THE OFFICIAL REPOSITORY OF
MALAYSIAN JUDGMENTS & RULINGS

[2018] MYCA 66 ENGLISH

Global Upline Sdn Bhd v Kerajaan Malaysia and Another Appeal
Suit Number: Appeal Nos. W-01(NCVC)(W)-14-01/2015 & W-01(NCVC)(W)-22-01/2015 

Contracts & commercial – Performance bond – Scope of a performance bond in a contract

Contracts & commercial – Performance bond – Whether the calling of the performance bond was undertaken out of bad faith – Whether the trial court was plainly wrong on the issue of performance bond

JUDGMENT

Brief facts of case

[1] The Plaintiff in this appeal before us is Global Upline Sdn Bhd (“the Plaintiff") a company incorporated in Malaysia and the Government of Malaysia is the Defendant (“the Defendant”).

[2] By way of a letter of intent dated 17 February 2005 from the Defendant and a subsequent letter of acceptance dated 9 November 2005, the Plaintiff agreed to carry out works in connection with the upgrading of Labuan Airport for a total sum of RM365 million (“the contract price”). However, the contract price was later on reduced to RM342,313,912.46.

[3] As required under the Letter of Acceptance, the Plaintiff furnished the Defendant with a performance bond from Bank Muamalat (“the Bank”) in the sum of RM18,250,000.00 being 5% of the contract price. The sum was later reduced to RM9,125,000.00 on 28 February 2011.

[4] A contract agreement was duly executed by the parties on 22 March 2006 (“the contract”) with its terms and conditions therein, including the Liquidated Ascertained Damages (“LAD”) clause.

[5] The Plaintiff was granted the 1st extension of time of 173 days by the Defendant through Extension of Time Certificate No. 1 (“the 1st EOT”) dated 8 January 2009 with the new date for completion being 30 April 2009.

[6] The Plaintiff then made a 2nd application of time vide its notice dated 14 April 2009 (“the 2nd EOT”).

[7] By way of letter dated 29 April 2009, the Defendant informed the Plaintiff that it was imposing provisional LAD of RM 32,131.05 per day for all interim payments made after 30 April 2009.

[8] The Plaintiff was further informed that as construction was to extend beyond 31 July 2009, the Defendant would then issue the Certificate of Non-Completion and LAD would be permanently imposed.

[9] In the meantime, the Plaintiff managed to complete a few buildings before the original date for completion on 8 November 2008 and the Defendant issued Taking-Over Certificates (“TOCs”).

[10] As at 31 July 2009, the Plaintiff had completed 99% of the Works, but the Defendant issued a Certificate of Non-Completion dated 8 October 2009 certifying that the Plaintiff failed to complete the works by 30 April 2009 and imposing LAD commencing 1 May 2009.

[11] The Certificate of Practical Completion (“CPC”) was issued on 19 October 2010 certifying that the Works were completed on 12 April 2010.

[12] To date, the Defendant retained a total sum of RM11,149,474.35 as LAD from 1 May 2009 to 12 April 2010.

[13] Apart from the LAD, the Defendant also retained a further sum of RM650,000.00 paid by the Plaintiff to the PWD for repair of certain public roads and also RM399,795.23 due to the Plaintiff under the contract.

[14] On 20 September 2012, the Defendant prepared a notice to the Bank claiming the sum of RM9,125,000.00 under the performance bond for the Plaintiff's failure to perform under the Contract.

[15] Although there was negotiation on the performance bond, the same was called and the Bank released the monies on 1 November 2012.

[16] As a result, the Plaintiff now claimed for the LAD, and the 2 other sums retained by the Defendant as well as for the performance bond to be refunded to them as they have completed the contract.

[17] After full trial, the learned Judicial Commissioner (“JC”) allowed the Plaintiff’s claim for the LAD, and the 2 sums retained by the Defendant, but dismissed the Plaintiff’s claim for performance bond.

[18] Dissatisfied with the decision, the Plaintiff appealed against it against PART of the decision on the performance bond only vide Appeal W-01(NCVC)(W)-14-01/2015, while the Defendant had also filed an appeal against the decision on the issue of LAD and the 2 sums retained by the Defendant vide appeal W-01(NCVC)(W)-22-01/2015.

