Unconscionability: Leave my Performance Bond Out of This

The performance of construction contracts or works, has not always been smooth sailing, even before the pandemic. Unanticipated events and changes in circumstance being the usual culprits, inevitably lead to delays and thereafter, a dispute.

Naturally, it is common practice for Performance Bonds or Bank Guarantees to be required as a form of security in construction contracts. In short, the bond or guarantee acts as collateral in the event of default by the contractor.

Having performance bonds and bank guarantees in place, an employer or owner (whatever the case may be) reserves the right to call on the Performance Bond or Bank Guarantee on default of the contractor which more often than not, involves some sort of delay or defects in the project.

This however is contingent on the type of Performance Bond or Bank Guarantee, which are either conditional bonds or unconditional bonds. As the name suggests, conditional bonds may only be called upon when the requisites of calling the conditional bond are met. Unconditional bonds may be called at any time.

At any time you say?

Unfair? Maybe. An obvious recourse is to ‘call’ your lawyer (pun intended) to get an injunction to restrain an unreasonable call on your Performance Bond or Bank Guarantee.

An injunction to restrain the call on a performance bond will only be granted by the Court on the fulfilment of the following requisites: -

1. the applicant has an arguable cause of action against the party that called the bond;
2. there is an element of fraud involved in the underlying contract or the calling of the bond is unconscionable;
3. the balance of convenience lies in favour of the applicant seeking to restrain the call of the bond;
4. the applicant provides an undertaking as to damages if, upon the determination of the matter, the court finds that there is no valid claim against the caller of the bond or if the caller of the bond suffers any loss as a result of the injunction;
5. all requisites under Order 29 Rule 1 Rules of Court, 2012 are met; and
6. there exists no policy or equitable consideration that mitigates the grant of an injunction.

How is a call on the performance bond unconscionable?

In answering this question, the applicant must show that there is an element of unfairness, or bad faith involved in the call of the performance bond or bank guarantee. Recognition of this was illustrated in the Federal Court decision of Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining Co Sdn Bhd [2012] 4 MLJ 1 where the court had agreed with the following proposition: -          

“As in the case of fraud, to establish 'unconscionability' there must be placed before the court manifest or strong evidence of some degree in respect of the alleged unconscionable conduct complained of, not a bare assertion. Hence, the respondent has to satisfy the threshold of a seriously arguable case that the only realistic inference is the existence of 'unconscionability' which would basically mean establishing a strong prima facie case. In other words, the respondent has to place sufficient evidence before the court so as to enable the court to be satisfied, not necessarily beyond reasonable doubt, that a case of 'unconscionability' being committed by the beneficiary (the appellant) has been established to an extent sufficient for the court to be minded to order injunction sought. This additional ground of 'unconscionability' should only be allowed with circumspect where events or conduct are of such degree such as to prick the conscience of a reasonable and sensible man.”

(see also Kejuruteraan Bintai Kindenko Sdn Bhd v Nam Fatt Construction Sdn Bhd & Anor [2010] MLJU 1869 & KNM Process Systems Sdn Bhd v Lukoil Uzbekistan Operating Company LLC [2020] MLJU 85)

It is well settled that there must be strong evidence of ‘unconscionability’ to restrain an unfair call on a performance bond or bank guarantee. This was echoed in the recent decision of Ahmad Zaki Sdn Bhd v SN Akmida Holdings Sdn Bhd [2021] MLJU 644.

Conclusion

Not Before: threats alone are insufficient and there would need to be an actual call on the performance bond or bank guarantee before the Court will grant an injunction restraining the same. So, unless a call on the performance bond or bank guarantee has been made, do not ‘call’ your lawyer just yet.