Herbert Smith Freehills review four decisions from Malaysia’s Court of Appeal relating to applications made in support of arbitration to restrain the calling of performance bonds in the construction sector.
In East Coast Economic Region Development Council v Inai Kiara Sdn Bhd & Another (Civil Appeal No. W-02(IM)(NCVC)-1048-05/2018), the Court of Appeal reversed the injunction granted by the High Court to restrain the employer from calling on the performance bond, and granted a stay of litigation proceedings in favour of arbitration, holding that an ongoing arbitration between the parties is not of itself a valid reason to stop the call on a performance bond.
In Target Resources Sdn Bhd v THP Bina Sdn Bhd (Civil Appeal No. B-02(C)(A)-664-03/2018), the dispute related to the termination of a construction contract which was pending determination in arbitration. The contractor applied for an interim injunction to restrain the employer from receiving the proceeds under a bank guarantee, and from making any further demand on the bank guarantee pending the resolution of the arbitration, on the basis that it would be unconscionable for the employer to receive the proceeds under the bank guarantee. The CA considered that there was sufficient evidence of unconscionable conduct and granted the injunction.
In Maxwell Accent JV Sdn Bhd v Kuala Lumpur Aviation Fuelling System Sdn Bhd (Civil Appeal No. W-02(C)(A)-827-04/2017), the contractor applied for an injunction to restrain the employer from calling on or receiving the proceeds under a bank guarantee pending the commencement and disposal of their dispute by arbitration; the CA granted the injunction, noting that there was sufficient evidence to demonstrate a strong prima facie case that the events leading to the call and conduct of the employer were of such degree as to “prick the conscience of a reasonable and sensible man”.
In Dunggon Jaya Sdn Bhd v Aeropod Sdn Bhd and Another (Civil Appeal Nos. S-02(NCVC)(A)-1146-06/2017 and S-02(NCVC)(A)-1147-06/2017), the contractor alleged that under the express terms of the bank guarantee, monies could only be released by the guarantor bank once the contractor was adjudicated to be in breach of the contract. Although the CA noted that the bank guarantee was an unconditional and on-demand performance bond, the employer was restrained from calling on the bank guarantee on the basis that it was unconscionable to do so.
The authors note that while these cases relate to the Malaysian construction sector and domestic arbitration, they illustrate the importance of being conscious to the choice of law and arbitral seat of a performance bond in the international construction industry. In particular, where possible, a party should be aware of the various options available for contracting out of the possibility of injunctions restraining calls on performance bonds at the negotiation and drafting stage by defining trigger events in advance; seek to exclude unconscionability as a ground to restrain a call on a bond; and agreeing to a law governing a performance bond which does not adopt unconscionability as an exception, such as English law