FEDERAL COURT OF MALAYSIA
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www.ipsofactoJ.com/appeal/index.htm [2000] Part 3 Case 13 [FCM] |
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FEDERAL COURT OF MALAYSIA |
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Coram |
Malaysia - vs - South East Asia Insurance Bhd |
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S.F. CHONG CJ (SABAH & SARAWAK) MOHAMED DZAIDDIN FCJ ABDUL MALEK AHMAD FCJ |
26 JUNE 2000 |
Judgment
Mohamed Dzaiddin, FCJ
(delivering the judgment of the court)
This appeal concerns the interpretation of a performance bond and an insurance guarantee both dated May 16, 1991 given by the respondent to the appellant for the due performance of contract works by Jasib Shipyard & Engineering (M) Sdn Bhd (the contractor) under a contract No PPS 13/90 dated January 25, 1992 (the said contract).
Leave was granted by this court on August 4, 1998 to determine whether the said performance bond and the insurance guarantee are conditional or on demand bonds.
BACKGROUND
Briefly, the facts are as follows. On January 25, 1992 the contractor entered into the said contract with the appellant to construct and complete the partially completed beach restoration works between Sungai Terengganu and Kuala lbai, Kuala Terengganu. In consideration of the due performance of the said contract the respondent gave the appellant a performance bond for RM420,645 and an insurance guarantee against advance payment for RM1,069,035.
Sometime in November 1992 the appellant discovered that the contractor had defaulted in the completion of the works. Hence, by an AR Registered letter dated November 30, 1992 the appellant terminated the said contract with a copy sent to the respondent. Consequently, on December 12, 1992, the appellant sent a notice to the respondent demanding payment of RM420,645 under the performance bond and RM1,069,035 under the insurance guarantee. Since the respondent failed to respond to the above demand, the appellant instituted civil action against the respondent for payment of the aforesaid sum. This was followed by an application for summary judgment under Order 14 of the Rules of the High Court 1980.
At the High Court level, the Registrar dismissed the application, but on appeal, the learned High Court Judge reversed the Registrar's decision and gave summary judgment against the respondent. On further appeal, the Court of Appeal on September 24, 1996 found that there were triable issues in the case and allowed the respondent's appeal, set aside the learned Judge's decision and restored the decision of the learned Registrar.
The issue here and in the Court of Appeal is on the construction of the performance bond and the insurance guarantee against advance payment. With respect to the performance bond, paragraphs 1 and 2 provide [translation:[a]
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(1) |
Should the Contractor (unless .... entitled to) default in the performance of the contract in respect of any matter or breach any of its obligations in the contract, the Government may, if necessary, offer the Guarantor a chance to negotiate before making a decision. |
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(2) |
The guarantor shall pay damages to the Government a sum not exceeding RM420,645.00 within three months upon receipt of a written notice demanding that the guarantor pays the Government for any breach of the contractor's obligations under the contract, provided always that the amount payable shall not exceed the amount stipulated in this paragraph. |
The Court of Appeal held there were triable issues with regard to the construction of the documents. In its judgment (at p 241 AR) the court held:
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From the wordings of both the clauses above, it would appear that the liability under Clause 2 would only arise after the breach mentioned in Clause 1 occurs. Therefore the question as to whether the performance bond is a conditional one or an on demand one becomes an issue and there ought to be a trial to determine this which in turn will affect the validity of the notice issued by the Respondent. |
It concluded (at p 242):
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We are satisfied that the bond itself specifies the circumstances under which a demand can be made. It requires more than a mere demand or a demand simpliciter to trigger payment. The demand also had to assert the basis of the claim [see Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967]. The Respondent has not shown whether there had been any breach committed by the contractor, something which can only be determined after a full trial. |
RIVAL SUBMISSIONS
The English translation of paragraph 2 of the performance bond reads as follows:
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The guarantor shall pay damages to the Government a sum not exceeding RM420,645.00 within three months upon receipt of a written notice demanding that the guarantor pays the Government for any breach of the contractor's obligations under the contract, provided always that the amount payable shall not exceed the amount stipulated in this paragraph. |
The primary submission of Miss Chan, for the appellant, was that the performance bond is an on demand bond and not a conditional one as found by the Court of Appeal. Once a proper demand asserting the basis of the claim has been made to the guarantor, the latter must pay the sum demanded. In the present case, there was no requirement for the appellant to prove the breach. It was sufficient to show the basis of the demand and the demand given to the respondent was a proper and sufficient one. Miss Chan relied on Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546 which was followed by this court in China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 AMR 2233. In addition, she cited the following authorities:
IE Contractors Ltd v Lloyds Bank and Rafidain Bank [1990] 2 Lloyd's Rep 496;
Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967;
Nanyang Insurance Co (Malaysia) v Chin Kim Hin & Wong Siew Kong [High Court decision (unreported) dated September 19, 1991];
Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 AMR 189.
