 7

20 Construction Project Management. This study aims to fulfill two key objectives: to review literature and Government documents relating to the rules on the requirement for performance bond or performance guarantee sum for public infrastructure contracts in Malaysia; and to assess the consequences to the Government of the contractors' opting for either the performance bond or the performance guarantee sum. The second was by En. Jamaluddin Yaakob called Performance Bond in Construction Contract: Problems with Drafting & Calling the Bonds. This research was presented at the seminar on Issues on Non-Performance of Construction Contract at Rumah Alumni, Universiti Teknologi Malaysia, Skudai, Johor on February organized by the Department of Quantity Surveying, Faculty of Built Environment, Universiti Teknologi Malaysia. The main objective of this paper is examine the correlation between the wordings of performance bonds and the problems that arise when making a call on the bond. The third was by Nur'Ain Ismail called Performance Bond and An Injunction. This research was a master s project report (dissertation) submitted on July 2007 in fulfillment of the requirements for the award of the degree of Master in Science of Construction Contract Management, Universiti Teknologi Malaysia. The objective of the study is to identify legal principles used by the courts in granting or rejecting an application for injunction against bondsmen from making payment or against employer from receiving the bonds. 1.5 Scope of Topic As far as the scope of study is concerned, this Masters Project paper gather some medium of literatures such as the standard forms of contract (for example, PWD203A), 8

21 other related documents (for example, Bank Guarantee for Performance Bond or PWD Q7/81), and relevant law cases (for example, from Malayan law Journal) as well as Reference Books and other mediums (for example, journals, articles, magazines, newspapers, internets, etc.) for analyzing the legal interpretation between conditional and unconditional on demand performance bond in construction contract. 1.6 Significance of Topic As has been mentioned in the objective, this research is important to the construction industry because it determines the phrase(s) in the Performance Bond in a construction contract whether the phrase(s) is/are conditional or unconditional on demand guarantees. By clearing this issue, it is hoped that no more dispute will arise due to the interpretation of the content of the Performance Bond especially in a construction contract. Hopefully, this study will add as a reference to the Malaysian construction contract practice to be more effective. 1.7 Methodology and Research Process Basically, this Masters Project paper adopts five steps as its methodology and research process in order to achieve its objective. The steps are discussed further as follows: Step 1: Identification of Research Topic This is to give a thorough understanding what is this research is all about with some initial definition of the topic under study. 9

22 Step 2 Research Objective This is the determining of what the research is hoping to achieve in studying the determination on the phrase(s) in the Performance Bond in a construction contract whether they is/are conditional or unconditional on demand guarantees. Step 3: Data Collection This is of course the gathering and consuming the medium of literatures as stated in the Scope of Study above. The medium of literatures is divided into two categories, namely the primary data and secondary data as shown in Figure 1.3 below. Step 4: Analysis This is the main text of this Masters Project dissertation which is analyzing and commenting the content of the Performance Bond in relation to whether it is a conditional or an unconditional on demand guarantee through the legal point of view from the examples of judgment held in law cases and later written systematically into chapters in this Masters Project paper. By using the words Performance Bond, 67 cases for the past 20 years were downloaded from the Malayan Law Journal to be analyzed further. From the first reading and screening of the above cases, the judge of 25 cases did interpret the distinction between conditional and unconditional Performance Bond. Further screening was done from the 25 cases whereby only cases which the judge discussed on the wordings or phrase(s) of the Performance Bond will be further analyzed. From this, 15 cases were identified to be further consumed. 10

23 Definition of Research Topic Data Collection Primary Data Secondary Data The standard forms of contract (for example, PWD203A) Other related documents (for example, Bank Guarantee for Performance Bond or PWD Q7/81) Relevant law cases (for example, from Malayan law Journal) Reference Books and other mediums (for example, journals, articles, magazines, newspapers, internets, etc.) Analysis of Data Conclusion & Recommendation Figure 1.3: Flowchart of the research methodology 11

24 Step 5: Conclusion and Recommendation This step concludes and summarizes the whole of the Masters Project paper, the outcome of objective achievable as well as making some recommendations to the outcomes. This Masters Project paper also hope to produce a new revised Bank Guarantee for Performance Bond that cleared the issue of interpreting the content whether it is conditional or not. 1.8 The organizational of the research proposal This Masters Project paper seeks to achieve its aim in five chapters with the main reference will be the identification of phrase(s) in the Performance Bond in a construction contract that differentiate between conditional and unconditional on demand guarantee: Chapter 1: Introduction The introduction is the first chapter consists of the overview of this Masters Project paper as well as stating the aim and objectives, issue or problem statement, scope and methodology of study, previously similar research, and brief description of chapter organization. Chapter 2: Performance Bond The second chapter is basically the brief information on the bond application, management and its effectiveness in the Malaysian construction contract practice. 12

25 Chapter 3: Comparative Analysis: Conditional versus Unconditional Performance Bond The third chapter is basically the detail legal issues regarding the identification of phrase(s) in the Performance Bond that differentiate between conditional and unconditional on demand guarantee. Chapter 4: Conclusion and Recommendation Lastly, chapter five conclude and summarize the whole of the paper, the outcome of objective achievable as well as making some recommendation to the outcomes as well as developing a new Bank Guarantee for Performance Bond. This will add to the existing references for students and practitioners in the Malaysian Construction Industry especially in the context of Construction Contract Management. 13

26 Performance Bond: Conditional or Unconditional PERFORMANCE BOND

27 CHAPTER 2 PERFORMANCE BOND 2.1 Introduction The success of a construction project is measured by its timely completion to specification within the budget allocated. However, in the execution of any engineering project there is invariably an element of risk involved 16 : that is to say, construction is a highly risky business, where the level of risk is considered much higher than in other types of economic activities. 17 Figure 2.1 illustrates the risk spectrum which identifies some principal sources of risk. Furthermore, projects involve commercial risks and they involve people. 18 All parties take some form of risk when they enter into construction contract. The acceptance of an obligation brings with it the acceptance of a commensurate risk, i.e. the risk of being unable to fulfill the obligation because one's own inadequacy, incapacity, inadvertence or error, or because of interference from outside sources or supervening events S Radhakrihnan (1999), Legal Aspects of Insurance for Engineering Projects, Article, [1999] 1 MLJ cxxx; [1999] 1 MLJA 130 Khairuddin Abdul Rashid (2004), p. 1 John Murdoch and Will Hughes (2000), Construction Contracts Law and Management, 3 rd Edition, Spon Press, London, p. 7 Nigel M. Robinson et. al. (1996), p

28 BUSINESS RISK (Will the development fulfill its intended purpose?) FINANCIAL RISK (Will the development be available?) DEVELOPMENT RISK MONEY RATE RISK (Will the cost of money change?) PRICE/COST LEVEL RISK (Will the price/cost level change?) DESIGN RISK (Will the design be cost-efficient?) (Will it have good buildability?) MANAGEMENT RISK (Will the construction management be efficient and effective?) CONSTRUCTION RISK DAMAGE OR INJURY RISK (Will there be third party claims?) (Will there be damage to the works?) POLITICAL/SOCIAL RISKS (Will the operating environment change?) INTER-PERSONAL RISKS (Will there be personality clashes?) (Will there be industrial unrest?) ESTIMATING/PRICING RISKS (Will there be measurement/pricing error?) Figure 2.1: The risk spectrum: some principal sources of risk ibid 15

29 The following examples summarize many of the risks. 21 Some of them are contractor's risks (for example: payments; price fluctuation; etc.) and some are employer's risks (for example: workmanship; materials and goods; insolvency; etc.): Physical works ground conditions; artificial obstructions; defective materials or workmanship; tests and samples; weather; site preparation; inadequacy of staff, labour, plant, materials, time or finance. Delay and disputes possession of site; late supply of information; inefficient execution of work; delay outside both parties' control; layout disputes. Direction and supervision greed; incompetence; inefficiency; unreasonableness; partiality; poor communication; mistakes in documents; defective designs; compliance with requirements; unclear requirements; inappropriate consultants or contractors; changes in requirements. Damage and injury to persons and property negligence or breach of warranty; uninsurable matters; accidents; uninsurable risks; consequential losses; exclusions, gaps and time limits in insurance cover. External factors government policy on taxes, labour, safety or other laws; planning approvals; financial constraints; energy or pay restraints; cost of war or civil commotion; malicious damage; intimidation; industrial disputes. Payment delay in settling claims and certifying; delay in payment; legal limits on recovery of interest; insolvency; funding constraints; shortcomings in the measure and value process; exchange rates; inflation. Law and arbitration delay in resolving disputes; injustice; uncertainty due to lack of records or ambiguity of contract; cost of obtaining decision; enforcing decisions; changes in statutes; new interpretations of common law. Risks are inevitable and cannot be eliminated. They can, however, be transferred. 22 One of the main roles of a contract is to distribute risks between the parties John Murdoch and Will Hughes (2000), p. 83 ibid, p

30 Standard forms of contracts contained express risks distributing provisions. Risk transferring contracts commonly exist between the various parties concerned in construction 23, as shown in Figure 2.2. The contracting parties: Nature of the contract: Client Contractor Designer Nominated subcontractor Nominated supplier Contract for services and indemnities Contract for services Performance warranty Material quality and/or fitness warranty Contractor Sub-contractor Supplier Contract for services and indemnities Contract for sale and warranty Insurer Client Contractor Subcontractor Supplier Designer Fire Insurance (existing buildings) (1) Contractor's 'All Risks' Employers' liability Public liability Contract works, material and plant (2) Employer's risks (as specified) Loss or damage to materials in transit Professional indemnity Surety Or Guarantor or Bondsman Client Contractor Contractor's performance bond Subcontractor's performance bond Contract of indemnity against calls on main bond Figure 2.2: The risk spectrum: some principal sources of risk Nigel M. Robinson et. al. (1996), p. 188 Ibid, p

31 In the context of public infrastructure work in Malaysia, one major risk to the Government is non-performance of construction contracts by the contractors. 25 As illustrated in Figure 2.2, performance bond is a legal and management instrument used by employers to manage risk with respect to contractor's nonperformance. 2.2 Definition As mentioned in Chapter 1, a performance bond is a bond giving security for the carrying out of a contract, where a bond is a deed by which one person (the obligator) commits himself to another (the obligee) to do something or refrain from doing something. 26 In construction contracts, a performance bond is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor s default, repudiation or insolvency. 27 In Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 28, Shaik Daud JCA further defines performance bond by stating: Having considered the submissions it is relevant to find out what therefore is a performance bond. As I see it there is nothing special or unique in a performance bond. It is in fact a written contract of guarantee by a bank, other financial institutions or in some cases as insurance company, whereby they guarantee the due performance of a contract and in the Khairuddin Abdul Rashid (2004), p. 1 Elizabeth A. Martin (2003), p.53 Nigel M. Robinson et. al. (1996), p.205 [1995] 3 MLJ

