Kejuruteraan Bintai Kidenko Sdn Bhd

v.
842 Nam Fatt Construction Sdn Bhd & Anor [2010] 18 MLRH

KEJURUTERAAN BINTAI KIDENKO SDN BHD

v.
NAM FATT CONSTRUCTION SDN BHD & ANOR

High Court Malaya, Kuala Lumpur

Mohamad Ariff Md Yusof J
[Suit No: 22 Ncc-199-2010]
9 December 2010

JUDGMENT

Mohamad Ariff Md Yusof J:

Introduction

This is an application for an interlocutory injunction to restrain the 1st Defendant from
receiving the proceeds from two Performance Guarantees upon which two calls had
been made by the 1st Defendant. The 2nd Defendant is the Guarantor Bank, which has,
through its counsel, indicated that it will abide by any order that this Court makes in
relation to this matter.

The Plaintiff is a sub-contractor to the 1st Defendant, the main contractor for a project
for the construction of the Integrated Customs, Immigration and Quarantine Complex in
Johor Bahru. The employer is a company called Gerbang Perdana Sdn Bhd (GPSB),
with JKR as the project owner.

The Plaintiff is one of several sub-contractors for the Project for two components,
namely the electrical and mechanical works which have a total contract value of RM100
million made up of RM54 million (for the mechanical portion) and RM46 million (for
the electrical portion). The revised contract sum for the entire project is
RM577,582,886.44. This appears from Exhibit LKC - 8 to the Affidavit in Reply filed
by the 1st Defendant (Enclosure 20), ie, the Contractor's Certificate of Payment dated
31 December 2009. By that Certificate, a sum of RM1,251,964.49 is certified as now
due to the contractor. The sum now certified as due has taken into account numerous
deductions for non-compliance and failure to perform obligations under the contract,
including deductions for non-compliance and damages due to non-completion attributed
to the Plaintiff for the M & E portions of the works.

Significant delays have occurred in the completion of the project which should have
been completed by 13 September 2005, but according to the Plaintiff the works have
been completed and a Certificate of Practical Completion (CPC) has been issued by
JKR on 8 September 2007 and backdated to be effective from 31 May 2007.
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The Plaintiff's Contention

According to the Plaintiff, the employer has also issued a Certificate of Non-
Completion dated 1 June 2007 to the 1st Defendant, and this, according to the Plaintiff,
was issued mala fide.

It is the contention of the Plaintiff that the conduct of the 1st Defendant is
unconscionable as it has failed to either assess or claim for the monies due and owing to
the Plaintiff and thereby is in willful disregard of its contractual obligations to the
Plaintiff. The Plaintiff goes so far as to argue that the 1st Defendant as contractor and
the employer have sought to "engineer a situation to avoid making payment of the sums
due and owing to the Plaintiff." Although the CMC was issued allegedly mala fides, the
1st Defendant has to date refused to challenge the issuance of the document. Instead, the
1st Defendant is demanding for the sums guaranteed by the two Performance
Guarantees, and in this regard is acting unconscionably for the following reasons:

1. The 1st Defendant has failed to take steps to pursue the Plaintiff's claims for
prolongation costs, variations and other claims.

2. It is also failed to take steps to pursue the Plaintiff's claim for additional time and
costs.

3. In complete and total disregard of its contractual obligations, the 1st Defendant
has failed to properly assess the Plaintiff's claim for additional time and cost.

4. The 1st Defendant has failed to properly assess the back charges imposed by the
employer.

5. For the electrical contract portion, the final draft account prepared by the
employer illustrates very clearly the Plaintiff is owed monies.

As regards the fifth ground stated above, see Exhibit A-21 to the Plaintiff's Affidavit in
Support, where the sum of RM130,665.44 is certified as a final amount due to the
contractor, including retention sum. The sum is in respect of package No. CIQ 06 where
the nominated subcontractor is named as the Plaintiff.

It has, however, to be stated that for the mechanical works portion, the relevant
statement of final account is certified as showing a negative final amount to the tune of
RM4,963, 554.61.

The Plaintiff supports this application for injunction, inter alia, on the following basis:

"The Plaintiff filed this application for an injunction as it was anticipated that the
1st Defendant will be making a demand of the said Performance Guarantees. The
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1st Defendant together with the GPSB was contending that the amount due and
owing from the Plaintiff was approximately RM4.96 million. The sum is close to
the guarantee sum (RM2.7 million and RM2.3 million. As such, the 1st Defendant
together with the GPSB was engineering a situation to enable them to make on
demand on the Performance Guarantees."

