Restraining a Call on a Performance Bond – Unconscionability

Restraining a Call on a Performance Bond – Unconscionability

Firstly let’s address what ‘unconscionability’ actually means. Unconscionability (also known as unconscientious dealings) is a term used in contract law to describe a defence against the enforcement of a contract based on the presence of terms that are excessively unfair to one party. Typically, such a contract is held to be unenforceable because the consideration offered is lacking or is so obviously inadequate that to enforce the contract would be unfair to the party seeking to escape the contract.

In and of itself, inadequate consideration is likely not enough to make a contract unenforceable. However, the court will consider evidence that one party to the contract took advantage of its superior position to insert provisions that make the agreement overwhelmingly favouring the interests of that party.Usually for a court to find a contract unconscionable the party claiming unconscionability will have to prove both that there was a problem with the substance of the contract and the process through which that contract was formed. The substantive problem will usually be the consideration, but could also be the terms, interest payments, or other obligations the court finds unfair. Procedural issues that a court could consider include a party’s lack of choice, superior bargaining position or knowledge, and other circumstances surrounding the bargaining process.

Upon finding unconscionability a court has a great deal of flexibility on how it remedies the situation. It may refuse to enforce the contract, refuse to enforce the offending clause, or take other measures it deems necessary to have a fair outcome. Damages are usually not awarded.

In the case of Malaysian Refining Company Sdn Bhd v Sumatec Engineering and Construction Sdn Bhd [2011] the court found for the appellant and held that the exparte injunction granted by the high court preventing a call on the bond was no warranted. The Court did however confirm that where it can be proven and shown in sufficient depth unconscionability was grounds to prevent a call on an on-demand bond and not solely fraud which was the Malaysian courts previous stand on injunctions preventing calls being made against on-demand bank guarantees.

Please refer Malaysian Refining Company Sdn Bhd v Sumatec Engineering and Construction Sdn Bhd [2011]

This was taken to the next level in the case of Kejuruteraan Bintai Kindenko Sdn Bhd v Nam Fatt Construction Sdn Bhd [2011] in which the court allowed for an injunction preventing the call on a bank guarantee due to unconscionability. In this instance there questions as to the validity of the plaintiffs claims for damages in respect of defective works.

Please refer Kejuruteraan Bintai Kindenko Sdn Bhd v Nam Fatt Construction Sdn Bhd [2011]

MALCONLAW 2011