With respect to the insurance guarantee, Miss Chan submitted that this was also an on demand performance bond. What was disputed by the Court of Appeal was the amount due to the contractor under the progress payment, where the court observed that the interim payments had not been taken into account by the appellant when they claimed for the full sum of RM1,069,035 in the amended statement of claim and Order 14 summons.
The upshot of Miss Chan's argument was that on the true construction of paragraph 2 of the performance bond and based on the above authorities, the said bond is an on demand bond. Hence, the Court of Appeal erred in its interpretation that it is a conditional bond.
Mr. Pathmanathan, for the respondent, submitted that on the face of the performance bond, this is not an on demand bond but a conditional one. However, the thrust of counsel's argument is that as the performance bond in the instant appeal is a guarantee, both Esal and IE Contractors, supra, relied by Miss Chan are no longer good law as they have been overruled by the English House of Lords in Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1995] 3 All ER 737. The ratio of the case is that as the bond amounted to a guarantee, proof of damage and not mere assertion thereof was required before liability under the bond arose. Therefore, in the circumstances of the case, the appellant must prove their loss and not merely asserted that the sum of RM420,645 was the amount of damages payable to them under paragraph 2 of the performance bond.
Miss Chan in her reply contended that Trafalgar House did not overrule but distinguished Esal.
DELIBERATION
It is not disputed that both the Performance Bond and the Insurance Guarantee are performance bonds. This court in China Airlines, supra, quoting "The Modern Law of Guarantee" by O'Donovan & Phillips (2nd Edn) stated that 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 builder and the proprietor sustaining loss as a result of such breach. 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 the guarantor by the proprietor with no necessity for the proprietor to prove any default by the principal in performance of the principal contract.
The issue in the present appeal is whether the two documents are conditional or on demand bonds. In deciding this question the court will consider the overall purpose of the contractual relationship (Attaleia Marine Co Ltd v Bimeh Iran (Iran Insurance Co) [1993] 2 Lloyd's Rep 497 at 502) and the factual matrix of the case (Guyana and Trinidad Mutual Life v RK Plummer (1988) LRC (Comm) 548, 553 CA; IE Contractors.) Indeed, we are reminded by Staughton LJ in IE Contractors at p 499 that in interpreting the written documents 'it must never be forgotten that the task of the court is to construe the documents which were used in this case, and not any others.'
We shall first deal with the Performance Bond.
The material part of paragraph 2 of the Performance Bond reads:
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The guarantor shall pay damages to the Government a sum not exceeding RM420,645.00 within three months upon receipt of a written notice demanding that the guarantor pays the Government for any breach of the contract's obligations under the contract, .... [emphasis added] |
In construing the above paragraph, we would adopt the approach taken by Lord Justice Ackner (as he then was) in Esal, p 550. There are three possible meanings which can be given to the above paragraph.
First, no more than a mere written demand is required.
Secondly, the demand must assert a failure to perform the contract.
Thirdly, because of the word "damages", proof thereof and not mere assertion is required before liability under the bond arises. In our view, the second possibility is the answer because in addition to the demand made, the paragraph requires the Government to state the breach of the contractor's obligations under the contract.
In the instant case, the demand made by the appellant on the respondent for the above performance bond and the insurance guarantee is contained in the letter dated December 12, 1992 (p 180 AR). The material part reads as follows [literal translation]:
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I have been directed to inform you that the Contractor had defaulted in the completion of the works stated above. Please refer to our notice of termination to the Contractor ref: xxxx dated 30.11.1992 a copy of which has been served on you earlier.
