Panzana Enterprise Sdn Bhd v Turnpike Synergy Sdn Bhd (B-02(C)(A)-516-03/2022)

There are two appeals before us arising from the decision of the High Court, which, by the consent of the parties, are heard together.

The appeals are as follows:

Civil Appeal No.: B-02(C)(A)-516-03/2022 (“Appeal 516”). Appeal 516 relates to the appellant’s appeal against the learned Judge’s decision, which dismissed the appellant’s Originating Summons (“OS”) dated 31.3.2021; and

Civil Appeal No.: B-02(IM)(C)-517-03/2022 (“Appeal 517”). Appeal 517 relates to the appellant’s appeal against the learned Judge’s decision to allow the respondent’s Notice of Application dated 21.4.2021 in setting aside the ex parte injunction.

The respondent is a subsidiary of Projek Lintasan Kota Holdings Sdn Bhd. It is responsible for overseeing the construction of the Damansara-Shah Alam Elevated Expressway, also known as “DASH”.

The appellant, Panzana Enterprise Sdn Bhd, was appointed by the appellant company as the main contractor for the project known as: Projek Penswastaan Lebuhraya Bertingkat Damansara-Shah Alam Package DASH-CA4 – Construction and Completion of Mainline and Other Associated Works from CH. 4983 to CH.9307. The Letter of Acceptance dated 4.8.2016 (“LA”) was acknowledged and accepted by the appellant.

The value of the contract, according to cl 7.0 of the Conditions of Contract dated 27.2.2017 (“COC”), is RM670,000,000.31.

The commencement date of the Project is 29.8.2016 and the completion date is 28.2.2019. The completion date was later extended to 30.12.2020.

In addition to the COC and LA, the Project is also governed by two other documents. They are the Special Provisions to the COC (“SPCOC”) and a Supplemental Agreement dated 24.9.2020.

Cl 13.1(a) of the SPCOC stipulates that the appellant, as the contractor, shall provide a performance bond issued by a licensed Bank to secure the due performance of the obligations under the Contract. Pursuant to the said clause, the appellant provided a Bank Guarantee (“BG”) dated 22.8.2016 issued by Ambank (M) Bhd for the sum of RM33,500.000.02 (“Ambank Guarantee 1”) in favour of the respondent as the performance bond.

On 4.2.2021, the appellant, at the request of the respondent, further provided another BG for the sum of RM10,000,000.00, also issued by Ambank (“Ambank Guarantee 2”). Ambank Guarantee 2 was procured in return for the respondent’s partial release of the retention sum to the appellant.

On 10.2.2021, the Project’s Superintending Officer (“SO”) issued a notice of default. The Notice of Default, purportedly made under cl 51.1(a) of the COC, alleged that the appellant failed to proceed with the works regularly and diligently. It inter alia states as follows: Therefore, pursuant to Clause 51.1(a) of the Conditions of Contract, we now serve you this NOTICE OF DEFAULT which you are required to remedy the aforesaid defaults within fourteen (14) days of the receipt of this Notice FAILING WHICH the Superintending Officer shall have the right to forthwith terminate the Contract by giving you a written notice pursuant to Clause 51.1(b).

The appellant disputed the notice and, by a letter dated 19.2.2021 to the respondent, registered its strong disagreement with the allegations of default. According to the appellant, the Project consultant should not have rejected the appellant’s application for an extension of time. The appellant insisted that the reasons for the application were valid since:

There was a delay in receiving the Project information; and

(ii) There was also a delay in procuring the authorities’ approval, including from the Malaysian Highway Authority.

In short, it is the appellant’s position that the purported Notice of Default was wrongful.

The respondent did not accept the appellant’s explanation.

On 29.3.2021, the SO issued a notice of termination pursuant to cl 51.1(b) of the COC (“Notice of Termination”), terminating the appellant’s employment under the Contract effective immediately.

The appellant, through its letter dated 30.3.2021, contested the Notice of Termination. It contended that the purported termination was not carried out in accordance with the terms of the Contract.

Subsequent to the purported termination of the Contract, the respondent issued and served two letters, both dated 29.3.2021, to Ambank to demand the release of the proceeds of the Bank Guarantees following the Notice of Termination.

Aware of the demand for the release of the proceeds of the two Bank Guarantees, the appellant filed the OS at the Shah Alam High Court against the respondent.

In the OS, the appellants sought inter alia for the following reliefs in

A declaration that it would be unconscionable for the respondent to call or receive the proceeds of the Bank Guarantees for the total sum of RM33,500,000.02 (Para 1(a)).

A declaration that it would be unconscionable for the respondent to receive the proceeds of the Bank Guarantees (Para 1(b)).

