Judgment

Mokhtar Sidin, JCA

(delivering the judgment of the court)

1. 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.

2. 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:

   1. that the performance bond dated August 22, 1998 was supplemental to a contract dated July 15, 1995, and thus invalid;

   2. 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;

   3. 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;

   4. 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;

   5. 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

   6. such other order / direction or relief.

3. At the same time the plaintiff took out an ex parte summons-in-chambers praying for an order that:

   1. 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

   2. 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.

4. 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:

   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 1.0 You are hereby informed that your tender for the above-mentioned works in the revised sum of Ringgit Malaysia: Ninety-Six Million Only (RM96,000,000) is accepted subject to the terms, conditions and stipulations of the Tender Documents upon which the Tender is based and of this Letter of Acceptance. This revised tendered sum shall be deemed to include all revisions of works as shown in the list of revised drawings appended herewith (Page DL/1-DL/12) which shall form part of the Contract. 2.0 You will be required to execute in due course a formal Contract Agreement. However, until the formal Contract Agreement is executed, your Tender together with this Letter of Acceptance shall constitute a binding contract between yourselves and Castle Inn Sdn Bhd, hereinafter referred to as the Employer. 3.0 You will be informed when the Contract Documents are ready for your signature. However, before the signing of the Contract Documents, the prices and rates in the Tender Documents shall be scrutinised and adjusted by the Quantity Surveyor as to their reasonableness but the Contract Sum as mentioned above shall remain unaltered. 4.0 We wish to draw your attention to the stipulations of the Tender Documents whereby as conditions precedent to the commencement of the works, you are required to deposit with the Employer or the Architect the followings: 4.1 Performance Bond amounting to RM4,800,000 (being 5% of the Contract Sum) in cash or in the form of an approved Banker's Guarantee. 4.2 Insurance Policy for Public Liability (i.e. insurance against injury to persons and damage to property) of an insured value not less than RM2,000,000.00. 4.3 Registration numbers under Employer's Social Security (SOCSO) scheme and / or 4.4 Insurance Policy for Workmen's Compensation for a value equivalent to 15% of the Contractor's work (being estimated total earning of Contractor's workmen not covered under SOCSO scheme). 4.5 Insurance Policy for the Insurance of the Works against Fire, etc. as stipulated in the Tender Document. Provided that for the purpose of commencement of the works and no other, you may produce to the Architect the Original Cover Notes of the abovementioned insurance policies and the receipts of premium paid. The Original Cover Notes are acceptable only for a valid interim period stipulated by the approved Insurance Company. 5.0 The date for Possession of Site as referred to in the Conditions of Contract shall be 15 July 1995 but no work under this Contract shall commence unless and until you have complied with the provisions of paragraph 4 of this letter and you shall not be entitled to claim for any loss or damage caused by compliance to the requirement of this paragraph. 6.0 Based on the Tender Completion Period of Twenty Four (24) months, the Date of Completion for the whole of the Works under this Contract is 14 July 1997. 7.0 Further to the recent Tender Interviews, you have confirmed your agreement on the followings: 7.1 You shall not be entitled to any advance payment. 7.2 To accept the specialist contractor, who has not been identified at this point of time, for the construction of the Sewerage Treatment Plant as your domestic sub-contractor and henceforth be fully responsible for their performance. You are however entitled to be paid for profit and attendance amounting to a total of 3% of the sub contract price for Sewerage Plant Treatment. 8.0 You are to obtain approval in an acceptance form from the Department of Inland Revenue in respect to direct remittance of withholding tax. If you are unable to obtain such written approval then you are to identify and appoint an approved firm of solicitors or accountants to process these withholding tax payments to the appropriate authorities. All costs incurred in this appointment are to be borne by you. 9.0 This award is subject to the terms, conditions, stipulations and agreements in the following documents upon which this letter is based: 9.1 Tender Documents dated 16 May 1995.Your letter of 30 May 1995 to 9.2 Castle Inn Sdn Bhd subject to the following clarifications: 9.2.1 Item 2.3 of your letter: You shall use cast iron only for soil, waste and vent pipes at no extra cost or time to the contract. 9.3 Your letter of 7 June 1995 addressed to DBS Property Services Pte Ltd subject to the deletion of para 2. 9.4 Your letter of 14 June 1995 addressed to DBS Property Services Pte Ltd subject to the deletion of para 4. 9.5 This Letter of Award. This contents of the above documents shall be deemed to be mutually complementary to this Letter of Award and this Letter of Award shall take precedence over any other document in the event of disputes as to the construction of the Contract. The Architect shall also decide between the discrepant items at no extra cost to the employer. Six (6) copies of this letter are sent to you. Please return the original and four copies duly signed and witnessed where indicated to this office and retain one copy for your record. [emphasis added]

