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The legal conditionality of performance bond in Malaysian construction contract

Author

Listed:
  • Supardi, Azizan
  • Adnan, Hamimah
  • Yaakob, Jamaluddin

Abstract

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. There are two types of performance bonds: Conditional bond or default bond; and Unconditional bond or on-demand bond. However, in Malaysia, 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.

Suggested Citation

  • Supardi, Azizan & Adnan, Hamimah & Yaakob, Jamaluddin, 2007. "The legal conditionality of performance bond in Malaysian construction contract," MPRA Paper 33904, University Library of Munich, Germany, revised 2007.
  • Handle: RePEc:pra:mprapa:33904
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    File URL: https://mpra.ub.uni-muenchen.de/33904/1/MPRA_paper_33904.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Performance Bond; Conditional Bond; Unconditional on-demand Bond; Malaysian Construction Contract;

    JEL classification:

    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction

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