32 event of a breach or non-performance of the contract, they guarantee to pay, on a written demand being made, the sum stipulated in the guarantee. Therefore, a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need to look at the written bond itself to determine what are the terms and conditions agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself. 2.3 Nature of Performance Bond A bond or guarantee is an arrangement under which the performance of a contractual duty owed by one person (A) to another (B) is backed up by a third party (C). What happens is that C promises to pay B a sum of money if A fails to fulfill the relevant duty. In this context A is commonly known as the principal debtor or simply principal; B is called the beneficiary; and C is called the bondsman, surety or guarantor. 29 In a construction contract, performance bond is also a three-party instrument between bondsman, the employer and the contractor. The agreement, however, binds the contractor to comply with the terms of a contract. If the contractor fails to perform the contract, the bondsman assumes the responsibility to indemnify the employer up to the maximum amount of the bond. The Bondsman's obligation to pay is now arises when called upon to do so by the employer. The obligation to pay is, however, independent of the underlying contract. This is due to the fact that the performance bond is like a letter of credit and designed to release 'no quibble' cash to the beneficiary in the event the call on the bond. This is agreed by 29 John Murdoch and Will Hughes (2000), p

33 what Lord Denning MR said in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 30 that: A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. 2.4 Purpose of Performance Bond Rekhraj J in the case of Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor [1998] 31 stated that the purpose of performance bond is as follows: It is to be understood that the purpose of the performance bond in the construction industry is to perform the role of an effective safeguards against non-performance, inadequate performance or delayed performance and its production provides a security as readily available to be realized, when the prescribed event occurs, viz a viz simply failing to complete the work which had been contracted to carry out [1978] QB 159, [1978] 1 All ER 976, [1977] 3 WLR 764, [1978] 1 Lloyd's Rep 166, 6 Build LR 1, 10 Legal Decisions Affecting Bankers 50 [1998] 7 MLJ

34 The purpose of a bond is therefore to provide the employer with some financial security in the form of a cash payable by the bank for the contractor's failure to perform his obligation under the construction contract. 2.5 Performance Bond in Construction Contract Whether or not a contractor is required to provide performance bond depends on the terms of the contract. In Malaysia, as in Chapter 1, Clause 37(a) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract states that the Contractor shall either deposit with the Government a performance bond in cash or alternatively by way of a Treasury's Deposit or Banker's Draft or approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a condition precedent to the commencement of work. In other words, the Contractor is not permitted to carry out any work under the Contract unless and until the performance bond is given. The failure of the Contractor to give the performance bond may amount to a fundamental breach of contract entitling the Government to discharge the Contract and sue the Contractor for damages accordingly. 32 However, it is not the only places where performance bond is mentioned. Under Clause 10 of the Conditions of Tendering in the Form of Tender (PWD 203B Rev. 1/82) states the following: The successful tenderer shall so soon as it practicable but before the commencement of the Works deposit with the Superintending Officer Performance Bond amounting to 5% of the Contract Sum; 32 Lim Chong Fong (2004), p

35 Another place where the requirement of performance bond is mandatory before commencement of contractor's works is under Clause 4 of the Letter of Acceptance (PWD 203D Rev. 1/82), which states: I wish to draw your attention to the Conditions of Tendering whereby as conditions precedent to the commencement of the Works, you are required to deposit with the Government or the Superintending Officer Performance Bond amounting (being 5% of the Contract Sum) in cash or in the form of Treasury's Deposit, Banker's Draft or an approved banker's or Insurance Guarantee. It is also unusual for private projects to require the contract to provide performance bond. Performance Bond, however, is the precondition for: Taking possession of site By Clause 38(a) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract it is made clear that even if possession of the Site has been given, the Contractor cannot commence work unless and until the performance bond and the insurance policies required under the Contract have been deposited with the Government or the Superintending Officer. Thus if the Contractor delays in depositing the performance bond or insurance, he does so at his own peril as the time available for the execution of the Works under the Contract would be ticking away. 33 Advance payment The advance payment is paid to the Contractor upon application from him together with a bank or insurance guarantee for the amount of advance to be paid, 33 Lim Chong Fong (2004), p

36 and provided that he has returned the Letter of Acceptance duly signed and witnessed, and submitted the Performance Bond and the requisite insurance policies required by the Contract. 34 First interim payment It is further provided that, other than for the first Interim Certificate, the Superintending Officer need not issue further Interim Certificates unless and until the Contractor has returned to the Government the Letter of Acceptance of Tender duly signed by the Contractor, and has deposited with him or the Government the insurance policies and performance bond required under clauses 33, 34, 36 and 37 of these Conditions in the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract respectively. 35 As mentioned in Chapter 1, the validity period of the performance bond is as indicated in Figure 1.2 hereinbefore. By clause 37(b) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract, the performance bond is required to be maintained for such period as provided in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability Period stated in the Contract calculated from the date of completion of the Works or any authorized extension thereto or if the contract is determined, until one year after the date of determination Jabatan Kerja Raya (1988), A Guide on the Administration of Public Works Contracts, Ibu Pejabat JKR Malaysia, p Lim Chong Fong (2004), p. 110 Lim Chong Fong (2004), p

37 2.6 Types of Performance Bond As also mentioned in Chapter 1, there are two types of performance bond: conditional and unconditional or on demand. Mohamed Dzaiddin FCJ in delivering the grounds of judgment of the court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996] 37 reveal this by saying: A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a result of the principal's default. 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 him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. A sample of a conditional performance bond can be found in the case of Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 38 as follows: If the sub-contractor (unless relieved from the performance of 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 guarantor shall pay to the contractor up to and not exceeding the sum of RM422,000 (Malaysian [1996] 2 MLJ 517 [1995] 3 MLJ

38 Ringgit four hundred twenty two thousand) only representing 10% of the contract value or such part thereof on the contractor's demand notwithstanding any contestation or protest by the sub-contractor or by the guarantor or by any other third party, provided always that the total of all partial demands so made shall not exceed the sum of RM422,000 (Malaysian Ringgit four hundred twenty two thousand) only and that the guarantor's liability to pay the contractor as aforesaid shall correspondingly be reduced proportionate to any partial demand having been made as aforesaid. On the other hand, a sample of an unconditional on demand performance bond can be found in the case of Kirames Sdn Bhd v Federal Land Development Authority [1991] 39 as follows: We, Jerneh Insurance Corporation Sdn Bhd Limited, having the registered office at 7th Floor, Wisma MISC, No 2, Jalan Conlay, Kuala Lumpur do hereby irrevocable and absolutely guarantee that the sum of Ringgit 117,535 by way of security deposit under the said contract shall be paid to you by us as per the following terms: (a) (b) the said sum of Ringgit 117,535 shall be paid by us forthwith on demand by you in writing without your having to assign any reason whatsoever for such demand; the said sum of Ringgit 117,535 shall be paid by us forthwith to you irrespective of whether or not there is any dispute between the said contract and yourselves (the Authority) in respect of or relating to the said contract or in respect of any other matter and irrespective of whether 39 [1991] 2 MLJ

39 or not such said dispute, if any, has been settled, resolved, litigated or adjudicated upon otherwise howsoever. Thus it is seen in the above samples that the main distinction between the two types of bond is with respect to the requirements for making call on the bond. In conditional performance bond, the beneficiary must comply with conditions precedent for calling the bond. In on demand performance bond, on the other hands, the only condition precedent for calling the bond is a written notice to the guarantor. 2.7 Construction of Performance Bond In order to determine the construction of a performance bond, Sir Denys Buckley stipulated in the case of IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990] 40 that: I am in entire agreement with the proposition that to discover what the parties intended should trigger the indemnity under the bond involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties in that respect. The Malaysian Superior courts have referred to and approved this approach in a number of cases. One of the case that the Superior Court approval of the above IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990] 41 judgment is Esso [1990] 2 Lloyd's Rep 496, SI Build LR 1 [1990] 2 Lloyd's Rep 496, SI Build LR 1 26

40 Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 42. Peh Swee Chin FCJ in delivering the grounds of judgment of the court said that: That the real issue of a performance bond is one of contractual interpretation was the unanimous view of three judges in the Court of Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write an essay on performance bonds, in the instant appeal, except to repeat that it 'involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties' -- per Sir Denys Buckley in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503; (1991) 51 BLR 1 at p 15. Another judgment is by Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 43. In this Court of Appeal, he had also approved IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990] 44, as per Chapter 1, by saying: Therefore a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need only to look at the written bond itself to determine what are the terms and conditions agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself [1995] 1 MLJ 149 [1995] 3 MLJ 449 [1990] 2 Lloyd's Rep 496, SI Build LR 1 27

41 2.8 Summary Historically, Lord Denning MR said in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 45 in interpreting performance bond: A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. However, Rekhraj J in the case of Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor [1998] 46 stated that the purpose of performance bond is as follows: It is to be understood that the purpose of the performance bond in the construction industry is to perform the role of an effective safeguards against non-performance, inadequate performance or delayed performance and its production provides a security as readily available to be realized, when the prescribed event occurs, viz a viz simply failing to complete the work which had been contracted to carry out [1978] QB 159, [1978] 1 All ER 976, [1977] 3 WLR 764, [1978] 1 Lloyd's Rep 166, 6 Build LR 1, 10 Legal Decisions Affecting Bankers 50 [1998] 7 MLJ

42 In addition, Mohamed Dzaiddin FCJ in delivering the grounds of judgment of the court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996] 47 said: A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a result of the principal's default. 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 him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. The Malaysian Supreme Court approved the IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990] 48 judgment in constructing a performance bond. Peh Swee Chin FCJ in delivering the grounds of judgment of the court in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 49 said that: That the real issue of a performance bond is one of contractual interpretation was the unanimous view of three judges in the Court of Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write an essay on performance bonds, in the instant appeal, except to repeat that it 'involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties' -- per [1996] 2 MLJ 517 [1990] 2 Lloyd's Rep 496, SI Build LR 1 [1995] 1 MLJ

43 Sir Denys Buckley in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503; (1991) 51 BLR 1 at p 15. Therefore, Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 50 said: Therefore a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need only to look at the written bond itself to determine what are the terms and conditions agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself. 50 [1995] 3 MLJ

44 Performance Bond: Conditional or Unconditional COMPARATIVE ANALYSIS: CONDITIONAL VERSUS UNCONDITIONAL PERFORMANCE BOND

45 CHAPTER 3 COMPARATIVE ANALYSIS: CONDITIONAL VERSUS UNCONDITIONAL PERFORMANCE BOND 3.1 Introduction As has been discussed in Chapter 1, there are two types of performance bond: conditional and unconditional or on demand. Furthermore, as mentioned also in Chapter 1, in Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 51, Abdul Wahab Said Ahmad JC stated that: A performance bond or guarantee is in fact a written contract to guarantee due performance in the event of breach or non performance of the contract. In determining whether it is conditional or otherwise, the court is concerned with the contractual construction or interpretation of the bond or guarantee itself. A great deal depends on the wording of the guarantee itself to discover the intention of the parties. There are a lot of judgments being made to distinguish whether the bond is conditional or unconditional bond. Some of them will now being reproduces the 51 [2005] 2 MLJ

