The facts are these. The plaintiff was engaged by the defendant (a developer) to construct a building. In the course of work, the defendant pointed out defects with the façade cladding of the building. The plaintiff undertook to rectify these defects.
The architect engaged by the defendant to supervise the works issued the completion certificate certifying completion (completion certificate), which also enclosed a schedule of outstanding classes of defects. The plaintiff failed to remedy the outstanding defects, despite reminders. The defendant then called on the performance bond to fund the completion of the rectification work by another contractor, engaged by the defendant.
The defendant claimed to have awarded the contract for the rectification works to Weng Thai Construction (WTC).
Though the plaintiff did not dispute that there were outstanding defects, it alleged that it would be unconscionable for the defendant to call on the performance bond from a bank.
The view taken by the court was that the plaintiff had established a strong prima facie case of unconscionability.
It was also noted by the court that the total amount which the defendant claimed the plaintiff owed mainly for defective works amounted to more than 25% of the original contract value which the defendant awarded to the plaintiff to contract the entire buildings. It seemed strange that the architects issued a completion certificate when such a large amount of rectification works remained outstanding.
The court thus ordered the call on the bond to be deferred until further order and for all rectification works to be completed by the plaintiff within six months.
The defendant’s appeal to the Court of Appeal in Singapore was dismissed.
The Court of Appeal upheld the High Court’s decision that the bond is question was not an unconditional on demand bond and that the plaintiff’s claim of unconscionability had been established
Potton Homes Ltd v. Coleman Contractors (Overseas) Ltd (1984) 28 Build L R 24 at page 28 where His Lordship said that:-
“.. in principle I do not think it possible to say that in no circumstances whatsoever, apart from fraud, will the court restrain the buyer. The facts of each case must be considered. If the contract is avoided or if there is a failure of consideration between buyer and seller for which the seller undertook to procure the issue of the performance bond, I do not see why, as between seller and buyer, the seller should not be able to prevent a call upon the bond by the mere assertion that the bond is to be treated as cash in hand.”.
easy reading ....
SUMATEC ENGINEERING AND CONSTRUCTION SDN BHD v. MALAYSIAN REFINING COMPANY SDN BHD
FEDERAL COURT, PUTRAJAYA
ARIFIN ZAKARIA CJ, HASHIM YUSOFF FCJ, ABDULL HAMID EMBONG FCJ
[CIVIL APPEAL NO: 02 (i)-27-2011 (W)]
29 FEBRUARY 2012
The appellant (`Sumatec') was appointed by the respondent (`MRC') to be its contractor for a project (`the Structural Steel works contract'). Sumatec was to also provide a bank guarantee for the due performance of the contract. It was Sumatec's assertion that they had duly completed all works required of them by delivery of all agreed steel structure, which was confirmed by the respondent through the issuance of a Provisional Acceptance Certificate.
However, a dispute arose between the two parties and subsequently Sumatec was informed that MRC had proceeded to make a demand for payment or encashment of the bank guarantee. Sumatec contended that MRC's call on the bank guarantee amounted to unconscionable conduct and this in itself was sufficient ground to challenge the calling for payments under the said bank guarantee. In the High Court, Sumatec succeeded in obtaining an injunction to restrain the respondent from calling upon the bank guarantee issued by Bank Islam Malaysia Berhad (BIMB).
However, the Court of Appeal found that MRC was not guilty of any unconscionable conduct to restrain it from calling on the bank guarantee and had allowed MRC's appeal, concluding that the balance of convenience tipped in favour of MRC and that damages would, at the end of the day, be a sufficient remedy for Sumatec.
Herein, leave to appeal was allowed on the sole question namely, whether `unconscionable conduct' on the part of a beneficiary of a bank guarantee or a performance bond was a distinct ground, apart from "fraud", that entitled the court to restrain the beneficiary from calling on or demanding and receiving monies under the bank guarantee or performance bond.
Held (dismissing the appeal with costs)
Per Abdull Hamid Embong FCJ delivering the judgment of the court:
(1) The principle recognising unconscionability as a separate and distinct ground to restrain a beneficiary from making a call on a performance bond accorded with good commercial sense (Kejuruteraan Bintai Kindenko Sdn Bhd v. Nam Fatt Construction Sdn Bhd & Anor; Focal Asia Sdn Bhd & Anor v. Raja Noraini Raja Datuk Nong Chik & Anor). Thus, unconscionability may now be raised as a distinct ground. The determination on whether unconscionability applies in a particular case would therefore depend largely on the material facts. (para 40)
(2) Sumatec raised several incidences of the alleged unconscionable conduct on the part of MRC. These were factual matters which had been carefully evaluated and answered in the Court of Appeal. The learned judges had rightly concluded based on the materials before them, that unconscionability had not been proven to maintain the injunction granted. There were no reasons to justify an interference with the appellate judges' exercise of their discretion to set aside the injunction. It was unnecessary to add, minus or expand on the reasons given by the Court of Appeal to its negative finding of unconscionability on the part of MRC. Balance of convenience favoured refusal of the injunction. (para 43)
