INTRODUCTION
The Court of Appeal in the recent case of Pengerang Refining Company Sdn Bhd v Sinopec Engineering (Group) Co Ltd & Anor and another appeal [2026] 1 MLJ 636 held that where works have been completed, any demand on the performance bond will be unconscionable.
In this case, Pengerang Refining Company Sdn Bhd (“Pengerang”), the employer and owner of the refinery, demanded payment under a USD132,902,900 performance bond procured by Sinopec Engineering (Group) Co Ltd and Sinopec Engineering Group Malaysia Sdn Bhd (“Sinopec”), the contractor. Pengerang made a demand on the bond despite the fact that the facility had been completed after inspection and testing, handed over to Pengerang, and Pengerang had earned revenue from operating the facility.
The Court held that Pengerang’s demand on the performance bond was unconscionable and went against the purpose of the performance bond.
BACKGROUND FACTS
Pengerang appointed Sinopec to carry out the engineering, procurement, construction and commissioning (EPCC) of Refinery Package 2 for the RAPID Project in Pengerang, Johor.
Pursuant to the EPCC contract, Sinopec procured a Maybank performance bond in favour of Pengerang for USD132,902,900, being 10% of the contract price. Sinopec also procured a parent company guarantee from SINOPEC Group, which guaranteed the obligations and liabilities of Sinopec under the EPCC contract.
Ten years into the contract, disputes arose between the parties. Sinopec issued a notice of dispute and commenced arbitral proceedings against Pengerang.
Pengerang then made a demand on the performance bond, contending that Sinopec owed damages in the same amount as the performance bond. Sinopec applied to the High Court for an interim injunction to restrain Pengerang from calling on, or receiving payment under, the performance bond pending the final award in arbitration.
MAIN ISSUE
The main issue before the Court of Appeal was whether Pengerang’s demand on the performance bond was unconscionable.
Sinopec contended that there was a prima facie case that the demand was unconscionable as the facility had been completed and handed over to Pengerang, who had earned revenue from operating the facility. Sinopec further contended that the demand was made after completion of the facility, which was contrary to the purpose of the performance bond.
The Court also obsessed that Pengerang deliberately withheld the issuing of the approved performance test report for ARDS Unit 1210 to Sinopec, despite the project being completed after inspection and testing. This was done to avoid issuing the certificate of provisional acceptance.
Pengerang then informed Sinopec that Sinopec was not entitled to the certificate of provisional acceptance because Sinopec had not paid delay damages amounting to the sum of USD132,902,900, being the exact amount stated in the performance bond.
DECISION OF THE COURT OF APPEAL
The Court of Appeal unanimously dismissed Pengerang’s appeals. The Court held that the law is settled: where the works are completed, any demand on the performance bond will be unconscionable.
On the facts of this case, the facility had been completed, handed over and operated by Pengerang. Pengerang had also earned revenue from operating the facility. In these circumstances, Pengerang was not entitled to the alleged delay damages after the facility had been completed and handed over to Pengerang.
The Court further held that Pengerang’s call on the performance bond was against the purpose of the bond.
A PERFORMANCE BOND IS SECURITY, NOT A SHORTCUT
This decision highlights the important distinction between security for performance and recovery of disputed claims.
A performance bond is intended to secure the contractor’s performance of its obligations under the contract, and to guarantee delivery of the completed project within the agreed time frame.
It is not intended to operate as a general recovery mechanism after the works have been completed, handed over and put into operation by the employer.
In any event, Pengerang was not without remedy after completion. Pengerang could still make a demand on the parent company guarantee. The underlying dispute between Pengerang and Sinopec also remained subject to arbitration.
CONCLUSION
A performance bond serves a specific commercial purpose. An employer cannot call on a performance bond in a manner which is unconscionable or contrary to the purpose of the bond, especially where the employer has taken the benefit of the completed project.
A performance bond secures performance of the works, and should not be used as a backdoor claim for alleged damages for delay after completion.
KEY TAKEAWAYS
For contractors, this case confirms that the Malaysian courts may restrain a call on a performance bond where there is a seriously arguable case, or prima facie case, that the call is unconscionable.
For employers, this decision serves as a clear reminder that a performance bond should not be used as a substitute for proving disputed delay damages, especially after the project has been completed, handed over and put into operation.
Disclaimer: This article is for general information only and does not constitute legal advice or legal opinion. It should not be relied upon as a substitute for specific legal advice. No person should act (or refrain from acting) based on this article without obtaining advice on the specific facts and circumstances. Halim Hong & Quek does not accept responsibility or liability for any loss or damage arising from reliance on this article. Halim Hong & Quek reserves the right to update, amend or withdraw this article at any time. All rights reserved.
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About the authors
Ankit R. Sanghvi
Partner
Dispute Resolution
Halim Hong & Quek
ankit.sanghvi@hhq.com.my
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Chew Jin Heng
Senior Associate
Dispute Resolution
Halim Hong & Quek
jhchew@hhq.com.my