46 important statements from the law cases that make up the comparative analysis on the differences. 3.2 Law Cases held and cited to differentiate the conditionality of the Performance Bond by its wordings By using the words Performance Bond, 67 cases for the past 20 years were downloaded from the Malayan Law Journal to be analyzed further. From the first reading and screening of the above cases, the judge of 25 cases did interpret the distinction between conditional and unconditional Performance Bond. Further screening was done from the 25 cases whereby only cases which the judge discussed on the wordings or phrase(s) of the Performance Bond will be further analyzed. From this, 15 cases were identified to be further consumed as follows: Law Cases No. 1 In Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 52, Abdul Wahab Said Ahmad JC stated that: In LEC Contractors (M) Sdn Bhd Mokhtar Sidin JCA distinguished the case of Teknik Cekap and at p 358 said: That is the position of an on demand performance bond From the wordings of the guarantee it is clear to us that it is 'on demand' performance bond as stated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd: 'All that was required to trigger them was a demand in writing'; or in the words of Mohamed 52 [2005] 2 MLJ

47 Dzaidin FCJ in the case of China Airlines Ltd v Maltran AirCorp Sdn Bhd: 'the guarantor will become liable merely when demand is made upon the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract'. The appellant claimed that the bank guarantee is a conditional bond. To support this contention learned counsel for the appellant referred to the case of Teknik Cekap, a decision of this court where the court held that a performance bond was a conditional bond. It was held by the court that because the bond began the words: 'If the subcontractor shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay'. Apparently this is the case in Malaysia where similar wordings has been used where the court has held that it was a conditional bond. In our view the court in the case of Teknik Cekap decided it on its own facts. Apparently one of the factors that influenced the court and the court below was the fact that the demand made was band in law. This is our view distinguished that case from the present appeal. The judge followed LEC Contractors (M) Sdn Bhd and hold this guarantee is an unconditional on demand guarantee. Law Cases No. 2 In Daewoo Engineering & Construction Co Ltd v The Titular Roman Catholic Archibishop of Kuala Lumpur [2004] 53, Abdul Wahab Said Ahmad JC stated that: 53 [2004] 7 MLJ

48 I agree with the learned defendant's counsel that the Letter of Guarantee seen in isolation is payable on demand because of the presence of the no contestation clause, i.e. 'notwithstanding any contestation or protest by the contractor or by the guarantor or by any third party.' Law Cases No. 3 In Sime Engineering Sdn Bhd & Anor v Public Bank Berhad [2004] 54, Vincent Ng J stated that: The defendant issued the guarantee on the following terms: we hereby irrevocably undertake to pay to you an amount notwithstanding any objection by the Subcontractor (Miya) upon receipt by us of your first demand in writing. (emphasis added). The area of law concerning bank guarantees is well established; in the absence of fraud, the bank is obliged to pay on the guarantee promptly on demand. Law Cases No. 4 In Danaharta Managers Sdn Bhd v Huang Ee Hoe & Ors [2002] 55, Kang Hwee Gee J stated that: [2004] 7 MLJ 475 [2002] 2 MLJ

49 Thus, in English Court of Appeal case of Easal (Commodities) Ltd v Oriental Credit Ltd; Banque Du Caire SA v Wells Fargo Bank NA [1985] 2 Lloyd's Rep 546, a guarantee couched in the clause: We undertake to pay the said amount of your written demand in the event that the supplier fails to execute the contract in perfect performance was held by Ackner LJ to be payable on demand. The same construction was applied in our own jurisdiction in the Federal Court case of Government of Malaysia v South East Asia Insurance Bhd [2000] 3 MLJ 625, where the performance bond issued by the insurance company in that case had read at p 631F: The guarantor shall pay damages to the Government a sum not exceeding RM420,645 within three months upon a receipt of a written notice demanding that the guarantor pays the Government for any breach of the contract's obligations under the contract, (Emphasis added). Mohamed Dzaiddin FCJ (as he then was), following Ackner LJ in Easal held at p 636B that: In our judgment, on its true construction this Gerenti Pelaksanaan is and unconditional bond or an on demand bond and all that is required to activate it is a written demand (Easal). It is simply a performance bond whereby the insurance company guarantees performance by the Contractor of the works under the said contract, and in the event of non performance or any breach of the terms thereof, the insurance company undertakes to pay the 35

50 Government a sum not exceeding RM420,645 upon a formal demand. (Emphasis added). Law Cases No. 5 In Government of Malaysia v South East Asia Insurance Bhd [2000] 56, Mohamed Dzaiddin FCJ stated that: The material part of para 2 of the Gerenti Perlaksanaan reads: The guarantor shall pay damages to the Government a sum not exceeding RM420,645 within three months upon receipt of a written notice demanding that the guarantor pays the Government for any breach of the contract's obligations under the contract,.... (Emphasis added.) In construing the above para, we would adopt the approach taken by Lord Justice Ackner (as he then was) in Esal, p 550. There are three possible meanings which can be given to the above paragraph. First, no more than a mere written demand is required. Secondly, the demand must assert a failure to perform the contract. Thirdly, because of the word 'damages', proof thereof and not mere assertion is required before liability under the bond arises. In our view, the second possibility is the answer because in addition to the demand made, the paragraph requires the Government to state the breach of the contractor's obligations under the contract.. 56 [2000] 3 MLJ

51 The next question that arises is whether para 2 of the Gerenti Perlaksanaan requires anything more than a demand asserting the breach without the appellant proving the loss in view of the opening words: 'The guarantor shall pay damages to the Government...'? It is to be noted that the amounts payable under the two bonds are set out in para 2 of the letter of demand. But, in the letter of demand there is no express assertion that the amounts demanded are in respect of damages which the appellant had suffered. Reading the notice of demand as a whole, it is reasonable to conclude that it complies with para 2 of the Gerenti Perlaksanaan because the particulars in para 2.1 of the notice refers to the amount specified in para 2 of the bond and in substance is the amount which the respondent is required to pay as damages for the contractor's breach of the said contract. Accordingly, there was sufficient demand made in compliance with para 2 of the Gerenti Perlaksanaan. In support of the above conclusion, we would rely on IE Contractors', which was followed by this court in Esso Petroleum. The terms of the performance bonds in IE Contractors issued by Rafidain Bank, inter alia, stated: (1) We have issued in your favour, as beneficiaries, this letter of guarantee to indemnify you against any damages that you may sustain, up to an amount of ID211,896 (Iraqi Dinars Two Hundred Eleven Thousand Eight Hundred and Ninety Six only). (2) Covering Performance of Contract Guarantee covering damages which you claim are duly and properly owing to your organisation by GKN Contractors Ltd, under the terms of the Contract for a Slaughterhouse at Duhouk made on 12 June 1978 between you and GKN Contractors Ltd and Ross Poultry Ltd, 37

52 (3) We undertake to pay you unconditionally the said amount on demand, being your claim for damages brought about by the above named principal. (Emphasis added.) The demand made on all three bonds reads as follows: In view of the non-discharge by the company of its contractual obligations in making good the deficiencies of the slaughter houses of Al-Quadisiya, Karbala and Dohuk, we request withdrawal of the under-mentioned Gurantees and transference of their amounts to this Establishment. The amounts of the performance bonds were then set out. Leggatt J held, inter alia, that the demand made was invalid for not stating that it was 'for damages etc' as set out in the bonds. Allowing the appeal, the Court of Appeal declined to adopt such a 'strict compliance approach' of Leggatt J. Staughton LJ, delivering the judgment of the court held at pp : On any view there was a plain assertion that the contractors had not fulfilled their obligations. But there was no express assertion that the amounts claimed represented no less than the damage which the employers had suffered. Two questions arise: first, did the performance bonds require anything more than mere demands? Secondly, if so, did the demand presented assert such facts as the performance bonds required that it should assert? Mr Justice Leggatt answered these 38

53 questions (1) 'Yes', and (2) 'No', and held that Rafidain were not liable to the employers. In my judgment the demand is required to state that it is a claim for damages brought about by the contractors. Thus I agree with the Judge that something more than a mere demand was needed, although not exactly with the requirement that he adopted. It is arguable that some further assertion is required by para 5 of the performance bonds. But on a fair reading of the document as a whole I do not think that the rigmarole in the proviso which that paragraph contains was required to be repeated verbatim, or at all. In our judgment, on its true construction this Gerenti Perlaksanaan is an unconditional bond or an on demand bond and all that is required to activate it is a written demand (Esal). It is simply a performance bond whereby the insurance company guarantees performance by the Contractor of the works under the said contract, and in the event of non-performance or any breach of the terms thereof, the insurance company undertakes to pay the Government a sum not exceeding RM420,645 upon a formal demand. With respect to the Insurance Guarantee, the relevant paragraphs state as follows: We, the undersigned, at the request of the contractor irrevocably undertake and guarantee to the Government that: 1 We shall pay to the Government free of interest, the sum of RM1,069,035 (Ringgit Malaysia: ONE MILLION SIXTY-NINE THOUSAND AND THIRTY FIVE ONLY 39

54 ...) the advance payment mentioned above or such part thereof as shall not have already been recovered by the Government pursuant to cl 3 or 4 hereof and such sum shall be paid on the Government's demand notwithstanding any contestation or protest by the contractor or by ourselves or by any other third party Subject to cl 4, our responsibility for paying the said sum of RM1,069,035 (Ringgit Malaysia: ONE MILLION SIXTY-NINE THOUSAND AND THIRTY FIVE ONLY...) shall be automatically reduced by the amount or amounts of any payments made by us to the Government in respect of this guarantee. 4 The said sum which we guarantee to pay to the Government shall be reduced automatically in proportion to deductions made by the Government out of the progress payments due to the contractor for repayment of the advance payment so made. This Guarantee shall be cancelled immediately after the whole of the advance payment have been released through payments by us or through deductions made out of the progress payments due to the contractor, or after the expiry of the period mentioned in cl 5, whichever is the earlier. Paragraph 1 is so drafted that the guarantor shall become liable merely when demand is made by the Government notwithstanding any contestation or protest by the contractor or the guarantor or by any third party. It is clear that the overall purpose of the Insurance Guarantee is for the reimbursement 40

55 of the advance payment of RM1,069,035, less whatever amounts of payment made by the guarantor and deductions out of the progress payments under paras 3 and 4 upon a written demand made. In Esal, the bank 'undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract'. It was held that the latter words did not alter the fact that the moneys were payable upon a written demand. Likewise, in the present case, the words 'notwithstanding any contestation or protest by the contractor or by ourselves or by any other third party' in para 1 above, do not alter the fact that the money is payable on a written demand under and pursuant to the said Insurance Guarantee. Therefore, on its true construction this Insurance Guarantee is an on demand performance bond. Law Cases No. 6 In LEC Contractors (M) Sdn Bhd (formerly known as Lotterworld Engineering & Construction Sdn Bhd) v Castle Inn Sdn Bhd & Anor [2000] 57, Mokhtar Sidin JCA stated that: It was submitted by the plaintiff the performance bond was a conditional bond. Counsel for the plaintiff referred to the following clause in the guarantee: (1) If the Contractor (unless relieved from the performance by any clause of the Contract or by statute ) commit any breach of his obligations thereunder then the Guarantor shall pay to the Principal up to and not exceeding the sum of Ringgit Malaysia: Four Million Eight Hundred Thousand Only (RM4.8m) representing 5% of the Contract Value or such part thereof, on the 57 [2000] 3 MLJ

