1. Infrastructure project — Failure to renew performance bond — Termination of contract — Application for interim injunction pending arbitration under Section 11(1)(h) Arbitration Act 2005. (Para 3 , 4 , 5 , 6 , 7 , 9 , 15 )
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2016 MarsdenLR 1466
HIGH COURT (KUALA LUMPUR)
SWEE SENG, J
Scomi Transit Projects SDN BHD – Plaintiff
Versus
Prasarana Malaysia Berhad – Defendant
ORIGINATING SUMMONS NO: WA-24C-45-06/2016
Advocates:
Kevin Prakash and Zaid Abdul Malek (Messrs Mohanadass Partnership) for the Plaintiff.
Rabindra S Nathan, Harjinder Kaur, Oazair Huneid Tyeb and Neoh Jin Kiat (Messrs Shahrizat Rashid & Lee) for the Defendant.
Kevin Prakash and Zaid Abdul Malek (Messrs Mohanadass Partnership) for the Plaintiff.
Rabindra S Nathan, Harjinder Kaur, Oazair Huneid Tyeb and Neoh Jin Kiat (Messrs Shahrizat Rashid & Lee) for the Defendant.
Failure to maintain a performance bond in a construction contract is a fundamental breach. Interim injunctions to prevent termination are generally refused as they effectively compel specific performance, which is prohibited for building/engineering contracts under the Specific Relief Act 1950.
Headnote:(A) Arbitration Act 2005 - Section 11(1)(h) - Interim injunction - Grant of interim measure pending arbitration - The court must determine if the facts disclose a bona fide serious issue to be tried, weigh the harm produced by the grant against the harm resulting from refusal, and consider whether damages constitute an adequate alternative remedy. (Paras 15-18)
(B) Construction Contracts - Performance Bond - The obligation to maintain and renew a performance bond is a standalone and critical security feature of infrastructure contracts, independent of other disputes such as payment claims or extensions of time - Failure to renew the bond constitutes a fundamental breach entitling the employer to terminate the contract. (Paras 43-58)
(C) Contract Law - Negotiations - Where parties negotiate a remedial plan on a "subject to contract" basis, no concluded agreement is reached until terms are finalized - Such negotiations do not estop a party from exercising contractual rights to terminate for breach. (Paras 32-37)
(D) Specific Relief Act 1950 - Section 54(f) and Section 20(1) - Injunction to prevent breach of contract - An injunction cannot be granted to prevent the breach of a contract the performance of which would not be specifically enforced - Building, engineering, or technology contracts are generally unsuitable for specific performance as they are contracts for services and difficult for the court to supervise. (Paras 138-157)
Facts of the case:
A contractor failed to renew a performance bond required under a principal contract for a public infrastructure project. The employer issued a notice of termination based on this failure. The contractor sought an interim injunction pending arbitration, arguing that the employer was estopped from terminating because they were negotiating a remedial plan and that the employer had caused payment delays. The contractor further contended that termination would cause irreparable reputational damage and jeopardize public safety.
Findings of Court:
The court found that the obligation to maintain the performance bond was a separate, independent contractual requirement. The negotiations for a remedial plan were conducted on a "subject to contract" basis and did not waive the employer's right to terminate. The court further found that damages are an adequate remedy for wrongful termination in construction contracts and that the public interest in completing the infrastructure project favored the employer's right to replace a failing contractor.
Issues: Whether the failure to renew the performance bond constituted a serious issue to be tried; whether the employer was estopped from terminating due to ongoing negotiations; whether damages were an adequate remedy; and whether an injunction could be granted to prevent the termination of a construction contract under the Specific Relief Act 1950.
Ratio Decidendi: A performance bond is a critical security feature in infrastructure contracts; failure to maintain it is a fundamental breach. Interim injunctions to prevent termination of building or engineering contracts are generally refused as they effectively compel specific performance, which is barred by Section 54(f) of the Specific Relief Act 1950 when the contract is unsuitable for specific performance under Section 20(1).
Result: The ad-interim injunction was discharged and the applications were dismissed with costs awarded to the defendant.
Legal Category Hierarchy
- contract law
- practice and procedure
- statutory law
Table of Contents
2. Plaintiff claims termination was unlawful and estopped by negotiations; Defendant asserts failure to maintain performance bond is a fundamental breach justifying termination. (Para 8 , 12 , 13 , 14 , 22 , 23 , 86 , 88 , 89 , 92 )
3. Performance bonds are critical security features; negotiations subject to contract do not waive contractual rights; public interest outweighs contractor's interest in infrastructure projects. (Para 24 , 32 , 33 , 34 , 35 , 37 , 43 , 44 , 57 , 58 , 61 , 64 , 65 , 78 , 81 , 82 , 83 , 108 , 110 , 113 , 118 , 120 , 126 , 137 )
4. Failure to maintain a performance bond is a fundamental breach; injunctions are unavailable to prevent breach of contracts unsuitable for specific performance under Section 54(f) SRA 1950. (Para 57 , 58 , 147 , 148 , 155 , 156 )
5. Interim injunction discharged and application dismissed with costs. (Para 158 )
6. Is the failure to renew a performance bond a valid ground for terminating a construction contract?
Yes. A performance bond is a critical and standalone security feature in infrastructure contracts. Failure to maintain or renew the bond constitutes a fundamental breach, entitling the employer to terminate the contract independently of other disputes or claims. (Para 43 , 44 , 57 , 58 )
7. Does negotiating a remedial plan 'subject to contract' estop a party from exercising a contractual right to terminate?