The Appeals

[19] We heard the two appeals together as early as 27 October 2015 but after a series of postponements the hearing of these appeals was completed on 3 October 2017. Among other reasons of the delay was the Defendant’s intention to file Supplementary Record of Appeal out of time and to include minutes of meeting held on 21 January 2010 and 19 March 2010 in the record vide Notice of Motion Enclosure 10a. In the course of exchanging affidavits, the Plaintiff on the other hand filed an application to expunge from the Record of Appeal the affidavit affirmed by one Burhan Irwan Cheong on 9 June 2016 (the disputed affidavit) filed by the Defendant in support of application at Enclosure 10a.

[20] Having heard submissions on the said application, we had dismissed the said Notice of Motion Enclosure 10a and allowed Enclosure 30a and proceeded with the hearing of the main appeals.

[21] Having heard parties on the main appeal, we had dismissed the appeal by the Defendant Government of Malaysia and also we had dismissed the Plaintiff's appeal on the issue of the performance bond. We had since been informed that the Plaintiff was aggrieved by our decision and had since filed application for leave to appeal to the apex Court. No such action was taken by the Government of Malaysia. As such, this Ground of Judgement shall only be dealing with the appeal lodged by the Plaintiff for the Performance bond issue. The parties will be referred to by us as they appeared in the High Court, in this ground of appeal.

[22] The Plaintiff’s case on the performance bond was one of the complaints it had against the Defendant and was one of the heads of claim that it had filed in the writ against the Defendant.

[23] As a brief background, the issue that surrounded this performance bond had been this. As would be usual in most contracts for works of sizeable magnitude, the project owner would insist on the inclusion of a performance bond provisions in the contract documents between the contracting parties. In this case, the contract value was nearly half a billion ringgit involving the construction of the Labuan Airport. The fact that the project was not completed within the stipulated time was not in issue. This would be easily discernible from a short chronology pertaining to the same, which had invariably led to the calling on the performance bond by the Defendant. The Plaintiff was not happy with this event and had cried foul, alleging that the Defendant had breached the contract when it called on the performance bond.

[24] The learned JC had considered the evidence before her and she had concluded that the Defendant had been correct when it called on the performance bond. Her rationale was contained in her Grounds of Judgement at paragraphs 38, 39 and 40.

Our findings

[25] We had considered her findings as contained in those paragraphs referred to by us. We noted that she had addressed the grievances of the Plaintiff pertaining to the alleged wrongful calling for the full amount of the performance bond by the Defendant.

[26] What is a performance bond? Essentially, a performance bond is issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects. All these features were present in the performance bond we were dealing with in this appeal. Not unlike such other documents of that nature, it was put in place to ensure that the contractor performed its part of the bargain as stipulated in the contract and deliver the completed construction project as agreed between the contracting parties. Failure to deliver on the promise will invariably clothe the employer with the necessary trigger to invoke its right under the bond instrument to call on the performance bond usually for the purpose of engaging third party contractor to complete the works left uncompleted by the original contractor. Of course how a performance bond clause is worded may differ but its essence does not depart from the fundamental purpose of providing a form of guarantee given by the contractor which is liable to be called upon by the employer on the occurrence of a breach that results in the failure by the contractor to deliver on its promise to deliver up the completed project within the agreed time frame as per the contract.

[27] Now, in this appeal, Clause 10 of the Agreement was referred to by the Plaintiff. This Clause 10 had related to matters pertaining to the performance bond. According to the Plaintiff, the right to call on the performance bond must be dependent upon the Defendant’s estimated costs of repairing the outstanding works. The learned JC had rejected this interpretation to Clause 10. She described such interpretation as being a ‘flawed’ one.

