Performance Bond Conditional or Unconditional

PERFORMANCE BOND: CONDITIONAL OR UNCONDITIONAL
'AZIZAN BIN SUPARDI
UNIVERSITI TEKNOLOGI MALAYSIA

To my family for their love and support
iii
ACKNOWLEDGEMENTS
With high gratitude to Allah S.W.T. who gave me the ideas and physical strength in
preparing this master project. This project would not have been completed without the
support and encouragement from the various people involved. Because of that, I wish to
express my deepest gratitude to these people who provided valuable cooperation in my
carrying out of this final project.
First of all, I would give my acknowledgement to my supervisor En Jamaluddin Yaakob
for his guidance, support and giving the ideas in preparing of this master project. My
appreciation also goes to all the lecturers for the course of Master of Science in
Construction Contract Management, for their patient and kind advice during the process
of completing the master project.
I am also thankful to my parents, Hj Supardi Surtiman and Hjh Zamnah Abdul Hamid,
my beloved wife, Noor Baini Abdullah, my three sons, Muhammad Haziq, Muhammad
Hakim and Muhammad Hafiy, and a daughter, Nur Batrisyia for their great consideration
and encouragement while preparing this master project.
Lastly, I would like to thank my classmates for giving me the needed morale support and
supplying me with the information on how to write a master project.
Thank you to all the parties involved who have provided me with great cooperation that I
really need in completing the master project.
iv
ABSTRACT
In construction contracts, a 'performance bond' is a bond taken out by the

contractor, usually with a bank or insurance company (in return for payment of a
premium), for the benefit of and at the request of the employer, in a stipulated maximum
sum of liability and enforceable by the employer in the event of the contractor's default,
repudiation or insolvency, as stated by Nigel M Robinson et. al. in his book, Construction
Law in Singapore and Malaysia. He further added that there are two types of
performance bonds: Conditional bond or default bond, whereby the surety accepts 'joint
and several' responsibility for the performance of the contractor's obligations under the
contract; and Unconditional bond or on-demand bond, which is a covenant by the surety
(usually a bank) to indemnify the employer following contractor's default, subject to
stated terms and up to a sum commonly 5% of the main contract sum. However, in
Malaysia, for the past 20 years and since the famous case of Teknik Cekap Sdn Bhd v
Public Bank Berhad [1995] 3 MLJ 449 to the recent Suharta Development Sdn Bhd v
United Overseas Bank (M) Bhd & Anor [2005] 2 MLJ 762, the question of whether the
performance bond in a construction contract is a conditional or an unconditional
guarantees is still one of the issues relating to performance bond that has been discussed.
Thus, in order to determine the types of performance bond applicable in a contract, a
thorough understanding of the content of the bond is required. Therefore, the objective of
this research is to determine the phrase(s) in the Performance Bond in a construction
contract that determine whether the performance bond is a conditional or unconditional
on demand guarantee. In order to achieve this objective, the research was conducted by
analyzing relevant court cases. From the findings, it can be concluded that unless an
undisputed meaning of the words in the performance bond to make the performance bond
to be purely conditional or unconditional 'on-demand' bond, most court interpreted
performance bond to be an on-demand performance bond which is only conditional upon
the beneficiary asserting the basis of the claim upon the issuer of the bond contending
that there has been breach of contract.
v
ABSTRAK
Di dalam kontrak pembinaan, sesuatu 'bon perlaksanaan' adalah satu bond yang
diambil oleh kontraktor, selalunya dengan satu bank atau syarikat insuran (sebagai
balasan kepada bayaran premium), untuk faedah dan atas permintaan majikan, mengikut
jumlah liability maksimum yang dinyatakan dan dikuatkuasakan oleh majikan di dalam
kejadian di mana kemungkiran, keengganan atau kebankrapan kontraktor, seperti
dinyatakan oleh Nigel M Robinson et. al. di dalam bukunya, Construction Law in
Singapore and Malaysia. Dia menambah bahawa terdapat dua jenis bon perlaksanaan:
Conditional bond atau default bond, di mana penjamin menerima tanggungjawab
'bersama dan beberapa' untuk perlaksanaan obligasi kontraktor di bawah kontrak; dan
Unconditional bond atau on-demand bond, iaitu permuafakatan oleh penjamin (selalunya
bank) untuk menggantirugi majikan atas kemungkiran kontraktor, tertakluk kepada
syarat-syarat dan kepada jumlah harga biasanya 5% daripada harga kontrak utama. Akan
tetapi, di Malaysia, selama 20 tahun sejak kes Teknik Cekap Sdn Bhd v Public Bank
Berhad [1995] 3 MLJ 449 kepada Suharta Development Sdn Bhd v United Overseas
Bank (M) Bhd & Anor [2005] 2 MLJ 762, persoalan samada bon perlaksanaan di dalam
kontrak pembinaan adalah jaminan bersyarat atau tidak, masih salah satu masalah yang
diperbincangkan. Oleh itu, untuk menentukan jenis bon perlaksanaan yang digunakan di
dalam kontrak, pengetahuan mendalam kandungan bon tersebut adalah diperlukan. Oleh
sebab itu, objektif kajian ini adalah untuk menentukan frasa atau frasa-frasa dalam bon
perlaksanaan di dalam kontrak pembinaan yang menentukan samada bon perlaksanaan
tersebut adalah jaminan bersyarat atau tidak. Untuk mencapai objektif ini, kajian
dijalankan dengan menganalisa kes-kes mahkamah yang relevan. Dari keputusannya,
kesimpulan boleh dibuat bahawa kecuali makna perkataan-perkataan bon perlaksanaan
adalah bersyarat tulen atau tidak bersyarat tulen, kebanyakan mahkamah mentafsir bon
perlaksanaan adalah bon perlaksanaan tidak bersyarat di mana syaratnya hanyalah pada
waris menuntut hak dengan mengemukakan tuntutan terhadap bon beralasan bahawa
terdapat pelanggaran kontrak.
vi
TABLE OF CONTENTS
PAGE
TITLE i
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
ABSTRAK vi
TABLE OF CONTENTS vii
LIST OF CASES ix
LIST OF ABBREVIATIONS xi
LIST OF FIGURES / TABLES xii
CHAPTER 1 INTRODUCTION
1.1 Background of Topic 1

1.2 Problem Statement 4
1.3 Objective of Topic 7
1.4 Previous Research 7
1.5 Scope of Topic 8
1.6 Significant of Topic 9
1.7 Methodology and Research Process 9
1.8 The organizational of research proposal 12
vii
PAGE
CHAPTER 2 PERFORMANCE BOND
2.1 Introduction 14
2.2 Definition 18
2.3 Nature of Performance Bond 19
2.4 Purpose of Performance Bond 20
2.5 Performance Bond in Construction Contract 21
2.6 Types of Performance Bond 24
2.7 Construction of Performance Bond 26
2.8 Summary 28
CHAPTER 3 COMPARATIVE ANALYSIS: CONDITIONAL VERSUS

UNCONDITIONAL PERFORMANCE BOND
3.1 Introduction 31
3.2 Law Cases held and cited to differentiate the Conditionality
of the Performance Bond by its wordings 32
3.3 Comparative Analysis of the Law Cases 74
3.4 Summary 79
CHAPTER 4 CONCLUSION AND RECOMMENDATION
4.1 Introduction 82
4.2 Conclusion 84
4.3 Recommendation 89
REFERENCES 91
BIBLIOGRAPHY 93
viii
LIST OF CASES
PAGE
Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141
CLR 335..…………………………………………………………………………..……..63
Bocotra Construction Pte Ltd v Attorney General (No 2) [1995] 2 SLR 733
…..…………………………………………………………………..………………..49, 77
China Airlines Ltd v Maltran Air Corp Sdn Bhd [1996] 2 MLJ 517
……....………………………………….....…………..….…4, 6, 24, 29, 33, 44, 46, 56, 85
Daewoo Engineering & Construction Co Ltd v The Titular Roman Catholic Archibishop
of Kuala Lumpur [2004] 7 MLJ 136…...…………………………………………….…..33
Damatar Paints (P) Ltd v Indian Oil Corp AIR 1982 Delhi 57
……………………………………………………………………………………..……..42
Danaharta Managers Sdn Bhd v Huang Ee Hoe & Ors [2002] 2 MLJ 424
……………………………………………………………………………………..……..34
Easal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546
…..…..…………………... 35, 36, 39, 45, 49, 50, 52, 54, 55, 58, 71, 72, 74, 77, 78, 79, 87
Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159
……………………………………..…………….…...20, 28, 52, 59, 68, 70, 76, 80, 84, 88
Esso Petroleum Malaysia Inc. v. Kago Petroleum Sdn. Bhd. [1995] 1 MLJ 149
……....................6, 26, 29, 32, 37, 46, 55, 58, 61, 70, 73, 74, 75, 78, 80, 81, 86, 87, 89, 90
Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1994] 4 MLJ 199
…..……………………………………………………………………..……..47, 76, 80, 88
Government of Malaysia v South East Asia Insurance Bhd [2000] 3 MLJ 625
…..…..………………………………………………………………….………….4, 35, 36
IE Contractors Ltd v Lloyd’s Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496
……...…………….…………..26, 27, 29, 37, 50, 61, 62, 70, 71, 75, 80, 81, 86, 87, 89, 90
Jowitt v Callaghan (1938) 38 SR (NSW) 512
……………………………………………………………………………………..……..64
ix
Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ 198
…..………………………………………………………………..………..……..25, 64, 70
LEC Contractors (M) Sdn. Bhd. v Castle Inn Sdn Bhd [2000] 3 MLJ 339
……....……………………………………………………….…..…….……5, 6, 32, 33, 41
Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd [1998] 7 MLJ
105…..…………………………………………………...…..……………….20, 28, 52, 85
Nik Sharifuddin Bin Nik Kadir v Mohaiyani Securities Sdn Bhd [1994] 3 MLJ 551
……………………………………………………………………………………..……..62
Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anors [1989] 1 MLJ 190
……………………………………………………………………………………..… ….67
Pesticides India v State Chemicals & Pharmaeuticals Corp of India AIR 1982 Delhi 78
……………………………………………………………………………………..……..42
Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998] 5 MLJ 233
…..……………………………………………………………………..……..54, 78, 81, 88
RD Harbottle (Merchantile) Ltd v National Westminster Bank Ltd [1978] 1 QB 146
………………………………...………………………………………………………….60
Re Conley [1938] 2 All ER 127
……………………………………………………………………………………..……..25
Sime Engineering Sdn Bhd & Anor v Public Bank Berhad [2004] 7 MLJ 475
……………………………………………………………………………………..……..34
Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd [2005] 2 MLJ 762
…..…..……………………………………………………………………………..5, 31, 32
Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 3 MLJ 449
….…..….……..4, 5, 6, 18, 24, 27, 30, 32, 33, 42, 46, 50, 55, 69, 73, 75, 78, 80, 84, 86, 87
x
LIST OF ABBREVIATIONS
AC Law Reports: Appeal Cases

All ER All England Law Reports
AMR All Malaysia Reports
App Cas Appeal Cases
Build LR Building Law Reports
CLJ Current Law Journal (Malaysia)
EWCA Civ Court of Appeal, Civil Division (England & Wales)
HL House of Lords
Lloyd’s Rep Lloyd’s List Reports
LR Law Reports
MLJ Malayan Law Journal
PC Privy Council
QB Queen Bench
SCR Session Cases Report
SLR Singapore Law Report
WLR Weekly Law Report
xi
LIST OF FIGURES / TABLES
PAGE
Figure 1.1: Relationship of Parties to a Bond and the Underlying Contract

………………………………………………………………………………..…………....2
Figure 1.2: Time line indicating the validity period of the performance bond
……………………………………………………………………………………………..3
Figure 1.3: Flowchart of the research methodology

…………………………………………………………………………………………....11
Figure 2.1: The risk spectrum: some principal sources of risk

……………………………………………………………………………………...…….15
Figure 2.2: The risk spectrum: some principal sources of risk

……………………………………………………………………………………...…….17
xii
Performance Bond: Conditional or Unconditional
INTRODUCTION
CHAPTER 1
INTRODUCTION
1.1 Background of Topic
A performance bond is a bond giving security for the carrying out of a contract,
where a bond is a deed by which one person (the obligator) commits himself to another
(the obligee) to do something or refrain from doing something.1 In construction contracts,
a ‘performance bond’ is a bond taken out by the contractor, usually with a bank or
insurance company (in return for payment of a premium), for the benefit of and at the
request of the employer, in a stipulated maximum sum of liability and enforceable by the
employer in the event of the contractor’s default, repudiation or insolvency.2 These
relationships can be illustrated in Figure 1.1.
In Malaysia, most of the need of a performance bond is made through an

agreement between the Government, the contractor and a third party (usually a bank or
insurance company), whereby the third party agrees to pay a sum of money to the
Government, in the event of non-performance of the construction contract by the
1
Elizabeth A. Martin (2003), A Dictionary of Law, 5th Edition reissued with new covers, Oxford
University Press, Oxford, p.53
2
Nigel M. Robinson et. al. (1996), Construction Law in Singapore and Malaysia, 2nd Edition,
Butterworths Asia, Singapore, p.205
1
contractor.3 It is provided in Clause 37(a) of the P.W.D. Form 203A (Rev. 10/83)
Standard Form of Contract to be Used Where Bills of Quantities Form Part of the
Contract that the Contractor shall either deposit with the Government a performance
bond in cash or alternatively by way of a Treasury's Deposit or Banker's Draft or
approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a
condition precedent to the commencement of work. In other words, the Contractor is not
permitted to carry out any work under the Contract unless and until the performance bond
is given. The failure of the Contractor to give the performance bond may amount to a
fundamental breach of contract entitling the Government to discharge the Contract and
sue the Contractor for damages accordingly.4
Bank Contractor
Obligator Indemnity Assured
Bond Contract
Developer
Obligee
Figure 1.1: Relationships of Parties to a Bond and the Underlying Contract5
The validity period of the performance bond is as indicated in Figure 1.2 below.
By clause 37(b), the performance bond is required to be maintained for such period as
provided in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability
3
Khairuddin Abdul Rashid (2004), Guarantee Against Non-Performance of Construction Contract by
the Contractor: Performance Guarantee Sum versus Performance Bond, Seminar, 1st International
Conference, Toronto Canada, May 27 2004 – May 28 2004, World of Construction Project
Management, p. 5
4
Lim Chong Fong (2004), The Malaysian PWD Form of Construction Contract, Sweet & Maxwell
Asia, Petaling Jaya, p. 76
5
Chow Kok Fong (2004), Law and Practice of Construction Contracts, 3rd Edition, Sweet & Maxwell
Asia, Singapore, p. 525
2
Period stated in the Contract calculated from the date of completion of the Works or any
authorized extension thereto or if the contract is determined, until one year after the date
of determination.6
Completion
Possession Practical of making
of site completion good defects
Contractor Construction Defects liability

informed
about the
bond Validity period of the Performance Bond extends to 6 months
during after the expiry of the defects liability period
tender
Figure 1.2: Time line indicating the validity period of the performance bond7
There are two types of performance bonds, as set out below.8
• Conditional bond or default bond. A default bond is a contract of guarantee

whereby the surety accepts ‘joint and several’ responsibility for the performance
of the contractor’s obligations under the building contract: the contractor remains
primarily liable for his performance and not protected by the bond.
• Unconditional bond or on-demand bond. An on-demand bond is a covenant by