56 Principal's written demand notwithstanding any contestation or protest by the Contractor or by Guarantor or by any other third party. Te learned counsel for the plaintiff then cited the case of Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 MLJ 449. Learned counsel submitted that the performance bond in the present appeal is in pari materia with the performance bond in that case and the Court of Appeal in that case held that the performance bond to be a conditional bond. Since the performance bond in the present appeal is a conditional bond no lawful demand could be made until there is a breach or failure to execute the contract on the part of the plaintiff. The breach would be of any of the terms of the underlying contract. As such one has to examine the underlying contract and determine whether the plaintiff was in breach of any of its terms. Plaintiff went on to submit that the standard in Teknik Cekap is still too low. It was submitted by counsel for the plaintiff that the contractor must be adjudged by a competent tribunal of law to be in breach of contract and the breach ought to be identified and proved... Again it was held in Damatar Paints (P) Ltd v Indian Oil Corp AIR 1982 Delhi 57 that an irrevocable performance bank guarantee is a distinct separate transaction. If disputes arise between the company on whose behalf the guarantee is given and a corporation in whose favour it is given and the disputes are referred to arbitration, the payment of the guarantee cannot be stayed pending the arbitration. This proposition is followed in Pesticides India v State Chemicals & Pharmaceuticals Corp of India AIR 1982 Delhi 78 Adverting to the bank guarantee, its heading states 'Bank Guarantee for the Performance Bond' (emphasis added) and in recital (2) it is stated: 42

57 The Guarantor has agreed to guarantee the due performance of the contract in the manner hereinafter appearing. The crucial condition appears in para (1) of the said agreement which reads: (1) If the contractor (unless relieved from the performance by any clause of the Contract or by statute or by 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 Guarantor will indemnify and pay the principal the sum of Malaysian Ringgit: One hundred seventy-nine thousand three hundred eighty four and sen fifty eight only (RM179,384.58) provided that the principal or his authorized representative has made a claim against the Guarantor not later than six (6) months after the expiry date of the Contract. It can at once be noted that the defendant is bound to indemnify the plaintiff should Sarikon fail to execute the contract or commit any breach of their obligations thereunder unless relieved from the performance by any clause of the contract or by statute or by decision of a tribunal of competent jurisdiction. When Sarikon failed to execute the contract, that is, when they failed 'to complete and carry into effect' the works (see meaning of 'execute' as defined in Jowitts Dictionary of English Law (2nd Ed) (Vol 1 p 741) and they were not excused by any term in the contract or by the decision of a tribunal made before the demand for indemnity by 43

58 the plaintiff to the defendant under the terms of the bank guarantee, then the defendant is bound to pay on demand. The Federal Court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and another appeal [1996] 2 MLJ 517 held that a bank guarantee is a performance bond of which there are two types. The first is a conditional bond whereby the guarantor becomes liable upon proof of a breach of the terms of the principal and beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore be as a result of such breach. The second is an 'unconditional' or 'on demand' bond where the guarantor will become liable when demand is made upon him by the beneficiary with no necessity to prove any default in performance of the principal contract. In that case the wordings of the letter of guarantee as at p 533 reads as follows: Letter of Guarantee We Perwira Habib Bank Malaysia Bhd, Cawangan Bandar, Tingkat Bawah Wisma Pahlawan, Jalan Sulaiman, Kuala Lumpur, hereby undertake to pay on demand to Messrs China Airlines Ltd the sum of RM400,000 (Ringgit Malaysia: Four Hundred Thousand Only) as may be required for the due performance of the covenants in the contract between you and Messrs Maltran Air Corp Sdn Bhd, 79, 2nd Floor, Jalan Bukit Bintang, Kuala Lumpur. The said sum shall become payable by us in the event of the said Messrs Maltran Air Corp Sdn Bhd's failure to perform the said covenants. 44

59 As can be seen the wordings are somewhat similar to the wordings in the present appeal. Mohamed Dzaiddin FCJ, delivering the judgment of the court in that case, at pp , said: A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a result of the principal's default. 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 him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. According to the learned authors of The Modern Contract of Guarantee (2nd Ed) at p 664, the tendency of the English courts (since, according to the authors, that the Australian courts have not yet been faced with the same problems of construction) has been to treat the performance bonds as unconditional if there was a clear statement that the amount guaranteed was payable by the bank simply upon a written demand being made, even though there might be some indications to the contrary elsewhere in the document. The learned authors cited Esal (Commodities) Ltd as case, where the bank 'undertook to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance' (emphasis added), it was held that the latter words did not alter the fact that the money was payable upon a written demand being made as stated in the earlier part of the clause. The beneficiary of the bond did not have to show a failure to perform by the supplier in order to claim upon the bond. 45

60 That is the position of an on demand performance bond. It is clear to us that the bank guarantee in the present appeal is a performance bond. From the wordings of the guarantee it is clear to us that it is 'on demand' performance bond and as stated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd: 'All that was required to trigger them was a demand in writing'; or in the words of Mohamed Dzaiddin FCJ in the case of China Airlines Ltd v Maltran Air Corp Sdn Bhd: '... the guarantor will become liable merely when demand is made upon by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract.' The appellant claimed that the bank guarantee is a conditional bond. To support this contention learned counsel for the appellant referred to the case of Teknik Cekap, a decision of this court where the court held that a performance bond was a conditional bond. It was held by the court that because the bond began with the words 'if the sub-contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay...'. Apparently this is the only case in Malaysia where similar wordings had been used where the court had held that it was a conditional bond. In our view the court in the case of Teknik Cekap decided it on its own facts. Apparently one of the factors that influenced the court and the court below was the fact that the demand made was bad in law. This in our view distinguished that case from the present appeal. From the authorities we have referred earlier it is clear to us that to determine whether a performance bond is a conditional or unconditional bond, the court should not be concerned whether there was actual breach being committed or not. It is for the parties to litigate as to whom the blame is to be placed. The court is only concerned whether on the wordings of the 46

61 bond, it is an on demand bond. If it is so then the bank has to pay the person whom it guaranteed. The only exception to this is in the case of fraud which comes to the notice of the bank. As we have said earlier it is clear to us that this is an on demand performance bond. A proper demand had been made and as such the bank (second defendant) is obliged to pay the first defendant the amount stated in the bond. As to whether the plaintiff or the first defendant was at fault is not the concern of the bank. That dispute is for the parties to the contract to settle either by arbitration or by litigation in court. The bank has no choice but to pay the amount demanded. The first defendant is entitled to that sum not under the contract but under the performance bond. Law Cases No. 7 In Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1999] 58, Steve Shim J stated that: In the instant case, it has not been disputed that the bank guarantee is, in substance, a performance bond issued by the second defendant (a bank) to secure the first defendant's due performance under the building contract. It is in the light of the established principles aforesaid that the bank guarantee in this case has to be construed. It is incumbent upon this court to look at the words used in the said bank guarantee which read as follows:... which shall become payable by us immediately on receipt of notice in writing given to us by the Employer M/s Fasda Heights Sdn Bhd or its authorised representative in the event of the contractor M/s Soon Ee Sing Construction Sendirian Berhad failing to execute the works and/or in breach of contract. 58 [1999] 4 MLJ

62 Here, counsel for the plaintiff has laid emphasis on the imperative use of the words 'immediately on receipt of the notice in writing' and submits that those words must be construed to require the second defendant to make immediate payment upon demand and precludes an interpretation that the second defendant is entitled or required to make any inquiry relating to any alleged failure on the part of the contractor to execute the works and/or in breach of contract, before honouring the plaintiff's demand. Counsel for the first defendant has however drawn attention to the significance of the words 'in the event of the contractor failing to execute the works and/or in breach of contract' therein and submits that when read in the light of the whole paragraph, no liability exists under the said bank guarantee unless and until there has been a breach of the underlying building contract which, according to him, has to be established before a demand can be made or entertained. He has laboured on this at some length by referring to certain English authorities but it seems that the thrust of his contention relates more to the question of whether or not it is right and/or equitable and/or unconscionable for the plaintiff to call upon the bank guarantee. I do not think this issue is of direct relevance to the application. This will become apparent later. In the meanwhile, let me revert to the issue at hand and consider the position taken by counsel for the second defendant. In substance, I think he is adopting a similar stand as counsel for the first defendant although he has added a supplementary by submitting that the absence of such words as 'unequivocal' or 'unconditional' or 'absolutely' in the bank guarantee has the effect of militating against its unconditionality. In my view, the words used in the bank guarantee are sufficiently clear. On a proper reading of the whole paragraph cited above, they must reasonably be construed to mean that the bank (second defendant) would be liable to release the monies to the plaintiff immediately only upon the following 'conditions' 48

63 namely: (1) that the demand is in writing; and (2) the contractor fails to execute the works and/or in breach of the contract. In this context it is significant to consider the nature and effect of the 'conditions' above. As regards the 'condition' for the demand to be made in writing, it has been said that such a 'condition' is merely to regulate the right to call on the guarantee and is therefore purely a procedural matter. It does not render a guarantee conditional in the true sense (see Bocotra Construction Pte Ltd v A-G (No 2) [1995] 2 SLR 733 (CA). I am prepared to adopt that as a correct statement of law. That being the position, the requirement to make the demand in writing in this case does not render the bank guarantee conditional in the real sense. In considering the second 'condition', ie in the event the contractor fails to execute the works and/or in breach of the contract, I think it pertinent to cite the English case of Esal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank NA [1985] 2 AC 546 to see how the Court of Appeal in that case dealt with a performance bond which, in effect and in substance, is similar to the bank guarantee in our case. In that case, the bond provided as follows: We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance... It was held that there were three possible meanings for the words used: (i) that no more than a written demand was required; (ii) that the demand must assert a failure to perform the contract; or (iii) that there must in fact have been a failure to perform. The Court of Appeal unanimously rejected the third 49

64 solution. This was reflected in that part of the speech by Ackner LJ, which stated: If the performance bound was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could safely be made by the bank except on a judgement of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely, to enable the beneficiary to obtain prompt and certain payment. This apparently prompted Staughton LJ in IE Contractors Ltd v Lloyd's Bank plc & Rafidain Bank, to conclude that there was a bias or presumption in favour of the construction that performance bond was to be conditioned upon documents rather than facts. In any event, the Court of Appeal in Esal by a majority, opted for the second construction that the demand must assert the failure to perform the contract. This was how Ackner LJ put it: However, I accept Mr Tugendhat's alternative submission that in addition to the beneficiary making the demand. We must also inform the bank that he does so on the basis provided for in the performance bond itself. This interpretation not only gives meaning and effect to the words 'in the event that the supplier fails...' which otherwise would be mere surplusage, but it in no way imposes an extravagant demand upon the bank. A bank beneficiary may seek, honestly or dishonestly, to apply a performance bond to the wrong contract, and the need to inform the bank of the true basis upon which he is making his demand may be vary salutary. 50

