The interpretation of performance bonds as either conditional or on-demand bonds is crucial in determining liability and the need for proof of breach.

Mohamed Dzaiddin FCJ:

This appeal concerns the interpretation of a performance bond (gerenti perlaksanaan) and an insurance guarantee both dated 16 May 1991 given by the respondent to the appellant for the due performance of contract works by Jasib Shipyard & Engineering (M) Sdn. Bhd. (the contractor) under a contract no. PPS 13/90 dated 25 January 1992 (the said contract).

Leave was granted by this court on 4 August 1998 to determine whether the said performance bond and the insurance guarantee are conditional or on demand bonds.

Background

Briefly, the facts are as follows. On 25 January 1992 the contractor entered into the said contract with the appellant to construct and complete the partially completed beach restoration works between Sungai Terengganu and Kuala Ibai, Kuala Terengganu. In consideration of the due performance of the said contract the respondent gave the appellant gerenti perlaksanaan (performance bond) for RM420,645 and an insurance guarantee against advance payment for RM1,069,035.

Sometime in November 1992 the appellant discovered that the contractor had defaulted in the completion of the works. Hence, by an A.R. Registered letter dated 30 November 1992 the appellant terminated the said contract with a copy sent to the respondent. Consequently, on 12 December 1992, the appellant sent a notice to the respondent demanding payment of RM420,645 under the gerenti perlaksanaan and RM1,069,035 under the insurance guarantee. Since the respondent failed to respond to the above demand, the appellant instituted civil action against the respondent for payment of the aforesaid sum. This was followed by an application for summary judgment under O. 14 of the Rules of the High Court 1980.

At the High Court level, the registrar dismissed the application, but on appeal, the learned High Court judge reversed the registrar's decision and gave summary judgment against the respondent. On further appeal, the Court of Appeal on 24 September 1996 found that there were triable issues in the case and allowed the respondent's appeal, set aside the learned judge's decision and restored the decision of the learned registrar.

The issue here and in the Court of Appeal is on the construction of the gerenti perlaksanaan and the insurance guarantee against advance payment. With respect to the gerenti perlaksanaan, paras 1 and 2 provide:

1) Jika Kontraktor (melainkan ... layak) mungkir melaksanakan kontrak mengenai apa-apa perkara atau melakukan apa-apa perlanggaran terhadap kewajipannya di bawah kontrak, maka Kerajaan akan, jika perlu, memberi Penggerenti peluang untuk berbincang sebelum sesuatu keputusan dibuat.

2) Penggerenti akan membayar gantirugi kepada Kerajaan sebanyak dan setakat RM420,645.00 dalam tempoh tiga bulan selepas menerima satu notis bertulis mengkehendaki penggerenti membayar kepada Kerajaan apa-apa perlanggaran oleh Kontraktor terhadap kewajipannya dibawah kontrak dengan sentiasa tertakluk bahawa segala apa-apa amaun wang bayaran oleh Penggerenti tidak melebihi had yang disebutkan dalam perenggan ini.

The Court of Appeal held there were triable issues with regard to the construction of the documents. In its judgment (at p. 241 AR) the court held:

From the wordings of both the clauses above, it would appear that the liability under clause 2 would only arise after the breach mentioned in clause 1 occurs.

Therefore the question as to whether the performance bond is a conditional one or an on demand one becomes an issue and there ought to be a trial to determine this which in turn will affect the validity of the notice issued by the Respondent.

It concluded (at p. 242):

We are satisfied that the bond itself specifies the circumstances under which a demand can be made. It requires more than