COURT OF APPEAL, MALAYSIA
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www.ipsofactoJ.com/appeal/index.htm [2000] Part 3 Case 9 [CAM] |
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COURT OF APPEAL, MALAYSIA |
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Coram |
LEC Engineering (M) Sdn Bhd - vs - Castle Inn Sdn Bhd |
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LAMIN MOHD YUNUS PCA AHMAD FAIRUZ JCA MOKTHAR SIDIN JCA |
29 MAY 2000 |
Judgment
Mokhtar Sidin, JCA
(delivering the judgment of the court)
We have dismissed the appeal earlier and now we give our reasons for doing so. To start with it is better for us to state the facts and the events leading to this appeal.
On July 24, 1998, the appellant who was the plaintiff in the court below, took out a writ for a declaratory order. To avoid any confusion we will refer to the appellant and the respondents as the plaintiff and defendants as in the court below. The declaratory order sought by the plaintiff are:
that the performance bond dated August 22, 1998 was supplemental to a contract dated July 15, 1995, and thus invalid;
that the said contract and / or the performance bond did not permit the first defendant, whether by itself and / or through its agents or servants to make a call on the performance bond;
that an injunction be granted against the first defendant, whether by itself, or through its agents or servants from further calling and / or receiving the payment in the sum of RM4,800,000 which was payable upon the principal's written demand, made on the second-named defendant, until the disposal of the arbitration;
for a declaration that the said performance bond is a conditional bond and that the second defendant is obliged to pay to the first-named defendant upon proof that the plaintiff is in breach of the obligations under the said contract, and that the plaintiff is not relieved from the performance of the contract;
the second-named defendant whether by itself or by its servants or agents be enjoined and restrained from paying the said sum of RM4,800,000 or any other sum that shall be payable under the performance bond until the disposal of the arbitration proceedings; and
such other order / direction or relief.
At the same time the plaintiff took out an ex parte summons-in-chambers praying for an order that:
an injunction be granted against the first-named defendant whether by itself, or by its servants or agents from further calling and / or receiving payments in the sum of RM4,800,000 under the performance bond from the second-named defendant, until the disposal of this matter inter partes, and
an injunction against the second-named defendant, restraining them from paying the first-named defendant, the sum of RM4,800,000 or any sum payable under the performance bond until the disposal of the hearing inter partes.
The undisputed facts leading to the filing of the writ and the summons-in-chambers were that on July 15, 1995 the plaintiff and the first defendant executed a formal contract for the construction and completion of a hotel cum office development in Johore Bahru for the sum of RM96,000,000. From the evidence it is clear to us that the plaintiff was awarded the contract by the first defendant by a letter dated June 30, 1995 whereby the plaintiff was required to execute a formal contract which was the contract dated July 15, 1995. One of the terms and conditions stipulated in the letter dated June 30, 1995 was the depositing of a performance bond of RM4,800,000 which is the subject matter of this appeal. The plaintiff apparently accepted this term when it signed the acceptance letter dated June 30, 1995. Since this letter is important it is better for us to state the contents of that letter:
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THE EXECUTION AND COMPLETION OF THE PROPOSED HOTEL CUM OFFICE DEVELOPMENT AT HARIMAU ROAD JOHORE BAHRU JOHORE FOR CASTLE INN SDN BHD LETTER OF ACCEPTANCE OF TENDER
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The plaintiff acknowledged receipt of that letter and confirmed its agreement to the terms stated above. Pursuant to this letter the plaintiff then gave a Bank Guarantee No 0686/95/01925 issued by the second defendant. The contents of that bank guarantee which is the subject matter of this appeal are as follows:
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THIS AGREEMENT is made the 22nd day of August, 1995 BETWEEN The Bank of Nova Scotia Bhd of Menara Boustead, No. 69, Weld Road, 50200 Kuala Lumpur (hereinafter called the "Guarantor") of the one part and Castle Inn Sdn. Bhd. of Suite 138, 1st Floor, Johore Tower, Gereja Road, 80100 Johore Bahru (hereinafter called the "Principal") of the other part. WHEREAS
NOW the Guarantor hereby agrees with the Principal as follows:
[emphasis added] |
Apparently disputes arose between the plaintiff and the first defendant. As a result of those disputes, the plaintiff demanded arbitration proceedings by giving notice to the first defendant to arbitrate under Clause 34(1) of the contract. At the same time the plaintiff took out the writ stated above. The plaintiff also took out the ex parte summons-in-chambers to stop the first defendant from calling or receiving the sum of RM4,800,000 from the second defendant under the guarantee (the performance bond).