65 In my view, the same approach can be taken in the present case. It is therefore clear that the words 'in the event the contractor fails to execute the works and/or in breach of the contract' in the bank guarantee amount to a condition precedent. It means that this condition has to be complied with before the second defendant can release the monies when a demand is made on the bank guarantee by the plaintiff. I may add that at this stage, there is no burden of proof placed on the beneficiary nor is there any obligation on the part of the bank to inquire into the facts of the condition or require proof thereof. In the light of the authorities cited where it was held sufficient in such a situation for the beneficiary to assert clearly in the demand the condition or conditions stipulated in the performance bond, there is therefore a necessity to take a closer look at the demand made by the plaintiff on the bank guarantee in the instant case. The plaintiff had in fact sent two letters of demand on the bank guarantee. The first demand dated 31 July the relevant part of which states: 1 We refer to your bank guarantee (BG) dated 12 March 1997 (Your Ref ) Non-execution of Works ad breach of building contract. Further please take note that Soon Ee Sing Construction Sdn Bhd (the Contractor) has failed to execute the Project Works in accordance with the building contract and/or is in breach of the building contract... 4 Claim on BG. By reason of para 3 above and pursuant to the BG, we hereby demand that the sum of RM2,655,425 is forthwith paid to us... 51

66 The second demand dated 11 August 1998 was couched in substantially similar terms. From the contents therein, it is clear that the plaintiff had asserted positively that the contractor had failed to execute the works under the building contract. There was also annexed to the letters of demand two certificates issued by the architect. In my view, the assertions as reflected in the two letters of demand were sufficient 'to trigger off the guarantee' (in the words of Shaik Daud JCA in Teknik Cekap) and on that basis, it is clear that the condition stipulated in the bank guarantee had been complied with and therefore the second defendant (bank) had no option but to release the monies to the plaintiff. In the circumstances, it was wrong for the second defendant to withhold or refuse to pay the monies to the plaintiff when the demand was made on the bank guarantee at the material time. Law Cases No. 8 In Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor [1998] 59, Rekhraj J stated that: This argument has been well fortified in the leading case of Edward Owen Engineering Ltd v Barclays Bank International Ltd & Anor [1978] QB 159, where the performance bond was payable 'on first of our demand without any condition or proof.' The Court of Appeal in the case of Re Esal (Commodities) Ltd [1985] BCLC 450 in its literal interpretation of the words 'We undertake to pay the said amount on your written demand in the event the supplier fails to execute the contract in perfect performance', rejected the argument of strict application in accordance with its terms as that would 59 [1998] 7 MLJ

67 have meant that the beneficiary would have to prove a failure to perform the contract, rather than simply to assert it. The choice words of the performance bond are: If the contractor (unless relieved from the performance by any clause of the contract or by statute or by the decision of tribunal of competent jurisdiction) shall in any respect fail to execute the contract or commit any breach of his obligation thereunder then the guarantor shall pay... on the principal's written demand notwithstanding any contestation or protest by the contractor or by the guarantor or by any other third party.... The performance bond was procured by the plaintiff to the first named defendant and the plaintiff was fully aware of the choice of words expressing the intention -- that it was payable, notwithstanding any contestation or protest by the contractor. It would be superfluous to submit now that it was not so intended and that the payment was subject to a dispute being decided because s 94 of the Evidence Act 1950, which reads -- 'when language used in a document is plain (ie unambiguous) in itself and when it applies accurately to existing facts, evidence may not be given to show that it was not meant to apply to such facts'. The words of the performance bond are clear in the context and consistent with an immediate undertaking to pay on written demand without any protest by the plaintiff, in that, the beneficiary is entitled to forfeit the cash deposit -- if such had been obtained or in the case of a bond, an advantage to immediate payment before the underlying dispute is determined either by trial or by arbitration'. This court will not therefore attribute an intention contrary to the plain meaning of the words used to attach liability towards payment upon demand. 53

68 Law Cases No. 9 In Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998] 60, Kamalanathan Ratnam JC stated that: The English Court of Appeal in the case of Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546 tackled this issue in the context of an undertaking in a performance bond which was as follows: We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance.... After summarizing the arguments of counsel for the defendant, Lord Ackner LJ rejected an interpretation of the said undertaking which required the bank which issued the performance bond to take upon itself the obligation of deciding the merits of the dispute as it was a function for which the bank was wholly unfitted and which the parties could not sensibly have intended. He went on to say that the absurdity of such an interpretation was clear in that:... if the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a competent court of jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment. 60 [1998] 5 MLJ

69 Esal (Commodities) was followed and directly applied in Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 MLJ 449 wherein our Court of Appeal decided that the wording of the performance bond considered therein required the beneficiary to assert in substance, without the need to use the exact words as found in the performance bond, that there was a breach of contract. The bond in Teknik Cekap was as follows: If the subcontractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder, then the guarantor shall pay.... Clause 2(i) of the performance bond in the instant case reads: If the contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder, then the guarantor will indemnify and pay the principal.... The said cl 2(i) is virtually identical to the one used in Teknik Cekap and is similar to the one used in Esal (Commodities). As such, I hold that cl 2(i) of the instant case renders the performance bond an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been a breach of contract. I further find that upon such a demand being made, the liability of the defendant to pay under the performance bond is immediately attracted. I therefore reject the defendant's contention that the said letter only constitutes a mere notification and not a demand. In fact, referring to Esso Petroleum, Peh Swee Chin FCJ said at p 157: 55

70 ... There was nothing there that could suggest that the demand was not proper, and for complying with the simple words there of making a claim by 'a demand in writing', the said letter was sufficiently compliant even though it was verbose. Law Cases No. 10 In China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996] 61, Mohamed Dzaiddin FCJ (delivering the grounds of judgment of the court) stated that: The second ground of appeal is substantially against the bank regarding the letter of guarantee AC4 which, in part, provides as follows: Letter Of Guarantee We Perwira Habib Bank Malaysia Bhd, Cawangan Bandar, Tingkat Bawah Wisma Pahlawan, Jalan Sulaiman, Kuala Lumpur, hereby undertake to pay on demand to Messrs China Airlines Ltd the sum of RM400,000 (Ringgit Malaysia: Four Hundred Thousand Only) as may be required for the due performance of the covenants in the contract between you and Messrs Maltran Air Corp Sdn Bhd, 79, 2nd Floor, Jalan Bukit Bintang, Kuala Lumpur. The said sum shall become payable by us in the event of the said Messrs Maltran Air Corp Sdn Bhd's failure to perform the said covenants. 61 [1996] 2 MLJ

71 The complaint of Encik Chandran was that the learned judge had failed to appreciate that AC4 was a conditional guarantee, where by the express terms that: 'The said sum shall become payable by us in the event of the said Messrs Maltran Air Corp Sdn Bhd's failure to perform the said covenants.' Encik Nantha Balan, for the bank, submitted that AC4 was an unconditional 'on demand' type of guarantee where liability to pay arose immediately upon a demand being made on the bank by China Airlines, who was the beneficiary under the guarantee. It was submitted that the words 'The said sum shall become payable by us in the event of the said Messrs Maltran Air Corp Sdn Bhd's failure to perform the said covenants' did not demolish the unconditional on demand nature of the guarantee. They merely referred to the circumstance in which the beneficiary would be entitled to make a demand. A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a result of the principal's default. 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 him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. According to the learned authors of The Modern Contract of Guarantee (2nd Ed) at p 664, the tendency of the English courts (since, according to the authors, that the Australian courts have not yet been faced with the same problems of construction) has been to treat the performance bonds as unconditional if there was a clear statement that the amount guaranteed was 57

72 payable by the bank simply upon a written demand being made, even though there might be some indications to the contrary elsewhere in the document. The learned authors cited Esal ( Commodities) Ltd 's case, where the bank 'undertook to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance ' (emphasis added), it was held that the latter words did not alter the fact that the money was payable upon a written demand being made as stated in the earlier part of the clause. The beneficiary of the bond did not have to show a failure to perform by the supplier in order to claim upon the bond. Esal is also an example of contractual interpretation of the words in a performance bond -- the interpretation aspect of it was emphasized in the (then) Supreme Court case of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149. Returning to Esal( Commodities ) Ltd, a case which we will place reliance on, the material words of the undertaking in the performance bond read: 'We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance.' OCL, the appellant, contended that liability under the performance bond was conditional and that the condition had not been complied with. Mr Tugendhat, counsel for OCL, relied on the words in the undertaking immediately following 'written demand': 'in the event that the supplier fails to execute the contract in perfect performance.' OCL contended that on the true construction of the performance bond, either: (a) there was no liability under the performance bond unless and until there had been a breach of the underlying contract of sale, and this was never 58

73 established; alternatively, (b) that the beneficiary of the performance bond not only had to make a written demand for payment under and pursuant to the performance bond, but he must in the making of the demand assert that the demand was made because the supplier had failed properly to execute the contract. Ackner LJ (as he then was), delivering the judgment of the Court of Appeal, stated (at pp ) as follows: As regards the first interpretation, Mr Tugendhat is obliged to accept that if he is right, the bank, by entering into the performance bond is taking upon itself the obligation of deciding the merits of a dispute under a contract of sale, a function for which it is virtually common ground the bank is wholly unfitted and which the parties could not sensibly have intended. As Mr Sumption for WF correctly submitted, if the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a competent court of jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment. There is no need to cite, at any length, the well-known case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159 as to the general nature of a performance bond, where it is stressed that a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in 59

74 default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud. His Lordship added: However, I accept Mr Tugendhat's alternative submission that in addition to the beneficiary making the demand, he must also inform the bank that he does so on the basis provided for in the performance bond itself. This interpretation not only gives meaning and effect to the words 'in the event that the supplier fails...' which otherwise would be mere surplusage, but it in no way imposes an extravagant demand upon the bank. A beneficiary may seek, honestly or dishonestly, to apply a performance bond to the wrong contract, and the need to inform the bank of the true basis upon which he is making his demand may be very salutary. Moreover, the desire for an extension of the performance bond may, on occasions, be due to the fact that the performance, for one reason or another, might have been justifiably delayed and the beneficiary does not yet know whether or not there will in due course be full compliance with the contract. The requirement that he must, when making his demand for payment in order to support his request for an extension, also commit himself to claiming that the contract has not been complied with, may prevent some of the many abuses of the performance bond procedure that undoubtedly occur. (See the observation of Kerr J (as he then was) in RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] 1 QB 146 at p 150. In her grounds of judgment, the learned judge recognized that AC4 is an 'on demand guarantee'. 60