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The notice of termination of the contract (p 177 AR) served on the contractor expressly mentioned about the contractor's breach under paragraph 51 (a) of the said contract, i.e. failure to execute the said works in accordance with the said contract.
Therefore, from the above notice, we find there is a clear assertion that the contractor had failed to perform his contract under paragraph 51 (a) of the said contract.
The next question that arises is whether paragraph 2 of the Performance Bond requires anything more than a demand asserting the breach without the appellant proving the loss in view of the opening words: "The guarantor shall pay damages to the Government..."? It is to be noted that the amounts payable under the two bonds are set out in paragraph 2 of the letter of demand. But, in the letter of demand there is no express assertion that the amounts demanded are in respect of damages which the appellant had suffered. Reading the notice of demand as a whole, it is reasonable to conclude that it complies with paragraph 2 of the Performance Bond because the particulars in paragraph 2.1 of the notice refers to the amount specified in paragraph 2 of the bond and in substance is the amount which the respondent is required to pay as damages for the contractor's breach of the said contract. Accordingly, there was sufficient demand made in compliance with paragraph 2 of the Performance Bond.
In support of the above conclusion, we would rely on IE Contractors, ibid, which was followed by this court in Esso Petroleum, supra. The terms of the performance bonds in IE Contractors issued by Rafidain Bank, inter alia, stated:
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(1) |
We have issued in your favour, as beneficiaries, this letter of guarantee to indemnify you against any damages that you may sustain, up to an amount of l.D.211,896/- (IRAQI DINARS TWO HUNDRED ELEVEN THOUSAND EIGHT HUNDRED AND NINETY SIX ONLY). |
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(2) |
Covering PERFORMANCE OF CONTRACT GUARANTEE COVERING DAMAGES WHICH YOU CLAIM ARE DULY AND PROPERLY OWING TO YOUR ORGANISATION BY GKN CONTRACTORS LTD., UNDER THE TERMS OF THE CONTRACT FOR A SLAUGHTER HOUSE AT DUHOUK MADE ON 12 JUNE 1978 BETWEEN YOU AND GKN CONTRACTORS LTD AND ROSS POULTRY LTD., |
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We undertake to pay you unconditionally the said amount on demand, being your claim for damages brought about by the above named principal. |
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[emphasis added] |
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The demand made on all three bonds read as follows:
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In view of the non-discharge by the company of its contractual obligations in making good the deficiencies of the slaughter houses of AI-Quadisiya, Karbala and Dohuk, we request withdrawal of the under-mentioned Guarantees and transference of their amounts to this Establishment. |
The amounts of the performance bonds were then set out.
Leggatt J held, inter alia, that the demand made was invalid for not staling that it was 'for damages etc.' as set out in the bonds. Allowing the appeal, the Court of Appeal declined to adopt such a 'strict compliance approach' of Leggatt J. Staughton LJ, delivering the judgment of the court held (pp 501-502):
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On any view there was a plain assertion that the contractors had not fulfilled their obligations. But there was no express assertion that the amounts claimed represented no less than the damage which the employers had suffered. Two questions arise: first, did the performance bonds require anything more than mere demands? Secondly, if so, did the demand presented assert such facts as the performance bonds required that it should assert? Mr. Justice Leggatt answered these questions (1) "Yes", and (2) "No", and held that Rafidain were not liable to the employers. .... In my judgment the demand is required to state that it is a claim for damages brought about by the contractors. Thus I agree with the Judge that something more than a mere demand was needed, although not exactly with the requirement that he adopted. It is arguable that some further assertion is required by paragraph 5 of the performance bonds. But on a fair reading of the document as a whole I do not think that the rigmarole in the proviso which that paragraph contains was required to be repeated verbatim, or at all. Did the demand made comply with the requirements of the bonds as I have construed them? It certainly asserted breaches of contract, but it did not in terms mention damages. It is here that the degree of strict compliance necessary becomes important. I resolutely decline to interpret these bonds as saying that Rafidain will pay if, but only if, the precise words in paragraph 3 are to be found in the demand. They were issued by one Iraqi concern to another, written in both English and Arabic, in language which is both prolix and vague. I cannot attribute to the parties an intention that there had to be a strict degree of compliance. In my judgment the demand made did say in substance, although not in express words, that what it claimed was damages for breach of contract. Accordingly I would hold that it was a sufficient demand upon the performance bonds. [emphasis added] |
Mr. Pathmanathan had submitted that IE Contractors is no longer good law as it had been overruled by Trafalgar House where the House of Lords decided that on its true construction, the bond in the case was a 'guarantee' in which proof of damage and not mere assertion thereof was required before liability under the bond arose and the defendants would be entitled to raise all questions of sums due and cross-claims which would have been available to subcontractors in an action against them for damages.