This application was based on a certificate of urgency and was heard by the learned Judge on July 24, 1998 whereby the learned Judge granted the plaintiff a restraining order restraining the first defendant from further calling and / or receiving the sum of RM4,800,000. The learned Judge did not grant the injunction as prayed for by the plaintiff.
The plaintiff then applied for the application to be heard inter partes in order to obtain the injunction against the first defendant pending the disposal of the writ or the arbitration. As can be seen from the record it is the plaintiff who has moved the court to hear the disputes between the parties and to enjoin the first defendant from demanding the RM4,800,000 from the second defendant under the performance bond.
At the end of the hearing of the application the learned Judge dismissed the plaintiff's application for injunction and also set aside the restraining order given at the ex parte hearing on July 24, 1998. The learned Judge also gave interest at the rate of 8% per annum on the sum of RM4,800,000 from July 18, 1998 in lieu of damages under the plaintiff's undertaking during the ex parte hearing. July 18, 1998 was the date of demand made by the first defendant in its letter of demand to the second defendant. The learned Judge awarded the interest on the ground that the first defendant had been deprived of the use of the money from that date.
Against that decision the plaintiff appealed to us.
Before us we identified that the plaintiff had raised five issues.
FIRST ISSUE
(Whether the notice of demand dated July 18, 1998 was a valid notice)
This notice of demand is exhibited at p 663 of the record of appeal (Vol 3). Since this is a short letter it is better for us to quote it in full:
Dear Sirs, CONTRACT DATED 15TH JULY 1995 BETWEEN CASTLE INN SDN BHD AND LOTTEWORLD ENGINEERING & CONSTRUCTION SDN BHD FOR THE EXECUTION AND COMPLETION OF THE PROPOSED HOTEL CUM OFFICE DEVELOPMENT AT HARIMAU RD, JOHORE BAHRU, JOHORE (HEREINAFTER REFERRED TO AS "THE CONTRACT") BANK GUARANTEE NO 0686/95/01925 FOR THE AMOUNT OF RM4,800,000.00 (HEREINAFTER REFERRED TO AS "THE PERFORMANCE BOND") We act for Messrs Castle Inn Sdn Bhd who is the beneficiary in respect of the above matter. We are instructed to inform you that Lotteworld Engineering & Construction Sdn Bhd is in breach of its obligations under the contract, inter alia, for failing to comply with the Architect's Notice of Default dated 26th June 1998 resulting in our client determining Lotteworld Engineering & Construction Sdn Bhd's employment under the contract. Please find enclosed the relevant letters. We hereby demand that the sum of RM4,800,000.00 under the performance bond be paid forthwith to our client or to us as its solicitors. Yours faithfully, AZMAN, DAVIDSON & CO Sgd. |
It was submitted by the plaintiff that the demand was invalid as it was not made by the first defendant. The demand ought to have been made by the first defendant and not by its solicitors. It was submitted that the demand must be made strictly in accordance with the terms of the guarantee. In the guarantee it is stated as follows:
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.... the Guarantor shall pay to the Principal up to and not exceeding the sum of Ringgit Malaysia: Four Million Eight Hundred Thousand Only (RM4,800,000.00) representing 5% of the Contract value or such part thereof, on the Principal's written demand notwithstanding any contestation or protest by the Contractor or by Guarantor or by any other third party... |
Since the guarantee stated "on the Principal's written demand" it was submitted that the demand must be made by the first defendant itself. In the present appeal the notice of demand was made by the solicitors for the first defendant and as such the demand made was not valid. It was submitted that the demand must be made strictly in accordance with the terms of the guarantee. To support this contention the plaintiff cited four cases:
Mok Hin Wah v UMBC Bhd [1987] 2 MLJ 617;
Orang Kaya Menteri Paduka Wan Ahmad Isa Shukri Wan Rashid v Kwong Yik Bank Bhd [1989] 3 MLJ 155;
Lee Ah Chor v Southern Bank [1991] 1 MLJ 428 and
D&C Finance Bhd v Che Mohamad Che Kob (a High Court decision which was unreported).
