Performance Bond (Malaysia)
PERFORMANCE BOND
Contracts Act 1950 (Act 136) | Financial Services Act 2013 (Act 758) | Islamic Financial Services Act 2013 (Act 759)
Bond Date: [Bond Date]
PARTIES:
Surety: [Surety Name] of [Surety Address]
Principal: [Principal Name] (SSM No. [Principal SSM]) of [Principal Address]
Beneficiary: [Beneficiary Name] of [Beneficiary Address]
RECITALS
A. The Principal has entered into the following contract with the Beneficiary (the "Main Contract"): [Main Contract Reference], with a total contract sum of [Main Contract Sum].
B. As a condition of the Main Contract, the Principal is required to provide a performance bond as security for the Principal's performance obligations.
C. The Surety, a financial institution licensed by Bank Negara Malaysia under the Financial Services Act 2013 (Act 758) [or the Islamic Financial Services Act 2013 (Act 759) for Takaful bonds], has agreed to issue this Performance Bond.
1. BOND OBLIGATION
1.1 In consideration of the Beneficiary entering into the Main Contract with the Principal, the Surety hereby unconditionally and irrevocably undertakes to pay the Beneficiary on demand the Bond Amount of [Bond Amount] (the "Bond Amount"), subject to the terms of this Bond.
1.2 Bond Type: [Bond Type].
1.3 Demand conditions: [Demand Conditions].
1.4 The Surety's maximum liability under this Bond is limited to the Bond Amount of [Bond Amount]. The Surety shall not be liable for interest, costs, or consequential losses in excess of the Bond Amount.
2. DEMAND PROCEDURE
2.1 A demand under this Bond must be made in writing, addressed to the Surety at the address stated above, before the Bond Expiry Date.
2.2 For an on-demand bond: the written demand from the Beneficiary, signed by an authorised representative, stating that the Principal has failed to perform its obligations under the Main Contract, constitutes sufficient demand without further proof.
2.3 For a conditional bond: the written demand must be accompanied by: [Demand Conditions].
2.4 The Surety shall pay the demanded amount within 14 days of receipt of a valid demand.
3. BOND TERM
3.1 This Bond is effective from [Bond Effective Date] and shall expire on [Bond Expiry Date], unless a valid demand has been made before expiry.
3.2 Extension provision: [Extension Provision].
3.3 Upon expiry of this Bond without a demand having been made, this Bond shall be void and the Surety shall have no further liability hereunder. The Beneficiary shall return the original Bond document to the Surety within 14 days of expiry.
4. GOVERNING LAW
4.1 This Bond is governed by the laws of Malaysia, including the Contracts Act 1950 (Act 136), particularly Sections 125-147 (contracts of guarantee), and the Financial Services Act 2013 (Act 758) or the Islamic Financial Services Act 2013 (Act 759) as applicable.
4.2 Any dispute arising from this Bond shall be subject to the exclusive jurisdiction of the Kuala Lumpur High Court.
4.3 The Surety acknowledges that an on-demand bond call by the Beneficiary may only be restrained by court injunction in cases of clear fraud or unconscionable conduct, as established by the Court of Appeal in Kejuruteraan Usaha Tegas Sdn Bhd v Sediabena Sdn Bhd [2012] 5 MLJ 281.
Surety (Authorised Signatory)
________________
Signature
Principal (Contractor)
________________
Signature
What Is a Performance Bond (Malaysia)?
A Performance Bond in Malaysia commits the guarantor to answer for another party's obligations if that party defaults.
Malaysian performance bonds are classified into two main types. An on-demand (or unconditional) performance bond requires the surety to pay the bond amount upon first written demand by the employer, without the employer being required to prove breach or actual loss. On-demand bonds in Malaysia are governed by the principle established in Esso Petroleum Malaysia Inc v ACIPC (2010) and the Court of Appeal in Kejuruteraan Usaha Tegas Sdn Bhd v Sediabena Sdn Bhd [2012] that a court will only restrain payment on an on-demand bond in cases of fraud or unconscionable conduct by the employer in calling the bond. A conditional (or default) performance bond requires the employer to establish the contractor's breach and the resulting loss before the surety is obligated to pay.