No. Where negotiations are conducted on a 'subject to contract' basis and no concluded agreement is reached, parties are permitted to walk away. Such negotiations do not create an implied duty of good faith that waives accrued contractual rights or prevents termination for breach. (Para 32 , 33 , 34 , 35 , 78 , 81 , 82 )
8. Are damages considered an adequate remedy for the wrongful termination of a construction contract?
Yes. Losses resulting from wrongful termination are generally calculable as monetary damages for the unperformed portion of the works. Reputational damage is also assessable in law, and the court will not grant an injunction if damages provide an adequate alternative remedy. (Para 98 , 99 , 110 , 113 )
9. How does public interest influence the balance of convenience regarding interim injunctions in public infrastructure projects?
Public interest in the timely and safe completion of a project for the general good outweighs the private interest of a contractor. An injunction that causes a stalemate in a public project is generally contrary to the public interest. (Para 114 , 120 , 122 , 126 )
10. Can an interim injunction be granted to prevent the breach of a contract that is unsuitable for specific performance?
No. Under Section 54(f) of the Specific Relief Act 1950, an injunction cannot be granted to prevent the breach of a contract whose performance would not be specifically enforced, such as complex technical contracts requiring mutual trust and confidence. (Para 149 , 150 , 152 , 155 , 156 )
SWEE SENG
THE JUDGMENT OF Y.A. LEE SWEE SENG
[1]Until people can travel by the “folding of space ” as a science fiction would have us imagine, it is still the transportation from one place to another by roads, rails, by sea and air transport. A reliable and efficient mode of public transportation in a capital city is important both for commerce and industry, for work and play, for its people and for tourists as well. It is part of the factors that go into determining how livable a city is - convenience, comfort and connectivity.
[2]There has been for some time now the Kuala Lumpur Monorail connecting some important locations in the Kuala Lumpur city from the connecting hub of KL Sentral through the iconic Jalan Imbi/Jalan Bukit Bintang and even passing by the nostalgic Chow Kit. The experience of being sardine-packed with only standing space during rush hours is a common one. It would not be an exaggeration to say that what started off as a system of seamless connectivity of transport is now bursting at the seams. Hence the move to expand the number of trains by 12 more four- coach trains and also extending the number of stations.
Project
[3]The Defendant and Scomi Rail Bhd on 3 June 2011, entered into the Kuala Lumpur Monorail Fleet Expansion Project Contract (“Principal Contract”) for the purposes of undertaking the engineering, procurement, construction and commissioning and provision of warranty (“Works”) for the Kuala Lumpur Monorail Fleet Expansion Project (“the Project”). On the same day, the Defendant, Scomi Rail Bhd and the Plaintiff entered into a Novation Agreement where all the rights and liabilities of Scomi Rail Bhd under the Principal Contract were novated to the Plaintiff. Along the way the Plaintiff and the Defendant (“the Parties”) entered into other agreements during the course of the Principal Contract with the aim of an orderly completion of the Works. The relevant agreements are the First Supplemental Agreement dated 16 April 2014 (“FSA”) and the Second Supplemental Contract dated 15 April 2015 (“SSC”). The Principal Contract, the FSA and the SSC are collectively referred to as the “Contract”.
Problem
[4]There were considerable delays in construction and commissioning of the Works. The Principal Contract being in June 2011, the Completion was supposed to be in July 2013. The Defendant has only delivered 5 out of 12 trains so far.
[5]The Defendant as Employer, issued a Notice of Termination dated 9 June 2016 to the Plaintiff as Contractor. It was a term of the Principal Contract in Clause 4.2.1.2 that the agreed Performance Bond must be kept valid until the completion of the Works and the remedying of any defects.
[6]The Plaintiff did not renew the Performance Bond in spite of reminders by the Defendant. The Defendant by its letter of 25 April 2016 requested the Plaintiff to renew the Performance Bond, failing which it would exercise its right under Clause 15.2 of the Principal Contract to terminate the Contract. However, instead of extending the Performance Bond which had expired on 25 April 2016, the Plaintiff wrote on 18 May 2016 to the Defendant requesting for a waiver of the requirement of the Performance Bond until 30 June 2016. This request was rejected by the Defendant pursuant to its letter dated 2 June 2016.
[7]The Defendant’s Notice of Termination to the Plaintiff was pursuant to clause 15.2.2 of the Principal Contract by virtue of the Plaintiff’s failure to comply with its obligation under clause 4.2.1.2 of the Principal Contract to maintain and renew the performance bond so that it remained in full force and effect until the Plaintiff has fully executed and completed the Works.
[8]The Plaintiff contended that the Defendant’s termination of the Contract was unconscionable and unlawful and that the Defendant was at all material time, estopped from terminating the Contract as the delay was attributable to the Defendant and further that parties were negotiating a fresh Remedial Plan for the completion of the