It is clear to us that the cases of Mok Hin Wah and Orang Kaya Menteri Paduka Wah Ahmad Isa Shukri Wan Rashid can easily be distinguished from the present appeal. In those cases the notice of demand sent to the guarantor was a carbon copy of the notice to the principal. As such it was held that the notice of demand as against the guarantor was not good. In the case of Lee Ah Chor it is clear to us that it does not support the contention made by counsel for the plaintiff. It is clear to us that the notice of demand required in that case is somewhat similar to the provisions in the present appeal. In that case as can be seen at p 432 the relevant provisions in respect of that case was Clause 11 which reads as follows:
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Any notice or demand in relation to the matters aforesaid may be effectually given or made to me / us by any officer of the bank or by notice in writing under the hand of any such officer either served personally on me / us or left for or sent by post to me / us at my / our usual or last known place of business in... |
Comparing this demand and the demand in the present case we find that the demand in Lee Ah Chor was more restrictive in the sense that the notice was to be made "by any officer of the bank" whereas in the present case it was "the principal's written demand". In Lee Ah Chor the then Supreme Court held:
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In the present case, as clearly provided by Clause 11 of the first guarantee, the mode of serving the notice can either be made by an officer of the bank or by the solicitor as agent of the bank and therefore the service of the notice by the solicitor acting for the respondent is a valid notice. |
In the present case the only mandatory part is on the guarantor to pay when the demand is made. As such we are of the view what was held in Lee Ah Chor is applicable here.
As to the case of D&C Finance Bhd v Che Mohamad Che Kob the words "By You" was used. That by itself distinguished it from the present appeal. That was a decision of the High Court. We are of the view that what was said there cannot be the correct proposition of law. As can be seen D & C Bank is only a legal entity not a real person.
If the word "By You" is to be interpreted strictly then it is impossible for the bank by itself to make a demand. The demand had to be made by the bank not by an officer or by any director. In our view the words "By You" mean that the demand shall be made by the bank through its officers or legal representatives which falls back to the decision in Lee Ah Chor.
In view of what we have stated we are of the view that there is no merit in the submission of the plaintiff.
We hold that there was a proper notice of demand in accordance with the guarantee.
SECOND ISSUE
(Whether the performance bond in the instant case is a conditional or unconditional bond)
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:
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(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 (RM4,800,000.00) representing 5% of the Contract value or such part thereof, on the Principal's written demand notwithstanding any contestation or protest by the Contractor or by Guarantor or by any other third party ... |
The learned counsel for the plaintiff then cited the case of Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967. 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. The 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.
On the other hand, it was contended by learned counsel for the first defendant that the real issue is whether the bond is payable on demand, or whether the bond is only payable upon proof of breach of the underlying contract. The issue is not whether the bond is conditional or unconditional.