Trafalgar House concerned the effect of a bond granted to a main contractor by a subcontractor who was unable to complete the subcontract after the receivers had been called in. The bond was drafted in archaic English which prompted Lord Jauncey to comment (ibid, p 745):
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I find great difficulty in understanding the desire of commercial men to embody so simple an obligation in a document which is quite unnecessarily lengthy, which obfuscates its true purpose and which is likely to give rise to unnecessary arguments and litigation as to its meaning. |
It is sufficient to refer to the headnote which summarises the facts of the case and the issues. "The plaintiff contractors entered into a contract with a local authority for the construction of a leisure complex. The plaintiffs engaged sub-contractors for ground works and required them to provide a bond for 10% of sub-contract value of £1,012,851.31. The subcontractors entered into such a bond with the defendants, described as 'the surety', under which the surety's obligation was null and void if the subcontractors fulfilled the terms of the contract or if on default by the sub-contractors the surety 'shall satisfy and discharge the damages sustained by' the main contractors up to the amount of the bond. Before they completed work under the sub-contract the sub-contractors went into receivership and were unable to continue. The plaintiffs completed the works themselves and issued a writ against the defendants claiming £101,285 under the bond and applied for summary judgment. The official referee refused the defendants leave to defend and entered summary judgment. The defendants' appeal to the Court of Appeal was dismissed on the grounds,
that the purpose of the bond was to provide immediate funds for the plaintiffs in the event of failure of performance by the sub-contractors,
that the bond was not a guarantee in the ordinary sense whereby the guarantor agreed to 'see to it' that the sub- contractors' obligation would be performed but imposed on the surety an independent obligation to pay, on demand being made in good faith by the plaintiffs, a gross sum of damages representing the additional expenditure incurred by the plaintiffs as a result of the sub-contractors' breach, and
that in calculating that sum no account was to be taken of debts and credits, including the value of any set-offs and counterclaims due to or by the parties."
Two principal issues arose in the appeal from the decision of the Court of Appeal. One, whether the bond was a guarantee, and secondly whether the affidavits lodged by the appellants raised an issued to be tried. For our purpose, the first issue is crucial.
Lord Jauncey, delivering the opinion of the House, approached the issue by considering whether the bond in the case without the second part of the condition was a guarantee, and if so, whether the addition of that second part altered the position. The second part of the condition was in respect of payment of damages sustained by the plaintiffs up to the amount of the bond. After considering several authorities, his Lordship found that the Court of Appeal was in error in concluding that the bond was not a guarantee but was akin to an on demand bond. His Lordship held (ibid, p 743):
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I have therefore no hesitation in concluding that the Chambers bond without the second part of the condition would amount to a guarantee and that the appellants would be entitled to raise all questions of sums due and cross-clam is which would have been available to Chambers in an action against them for damages. |
It would appear to us that the above dictum of the House of Lords was based on the interpretation of a performance bond peculiar to the case, after having taken the view that on its true construction the bond was a guarantee and that his Lordship's conclusion was made upon the basis that the bond was construed without the second part of the condition which provided for the payment of damages sustained by the plaintiffs up to the amount of the bond.
It is trite law that in every case the terms of the performance bond need to be carefully considered. We find the text of the bond in Trafalgar House is not identical to that of paragraph 2 of the Performance Bond. Having read the House of Lords' judgment, we also found that IE Contractors was not referred to or discussed by Lord Jauncey. His Lordship did, however, refer to Esal where he observed that in recent years there has come into existence a creature described as an ' on demand' bond in terms of which a creditor is entitled to be paid merely on making a demand for the amount of the bond. All that was required to activate it was a demand by the creditor stated to be on the basis of the event specified in the bond.