Bank Negara Malaysia (BNM) regulates the issuance of performance bonds by licensed financial institutions under the Financial Services Act 2013 (Act 758) and the Islamic Financial Services Act 2013 (Act 759) for Shariah-compliant bonds. Insurance companies issuing performance bonds in Malaysia are regulated by BNM under the Financial Services Act 2013. Performance bonds issued by foreign institutions are generally not accepted for Malaysian public sector contracts without prior Ministry of Finance approval.
For government construction contracts, Treasury Circular No. 4 of 1995 (as updated) prescribes the standard performance bond amount as 5% of the contract sum. For PAM 2018 private sector building contracts, the bond amount is specified in the PAM 2018 Appendix, typically 5-10% of the contract sum. Performance bonds must be maintained throughout the contract period including the defects liability period.
The legal framework governing the Performance Bond (Malaysia) in Malaysia draws on several key statutes and regulatory bodies. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Parties executing a Performance Bond (Malaysia) in Malaysia should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Financial Services Act 2013 (Act 758) sets the foundational requirements.
When Do You Need a Performance Bond (Malaysia)?
A Performance Bond in Malaysia is required in construction and commercial contracts to secure the performance obligations of one party.
A Performance Bond is needed when an employer engages a CIDB-registered contractor for construction works above MYR 200,000. The PAM 2018 Standard Form and JKR standard government forms both include performance bond requirements as standard. Lenders financing the construction project will typically also require performance bonds as a precondition of drawdown.
A Performance Bond is required for all government construction contracts in Malaysia. Treasury Circular No. 4 of 1995 mandates a performance bond of 5% of the contract sum from the appointed contractor before commencement of works. The bond must be issued by a licensed Malaysian bank or Takaful operator approved by Bank Negara Malaysia.
A Performance Bond is needed when a Malaysian company enters a large commercial supply, services, or IT contract. Performance bonds are used across sectors including oil and gas (PETRONAS vendor requirements), telecommunications (Telekom Malaysia, Maxis, Celcom procurement), and property development for contractor security.
A Performance Bond is required when a foreign contractor obtains a Malaysian construction or concession contract. Foreign performance bonds may require Ministry of Finance approval, and the format must comply with Malaysian banking standards.
A Performance Bond is needed in government-linked company (GLC) procurement — including contracts with Tenaga Nasional Berhad (TNB), Prasarana Malaysia, and PLUS Expressways — where bond requirements are specified in tender documents and standard supply agreements.
Parties in Malaysia should prepare a Performance Bond (Malaysia) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.
What to Include in Your Performance Bond (Malaysia)
A valid Performance Bond in Malaysia must contain the following key elements.
Parties: Full names of the surety (bank or insurance company), the principal (contractor or obligor), and the beneficiary (employer or obligee). The surety must be a licensed financial institution under the Financial Services Act 2013 (Act 758) or a licensed Takaful operator under the Islamic Financial Services Act 2013 (Act 759) for Shariah-compliant bonds.
Underlying Contract Reference: Reference to the main construction contract including contract number, parties, works description, and contract sum in Malaysian Ringgit (MYR). The performance bond is an accessory instrument to the main contract.
Bond Amount: The bond sum in Malaysian Ringgit (MYR), typically 5% of the main contract sum for government contracts under Treasury Circular No. 4 of 1995, or as specified in the PAM 2018 Appendix for private sector contracts. The bond amount must be stated as a fixed monetary sum.
Bond Type: Whether the bond is on-demand (unconditional, payable on first written demand without proof of breach) or conditional (payable only upon establishment of the contractor's default). Malaysian courts treat these categories differently in injunction applications, as established in Bauer (M) Sdn Bhd v Government of Sarawak [2011].
Demand Conditions: For on-demand bonds, the written demand requirements and any accompanying certifications or documents required. For conditional bonds, the documentary evidence of default (e.g., Architect's certificate, termination notice) required for a valid demand.
Effective Date and Expiry: The bond's effective date (typically the date of the main contract) and its expiry date. Performance bonds typically expire on the date of the Architect's Certificate of Making Good Defects or a fixed period (e.g., 18-24 months) after the Certificate of Practical Completion, consistent with the defects liability period under PAM 2018.
Governing Law: Malaysian law and the exclusive jurisdiction of the Kuala Lumpur courts for bond demand disputes.
Additional compliance elements for a Performance Bond (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.