We are of the same view with the learned counsel for the first defendant as can be seen in Syarikat Perumahan Pegawai Kerajaan Sdn Bhd v Bank Bumiputra Malaysia Bhd [1991] 2 MLJ 565. In that case the cause of action of the plaintiff was grounded on the alleged breach of a bank guarantee whereby the defendant agreed to guarantee the due performance of a building contract. The contract was entered between the plaintiff and Sarikon Sdn Bhd (the contractor) whereby the contractor undertook to complete certain construction works. On December 15, 1987 the receivers and managers of the contractor informed the plaintiff by telex of their intention to terminate all works under the building contract with effect from December 18, 1987 and apparently on that date the contractor abandoned all works on site. The plaintiff called upon the defendant to honour the bank guarantee which the defendant failed to do. The defendant contended that since Sarikon had alleged that the plaintiff had wrongly terminated the contract, the plaintiff had no right to call upon the defendant to honour the guarantee. As such the defendant contended that the guarantee is a conditional performance bond and not an on demand performance bond. B.C. Lim J in his judgment at pp 567 and 568 said:
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A review of the English case law seems to suggest that a performance guarantee, like an irrevocable or confirmed letter of credit, is a guarantee by the bank to a seller for payment of price. The bank is not concerned with the contract entered into by its customer and the third party or with any dispute between the buyer and the seller. The terms of the guarantee and the bank's obligation to pay are contained in the guarantee itself. There is a line of English authorities acknowledging this proposition - see for example Hamzeh Malas v British lmex Industries Ltd, Discount Records Ltd v Barclays Bank Ltd and RD Harbottle (Mercantile) Ltd v Barclays Bank. Appeal in Edward Owen Engineering Ltd v Barclays Bank. Thus Lord Denning said at p 171 of the reported case:
However that may be, the question to ask and to be answered is whether the English common law principle can apply to a performance guarantee given in our country in view of s 81 of our Contracts Act 1950. That section says:
To my mind, the words emphasized by me are of some significance. The said words reduce the efficacy of the provision that the liability of the surety is co-extensive with that of the principal debtor in cases where a surety has executed an agreement of guarantee or indemnity with the person indemnified indicating that the surety would pay subject only to the terms of the said agreement. In this respect therefore the English common law rule of disregarding whether the surety's obligation is absolute or conditional cannot apply. Since our contract statute is a replica of the Indian Contract Act 1872, it is useful to look into the Indian authorities in order to find out how the Indian courts deal with the issue. The answer to the issue can be found in United Commercial Bank v Bank of India where it is stated at p 1438:
Again it was held in Dama tar Paints (P) Ltd v Indian Oil Corp 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. .... Adverting to the bank guarantee, its heading states 'Bank Guarantee / or the Performance Bond' (emphasis is mine) and in recital (2) it is stated:
The crucial condition appears in paragraph (1) of the said agreement which reads:
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 the plaintiff to the defendant under the terms of the bank guarantee, then the defendant is bound to pay on demand. ... [emphasis added] |
As can be seen from the above the wordings of the guarantee in that case if not identical are similar to Clauses (1) and (3) of the guarantee in the present case. The guarantee in the present appeal is more elaborately worded but the meaning is the same. We entirely agreed with what had been said by B.C. Lim J in the above case. Haidar Mohd Noor J (as he then was) in the case of Kejuruteraan Awam Cang Ceng (M) Sdn Bhd v The Standard Chartered Bank [1991] 3 CLJ 2502, and Mahadev Shankar J (as he then was) in the case of Sri Palmar Development & Construction Sdn Bhd v Transmetric Sdn Bhd [1994] 1 CLJ 224 were of the same view.
The then Supreme Court in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 AMR 189 was of the same view. In that case the appellant agreed with the respondent, for the respondent to sell and deliver certain construction materials to the appellant from time to time on specified dates which were regarded as being the essence. It was agreed between the parties that the appellant would be entitled to deduct a maximum of 10% of the purchase price in respect of any delay in delivery by the respondent. However, at the request of the respondent, the appellant paid the full price in exchange of two letters of guarantee (the performance bond) issued by Bank Bumiputra Malaysia Bhd (the bank), for the sum of DM466,562 and DM17,640 totalling DM484,202, which was equivalent to the deductions the appellant would have been entitled to make. Subsequently, the appellant informed the respondent that damages for delay amounted to 90% of the total sum of DM484,202 and requested for payment within seven days. Payment was not made and the respondent wrote to the appellant for particulars justifying the claim. Without replying, the appellant made a written demand on the performance bonds addressed to the bank. The respondent obtained an ex parte injunction restraining the appellant from receiving any part of the moneys under the performance bonds and alleged that:
the delays were caused by Esso's refusal to accept the goods; and
the appellant had not at the time of acceptance of the delayed goods, indicated its intention to claim damages.
The appellant's application to the High Court to set aside the injunctions was dismissed. The appellant appealed against that decision. The then Supreme Court held that:
The performance bonds were stated to be 'unconditional' guarantees and, on a true construction, were pure 'on demand' guarantees. All that was required to trigger them was a demand in writing.