The Performance Guarantees

Both Performance Guarantees (Bank Guarantee No. TF 001G9019204 RM2.7 million
and Bank Guarantee No. TF 001G9019184 RM2.3 million in respect of the mechanical
works package and electrical works package respectively) are dated 18th February 2004
with the validity period ending 30th of September 2008. The expiry date of the
Guarantees was subsequently extended to 31st May 2010, with the last date for
presentation of claims as 28th of June 2010.

The critical parts of both Guarantees read as follows:

"1) On the Guarantor's receipt of the contractor's first written demand, the
Guarantor shall forthwith pay to the contractor the amount specified in such
demand notwithstanding any contestation or protest by the nominated subcontractor
or Guarantor or by any other third party and without proof or conditions.

Provided always a total of all demands so made shall not exceed the sum of (RM
2.7 million and RM2.3 million respectively) (Guaranteed Sum) and the total
amount recoverable against the Guarantor under this agreement shall not exceed the
Guaranteed Sum."

Prima facie, and on its wording as disclosed above, both Performance Guarantees
appear to be couched as an unconditional on demand Guarantees. As clearly stated, the
Guarantor shall forthwith pay to the contractor the amount demanded "without proof or
conditions".

These Performance Bonds have been issued pursuant to Clause 24 of the subcontract
whereby the nominated subcontractor shall as a condition precedent to the
commencement of work under the subcontract deposit to the contractor a Performance
Bond either in cash or in the form of an approved Bank Guarantee equal to 5% of the
subcontract sum for the due observance and performance of the subcontract. It is
provided further that if the nominated subcontractor feels that the subcontractor or
commits a breach of its obligations under the subcontract the contractor may utilise and
make payments out of, or deductions from, the said Performance Bond "provided that
the contractor shall not be entitled to utilise such Performance Bond unless the
employer shall have issued to the contractor (with a duplicate copy to the nominated
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subcontractor) a certificate in writing stating in his opinion that the nominated

subcontractor has been in default ..." This proviso appears in Clause 24(c).

The Defendant's Contention

It is strongly advanced for the Defendant that the two Performance Guarantees are
unconditional and an "on demand" Guarantees, and as such the court should not be
concerned with the contractual issues between the parties, namely the court should not
be concerned with any dispute relating to the underlying contract. Further, counsel for
the Defendant urged upon this court that the only exception allowed for court
intervention to stop any payment on the on demand Guarantee is fraud - the so-called
"fraud exception". Addressing the issues of default and the Plaintiff's contention that
any demand made by the 1st Defendant on the Performance Guarantees would be
"unconscionable, fraudulent and wrong in law", the allegations of the Plaintiff were
strongly denied, with the 1st Defendant taking the stand that the Plaintiff itself had
failed to observe and perform the subcontracts, and had itself committed breach of its
obligations under the subcontracts. The 1st Defendant cited numerous breaches such as
bad workmanship and outstanding works of the Plaintiff hampering interfacing works of
other contractors, failure to carry out in complete all outstanding works before the
deadline set for the completion of handing over of the ICIQ building, failure to provide
adequate manpower to carry out the contractual obligations, delaying M & E installation
works and other remedial rectification works, incomplete underfloor trunking works
which had halted the commencement/completion of the ICT installation component,
untrue reporting by the Plaintiff on the progress of the subcontract works, and
incomplete M & E scope of works. The 1st Defendant also further argued that in view
of the Plaintiff's numerous default in carrying out some of the contract works, the
employer had to engage third-party contractors and in so doing charged the cost and
expenses incurred to the 1st Defendant. In some cases, the 1st Defendant itself had to
carry out these rectification works arising from the failure by the Plaintiff to carry out
its obligations. Further, the 1st Defendant argued that the issues and disputes raised by
the Plaintiff are in fact allegations which mainly concerned the employer. Arguing that
the principles of law governing unconditional or on demand Performance Bonds are
"well settled", counsel for the 1st Defendant succinctly enumerated these governing
principles. To do justice to counsel's diligence and detailed analysis of the case
authorities, I quote below the statements of principles as argued before me with
necessary revisions:

(i) Where a Performance Bond is an "unconditional" or "on demand" Bond on its

true construction, such Bond is independent of any underlying contract between the
parties. Therefore, it is not open to the judge to enquire into any breach of such an
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underlying contract. Counsel cites the Supreme Court in Esso Petroleum Malaysia
Inc v. Kago Petroleum Sdn Bhd [1994] 1 MLRA 446; [1995] 1 MLJ 149; [1995] 1
CLJ 283.