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Forms Legal. (2026). Performance Bond (Malaysia) (Malaysia) [Legal document template]. Forms Legal. https://forms-legal.com/malaysia/financial/agreements/performance-bond-malaysia
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title = {Performance Bond (Malaysia) (Malaysia)},
year = {2026},
howpublished = {\url{https://forms-legal.com/malaysia/financial/agreements/performance-bond-malaysia}},
note = {Free legal document template. Based on Financial Services Act 2013 (Act 758)}
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Frequently Asked Questions
An on-demand performance bond (also called an unconditional performance bond) in Malaysia is a financial guarantee under which the surety — typically a licensed bank regulated by Bank Negara Malaysia under the Financial Services Act 2013 — is obligated to pay the bond amount upon first written demand by the beneficiary (employer), without the employer being required to prove the contractor's breach or actual loss. The on-demand nature of the bond provides the employer with immediate liquidity security. Malaysian courts have consistently held that they will not grant an injunction to prevent a valid demand on an on-demand performance bond unless the employer's demand is fraudulent or unconscionably made, as established by the Court of Appeal in Kejuruteraan Usaha Tegas Sdn Bhd v Sediabena Sdn Bhd [2012] 5 MLJ 281. The contractor's remedy, if it believes the demand was wrongful, is to sue the employer for damages after the bond has been paid, not to restrain the demand.
Performance bond premiums in Malaysia are charged by banks and insurance companies as a percentage of the bond amount per annum, typically ranging from 0.25% to 1.5% of the bond sum depending on the creditworthiness of the principal (contractor), the nature of the underlying contract, the bond type (on-demand vs conditional), and the duration. For a government construction contract with a bond amount of MYR 500,000 and a standard 5% bond rate on a MYR 10,000,000 contract sum, the annual premium might be MYR 1,250 to MYR 7,500. Performance bonds issued under the Takaful framework (Shariah-compliant bonds issued under the Islamic Financial Services Act 2013, Act 759) have similar pricing structures. Banks regulated by Bank Negara Malaysia may also require the contractor to provide counter-security (cash margin, fixed deposit, or property collateral) before issuing the bond, particularly for smaller contractors or high-risk projects.
A contractor seeking to prevent an employer from calling a performance bond in Malaysia faces a high legal threshold. Malaysian courts, following the principles in Esso Petroleum Malaysia Inc v ACIPC (2010) and Kejuruteraan Usaha Tegas Sdn Bhd v Sediabena Sdn Bhd [2012], will only grant an injunction restraining a bond call where the contractor can demonstrate on a prima facie basis that the employer's demand involves clear fraud or unconscionable conduct. Commercial unfairness, a dispute about the contractor's liability, or a pending adjudication under CIPAA 2012 (Act 746) is generally insufficient to restrain an on-demand bond call. The injunction application must be made urgently to the Kuala Lumpur High Court under Order 29 of the Rules of Court 2012. If the injunction is refused, the contractor's remedy is to seek restitution of the bond proceeds from the employer if the underlying claim is ultimately resolved in the contractor's favour through AIAC arbitration or High Court litigation.
A Performance Bond and an Advance Payment Guarantee are both financial security instruments used in Malaysian construction contracts, but they serve different purposes. A Performance Bond secures the contractor's overall performance of the construction works and is typically 5% of the contract sum, callable if the contractor defaults or is terminated. An Advance Payment Guarantee (APG), by contrast, secures the employer's advance payment to the contractor at the commencement of works — typically 10-20% of the contract sum paid to mobilise the contractor. The APG guarantees that the contractor will repay the advance if it fails to perform or if the advance is not recovered through deductions from progress payments as the works proceed. Both instruments are issued by licensed banks or insurance companies regulated by Bank Negara Malaysia (BNM), but they differ in their trigger conditions, amounts, and drawdown schedules.
A Performance Bond is not required by statute for all construction contracts in Malaysia, but it is effectively mandatory in practice for government contracts and strongly recommended for private sector contracts. For government contracts, Treasury Circular No. 4 of 1995 makes a performance bond of 5% of the contract sum a mandatory pre-commencement requirement. For private sector building contracts under the PAM 2018 Standard Form, the performance bond requirement is set out in the PAM 2018 Appendix and is negotiated between the parties; it is common for employers to require bonds of 5-10%. For contracts under MYR 200,000, performance bonds are less common but may still be required by sophisticated employers. The CIDB Act 1994 (Act 520) does not itself mandate performance bonds, but CIDB registration is a practical prerequisite for contractors seeking bonding from Malaysian banks.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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