Construction Law Miniseries Episode 1: The Decision of Sumatec Engineering


Harneshpal Karamjit Singh, Legal Associate (Class Action, Commercial & Construction Department)

Hakem Arabi & Associates

Today, I would like to share my humble and respectful views on Construction Law touching Performance Bonds.

The Focus is on the Federal Court decision of Sumatec Engineering and Construction Sdn Bhd V Malaysian Refining Company Sdn Bhd [2012] 3 CLJ 401 (“Sumatec Engineering”).

  1. Sumatec Engineering is an important Federal Court decision that concerned the calling on a bank guarantee and/or performance bond.

  2. The Federal Court was concerned with the issue whether 'unconscionable conduct' on the part of a beneficiary of a bank guarantee or a performance bond was a distinct ground to restrain the beneficiary from calling on the guarantee or bond.

  3. The Federal Court held that unconscionability is now recognized as a separate and distinct ground to restrain a beneficiary from making a call on a performance bond and/or bank guarantee accorded with good commercial sense.

  4. The Federal Court also recognized three entrenched principles concerning bank guarantee and performance bond as follows:

    1. The autonomy principle - the guarantee constitutes a separate contract between the beneficiary and the issuing bank;
    2. The “cash in hand” principle - Importance of promoting commercial efficacy and certainty in the use guarantees and bonds;
    3. The ‘fraud’ exception - the exception to the autonomy and cash in hand principles is whether the calling on the bond and guarantee constitutes fraud.

  5. Unconscionability is fact specific. There is not set formula and will be considered on a case to case basis with an assessment of the totality of the circumstances by the Malaysian courts.

  6. One distinction to be drawn is that the injunction will be granted to restrain beneficiary from making a demand on the bond and not the bank from making payment out on a performance bond.

  7. Construction lawyers in Malaysia can now raise unconscionability, in addition to fraud, as a distinct ground, to restrain a beneficiary under a bank guarantee or performance bond.

This Write-Up has been published with modifications as a LinkedIn Article by the Author and can be found at