(ii) A Bank Guarantee (or Performance Bond) is a distinct document from the
building contract. The Bank Guarantee is an agreement between the beneficiary and
the provider of the Bond. The building contract therefore forms no part of the Bank
Guarantee nor incorporated into it. Karya Legenda Sdn Bhd v. Kejuruteraan Bintai
Kindenko Sdn Bhd & Another [2007] 2 MLRA 251; [2007] 6 MLJ 72; [2007] 6 CLJ
18; Cygal Berhad v. Bandar Subang Sdn Bhd [2004] 2 MLRA 741; [2004] 3 CLJ
67; [2004] 4 AMR 252.

(iii) All that is required to trigger an "on demand bond" is a demand in writing.
Esso Petroleum Malaysia Inc v. Kago Petroleum Sdn Bhd [1994] 1 MLRA 446;
[1995] 1 MLJ 149; [1995] 1 CLJ 283.

(iv) Where Bank Guarantee is an unconditional and an "on demand" Bank

Guarantee, there is no necessity for the demand letter to expressly assert that the
Defendant has failed to perform or breached the underlying contract. Karya
Legenda, supra, and Hisniaga Jaya Sdn Bhd v. Dua Masa Construction Sdn Bhd &
Another [2008] 8 MLRH 514.

(v) The dispute as to which party was at fault is for the parties to resolve through
litigation or arbitration. The issuer of the Bond has no choice but to pay the amount
demanded as the beneficiary is entitled to be paid not under the terms of the
underlying contract but under the terms of the Performance Bond. LEC Contractors
(M) Sdn Bhd v. Castle Inn Sdn Bhd & Another [2000] 1 MLRA 365; [2000] 3 MLJ
339; [2000] 3 CLJ 473; [2000] 3 AMR 2625.

(vi) As an unconditional on demand Performance Bond is equated to an irrevocable

letter of credit, the court will not disturb the established mercantile practice of
treating the right of the beneficiary to payment forthwith as equivalent to cash in
hand. LEC Contractors, supra.

(vii) Where the Bank Guarantee is an unconditional or an "on demand" guarantee,

the beneficiary is entitled to immediate payment before the underlying dispute is
determined either by trial or arbitration, and the court will not attribute an intention
contrary to the plain meaning of the words. Lotteworld Engineering & Construction
Sdn Bhd v. Castle Inn Sdn Bhd & Another [1998] 6 MLRH 834; [1998] 7 MLJ 105.

(viii) If a dispute is a referred to arbitration pursuant to an underlying contract, the

payment of the monies guaranteed cannot be stayed pending the arbitration.
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Syarikat Perumahan Pegawai Kerajaan Sdn Bhd v. Bank Bumiputra Malaysia Bhd
[1990] 2 MLRH 239; [1991] 2 MLJ 565; [1990] 3 CLJ (Rep) 159; [1990] 2 CLJ
1052.

(ix) The Bank can only be restrained from making payment under a Performance
Bond if and only if there is fraud of which the Bank has notice. Esso Petroleum
Malaysia Inc v. Kago Petroleum Sdn Bhd, supra.

(x) The fraud must be on the Performance Bond itself and not the other documents.
Patel Holdings Sdn Bhd v. Estet Pekebun Kecil & Another [1988] 2 MLRH 44;
[1989] 1 MLJ 190; [1989] 2 CLJ (Rep) 215; [1989] 1 CLJ 229.

(xi) There must be clear evidence of fraud in order to justify the grant of an
injunction to stop the Bank from making payment on the Performance Bond, and
mere allegations of fraud would not suffice, nor would bad faith or unconscionable
conduct constitute fraud. LEC Contractors, supra.

(xii) In providing the Performance Bond, it would have to be assumed that the
provider or account party was aware that the Guarantor would have to pay out even
in the face of any contestation or protest in respect of the underlying contract. In
such an event, the remedy will be to sue for damages under the underlying contract.
If the provider succeeds in its action, the fact that the beneficiary has drawn on the
Performance Bond can and will be taken into account the court in assessing
damages. Hemis Interco BV Sdn Bhd v. Syarikat Pembinaan Hashbudin (M) Sdn
Bhd [1985] 1 MLRH 454; [1986] 1 MLJ 245; [1986] CLJ (Rep) 365; [1986] 1 CLJ
562.