75 Law Cases No. 11 In Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 62, Peh Swee Chin FCJ (delivering the grounds of judgment of the court) stated that: One, therefore, looked at the letter dated 11 October 1993 as set out above which was supposed to trigger the operation of the instant performance bonds. There was nothing there that could suggest that the demand was not proper and, complying with the simple words there of making a claim by 'a demand in writing', the said letter was sufficiently compliant even though it was verbose. In the court of the first instance in IE Contractors [1989] 2 Lloyd's Rep 205, Leggatt J held that the demand made to Rafidain Bank was invalid, inter alia, for not stating that the demand was 'for damages, etc' as set out in the bond therein, but the Court of Appeal (Staughton and Purchas LJJ and Sir Denys Buckley) in IE Contractors [1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1, declined to adopt such a requirement of strict compliance with the words and that notwithstanding that the precise words 'for damages, etc' were not used, a valid demand was made. We wish to associate ourselves with that rather common sense approach. If words are in apparent conformity with the wording in any particular bond, they are sufficient. On the type of such pure on demand performance bonds, the issuer should unquestionably pay on demand except in the case of fraud. Any argument of immediate disadvantage to the party who caused such a document to be in use 62 [1995] 1 MLJ

76 is of no avail to the party who must face the risks of such unquestioned payment except where there is fraud; there was even no allegation of it, let alone any evidence of it. Law Cases No. 12 In Nik Sharifuddin Bin Nik Kadir v Mohaiyani Securities Sdn Bhd [1994] 63, Zakaria Yatim J stated that: In IE Contractors 51 BLR 5, the terms of the performance bonds issued to the second defendant were as follows: (1) we have issued in your favour, as beneficiaries, this letter of guarantee to indemnify you against any damages that you may sustain, up to an amount of ID211,896 (Iraqi Dinars two hundred eleven thousand eight hundred and ninety six only); (2) covering performance of contract guarantee covering damages which you claim are duly and properly owing to your organization by GKN Contractors Ltd, under the terms of the contract for a slaughterhouse at Duhouk made on 12 June 1978 between you and GKN Contractors Ltd and Ross Poultry Ltd; and (3) we undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the above-named principal. 63 [1994] 3 MLJ

77 The Court of Appeal decided that the bonds were not to be interpreted as stating that the second defendant would pay if the precise words set out in court were to be found in the demand. The demand stated in substance, although not in express words, that it claimed damages for breach of contract and that was therefore sufficient. Accordingly, the second defendant was liable to the employer. In the present case, the banker's guarantee is a form of security. The guarantee document states that the bank guaranteed that the amount stated therein being 'the amount of security deposit required to be deposited' with the defendant. Clause 2(i) of the agreement provides that the plaintiff would place the sum of RM50,000 'which shall be used to guarantee the due performance by the remisier of the obligations and covenants under this agreement...' (Emphasis added.) The defendant accepted the bankers guarantee in lieu of a cash deposit of RM50,000. In the defendant's letter dated 18 February 1992, it was stated that the banker's guarantee was required as collateral. In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In Liquidation) & Ors (1978) 141 CLR 335, Gibbs ACJ in his judgment at pp said: The undertaking of the bank was expressed to be given in consideration of the appellant dispensing with the provision of a retention fund, and was undoubtedly given for the purposes of cl 30(c) of the building contract -- it was a 'bank guarantee, guarantee bond or other form of security' within the meaning of that clause. It was therefore intended to be 'effective as security in lieu of the retention fund', ie effective as security that Mainline should carry out its obligations under the contract -- see cl 30(a). Although the liability assumed by the bank was in form absolute, it 63

78 was, to the knowledge of the appellant, only undertaken for the purpose of affording security for the performance by Mainline of its obligations; the undertaking was collateral in substance, although not in form. The contract between the appellant and the bank appears to fall within the description of 'guarantee' contained in such authorities as Rowlatt on Principal and Surety (3rd Ed, 1936) at p 4; Jowitt v Callaghan (1938) 38 SR (NSW) 512 at pp and Re Conley[1938] 2 All ER 127 at pp 131, 135. In the present case, there is no evidence that a demand had been made on the guarantee, but in its letter dated 7 February 1993, the defendant had indicated that it would draw down on the banker's guarantee. In my opinion, the banker's guarantee is not an unconditional guarantee. In the circumstances, the court should look at the underlying contract. Clause 6(ii) of the agreement provides that the plaintiff is to indemnify the defendant against all losses where a buying client has failed to pay within the time allowed by the KLSE Rules and where the defendant has to sell in the open market for the same securities and incurs a loss in doing so. Clause 11 provides for the termination of the agreement. Law Cases No. 13 In Kirames Sdn Bhd v Federal Land Development Authority [1991] 64, Zakaria Yatim J stated that: 64 [1991] 2 MLJ

79 Under the agreement dated 3 October 1985 between the plaintiff and the defendant, the defendant agreed to supply to the plaintiff reinforced concrete spun pipes to Felda Kalabaka Complex, Sabah for a total contract price of$ 2,350,700 for the period from 6 August 1985 to 31 May As a condition precedent to the execution of the said agreement the plaintiff was required to deposit with the defendant a sum equivalent to five percent of the value of the contract which was $ 117,557. On the question of security deposit, cl 2 of the said agreement provides: (a) The supplier shall as a condition precedent to the execution of the agreement of this contract, deposit with the Authority a sum equivalent to the amount referred to in the Appendix in cash or by way of a banker's guarantee which shall in any event be equivalent to 5% of the value of the contract price which guarantee shall be in a form to be prescribed by the Authority and which deposit shall hereinafter be referred to as 'the security deposit'. It is agreed that the Authority may utilize and make payments out of or deductions from the said security deposit in accordance with the terms of this contract. (b) The security deposit (or any balance remaining to the credit of the Supplier) shall be released within the period stated in the Appendix from the date of expiry of the contract. (c) The security deposit (or any balance thereof remaining to the credit of the supplier) shall be forfeited to the Authority at any time in the event of any breach of the terms, covenants, conditions and stipulations on the 65

80 supplier's part to be performed or observed in this contract. Pursuant to the above condition, the plaintiff obtained and delivered to the defendant a security guarantee for the sum of $ 117,535 which was accepted by the defendant. The security guarantee, dated 2 October 1955, was issued by Jerneh Insurance Corp Sdn Bhd and addressed to the defendant as the beneficiary. The security guarantee states: In consideration of your agreeing to grant Kirames Sdn Bhd 41/2 M/S, Apas Road, Tawau, Sabah (hereinafter called the 'paid contractor') bearing No VS-0-SP (hereinafter called 'the said contract') in respect of supply and delivery of RC span pipes to Felda Kalabakan Complex, Sabah. We, Jerneh Insurance Corporation Sdn Bhd Limited, having the registered office at 7th Floor, Wisma MISC, No 2, Jalan Conlay, Kuala Lumpur do hereby irrevocable and absolutely guarantee that the sum of Ringgit 117, 535 by way of security deposit under the said contract shall be paid to you by us as per the following terms: (a) the said sum of Ringgit 117,535 shall be paid by us forthwith on demand by you in writing without your having to assign any reason whatsoever for such demand; (b) the said sum of Ringgit 117,535 shall be paid by us forthwith to you irrespective of whether or not there is any dispute between the said contract and yourselves (the Authority) in respect of or relating to the said contract or 66

81 in respect of any other matter and irrespective of whether or not such said dispute, if any, has been settled, resolved, litigated or adjudicated upon otherwise howsoever. This guarantee is effective from 6 September It is clear that the above document is a guarantee given by Jerneh Insurance Corp Sdn Bhd on behalf of the plaintiff for the due performance of the contract dated 3 October The guarantee is an 'on-demand' guarantee. Law Cases No. 14 In Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anor [1989] 65, Wan Adnan J stated that: The letter of guarantee reads: In consideration of... we hereby guarantee you the sum of $ 250,000 (ringgit: two hundred and fifty thousand only) being security deposit required under the said contract and shall become payable by us on request by you without your having to assign any cause for any request. In the letter of indemnity given by the plaintiffs to the second defendant, the plaintiffs: 65 [1989] 1 MLJ

82 hereby agree and irrevocably authorize you to pay to the guaranteed party the sum guaranteed upon demand by the guaranteed party and we shall at all times hereafter unconditionally indemnify and keep you indemnified... The guarantees are in fact performance bonds. In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, Lord Denning MR stated the law as to performance bonds as follows: A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit... All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice. 68

83 Law Cases No. 15 that: In Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 66, Shaik Daud JCA stated It is, therefore, pertinent to set out the relevant clause of the bond which has caused this concern in this case. It can be found on the first page of the bond dated 1 June 1992 issued by PBB and is as follows: If the sub-contractor (unless relieved from the performance of 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 guarantor shall pay to the contractor up to and not exceeding the sum of RM422,000 (Malaysian Ringgit four hundred twenty two thousand) only representing 10% of the contract value or such part thereof on the contractor's demand notwithstanding any contestation or protest by the sub-contractor or by the guarantor or by any other third party, provided always that the total of all partial demands so made shall not exceed the sum of RM422,000 (Malaysian Ringgit four hundred twenty two thousand) only and that the guarantor's liability to pay the contractor as aforesaid shall correspondingly be reduced proportionate to any partial demand having been made as aforesaid. It 'involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties'. This is the unanimous view 66 [1995] 3 MLJ

84 expressed in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank (1990) 51 BLR 1. Much of the confusion and problems in interpreting performance bonds arose with the celebrated decision of the English Court of Appeal in Edward Owen Engineering Ltd v Barclays Bank International Ltd & Anor [1978] 1 All ER 976; [1977] 3 WLR 764. In that case, Lord Denning MR having pointed out that a performance bond was similar to a letter of credit added that performance bonds are virtually promissory notes payable on demand. Since then it has been seen that performance bonds are, however, not on the same footing as letters of credit, they do not form part of the financial transactions supporting the performance of a contract. They are in fact collateral and subsidiary to a contract. In IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank, the court made a distinction between letters of credit and performance bonds and made it clear that the question of what was required to comply with a particular performance bond was one of construction of that bond. There is no doubt that some performance bond must be paid merely on a demand being made, and whether this is so must depend on the wording of the bond itself. In Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ 198, the guarantee provided that the guarantor shall 'irrevocally and absolutely guarantee payment on demand without having to assign any reason whatsoever for such demand'. In the light of these clear and unambiguous wording it can be said that this is an unconditional and a pure 'on demand' bond. What is required to trigger payment in such bonds is the demand simpliciter. In Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149, the then Supreme Court on examination of the performance bond in that case held that it was a pure on demand guarantee and therefore a mere demand would trigger off the guarantees without asserting any reasons thereto. In that case the guarantor agrred to 'unconditionally and irrevocably guarantee payment...'. 70

