Article

Factual Summary: Builder agreed with Purchaser to construct and deliver an offshore rig. Under the contract, Purchaser was to pay the purchase price in five installments prior to delivery and Builder was to provide "Refund Guarantees" to secure return of the advances in the event of nonperformance. Three Banks (Guarantors) issued twelve guarantees entitled "Refund Guarantees," which permitted a demand under three scenarios.

They are set forth in the text of the Refund Guarantee, which is reprinted at the end of the abstract. First, Purchaser could make an "Initial Demand" if it presented Guarantors with notice that the contract had been cancelled or rescinded under the contract. Second, if Builder gave notice within five days that it disputed Purchaser's demand and the dispute was referred to arbitration, Guarantors would defer payment on the Refund Guarantees until Purchaser could make a "Deferred Demand" by presenting an arbitration award in its favor, or a settlement agreement between itself and Builder. Third, in anticipation of delayed delivery or arbitration arising over an Initial Demand continuing beyond the Refund Guarantees' expiration date, Purchaser could request that Builder furnish Replacement Guarantees in Purchaser's favor. In the event that no replacement was made within 14 banking days, Beneficiary could make a "New Demand".

After Purchaser paid four advance installments, delivery of the offshore rig was delayed. Instead of providing Replacement Guarantees, Guarantors extended the expiration dates of the Refund Guarantees. Guarantors complied with this request, starting what became a series of month-to-month extensions. Purchaser provisionally accepted this modification, but expressed serious concern that the guarantees would not be in place for thirty days past the expected delivery date as required by the terms of the contract. Moreover, the next monthly extension of the expiration date was not furnished on time. Purchaser notified Builder that it was rescinding the contract for breach of the contract due to the delay and failure to provide Replacement Guarantees and failure to deliver the rig as promised in the contract.

Purchaser then drew on the Refund Guarantees, making an Initial Demand and, alternatively, a New Demand. After the rescission of the contract was referred to arbitration, Builder applied for an ex parte interim injunction to prevent Purchaser from drawing on or receiving payment from the Refund Guarantees. At trial, Purchaser argued it had made a valid New Demand. The trial court granted the injunction and made it final, finding that the contract intended to defer payment of the Refund Guarantees pending arbitration to determine the validity of a contract cancellation. On appeal, reversed.

Legal Analysis:

1. First Demand Performance Bonds. The appellate opinion defined a first demand performance bond as "an undertaking by the bond issuer (usually a bank) to pay a specified sum to the beneficiary immediately on receipt of a compliant demand" (¶25) and observed that "businessmen commonly refer to first demand performance bonds as 'first demand performance guarantees. '" (¶30) The court also noted that "a performance bon acts as a 'risk-distributing device' which transfers the risk of default from the beneficiary to the account holder" (¶25) and observed that "[a]s a general rule, the bank will not concern itself with the merits of any underlying dispute between the beneficiary and its customer, or with the factual accuracy or otherwise of any statement made to it by the beneficiary or the genuineness of any document presented to it in order to obtain payment." (¶26) Comparing demand performance bonds to letters of credit, the appellate opinion stated that they found that "first demand performance bonds bear close substantive resemblance to letters of credit" (¶26) but cautioned that despite similarities, "a performance bond is not 'equivalent to a letter of credit for all purposes.'" (¶26) In particular, the appellate opinion noted the "peculiar 'document-centric' function." (¶27)

2. Variations. The appellate opinion noted that a demand performance bond might vary the norm and be "predicated on the existence (and/or proof) of a breach and/or the occasioning of loss and damage on the underlying contract. This is of course an altogether different type of bond where the merits of the underlying dispute might be relevant. Such an instrument diminishes the effectiveness of the traditional on demand performance bond as a cash equivalent for the beneficiary as it might import by reference the need to verify or attest to facts before a compliant demand can be or is deemed made. However, the nature and characteristics of the instrument is a matter for agreement between the parties to the contract: it is for them to decide what arrangement best suits their needs. The courts should not be astute in ascribing or imputing intentions to the parties in this genre of instruments if the terms are not explicit (for reasons why this is the case, see [32] below)." (¶28)

3. True or "See to it Guarantee". The appellate opinion defined a "true" or "see to it" guarantee as "a contract whereby the surety promises the creditor to be responsible, in addition to the principal, for performance of the underlying contract between the principal and the creditor, if the principal fails to perform his obligations . . . . The surety's liability is thus secondary to that of the principal. In contrast, the liability of the bond issuer to honour payment on the bond is a primary liability that falls on its shoulders alone . . ." (citations omitted). (¶ 29)

4. Conditional Bonds. Where the bond is conditioned on breach or actual loss, the appellate opinion noted that they "are usually described as 'conditional bonds.'" (¶29) Citing J. O'Donovan and J. Phillips, The Modern Contract of Guarantee, (Sweet & Maxwell, 2nd ed. 2010), the appellate opinion noted that the authors stated that conditional bonds have some characteristics of a true guarantee but "are not guarantees in the true sense of the word." The appellate opinion also made a distinction between "conditional and unconditional performance bonds" (¶31) although it did not explain what constituted an unconditional performance bond.

