FAQ On How To Prevent Or Resist The Calling Of A Performance Bond

• Published date: 03 May 2022
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Criminal Law, Contracts and Commercial Law, Construction & Planning, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: MahWengKwai & Associates
• Author: Christine Toh

Most if not all construction contracts impose a mandatory obligation on the contractor to furnish to its employer a performance bond to guarantee the performance of the contract.

A performance bond is a contract between the bank and the person entitled to receive the performance bond ("the beneficiary"). Performance bonds are usually in the form of a bank guarantee for a certain percentage of the contract sum. Although the performance bond is entirely separate from the construction contract, the performance bond contract is closely related to the underlying construction contract.

We have previously published an article titled Performance Bonds and Bank Guarantees - Interpretations and Demands which explores the various interpretations of performance bonds and the requirements of a valid demand. This article answers frequently asked questions on how to prevent/resist a call on a performance bond in the construction industry.

General FAQ

1. What should I do if the beneficiary calls on the performance bond?

You may apply for an injunction from the Malaysian courts if you wish to resist the calling on the performance bond.

2. How does an injunction help?

An injunction is a judicial order from the courts to prevent a party from doing an act or to compel a party to do an act.

In this case, the court may, if your application for an injunction against the call of a performance bond is allowed, order that:

• The guarantor (usually the bank) be restrained from releasing the sums under the performance bond to the beneficiary (usually the employer); and/or
• The beneficiary be restrained from calling on the performance bond.

3. How quickly can an injunction be applied for and obtained?

In very urgent circumstances, an injunction application can be prepared by solicitors within a matter of days. However, it is best to seek the advice of and appoint solicitors as early as possible, and as soon as and a dispute of the calling of a performance bond is anticipated.
An application for an interim injunction can be filed on an ex-parte basis together with a certificate of urgency in order to obtain an urgent hearing date, possibly within a matter of days. An interim injunction is intended to hold the status quo pending the final determination of the suit between the parties. An ex-parte hearing is one which is heard on an urgent basis without full arguments being presented by the opposing parties. An ex-parte injunction given under Order 29 Rule 1 of the Rules of Court 2012 is only valid for 21 days and may be extended at the discretion of the court until the inter-partes hearing of the interim injunction.

4. How do the Malaysian Courts approach an application for an injunction to restrain the calling of a performance bond?

Generally, the courts are slow to interfere with a beneficiary's call on the performance bond as the court recognizes that "in the world of commerce, trustworthiness is a byword for doing business and a performance bond thus plays a crucial role causing more business to be formed and to be transacted."

It is only in "exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. - See Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995]1 MLJ 149

5. Under what circumstances will the courts allow an application for an injunction to restrain the calling of a performance bond?

The courts do recognise that the rigidity of the autonomy principle between the beneficiary and the bank may result in injustice. Hence, the courts have allowed injunction applications to restrain the calling of a performance bond in situations where there is fraud or unconscionable conduct even where there is a valid demand issued by a beneficiary.

On what amounts to a valid demand, please read...