In relation to the distinction between conditional and unconditional Bonds, and the
supporting policy considerations, I had occasion to analyse this area in Focal Asia Sdn
Bhd & Anor v. Raja Noraini Raja Datuk Nong Chik & Anor [2009] 11 MLRH 9, and I
wish to refer and adopt the same here:

"The law on what constitutes an unconditional Bond or Guarantee has been

extensively analysed and stated by the Federal Court in China Airlines Ltd v.
Maltran Air Corporation Sdn Bhd [1996] 1 MLRA 260; [1996] 2 MLJ 517; [1996]
3 CLJ 163; [1996] 1 AMR 2233 and Kerajaan Malaysian v. South-East Asia
Insurance Bhd [2000] 1 MLRA 445; [2000] 3 MLJ 625; [2000] 3 CLJ 705; [2000]
1 AMR 355. I wish to add in this connection that the cases do not place much
emphasis on the terminology used, whether it be "bond" or "guarantee". Both are
interchangeable.
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The Federal Court in China Airlines Ltd drew a distinction between two types of
Performance Bond: a conditional Performance Bond and an unconditional or "on
demand" Performance Bond. As for a conditional Performance Bond, the Federal
Court held that it is a 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" (at page of the report). The unconditional or "on
demand" Performance Bond, on the other hand, refers to a Bond "which is so
drafted that the Guarantor becomes liable merely when a demand is made upon him
by the beneficiary with no necessity for the beneficiary to prove any default on the
part of the principal in the performance of the principal contract" (at page of the
report).

Whether a Bond is unconditional/"on demand" Bond for a conditional one, is a matter

essentially of construction and identifying the intention of the parties in a commercial
setting. It is useful in this collection to be reminded of Lord Denning's statements in
Attica Sea Carriers Corporation v. Ferrostaal Poseidon Bulk Reederai GMBH [1976] 1
Llyod's Rep 250, (at p 5):

"The parties can, by clear words, provided that complete performance of the
particular stipulation can be a condition precedent: but, in the absence of clear
words, the court looks to see which of the rival interpretations give the more
reasonable result ... the fact that a particular construction leads to a very
unreasonable result must be a relevant consideration. The more unreasonable the
result, the more unlikely it is that the parties can have intended it, and if they do
intend it, the more necessary it is that they shall make that intention abundantly
clear." (quoting in part Lord Reid in Wickman v. Schuler [1974] AC 235)

See also Esso Petroleum Malaysia v. Kago Petroleum [1994] 1 MLRA 446; [1995]
1 MLJ 149; [1995] 1 CLJ 283. The underlying purpose of a Performance Bond is to
provide security which is to be readily, promptly and assuredly realizable when the
prescribed event occurs: (Esal (Commodities) v. Oriental Credit [1985] Llyod's
Law Rep 496). In this commercial setting it will be unreasonable to require liability
to be dependent on a finding of fact that the principal has been in breach of
contract. Whether there has been a breach of the principal contract is a matter to be
decided between the immediate parties, which may very well be an outcome to be
decided after litigation. As between the beneficiary of the Bond/Guarantee, which
is unconditional on its wording, and the bank/insurance company issuing the Bond
on Guarantee, the contractual intent has to be that the beneficiary has the right to
demand payment merely by calling on the Bond or Guarantee without needing to
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prove breach. It may, however, be necessary to refer to the breach in the demand. In
short, it depends on the wording of the particular Bond or Guarantee.

This narrow view of the law applies most clearly in the context of international
trade transactions and letters of credit.

Nevertheless, the view taken in English law tends to merge both letters of credit
and Performance Bonds/Guarantees as a group which is subject to the same legal
treatment. This position is acknowledged in, for example, the English Court of
Appeal decision in Edward Owen Engineering Ltd. v. Barclays Bank International
Ltd and Another [1978] 1 QB 159, where Lord Denning M.R. stated:

"... [a] 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 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
where there is clear fraud on which the bank has notice." (at page 171 of the
Report)

Performance Guarantees are taken to be virtually promissory notes payable on

demand. The only exception to this principle is the so-called "obvious fraud to the
knowledge of the bank" exception: see page 169 of Edward Owen. Also, on the
same page, this passage appears in the judgment:

"... there is this exception to the strict rule: the Bank ought not to pay if it
knows that the documents are forged or that the request for payment is made
fraudulently in circumstances where there is no right to payment."

