While the world has moved past the COVID-19 pandemic, its aftermath continues to affect many, especially contractors in the construction industry. Given the long-term nature of their contracts, delays in one phase can trigger a cascading effect, prolonging recovery.
The recent Court of Appeal decision in Panzana Enterprise Sdn Bhd v Turnpike Synergy Sdn Bhd [2024] 8 AMR 881 examines the reliefs available to contractors under the Temporary Measures for Reducing the Impact of Coronavirus Disease (COVID-19) Act 2020 (COVID-19 Act). Notably, this case tests the efficacy of the COVID-19 Act in the face of the unconditional and on-demand nature of bank guarantees provided by contractors to employers.
Brief Facts
The respondent, Turnpike Synergy Sdn Bhd (Turnpike), was responsible for overseeing the construction of an expressway project for which the appellant, Panzana Enterprise Sdn Bhd (Panzana), was appointed as the main contractor. As part of the terms of the contract between Turnpike and Panzana, Panzana furnished two bank guarantees issued by AmBank in favor of Turnpike.
A dispute subsequently arose when there was a delay and slow progress of the construction works, which resulted in Turnpike issuing a notice of default to Panzana and subsequently a notice of termination, terminating Panzana’s employment under the contract. Both the notice of default and the notice of termination were issued during the period covered by the COVID-19 Act.
Following the notice of termination, Turnpike called on the bank guarantees. Panzana, nonetheless, filed an originating summons at the High Court, essentially seeking a declaration that it would be unconscionable for Turnpike to call or receive the proceeds of the bank guarantees. Panzana also sought an ex parte injunction to restrain Turnpike from receiving the proceeds of the bank guarantees pending the disposal of the originating summons. The High Court granted the ex parte injunction.
However, the High Court subsequently dismissed the originating summons and allowed Turnpike’s application to set aside the ex parte injunction (HC Order). The High Court 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 Turnpike to AmBank. In essence, the High Court held that Panzana failed to establish that its inability to perform its obligation under the contract was due to measures taken to curb COVID-19. Accordingly, Panzana was not entitled to the protection under Section 7 of the COVID-19 Act.
Being aggrieved, Panzana appealed to the Court of Appeal.
The Appeal
The main issue before the Court of Appeal is whether it was unconscionable for Turnpike to call for or receive the proceeds of the bank guarantees.
The Court of Appeal allowed the appeal and set aside the HC Order. The Court of Appeal recognized that bank guarantees are, in reality, a contract between Turnpike as the beneficiary and the bank issuing the bank guarantees. If calls on the bank guarantees are too liberally subject to injunctive relief, the security loses its efficacy, and the purpose of the bank guarantees would be eroded or even wholly undermined. Nonetheless, it does not follow that there are no exceptions that justify injuncting the calling of bank guarantees.
Referring to Sumatec Engineering & Construction Sdn Bhd v Malaysian Refining Company Sdn Bhd [2012] 2 AMR 673, the Court of Appeal affirmed that unconscionability is a legitimate ground to injunct a beneficiary from claiming on a performance bond. The right test for what constitutes unconscionable is the “seriously arguable and realistic inference” test as applied in Focal Asia Sdn Bhd & Anor v Raja Noraini binti Raja Datuk Nong Chik & Anor [2011] 2 AMR 515.
The Court of Appeal disagreed with the High Court that Panzana had the burden of proving a direct link between the delay and the measures prescribed under the COVID-19 Act. The Court of Appeal was of the view that the COVID-19 Act should be interpreted generously, bearing in mind the special purpose for which it was enacted to relieve the suffering of those affected by the COVID-19 pandemic.
The Application of Section 7 of the COVID-19 Act
The Court of Appeal took judicial notice of the various disruptions brought to the construction industry during the pandemic period and was of the view that Section 7 of the COVID-19 Act, when read in conjunction with paragraphs 1 and 2 of the Schedule to Part II of the COVID-19 Act, clearly provides statutory protection to parties affected by the pandemic. The inability of any party to perform any contractual obligation arising from a construction work contract due to the measures taken to control the spread of COVID-19 shall not give rise to the other party exercising rights under the contract. The provision reflects the broader legislative intent of the COVID-19 Act, which seeks to mitigate the economic consequences of the pandemic by preventing one-sided contractual enforcement that could exacerbate financial distress.
Accordingly, the court held that calling bank guarantees would be unconscionable, as the COVID-19 Act was fully applicable to the parties, and there was in place, effected by the COVID-19 Act, a temporary suspension of all contractual obligations of the parties. Turnpike could not, therefore, assert and insist on its initial contractual rights.
Conclusion
This ruling demonstrates the court’s readiness to interpret the COVID-19 Act widely in line with its object and purpose and, thereafter, apply the doctrine of unconscionability to defeat an employer’s calling of the bank guarantees furnished by the contractor. It is notable that the Court of Appeal took judicial notice of the extreme hardships experienced by contractors during the pandemic and required no direct proof that the contractors’ delay was caused by COVID-19-related measures. The court has rightfully preserved the integrity and business efficacy of bank guarantees as common security while heeding the statutory command of the COVID-19 Act.
12 March 2025