85 In the present case, however, the bond began with the words ' If the subcontractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay...' (emphasis added). Now from the very wording of the bond itself it is clear and unequivocal that what would trigger off the guarantee is the sub-contractor's failure to execute the contract or commit any breach thereof. Then and only then would the liability of the guarantor arise. Therefore giving the words in the bond their plain meaning, it cannot by any stretch of imagination be said that the bond in the circumstances of this case is an unconditional bond. Similarly in Esal (Commodities) and Relton v Oriental Credit and Wells Fargo Bank NA [1985] 2 Lloyd's Rep 546, the performance bond stated 'we undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance...' (emphasis added) the Court of Appeal held that:... however in additional to the beneficiary making the demand he must also inform the bank that he did so on the basis provided for in the performance bond... The court there found that when making the demands the beneficiary did not assert that there was a failure to perform the contract. The court came to the conclusion that liability under the performance bond was conditional and the condition had not been complied with. The court went on to say that this interpretation not only gave meaning but also effect to the words 'in the event that the supplier fails...' which otherwise would be mere surplusage. This decision was followed by the Court of Appeal in IE Contractors. In that case the performance bond stated as follows: 71

86 We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the abovenamed principal. (Emphasis added.) Clause 1 of the performance bond stipulates what those conditions are and that clause is worded in the following manner: If the sub-contractor (unless relieved from the performance of any clause of the contract...) shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor [ie the bank] shall pay to the contractor [ie Teknik] up to and not exceeding the sum of RM422,000 (Malaysian Ringgit four hundred twenty two thousand) only representing 10% of the contract value or such part thereof on the contractor's demand, notwithstanding any contestation or protest by the sub-contractor or by the guarantor or by any other third party... Teknik interprets that clause to be just this -- that the performance bond is an on demand performance bond and the liability to pay arises once a demand is made and the fact that the demand in this case is silent as to any wrongdoing or omission committed by the sub-contractor is immaterial to the validity of the demand as the issuance of the demand itself implies that a breach had already been committed by the sub-contractor. In Esal's case, the form of undertaking was expressed as follows: 72

87 We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance. (Emphasis added.) Ackner LJ, who delivered the principal judgment, had this to say about the undertaking:... in addition to the beneficiary making the demand, he must also inform the bank that he does so on the basis provided in the performance bond itself. This interpretation not only gives meaning and effect to the words 'in the event that the supplier fails...' which otherwise would be mere surplusage, but it in no way imposes an extravagant demand upon the bank. Our attention was also drawn to the case of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149, where the then Supreme Court in interpreting a performance bond that was before it, held:...[it] was... a pure on demand guarantee, and all that was required to trigger it was a demand in writing. It would not be dependent or conditional on the production of a document, eg a certificate from some nominated independent person like an architect as in some building contracts, etc. Neither was it worded to make it conditional for Bank Bumiputra, the issuer of the performance bond, to inquire into the existence or otherwise of any breach of any contractual obligation between the beneficiary of the bond, ie the buyer in this case and the seller; at the behest of the latter itself, the performance bond was issued. 73

88 The undertaking to pay in Esso Petroleum's case simply reads as follows, '... we hereby unconditionally and irrevocably guarantee the payment to EPMI' and the mode of making a claim under such a guarantee was worded as follows: All claims, if any, in respect of or under this guarantee must be made in writing and received by us at any time on or before the expiry of this guarantee. 3.3 Comparative Analysis of the Law Cases From the analysis of the case laws, it seems that most of the judges referred to the surrounding five law cases which will be discussed below to interpret whether the wording of the performance bonds are conditional or unconditional 'on-demand' bonds. The cases together with the critical comments are now being elaborated. The first and mostly referred to be Easal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank NA [1985] 67. This case gives the conclusion that there are three possible meanings for the words used in the performance bond. The first is that no more a written demand is required. The second is the demand must assert a failure to perform the contract. Lastly, there must in fact have been a failure to perform. However, most of the judge rejected the third solution. This was reflected in that part of the speech by Ackner LJ, which stated: 67 [1985] 2 AC

89 If the performance bound was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could safely be made by the bank except on a judgement of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely, to enable the beneficiary to obtain prompt and certain payment. The second case is the Malaysian case of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 68. However, after analyzing the judgment, it is seen that Peh Swee Chin FCJ in interpreting the words of the performance bond, referred to the case of IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 69. It is the third most referred law case for judgment. In IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 70, Staughton LJ made a conclusion that there was a bias or presumption in favour of the construction that performance bond was to be conditioned upon documents rather than facts. This statement is to be compared with the next case which is the fourth most referred case. The fourth case is also the famous Malaysian case of Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 71. This case held that a performance bond was a conditional bond because the bond began with the words 'if the subcontractor shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay '. However, this is the only Malaysian case that the court held the performance bond to be a conditional bond when similar wordings had been used in other Malaysian performance bond [1995] 1 MLJ 149 [1990] 2 Lloyd's Rep 296 ibid [1995] 3 MLJ

90 Last but not least, the case of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 72. This case stressed the general nature of a performance bond that a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud. However, attention should be given as to what Steve Shin J held in Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1999] 73. He made quite good critics as to the wordings of the performance bond. He said that: In my view, the words used in the bank guarantee are sufficiently clear. On a proper reading of the whole paragraph cited above, they must reasonably be construed to mean that the bank (second defendant) would be liable to release the monies to the plaintiff immediately only upon the following 'conditions' namely: (1) that the demand is in writing; and (2) the contractor fails to execute the works and/or in breach of the contract. In this context it is significant to consider the nature and effect of the 'conditions' above. As regards the 'condition' for the demand to be made in writing, it has been said that such a 'condition' is merely to regulate the right to call on the guarantee and is therefore purely a procedural matter. It does not render a [1978] 1 QB 159 [1999] 4 MLJ

91 guarantee conditional in the true sense (see Bocotra Construction Pte Ltd v A-G (No 2) [1995] 2 SLR 733 (CA). I am prepared to adopt that as a correct statement of law. That being the position, the requirement to make the demand in writing in this case does not render the bank guarantee conditional in the real sense. In considering the second 'condition', ie in the event the contractor fails to execute the works and/or in breach of the contract, I think it pertinent to cite the English case of Esal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank NA [1985] 2 AC 546 to see how the Court of Appeal in that case dealt with a performance bond which, in effect and in substance, is similar to the bank guarantee in our case. In that case, the bond provided as follows: We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance... It was held that there were three possible meanings for the words used: (i) that no more than a written demand was required; (ii) that the demand must assert a failure to perform the contract; or (iii) that there must in fact have been a failure to perform. The Court of Appeal unanimously rejected the third solution. This was reflected in that part of the speech by Ackner LJ, which stated: If the performance bound was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of 77

92 the contract of sale, payment could safely be made by the bank except on a judgement of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely, to enable the beneficiary to obtain prompt and certain payment. Kamalanathan Ratnam JC in Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998] 74 also made quite interesting statements towards the meaning of the words in the performance bond. He said that: Clause 2(i) of the performance bond in the instant case reads: If the contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder, then the guarantor will indemnify and pay the principal.... The said cl 2(i) is virtually identical to the one used in Teknik Cekap and is similar to the one used in Esal (Commodities). As such, I hold that cl 2(i) of the instant case renders the performance bond an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been a breach of contract. Lastly, to be an undisputed meaning of the words in the performance bond, the performance bond itself should be either purely conditional or purely unconditional 'ondemand' bond. The best examples for this are in the cases of Esso Petroleum Malaysia 74 [1998] 5 MLJ

93 Inc v Kago Petroleum Sdn Bhd [1995] 75 and IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 76 which respectively as follows:... we hereby unconditionally and irrevocably guarantee the payment to EPMI We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the abovenamed principal. 3.4 Summary The held of fifteen law cases had been cited to differentiate the conditionality of the performance bond by its wordings. Some of the cases held that the performance bonds were conditional performance bond and some of them held the performance bond to be unconditional 'on-demand' performance bond. However, some interesting conclusion can be made from the words in the performance bond. Easal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank NA [1985] 77 gives the conclusion that there are three possible meanings for the words used in the performance bond, i.e. no more a written demand is required; the demand must assert a failure to perform the contract; and there must in fact have been a failure to perform. However, most of the judge rejected the last possible meaning of the words used [1995] 1 MLJ 149 [1990] 2 Lloyd's Rep 296 [1985] 2 AC

94 In interpreting the words of the performance bond, Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 78 referred the case of IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 79, which a conclusion can be made that there was a bias or presumption in favour of the construction that performance bond was to be conditioned upon documents rather than facts. Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 80 held that because the performance bond because the bond began with the words 'if the subcontractor shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay ', the bond was a conditional bond. Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 81 stressed the general nature of a performance bond that a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud. Steve Shin J in Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1999] 82 made quite good critics as to the wordings of the performance bond. He said that there are two 'conditions' that the bank must adhere to. The first is that the demand is in writing. It has been said that such a 'condition' is merely to regulate the right to call on the guarantee and is therefore purely a procedural matter. It does not render a guarantee conditional in the true sense. The second is that the contractor fails to execute the works and/or in breach of the contract. Three possible meanings for the words used: [1995] 1 MLJ 149 [1990] 2 Lloyd's Rep 296 [1995] 3 MLJ 449 [1978] 1 QB 159 [1999] 4 MLJ

95 (i) that no more than a written demand was required; (ii) that the demand must assert a failure to perform the contract; or (iii) that there must in fact have been a failure to perform. Most of the courts unanimously rejected the third solution. Kamalanathan Ratnam JC in Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998] 83 also made quite interesting statements towards the meaning of the words in the performance bond. He said that the wordings of 'If the contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder, then the guarantor will indemnify and pay the principal...' renders the performance bond to be an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been a breach of contract. Lastly, to be an undisputed meaning of the words in the performance bond, the performance bond itself should be either purely conditional or purely unconditional 'ondemand' bond. The best examples for this are in the cases of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 84 and IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 85 which respectively as follows:... we hereby unconditionally and irrevocably guarantee the payment to EPMI We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the abovenamed principal [1998] 5 MLJ 233 [1995] 1 MLJ 149 [1990] 2 Lloyd's Rep

96 Performance Bond: Conditional or Unconditional CONCLUSION AND RECOMMENDATION

97 CHAPTER 4 CONCLUSION AND RECOMMENDATION 4.1 Introduction As discussed under Chapter 1, a performance bond is a bond giving security for the carrying out of a contract, where a bond is a deed by which one person (the obligator) commits himself to another (the obligee) to do something or refrain from doing something. 86 In construction contracts, a performance bond is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor s default, repudiation or insolvency. 87 In Malaysia, most of the need of a performance bond is made through an agreement between the Government, the contractor and a third party (usually a bank or insurance company), whereby the third party agrees to pay a sum of money to the Government, in the event of non-performance of the construction contract by the contractor. 88 It is provided in Clause 37(a) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Elizabeth A. Martin (2003), p.53 Nigel M. Robinson et. al. (1996), p.205 Khairuddin Abdul Rashid (2004), p. 5 82