the surety (usually a bank) to indemnify the employer following contractor’s
default, subject to stated terms and up to a sum commonly between 10 and 20% of
the main contract sum. The contractor is not a party to this arrangement.
6
Lim Chong Fong (2004), p. 77
7
Khairuddin Abdul Rashid (2004), p. 6
8
Nigel M. Robinson et. al. (1996), p. 205 but under on-demand bond in Malaysia, subject to stated terms
and up to a sum commonly 5% of the main contract sum.
3
Thus, in order to determine the types of performance bond applicable in a
contract, a thorough understanding of the content of the bond is required. The Court of
Appeal in the famous Teknik Cekap Sdn Bhd v Public Bank Berhad [1995]9 held that:
Therefore a performance bond is nothing more than a written guarantee,

and in order to interpret the obligations of the bank, one need only to look
at the written bond itself to determine what are the terms and conditions
agreed upon between the parties. A great deal, therefore, depends on the
wording of the bond itself.
1.2 Problem Statement
As discussed above, there are two types of performance bond. The distinction
between conditional and unconditional 'on demand' guarantee is also been discussed in
the case of China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran
Air Services Corp Sdn Bhd) and Another Appeal [1996]10 and later is agreed upon in the
case of Government of Malaysia v South East Asia Insurance Bhd [2000]11. In the former
case, the court cited that:
A bank guarantee is a performance bond. There are two types of

performance bond. The first type is a conditional bond whereby the
guarantor becomes liable upon proof of a breach of the terms of the
principal contract by the principal and the beneficiary sustaining loss as a
result of such breach. The guarantor's liability will therefore arise as a
result of the principal's default. The second type is an unconditional or 'on
demand' performance bond which is so drafted that the guarantor will
become liable merely when demand is made upon him by the beneficiary
9
[1995] 3 MLJ 449
10
[1996] 2 MLJ 517
11
[2000] 3 MLJ 625
4
with no necessity for the beneficiary to prove any default by the principal
in performance of the principal contract.
However, in Malaysia, for the past 20 years and since the famous Teknik Cekap
Sdn Bhd v Public Bank Berhad [1995]12 to the recent Suharta Development Sdn Bhd v
United Overseas Bank (M) Bhd & Anor [2005]13, the question of whether the
performance bond in a construction contract is a conditional or an unconditional
guarantees is still one of the issues relating to performance bond that been discussed.
In Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor
[2005]14, Abdul Wahab Said Ahmad JC stated that:
A performance bond or guarantee is in fact a written contract to guarantee

due performance in the event of breach or non performance of the contract. In
determining whether it is conditional or otherwise, the court is concerned with
the contractual construction or interpretation of the bond or guarantee itself.
A great deal depends on the wording of the guarantee itself to discover the
intention of the parties.
The defendant contended that the terms of the guarantee is conditional and
cited Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 MLJ 449 whilst
the plaintiff relied on LEC Contractors (M) Sdn Bhd (formerly known as
Lotterworld Engineering & Construction Sdn Bhd) v Castle Inn Sdn Bhd &
Anor [2000] 3 MLJ 339. In both the cases the terms of the bond are similar to
that in the case before me. The Court of Appeal in Teknik Cekap Sdn Bhd
held the bond to be conditional but in LEC Contractors (M) Sdn Bhd held it
is an on demand bond.
12
[1995] 3 MLJ 449
13
[2005] 2 MLJ 762
14
ibid
5
In LEC Contractors (M) Sdn Bhd Mokhtar Sidin JCA distinguished the case
of Teknik Cekap and at p 358 said:
That is the position of an on demand performance bond. It is clear to us that

the bank guarantee in the present appeal is a performance bond. From the
wordings of the guarantee it is clear to us that it is 'on demand' performance
bond as stated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd:
'All that was required to trigger them was a demand in writing'; or in the
words of Mohamed Dzaidin FCJ in the case of China Airlines Ltd v Maltran
AirCorp Sdn Bhd: 'the guarantor will become liable merely when demand is
made upon the beneficiary with no necessity for the beneficiary to prove any
default by the principal in performance of the principal contract'.
The appellant claimed that the bank guarantee is a conditional bond. To

support this contention learned counsel for the appellant referred to the case
of Teknik Cekap, a decision of this court where the court held that a
performance bond was a conditional bond. It was held by the court that
because the bond began the words: 'If the subcontractor … shall in any
respect fail to execute the contract or commit any breach of his obligations
thereunder then the guarantor shall pay'. Apparently this is the case in
Malaysia where similar wordings has been used where the court has held that
it was a conditional bond.
From the above case, therefore, it is important to determine the content of the
performance bond: whether the client can call upon the bond in the case of non-
performance of the contractor or can the bank restraint the client from calling the bond
among other. So, the phrase(s) in the bond shall be the issue of discussion.
6
This phrase(s) should also be in written form. A clear written phrase(s) that make
up the content of the performance bond can clear the distinction between conditional and
unconditional on demand guarantee.
Hence it is important and necessary to understand the circumstances in

performance bond, which will be available to the parties to a building contract. And from
that, the parties involved will clearly defined their rights and liability against bonds and
guarantee to assist the respective party in construction contract.15
1.3 Objective of Topic
As such, this Masters Project has the objective to determine the phrase(s) in the
Performance Bond in a construction contract that determine whether the performance
bond is a conditional or an unconditional on demand guarantee. By clearing this issue, it
is hoped that no more dispute will arise under the interpretation of the content of the
Performance Bond especially in a construction contract.
1.4 Previous Research
There is quite a number of similar research have been done previously. The first
was by Dr Khairuddin Abdul Rashid called Guarantee against Non-performance of
Construction Contract by the Contractor: Performance Guarantee Sum versus
Performance Bond. This research was presented at the 1st International Conference at
Toronto, Canada on May 27 2004 to May 28 2004 organized by the World of
15
Nur'Ain Ismail (2007), Performance Bond and An Injunction, Master's Project Report (Dissertation),
Universiti Teknologi Malaysia, p. 6.
7
Construction Project Management. This study aims to fulfill two key objectives: to
review literature and Government documents relating to the rules on the requirement for
performance bond or performance guarantee sum for public infrastructure contracts in
Malaysia; and to assess the consequences to the Government of the contractors' opting for
either the performance bond or the performance guarantee sum.
The second was by En. Jamaluddin Yaakob called Performance Bond in

Construction Contract: Problems with Drafting & Calling the Bonds. This research was
presented at the seminar on Issues on Non-Performance of Construction Contract at
Rumah Alumni, Universiti Teknologi Malaysia, Skudai, Johor on February 26 2005
organized by the Department of Quantity Surveying, Faculty of Built Environment,
Universiti Teknologi Malaysia. The main objective of this paper is examine the
correlation between the wordings of performance bonds and the problems that arise when
making a call on the bond.
The third was by Nur'Ain Ismail called Performance Bond and An Injunction.
This research was a master’s project report (dissertation) submitted on July 2007 in
fulfillment of the requirements for the award of the degree of Master in Science of
Construction Contract Management, Universiti Teknologi Malaysia. The objective of the
study is to identify legal principles used by the courts in granting or rejecting an
application for injunction against bondsmen from making payment or against employer
from receiving the bonds.
1.5 Scope of Topic
As far as the scope of study is concerned, this Masters Project paper gather some
medium of literatures such as the standard forms of contract (for example, PWD203A),
8
other related documents (for example, Bank Guarantee for Performance Bond or PWD
Q7/81), and relevant law cases (for example, from Malayan law Journal) as well as
Reference Books and other mediums (for example, journals, articles, magazines,
newspapers, internets, etc.) for analyzing the legal interpretation between conditional and
unconditional on demand performance bond in construction contract.
1.6 Significance of Topic
As has been mentioned in the objective, this research is important to the

construction industry because it determines the phrase(s) in the Performance Bond in a
construction contract whether the phrase(s) is/are conditional or unconditional on demand
guarantees. By clearing this issue, it is hoped that no more dispute will arise due to the
interpretation of the content of the Performance Bond especially in a construction
contract. Hopefully, this study will add as a reference to the Malaysian construction
contract practice to be more effective.
1.7 Methodology and Research Process
Basically, this Masters Project paper adopts five steps as its methodology and
research process in order to achieve its objective. The steps are discussed further as
follows:
Step 1: Identification of Research Topic
This is to give a thorough understanding what is this research is all about

with some initial definition of the topic under study.
9
Step 2 Research Objective
This is the determining of what the research is hoping to achieve in

studying the determination on the phrase(s) in the Performance Bond in a
construction contract whether they is/are conditional or unconditional on
demand guarantees.
Step 3: Data Collection
This is of course the gathering and consuming the medium of literatures as

stated in the Scope of Study above. The medium of literatures is divided
into two categories, namely the primary data and secondary data as shown
in Figure 1.3 below.
Step 4: Analysis
This is the main text of this Masters Project dissertation which is

analyzing and commenting the content of the Performance Bond in
relation to whether it is a conditional or an unconditional on demand
guarantee through the legal point of view from the examples of judgment
held in law cases and later written systematically into chapters in this
Masters Project paper. By using the words ‘Performance Bond’, 67 cases
for the past 20 years were downloaded from the Malayan Law Journal to
be analyzed further. From the first reading and screening of the above
cases, the judge of 25 cases did interpret the distinction between
‘conditional’ and ‘unconditional’ Performance Bond. Further screening
was done from the 25 cases whereby only cases which the judge discussed
on the wordings or phrase(s) of the Performance Bond will be further
analyzed. From this, 15 cases were identified to be further consumed.
10
Definition of
Research Topic
Data Collection
Primary Secondary
Data Data
The standard forms of contract Reference Books and other

(for example, PWD203A) mediums
Other related documents (for example, journals, articles,
(for example, Bank Guarantee magazines, newspapers,
for Performance Bond or PWD internets, etc.)
Q7/81)
Relevant law cases
(for example, from Malayan
law Journal)
Analysis of
Data
Conclusion &
Recommendation
Figure 1.3: Flowchart of the research methodology
11
Step 5: Conclusion and Recommendation
This step concludes and summarizes the whole of the Masters Project
paper, the outcome of objective achievable as well as making some
recommendations to the outcomes. This Masters Project paper also hope
to produce a new revised Bank Guarantee for Performance Bond that
cleared the issue of interpreting the content whether it is conditional or
not.
1.8 The organizational of the research proposal
This Masters Project paper seeks to achieve its aim in five chapters with the main
reference will be the identification of phrase(s) in the Performance Bond in a construction
contract that differentiate between conditional and unconditional on demand guarantee:
Chapter 1: Introduction
The introduction is the first chapter consists of the overview of this

Masters Project paper as well as stating the aim and objectives, issue or
problem statement, scope and methodology of study, previously similar
research, and brief description of chapter organization.
Chapter 2: Performance Bond
The second chapter is basically the brief information on the bond

application, management and its effectiveness in the Malaysian
construction contract practice.
12
Chapter 3: Comparative Analysis: Conditional versus Unconditional
Performance Bond
The third chapter is basically the detail legal issues regarding the
identification of phrase(s) in the Performance Bond that differentiate
between conditional and unconditional on demand guarantee.
Chapter 4: Conclusion and Recommendation
Lastly, chapter five conclude and summarize the whole of the paper, the
outcome of objective achievable as well as making some recommendation
to the outcomes as well as developing a new Bank Guarantee for
Performance Bond. This will add to the existing references for students
and practitioners in the Malaysian Construction Industry especially in the
context of Construction Contract Management.
13
PERFORMANCE BOND
CHAPTER 2
PERFORMANCE BOND
2.1 Introduction
The success of a construction project is measured by its timely completion to

specification within the budget allocated. However, in the execution of any engineering
project there is invariably an element of risk involved16: that is to say, construction is a
highly risky business, where the level of risk is considered much higher than in other
types of economic activities.17 Figure 2.1 illustrates the risk spectrum which identifies
some principal sources of risk. Furthermore, projects involve commercial risks and they
involve people.18
All parties take some form of risk when they enter into construction contract. The
acceptance of an obligation brings with it the acceptance of a commensurate risk, i.e. the
risk of being unable to fulfill the obligation because one's own inadequacy, incapacity,
inadvertence or error, or because of interference from outside sources or supervening
events.19
16
S Radhakrihnan (1999), Legal Aspects of Insurance for Engineering Projects, Article, [1999] 1 MLJ
cxxx; [1999] 1 MLJA 130
17
18
John Murdoch and Will Hughes (2000), Construction Contracts – Law and Management, 3rd Edition,
Spon Press, London, p. 7
19
Nigel M. Robinson et. al. (1996), p. 185
14
• BUSINESS RISK
(Will the development fulfill its intended
purpose?)
• FINANCIAL RISK
(Will the development be available?)
• MONEY RATE RISK

DEVELOPMENT (Will the cost of money change?)
RISK
• PRICE/COST LEVEL RISK
(Will the price/cost level change?)
• DESIGN RISK
(Will the design be cost-efficient?)
(Will it have good buildability?)
• MANAGEMENT RISK
(Will the construction management be
efficient and effective?)
• DAMAGE OR INJURY RISK

(Will there be third party claims?)
CONSTRUCTION (Will there be damage to the works?)
RISK
• POLITICAL/SOCIAL RISKS
(Will the operating environment change?)
• INTER-PERSONAL RISKS
(Will there be personality clashes?)
(Will there be industrial unrest?)
• ESTIMATING/PRICING RISKS
(Will there be measurement/pricing error?)
Figure 2.1: The risk spectrum: some principal sources of risk20
20
ibid
15
The following examples summarize many of the risks.21 Some of them are
contractor's risks (for example: payments; price fluctuation; etc.) and some are
employer's risks (for example: workmanship; materials and goods; insolvency; etc.):
• Physical works – ground conditions; artificial obstructions; defective materials or

workmanship; tests and samples; weather; site preparation; inadequacy of staff,
labour, plant, materials, time or finance.
• Delay and disputes – possession of site; late supply of information; inefficient
execution of work; delay outside both parties' control; layout disputes.
• Direction and supervision – greed; incompetence; inefficiency;
unreasonableness; partiality; poor communication; mistakes in documents;
defective designs; compliance with requirements; unclear requirements;
inappropriate consultants or contractors; changes in requirements.
• Damage and injury to persons and property – negligence or breach of
warranty; uninsurable matters; accidents; uninsurable risks; consequential losses;
exclusions, gaps and time limits in insurance cover.
• External factors – government policy on taxes, labour, safety or other laws;
planning approvals; financial constraints; energy or pay restraints; cost of war or
civil commotion; malicious damage; intimidation; industrial disputes.
• Payment – delay in settling claims and certifying; delay in payment; legal limits
on recovery of interest; insolvency; funding constraints; shortcomings in the
measure and value process; exchange rates; inflation.
• Law and arbitration – delay in resolving disputes; injustice; uncertainty due to
lack of records or ambiguity of contract; cost of obtaining decision; enforcing
decisions; changes in statutes; new interpretations of common law.
Risks are inevitable and cannot be eliminated. They can, however, be

transferred.22 One of the main roles of a contract is to distribute risks between the parties.
21
John Murdoch and Will Hughes (2000), p. 83
22
ibid, p. 85
16
Standard forms of contracts contained express risks distributing provisions. Risk
transferring contracts commonly exist between the various parties concerned in
construction23, as shown in Figure 2.2.
The contracting parties: Nature of the contract:

Client Contractor Contract for services and indemnities
Designer Contract for services
Nominated sub- Performance warranty

contractor
Nominated supplier Material quality and/or fitness warranty
Contractor Sub-contractor Contract for services and indemnities
Supplier Contract for sale and warranty
Insurer Client Fire Insurance (existing buildings)
Contractor (1) Contractor's 'All Risks'