Since the performance bonds were on demand performance bonds, they were independent of any underlying contract between Esso and Kago. Therefore, it was not open to the judge to inquire into any breach of such underlying contract as he seemed to have done.
S.C. Peh FCJ (as he then was), delivering the judgment of the court at pp 200 and 201 said:
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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 straight forward 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. Looking at the performance bond (bank guarantee No 065-92-106) as set out above, it was stated to be an 'unconditional' guarantee. The only other thing to note would be the stated requirement that all claims must be made in writing. This performance bond was, on a true construction, 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, e.g. 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, i.e. the buyer in this case, and the seller; at the behest of the latter itself, the performance bond was issued. It was not even worded to make it conditional on a simple declaration by the beneficiary, without proof to its issuer, that the seller had not paid damages to the buyer after the release by the buyer of the sum of DM466,562. In fact, the present performance bond, had it been worded, e.g. to require any proof of breach by the buyer so as to deserve any payment, then, in such event, its commercial acceptability as a performance bond, would be mostly lost. Dealing further with the construction of the performance bond, since we found it was an on demand performance bond, this would, in our view, make the present performance bonds independent of any underlying contract, i.e. any contract between the buyer and the seller. We thought, therefore, it was not open to his Lordship in the court below to impart into this on demand guarantee, by implication, a requirement to have regard to, or to inquire into any breach of any obligation of such underlying contract, and this seemed to have been done. The next and only other question from the instant performance bonds would be as to what sort of demand it would be as required by its wording. |
The Federal Court in China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 AMR 2233 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 2254 reads as follows:
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LETTER OF GUARANTEE We PERWIRA HABIB BANK MALAYSIA BHD, Cawangan Bandar, Ground Floor, Wisma Pahlawan, Sulaiman Road, 50000 Kuala Lumpur, hereby undertake to pay on demand to MESSRS CHINA AIRLINES LIMITED the sum of MYR400,000 (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 CORPORATION SDN BHD, 79, 2nd Floor, Bukit Bintang Road, 55100 Kuala Lumpur. The said sum shall become payable by us in the event of the said MESSRS MALTRAN AIR CORPORATION SDN BHD's failure to perform the said covenants. |
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 p 2256, said:
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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, 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' it was held that 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. [emphasis added] |
From the authorities referred above the tendency of the Malaysian courts is to interpret the performance bonds in accordance with the decision of Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546. At p 549 Ackner LJ said:
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.... 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 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, 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... |
Since the decision of Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159 was referred to in the above decision it is better for us to look at it. In that case the plaintiffs contracted with Libyan customers to erect greenhouses in Libya and agreed with a performance guarantee for 10% of contract price should be issued by the defendant and lodged with a Libyan bank. The contract, which was governed by Libyan law, provided that an irrevocable confirmed, confirmable letter of credit payable at the defendant bank was to be opened in favour of the plaintiffs. After the plaintiffs had given a counter guarantee to the defendant bank, the latter on their own responsibility and on the plaintiffs' behalf gave a performance bond for £50,203 to the Libyan bank and confirmed that their guarantee was payable 'on demand without proof or conditions'. The Libyan bank then issued a guarantee bond for the plaintiffs for the same sum in favour of the Libyan customers. No letter of credit which complied with the terms of the contract was opened by the customers and the plaintiffs, after telling them that the guarantee given had no effect, accepted their conduct as a repudiation of the contract. At the customers' request the Libyan bank then claimed £50,203 under the guarantee from the defendants. The plaintiffs obtained an interim injunction on their ex-parte application to restrain the defendant from paying the Libyan bank. Kerr J discharged the injunction. The plaintiffs appealed. The Court of Appeal dismissed the appeal. Lord Denning MR at p 169 said:
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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. That was clearly stated in Hamzeh Malas & Sons v British lmex Industries Ltd [1958] 2 QB 127. Jenkins LJ, giving the judgment of this court, said, at p 129:
To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. The most illuminating case is of Sztejn v J Henry Schroder Banking Corporation (1941) 31 NYS 2d 631 which was heard in the New York Court of Appeals. After citing many cases Shientag J said, at p 633:
He said, at p 634, that in that particular case it was different because:
That case shows that there is this exception of the strict rule: the bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment. I would in this regard quote the words of Browne J in an unreported case when he was sitting at first instance. It is Bank Ruso-lran v Gordon, Woodroffe & Co Ltd (unreported), October 3, 1972. He said:
But as Kerr J said in this present case:
Such is the law as to a confirmed letter of credit. How does it stand with regard to a performance bond or a performance guarantee? Seeing that it is a guarantee of performance - that is, a guarantee that the supplier will perform his contracted obligations - one would expect that it would be enforced in such a case as this: ... ....