The respondent be restrained from receiving the proceeds of the Bank Guarantees pending the disposal of the arbitration proceeding between the appellant and the respondent (Para 1(c)).

The respondent be restrained from receiving the proceeds of the Bank Guarantees (Para 1(d)).

The OS is accompanied by an application for an ex parte injunction in Encl 2, seeking to restrain the respondent from receiving the proceeds of the Bank Guarantees pending the disposal of the OS.

The ex parte application was allowed by the learned Judge on 1.4.2021.

On 21.4.2021, the respondent, by way of a Notice of Application in Encl 19, applied to set aside the ex parte injunction.

On 4.3.2022, the learned Judge dismissed the appellant’s OS. The respondent’s setting aside application in Encl 19 was allowed.

Aggrieved, the appellant filed these appeals – Appeal No. 516 and Appeal No. 517 – which are now before this Court.

However, on 2.6.2022, the learned Judge granted an Erinford injunction, restraining the respondent from receiving the proceeds of the Bank Guarantees pending the disposal of these Appeals. Appeal No. 517 is against the decision of the High Court in Encl 19 in allowing the respondent’s application to set aside the injunction.

The grounds of the decision of the learned Judge on the OS can be summarised as follows:

The Termination Notice is valid under cl 51.1(b) of the COC;

The respondent’s demands on the Bank Guarantees are lawful since the Bank Guarantees are unconditional guarantees payable by Ambank on the respondent’s written demands.

S 7 of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (COVID-19) Act 2020 (“COVID-19 Act”) did not apply because the appellant has failed to prove the second and third conditions of s 7.

S 9 of the COVID-19 Act is optional and can only be invoked if both the appellant and the respondent agree to do so.

The respondent’s demands on the Bank Guarantees were not unconscionable.

The balance of convenience does not lie in favour of the appellant. Can unconscionability be raised as a distinct ground?

As alluded to earlier, at the High Court, the learned Judge, to whom learned counsel for the respondent deferred, was of the view that a commercially sensible construction of the Bank Guarantees revealed that they were unconditional Bank Guarantees which were payable by Ambank on written demands made by the respondent to Ambank.

Before us, learned counsel for the respondent, citing the judgment of the Singapore Court of Appeal in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] SGCA 28 CA, submitted that if calls on the Bank Guarantees are too liberally subject to injunctive relief from the courts, the security loses its efficacy and the raison d’être of the Bank Guarantees would be eroded or even wholly undermined.

I am of the respectful view that is the correct general proposition of law, even in Malaysia.

But the question before us is, are there circumstances where a beneficiary, in this appeal, the respondent, is restrained from calling on a Bank Guarantee or Performance Bond? Are there legally recognised exceptions?

The answer to the questions, I believe, are in the affirmative. The test is laid down by the Federal Court in Sumatec Engineering & Construction Sdn Bhd v Malaysian Refining Co Sdn Bhd [2012] 4 MLJ 1. The Federal Court in Sumatec (supra) reiterated the proposition on the principle recognising “unconscionability” as a separate and distinct ground to restrain a beneficiary from making a call on a performance bond accorded with good commercial sense.

What, then, is unconscionable? As a guide to the added exception of unconscionability, the Federal Court affirmed and applied the test applied in Focal Asia Sdn Bhd & Anor v Raja Noraini binti Raja Datuk Nong Chik & Anor [2009] 1 LNS 913, which is the “seriously arguable and realistic inference” test. In delivering the judgment in Focal Asia, Mohamad Ariff J (later JCA) held that a demand guarantee or Performance Bond, which is unconditional, has first and foremost to be treated as subject to the well-established principle of autonomy of the document, which must be kept separate from the underlying contract. The rule on payment upon a call is strict, subject only to the clear fraud exception. In short, the issuing Bank has to pay if the call on the document is not fraudulent or is not based on a forged document.

However, as between the immediate parties, namely the principal and the beneficiary, the learned Judge held that the law allows an extended exception to the autonomy principle. His Lordship then further observed as follows in his “Conclusion” at para 11 of the judgment: If there is clear evidence of fraud in the underlying contract, or unconscionability, the Court can interfere. In these two situations, the integrity and autonomy of the document will not be compromised, since the paying bank will not be directly prevented from acting on the document. It is the beneficiary that is prevented from making a call on the document on these grounds. Nonetheless, the evidence allowing intervention by the Court must be clear. I accept the test of “seriously arguable that the only realistic inference is fraud” as good law in an interlocutory application such as the present.

Applying the said proposition the question in this appeal is therefore, whether on the facts of this appeal, the appellant had discharged this burden.

