PENGERANG REFINING COMPANY SDN BHD v 1. ) SINOPEC ENGINEERING (GROUP) CO LTD 2. ) SINOPEC ENGINEERING GROUP MALAYSIA SDN BHD

Case Significance

Illustrates the unconscionability ground for restraining a call on a performance bond in aid of arbitration under section 11 of the Arbitration Act 2005, the Court of Appeal upholding an injunction where the owner demanded the bond sum as delay damages to which it was not entitled after the facility had been completed and operated.

This Court of Appeal decision concerns two related appeals arising from an injunction restraining a call on a performance bond pending arbitration, and this record relates to the appeal against the ex parte order granting that injunction under section 11 of the Arbitration Act 2005. The appellant, an owner, held a performance bond of about USD132.9 million issued in connection with an engineering contract with the respondent contractors, and the respondents had obtained an ex parte order, followed by an ad interim injunction, restraining the appellant from making or receiving payment on a demand under the bond pending the final arbitration award. The central question was whether the appellant's demand on the performance bond was unconscionable. On the facts, the court found that the appellant had informed the respondent it was not entitled to a certificate of provisional acceptance because it had not paid delay damages equal to the bond sum — a sum to which the court considered the appellant was not entitled once the facility had been completed and handed over and after the appellant had earned revenue from operating it. The court concluded that the appellant's demand on the performance bond was unconscionable and against the very purpose of the bond, and noted that the appellant was not without remedy, since it could still make a demand on the parent company guarantees. Finding no real substance in the appeal warranting interference with the High Court's decision to restrain the call, the court dismissed the appeal with costs of RM25,000. The court's reasoning underscores that although a performance bond is ordinarily treated as autonomous and payable on demand, a beneficiary who calls on it to extract a sum it is not entitled to, after the secured works have been completed and taken over, engages the unconscionability exception, particularly where alternative security remains available to it. The judgment illustrates the unconscionability ground for restraining a call on a performance bond in aid of arbitration.