Subcontractor • Employers' liability
• Public liability
• Contract works, material and
plant
(2) Employer's risks (as specified)
Supplier Loss or damage to materials in transit
Designer Professional indemnity
Surety Client Contractor's performance bond

Or Contractor Subcontractor's performance bond
Guarantor Contract of indemnity against calls on
or main bond
Bondsman
Figure 2.2: The risk spectrum: some principal sources of risk24
23
Nigel M. Robinson et. al. (1996), p. 188
24
Ibid, p. 189
17
In the context of public infrastructure work in Malaysia, one major risk to the
Government is non-performance of construction contracts by the contractors.25 As
illustrated in Figure 2.2, performance bond is a legal and management instrument used by
employers to manage risk with respect to contractor's nonperformance.
2.2 Definition
As mentioned in Chapter 1, a performance bond is a bond giving security for the

carrying out of a contract, where a bond is a deed by which one person (the obligator)
commits himself to another (the obligee) to do something or refrain from doing
something.26 In construction contracts, a ‘performance bond’ is a bond taken out by the
sum of liability and enforceable by the employer in the event of the contractor’s default,
repudiation or insolvency.27
In Teknik Cekap Sdn Bhd v Public Bank Berhad [1995]28, Shaik Daud JCA further
defines performance bond by stating:
Having considered the submissions it is relevant to find out what therefore

is a performance bond. As I see it there is nothing special or unique in a
performance bond. It is in fact a written contract of guarantee by a bank,
other financial institutions or in some cases as insurance company,
whereby they guarantee the due performance of a contract and in the
25
26
Elizabeth A. Martin (2003), p.53
27
Nigel M. Robinson et. al. (1996), p.205
28
[1995] 3 MLJ 449
18
event of a breach or non-performance of the contract, they guarantee to
pay, on a written demand being made, the sum stipulated in the guarantee.
Therefore, a performance bond is nothing more than a written guarantee,
and in order to interpret the obligations of the bank, one need to look at
the written bond itself to determine what are the terms and conditions
2.3 Nature of Performance Bond
A bond or guarantee is an arrangement under which the performance of a

contractual duty owed by one person (A) to another (B) is backed up by a third party (C).
What happens is that C promises to pay B a sum of money if A fails to fulfill the relevant
duty. In this context A is commonly known as the principal debtor or simply principal; B
is called the beneficiary; and C is called the bondsman, surety or guarantor.29
In a construction contract, performance bond is also a three-party instrument

between bondsman, the employer and the contractor. The agreement, however, binds the
contractor to comply with the terms of a contract. If the contractor fails to perform the
contract, the bondsman assumes the responsibility to indemnify the employer up to the
maximum amount of the bond. The Bondsman's obligation to pay is now arises when
called upon to do so by the employer.
The obligation to pay is, however, independent of the underlying contract. This is
due to the fact that the performance bond is like a letter of credit and designed to release
'no quibble' cash to the beneficiary in the event the call on the bond. This is agreed by
29
John Murdoch and Will Hughes (2000), p. 230
19
what Lord Denning MR said in Edward Owen Engineering Ltd v Barclays Bank
International Ltd [1978]30 that:
A performance bond is a new creature so far as we are concerned. It has

many similarities to a letter of credit, with which of course we are very
familiar. It has been long established that when a letter of credit is issued
and confirmed by a bank, the bank must pay it if the documents are in
order and the terms of the credit are satisfied. Any dispute between buyer
and seller must be settled between themselves. The bank must honour the
credit.
2.4 Purpose of Performance Bond
Rekhraj J in the case of Lotterworld Engineering & Construction Sdn Bhd v

Castle Inn Sdn Bhd & Anor [1998]31 stated that the purpose of performance bond is as
follows:
It is to be understood that the purpose of the performance bond in the

construction industry is to perform the role of an effective safeguards
against non-performance, inadequate performance or delayed
performance and its production provides a security as readily available to
be realized, when the prescribed event occurs, viz a viz simply failing to
complete the work which had been contracted to carry out.
30
[1978] QB 159, [1978] 1 All ER 976, [1977] 3 WLR 764, [1978] 1 Lloyd's Rep 166, 6 Build LR 1, 10
Legal Decisions Affecting Bankers 50
31
[1998] 7 MLJ 105
20
The purpose of a bond is therefore to provide the employer with some financial security
in the form of a cash payable by the bank for the contractor's failure to perform his
obligation under the construction contract.
2.5 Performance Bond in Construction Contract
Whether or not a contractor is required to provide performance bond depends on

the terms of the contract. In Malaysia, as in Chapter 1, Clause 37(a) of the P.W.D. Form
203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of Quantities Form
Part of the Contract states that the Contractor shall either deposit with the Government a
performance bond in cash or alternatively by way of a Treasury's Deposit or Banker's
Draft or approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a
sue the Contractor for damages accordingly.32 However, it is not the only places where
performance bond is mentioned.
Under Clause 10 of the Conditions of Tendering in the Form of Tender (PWD

203B Rev. 1/82) states the following:
The successful tenderer …… shall so soon as it practicable but before the

commencement of the Works deposit with the Superintending Officer ……
Performance Bond amounting to 5% of the Contract Sum; ……
32
21
Another place where the requirement of performance bond is mandatory before
commencement of contractor's works is under Clause 4 of the Letter of Acceptance (PWD
203D – Rev. 1/82), which states:
I wish to draw your attention to the Conditions of Tendering whereby as

conditions precedent to the commencement of the Works, you are required
to deposit with the Government or the Superintending Officer ……
Performance Bond amounting …… (being 5% of the Contract Sum) in
cash or in the form of Treasury's Deposit, Banker's Draft or an approved
banker's or Insurance Guarantee. ……
It is also unusual for private projects to require the contract to provide

performance bond. Performance Bond, however, is the precondition for:
• Taking possession of site
By Clause 38(a) of the P.W.D. Form 203A (Rev. 10/83) Standard Form of
Contract to be Used Where Bills of Quantities Form Part of the Contract it is
made clear that even if possession of the Site has been given, the Contractor
cannot commence work unless and until the performance bond and the insurance
policies required under the Contract have been deposited with the Government or
the Superintending Officer. Thus if the Contractor delays in depositing the
performance bond or insurance, he does so at his own peril as the time available
for the execution of the Works under the Contract would be ticking away.33
• Advance payment
The advance payment is paid to the Contractor upon application from him
together with a bank or insurance guarantee for the amount of advance to be paid,
33
22
and provided that he has returned the Letter of Acceptance duly signed and
witnessed, and submitted the Performance Bond and the requisite insurance
policies required by the Contract.34
• First interim payment
It is further provided that, other than for the first Interim Certificate, the
Superintending Officer need not issue further Interim Certificates unless and until
the Contractor has returned to the Government the Letter of Acceptance of Tender
duly signed by the Contractor, and has deposited with him or the Government the
insurance policies and performance bond required under clauses 33, 34, 36 and 37
of these Conditions in the P.W.D. Form 203A (Rev. 10/83) Standard Form of
Contract to be Used Where Bills of Quantities Form Part of the Contract
respectively.35
As mentioned in Chapter 1, the validity period of the performance bond is as

indicated in Figure 1.2 hereinbefore. By clause 37(b) of the P.W.D. Form 203A (Rev.
10/83) Standard Form of Contract to be Used Where Bills of Quantities Form Part of the
Contract, the performance bond is required to be maintained for such period as provided
in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability Period
stated in the Contract calculated from the date of completion of the Works or any
of determination.36
34
Jabatan Kerja Raya (1988), A Guide on the Administration of Public Works Contracts, Ibu Pejabat
JKR Malaysia, p. 301.
35
36
23
2.6 Types of Performance Bond
As also mentioned in Chapter 1, there are two types of performance bond:

conditional and unconditional or on demand. Mohamed Dzaiddin FCJ in delivering the
grounds of judgment of the court in China Airlines Ltd v Maltran Air Corp Sdn Bhd
(formerly known as Maltran Air Services Corp Sdn Bhd) and Another Appeal [1996]37
reveal this by saying:

A sample of a conditional performance bond can be found in the case of Teknik

Cekap Sdn Bhd v Public Bank Berhad [1995]38 as follows:
If the sub-contractor (unless relieved from the performance of any clause

of the contract or by statute or by the decision of a tribunal of competent
jurisdiction) shall in any respect fail to execute the contract or commit any
breach of his obligations thereunder then the guarantor shall pay to the
contractor up to and not exceeding the sum of RM422,000 (Malaysian
37
[1996] 2 MLJ 517
38
[1995] 3 MLJ 449
24
Ringgit four hundred twenty two thousand) only representing 10% of the
contract value or such part thereof on the contractor's demand
notwithstanding any contestation or protest by the sub-contractor or by
the guarantor or by any other third party, provided always that the total of
all partial demands so made shall not exceed the sum of RM422,000
(Malaysian Ringgit four hundred twenty two thousand) only and that the
guarantor's liability to pay the contractor as aforesaid shall
correspondingly be reduced proportionate to any partial demand having
been made as aforesaid.
On the other hand, a sample of an unconditional on demand performance bond

can be found in the case of Kirames Sdn Bhd v Federal Land Development Authority
[1991]39 as follows:
We, Jerneh Insurance Corporation Sdn Bhd Limited, having the registered
office at 7th Floor, Wisma MISC, No 2, Jalan Conlay, Kuala Lumpur do
hereby irrevocable and absolutely guarantee that the sum of
Ringgit 117,535 by way of security deposit under the said contract shall
be paid to you by us as per the following terms:
(a) the said sum of Ringgit 117,535 shall be paid by us

forthwith on demand by you in writing without your having
to assign any reason whatsoever for such demand;
(b) the said sum of Ringgit 117,535 shall be paid by us
forthwith to you irrespective of whether or not there is any
dispute between the said contract and yourselves (the
Authority) in respect of or relating to the said contract or
in respect of any other matter and irrespective of whether
39
[1991] 2 MLJ 198
25
or not such said dispute, if any, has been settled, resolved,
litigated or adjudicated upon otherwise howsoever.
Thus it is seen in the above samples that the main distinction between the two
types of bond is with respect to the requirements for making call on the bond. In
conditional performance bond, the beneficiary must comply with conditions precedent for
calling the bond. In on demand performance bond, on the other hands, the only condition
precedent for calling the bond is a written notice to the guarantor.
2.7 Construction of Performance Bond
In order to determine the construction of a performance bond, Sir Denys Buckley

stipulated in the case of IE Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank
[1990]40 that:
I am in entire agreement with the proposition that to discover what the

parties intended should trigger the indemnity under the bond involves a
straightforward exercise of construction, or interpretation, of the bond to
discover the intention of the parties in that respect.
The Malaysian Superior courts have referred to and approved this approach in a
number of cases. One of the case that the Superior Court approval of the above IE
Contractors Ltd v Lloyds Bank PLC, and Rafidain Bank [1990]41 judgment is Esso
40
[1990] 2 Lloyd's Rep 496, SI Build LR 1
41
26
Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995]42. Peh Swee Chin FCJ in
delivering the grounds of judgment of the court said that:
That the real issue of a performance bond is one of contractual

interpretation was the unanimous view of three judges in the Court of
Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank
[1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write
an essay on performance bonds, in the instant appeal, except to repeat
that it 'involves a straightforward exercise of construction, or
interpretation, of the bond to discover the intention of the parties' -- per
Sir Denys Buckley in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503;
(1991) 51 BLR 1 at p 15.
Another judgment is by Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank
Berhad [1995]43. In this Court of Appeal, he had also approved IE Contractors Ltd v
Lloyds Bank PLC, and Rafidain Bank [1990]44, as per Chapter 1, by saying:

42
[1995] 1 MLJ 149
43
[1995] 3 MLJ 449
44
27
2.8 Summary
Historically, Lord Denning MR said in Edward Owen Engineering Ltd v Barclays

Bank International Ltd [1978]45 in interpreting performance bond:
A performance bond is a new creature so far as we are concerned. It has many

similarities to a letter of credit, with which of course we are very familiar. It has
been long established that when a letter of credit is issued and confirmed by a
bank, the bank must pay it if the documents are in order and the terms of the
credit are satisfied. Any dispute between buyer and seller must be settled between
themselves. The bank must honour the credit.
However, Rekhraj J in the case of Lotterworld Engineering & Construction Sdn

Bhd v Castle Inn Sdn Bhd & Anor [1998]46 stated that the purpose of performance bond is
as follows:

45
46
[1998] 7 MLJ 105
28
In addition, Mohamed Dzaiddin FCJ in delivering the grounds of judgment of the
court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air
Services Corp Sdn Bhd) and Another Appeal [1996]47 said:

The Malaysian Supreme Court approved the IE Contractors Ltd v Lloyds Bank
PLC, and Rafidain Bank [1990]48 judgment in constructing a performance bond. Peh
Swee Chin FCJ in delivering the grounds of judgment of the court in Esso Petroleum
Malaysia Inc v Kago Petroleum Sdn Bhd [1995]49 said that:

Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank
[1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write
an essay on performance bonds, in the instant appeal, except to repeat
that it 'involves a straightforward exercise of construction, or
interpretation, of the bond to discover the intention of the parties' -- per
47
[1996] 2 MLJ 517
48
49
[1995] 1 MLJ 149
29
Sir Denys Buckley in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503;
(1991) 51 BLR 1 at p 15.
Therefore, Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank Berhad
[1995]50 said:

50
[1995] 3 MLJ 449
30
COMPARATIVE ANALYSIS:
CONDITIONAL VERSUS UNCONDITIONAL PERFORMANCE BOND
CHAPTER 3
COMPARATIVE ANALYSIS:
CONDITIONAL VERSUS UNCONDITIONAL PERFORMANCE BOND
3.1 Introduction
As has been discussed in Chapter 1, there are two types of performance bond:
conditional and unconditional or on demand. Furthermore, as mentioned also in Chapter
1, in Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005]51,
Abdul Wahab Said Ahmad JC stated that:
A performance bond or guarantee is in fact a written contract to guarantee

due performance in the event of breach or non performance of the contract. In
determining whether it is conditional or otherwise, the court is concerned with
the contractual construction or interpretation of the bond or guarantee itself.
A great deal depends on the wording of the guarantee itself to discover the
intention of the parties.
There are a lot of judgments being made to distinguish whether the bond is
conditional or unconditional bond. Some of them will now being reproduces the
51
[2005] 2 MLJ 762
31
important statements from the law cases that make up the comparative analysis on the
differences.
3.2 Law Cases held and cited to differentiate the conditionality of the
Performance Bond by its wordings
By using the words ‘Performance Bond’, 67 cases for the past 20 years were
downloaded from the Malayan Law Journal to be analyzed further. From the first reading
and screening of the above cases, the judge of 25 cases did interpret the distinction
between ‘conditional’ and ‘unconditional’ Performance Bond. Further screening was
done from the 25 cases whereby only cases which the judge discussed on the wordings or
phrase(s) of the Performance Bond will be further analyzed. From this, 15 cases were
identified to be further consumed as follows:
• Law Cases No. 1
In Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor
[2005]52, Abdul Wahab Said Ahmad JC stated that:
In LEC Contractors (M) Sdn Bhd Mokhtar Sidin JCA distinguished the case
of Teknik Cekap and at p 358 said:
That is the position of an on demand performance bond ………