To answer the question, let us now examine the material facts of the instant appeal as found by the learned High Court Judge. The factual circumstances

This Court takes judicial notice that beginning 18.3.2020, the Movement Control Order (“MCO”) was enforced nationwide. The MCO encompassed the restrictions on movement and assembly. Above all, the MCO mandated the closure of businesses, industry which includes educational institutions, to curb the COVID-19 pandemic.

It is not in dispute that the Notice of Default was dated 10.2.2021. And despite the appellant’s strong disagreement with the allegations of default, the SO nevertheless proceeded to issue the Notice of Termination on 29.3.2021.

Based on the aforesaid factual matrix, the Notice of Termination was issued during the period covered by the Temporary Measures for Reducing the Impact of Coronavirus Disease (Covid-19) Act 2020 (“COVID-19 Act”). S 7 of the Act provides as follows: The inability of any party or parties to perform any contractual obligation arising from any of the categories of contracts specified in the Schedule to this Part due to the measures prescribed, made or taken under the Prevention and Control of Infectious Diseases Act 1988 [Act 342] to control or prevent the spread of COVID-19 shall not give rise to the other party or parties exercising his or their rights under the contract. S 7 of the COVID-19 Act comes under Part II of the same. The operation of Part II has been extended to 31.3.2021 pursuant to the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) (Extension of Operation) Order 2020 [P.U.(A) 386/2020]: Extension of operation of Part II of the Act 2. The operation of Part II of the Act is extended for the period from 1 January 2021 to 31 March 2021.

Paragraphs 1 and 2 of Schedule to Part II of the COVID-19 Act have listed the following categories of contracts to which s 7 applies:

Construction work contract or construction consultancy contract and any other contract related to the supply of construction material, equipment or workers in connection with a construction contract.

Performance bond or equivalent that is granted pursuant to a construction contract or supply contract.

The learned Judge, in his grounds of judgment, was of the view that the appellant failed to discharge the evidential burden of establishing the appellant’s inability to perform its obligation under the Contract was due to the measures prescribed by the Prevention and Control of Infectious Diseases Act 1988 (“PCIDA”) so as to be entitled to the protection under s 7 of the COVID-19 Act.

In short, the learned High Court Judge, in interpreting ss 7 and 9 of the COVID-19 Act, concluded that the appellant is required to prove, on the balance of probabilities, that it is affected by the measures prescribed under PCIDA before the protection afforded by s 7 of COVID-19 becomes operational.

With respect, we are unable to agree with this approach. We will now give our reasons.

Before us, learned counsel for the respondent submitted that the delay had already started even before the commencement of the COVID-19 Act. While that might be true, the fact remains that the effective Notice of Default and Notice of Termination were issued during the period covered by the COVID-19 Act.

The moment the COVID-19 Act comes into operation, the obligations of the appellant are suspended during that period. The long and short of it is that the inability of the appellant to perform the Contract within that period due to the measures prescribed under the COVID-19 Act shall not give rise to the other party or parties exercising his or their rights under the Contract.

The extension of the argument is that the respondent would be precluded from calling on the appellant to rectify any breaches during the said period. In this case, it was to catch up with the delay in the Works, which had reached about 86% and was not progressing as required under the Contract.

The special measures taken under the COVID-19 Act involve various phases covering restrictions such as being unable to leave home or travel to work and self-isolation the moment one is in close contact with a COVID-19 patient, though not tested positive for the virus and the like. The supply chain was disrupted and indeed, there was a general total inactivity or slowdown in the progress of construction works generally. As alluded to earlier, the affected period started on 18.3.2020.

In tabling the COVID-19 Bill, Parliament was acutely conscious of the hardship suffered by all, especially those in the construction industry. As stated earlier, para 1 of the Schedule to Part II of the COVID-19 Act provides relief and suspension of contractual obligations under it.

Learned counsel for the respondent submitted that the appellant must prove how the delay is related to the measures prescribed under the COVID-19 Act. With respect, we disagree. We do not think, at least at this juncture, that the appellant needs to prove anything other than that they could not discharge their contractual obligation under the Contract because of the different and various measures taken by the Government under the COVID-19 Act.

In our considered view, the COVID-19 Act should be interpreted generously – bearing in mind the special purpose for which the Act was enacted to relieve the suffering of those affected by the COVID- 19 pandemic, where movements of labour and materials were severely affected.

In any event, s 7 of the COVID-19 Act is broad enough to cover the reason behind the call, which is the purported termination of the PWD 203 Contract due to the breach in that the appellant had failed to proceed with the works regularly and diligently.