The locus classicus on international trade law, Schmitthoff's Export Trade: The
Law and Practice of International Trade (11th Ed, 2007) includes a relevant
commentary on this point:

"A Bank Guarantee is normally an absolute undertaking by the Bank to pay if

the conditions for payment are satisfied. A confusing terminology has arisen to
describe these undertakings. In practice, demand Guarantee, Performance
Bonds and standby letters of credit have a similar legal character and resemble
documentary credits in that they are primary in form, and generally conditional
upon presentation of a written demand for payment together with any other
stipulated documents. The issuing Bank is not concerned as to whether there
has been any actual default by the principal.
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Many considerations which apply to documentary credits likewise apply to the

Bank Guarantee. In particular, the principles of the autonomy of the bank's
undertaking and the strict compliance with the conditions stated in the bank's
instructions (mandate) apply mutatis mutandis to Bank Guarantees as well." (at
pages 245 - 246)

The recognised principle is that of "autonomy" of the Bank Guarantee which is

separate from the underlying contract."

The Issue of Unconscionability

The governing principles of law as outlined by counsel for the 1st Defendant, which I
have taken the liberty to restate above earlier, are of course borne out by the cases, but
some uncertainty remains as regards the place of the doctrine of unconscionability in the
area of Performance Bonds. This is most noticeable at the High Court level, where there
have to date been two different approaches taken on this issue. As far as the higher
courts are concerned, it would appear that there are views expressed which would seem
to be against any reception of the unconscionability doctrine to expand the "fraud
exception". The nearest authority to support this exclusionary approach would appear to
be LEC Contractors, supra, where it was stated:

"When a Performance Bond is found to be an on demand Bond then no injunction

could be obtained to stop the payment. There may be good grounds between the
parties for injunction to apply but they would not be good to injunct the bank as can
be seen in the case of Edward Owen where the injunction was set aside because the
guarantee was an on demand Performance Bond. The only exception is in case of
fraud which is brought to the notice of the Bank. ... Fraud must be specifically
pleaded and proved. Mere allegation is not sufficient ... (at page 2655 of the
Report)

First of all we wish to point out that the authorities we have referred above clearly
indicated that in order to justify any injunction to stop payment there must be clear
evidence of fraud on the part of the 1st Defendant which comes to the knowledge of
the 2nd Defendant. Bad faith or unconscionable conduct by itself is not fraud ..." (at
page 2657 of the Report) (Emphasis added)

Given these passages in the report of the case, it would appear that the issue of
unconscionable conduct was directly before the Court of Appeal. And it would also
appear that the Court of Appeal referred to and adopted the passages of Lord Denning in
Edward Owen which recognise only the fraud exception. On the facts of LEC
Contractors, the applicant had argued that the Respondent was guilty of
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fraud/unconscionable conduct in demanding payment under the Performance Bond by

its failure to disclose material facts, namely that the breach complained of was caused or
occasioned by it. It was also argued that attempt to obtain payment on the performance
bond without the dispute between the parties being determined by arbitration or
adjudication by the court, was made a bad faith and was an unconscionable conduct to
obtain unjust enrichment. I had occasion in Focal Asia, supra, which was a case
concerning an alleged fraud on the call of the Bank Guarantee, to state as well that the
ground of unconscionable conduct has sound commercial reasons in its support and in
this regard the approach taken by the Singapore courts, which have recognised and
applied unconscionable conduct as a separate ground to stop payment on a Performance
Bond or Guarantee, is one that should be applied in Malaysia, unless constrained by
higher authority. Having reevaluated and reconsidered the arguments and the decision in
LEC Contractors, I must say I am constrained by this decision of the Court of Appeal
such that in my view, despite the sound commercial reasons in favour of adopting the
unconscionable conduct ground, it is not as yet open to the High Court to depart from
the approach clearly expressed in LEC Contractors. There could however be situations
where fraud and unconscionable conduct can overlap, but the overriding ground has still
to be fraud which is brought to the notice of the Bank. To this extent, I share the same
view stated by Mohamed Hishammuddin J (as his Lordship then was) in Pasukhas
Construction Sdn Bhd & Anor v. MTM Millineum Holdings Sdn Bhd [2009] 1 MLRH
861; [2009] 8 MLJ 1; [2009] 6 CLJ 480. See also the latest decision of Lee Swee Seng
JC in Nam Fatt Corporation v. Petrodar Operating Co Ltd & CIMB Bank (L) Ltd
[2010] 1 MLRH 745; [2011] 7 MLJ 305; [2010] 9 CLJ 732 (Suit No. S-22-315-2010)
which adopts the same approach to the issue of fraud of which the Bank has notice
being the only ground permissible.