From the wordings of the guarantee it is clear to us that it is 'on
demand' performance bond as stated in Esso Petroleum Malaysia
Inc v Kago Petroleum Sdn Bhd: 'All that was required to trigger
them was a demand in writing'; or in the words of Mohamed
52
[2005] 2 MLJ 762
32
Dzaidin FCJ in the case of China Airlines Ltd v Maltran AirCorp
Sdn Bhd: 'the guarantor will become liable merely when demand
is made upon the beneficiary with no necessity for the beneficiary
to prove any default by the principal in performance of the
principal contract'.
The appellant claimed that the bank guarantee is a conditional

bond. To support this contention learned counsel for the appellant
referred to the case of Teknik Cekap, a decision of this court
where the court held that a performance bond was a conditional
bond. It was held by the court that because the bond began the
words: 'If the subcontractor … shall in any respect fail to
execute the contract or commit any breach of his obligations
thereunder then the guarantor shall pay'. Apparently this is the
case in Malaysia where similar wordings has been used where the
court has held that it was a conditional bond. In our view the court
in the case of Teknik Cekap decided it on its own facts. Apparently
one of the factors that influenced the court and the court below
was the fact that the demand made was band in law. This is our
view distinguished that case from the present appeal.
The judge followed LEC Contractors (M) Sdn Bhd and hold this guarantee is
an unconditional on demand guarantee.
• Law Cases No. 2
In Daewoo Engineering & Construction Co Ltd v The Titular Roman Catholic

Archibishop of Kuala Lumpur [2004]53, Abdul Wahab Said Ahmad JC stated that:
53
[2004] 7 MLJ 136
33
I agree with the learned defendant's counsel that the Letter of Guarantee seen
in isolation is payable on demand because of the presence of the no
contestation clause, i.e. 'notwithstanding any contestation or protest by the
contractor or by the guarantor or by any third party.'
• Law Cases No. 3
In Sime Engineering Sdn Bhd & Anor v Public Bank Berhad [2004]54, Vincent Ng
J stated that:
The defendant issued the guarantee on the following terms:
…we…hereby irrevocably undertake to pay to you an amount

…notwithstanding any objection by the Subcontractor (Miya)
upon receipt by us of your first demand in writing. (emphasis
added).
The area of law concerning bank guarantees is well established; in the

absence of fraud, the bank is obliged to pay on the guarantee promptly on
demand.
• Law Cases No. 4
In Danaharta Managers Sdn Bhd v Huang Ee Hoe & Ors [2002]55, Kang Hwee
Gee J stated that:
54
[2004] 7 MLJ 475
55
[2002] 2 MLJ 424
34
Thus, in English Court of Appeal case of Easal (Commodities) Ltd v Oriental
Credit Ltd; Banque Du Caire SA v Wells Fargo Bank NA [1985] 2 Lloyd's
Rep 546, a guarantee couched in the clause:
We undertake to pay the said amount of your written demand in

the event that the supplier fails to execute the contract in perfect
performance …
was held by Ackner LJ to be payable on demand. ………
The same construction was applied in our own jurisdiction in the Federal
Court case of Government of Malaysia v South East Asia Insurance Bhd
[2000] 3 MLJ 625, where the performance bond issued by the insurance
company in that case had read at p 631F:
The guarantor shall pay damages to the Government a sum not

exceeding RM420,645 within three months upon a receipt of a
written notice demanding that the guarantor pays the
Government for any breach of the contract's obligations under
the contract, … (Emphasis added).
Mohamed Dzaiddin FCJ (as he then was), following Ackner LJ in Easal held
at p 636B that:
In our judgment, on its true construction this Gerenti Pelaksanaan

is and unconditional bond or an on demand bond and all that is
required to activate it is a written demand (Easal). It is simply a
performance bond whereby the insurance company guarantees
performance by the Contractor of the works under the said
contract, and in the event of non performance or any breach of the
terms thereof, the insurance company undertakes to pay the
35
Government a sum not exceeding RM420,645 upon a formal
demand. (Emphasis added)
.
• Law Cases No. 5
In Government of Malaysia v South East Asia Insurance Bhd [2000]56, Mohamed

Dzaiddin FCJ stated that:
The material part of para 2 of the Gerenti Perlaksanaan reads:
The guarantor shall pay damages to the Government a sum not

exceeding RM420,645 within three months upon receipt of a
written notice demanding that the guarantor pays the
Government for any breach of the contract's obligations under
the contract, ... . (Emphasis added.)
In construing the above para, we would adopt the approach taken by Lord
Justice Ackner (as he then was) in Esal, p 550. There are three possible
meanings which can be given to the above paragraph. First, no more than a
mere written demand is required. Secondly, the demand must assert a failure
to perform the contract. Thirdly, because of the word 'damages', proof thereof
and not mere assertion is required before liability under the bond arises. In
our view, the second possibility is the answer because in addition to the
demand made, the paragraph requires the Government to state the breach of
the contractor's obligations under the contract. ……….
56
[2000] 3 MLJ 625
36
The next question that arises is whether para 2 of the Gerenti Perlaksanaan
requires anything more than a demand asserting the breach without the
appellant proving the loss in view of the opening words: 'The guarantor shall
pay damages to the Government ...'? It is to be noted that the amounts
payable under the two bonds are set out in para 2 of the letter of demand. But,
in the letter of demand there is no express assertion that the amounts
demanded are in respect of damages which the appellant had suffered.
Reading the notice of demand as a whole, it is reasonable to conclude that it
complies with para 2 of the Gerenti Perlaksanaan because the particulars in
para 2.1 of the notice refers to the amount specified in para 2 of the bond and
in substance is the amount which the respondent is required to pay as
damages for the contractor's breach of the said contract. Accordingly, there
was sufficient demand made in compliance with para 2 of the Gerenti
Perlaksanaan.
In support of the above conclusion, we would rely on IE Contractors', which

was followed by this court in Esso Petroleum. The terms of the performance
bonds in IE Contractors issued by Rafidain Bank, inter alia, stated:
(1) We have issued in your favour, as beneficiaries, this letter

of guarantee to indemnify you against any damages that
you may sustain, up to an amount of ID211,896 (Iraqi
Dinars Two Hundred Eleven Thousand Eight Hundred
and Ninety Six only).
(2) Covering Performance of Contract Guarantee covering
damages which you claim are duly and properly owing to
your organisation by GKN Contractors Ltd, under the
terms of the Contract for a Slaughterhouse at Duhouk
made on 12 June 1978 between you and GKN Contractors
Ltd and Ross Poultry Ltd,
37
(3) We undertake to pay you unconditionally the said amount
on demand, being your claim for damages brought about
by the above named principal. (Emphasis added.)
The demand made on all three bonds reads as follows:
In view of the non-discharge by the company of its contractual

obligations in making good the deficiencies of the slaughter
houses of Al-Quadisiya, Karbala and Dohuk, we request
withdrawal of the under-mentioned Gurantees and transference
of their amounts to this Establishment.
The amounts of the performance bonds were then set out.
Leggatt J held, inter alia, that the demand made was invalid for not stating
that it was 'for damages etc' as set out in the bonds. Allowing the appeal, the
Court of Appeal declined to adopt such a 'strict compliance approach' of
Leggatt J. Staughton LJ, delivering the judgment of the court held at pp 501-
502:
On any view there was a plain assertion that the contractors had
not fulfilled their obligations. But there was no express assertion
that the amounts claimed represented no less than the damage
which the employers had suffered.
Two questions arise: first, did the performance bonds require

anything more than mere demands? Secondly, if so, did the
demand presented assert such facts as the performance bonds
required that it should assert? Mr Justice Leggatt answered these
38
questions (1) 'Yes', and (2) 'No', and held that Rafidain were not
liable to the employers. In my judgment the demand is required to
state that it is a claim for damages brought about by the
contractors. Thus I agree with the Judge that something more than
a mere demand was needed, although not exactly with the
requirement that he adopted.
It is arguable that some further assertion is required by para 5 of

the performance bonds. But on a fair reading of the document as a
whole I do not think that the rigmarole in the proviso which that
paragraph contains was required to be repeated verbatim, or at
all. ………
In our judgment, on its true construction this Gerenti Perlaksanaan is an

unconditional bond or an on demand bond and all that is required to
activate it is a written demand (Esal). It is simply a performance bond
whereby the insurance company guarantees performance by the Contractor of
the works under the said contract, and in the event of non-performance or any
breach of the terms thereof, the insurance company undertakes to pay the
Government a sum not exceeding RM420,645 upon a formal demand.
With respect to the Insurance Guarantee, the relevant paragraphs state as

follows:
We, the undersigned, at the request of the contractor irrevocably

undertake and guarantee to the Government that:
1 We shall pay to the Government free of interest, the sum

of RM1,069,035 (Ringgit Malaysia: ONE MILLION
SIXTY-NINE THOUSAND AND THIRTY FIVE ONLY
39
...) the advance payment mentioned above or such part
thereof as shall not have already been recovered by the
Government pursuant to cl 3 or 4 hereof and such sum
shall be paid on the Government's demand
notwithstanding any contestation or protest by the
contractor or by ourselves or by any other third party.
2 ...
3 Subject to cl 4, our responsibility for paying the said sum

of RM1,069,035 (Ringgit Malaysia: ONE MILLION
SIXTY-NINE THOUSAND AND THIRTY FIVE ONLY
...) shall be automatically reduced by the amount or
amounts of any payments made by us to the Government
in respect of this guarantee.
4 The said sum which we guarantee to pay to the

Government shall be reduced automatically in proportion
to deductions made by the Government out of the progress
payments due to the contractor for repayment of the
advance payment so made. This Guarantee shall be
cancelled immediately after the whole of the advance
payment have been released through payments by us or
through deductions made out of the progress payments
due to the contractor, or after the expiry of the period
mentioned in cl 5, whichever is the earlier.
Paragraph 1 is so drafted that the guarantor shall become liable merely when
demand is made by the Government notwithstanding any contestation or
protest by the contractor or the guarantor or by any third party. It is clear
that the overall purpose of the Insurance Guarantee is for the reimbursement
40
of the advance payment of RM1,069,035, less whatever amounts of payment
made by the guarantor and deductions out of the progress payments under
paras 3 and 4 upon a written demand made. In Esal, the bank 'undertake to
pay the said amount on your written demand in the event that the supplier
fails to execute the contract'. It was held that the latter words did not alter
the fact that the moneys were payable upon a written demand. Likewise, in the
present case, the words 'notwithstanding any contestation or protest by the
contractor or by ourselves or by any other third party' in para 1 above, do
not alter the fact that the money is payable on a written demand under and
pursuant to the said Insurance Guarantee. Therefore, on its true construction
this Insurance Guarantee is an on demand performance bond.
• Law Cases No. 6
In LEC Contractors (M) Sdn Bhd (formerly known as Lotterworld Engineering &
Construction Sdn Bhd) v Castle Inn Sdn Bhd & Anor [2000]57, Mokhtar Sidin JCA stated
that:
It was submitted by the plaintiff the performance bond was a conditional

bond. Counsel for the plaintiff referred to the following clause in the
guarantee:
(1) If the Contractor (unless relieved from the performance

by any clause of the Contract or by statute … ) … commit
any breach of his obligations thereunder then the
Guarantor shall pay to the Principal up to and not
exceeding the sum of Ringgit Malaysia: Four Million
Eight Hundred Thousand Only (RM4.8m) representing
5% of the Contract Value or such part thereof, on the
57
[2000] 3 MLJ 339
41
Principal's written demand notwithstanding any
contestation or protest by the Contractor or by Guarantor
or by any other third party … .
Te learned counsel for the plaintiff then cited the case of Teknik Cekap Sdn
Bhd v Public Bank Bhd [1995] 3 MLJ 449. Learned counsel submitted that
the performance bond in the present appeal is in pari materia with the
performance bond in that case and the Court of Appeal in that case held that
the performance bond to be a conditional bond. Since the performance bond
in the present appeal is a conditional bond no lawful demand could be made
until there is a breach or failure to execute the contract on the part of the
plaintiff. The breach would be of any of the terms of the underlying contract.
As such one has to examine the underlying contract and determine whether
the plaintiff was in breach of any of its terms. Plaintiff went on to submit that
the standard in Teknik Cekap is still too low. It was submitted by counsel for
the plaintiff that the contractor must be adjudged by a competent tribunal of
law to be in breach of contract and the breach ought to be identified and
proved. ……..
Again it was held in Damatar Paints (P) Ltd v Indian Oil Corp
AIR 1982 Delhi 57 that an irrevocable performance bank
guarantee is a distinct separate transaction. If disputes arise
between the company on whose behalf the guarantee is given and a
corporation in whose favour it is given and the disputes are
referred to arbitration, the payment of the guarantee cannot be
stayed pending the arbitration. This proposition is followed in
Pesticides India v State Chemicals & Pharmaceuticals Corp of
India AIR 1982 Delhi 78 Adverting to the bank guarantee, its
heading states 'Bank Guarantee for the Performance Bond'
(emphasis added) and in recital (2) it is stated:
42
The Guarantor has agreed to guarantee the due
performance of the contract in the manner hereinafter
appearing.
The crucial condition appears in para (1) of the said agreement

which reads:
(1) If the contractor (unless relieved from the

performance by any clause of the Contract or
by statute or by decision of a tribunal of
competent jurisdiction) shall in any respect fail
to execute the Contract or commit any breach
of his' obligations thereunder then the
Guarantor will indemnify and pay the
principal the sum of Malaysian Ringgit: One
hundred seventy-nine thousand three hundred
eighty four and sen fifty eight only
(RM179,384.58) provided that the principal or
his authorized representative has made a claim
against the Guarantor not later than six (6)
months after the expiry date of the Contract.
It can at once be noted that the defendant is bound to indemnify the

plaintiff should Sarikon fail to execute the contract or commit any
breach of their obligations thereunder unless relieved from the
performance by any clause of the contract or by statute or by
decision of a tribunal of competent jurisdiction. When Sarikon
failed to execute the contract, that is, when they failed 'to complete
and carry into effect' the works (see meaning of 'execute' as
defined in Jowitts Dictionary of English Law (2nd Ed) (Vol 1 p
741) and they were not excused by any term in the contract or by
the decision of a tribunal made before the demand for indemnity by
43
the plaintiff to the defendant under the terms of the bank
guarantee, then the defendant is bound to pay on demand. ………
The Federal Court in China Airlines Ltd v Maltran Air Corp Sdn Bhd
(formerly known as Maltran Air Services Corp Sdn Bhd) and another
appeal [1996] 2 MLJ 517 held that a bank guarantee is a performance bond
of which there are two types. The first is a conditional bond whereby the
guarantor becomes liable upon proof of a breach of the terms of the principal
and beneficiary sustaining loss as a result of such breach. The guarantor's
liability will therefore be as a result of such breach. The second is an
'unconditional' or 'on demand' bond where the guarantor will become liable
when demand is made upon him by the beneficiary with no necessity to prove
any default in performance of the principal contract. In that case the wordings
of the letter of guarantee as at p 533 reads as follows:
Letter of Guarantee
We Perwira Habib Bank Malaysia Bhd, Cawangan Bandar,

