A perspective on strengthening the sanctity of on-demand bank guarantees in Malaysia
The Promise That’s Supposed to Be “As Good as Cash”
Picture this: an employer secures a performance bond from a contractor at the start of a major project. Years later, the contractor falls short of its obligations under the construction contract, and the employer, well within its rights, calls on the bond it is entitled to.
A performance bond is meant to be “as good as cash”, an on-demand bank guarantee that pays out the moment a valid demand is made, no questions asked. That’s the whole point. It gives employers immediate security, regardless of whatever dispute is brewing on the underlying performance bond contract.
The Issue: Unconscionability as an Escape Hatch
Under Malaysian law, a contractor can apply to court to stop a bond call on two grounds: fraud, or unconscionability[1].
Sounds reasonable, until you see how it plays out. Contractors routinely rush to court the moment a bond is called, arguing it would be “unconscionable” to allow payment. Suddenly, the employer, the party that has suffered the loss in the first place, is stuck in litigation, unable to access the very security it bargained for.
The bond stops being “as good as cash” but merely sets the stage for another battleground.
Singapore’s Landscape (Past and Present)
Singapore was formerly in the same conundrum — apart from fraud, contractors there could also rely on unconscionability to block a bond call.
However, in recent years, the position of law has shifted. Singapore employers now have the option to contractually agree, right from the start, that unconscionability simply won’t apply. This came about thanks to the Singapore Court of Appeal’s decision in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] SGCA 24 — a case that essentially said: if both parties agreed to it, the courts will hold them to that bargain. This line of reasoning was once again applied in its totality where the Singaporean Courts have readily upheld the carving-outs of unconscionability from the scope of injunctions and to uphold mutually pre-agreed contractual terms in discerning performance bond injunction proceeds. See: Chian Teck Realty Pte Ltd v SDK Consortium and another [2024] 3 SLR 1031 and Star Engineering Pte Ltd v Pollisum Engineering Pte Lt [2024] 1 SLR 1099
The effect? If a bond expressly excludes unconscionability, a contractor is left with only one way to stop a call, that is by proving clear and unequivocal fraud. Given that fraud is a much tougher case to make than unconscionability, the applicant for the injunction can’t just complain that “this feels unfair”, but rather, is required to make a solid case of dishonesty.
In short, Singapore decided: if both parties agreed to it, let’s honour that deal.
Why Employers Should Consider Adopting Clauses Excluding Unconscionability as a Ground for Injunction
- It protects employers by raising the bar significantly. Unconscionability is a wide, flexible concept, which means contractors have plenty of room to argue their way into an injunction. Fraud, on the other hand, is a much higher threshold to meet as it requires clear, cogent evidence of dishonesty, not just a sense that something feels unfair. By excluding unconscionability, employers shut the floodgates that contractors so often rely on.
- It holds contractors to what they actually agreed to. The contractor signed up for the bond. They agreed to the terms. If things go wrong on their end, they shouldn’t get a second bite at the apple by crying “unconscionable” after the fact.
The Potential Future For Malaysian Employers
Ultimately, whilst the carving-out of unconscionability remains untested in Malaysia, employers may arguably consider, when negotiating their next performance bond, to expressly exclude unconscionability as a ground for injunction. It’s a small clause with a massive impact — and it might just be the difference between getting paid on time, or getting stuck in court for years.
This article is intended for general informational purposes only and does not constitute legal advice. Parties should seek independent legal advice in relation to their specific circumstances.
[1] As decided in the Federal Court case of Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining Company Sdn Bhd [2012] 4 MLJ 1