5. Indemnity; Demand Performance Bond; Demand Guarantee, name. Rejecting Applicant/Builder's suggestion that the undertaking is an indemnity payable on actual proof of breach, the appellate opinion concluded that "notwithstanding its label, the entire instrument is an on demand performance bond. Labelling the instruments as guarantees does not change the substance or nature of it. A spoon does not become a fork by calling it one." (¶44) The appellate opinion noted that the undertakings required a demand statement that the contract had been cancelled or rescinded and provided that the statement would be "final and conclusive". The opinion stated, "The italicised words make clear, in no uncertain terms, that the [Guarantors] are not to investigate the accuracy of [Beneficiary]'s assertion of breach. Such is the characteristic hallmark of a first demand performance bond: immediate payment eschewing any manner of delving into the merits of the underlying dispute . . . ." (¶45) It also noted the provision that payment was to occur regardless of a dispute or arbitration.

6. Demand. The appellate opinion noted that "in both conditional and unconditional performance bonds that a demand can be made subject to: (a) the fulfillment of various condition precedents; and/or (b) compliance with the stipulated form". (¶31) The court noted, "Other possible conditions include the occurrence of other trigger events (eg, insolvency) or the need for the beneficiary to take additional steps prior to making the demand. Inserting these conditions help to safeguard the account party from abusive calls by the beneficiary, where a simple demand by the beneficiary would be sufficient to bring about a bank's obligation to make payment under the bond. As for the form of the demand, the beneficiary may need to assert a breach of the underlying contract, or furnish prima facie evidence of the account party's alleged breach (in the case of conditional performance bonds), etc." (¶31)

7. Strict Compliance. The appellate opinion observed that "whether condition precedents are set or a form is prescribed, the doctrine of strict compliance equally applies." (¶31) The appellate opinion explained this rule as resulting from the lack of knowledge of the bank of the details of the underlying transaction and the need for a prompt decision and certainty. In such a situation, the appellate court stated that "[u]ltimately, there is no room for the application of any vague notions of unconscionability or the de minimis exception". (¶32)

8. Construing a Performance Bond. The appellate court noted that while extrinsic evidence is admissible to aid in contract construction, "the court should be restrained in its examination of the external context and extrinsic evidence. . . . At the time the call is made, both the beneficiary and bank need to be able to determine quickly if the demand is valid simply by looking at the bond instrument itself." (¶35) However, where the instrument is ambiguous, "the court's only recourse is to refer to extrinsic evidence for a better understanding of the parties' objective intentions and/or commercial purpose. Similarly, if the plain wording of the contract suggests a meaning inconsistent with the obvious external context in which the contract is made, this might indicate that 'that construction might not be as clear as was initially thought and might, on the contrary, be evidence of ['latent'] ambiguity". (¶36) The appellate opinion listed what it described as "the relevant principles of interpretation" which were described as "just signposts" (¶41), namely:

"(a)first, the aim of the exercise of construction is to ascertain the meaning the document would convey to a reasonable business person;
(b) secondly, the courts are concerned with the objective expressed intention of the parties and not their actual intentions;
(c) thirdly, the courts will not excessively focus on particular phrases or words. The emphasis is on the document as a whole;
(d) fourthly, the courts are prepared to look to the legal, regulatory and factual matrix constituting the background in which the document was drafted to inform them on how to interpret the document;
(e) fifthly, the courts will give regard to the overall commercial purpose of the parties in entering into the transaction;
(f) sixthly, preference will be given to an interpretation that makes the contract and its performance lawful and effective;
(g) seventhly, where the contract appears to be one-sided or onerous, it will be construed strictly against the party seeking to rely on it;
(h) eighthly, an interpretation that leads to very unreasonable results will be avoided unless it is required by clear words and there is no other tenable construction;
(i) ninthly, a specially agreed provision should override an inconsistent standard provision which has not been individually negotiated; and
(j) tenthly, a more precise provision should override an inconsistent general provision." (¶41)

9. Construing the Performance Bond at Issue. The appellate court rejected the implication suggested by Applicant/Builder that the undertaking provided for two types of New Demands, under one of which there can have been no Initial Demand and under the other of which there must have been an Initial Demand. Describing this construction as "convoluted" (¶47), the appellate opinion disagreed. It indicated that "it is plain to us that the parties' objective intentions are to cover different contingencies", (¶47) namely where there is no lapse in the Refund Guarantees or, alternatively where there is a failure to provide for the continued coverage of the Refund Guarantees although only one demand is contemplated on each Refund Guarantee. The appellate opinion concluded that:

"Crucially, once the deadline passes and no such Refund Guarantees are furnished, [Beneficiary]'s right to serve a New Demand on the Bank crystallizes into an accrued right and may be exercised anytime thereafter 'irrespective of whether or not the claim under the New Demand is disputed by the [Applicant/ ]Builder or has been referred to arbitration or there is an arbitration claim pending' (under the New Demand Clause).

