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Performance bond: conditional or unconditional

Supardi, Azizan and Yaakob, Jamaluddin and Adnan, Hamimah (2009): Performance bond: conditional or unconditional. Published in: Construction Industry Research Achievement International Conference (3 November 2009)

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In construction contracts, a 'performance bond' is a bond taken out by the contractor, usually with a bank or insurance company (in return for payment of a premium), for the benefit of and at the request of the employer, in a stipulated maximum sum of liability and enforceable by the employer in the event of the contractor's default, repudiation or insolvency, as stated by Nigel M Robinson et. al. in his book, Construction Law in Singapore and Malaysia. He further added that there are two types of performance bonds: Conditional bond or default bond; and Unconditional bond or on-demand bond. However, in Malaysia, for the past 20 years and since the famous case of Teknik Cekap Sdn Bhd v Public Bank Berhad [1995] 3 MLJ 449 to the recent Suharta Development Sdn Bhd v United Overseas Bank (M) Bhd & Anor [2005] 2 MLJ 762, the question of whether the performance bond in a construction contract is a conditional or an unconditional guarantees is still one of the issues relating to performance bond that has been discussed. Therefore, the objective of this research is to determine the phrase(s) in the Performance Bond in a construction contract that determine whether the performance bond is a conditional or unconditional on demand guarantee. In order to achieve this objective, the research was conducted by analyzing relevant court cases. From the findings, it can be concluded that unless an undisputed meaning of the words in the performance bond to make the performance bond to be purely conditional or unconditional 'on-demand' bond, most court interpreted performance bond to be an on-demand performance bond which is only conditional upon the beneficiary asserting the basis of the claim upon the issuer of the bond contending that there has been breach of contract.

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