Tingkat Bawah Wisma Pahlawan, Jalan Sulaiman, 50000 Kuala
Lumpur, hereby undertake to pay on demand to Messrs China
Airlines Ltd the sum of RM400,000 (Ringgit Malaysia: Four
Hundred Thousand Only) as may be required for the due
performance of the covenants in the contract between you and
Messrs Maltran Air Corp Sdn Bhd, 79, 2nd Floor, Jalan Bukit
Bintang, 55100 Kuala Lumpur. The said sum shall become
payable by us in the event of the said Messrs Maltran Air Corp
Sdn Bhd's failure to perform the said covenants.
44
As can be seen the wordings are somewhat similar to the wordings in the
present appeal. Mohamed Dzaiddin FCJ, delivering the judgment of the court
in that case, at pp 534-535, said:

guarantor becomes liable upon proof of a breach of the terms of
the principal contract by the principal and the beneficiary
sustaining loss as a result of such breach. The guarantor's liability
will therefore arise as a result of the principal's default. The
second type is an unconditional or 'on demand' performance bond
which is so drafted that the guarantor will become liable merely
when demand is made upon him by the beneficiary with no
necessity for the beneficiary to prove any default by the principal
in performance of the principal contract. According to the learned
authors of The Modern Contract of Guarantee (2nd Ed) at p 664,
the tendency of the English courts (since, according to the authors,
that the Australian courts have not yet been faced with the same
problems of construction) has been to treat the performance bonds
as unconditional if there was a clear statement that the amount
guaranteed was payable by the bank simply upon a written demand
being made, even though there might be some indications to the
contrary elsewhere in the document. The learned authors cited
Esal (Commodities) Ltd as case, where the bank 'undertook to
pay the said amount on your written demand in the event that the
supplier fails to execute the contract in perfect performance'
(emphasis added), it was held that the latter words did not alter the
fact that the money was payable upon a written demand being
made as stated in the earlier part of the clause. The beneficiary of
the bond did not have to show a failure to perform by the supplier
in order to claim upon the bond. ………
45
That is the position of an on demand performance bond. It is clear to us that
the bank guarantee in the present appeal is a performance bond. From the
wordings of the guarantee it is clear to us that it is 'on demand' performance
bond and as stated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn
Bhd: 'All that was required to trigger them was a demand in writing'; or in
the words of Mohamed Dzaiddin FCJ in the case of China Airlines Ltd v
Maltran Air Corp Sdn Bhd: '... the guarantor will become liable merely when
demand is made upon by the beneficiary with no necessity for the beneficiary
to prove any default by the principal in performance of the principal contract.'
The appellant claimed that the bank guarantee is a conditional bond. To

support this contention learned counsel for the appellant referred to the case
of Teknik Cekap, a decision of this court where the court held that a
performance bond was a conditional bond. It was held by the court that
because the bond began with the words 'if the sub-contractor ... shall in any
respect fail to execute the contract or commit any breach of his obligations
thereunder then the guarantor shall pay ...'. Apparently this is the only case
in Malaysia where similar wordings had been used where the court had held
that it was a conditional bond. In our view the court in the case of Teknik
Cekap decided it on its own facts. Apparently one of the factors that
influenced the court and the court below was the fact that the demand made
was bad in law. This in our view distinguished that case from the present
appeal.
From the authorities we have referred earlier it is clear to us that to

determine whether a performance bond is a conditional or unconditional
bond, the court should not be concerned whether there was actual breach
being committed or not. It is for the parties to litigate as to whom the blame is
to be placed. The court is only concerned whether on the wordings of the
46
bond, it is an on demand bond. If it is so then the bank has to pay the person
whom it guaranteed. The only exception to this is in the case of fraud which
comes to the notice of the bank. As we have said earlier it is clear to us that
this is an on demand performance bond. A proper demand had been made and
as such the bank (second defendant) is obliged to pay the first defendant the
amount stated in the bond. As to whether the plaintiff or the first defendant
was at fault is not the concern of the bank. That dispute is for the parties to
the contract to settle either by arbitration or by litigation in court. The bank
has no choice but to pay the amount demanded. The first defendant is entitled
to that sum not under the contract but under the performance bond.
• Law Cases No. 7
In Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor
[1999]58, Steve Shim J stated that:
In the instant case, it has not been disputed that the bank guarantee is, in
substance, a performance bond issued by the second defendant (a bank) to
secure the first defendant's due performance under the building contract. It is
in the light of the established principles aforesaid that the bank guarantee in
this case has to be construed. It is incumbent upon this court to look at the
words used in the said bank guarantee which read as follows:
... which shall become payable by us immediately on receipt of

notice in writing given to us by the Employer M/s Fasda Heights
Sdn Bhd or its authorised representative in the event of the
contractor M/s Soon Ee Sing Construction Sendirian Berhad
failing to execute the works and/or in breach of contract.
58
[1999] 4 MLJ 199
47
Here, counsel for the plaintiff has laid emphasis on the imperative use of the
words 'immediately on receipt of the notice in writing' and submits that those
words must be construed to require the second defendant to make immediate
payment upon demand and precludes an interpretation that the second
defendant is entitled or required to make any inquiry relating to any alleged
failure on the part of the contractor to execute the works and/or in breach of
contract, before honouring the plaintiff's demand. Counsel for the first
defendant has however drawn attention to the significance of the words 'in the
event of the contractor failing to execute the works and/or in breach of
contract' therein and submits that when read in the light of the whole
paragraph, no liability exists under the said bank guarantee unless and until
there has been a breach of the underlying building contract which, according
to him, has to be established before a demand can be made or entertained. He
has laboured on this at some length by referring to certain English authorities
but it seems that the thrust of his contention relates more to the question of
whether or not it is right and/or equitable and/or unconscionable for the
plaintiff to call upon the bank guarantee. I do not think this issue is of direct
relevance to the application. This will become apparent later. In the
meanwhile, let me revert to the issue at hand and consider the position taken
by counsel for the second defendant. In substance, I think he is adopting a
similar stand as counsel for the first defendant although he has added a
supplementary by submitting that the absence of such words as 'unequivocal'
or 'unconditional' or 'absolutely' in the bank guarantee has the effect of
militating against its unconditionality.
In my view, the words used in the bank guarantee are sufficiently clear. On a
proper reading of the whole paragraph cited above, they must reasonably be
construed to mean that the bank (second defendant) would be liable to release
the monies to the plaintiff immediately only upon the following 'conditions'
48
namely: (1) that the demand is in writing; and (2) the contractor fails to
execute the works and/or in breach of the contract. In this context it is
significant to consider the nature and effect of the 'conditions' above.
As regards the 'condition' for the demand to be made in writing, it has been
said that such a 'condition' is merely to regulate the right to call on the
guarantee and is therefore purely a procedural matter. It does not render a
guarantee conditional in the true sense (see Bocotra Construction Pte Ltd v
A-G (No 2) [1995] 2 SLR 733 (CA). I am prepared to adopt that as a correct
statement of law. That being the position, the requirement to make the demand
in writing in this case does not render the bank guarantee conditional in the
real sense.
In considering the second 'condition', ie in the event the contractor fails to

execute the works and/or in breach of the contract, I think it pertinent to cite
the English case of Esal (Commodities) Ltd & Reltor Ltd v Oriental Credit
Ltd & Wells Fargo Bank NA [1985] 2 AC 546 to see how the Court of
Appeal in that case dealt with a performance bond which, in effect and in
substance, is similar to the bank guarantee in our case. In that case, the bond
provided as follows:
We undertake to pay the said amount on your written demand in

performance ...
It was held that there were three possible meanings for the words used: (i)
that no more than a written demand was required; (ii) that the demand must
assert a failure to perform the contract; or (iii) that there must in fact have
been a failure to perform. The Court of Appeal unanimously rejected the third
49
solution. This was reflected in that part of the speech by Ackner LJ, which
stated:
If the performance bound was so conditional, then unless there

was clear evidence that the seller admitted that he was in breach of
the contract of sale, payment could safely be made by the bank
except on a judgement of a court of competent jurisdiction and this
result would be wholly inconsistent with the entire object of the
transaction, namely, to enable the beneficiary to obtain prompt
and certain payment.
This apparently prompted Staughton LJ in IE Contractors Ltd v Lloyd's Bank

plc & Rafidain Bank, to conclude that there was a bias or presumption in
favour of the construction that performance bond was to be conditioned upon
documents rather than facts. In any event, the Court of Appeal in Esal by a
majority, opted for the second construction that the demand must assert the
failure to perform the contract. This was how Ackner LJ put it:
However, I accept Mr Tugendhat's alternative submission that in

addition to the beneficiary making the demand. We must also
inform the bank that he does so on the basis provided for in the
performance bond itself. This interpretation not only gives
meaning and effect to the words 'in the event that the supplier
fails ...' which otherwise would be mere surplusage, but it in no
way imposes an extravagant demand upon the bank. A bank
beneficiary may seek, honestly or dishonestly, to apply a
performance bond to the wrong contract, and the need to inform
the bank of the true basis upon which he is making his demand
may be vary salutary……….
50
In my view, the same approach can be taken in the present case. It is therefore
clear that the words 'in the event the contractor fails to execute the works
and/or in breach of the contract' in the bank guarantee amount to a condition
precedent. It means that this condition has to be complied with before the
second defendant can release the monies when a demand is made on the bank
guarantee by the plaintiff. I may add that at this stage, there is no burden of
proof placed on the beneficiary nor is there any obligation on the part of the
bank to inquire into the facts of the condition or require proof thereof. In the
light of the authorities cited where it was held sufficient in such a situation for
the beneficiary to assert clearly in the demand the condition or conditions
stipulated in the performance bond, there is therefore a necessity to take a
closer look at the demand made by the plaintiff on the bank guarantee in the
instant case. The plaintiff had in fact sent two letters of demand on the bank
guarantee. The first demand dated 31 July 1998 -- the relevant part of which
states:
1 We refer to your bank guarantee (BG) dated 12 March

1997 (Your Ref 70015-700175).
2 ...
3 Non-execution of Works ad breach of building contract.

Further please take note that Soon Ee Sing Construction
Sdn Bhd (the Contractor) has failed to execute the Project
Works in accordance with the building contract and/or is
in breach of the building contract ...
4 Claim on BG.
By reason of para 3 above and pursuant to the BG, we
hereby demand that the sum of RM2,655,425 is forthwith
paid to us ...
51
The second demand dated 11 August 1998 was couched in substantially
similar terms. From the contents therein, it is clear that the plaintiff had
asserted positively that the contractor had failed to execute the works under
the building contract. There was also annexed to the letters of demand two
certificates issued by the architect. In my view, the assertions as reflected in
the two letters of demand were sufficient 'to trigger off the guarantee' (in the
words of Shaik Daud JCA in Teknik Cekap) and on that basis, it is clear that
the condition stipulated in the bank guarantee had been complied with and
therefore the second defendant (bank) had no option but to release the monies
to the plaintiff. In the circumstances, it was wrong for the second defendant to
withhold or refuse to pay the monies to the plaintiff when the demand was
made on the bank guarantee at the material time.
• Law Cases No. 8
In Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd &
Anor [1998]59, Rekhraj J stated that:
This argument has been well fortified in the leading case of Edward Owen
Engineering Ltd v Barclays Bank International Ltd & Anor [1978] QB 159,
where the performance bond was payable 'on first of our demand without
any condition or proof.' The Court of Appeal in the case of Re Esal
(Commodities) Ltd [1985] BCLC 450 in its literal interpretation of the words
'We undertake to pay the said amount on your written demand in the event
the supplier fails to execute the contract in perfect performance', rejected
the argument of strict application in accordance with its terms as that would
59
[1998] 7 MLJ 165
52
have meant that the beneficiary would have to prove a failure to perform the
contract, rather than simply to assert it.
The choice words of the performance bond are:
If the contractor (unless relieved from the performance by any

clause of the contract or by statute or by the decision of tribunal
of competent jurisdiction) shall in any respect fail to execute the
contract or commit any breach of his obligation thereunder then
the guarantor shall pay ... on the principal's written demand
notwithstanding any contestation or protest by the contractor or
by the guarantor or by any other third party ... .
The performance bond was procured by the plaintiff to the first named
defendant and the plaintiff was fully aware of the choice of words expressing
the intention -- that it was payable, notwithstanding any contestation or
protest by the contractor. It would be superfluous to submit now that it was
not so intended and that the payment was subject to a dispute being decided
because s 94 of the Evidence Act 1950, which reads -- 'when language used
in a document is plain (ie unambiguous) in itself and when it applies
accurately to existing facts, evidence may not be given to show that it was
not meant to apply to such facts'. The words of the performance bond are
clear in the context and consistent with an immediate undertaking to pay on
written demand without any protest by the plaintiff, in that, the beneficiary is
entitled to forfeit the cash deposit -- if such had been obtained or in the case
of a bond, an advantage to immediate payment before the underlying dispute
is determined either by trial or by arbitration'. This court will not therefore
attribute an intention contrary to the plain meaning of the words used to
attach liability towards payment upon demand.
53
• Law Cases No. 9
In Ramal Properties Sdn Bhd v East West-Umi Insurance Sdn Bhd [1998]60,
Kamalanathan Ratnam JC stated that:
The English Court of Appeal in the case of Esal (Commodities) Ltd v Oriental
Credit Ltd [1985] 2 Lloyd's Rep 546 tackled this issue in the context of an
undertaking in a performance bond which was as follows:

performance ... .
After summarizing the arguments of counsel for the defendant, Lord Ackner
LJ rejected an interpretation of the said undertaking which required the bank
which issued the performance bond to take upon itself the obligation of
deciding the merits of the dispute as it was a function for which the bank was
wholly unfitted and which the parties could not sensibly have intended. He
went on to say that the absurdity of such an interpretation was clear in that:
... if the performance bond was so conditional, then unless there

the contract of sale, payment could never safely be made by the
bank except on a judgment of a competent court of jurisdiction and
this result would be wholly inconsistent with the entire object of
the transaction, namely to enable the beneficiary to obtain prompt
and certain payment. ………
60
[1998] 5 MLJ 233
54
Esal (Commodities) was followed and directly applied in Teknik Cekap Sdn
Bhd v Public Bank Bhd [1995] 3 MLJ 449 wherein our Court of Appeal
decided that the wording of the performance bond considered therein required
the beneficiary to assert in substance, without the need to use the exact words
as found in the performance bond, that there was a breach of contract. The
bond in Teknik Cekap was as follows:
If the subcontractor ... shall in any respect fail to execute the

contract or commit any breach of his obligations thereunder,
then the guarantor shall pay ... .
Clause 2(i) of the performance bond in the instant case reads:
If the contractor ... shall in any respect fail to execute the

then the guarantor will indemnify and pay the principal ... .
The said cl 2(i) is virtually identical to the one used in Teknik Cekap and is
similar to the one used in Esal (Commodities). As such, I hold that cl 2(i) of
the instant case renders the performance bond an on-demand performance
bond which is only conditional upon the beneficiary asserting the basis of the
claim upon the issuer of the bond contending that there has been a breach of
contract. I further find that upon such a demand being made, the liability of
the defendant to pay under the performance bond is immediately attracted. I
therefore reject the defendant's contention that the said letter only constitutes
a mere notification and not a demand. In fact, referring to Esso Petroleum,
Peh Swee Chin FCJ said at p 157:
55
... There was nothing there that could suggest that the demand was
not proper, and for complying with the simple words there of
making a claim by 'a demand in writing', the said letter was
sufficiently compliant even though it was verbose.
• Law Cases No. 10
In China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran
Air Services Corp Sdn Bhd) and Another Appeal [1996]61, Mohamed Dzaiddin FCJ
(delivering the grounds of judgment of the court) stated that:
The second ground of appeal is substantially against the bank regarding the
letter of guarantee AC4 which, in part, provides as follows:
Letter Of Guarantee
We Perwira Habib Bank Malaysia Bhd, Cawangan Bandar,