[28] We had sighted Clause 10 of the Agreement and we must, with respect, express our view that the learned JC was correct in taking the position that she had taken on the matter. Indeed, there was nothing in Clause 10 that would be capable of suggesting the view that was taken by the Plaintiff. Rather, we were in unison in our view that Clause 10 ought to be interpreted in the manner as was done by the learned JC in the High Court. We now reproduce Clause 10 as follows:

“PERFORMANCE SECURITY

10.1 Performance Bond

The Contractor undertakes to provide a performance security for the due performance of the Contract in either the form mentioned below:

(i) Bank Guarantee

The Contractor shall within fourteen (14) Days of the date of the Letter of Acceptance provide to Employer the bond of a bank established in Malaysia, and to which the Employer has given his prior approval in writing, in a sum equal to the amount specified in Appendix 1 as being from time to time applicable and in the form appearing in Appendix 4, for the due observance and performance by the Contractor in the Contract. The Contractor shall maintain and renew if necessary the said bond so that it shall remain in full force and effect until the expiry date set out in Appendix 1 after which no claim shall be made against the said bond. The cost of obtaining the bond shall be at the expense of the Contractor and shall be included in the Contract Price.

OR

(ii) Performance Guarantee Sum

Where a deduction of ten percent (10%) on each interim payment shall be made up to a maximum value of five percent (4%) of the Contract Price. Half of the Performance Guarantee Sum shall be released upon Substantial Completion as certified in the Taking-Over Certificate for the Whole of the Works and the remaining half to be released six (6) months after the end of Defect Liability Period.

10.2 Advance Payment Bond

The Contractor shall within fourteen (14) Days of the date of the Letter of Acceptance provide to the Employer a bond of a bank established in Malaysia, and to which the Employer has given his prior approval in writing, in a sum equal to the Advance Payment and in the form appearing in Appendix 5A. The Contractor shall maintain and renew if necessary the said bond so that it shall remain in full force and effect until the expiry of twenty-eight (28) Days from the date upon which the full amount of the Advance Payment shall have been repaid after which no claim shall be made against the said bond. The cost of obtaining the bond shall be at the expense of the Contractor and shall be included in the Contract Price.

10.3 Parent Company Guarantees

Not Used

10.4 Condition Precedent to Payment

The provision by the Contractor of the Performance Bond and the Advance Payment Bond, each in accordance with this Clause 10, shall be a condition precedent to any payment by the Employer to the Contractor under the Contract.

10.5 Right to Deduct

If the Contractor shall fail to provide, maintain and/or renew the Performance Bond in the form of Bank Guarantee or Insurance Guarantee in accordance with the provisions of Clauses 10.1 (i) and 10.2 then the Employer may, without prejudice to any other rights and remedies to which he may be entitled, deduct from the forthcoming payments a sum equal to the amount of the bond from any monies due to the Contractor which sum shall be paid to the Contractor upon subsequent provision of the documents.”

[29] We noted that there was nothing in Clause 10 of the Agreement which ‘deals specifically as to how the Defendant should exercise its right to call on the performance bond', as was observed by the learned JC in paragraph 38 of her Grounds of Decision. But one thing is clear, the Plaintiff had failed to complete the works on the defects that had been identified by the Defendant despite numerous reminders given to the Plaintiff by the Defendant. When the Defendant called on the performance bond, it was a few days away from the expiry of the same. To our minds therefore there was a clear breach by the Plaintiff which legally triggered the right of the Defendant to call on the performance bond. It was a long time coming, under the circumstances. Coupled with the Accountant-General Circular no. 2 of 2011, the Defendant had no other option. For ease of reference, the said AG Circular No. 2 of 2011 reads as follows:

“ACCOUNTANT GENERAL OF MALAYSIA CIRCULAR NO. 2 OF 2011.

ACCOUNTING PROCEDURE FOR PERFORMANCE GUARANTEE SUM

4.5 Accounting Procedure for Performance Bond which comprises the Performance Guarantee Sum (PGS), Bank Guarantee and Insurance Guarantee.

4.5.1 The performance Bond shall be forfeited in accordance to the value of the loss suffered by the government in the event the contractor fails to comply with the conditions for completion of project and will be deposited into the government revenue. Pursuant to AP200.4(b), for local works contracts, expenses incurred by the ministries/ departments to rectify the defect within the defect liability period shall be claimed from the Performance Bond and such claim shall be credited to the Revenue from Fines and Forfeitures Account (76102). In the case of a forfeited bank guarantee and insurance guarantee, it shall be claimed and encashed. A collector’s statement is required to prepare by crediting to the Revenue from Fines and Forfeiture Account (76102).

