BGMC CORPORATION SDN BHD v 1. ) GITA KASTURI SDN. BHD. 2. ) UNITED OVERSEAS BANK (MALAYSIA) BERHAD

Case Significance

Confirms that a call on a performance bond will not be restrained under section 11 of the Arbitration Act 2005 where the beneficiary is exercising a contractual right to recover liquidated damages on the contractor's delay, absent a breach of the bond's conditions or unconscionable conduct, and that such a call is independent of the contract's dispute-resolution mechanism.

This High Court decision in the Construction Court at Shah Alam concerns an application, under section 11 of the Arbitration Act 2005, for an injunction to restrain a call on a performance bond pending arbitration. The plaintiff, the main contractor appointed by the first defendant for a construction project under a letter of award for a contract sum of over RM292 million, sought to restrain the first defendant from calling on a RM10 million performance bond issued by the second defendant bank, on the basis that the bond was conditional in nature and its conditions had not been met, and that the call was unconscionable. By consent, an ad interim injunction had been granted pending disposal of the originating summons. Examining the terms of the contract and the bond, the Court found that the first defendant had repeatedly complained of the plaintiff's delay in completing the works, which constituted a breach of the contract, and that under the relevant clause of the standard-form construction contract the first defendant was expressly entitled to recover liquidated damages from the performance bond. It concluded that the first defendant was merely exercising its contractual right to call on the bond upon the plaintiff's breach in failing to complete the works by the completion date, and that the call was not unconscionable. The Court also rejected the argument that calling on the bond had sidelined the contract's dispute-resolution mechanism, holding that a call on a performance bond is independent of the parties' rights to adjudication, arbitration or mediation and did not hinder or impede those rights. Finding neither a breach of the bond's conditions nor unconscionable conduct made out, the Court dismissed the originating summons with costs, and the plaintiff filed an appeal. The decision reinforces the autonomy of a performance bond as a security instrument: absent clear evidence that its conditions were unmet or that the call was unconscionable, the court will not intervene to restrain a beneficiary from enforcing it.