Tingkat Bawah Wisma Pahlawan, Jalan Sulaiman, 50000 Kuala
Lumpur, hereby undertake to pay on demand to Messrs China
Airlines Ltd the sum of RM400,000 (Ringgit Malaysia: Four
Hundred Thousand Only) as may be required for the due
performance of the covenants in the contract between you and
Messrs Maltran Air Corp Sdn Bhd, 79, 2nd Floor, Jalan Bukit
Bintang, 55100 Kuala Lumpur. The said sum shall become
payable by us in the event of the said Messrs Maltran Air Corp
Sdn Bhd's failure to perform the said covenants.
61
[1996] 2 MLJ 517
56
The complaint of Encik Chandran was that the learned judge had failed to
appreciate that AC4 was a conditional guarantee, where by the express terms
that: 'The said sum shall become payable by us in the event of the said
Messrs Maltran Air Corp Sdn Bhd's failure to perform the said
covenants.'………
Encik Nantha Balan, for the bank, submitted that AC4 was an unconditional
'on demand' type of guarantee where liability to pay arose immediately upon a
demand being made on the bank by China Airlines, who was the beneficiary
under the guarantee. It was submitted that the words 'The said sum shall
become payable by us in the event of the said Messrs Maltran Air Corp Sdn
Bhd's failure to perform the said covenants' did not demolish the
unconditional on demand nature of the guarantee. They merely referred to the
circumstance in which the beneficiary would be entitled to make a demand.
………
A bank guarantee is a performance bond. There are two types of performance

bond. The first type is a conditional bond whereby the guarantor becomes
liable upon proof of a breach of the terms of the principal contract by the
principal and the beneficiary sustaining loss as a result of such breach. The
guarantor's liability will therefore arise as a result of the principal's default.
The second type is an unconditional or 'on demand' performance bond which
is so drafted that the guarantor will become liable merely when demand is
made upon him by the beneficiary with no necessity for the beneficiary to
prove any default by the principal in performance of the principal contract.
According to the learned authors of The Modern Contract of Guarantee (2nd
Ed) at p 664, the tendency of the English courts (since, according to the
authors, that the Australian courts have not yet been faced with the same
problems of construction) has been to treat the performance bonds as
unconditional if there was a clear statement that the amount guaranteed was
57
payable by the bank simply upon a written demand being made, even though
there might be some indications to the contrary elsewhere in the document.
The learned authors cited Esal ( Commodities) Ltd 's case, where the bank
'undertook to pay the said amount on your written demand in the event that
the supplier fails to execute the contract in perfect performance ' (emphasis
added), it was held that the latter words did not alter the fact that the money
was payable upon a written demand being made as stated in the earlier part
of the clause. The beneficiary of the bond did not have to show a failure to
perform by the supplier in order to claim upon the bond.
Esal is also an example of contractual interpretation of the words in a

performance bond -- the interpretation aspect of it was emphasized in the
(then) Supreme Court case of Esso Petroleum Malaysia Inc v Kago
Petroleum Sdn Bhd [1995] 1 MLJ 149 . ………
Returning to Esal( Commodities ) Ltd, a case which we will place reliance

on, the material words of the undertaking in the performance bond read: 'We
undertake to pay the said amount on your written demand in the event that
the supplier fails to execute the contract in perfect performance.'
OCL, the appellant, contended that liability under the performance bond was
conditional and that the condition had not been complied with. Mr Tugendhat,
counsel for OCL, relied on the words in the undertaking immediately
following 'written demand': 'in the event that the supplier fails to execute the
contract in perfect performance.'
OCL contended that on the true construction of the performance bond, either:
(a) there was no liability under the performance bond unless and until there
had been a breach of the underlying contract of sale, and this was never
58
established; alternatively, (b) that the beneficiary of the performance bond not
only had to make a written demand for payment under and pursuant to the
performance bond, but he must in the making of the demand assert that the
demand was made because the supplier had failed properly to execute the
contract.
Ackner LJ (as he then was), delivering the judgment of the Court of Appeal,
stated (at pp 549-550) as follows:
As regards the first interpretation, Mr Tugendhat is obliged to

accept that if he is right, the bank, by entering into the
performance bond is taking upon itself the obligation of deciding
the merits of a dispute under a contract of sale, a function for
which it is virtually common ground the bank is wholly unfitted
and which the parties could not sensibly have intended. As Mr
Sumption for WF correctly submitted, if the performance bond was
so conditional, then unless there was clear evidence that the seller
admitted that he was in breach of the contract of sale, payment
could never safely be made by the bank except on a judgment of a
competent court of jurisdiction and this result would be wholly
inconsistent with the entire object of the transaction, namely to
enable the beneficiary to obtain prompt and certain payment.
There is no need to cite, at any length, the well-known case of
Edward Owen Engineering Ltd v Barclays Bank International
Ltd [1978] 1 QB 159 as to the general nature of a performance
bond, where it is stressed that a bank is not concerned in the least
with the relations between the supplier and the customer nor with
the question whether the supplier has performed his contractual
obligation or not, nor with the question whether the supplier is in
59
default or not, the only exception being where there is clear
evidence both of fraud and of the bank's knowledge of that fraud.
His Lordship added:
However, I accept Mr Tugendhat's alternative submission that in

addition to the beneficiary making the demand, he must also
inform the bank that he does so on the basis provided for in the
way imposes an extravagant demand upon the bank. A beneficiary
may seek, honestly or dishonestly, to apply a performance bond to
the wrong contract, and the need to inform the bank of the true
basis upon which he is making his demand may be very salutary.
Moreover, the desire for an extension of the performance bond
may, on occasions, be due to the fact that the performance, for one
reason or another, might have been justifiably delayed and the
beneficiary does not yet know whether or not there will in due
course be full compliance with the contract. The requirement that
he must, when making his demand for payment in order to support
his request for an extension, also commit himself to claiming that
the contract has not been complied with, may prevent some of the
many abuses of the performance bond procedure that undoubtedly
occur. (See the observation of Kerr J (as he then was) in RD
Harbottle (Mercantile) Ltd v National Westminster Bank Ltd
[1978] 1 QB 146 at p 150.
In her grounds of judgment, the learned judge recognized that AC4 is an 'on
demand guarantee'.
60
In Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995]62, Peh Swee
Chin FCJ (delivering the grounds of judgment of the court) stated that:
One, therefore, looked at the letter dated 11 October 1993 as set out above
which was supposed to trigger the operation of the instant performance
bonds. There was nothing there that could suggest that the demand was not
proper and, complying with the simple words there of making a claim by 'a
demand in writing', the said letter was sufficiently compliant even though it
was verbose.
In the court of the first instance in IE Contractors [1989] 2 Lloyd's Rep 205,
Leggatt J held that the demand made to Rafidain Bank was invalid, inter alia,
for not stating that the demand was 'for damages, etc' as set out in the bond
therein, but the Court of Appeal (Staughton and Purchas LJJ and Sir Denys
Buckley) in IE Contractors [1990] 2 Lloyd's Rep 496; (1991) 51 BLR 1,
declined to adopt such a requirement of strict compliance with the words and
that notwithstanding that the precise words 'for damages, etc' were not used,
a valid demand was made. We wish to associate ourselves with that rather
common sense approach. If words are in apparent conformity with the
wording in any particular bond, they are sufficient.
On the type of such pure on demand performance bonds, the issuer should
unquestionably pay on demand except in the case of fraud. Any argument of
immediate disadvantage to the party who caused such a document to be in use
62
[1995] 1 MLJ 149
61
is of no avail to the party who must face the risks of such unquestioned
payment except where there is fraud; there was even no allegation of it, let
alone any evidence of it.
In Nik Sharifuddin Bin Nik Kadir v Mohaiyani Securities Sdn Bhd [1994]63,
Zakaria Yatim J stated that:
In IE Contractors 51 BLR 5, … the terms of the performance bonds issued to

the second defendant were as follows:
(1) we have issued in your favour, as beneficiaries, this letter

of guarantee to indemnify you against any damages that
you may sustain, up to an amount of ID211,896 (Iraqi
Dinars two hundred eleven thousand eight hundred and
ninety six only);
(2) covering performance of contract guarantee covering

damages which you claim are duly and properly owing to
your organization by GKN Contractors Ltd, under the
terms of the contract for a slaughterhouse at Duhouk
made on 12 June 1978 between you and GKN Contractors
Ltd and Ross Poultry Ltd; and
(3) we undertake to pay you, unconditionally, the said

amount on demand, being your claim for damages
brought about by the above-named principal. ………
63
[1994] 3 MLJ 551
62
The Court of Appeal decided that the bonds were not to be interpreted as
stating that the second defendant would pay if the precise words set out in
court were to be found in the demand. The demand stated in substance,
although not in express words, that it claimed damages for breach of contract
and that was therefore sufficient. Accordingly, the second defendant was
liable to the employer. ………
In the present case, the banker's guarantee is a form of security. The

guarantee document states that the bank guaranteed that the amount stated
therein being 'the amount of security deposit required to be deposited' with
the defendant. Clause 2(i) of the agreement provides that the plaintiff would
place the sum of RM50,000 'which shall be used to guarantee the due
performance by the remisier of the obligations and covenants under this
agreement ...' (Emphasis added.) The defendant accepted the bankers
guarantee in lieu of a cash deposit of RM50,000. In the defendant's letter
dated 18 February 1992, it was stated that the banker's guarantee was
required as collateral. In Australasian Conference Association Ltd v
Mainline Constructions Pty Ltd (In Liquidation) & Ors (1978) 141 CLR
335, Gibbs ACJ in his judgment at pp 347-348 said:
The undertaking of the bank was expressed to be given in

consideration of the appellant dispensing with the provision of a
retention fund, and was undoubtedly given for the purposes of cl
30(c) of the building contract -- it was a 'bank guarantee,
guarantee bond or other form of security' within the meaning of
that clause. It was therefore intended to be 'effective as security in
lieu of the retention fund', ie effective as security that Mainline
should carry out its obligations under the contract -- see cl 30(a).
Although the liability assumed by the bank was in form absolute, it
63
was, to the knowledge of the appellant, only undertaken for the
purpose of affording security for the performance by Mainline of
its obligations; the undertaking was collateral in substance,
although not in form. The contract between the appellant and the
bank appears to fall within the description of 'guarantee' contained
in such authorities as Rowlatt on Principal and Surety (3rd Ed,
1936) at p 4; Jowitt v Callaghan (1938) 38 SR (NSW) 512 at pp
516-517 and Re Conley[1938] 2 All ER 127 at pp 131, 135.
In the present case, there is no evidence that a demand had been made on the
guarantee, but in its letter dated 7 February 1993, the defendant had
indicated that it would draw down on the banker's guarantee.
In my opinion, the banker's guarantee is not an unconditional guarantee. In

the circumstances, the court should look at the underlying contract. Clause
6(ii) of the agreement provides that the plaintiff is to indemnify the defendant
against all losses where a buying client has failed to pay within the time
allowed by the KLSE Rules and where the defendant has to sell in the open
market for the same securities and incurs a loss in doing so. Clause 11
provides for the termination of the agreement.
In Kirames Sdn Bhd v Federal Land Development Authority [1991]64, Zakaria

Yatim J stated that:
64
[1991] 2 MLJ 198
64
Under the agreement dated 3 October 1985 between the plaintiff and the
defendant, the defendant agreed to supply to the plaintiff reinforced concrete
spun pipes to Felda Kalabaka Complex, Sabah for a total contract price of$
2,350,700 for the period from 6 August 1985 to 31 May 1986. As a condition
precedent to the execution of the said agreement the plaintiff was required to
deposit with the defendant a sum equivalent to five percent of the value of the
contract which was $ 117,557. On the question of security deposit, cl 2 of the
said agreement provides:
(a) The supplier shall as a condition precedent to the

execution of the agreement of this contract, deposit with
the Authority a sum equivalent to the amount referred to
in the Appendix in cash or by way of a banker's
guarantee which shall in any event be equivalent to 5% of
the value of the contract price which guarantee shall be
in a form to be prescribed by the Authority and which
deposit shall hereinafter be referred to as 'the
security deposit'. It is agreed that the Authority may
utilize and make payments out of or deductions from the
said security deposit in accordance with the terms of this
contract.
(b) The security deposit (or any balance remaining to the

credit of the Supplier) shall be released within the period
stated in the Appendix from the date of expiry of the
contract.
(c) The security deposit (or any balance thereof remaining to

the credit of the supplier) shall be forfeited to the
Authority at any time in the event of any breach of the
terms, covenants, conditions and stipulations on the
65
supplier's part to be performed or observed in this
contract.
Pursuant to the above condition, the plaintiff obtained and delivered to the
defendant a security guarantee for the sum of $ 117,535 which was accepted
by the defendant. The security guarantee, dated 2 October 1955, was issued
by Jerneh Insurance Corp Sdn Bhd and addressed to the defendant as the
beneficiary. The security guarantee states:
In consideration of your agreeing to grant Kirames Sdn Bhd 41/2

M/S, Apas Road, Tawau, Sabah (hereinafter called the 'paid
contractor') bearing No 0232485-VS-0-SP (hereinafter called
'the said contract') in respect of supply and delivery of RC span
pipes to Felda Kalabakan Complex, Sabah.
We, Jerneh Insurance Corporation Sdn Bhd Limited, having the

registered office at 7th Floor, Wisma MISC, No 2, Jalan Conlay,
Kuala Lumpur do hereby irrevocable and absolutely guarantee
that the sum of Ringgit 117, 535 by way of security deposit under
the said contract shall be paid to you by us as per the following
terms:
(a) the said sum of Ringgit 117,535 shall be paid by us

forthwith on demand by you in writing without your
having to assign any reason whatsoever for such
demand;
(b) the said sum of Ringgit 117,535 shall be paid by us

forthwith to you irrespective of whether or not there is
any dispute between the said contract and yourselves (the
Authority) in respect of or relating to the said contract or
66
in respect of any other matter and irrespective of whether
or not such said dispute, if any, has been settled, resolved,
litigated or adjudicated upon otherwise howsoever.
This guarantee is effective from 6 September 1985 ...
It is clear that the above document is a guarantee given by Jerneh Insurance

Corp Sdn Bhd on behalf of the plaintiff for the due performance of the
contract dated 3 October 1985. The guarantee is an 'on-demand' guarantee.
In Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anor [1989]65, Wan Adnan J
stated that:
The letter of guarantee reads:
In consideration of ... we hereby guarantee you the sum of $

250,000 (ringgit: two hundred and fifty thousand only) being
security deposit required under the said contract and shall
become payable by us on request by you without your having to
assign any cause for any request.
In the letter of indemnity given by the plaintiffs to the second defendant, the
plaintiffs:
65
[1989] 1 MLJ 190
67
hereby agree and irrevocably authorize you to pay to the
guaranteed party the sum guaranteed upon demand by the
guaranteed party and we shall at all times hereafter
unconditionally indemnify and keep you indemnified ...
The guarantees are in fact performance bonds.
In Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978]

QB 159, Lord Denning MR stated the law as to performance bonds as follows:
A performance bond is a new creature so far as we are concerned.