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 contracted 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 a clear fraud of which the bank has notice. Such has been the course of decision in all the cases there have been this year in our courts here in England. First of all, there was RD Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] QB 146 before Kerr J. The judge considered the position in principle. I would like to adopt a passage from his judgment, p 761E-G.
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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 Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967, 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
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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 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.
THIRD ISSUE
(Fraud)
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 enjoin 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.
This is not the case here. As can be seen from the statement of claim, it pleaded bare allegations of fraud. No specific instances of fraud had been given. Fraud must be specifically pleaded and proved. Mere allegation is not sufficient. This is clearly stated by Phillips J in Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 WLR 1017. After referring the passages by Lord Denning in Edward Owen (supra), at p 1029, Phillips J said:
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In a number of instances the courts have purported to apply the Cyanamid test [1975] AC 396 in a case such as this: Howe Richardson Scale Co Ltd v Polimex-Cekop [1978] 1 Lloyd's Rep 161, 165, per Toskill LJ, Dong Jin Metal Co Ltd v Raymet Ltd. (unreported), 13 July 1993; Court of Appeal (Civil Division) Transcript No 945 of 1993, per Lloyd LJ and United Trading Corporation SA v Allied Arab Bank Ltd (Note) [1985] 2 Lloyd's Rep 554. Only in this last case did the court consider the nature of the threshold test. This raised the question of the cause of action where an injunction is sought to prevent a bank paying under a performance bond. Both parties agreed, having regard to Siskina (Owners of cargo lately laden on board) v Distos Compania Naviera [1979] AC 210, that a cause of action had to be demonstrated. Negligence was selected as the most plausible cause of action. Ackner LJ [1985] 2 Lloyd's Rep 554, 561 held that "the evidence of fraud must be clear, both as to the fact of fraud and as to the bank's knowledge" and went on to define the Cyanamid threshold test as follows:
The nature of the cause of action in a case such as this has not often been considered by the courts. Ackner LJ remarked that in America, which is the source of the fraud exception, it is not necessary for a plaintiff to demonstrate a cause of action against a bank: see [1985] Lloyd's Rep 554,561. In United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, 184 Lord Diplock stated:
This raises a question of whether, as an exception to the Siskina principle [1979] AC 210, the court will intervene by injunction to prevent the perpetration of a fraud. In Bolivinter Oil SA v Chase Manhattan Bank NA (Practice Note) [1984] 1 Lloyd's Rep 251, 254 Sir John Donaldson MR accepted the following proposition:
.... I turn to consider Mr. Bartlett's submission that a different test falls to be applied where an injunction is sought against the beneficiary. It seems to me that the effect of Mr. Bartlett's submissions is to deprive the letter of credit of any special status so far as the beneficiary is concerned. If a beneficiary is to be held to be fraudulent if he draws on a letter of credit in circumstances where he is uncertain as to the validity of his right to payment under the underlying contract, the plaintiff seeking to enjoin him will have to do more than persuade the court that there is a seriously arguable case that the claim under the underlying contract is invalid. This will rob the beneficiary of much of the benefit which a letter of credit is intended to bestow. Where a letter of credit is issued by way of conditional payment under an underlying contract, I do not consider that it is correct to imply a term into the underlying contract that the beneficiary will not draw on the letter of credit unless payment under underlying contract is due. On the contrary, I consider that the correct contractual inference that should normally be drawn is that the beneficiary will be entitled to draw on the letter of credit provided that he has a bona fide claim to payment under the underlying contract. If this is correct, there is no basis for the suggestion that the court should apply a different test when considering an application to restrain a beneficiary, rather than a bank, from effecting payment under a letter of credit. |
As can be seen from the submission of counsel for the plaintiff, it was alleged that the first defendant was guilty of fraud / unconscionable conduct:
by demanding on the bond when the first defendant was in breach;
the first defendant's non disclosure of material facts to the second defendant, namely, that plaintiff had put an end to the contract by accepting the first defendant's repudiation, and that the plaintiff had alternatively, determined the contract pursuant to Clause 26(i)(b) of the conditions of contract, thereby relieving the appellant from further performance of the contract; and
the first defendant is attempting to obtain payment of RM4.8 million without going to arbitration or without adjudication by the court as to who is the innocent party and who is in breach of contract. This amounts to unjust enrichment and bad faith or unconscionable conduct on the part of the first defendant.