5. 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:

   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 (1) This Agreement is supplemental to a Contract No. XXX (hereinafter called "the Contract") dated the 15th day of July 1995 and made between Lotteworld Engineering And Construction Sdn. Bhd. of Suite 11.2B, Level 11, Menara Pelangi, No. 2, Kuning Road, Taman Pelangi, 80400 Johore Bahru, Johore (hereinafter called the "Contractor") of the one part and the Principal of the other part whereby the Contractor agreed and undertake the EXECUTION AND COMPLETION OF THE PROPOSED HOTEL CUM OFFICE DEVELOPMENT AT HARIMAU ROAD, JOHORE BAHRU, JOHORE FOR CASTLE INN SDN BHD for the sum of Ringgit Malaysia: Ninety Six Million only (RM96,000,000.00). (2) The Guarantor has agreed to guarantee the due performance of the said contract in the manner hereinafter appearing: NOW the Guarantor hereby agrees with the Principal as follows: (1) If the Contractor (unless relieved from the performance by any clause of the Contract or by statute or by the decision of a tribunal of competent jurisdiction) shall in any respect fail to execute the Contract or commit any breach of his obligations thereunder then the Guarantor shall pay to the 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. Provided always that the total of all partial written demands so made shall not exceed the sum of Ringgit Malaysia: Four Million Eight Hundred Thousand Only (RM4,800,000.00) and that the Guarantor's liability to pay the Principal as aforesaid shall correspondingly be reduced proportionate to any partial demand having been made and paid as aforesaid. (2) The Guarantor shall not be discharged or released from this Guarantee by any arrangement between the Contractor and the Principal with or without the consent of the Guarantor or by any alteration in the obligations undertaken by the Contractor or by any forbearance whether as to payment, time, performance or otherwise, but the Guarantor shall be entitled to be informed of such arrangement or alteration. (3) This Guarantee shall be irrevocable and shall remain in force and effect until the expiry of the Defects Liability Period for the whole of the Works Plus six (6) months i.e. 14th January 1999 or any authorised extension thereof, and in the case of the contract being determined, one calendar year after the date of the determination Claims, if any, must be received by the Guarantor within the period of the Guarantee i.e. on or before 14th January 1999. [emphasis added]

6. 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).

7. 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.

8. 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.

9. 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.

10. 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)

11. 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:

    The Bank of Nova Scotia Bhd .... 50734 Kuala Lumpur. 18th July 1998 BY HAND 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.

12. 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:

    .... 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...

13. 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:

    1. Mok Hin Wah v UMBC Bhd [1987] 2 MLJ 617;

    2. Orang Kaya Menteri Paduka Wan Ahmad Isa Shukri Wan Rashid v Kwong Yik Bank Bhd [1989] 3 MLJ 155;

    3. Lee Ah Chor v Southern Bank [1991] 1 MLJ 428 and

    4. D&C Finance Bhd v Che Mohamad Che Kob (a High Court decision which was unreported).

14. 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:

    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...

15. 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:

    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.

16. 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.

17. 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.

18. 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.

19. In view of what we have stated we are of the view that there is no merit in the submission of the plaintiff.

20. 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)

21. It was submitted by the plaintiff the performance bond was a conditional bond. Counsel for the plaintiff referred) to the following clause in the guarantee:

    (1)

    If the Contractor (unless relieved from the performance by any clause of the Contract or by statute .... commit any breach of his obligations thereunder then the Guarantor shall pay to the Principal up to and not exceeding the sum of Ringgit Malaysia: Four Million Eight Hundred Thousand Only (RM4,800,000.00) 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 ...

22. 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.

23. 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.

24. 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.

25. 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:

    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: 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. 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: The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. 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: