AXIANERGY (M) SDN BHD v PETRONAS GAS BERHAD

Case Significance

Illustrates the unconscionability exception to a call on an on-demand bank guarantee, the court restraining a call under section 11 of the Arbitration Act 2005 where the beneficiary transferred the guarantee and directed payment to a party not named as beneficiary, coupled with an unsubstantiated demand and disregard of the contractual default mechanism.

This High Court decision concerns an application under section 11 of the Arbitration Act 2005 to restrain a beneficiary from calling on an on-demand bank guarantee pending arbitration of the underlying construction dispute. The plaintiff, a contractor, had been engaged by the defendant to carry out substructure works for a pipeline project, and the defendant held a bank guarantee for over RM9.1 million issued by a bank in its favour. The plaintiff sought an injunction to restrain the defendant from calling on the guarantee, and the court, having granted an ex parte order and then an ad interim injunction, proceeded to determine the substantive application together with the defendant's application to set aside the ex parte order. The court reaffirmed that, although an on-demand bank guarantee is unconditional and payable on demand as between the issuing bank and the named beneficiary, strict compliance with the express terms of the guarantee is required for a valid and enforceable call, and that unconscionability is an independent and recognised ground on which a call may be restrained, following Sumatec and Bintai Kindenko, where there is manifest and strong cogent evidence of conduct that is oppressive or lacking in good faith such as would prick the conscience of a reasonable person. On the facts, the court found that the defendant's unilateral transfer of the guarantee to a third party and its direction for payment to a party not named as beneficiary rendered the call legally questionable, and that this conduct, together with an unsubstantiated and evolving demand made in close proximity to the plaintiff's payment-adjudication proceedings and a failure to follow the contractual default mechanism, amounted, individually and cumulatively, to unconscionable conduct. The court allowed the application, dismissed the set-aside application, required the plaintiff to keep the guarantee valid pending the arbitration, and awarded costs of RM7,500. The judgment illustrates the unconscionability exception to calls on on-demand guarantees.