It has many similarities to a letter of credit, with which of course
we are very familiar. It has been long established that when a
letter of credit is issued and confirmed by a bank, the bank must
pay it if the documents are in order and the terms of the credit are
satisfied. Any dispute between buyer and seller must be settled
between themselves. The bank must honour the credit ...
All this leads to the conclusion that the performance guarantee

stands on a similar footing to a letter of credit. A bank which gives
a performance guarantee must honour that guarantee according to
its terms. It is not concerned in the least with the relations between
the supplier and the customer; nor with the question whether the
supplier has performed his contractual obligation or not; nor with
the question whether the supplier is in default or not. The bank
must pay according to its guarantee, on demand, if so stipulated,
without proof or conditions. The only exception is when there is
clear fraud of which the bank has notice.
68
In Teknik Cekap Sdn Bhd v Public Bank Bhd [1995]66, Shaik Daud JCA stated
that:
It is, therefore, pertinent to set out the relevant clause of the bond which has
caused this concern in this case. It can be found on the first page of the bond
dated 1 June 1992 issued by PBB and is as follows:
If the sub-contractor (unless relieved from the performance of

any clause of the contract or by statute or by the decision of a
tribunal of competent jurisdiction) shall in any respect fail to
execute the contract or commit any breach of his obligations
thereunder then the guarantor shall pay to the contractor up to
and not exceeding the sum of RM422,000 (Malaysian Ringgit
four hundred twenty two thousand) only representing 10% of the
contract value or such part thereof on the contractor's demand
notwithstanding any contestation or protest by the sub-contractor
or by the guarantor or by any other third party, provided always
that the total of all partial demands so made shall not exceed the
sum of RM422,000 (Malaysian Ringgit four hundred twenty two
thousand) only and that the guarantor's liability to pay the
contractor as aforesaid shall correspondingly be reduced
proportionate to any partial demand having been made as
aforesaid.
It 'involves a straightforward exercise of construction, or interpretation, of the

bond to discover the intention of the parties'. This is the unanimous view
66
[1995] 3 MLJ 449
69
expressed in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank
(1990) 51 BLR 1.
Much of the confusion and problems in interpreting performance bonds arose

with the celebrated decision of the English Court of Appeal in Edward Owen
Engineering Ltd v Barclays Bank International Ltd & Anor [1978] 1 All ER
976; [1977] 3 WLR 764 . In that case, Lord Denning MR having pointed out
that a performance bond was similar to a letter of credit added that
performance bonds are virtually promissory notes payable on demand. Since
then it has been seen that performance bonds are, however, not on the same
footing as letters of credit, they do not form part of the financial transactions
supporting the performance of a contract. They are in fact collateral and
subsidiary to a contract. In IE Contractors Ltd v Lloyds Bank plc and
Rafidain Bank, the court made a distinction between letters of credit and
performance bonds and made it clear that the question of what was required
to comply with a particular performance bond was one of construction of that
bond. There is no doubt that some performance bond must be paid merely on
a demand being made, and whether this is so must depend on the wording of
the bond itself. In Kirames Sdn Bhd v Federal Land Development Authority
[1991] 2 MLJ 198 , the guarantee provided that the guarantor shall
'irrevocally and absolutely guarantee payment on demand without having to
assign any reason whatsoever for such demand'. In the light of these clear
and unambiguous wording it can be said that this is an unconditional and a
pure 'on demand' bond. What is required to trigger payment in such bonds is
the demand simpliciter. In Esso Petroleum Malaysia Inc v Kago Petroleum
Sdn Bhd [1995] 1 MLJ 149 , the then Supreme Court on examination of the
performance bond in that case held that it was a pure on demand guarantee
and therefore a mere demand would trigger off the guarantees without
asserting any reasons thereto. In that case the guarantor agrred to
'unconditionally and irrevocably guarantee payment ...'.
70
In the present case, however, the bond began with the words ' If the sub-
contractor ... shall in any respect fail to execute the contract or commit any
breach of his obligations thereunder then the guarantor shall pay ...'
(emphasis added). Now from the very wording of the bond itself it is clear and
unequivocal that what would trigger off the guarantee is the sub-contractor's
failure to execute the contract or commit any breach thereof. Then and only
then would the liability of the guarantor arise. Therefore giving the words in
the bond their plain meaning, it cannot by any stretch of imagination be said
that the bond in the circumstances of this case is an unconditional bond.
Similarly in Esal (Commodities) and Relton v Oriental Credit and Wells
Fargo Bank NA [1985] 2 Lloyd's Rep 546, the performance bond stated 'we
undertake to pay the said amount on your written demand in the event that
the supplier fails to execute the contract in perfect performance ...'
(emphasis added) the Court of Appeal held that:
... however in additional to the beneficiary making the demand he

must also inform the bank that he did so on the basis provided for
in the performance bond ...
The court there found that when making the demands the beneficiary did not
assert that there was a failure to perform the contract. The court came to the
conclusion that liability under the performance bond was conditional and the
condition had not been complied with. The court went on to say that this
interpretation not only gave meaning but also effect to the words 'in the event
that the supplier fails ...' which otherwise would be mere surplusage. This
decision was followed by the Court of Appeal in IE Contractors. In that case
the performance bond stated as follows:
71
We undertake to pay you, unconditionally, the said amount on
demand, being your claim for damages brought about by the
abovenamed principal. (Emphasis added.) ………
Clause 1 of the performance bond stipulates what those conditions are and
that clause is worded in the following manner:
If the sub-contractor (unless relieved from the performance of

any clause of the contract ...) shall in any respect fail to execute
the contract or commit any breach of his obligations thereunder
then the guarantor [ie the bank] shall pay to the contractor [ie
Teknik] up to and not exceeding the sum of RM422,000
(Malaysian Ringgit four hundred twenty two thousand) only
representing 10% of the contract value or such part thereof on
the contractor's demand, notwithstanding any contestation or
protest by the sub-contractor or by the guarantor or by any other
third party ...
Teknik interprets that clause to be just this -- that the performance bond is an
on demand performance bond and the liability to pay arises once a demand is
made and the fact that the demand in this case is silent as to any wrongdoing
or omission committed by the sub-contractor is immaterial to the validity of
the demand as the issuance of the demand itself implies that a breach had
already been committed by the sub-contractor……….
In Esal's case, the form of undertaking was expressed as follows:
72
performance. (Emphasis added.)
Ackner LJ, who delivered the principal judgment, had this to say about the
undertaking:
... in addition to the beneficiary making the demand, he must also

inform the bank that he does so on the basis provided in the
way imposes an extravagant demand upon the bank.
Our attention was also drawn to the case of Esso Petroleum Malaysia Inc v
Kago Petroleum Sdn Bhd [1995] 1 MLJ 149 , where the then Supreme Court
in interpreting a performance bond that was before it, held:
...[it] was ... a pure on demand guarantee, and all that was
required to trigger it was a demand in writing. It would not be
dependent or conditional on the production of a document, eg a
certificate from some nominated independent person like an
architect as in some building contracts, etc. Neither was it worded
to make it conditional for Bank Bumiputra, the issuer of the
performance bond, to inquire into the existence or otherwise of any
breach of any contractual obligation between the beneficiary of the
bond, ie the buyer in this case and the seller; at the behest of the
latter itself, the performance bond was issued.
73
The undertaking to pay in Esso Petroleum's case simply reads as follows, '...
we hereby unconditionally and irrevocably guarantee the payment to
EPMI' and the mode of making a claim under such a guarantee was worded
as follows:
All claims, if any, in respect of or under this guarantee must be

made in writing and received by us at any time on or before the
expiry of this guarantee.
3.3 Comparative Analysis of the Law Cases
From the analysis of the case laws, it seems that most of the judges referred to the
surrounding five law cases which will be discussed below to interpret whether the
wording of the performance bonds are conditional or unconditional 'on-demand' bonds.
The cases together with the critical comments are now being elaborated.
The first and mostly referred to be Easal (Commodities) Ltd & Reltor Ltd v
Oriental Credit Ltd & Wells Fargo Bank NA [1985]67. This case gives the conclusion that
there are three possible meanings for the words used in the performance bond. The first is
that no more a written demand is required. The second is the demand must assert a failure
to perform the contract. Lastly, there must in fact have been a failure to perform.
However, most of the judge rejected the third solution. This was reflected in that part of
the speech by Ackner LJ, which stated:
67
[1985] 2 AC 546
74
If the performance bound was so conditional, then unless there was clear
evidence that the seller admitted that he was in breach of the contract of
sale, payment could safely be made by the bank except on a judgement of
a court of competent jurisdiction and this result would be wholly
inconsistent with the entire object of the transaction, namely, to enable the
beneficiary to obtain prompt and certain payment.
The second case is the Malaysian case of Esso Petroleum Malaysia Inc v Kago
Petroleum Sdn Bhd [1995]68. However, after analyzing the judgment, it is seen that Peh
Swee Chin FCJ in interpreting the words of the performance bond, referred to the case of
IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990]69. It is the third most
referred law case for judgment.
In IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990]70, Staughton
LJ made a conclusion that there was a bias or presumption in favour of the construction
that performance bond was to be conditioned upon documents rather than facts. This
statement is to be compared with the next case which is the fourth most referred case.
The fourth case is also the famous Malaysian case of Teknik Cekap Sdn Bhd v
Public Bank Bhd [1995]71. This case held that a performance bond was a conditional
bond because the bond began with the words 'if the subcontractor … shall in any respect
fail to execute the contract or commit any breach of his obligations thereunder then
the guarantor shall pay …'. However, this is the only Malaysian case that the court held
the performance bond to be a conditional bond when similar wordings had been used in
other Malaysian performance bond.
68
[1995] 1 MLJ 149
69
[1990] 2 Lloyd's Rep 296
70
ibid
71
[1995] 3 MLJ 449
75
Last but not least, the case of Edward Owen Engineering Ltd v Barclays Bank
International Ltd [1978]72. This case stressed the general nature of a performance bond
that a bank is not concerned in the least with the relations between the supplier and the
customer nor with the question whether the supplier has performed his contractual
obligation or not, nor with the question whether the supplier is in default or not, the only
exception being where there is clear evidence both of fraud and of the bank's knowledge
of that fraud.
However, attention should be given as to what Steve Shin J held in Fasda Heights
Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor [1999]73. He made quite good
critics as to the wordings of the performance bond. He said that:
In my view, the words used in the bank guarantee are sufficiently clear. On a
proper reading of the whole paragraph cited above, they must reasonably be
construed to mean that the bank (second defendant) would be liable to release
the monies to the plaintiff immediately only upon the following 'conditions'
namely: (1) that the demand is in writing; and (2) the contractor fails to
execute the works and/or in breach of the contract. In this context it is
significant to consider the nature and effect of the 'conditions' above.
As regards the 'condition' for the demand to be made in writing, it has been
said that such a 'condition' is merely to regulate the right to call on the
guarantee and is therefore purely a procedural matter. It does not render a
72
[1978] 1 QB 159
73
[1999] 4 MLJ 199
76
guarantee conditional in the true sense (see Bocotra Construction Pte Ltd v
A-G (No 2) [1995] 2 SLR 733 (CA). I am prepared to adopt that as a correct
statement of law. That being the position, the requirement to make the demand
in writing in this case does not render the bank guarantee conditional in the
real sense.
In considering the second 'condition', ie in the event the contractor fails to

execute the works and/or in breach of the contract, I think it pertinent to cite
the English case of Esal (Commodities) Ltd & Reltor Ltd v Oriental Credit
Ltd & Wells Fargo Bank NA [1985] 2 AC 546 to see how the Court of
Appeal in that case dealt with a performance bond which, in effect and in
substance, is similar to the bank guarantee in our case. In that case, the bond
provided as follows:

performance ...
It was held that there were three possible meanings for the words used: (i)
that no more than a written demand was required; (ii) that the demand must
assert a failure to perform the contract; or (iii) that there must in fact have
been a failure to perform. The Court of Appeal unanimously rejected the third
solution. This was reflected in that part of the speech by Ackner LJ, which
stated:
If the performance bound was so conditional, then unless there

77
the contract of sale, payment could safely be made by the bank
except on a judgement of a court of competent jurisdiction and this
result would be wholly inconsistent with the entire object of the
transaction, namely, to enable the beneficiary to obtain prompt
and certain payment.
Kamalanathan Ratnam JC in Ramal Properties Sdn Bhd v East West-Umi

Insurance Sdn Bhd [1998]74 also made quite interesting statements towards the meaning
of the words in the performance bond. He said that:
Clause 2(i) of the performance bond in the instant case reads:
If the contractor ... shall in any respect fail to execute the

then the guarantor will indemnify and pay the principal ... .
The said cl 2(i) is virtually identical to the one used in Teknik Cekap and is
similar to the one used in Esal (Commodities). As such, I hold that cl 2(i) of
the instant case renders the performance bond an on-demand performance
bond which is only conditional upon the beneficiary asserting the basis of the
claim upon the issuer of the bond contending that there has been a breach of
contract. …
Lastly, to be an undisputed meaning of the words in the performance bond, the

performance bond itself should be either purely conditional or purely unconditional 'on-
demand' bond. The best examples for this are in the cases of Esso Petroleum Malaysia
74
[1998] 5 MLJ 233
78
Inc v Kago Petroleum Sdn Bhd [1995]75 and IE Contractors Ltd v Lloyd's bank plc and
Rafidain Bank [1990]76 which respectively as follows:
... we hereby unconditionally and irrevocably guarantee the payment to

EPMI
We undertake to pay you, unconditionally, the said amount on demand,

being your claim for damages brought about by the abovenamed principal.
3.4 Summary
The held of fifteen law cases had been cited to differentiate the conditionality of
the performance bond by its wordings. Some of the cases held that the performance
bonds were conditional performance bond and some of them held the performance bond
to be unconditional 'on-demand' performance bond. However, some interesting
conclusion can be made from the words in the performance bond.
Easal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo Bank
NA [1985]77 gives the conclusion that there are three possible meanings for the words
used in the performance bond, i.e. no more a written demand is required; the demand
must assert a failure to perform the contract; and there must in fact have been a failure to
perform. However, most of the judge rejected the last possible meaning of the words
used.
75
[1995] 1 MLJ 149
76
[1990] 2 Lloyd's Rep 296
77
[1985] 2 AC 546
79
In interpreting the words of the performance bond, Esso Petroleum Malaysia Inc
v Kago Petroleum Sdn Bhd [1995]78 referred the case of IE Contractors Ltd v Lloyd's
bank plc and Rafidain Bank [1990]79, which a conclusion can be made that there was a
bias or presumption in favour of the construction that performance bond was to be
conditioned upon documents rather than facts.
Teknik Cekap Sdn Bhd v Public Bank Bhd [1995]80 held that because the
performance bond because the bond began with the words 'if the subcontractor … shall
in any respect fail to execute the contract or commit any breach of his obligations
thereunder then the guarantor shall pay …', the bond was a conditional bond.
Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978]81

stressed the general nature of a performance bond that a bank is not concerned in the least
with the relations between the supplier and the customer nor with the question whether
the supplier has performed his contractual obligation or not, nor with the question
whether the supplier is in default or not, the only exception being where there is clear
Steve Shin J in Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd &
Anor [1999]82 made quite good critics as to the wordings of the performance bond. He
said that there are two 'conditions' that the bank must adhere to. The first is that the
demand is in writing. It has been said that such a 'condition' is merely to regulate the right
to call on the guarantee and is therefore purely a procedural matter. It does not render a
guarantee conditional in the true sense. The second is that the contractor fails to execute
the works and/or in breach of the contract. Three possible meanings for the words used:
78
[1995] 1 MLJ 149
79
[1990] 2 Lloyd's Rep 296
80
[1995] 3 MLJ 449
81
[1978] 1 QB 159
82
[1999] 4 MLJ 199
80
(i) that no more than a written demand was required; (ii) that the demand must assert a
failure to perform the contract; or (iii) that there must in fact have been a failure to
perform. Most of the courts unanimously rejected the third solution.
Kamalanathan Ratnam JC in Ramal Properties Sdn Bhd v East West-Umi

Insurance Sdn Bhd [1998]83 also made quite interesting statements towards the meaning
of the words in the performance bond. He said that the wordings of 'If the contractor ...
shall in any respect fail to execute the contract or commit any breach of his obligations
thereunder, then the guarantor will indemnify and pay the principal ...' renders the
that there has been a breach of contract.