4.5.2 Ministries/ departments shall proceed with failed projects or rectify the defect by utilising the existing development vote or apply for new allocation if the balance vote is not sufficient.

4.5.3 For projects which are completed and the certificate of Practical Completion received, fifty percent (50%) of the PGS may be returned to the contractor and the balance 50% of the PGS will be released after the expiry of the defects liability period or after the Defect Liability Certificate has been issued, whichever occurs later.

Dr Performance Guarantee Sum (879507) xxx

Cr Bank xxx

(Payment to Contractor-PGS Owner)

4.5.4 Procedures with respect to managing the balance 50% of the PGS within the defect liability period.

a. The contractor (PGS Owner) is to rectify all defects until completion at its own expense, and the whole of the remaining PGS will be returned to the contractor. The entries are as follows:

Dr Performance Guarantee Sum (879507) xxx

Cr Bank xxx

(Payment to Contractor-PGS Owner)

b. A new contractor is appointed to rectify defects and the departmental vote was utilised to pay the new contractor, therefore the PGS will entered be into the revenue, limited to the actual cost incurred to pay the new contractor. The remaining balance of the PGS must be returned to the previous contractor (PGS Owner). The entries are as follows:

Dr Performance Guarantee Sum (879507) xxx

Cr Revenue from fines and Forfeitures Account (76102) xxx

Cr Bank xxx

(Payment to Contractor-PGS Owner)

c. The contractor (PGS Owner) fails to rectify the defects within the defects liability period and the cost of rectifying the defects by utilising the vote exceeds the balance of the PGS, therefore the whole of the PGS will be forfeited and entered into the revenue.

Dr Performance Guarantee Sum (879507) xxx

Cr Revenue from Fines and Forfeitures Account (76102) xxx”

[30] The project had involved the Labuan Airport that cost in the region of half a billion ringgit. It was a huge public project involving public funds. We were in agreement with the learned JC that it would be impossible for the Defendant to determine with precision the costs of engaging third party contractor(s) in order to complete the defective works that were left unattended by the Plaintiff despite the numerous reminders, a fact that was not lost on the learned JC in her determination of this issue. It would only be possible for the Defendant to determine the exact costs incurred upon the same being completed by the third party contractor(s) appointed for that purpose. We found that interpretation to the trigger of Clause 10 for the full amount of the performance bond, to be a more reasonable one. We agreed with the learned JC on this score. Such interpretation would be more in line with commercial sense and ‘commonsensical’ to borrow the word as was coined by Lord Clarke in the case of Rainy Sky and others v Koookmin Bank [2011] UKSC 50.

[31] It was also complained by the Plaintiff that there was mala fide on the part of the Defendant when it called on the performance bond in light of the fact that there was negotiation between the parties to extend the period of defect liability to be granted to the Plaintiff. We did note the meeting that took place on this matter between the parties. Indeed, certain specific proposals were made to the Defendant by the Plaintiff to complete the works on the defects. However, these were only proposals. It was not disputed that these proposals were never agreed upon by the Defendant. On the facts, we were not able to accede to the Plaintiff’s complaint that there was mala fide on the part of the Defendant that had actuated its action to make the call on the performance bond much to the chagrin of the Plaintiff. The glaring fact that remained had been that the defects were not rectified even a few days before the expiry of the performance bond period. Mala fide is made of sterner stuff. To allege mala fide may be easy, but to prove it as a matter of law is quite another thing altogether. Whether it be mala fide in the public law or private law realm, the underlying element is the same. It is that the impugned act has been one that is actuated by an improper or collateral purpose. The onus lies with the Plaintiff to prove such an allegation.

[32] The proper question that needed to be posed in the circumstances would be, ’was the calling of the performance bond undertaken out of bad faith on the part of the Defendant?’ Looking at the contemporaneous factors surrounding the calling of the performance bond, we were not able to draw a similar conclusion that was reached by the Plaintiff. We failed to see any element, in the circumstances of this case so as to convince us, on the balance of probabilities, that there was bad faith on the part of the Defendant. The number of indulgences granted and reminders to the Plaintiff to our minds had negated such alleged malignant intent on the part of the Defendant. It must not be forgotten that the Defendant was acting in compliance of the Accountant-General’s Circular No. 2 of 2011.