With reference to Trafalgar House, his Lordship stated (at p 743):
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In this case the Court of Appeal by determining that the appellants' liability under the bond arose on the failure of Chambers to complete the contract followed by a demand in good faith for the amount of the damages which they claim to have suffered were effectively treating it as a type of on demand bond. |
From the above observation of Lord Jauncey, we agree with Miss Chan that Trafalgar House did not overrule Esal and IE Contractors, but merely distinguished when his Lordship commented that "the Court of Appeal were effectively treating it as a type of on demand bond". In addition, the latest edition of The Modern Law of Guarantee (3rd Edn, 1996) in its chapter on performance bond discussed at length IE Contractors, but said nothing about the effect of Trafalgar House on the former, let alone mentioning it in the footnote.
In our judgment, on its true construction this Performance Bond is an unconditional bond or an 'on demand' bond and all that is required to activate it is a written demand (Esal). It is simply a performance bond whereby the insurance company guarantees performance by the contractor of the works under the said contract, and in the event of non-performance or any breach of the terms thereof, the insurance company undertakes to pay the Government a sum not exceeding RM420,645 upon a formal demand.
With respect to the insurance guarantee, the relevant paragraphs state as follows:
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We, the undersigned, at the request of the Contractor irrevocably undertake and guarantee to the Government that:
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Paragraph 1 is so drafted that the guarantor shall become liable merely when demand is made by the Government notwithstanding any contestation or protest by the contractor or the guarantor or by any third party. It is clear that the overall purpose of the insurance guarantee is for the reimbursement of the advance payment of RM1,069,035, less whatever amounts of payment made by the guarantor and deductions out of the progress payments under paragraphs 3 and 4 upon a written demand made. In Esal, the bank "undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract". It was held that the latter words did not alter the fact that the moneys were payable upon a written demand. Likewise, in the present case, the words "notwithstanding any contestation or protest by the Contractor or by ourselves or by any other third party" in paragraph 1 above, do not alter the fact that the money is payable on a written demand under and pursuant to the said insurance guarantee. Therefore, on its true construction this insurance guarantee is an on demand performance bond.
The Court of Appeal in its judgment at p 243 AR seemed to agree that this insurance guarantee is an on demand guarantee. However, what the court disputed was the amount claimed by the appellant. Relying on paragraphs 3 and 4 of the bond and the particulars of interim repayments in the respondent's defence, the court held that these repayments were not taken into account in the appellant's amended statement of claim where the full sum of RM1,069,035 was claimed.
After looking at the pleadings and opposing affidavits in the Order 14 application, we agree with the observation of the Court of Appeal.
CONCLUSION
Our answer to the question raised in this appeal is that on the true construction, both documents are unconditional or on demand bonds.
For reasons stated, we allow this appeal and make the following orders:
The respondent shall pay the appellant the sum of RM420,645 under the Performance Bond with interest at the rate of 8 per cent per annum from the date of judgment i.e. May 12, 1995 until realisation.
The amount due and payable to the appellant under the insurance guarantee be assessed by the Registrar of the High Court taking into account deductions already made by the appellant from the progress payments due to the contractor.
Costs here and below.
With liberty to apply.
Cases
China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 AMR 2233; Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 AMR 189; IE Contractors Ltd v Lloyds Bank and Rafidain Bank [1990] 2 Lloyd's Rep 496; Attaleia Marine Co Ltd v Bimeh Iran (Iran Insurance Co.) [1993] 2 Lloyd's Report 497; Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546; Guyana and Trinidad Mutual Life v RK Plummer (1988) LRC (Comm) 548 CA; Nanyang Insurance Co (Malaysia) v Chin Kim Hin & Wong Siew Kong, unreported; Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 AMR 2967; Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1995] 3 All ER 737.
Legislations
Rules of the High Court 1980: Ord.14
Authors and other references
O'Donovan & Phillips, The Modern Law of Guarantee, 2nd Edn
O'Donovan & Phillips, The Modern Law of Guarantee, 1996, 3rd Edn
Representations
S.G. Chan, SFC (Ministry of Agriculture, Malaysia) for Appellant
M Pathmanathan, (Yusof Khan & Pathmanathan) for Respondent
Notes:-
[a] Translation is not in the original judgment.
This decision is also reported at [2000] 3 AMR 2803
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