In relation to unconscionable conduct as a ground, the courts in Singapore have been at

the forefront of this development, and I take note that several recent High Court
decisions in Malaysia have cited these cases and some have even adopted these
persuasive authorities. See for instance Nafas Abadi Holdings v. Purajaya Holdings Sdn
Bhd (unreported), Satriadesa Corporation Sdn Bhd v. TNB [2009] 11 MLRH 130;
[2010] 4 CLJ 877, Radio & General Trading Co Sdn Bhd v. Wayss & Freytag [1997] 5
MLRH 303; [1998] 1 MLJ 346, and the more recent decisions of Verghese George JC
in TidalMarine Engineering Sdn Bhd v. Kerajaan Malaysia [2012] 5 MLRH 728;
[2012] 3 CLJ 385 (D-21 NCC-19-2010), MMN Bina Sdn Bhd v. Felda Properties Sdn
Bhd [2010] 2 MLRH 151; [2011] 2 CLJ 100 (D-24NCC-301-2010) and Sumatec
Engineering & Construction Sdn Bhd v. Malaysian Refining Company Sdn Bhd [2010]
4 MLRH 548 (D-22NCC-1123-2010).
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As far as the position in Singapore is concerned, the decision of the Court of Appeal
Singapore in GHL Pte Ltd v. Unitrack Building Construction Pte Ltd and Another
[1999] SGCA 60 is instructive and the several decisions of the Singapore courts are
analysed in this decision, with the Court of Appeal reaffirming the ground of
unconscionability as a separate ground additional to fraud. I feel it useful to quote some
revelant passages from this highly persuasive judgment:

"It should be noted that in Bocotra, this Court considered not only the English
authorities but the Singapore authorities as well: Royal Design Studio v. Chang
Development [1990] SLR 1116; Kvaerner Singapore Ltd v. DDL Shipbuilding
(Singapore) Ltd [1993] 3 SLR 350; and Chartered Electronics Pte Ltd v.
Development Bank of Singapore Ltd [1999] 4 SLR 655 ...

Royal Design Studio was decided on the ground of unconscionability, although the
word "unconscionability" was not expressly used there; but the circumstances in
which the injunction was continued were clearly those warranting the description of
unconscionability. Kvaerner Singapore was decided partly on the ground of
unconscionability and did not strictly follow the 'fraud' exception principle laid
down in the English cases. GP Selvam J said at p 353: The Defendants invoked the
principle in Edward Owen Engineering Ltd v. Barclays Bank International Ltd
[1978] QB 159 that except in cases of established fraud known to the issuer of the
Performance Guarantee he cannot be restrained from making payment on the
ground that the party to the underlying contract disputes liability. Later cases show
that it is not an immutable principle of universal application. And in my view it has
no application where the injunction is sought against a party to the underlying
contract who seeks to take advantage of the Performance Guarantee where by his
own volition he fails to perform a condition precedent in the sense I have described
...

Furthermore, a demand under the Performance Guarantee can be made only when
"the seller has failed or refused to fulfill his obligations under the contract". The
seller's failure or refusal is a condition precedent to the buyer making a demand. An
assertion to that effect is implied in a demand made by the buyer. In circumstances
where it can be said that the buyer had no honest belief that the seller has failed or
refused to perform his obligation, a demand by the Defendants/buyers in my view
is a dishonest act which would justify a restraint order ...

Fraud in the common law sense implies more than a mere absence of bona fides in
the claim. It implies an element of deceit on the part of the beneficiary, that is to
say, a case where the beneficiary presents a claim on the Performance Bond which
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he knows at the time to be invalid or false: GNK Contractors Ltd v. Lloyds Bank
Pic & Anor [1985] 30 Build LR 48, 63. This court in Bocotra did not overrule or
disapprove any of these local cases. At pp 744 - 776 of the judgment, after
expressly referring to the English cases and the local cases (except Chartered
Electronics) and also the obiter dictum of Everleigh LJ in Potton Homes v.
Coleman Contractors (Overseas) [1984] 28 Build LR 19, 28, the court came to the
concluding paragraph at p 776 which we have quoted above. Thereafter, the court
referred expressly to the ground of 'fraud or unconscionability' at pp 747 and 748,
which, again, we have quoted above. In our opinion, the court made a conscious
decision and advisedly used the words 'fraud or unconscionability ...

