Documentary Credit World

Topics: Auto-Extension Clause; Autonomy; Fraud; Implied Term; Injunction; Notice of Non-Extension; Performance Bond; Unconscionability.

Note: To support its work obligations, Chian Teck Realty Pte Ltd. (Subcontractor/Applicant), a Singapore reinforced concrete and precast specialist, applied for and caused Lonpac Insurance Bhd (Guarantor) to issue a SGD 1,123,152.55 performance bond in favour of SDK Consortium (Contractor/Beneficiary), the main contractor for a construction project (and consortium of three engineering companies). The bond value constituted 5% of the subcontract value and no practice rules were mentioned. The subcontract contained a clause stipulating that demands on the bond could not be restrained on the basis of unconscionability._{1 .}(para.3)

A few years into the project,₂ the relationship between the parties “deteriorated”. There were disputes regarding both performance of work as well as payment certifications. Subcontractor/Applicant later served a contract termination notice on Contractor/Beneficiary claiming it unilaterally reduced the scope of work and falsely accused Subcontractor/Applicant of performance delays. Contractor/Beneficiary’s first demand for payment was made 29 July 2022. Preceding the demand, Guarantor sent a letter to Contractor/Beneficiary in April 2022 informing that the bond would not be extended. While Contractor/Beneficiary claimed that it did not receive the April notice, it was undisputed that Contractor/Beneficiary received a second notice sent 19 July 2022.

Subcontractor/Applicant sought an injunction against Contractor/Beneficiary and Guarantor to restrain the former from demanding payment and the latter from honouring. The High Court of Singapore, Lee Seiu Kin, J., granted the injunction in so far as concerned the 29 July 2022 demand.

Subcontractor/Applicant argued the demand was made pursuant to cl.3, i.e. in response to a non-extension notice; because no valid notice had been given, however, no demand conforming to cl.3 could be made. Contractor/Beneficiary argued that cl.1 of the bond allowed it to demand payment at any time so long as its demand complied with the cl.4 requirements. Although the demand letter expressly stated it was being made pursuant to bond cl.4, that clause merely stipulated the form of demands, i.e. made in writing delivered to Guarantor ’s Singapore address “before the end of 90 days from the expiry” of the performance bond. There was no evidence before the Judge to suggest that the demand was made because of some contractual default by Subcontractor/Applicant, despite the underlying disputes. The Judge briefly reviewed the law of “unconditional” performance bonds which are generally payable against simple demands; moreover, such demands must strictly comply with the bond’s terms. (para.21). In reviewing the text, it was unclear from the face of the demand on what clause Contractor/Beneficiary was relying (reprinted on next page). Various email and telephone exchanges were reviewed regarding the intent behind Contractor/Beneficiary’s demand and timing thereof. Ultimately, the Judge found the demand on the bond was made pursuant to clause 3, i.e. in response to a notice of non-extension by Guarantor because “it [was] clear that the proximate cause of the claim on the Bond was the belief by [Contractor/Beneficiary] of its imminent expiry.” (para.29).

The next issue was whether Guarantor gave proper notice of non-extension, such that it could be the basis for which payment was demanded. (para.32). Although Guarantor sent a non-extension notice on 28 April 2022, the notice was delivered to an old address of Contractor/Beneficiary. Revisiting a previous decision in 1L30G Pte Ltd. v. EQ Insurance Co.₃ wherein a similar notice provision appeared, the Judge noted that the central issue “was whether the expiry of the performance bond under that clause was triggered upon the posting of the [notice] or upon actual receipt.” Having presided over that case, the same Judge held that actual notice was required. Such notice would “vest in the plaintiff the right to respond to protect its interests; the plaintiff thus needed actual notice to exercise its rights.” (para.32).₄ As the April notice was determined to be ineffective, the inquiry turned to the July notice. Again the Judge deemed the notice defective: “The 19 July Notice merely reaffirms the 28 April Notice by stating that the Bond was to expire on 1 August 2022. However, as of 19 July 2022, [Guarantor] would have only given 13 days’ notice of the expiry of the Bond.” With no proper notice of non-extension, the bond, from 3 May 2022 (i.e. 90 days prior to the 1 August expiry), automatically extended for another 6 months.₅ Contractor/Beneficiary’s demand was made pursuant to clause 3, “but the condition under cl 3 that [Guarantor] validly serve a notice of non- renewal did not exist, that basis falls and the claim is not valid.” (para.35).

The Judge then turned to the issue of fraud. Subcontractor/Applicant claimed that the demand by Contractor/Beneficiary was made fraudulently as it was made supposedly in compliance with cl.3 when “it was in fact non-compliant.” Reviewing case law, the Judge noted that proof of fraud sufficient to overcome autonomy is “a difficult exception to invoke.”₆ On the facts, the Judge ruled that Subcontractor/Applicant had not established fraud. Contractor/Beneficiary’s actions were reasonable under the circumstances in light of the multiple attempts by Contractor/Beneficiary to obtain clarification from Guarantor when exactly the performance bond would expire. Comparing the case to another where a beneficiary had been deemed reckless as to the truth in its presentations, “one critical consideration was that the calls were made notwithstanding that the notices seeking to extend the validity term of the performance bonds were obviously and manifestly non-compliant”.₇

Lastly, Subcontractor/Applicant argued that an implied term should be read into the subcontract such that Contractor/Beneficiary could not demand payment on the bond so long as Subcontractor/ Applicant extended the bond’s validity.₈ Were the term implied, Contractor/Beneficiary’s demand would have been in breach thereof, and the demand restrained as fraudulent. The Judge rejected this argument. As mentioned earlier, the subcontract stipulated that demands on the bond could not be restrained (save for fraud) on any grounds including unconscionability. (para.42, see also subcontract cl.8.4 below). The implied term forwarded by Subcontractor/Applicant would therefore have conflicted with the express terms of the subcontract. Additionally, the clear text of cl.8.4 indicated that the parties had no “gap” of when Contractor/ Beneficiary would be entitled to demand payment. The Judge found Subcontractor/ Applicant’s remaining arguments unpersuasive.

Ultimately, the Judge restrained Guarantor from honouring the 29 July 2022 demand as Guarantor had not given proper notice of non- extension, and thus Contractor/Beneficiary could not validly demand payment pursuant to bond cl.3. However, in finding that the bond’s validity had been extended by operation of cl.3 until “at least” 1 August 2023, a valid demand could still be made moving forward: “For the avoidance of doubt, this order does not restrain [Contractor/Beneficiary] from making a fresh call under the terms of the Bond.” (para.47).

Comment: In reviewing bond cl.3 which provides for Guarantor ’s ability not to “extend” the bond, the Judge introduces the term “non-renewal” and uses it interchangeably with “non- extension”. (first appearance of the term “non-renewal” appears in para.30). This is imprecise and unfortunate. The term “extend” (“extension” and its variations) is accurate if what is to be automatically changed is the period of time for which the undertaking is in force. The term “renew” (and its variations) could be misinterpreted to mean the re-creation of an original contract, a change in the amount of the undertaking or even a replenishing of available value.

[MJK]

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