EPMI

83
[1998] 5 MLJ 233
84
[1995] 1 MLJ 149
85
[1990] 2 Lloyd's Rep 296
81
CONCLUSION AND RECOMMENDATION

CHAPTER 4
CONCLUSION AND RECOMMENDATION
4.1 Introduction
As discussed under Chapter 1, a performance bond is a bond giving security for

the carrying out of a contract, where a bond is a deed by which one person (the obligator)
commits himself to another (the obligee) to do something or refrain from doing
something.86 In construction contracts, a ‘performance bond’ is a bond taken out by the
sum of liability and enforceable by the employer in the event of the contractor’s default,
repudiation or insolvency.87
In Malaysia, most of the need of a performance bond is made through an

agreement between the Government, the contractor and a third party (usually a bank or
insurance company), whereby the third party agrees to pay a sum of money to the
Government, in the event of non-performance of the construction contract by the
contractor.88 It is provided in Clause 37(a) of the P.W.D. Form 203A (Rev. 10/83)
Standard Form of Contract to be Used Where Bills of Quantities Form Part of the
86
Elizabeth A. Martin (2003), p.53
87
Nigel M. Robinson et. al. (1996), p.205
88
82
Contract that the Contractor shall either deposit with the Government a performance
bond in cash or alternatively by way of a Treasury's Deposit or Banker's Draft or
approved Banker's or Insurance Guarantee equal to 5% of the Contract Sum as a
sue the Contractor for damages accordingly.89
The validity period of the performance bond is as indicated in Figure 1.2 below.
By clause 37(b), the performance bond is required to be maintained for such period as
provided in the PWD Bond, i.e. until 6 months after the expiry of the Defects Liability
Period stated in the Contract calculated from the date of completion of the Works or any
of determination.90
There are two types of performance bonds, as set out below.91
• Conditional bond or default bond. A default bond is a contract of guarantee

whereby the surety accepts ‘joint and several’ responsibility for the performance
of the contractor’s obligations under the building contract: the contractor remains
primarily liable for his performance and not protected by the bond.
• Unconditional bond or on-demand bond. An on-demand bond is a covenant by

the surety (usually a bank) to indemnify the employer following contractor’s
89
90
ibid, p. 77
91
Nigel M. Robinson et. al. (1996), p. 205 but under on-demand bond in Malaysia, subject to stated terms
and up to a sum commonly 5% of the main contract sum.
83
default, subject to stated terms and up to a sum commonly between 10 and 20% of
the main contract sum. The contractor is not a party to this arrangement.
Thus, in order to determine the types of performance bond applicable in a

contract, a thorough understanding of the content of the bond is required. The Court of
Appeal in the famous Teknik Cekap Sdn Bhd v Public Bank Berhad [1995]92 held that:

Therefore, after discuss on the literature part and examining by case analysis of
this study at previous chapter, now, this chapter will conclude the study and give some
recommendation for future study. The objective of the study is to determine the phrase(s)
in the Performance Bond in a construction contract that determine whether the
performance bond is a conditional or an unconditional on demand guarantee.
4.2 Conclusion
As discussed under Chapter 2, historically, Lord Denning MR said in Edward

Owen Engineering Ltd v Barclays Bank International Ltd [1978]93 interpret performance
bond by saying that:
92
[1995] 3 MLJ 449
93
84
A performance bond is a new creature so far as we are concerned. It has many
similarities to a letter of credit, with which of course we are very familiar. It has
been long established that when a letter of credit is issued and confirmed by a
bank, the bank must pay it if the documents are in order and the terms of the
credit are satisfied. Any dispute between buyer and seller must be settled between
themselves. The bank must honour the credit.
However, Rekhraj J in the case of Lotterworld Engineering & Construction Sdn

Bhd v Castle Inn Sdn Bhd & Anor [1998]94 stated that the purpose of performance bond is
as follows:

In addition, Mohamed Dzaiddin FCJ in delivering the grounds of judgment of the

court in China Airlines Ltd v Maltran Air Corp Sdn Bhd (formerly known as Maltran Air
Services Corp Sdn Bhd) and Another Appeal [1996]95 said:

94
[1998] 7 MLJ 105
95
[1996] 2 MLJ 517
85
The Malaysian Supreme Court approved the IE Contractors Ltd v Lloyds Bank
PLC, and Rafidain Bank [1990]96 judgment in constructing a performance bond. Peh
Swee Chin FCJ in delivering the grounds of judgment of the court in Esso Petroleum
Malaysia Inc v Kago Petroleum Sdn Bhd [1995]97 said that:

Appeal in IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990]
2 Lloyd's Rep 496; (1991) 51 BLR 1. It is not our intention to write an
essay on performance bonds, in the instant appeal, except to repeat that it
'involves a straightforward exercise of construction, or interpretation, of
the bond to discover the intention of the parties' -- per Sir Denys Buckley
in IE Contractors [1990] 2 Lloyd's Rep 496 at p 503; (1991) 51 BLR 1 at
p 15.
Therefore, Shaik Daud JCA in Teknik Cekap Sdn Bhd v Public Bank Berhad
[1995]98 said:

96
97
[1995] 1 MLJ 149
98
[1995] 3 MLJ 449
86
As discussed further in Chapter 3, the held of fifteen law cases had been cited to
differentiate the conditionality of the performance bond by its wordings. Some of the
cases held that the performance bonds were conditional performance bond and some of
them held the performance bond to be unconditional 'on-demand' performance bond.
However, some interesting conclusion can be made from the words in the performance
bond.
In Easal (Commodities) Ltd & Reltor Ltd v Oriental Credit Ltd & Wells Fargo
Bank NA [1985]99, the judge stated that the words used in the performance bond can be of
three possible meanings, i.e. no more a written demand is required; the demand must
assert a failure to perform the contract; and there must in fact have been a failure to
perform. However, most of the judgment made rejected the last meaning.
Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995]100 in interpreting
the words of the performance bond, referred to the case of IE Contractors Ltd v Lloyd's
bank plc and Rafidain Bank [1990]101, which made a conclusion that there was a bias or
presumption in favour of the construction that performance bond was to be conditioned
upon documents rather than facts.
Teknik Cekap Sdn Bhd v Public Bank Bhd [1995]102 held that a performance bond
was a conditional bond because the bond began with the words 'if the subcontractor …
99
[1985] 2 AC 546
100
[1995] 1 MLJ 149
101
[1990] 2 Lloyd's Rep 296
102
[1995] 3 MLJ 449
87
thereunder then the guarantor shall pay …'.
Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978]103

stressed the general nature of a performance bond that a bank is not concerned in the least
with the relations between the supplier and the customer nor with the question whether
the supplier has performed his contractual obligation or not, nor with the question
whether the supplier is in default or not, the only exception being where there is clear
Quite good critics as to the wording of the performance bond were made by Steve
Shin J in Fasda Heights Sdn Bhd v Soon Ee Sing Construction Sdn Bhd & Anor
[1999]104. He stated that the bank must adhere to two 'conditions'. Firstly, the demand is
in writing. Such a 'condition' has been said to be merely to regulate the right to call on the
guarantee. Therefore, it is purely a procedural matter and does not render a guarantee
conditional in the true sense. Secondly, the contractor fails to execute the works and/or in
breach of the contract. This gives three possible meanings for the words used: (i) that no
more than a written demand was required; (ii) that the demand must assert a failure to
perform the contract; or (iii) that there must in fact have been a failure to perform. Most
of the courts unanimously rejected the third solution.
Kamalanathan Ratnam JC also made quite interesting statements towards the

meaning of the words in the performance bond in Ramal Properties Sdn Bhd v East West-
Umi Insurance Sdn Bhd [1998]105, by stating that the wordings of 'If the contractor ...
thereunder, then the guarantor will indemnify and pay the principal ...' renders the
103
[1978] 1 QB 159
104
[1999] 4 MLJ 199
105
[1998] 5 MLJ 233
88
that there has been a breach of contract.


EPMI

4.3 Recommendations
After discussing on the interpretation on application of injunction relief in

performance bond, the author notice that very careful choice of words should be adopted
by the constructor of a performance bond so that a clear understanding of its
conditionality can be achieved and undisputable. Therefore, the author makes the
following possible suggestion on the choice of words which could carry the meanings of
the performance bond to be conditional or unconditional 'on-demand' bond:
106
[1995] 1 MLJ 149
107
[1990] 2 Lloyd's Rep 296
89
The choice of words again should be an undisputed meaning of the words in the
performance bond. This should indicate whether the performance bond itself is either be
purely conditional or purely unconditional 'on-demand' bond. The best examples for this
are in the cases of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995]108 and
IE Contractors Ltd v Lloyd's bank plc and Rafidain Bank [1990]109 which respectively as
follows:

EPMI

108
[1995] 1 MLJ 149
109
[1990] 2 Lloyd's Rep 296
90
REFERENCES
Chow Kok Fong (2004), Law and Practice of Construction Contracts, 3rd Edition, Sweet
& Maxwell Asia, Singapore.
Elizabeth A. Martin (2003), A Dictionary of Law, 5th Edition reissued with new covers,
Oxford University Press, Oxford.
Jabatan Kerja Raya (1988), A Guide on the Administration of Public Works Contracts,
Ibu Pejabat JKR Malaysia.
Jamaluddin Yaakob (2005), Performance Bond in Construction Contract: Problems

with Drafting & Calling the Bonds, Seminar paper, Issues on Non-Performance of
Construction Contract, UTM, Skudai, Johor.
John Murdoch and Will Hughes (2000), Construction Contracts – Law and
Management, 3rd Edition, Spon Press, London.
Khairuddin Abdul Rashid (2004), Guarantee Against Non-Performance of

Construction Contract by the Contractor: Performance Guarantee Sum versus
Performance Bond, Seminar, 1st International Conference, Toronto Canada, May
27 2004 – May 28 2004, World of Construction Project Management.
91
Lim Chong Fong (2004), The Malaysian PWD Form of Construction Contract, Sweet &
Maxwell Asia, Petaling Jaya.
Nigel M. Robinson, Anthony P. Lavers, George Tan Keok Heng & Raymond Chan
(1996), Construction Law in Singapore and Malaysia, Second Edition,
Butterworths Asia, Singapore.
Nur'Ain Ismail (2007), Performance Bond and An Injunction, Master's Project Report
(Dissertation), Universiti Teknologi Malaysia.
P.W.D. Form 203A (Rev. 10/83) Standard Form of Contract to be Used Where Bills of
Quantities Form Part of the Contract.
S Radhakrihnan (1999), Legal Aspects of Insurance for Engineering Projects, Article,

[1999] 1 MLJ cxxx; [1999] 1 MLJA 130.
92
BIBILOGRAPHY
I. N. Duncan Wallace Q. C. (1995), Hudson’s Building and Engineering Contracts, 11th

Edition, Volume 1, Sweet & Maxwell, London.

Edition, Volume 2, Sweet & Maxwell, London.

Edition, 1st Supplement, Sweet & Maxwell, London.
Ir Harbans Singh KS (2002), Engineering and Construction Contracts Management –

Law and Principles, LexisNexis, Kuala Lumpur.

Pre-Contract Award Practice, LexisNexis, Kuala Lumpur.

Commencement and Administration, LexisNexis, Kuala Lumpur.

Post-Commencement Practice, LexisNexis, Kuala Lumpur.
John Uff (2002), Construction Law, 8th Edition, Sweet & Maxwell, London.
93
Malaysian Treasury (1997), ArahanPerbendaharaan, Instruction No 200.2, Kuala
Lumpur.
Malaysian Treasury (1999), Surat Pekeliling Perbendaharaan Bil. 2/1995 and Tambahan
Kedua Surat Pekeliling Perbendaharaan Bil. 2/1995,
http://www2.treasury.gov.my, August 1999.
P. A. M. 1998 Agreement and Conditions of Building Contract Private Edition with

Quantities.
Rajendra Navaratnam (2004), Recent Legal Developments In The Construction Industry

In Malaysia, Seminar, International Construction Conference 2004 (In
Conjunction With MALBEX & ICW 2004), CIOB Malaysia & MBAM.
Sinha & Dheeraj, Legal Dictionary, International Law Books Services, Kuala Lumpur.
Stephen Furst and Vivian Ramsey (2001), Keating on Building Contracts, 7th Edition,
Sweet & Maxwell, London.
Sundra Rajoo (1999), The Malaysian Standard Form of Building Contract (The PAM
1998 Form), Second Edition, Malayan Law Journal, Kuala Lumpur.
Tracey Summerell (1998), Who is Entitled to the Retention Fund?, Articles and Journals,
Masons, http://www.masons.com/library/articles/c&emonth/retentio.hts, June
1998.
94

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PERFORMANCE BOND: CONDITIONAL OR UNCONDITIONAL

'AZIZAN BIN SUPARDI

UNIVERSITI TEKNOLOGI MALAYSIA

express my deepest gratitude to these people who provided valuable cooperation in my

carrying out of this final project.

First of all, I would give my acknowledgement to my supervisor En Jamaluddin Yaakob

of completing the master project.

and encouragement while preparing this master project.

In construction contracts, a 'performance bond' is a bond taken out by the

1.1 Background of Topic 1

CHAPTER 2 PERFORMANCE BOND

CHAPTER 3 COMPARATIVE ANALYSIS: CONDITIONAL VERSUS

CHAPTER 4 CONCLUSION AND RECOMMENDATION

AC Law Reports: Appeal Cases

Figure 1.1: Relationship of Parties to a Bond and the Underlying Contract

Figure 1.3: Flowchart of the research methodology

Figure 2.1: The risk spectrum: some principal sources of risk

Figure 2.2: The risk spectrum: some principal sources of risk

1.1 Background of Topic

In Malaysia, most of the need of a performance bond is made through an

Figure 1.1: Relationships of Parties to a Bond and the Underlying Contract5

Contractor Construction Defects liability

There are two types of performance bonds, as set out below.8

• Conditional bond or default bond. A default bond is a contract of guarantee

• Unconditional bond or on-demand bond. An on-demand bond is a covenant by

Therefore a performance bond is nothing more than a written guarantee,

1.2 Problem Statement

A bank guarantee is a performance bond. There are two types of

A performance bond or guarantee is in fact a written contract to guarantee

That is the position of an on demand performance bond. It is clear to us that

The appellant claimed that the bank guarantee is a conditional bond. To

Hence it is important and necessary to understand the circumstances in

1.3 Objective of Topic

1.4 Previous Research

The second was by En. Jamaluddin Yaakob called Performance Bond in

1.5 Scope of Topic

1.6 Significance of Topic

As has been mentioned in the objective, this research is important to the

1.7 Methodology and Research Process

Step 1: Identification of Research Topic

This is to give a thorough understanding what is this research is all about

This is the determining of what the research is hoping to achieve in

Step 3: Data Collection

This is of course the gathering and consuming the medium of literatures as

This is the main text of this Masters Project dissertation which is

The standard forms of contract Reference Books and other

Figure 1.3: Flowchart of the research methodology

1.8 The organizational of the research proposal

The introduction is the first chapter consists of the overview of this

Chapter 2: Performance Bond

The second chapter is basically the brief information on the bond

Chapter 4: Conclusion and Recommendation

The success of a construction project is measured by its timely completion to

• MONEY RATE RISK

• DAMAGE OR INJURY RISK

Figure 2.1: The risk spectrum: some principal sources of risk20

• Physical works – ground conditions; artificial obstructions; defective materials or

Risks are inevitable and cannot be eliminated. They can, however, be