[33] Also, to our minds, the fact of the matter is that the calling of a performance bond on alleged breach of contract by the other party to a contract is necessarily a unilateral act by the party who suffers the alleged breach. In the main, it is done so that the party suffering the effect of the breach may utilise the fund in the performance bond to pay for third party expenses incurred in making good the uncompleted portion left behind by the defaulting party. If there be any surplus after paying the third party, the balance would be paid to the defaulting party. As was alluded to by the learned JC, it was open to the Plaintiff to challenge the costs incurred by the third party which in all fairness ought to reflect market rates unless there may have existed circumstances that could justify a different rate on the higher scale. But then again, that would be something which both the Plaintiff and Defendant will have to pursue in resolving the final amount which ought to be due to the Plaintiff. But surely, in the circumstances, it was not illegal nor in breach of the contract for the Defendant to have called on the performance bond and to call for the full amount of the said bond. Essentially, the right to call on the Performance bond under clause 10 resided with the Defendant. It was put in place to safeguard the interest of the Defendant in the event of default by the Plaintiff in completing the project within the agreed timeframe. Ipso facto, that right can be exercised at the instance of the Defendant, upon its Judgement call when a breach pertaining to the completion of the project had occurred. If such a call on the Performance bond was alleged to have been made mala fide, the onus lies with the Plaintiff to establish that fact.

[34] As such, having considered the totality of the evidence and the legal principles, we saw no reason to disagree with the decision of the learned JC on the issue that had pertained to the calling of the performance bond by the Defendant.

[35] It would require more than just a disagreement on our part with the finding of the learned JC that would justify a proper invocation of our appellate intervention. One instance has been identified to be that the learned JC must have been proven to be plainly wrong. [See, Gan Yook Chin & Anor v Lee Ing Chin & Ors [2004] 4 CLJ 309 case] That threshold is indeed a rather high one to establish. In this appeal before on the issue of performance bond, we found that the learned JC had not been shown to have been plainly wrong in that regard. The Plaintiff did not deliver the project on time despite the extensions of time and the indulgences given by the Defendant. Then, there is the AG’s circular to contain with and the performance bond was expiring. Clause 10 of the Agreement generally gave a unilateral right to the Defendant to call on the performance bond on the occurrence of a breach by the Plaintiff. In this case, the factum of a breach having been committed by the Plaintiff was beyond any dispute. The negotiation between the parties was testament of such fact, with the Plaintiff proposing certain terms that would extend the indulgence granted to the Plaintiff to make good the defective works at the Labuan Airport. The granting of any indulgence was a matter of utter discretion that reside with the Defendant. The fact that there were proposals coming from the Plaintiff did not in any way bind the Plaintiff, such that it was estopped to act in a way that was adverse against the Plaintiff or render the calling of the performance bond by the Defendant as being mired or tainted by mala fide.

Conclusion

[36] For the abovementioned reasons, we therefore had dismissed this appeal by the Plaintiff on the issue of calling of the performance bond by the Defendant, and as both appeals by parties were heard together, we had made no order as to costs, on account that the Plaintiff had nevertheless succeeded in the said other appeal. Deposits were ordered to be refunded to respective parties, where applicable.

Dated: 26 February 2018

Sgd

ABANG ISKANDAR BIN ABANG HASHIM
Judge
Court of Appeal

COUNSEL

For the Plaintiff: Tan Sri Muhammad Shafee Abdullah together with Miss Puteri Shehnaz Majid and Miss Sasha Ravindran, Messrs Cheah Teh & Su

For the Defendant: SFC Tuan Radhi Abas together with Miss Nurul Ainy Binti Yahaya, Senior Federal Counsel

Judgments referred to:

Gan Yook Chin & Anor v Lee Ing Chin & Ors [2004] 4 CLJ 309

Rainy Sky and Others v Koookmin Bank [2011] UKSC 50

 

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