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 first defendant which comes to the knowledge of the second defendant. Bad faith or unconscionable conduct by itself is not fraud. The examples given by the authorities above are those where from the very beginning there was intention to defraud the bank such as where the seller from the beginning had the intention not to send the goods to the buyer. That is not the case here. In the present case a genuine contract had been executed between the parties upon which the performance bond was given. From the record it is clear that works under the contract had commenced but then disputes between the parties arose and as a result of that the first defendant demanded payment under the performance bond.
With the greatest respect to the learned counsel for the plaintiff, not only fraud was not specifically pleaded but also it is clear to us the instances of fraud that he had stated in his submission are not instances of fraud but disputes between the parties. It is clear from the authorities those disputes must be settled between the parties and they would not affect the performance bond.
For that reason we hold that there was no evidence of fraud. What is more important is that the bank (second defendant) has no knowledge of any fraud or that fraud was ever given to their notice. As such the second defendant had no alternative but to honour the performance bond and meet the demand by the first defendant.
FOURTH ISSUE
(Serious issues to be tried)
Counsel for the plaintiff submitted injunction should be given to stop the payment by the second defendant (the bank) to the first defendant because there are serious issues to be determined at an arbitration or in the court. According to the learned counsel, the first defendant through its counsel in the court below had conceded in their submission that there are issues to be tried in the present appeal whether at a hearing in the court or at an arbitration. The plaintiff according to its counsel have an arguable case on the merits of the underlying dispute. Because of the concession, the plaintiff is entitled to the injunction to preserve the status quo, pending trial. Learned counsel for the plaintiff went on to submit that the issue whether the performance bond is a conditional or unconditional bond is in itself, a question to be tried, and therefore, there are also serious Issues to be tried.
The answer to this contention is found in the statement of Phillips J in Deutsche Ruckversicherung v Walbrook Insurance Co Ltd [1995] 1 WLR 1017 where at p 1030 he said:
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I turn to consider Mr. Bartlett's submission that a different test falls to be applied where an injunction is sought against the beneficiary. It seems to me that the effect of Mr. Bartlett's submissions is to deprive the letter of credit of any special status so far as the beneficiary is concerned. If a beneficiary is to be held to be fraudulent if he draws on a letter of credit in circumstances where he is uncertain as to the validity of his right to payment under the underlying contract, the plaintiff seeking to enjoin him will have to do no more than persuade the court that there is a seriously arguable case that the claim under the underlying contract is invalid. This will rob the beneficiary of much of the benefit which a letter of credit is intended to bestow. Where a letter of credit is issued by way of conditional payment under an underlying contract, I do not consider that it is correct to imply a term into the underlying contract that the beneficiary will not draw on the letter of credit unless payment under the underlying contract is due. On the contrary, I consider that the correct contractual inference that should normally be drawn is that the beneficiary will be entitled to draw on the letter of credit provided that he has a bona fide claim to payment under the underlying contract. If this is correct there is no has is for the suggestion that the court should apply a different test when considering an application to restrain a beneficiary, rather than a bank, from effecting payment under a letter of credit. [emphasis added] |
It is clear to us that since on demand performance bond is on similar footing as a letter of credit, serious issues to be tried is not one of the grounds upon which the court can grant an injunction against the beneficiary to stop payment from a bank under a performance bond. For that reason we see no merit in the submission of counsel for the plaintiff.
