Article

Note: To assure the completion of a SGD 9 million 50-unit residential development, Join-Aim Pte Ltd. (Contractor/Applicant) obtained a Performance Bond issued by Goh Tong Chuan (Issuer) in the amount of SGD 484,400 in favor of BS Mount Sophia Pte Ltd. (Developer/Beneficiary). Although a Completion Certificate was issued in August 2010 certifying that work outlined in the underlying contract had been completed, a disagreement subsequently arose regarding the project's completion date and extensions of time.

Contractor/Applicant commenced arbitration proceedings against Developer/Beneficiary, seeking a time extension, pecuniary damages, and a determination that Contractor/Applicant had completed its obligations within the agreed upon time extension. Following the initiation of the proceedings, Developer/Beneficiary drew on the Performance Bond for SGD 360,084.62. Subsequently, Contractor obtained an interim injunction to prevent the Issuer from honouring the Bond. The High Court of Singapore, Tay Yong Kwang J., continued the interim injunction that prohibited it from drawing on the Performance Bond.

Contractor/Applicant argued that it would be "patently unfair" to permit a drawing on the Performance Bond when Developer/Beneficiary owed more than SGD 1,450,000 and that "there was no conceivable loss" to Developer/Beneficiary. (¶24) The Judge noted that unconscionability was "a separate and independent ground for the court to grant an interim injunction restraining a beneficiary from making a call on a performance bond." (¶30)

The Judge also noted that "[t]he concept unconscionability involves unfairness, as distinct form dishonesty or fraud, or conduct of a kind so reprehensible or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party. . . . Mere breaches of contract by the party in question would not by themselves be unconscionable. It is important that the courts guard against unnecessarily interfering with contractual arrangements freely entered into by the parties. The parties must abide by the deal they have struck." (¶31)

The Judge added, "In intervening in a call on an on-demand bond/guarantee, the court is concerned with abusive calls on the bond." (¶31)

The Judge concluded that the terms of the Performance Bond "exhibited a strong prima facie case of unconscionability and was concerned that this was an abusive call on the bond." (¶37)

Comments:

Here is another instance of "unconscionability" as an excuse for liability that would constitute LC fraud or abuse under a more reasonable interpretation of the LC fraud or abuse exception than that adopted by the English courts and their followers. Clothed in the qualifications outlined by the Judge, this classification is unlikely to cause much harm to LC jurisprudence, but it is regrettable that such an imprecise name was used. The explanation that "unconscionability" is "unfairness" and not a breach of contract is even less helpful. What is "unfair" depends on one's perspective and timing. Many enforceable contract terms might be regarded as "unfair" both prospectively and retrospectively, and no one holds to that approach more than the English courts. To justify an exception to the independence principle, the drawing must have been an instance of egregious or outrageous conduct by the Beneficiary that either provoked the situation that led to the drawing or that had no conceivable basis. The term used by civil law courts, "abuse" or "abusive" would be preferable to "unconscionable" or "unfair."

Relevant Text of Performance Bond:

"1. In consideration of you not insisting on the Contractor paying SINGAPORE DOLLARS FOUR HUNDRED EIGHTY FOUR THOUSAND FOUR HUNDRED AND FORTY ONLY (S$484,440/-) as a security deposit for the Contract, we hereby irrevocably and unconditionally undertake, covenant and firmly bind ourselves to pay to you on demand any sum or sums which from time to time may be demanded by you up to a maximum aggregate of SINGAPORE DOLLARS FOUR HUNDRED EIGHTY FOUR THOUSAND FOUR HUNDRED AND FORTY ONLY (S484,440/-) ('the Said Sum').

"2. Should you notify us in writing, at any time prior to the expiry of this Bond, by notice purporting to be signed for and on behalf that you require payment to be made of the whole or any part of the said sum, we irrevocably and unconditionally agree to pay the same to you immediately on demand without further reference to the Contractor and notwithstanding any dispute or difference which may have arisen under the Contract or any instruction which may be given to us by the Contractor not to pay the same.

"3. We hereby confirm and agree that we shall be under no duty or responsibility to inquire into:

a. The reason or circumstances of any demand hereunder, or
b. The respective rights, obligations and/or liabilities of yourselves and the Contractor under the Contract, or
c. The authenticity of your notice or the authority or entitlement of persons signing such notice, but that we shall be entitled to and shall rely upon any written demand by you hereunder." ( ¶32)

[JEB/dm]

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