98 Contract that the Contractor shall either deposit with the Government a performance bond in cash or alternatively by way of a Treasury's Deposit or Banker's Draft or approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a condition precedent to the commencement of work. In other words, the Contractor is not permitted to carry out any work under the Contract unless and until the performance bond is given. The failure of the Contractor to give the performance bond may amount to a fundamental breach of contract entitling the Government to discharge the Contract and sue the Contractor for damages accordingly. 89 The validity period of the performance bond is as indicated in Figure 1.2 below. By clause 37(b), the performance bond is required to be maintained for such period as provided in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability Period stated in the Contract calculated from the date of completion of the Works or any authorized extension thereto or if the contract is determined, until one year after the date of determination. 90 There are two types of performance bonds, as set out below. 91 Conditional bond or default bond. A default bond is a contract of guarantee whereby the surety accepts joint and several responsibility for the performance of the contractor s obligations under the building contract: the contractor remains primarily liable for his performance and not protected by the bond. Unconditional bond or on-demand bond. An on-demand bond is a covenant by the surety (usually a bank) to indemnify the employer following contractor s Lim Chong Fong (2004), p. 76 ibid, p. 77 Nigel M. Robinson et. al. (1996), p. 205 but under on-demand bond in Malaysia, subject to stated terms and up to a sum commonly 5% of the main contract sum. 83

99 default, subject to stated terms and up to a sum commonly between 10 and 20% of the main contract sum. The contractor is not a party to this arrangement. Thus, in order to determine the types of performance bond applicable in a contract, a thorough understanding of the content of the bond is required. The Court of Appeal in the famous Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 92 held that: Therefore a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need only to look at the written bond itself to determine what are the terms and conditions agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself. Therefore, after discuss on the literature part and examining by case analysis of this study at previous chapter, now, this chapter will conclude the study and give some recommendation for future study. The objective of the study is to determine the phrase(s) in the Performance Bond in a construction contract that determine whether the performance bond is a conditional or an unconditional on demand guarantee. 4.2 Conclusion As discussed under Chapter 2, historically, Lord Denning MR said in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 93 interpret performance bond by saying that: [1995] 3 MLJ 449 [1978] QB 159, [1978] 1 All ER 976, [1977] 3 WLR 764, [1978] 1 Lloyd's Rep 166, 6 Build LR 1, 10 Legal Decisions Affecting Bankers 50 84

100 A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. However, Rekhraj J in the case of Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor [1998] 94 stated that the purpose of performance bond is as follows: It is to be understood that the purpose of the performance bond in the construction industry is to perform the role of an effective safeguards against non-performance, inadequate performance or delayed performance and its production provides a security as readily available to be realized, when the prescribed event occurs, viz a viz simply failing to complete the work which had been contracted to carry out. In addition, Mohamed Dzaiddin FCJ in delivering the grounds of judgment of the court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996] 95 said: A bank guarantee is a performance bond. 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 principal and the beneficiary sustaining loss as a result of such breach. The guarantor's liability will therefore arise as a [1998] 7 MLJ 105 [1996] 2 MLJ

101 result of the principal's default. 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 him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in performance of the principal contract. The Malaysian Supreme Court approved the IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990] 96 judgment in constructing a performance bond. Peh Swee Chin FCJ in delivering the grounds of judgment of the court in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 97 said that: That the real issue of a performance bond is one of contractual interpretation was the unanimous view of three judges in the Court of Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write an essay on performance bonds, in the instant appeal, except to repeat that it 'involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties' -- per Sir Denys Buckley in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503; (1991) 51 BLR 1 at p 15. Therefore, Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 98 said: Therefore a performance bond is nothing more than a written guarantee, and in order to interpret the obligations of the bank, one need only to look at the written bond itself to determine what are the terms and conditions [1990] 2 Lloyd's Rep 496, SI Build LR 1 [1995] 1 MLJ 149 [1995] 3 MLJ

102 agreed upon between the parties. A great deal, therefore, depends on the wording of the bond itself. As discussed further in Chapter 3, the held of fifteen law cases had been cited to differentiate the conditionality of the performance bond by its wordings. Some of the cases held that the performance bonds were conditional performance bond and some of them held the performance bond to be unconditional 'on-demand' performance bond. However, some interesting conclusion can be made from the words in the performance bond. In Easal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank NA [1985] 99, the judge stated that the words used in the performance bond can be of three possible meanings, i.e. no more a written demand is required; the demand must assert a failure to perform the contract; and there must in fact have been a failure to perform. However, most of the judgment made rejected the last meaning. Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 100 in interpreting the words of the performance bond, referred to the case of IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 101, which made a conclusion that there was a bias or presumption in favour of the construction that performance bond was to be conditioned upon documents rather than facts. Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 102 held that a performance bond was a conditional bond because the bond began with the words 'if the subcontractor 99 [1985] 2 AC [1995] 1 MLJ [1990] 2 Lloyd's Rep [1995] 3 MLJ

103 shall in any respect fail to execute the contract or commit any breach of his obligations thereunder then the guarantor shall pay '. Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 103 stressed the general nature of a performance bond that a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud. Quite good critics as to the wording of the performance bond were made by Steve Shin J in Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1999] 104. He stated that the bank must adhere to two 'conditions'. Firstly, the demand is in writing. Such a 'condition' has been said to be merely to regulate the right to call on the guarantee. Therefore, it is purely a procedural matter and does not render a guarantee conditional in the true sense. Secondly, the contractor fails to execute the works and/or in breach of the contract. This gives three possible meanings for the words used: (i) that no more than a written demand was required; (ii) that the demand must assert a failure to perform the contract; or (iii) that there must in fact have been a failure to perform. Most of the courts unanimously rejected the third solution. Kamalanathan Ratnam JC also made quite interesting statements towards the meaning of the words in the performance bond in Ramal Properties Sdn Bhd v East West- Umi Insurance Sdn Bhd [1998] 105, by stating that the wordings of 'If the contractor... shall in any respect fail to execute the contract or commit any breach of his obligations thereunder, then the guarantor will indemnify and pay the principal...' renders the 103 [1978] 1 QB [1999] 4 MLJ [1998] 5 MLJ

104 performance bond to be an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been a breach of contract. Lastly, to be an undisputed meaning of the words in the performance bond, the performance bond itself should be either purely conditional or purely unconditional 'ondemand' bond. The best examples for this are in the cases of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 106 and IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 107 which respectively as follows:... we hereby unconditionally and irrevocably guarantee the payment to EPMI We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the abovenamed principal. 4.3 Recommendations After discussing on the interpretation on application of injunction relief in performance bond, the author notice that very careful choice of words should be adopted by the constructor of a performance bond so that a clear understanding of its conditionality can be achieved and undisputable. Therefore, the author makes the following possible suggestion on the choice of words which could carry the meanings of the performance bond to be conditional or unconditional 'on-demand' bond: 106 [1995] 1 MLJ [1990] 2 Lloyd's Rep

105 The choice of words again should be an undisputed meaning of the words in the performance bond. This should indicate whether the performance bond itself is either be purely conditional or purely unconditional 'on-demand' bond. The best examples for this are in the cases of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 108 and IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990] 109 which respectively as follows:... we hereby unconditionally and irrevocably guarantee the payment to EPMI We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the abovenamed principal. 108 [1995] 1 MLJ [1990] 2 Lloyd's Rep

106 REFERENCES Chow Kok Fong (2004), Law and Practice of Construction Contracts, 3 rd Edition, Sweet & Maxwell Asia, Singapore. Elizabeth A. Martin (2003), A Dictionary of Law, 5 th Edition reissued with new covers, Oxford University Press, Oxford. Jabatan Kerja Raya (1988), A Guide on the Administration of Public Works Contracts, Ibu Pejabat JKR Malaysia. Jamaluddin Yaakob (2005), Performance Bond in Construction Contract: Problems with Drafting & Calling the Bonds, Seminar paper, Issues on Non-Performance of Construction Contract, UTM, Skudai, Johor. John Murdoch and Will Hughes (2000), Construction Contracts Law and Management, 3 rd Edition, Spon Press, London. Khairuddin Abdul Rashid (2004), Guarantee Against Non-Performance of Construction Contract by the Contractor: Performance Guarantee Sum versus Performance Bond, Seminar, 1 st International Conference, Toronto Canada, May May , World of Construction Project Management. 91

107 Lim Chong Fong (2004), The Malaysian PWD Form of Construction Contract, Sweet & Maxwell Asia, Petaling Jaya. Nigel M. Robinson, Anthony P. Lavers, George Tan Keok Heng & Raymond Chan (1996), Construction Law in Singapore and Malaysia, Second Edition, Butterworths Asia, Singapore. Nur'Ain Ismail (2007), Performance Bond and An Injunction, Master's Project Report (Dissertation), Universiti Teknologi Malaysia. P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the Contract. S Radhakrihnan (1999), Legal Aspects of Insurance for Engineering Projects, Article, [1999] 1 MLJ cxxx; [1999] 1 MLJA

108 BIBILOGRAPHY I. N. Duncan Wallace Q. C. (1995), Hudson s Building and Engineering Contracts, 11 th Edition, Volume 1, Sweet & Maxwell, London. I. N. Duncan Wallace Q. C. (1995), Hudson s Building and Engineering Contracts, 11 th Edition, Volume 2, Sweet & Maxwell, London. I. N. Duncan Wallace Q. C. (2004), Hudson s Building and Engineering Contracts, 11 th Edition, 1 st Supplement, Sweet & Maxwell, London. Ir Harbans Singh KS (2002), Engineering and Construction Contracts Management Law and Principles, LexisNexis, Kuala Lumpur. Ir Harbans Singh KS (2002), Engineering and Construction Contracts Management Pre-Contract Award Practice, LexisNexis, Kuala Lumpur. Ir Harbans Singh KS (2002), Engineering and Construction Contracts Management Commencement and Administration, LexisNexis, Kuala Lumpur. Ir Harbans Singh KS (2003), Engineering and Construction Contracts Management Post-Commencement Practice, LexisNexis, Kuala Lumpur. John Uff (2002), Construction Law, 8 th Edition, Sweet & Maxwell, London. 93

109 Malaysian Treasury (1997), ArahanPerbendaharaan, Instruction No 200.2, Kuala Lumpur. Malaysian Treasury (1999), Surat Pekeliling Perbendaharaan Bil. 2/1995 and Tambahan Kedua Surat Pekeliling Perbendaharaan Bil. 2/1995, August P. A. M Agreement and Conditions of Building Contract Private Edition with Quantities. Rajendra Navaratnam (2004), Recent Legal Developments In The Construction Industry In Malaysia, Seminar, International Construction Conference 2004 (In Conjunction With MALBEX & ICW 2004), CIOB Malaysia & MBAM. Sinha & Dheeraj, Legal Dictionary, International Law Books Services, Kuala Lumpur. Stephen Furst and Vivian Ramsey (2001), Keating on Building Contracts, 7 th Edition, Sweet & Maxwell, London. Sundra Rajoo (1999), The Malaysian Standard Form of Building Contract (The PAM 1998 Form), Second Edition, Malayan Law Journal, Kuala Lumpur. Tracey Summerell (1998), Who is Entitled to the Retention Fund?, Articles and Journals, Masons, June