We agree that Performance Bonds are used frequently in the construction industry;
that they are provided by and to parties who deal at arm's length; that the use of
Performance Bonds has resulted in substantial benefits to the parties and also in
savings; that the courts should give effect to the intention of the parties; and that the
law in relation to Performance Bonds should be placed on "a clear and
unambiguous footing' so that they could be accepted by parties whether in
Singapore or abroad. But, with respect, these are not the points involved with which
we are concerned. We are concerned with abusive calls on the bonds. It should not
be forgotten that a Performance Bond can operate as an oppressive instrument, and
in the event that a beneficiary calls on the bond in circumstances, where there is
prima facie evidence of fraud or unconscionability, the court should step in to
intervene at the interlocutory stage until the whole of the circumstances of the case
has been investigated. It should also not be forgotten that a Performance Bond is
basically a security for the performance of the main contract, and as such we see no
reason, in principle, why it should be so sacrosanct and inviolate as not to be
subject to the court's intervention except on the ground of fraud. We agree that a
beneficiary under a Performance Bond should be protected as to the integrity of the
security he has in case of non-performance by the party on whose account the
Performance Bond was issued, but a temporary restraining order does not prejudice
or adversely affect the security; it merely postpones the realisation of the security
until the party concerned is given an opportunity to prove his case."

The concept of "unconscionability", as developed by the Singapore courts, involves

unfairness, as distinct from dishonesty or fraud, or conduct of a kind so reprehensible or
lacking in good faith that a court of conscience would either restrain the party or refuse
to assist the party. Mere breaches of contract would not by themselves be
unconscionable (Royal Design Studio). It concerns abusive calls on the Guarantees or
 Kejuruteraan Bintai Kidenko Sdn Bhd
v.
854 Nam Fatt Construction Sdn Bhd & Anor [2010] 18 MLRH

Bonds which warrants court intervention without necessarily prejudicing the integrity of
the security.

As I ventured to suggest earlier, these are sound commercial and policy grounds to
support unconscionable conduct as a separate head of control, but I am bound by
precedent, and the comments in Focal Asia have to be taken in this context.

Standard of Proof
It remains to be considered, however, what should be the appropriate standard for courts
to apply to establish either fraud or unconscionable conduct (assuming the latter is
accepted as a separate ground). In terms of principle, the same standard should apply.

On the authorities, in the case of fraud the law appears to stipulate there must be clear
evidence of fraud in that the only realistic inference is that fraud was committed.

See eg, Commercial Injunctions by Steven Gee QC, 5th Edition at page 446:-

"For the fraud exception to apply and an injunction to be granted, the Claimant
must show clear evidence of fraud by the beneficiary, and show that it is obvious
that a fraud is being carried out by the beneficiary to the knowledge of the Bank.
The uncorroborated evidence of the Claimant is not sufficient. The test is whether
the Claimant has established, with the assistance of strong corroborative evidence,
that the only realistic inference is that there has been fraud by the beneficiary. This
does not require the Claimant to show that there is no possibility whatsoever of the
beneficiary's having acted honestly."

As stated in Themehelp Ltd v. West and Others [1996] QB 84, English Court of Appeal
(per Waite LJ) at page 100:

"The judge was entitled, in my judgment, to take all this into account in reaching
his conclusion that the buyers had satisfied the onus of showing, for the purposes of
interlocutory relief, that they had an arguable case at trial that fraud was the only
realistic inference." (emphasis added)

In Bains Harding (Malaysia) Sdn Bhd v. Arab-Malaysian Merchant Bank Berhad & 3
Ors [1995] 1 MLRH 335; [1996] 1 MLJ 425; [1996] 1 BLJ 25 at page 43:-

"... question of the plaintiff placing sufficient affidavit evidence before the court, so
as to enable the court to be satisfied, not necessarily beyond reasonable doubt, that
a case of fraud or the likelihood of a fraud being committed has been established to
an extent sufficient for the court to be minded to order the injunction sought."
 Kejuruteraan Bintai Kidenko Sdn Bhd
v.
[2010] 18 MLRH Nam Fatt Construction Sdn Bhd & Anor 855

Further, in United Trading Corporation SA and Murray Clayton Ltd v. Allied Arab
Bank Ltd and Others [1985] 2 Lloyd's Law Reports 554 it was said at page 561:-

"The corroborated evidence of a Plaintiff and the unexplained failure of a

beneficiary to respond to the attack, although given a fair and proper opportunity,
may well make the only realistic inference that of fraud, although the possibility
that he may ultimately come forward with an explanation cannot be ruled out. ...
Have the Plaintiffs established that it is seriously arguable that, on the material
available, the only realistic inference is that Agromark could not honestly have
believed the validity of its demands on the Performance Bond?"