FIFTH ISSUE
(Justice of the case)
The final point raised by counsel for the plaintiff is justice of the case. It was submitted that the status quo ought to be maintained to preserve the subject matter and substratum of the suit pending the disposal of the suit in respect of the underlying contract either through trial or arbitration. Counsel for the plaintiff contended that if the injunction is not granted, the bank will make the payment which will alter the status quo, which will cause irreparable prejudice and damages to the plaintiff. It was further contended that any prejudice to the first defendant could easily be compensated by payment of interest.
In our view "justice of the case" is what the first defendant called "the balance of convenience test". This principle was propounded in the American Cyanamid case. It was contended by the first defendant that the test is not applicable to an on demand performance bond. This was decided by the Court of Appeal in Singapore in Bocotra Construction Pte Ltd v Attorney General (No 2) [1995] 2 SLR 733 where it was held that the balance of convenience test propounded in the American Cyanamid case is not applicable to an irrevocable letter of credit. Since an on demand performance bond is of the same status as irrevocable letters of credit that case applies in the present appeal.
As submitted by counsel for the first defendant to which we agree, even if the American Cyanamid principle applied, the balance of convenience is still against the granting of injunction as pointed out in Howe Richardson Scale Co Ltd v Polimex-Cekop and National Westminster Bank Ltd [1978] 1 Lloyd's Law Reports 161 where it was held by the Court of Appeal:
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The bank takes the view that the time has come and that it is compelled to pay; in my view it would be quite wrong for the court to interfere with Polimex's opponent right under this guarantee to seek payment from the bank, because to do so would involve putting upon the bank an obligation to inquire whether or not there had been timeous performance of the seller's obligations under the sale contract. Further, in accordance with the principles laid down by the House of Lords in the American Cyanamid case the balance of convenience, it seems to me, is against the grant of an injunction. |
CONCLUSION
After considering the appeal as a whole we are of the view that the learned Judge in the court below came to the right conclusion when he refused the injunction. We could not find any error in his decision. As correctly pointed out by both parties the granting of the injunction is a matter of discretion by the learned Judge. The plaintiff had not shown to us that the learned Judge had exercised his discretion wrongly or that the discretion exercised was illegal.
For the above reasons we would not disturb the decision of the learned Judge. We therefore dismissed the appeal with costs and the decision of the learned Judge in refusing the injunction is hereby affirmed.
The plaintiff applied for a stay of execution pending appeal to the Federal Court. This was made orally in court. We see no reason to stay the execution and we therefore dismissed the application.
Cases
Bocotra Construction Pte Ltd v AG (No 2) [1995] 2 SLR 733; China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 AMR 2233; Deutsche Ruckversicherung AG v Walbrook Insurance Co Ltd [1995] 1 WLR 1017; Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159; Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546; Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 AMR 189; Howe Richardson Scale Co Ltd v Polimex-Cekop & National Westminster Bank Ltd [1978] 1 Lloyd's Law Reports 161; Syarikat Perumahan Pegawai Kerajaan Sdn Bhd v Bank Bumiputra Malaysia Bhd [1991] 2 MLJ 565; Lee Ah Chor v Southern Bank [1991] 1 MLJ 428; American Cyanamid v Ethicon [1975] 1 All ER 504; D&C Finance Bhd v Che Mohamad Che Kob (unreported); Kejuruteraan Awam Cang Ceng (M) Sdn Bhd v The Standard Chartered Bank [1991] 3 CLJ 2502; Mok Hin Wah v United Malayan Banking Corporation Bhd [1987] 2 MLJ 617; Orang Kaya Menteri Paduka Wan Ahmad Isa Shukri Wan Rashid v Kwong Yik Bank Bhd [1989] 3 MLJ 155; Sri Palmar Development & Construction Sdn Bhd v Transmetric Sdn Bhd [1994] 1 CLJ 224; Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967
Representations
Manjit Singh, W.V. Lye and H.L. Yap (Vincent Lim & Teoh) for Appellant
V.K. Lingam and R Sivagnanam (VK Lingam & Co) for First Respondent
Eric Clement and V Danaraj (Siva Thurai Mariany & Co) for Second Respondent
Notes:-
This decision is also reported at [2000] 3 AMR 2625
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