In KNM Process Systems Sdn Bhd v Ceca Gold Company Ltd & Ors [2023] 1 MLJ 814 CA, the 1st respondent awarded the appellant an engineering, procurement and construction contract (“EPC contract”). Pursuant to the EPC contract, the appellant was to provide a Bank Guarantee to the 1st respondent. Subsequently, disputes arose between the appellant and 1st respondent regarding the performance of the EPC contract. As a consequence, by a letter dated 17.5.2021, the 1st respondent gave the notice to terminate the EPC contract. Prior to that, by way of a letter dated 10.5.2021, the 1st respondent wrote to the 2nd respondent Bank demanding the sum under the Bank Guarantee. Upon being notified of the demand, the appellant filed an OS for, inter alia, an injunction to restrain the 1st respondent from receiving the proceeds from the Bank Guarantee. The High Court dismissed the appellant’s OS.

The Court of Appeal, in allowing the appeal, held that it is of no consequence that the bank guarantee is payable on demand. Abu Bakar Jais JCA (as his Lordship then was), in delivering the judgment of the Court, made the following observation at para [40]: As s 7 of Act 829 is applicable to the appellant, it is of no consequence that the bank guarantee is payable on demand. This statutory provision caters to the need to deal with the spread of Covid-19 affecting Malaysian business, commerce and trade. It also grants protection to parties who ought not to be liable because of the pandemic, as provided also by the legislations of other countries in protecting their own companies. It is enacted to deal with the non-performance of contracts, including the EPC contract in times of extreme difficulties. The appellant as a Malaysian company should not be prevented to seek refuge under the terms of s 7 of Act 829. This will include the protection against the call of the on-demand bank guarantee.

We take cognisance of the respondent’s contention that matters such as Performance Bonds and Bank Guarantees are, in reality, a contract between the respondent as the beneficiary and the Bank that issued the Bank Guarantees. However, in our view, it cannot be disputed that the Bank Guarantees are inextricably linked to the performance of the PWD 203 Contract. The Bank Guarantees were procured as part of the terms of the PWD 203 Contract.

In the circumstances of the case, and applying Sumatec Engineering (supra) and KNM Process Systems (supra), which we are bound to follow, such a call would be unconscionable as the COVID-19 Act was fully applicable to the parties to the construction contracts and there was in place, effected by the COVID-19 Act, a temporary suspension of all contractual obligations of the parties.

For the aforesaid reasons, our decision is as follows:

The test applicable to restrain the respondent from calling on the Bank Guarantees is whether the call would be unconscionable in the circumstances of the case.

“Unconscionability” is a separate and distinct ground to restrain a beneficiary from making a call on a performance bond accorded with good commercial sense

The Notice of Default dated 10.2.2021 and the Notice of Termination on 29.3.2021 were issued during the period covered by the COVID-19 Act.

The obligations of the appellant under the PWD 203 Contract are suspended during that period and the inability to perform the contract during that period due to the measures prescribed under s 7 of the COVID-19 Act shall not give rise to the other party or parties exercising his or their rights under the contract.

In short, the Notice of Default and Notice of Termination were null and void under s 7 of the COVID-19 Act.

The attendant consequence is that the respondent is precluded from exercising its right to call for the Bank Guarantees since doing so would be unconscionable in the circumstances of the case especially when the COVID-19 Act was in place.

The general proposition is that matters such as Bank Guarantees are, in reality, a contract between the respondent here as beneficiary and the Bank issuing the Bank Guarantees. However, the Bank Guarantees are inextricably linked to the performance of the PWD 203 Contract, under which the Bank Guarantees were procured as part of the terms of the PWD 203 Contract.

We find merits in the appeals. We find that the High Court had erred in not taking relevant factors into consideration and, in particular, the proper interpretation and application of the COVID-19 Act.

We therefore allow the appeals and set aside the High Court’s order.

We grant an order in terms of Encl 1 in para 1 (a), (b) and (c) and with that, the appellant’s appeal against Encl 19 is allowed and the order of the High Court is set aside in both appeals.

We allow costs to the appellant of RM50,000 for Appeal 516 here and below and we allow costs in Appeal 517 of RM10,000 here and below, both subject to allocator. Dated: 7 October 2024 -sgd- (WAN AHMAD FARID BIN WAN SALLEH) Judge High Court Counsel/Solicitors For the Appellant: Terence Loh Tan Tiam Poh & Bernice Ho Xin Hui [Messrs. Belden Advocates & Solicitors] For the Respondent: Vatsala Ratnasabapathy Dennis Khong Heng Kai & Kaushalya Ragunathan [Messrs. Zain & Co]