Hence, the Plaintiff has to satisfy the threshold of a seriously arguable case that the
only realistic inference is the existence of fraud, which would basically mean
establishing a strong prima facie case, at least at the interlocutory stage.

The kind of fraud envisaged in relation to an injunction is to prevent a call on a Bank

Guarantee where for example a call is made on the Guarantee when there is no
entitlement for a call to be made or when the claim itself is false (See: LEC Contractors
(M) Sdn Bhd v. Castle Inn Sdn Bhd & Anor [2000] 1 MLRA 365; [2000] 3 MLJ 339;
[2000] 3 CLJ 473, at pages 488, 492, 494, 495 & 499; [2000] 3 AMR 2625, per
Mokhtar Sidin JCA - Tab 5 of Bundle of Authorities). The tests set out in the
aforementioned cases apply to cases against the Bank and the beneficiary alike.

As can be seen from this line of argument, no distinction is drawn between fraud on the
call and fraud in the underlying contract.

Conclusion

Given the view I have taken as regards the decision of the Court of Appeal in LEC
Contractors, which limits injunctive relief only to the fraud exception, and since this
court is bound by this decision, the only proper order to make in this application is to
dismiss it. On the facts, however, even if I am to apply the unconscionable conduct
ground, I do not believe the Plaintiff has succeeded to establish a clear prima facie case,
or a seriously arguable case that the only realistic inference is unconscionable conduct
as regards one of the calls on the Performance Guarantees, namely the call on the
mechanical works component. As regards the Performance Guarantee in relation to the
electrical works component, however, the final draft account prepared by the employer
(Gerbang Perdana) shows the Plaintiff is owed monies, not the reverse. It will be
unconscionable to make a call on the Performance Guarantee on this. Hence on the
evidence there is evident unfairness, though not dishonesty or fraud. It will however fall
within the general rubric of conduct of a kind so lacking in good faith that a court of
 Kejuruteraan Bintai Kidenko Sdn Bhd
v.
856 Nam Fatt Construction Sdn Bhd & Anor [2010] 18 MLRH

conscience would either restrain the party or refuse to assist the party. This will be an
abusive call on the relevant Performance Guarantee which should warrant court
intervention without necessarily prejudicing the integrity of the security, pending the
resolution of the dispute between the parties in the arbitration which has commenced.
Nevertheless, I am bound by the decision of the Court of Appeal in LEC Contractors.
Some mention has to be made for the sake of completeness on one other argument
advanced by the Plaintiff in relation to the conduct of the 1st Defendant through their
counsel. In the course of the interlocutory application, certain undertakings were made
(although the parties differ on the exact effect) before me. The Plaintiff stressed that it
was agreed by counsel for the 1st Defendant that his client would defer calling on the
Performance Guarantees in return for the Plaintiff agreeing to extend their validity
period. Plaintiffs counsel strongly argued that the 1st Defendant should, in these
circumstances, be estopped from calling on the extended Performance Guarantees, and
for it to do so would be unconscionable conduct warranting court interference. In my
opinion, such conduct cannot properly be construed as the kind of unconscionable
conduct mentioned in the cases discussed above. The kind of fraud or unconscionable
conduct contemplated has to relate directly to the Performance Guarantee documents
themselves, and not any other external documents, such as the contested undertaking.
Such an approach will be in line with the principle stated in Patel Holdings Sdn Bhd v.
Estet Pekebun Kecil & Another, supra, mentioned earlier hereinabove.

For the reasons stated above, I am dismissing Enclosure 3 which is the Plaintiffs
Summons in Chambers for an interlocutory injunction, and by consensus of the parties,
Enclosure 1 (namely the main claim) as well since dismissal of Enclosure 3 practically
decides the entire dispute between the parties in relation to the motion to restrain the
call on the Performance Guarantees.

Costs of RM10,000.00 to be paid by the Plaintiff to the 1st Defendant.