To reiterate, the Refund Guarantees' most important feature was their availability as security for any claims made by [Beneficiary] pending delivery of the Rig. Once this security was compromised by a 'lapse' of the security, [Beneficiary] was entitled to exercise an entirely independent right to make a valid demand 'irrespective' of any other pending disputes the parties might have. This is so even if [Beneficiary] subsequently rescinded the Underlying Contract (as it did on 12 April 2011)." (¶¶53-54)

10. Unconscionability. The appellate opinion rejected the argument that the drawing was unconscionable in that Beneficiary/Purchaser was exploiting the ambiguity of the undertakings and the inadvertent failure to meet a deadline caused by an unanticipated holiday. The appellate opinion stated that if Beneficiary/Purchaser "is entitled to enforce its rights in such a manner, then it would not lie in [Seller/Applicant]'s mouth to claim that such enforcement is unconscionable." (¶22) Moreover, since time was of the essence, "the court ordinarily will not exercise its jurisdiction to grant the breaching party equitable relief in instruments of this genre even though it may have the power to do so." (¶22)

Text: As reproduced in the appellate opinion, the Refund Guarantees provided in part:

"3. At the request of [LABROY] ... we, [OCBC/UOB/DBS] ... hereby:-

a. absolutely, irrevocably and unconditionally guarantee to pay to you an amount up to but not exceeding a total amount of ... (the "Guaranteed Amount") representing one-third of the [First/Second/Third/Fourth] Installment plus interest at the rate of six percent (6%) per annum, if and when the same or any part thereof becomes repayable to the Owner [ie, MM] from the Builder [ie, Labroy] in accordance with the terms of the Contract [ie, the Underlying Contract]; subject to clause 3 (b) below and provided always that our maximum liability under this Refund Guarantee shall not at any time exceed the Guaranteed Amount.

b. Irrevocably undertake that payment under this Refund Guarantee will be effected by us within fourteen (14) Singapore banking days following our receipt of a written demand from the Owner for payment, stating that the Contract is cancelled or rescinded by the Owner in accordance with the terms of the Contract, which statement shall be final and conclusive, together with the original of this Refund Guarantee. We shall inform Builder by way of registered mail and electronic mail (for which acknowledgement is not required from Builder) by 6pm of the next Singapore banking day from the date of receipt of such written demand from the Owner.

PROVIDED THAT, in the event we receive notification ("Notification") from the Builder within (5) Singapore banking days from the date of our receipt of your written demand referred to in paragraph 3 (b) above (which demand shall be referred to hereinafter as the "Initial Demand") that your claim for refundment is disputed by the Builder and has been referred to arbitration in accordance with the Contract, we shall be entitled to defer payment of the entire sum claimed under the Initial Demand and only be liable to pay to the Owner the sum adjudged to be due to the Owner by the Builder pursuant to an award (hereinafter the "Award") made under such arbitration or as agreed pursuant to a settlement agreement between the Builder and the Owner such deferred payment to be payable by us to the Owner immediately upon receipt by us from the Owner of a further written demand (which demand shall be referred to hereinafter as the "Deferred Demand") for the sum(s) so adjudged together with a certified true copy of the Award or the settlement agreement (as the case may be) and PROVIDED ALWAYS that our maximum liability hereunder shall not at any time exceed the Guaranteed Amount.

For the avoidance of doubt, we shall not be obliged to make any payment under the Initial Demand till five (5) Singapore banking days have elapsed from the date of our receipt of the Initial Demand. ...

In the event of (i) any possible delay in the delivery of the Rig or (ii) if an Initial Demand has been made and your claim for refundment is disputed and referred to arbitration and the said arbitration cannot reasonably be expected to be concluded thirty (30) Singapore banking days before the Expiry Date [ie, of the Refund Guarantee], ... the Owner shall be entitled to request from the Builder for a replacement guarantee to be issued by us in similar terms as this Refund Guarantee with expiry date 30 calendar days from the new anticipated date of the delivery of the Rig to the Owner or conclusion of the arbitration (as the case may be) ... which replacement guarantee must be furnished by the Builder to the Owner not later than fourteen (14) Singapore banking days before the Expiry Date
... <em>In the event such replacement guarantee is not furnished no less than fourteen (14) Singapore banking days before the Expiry Date ... </em> as provided in Article 3.8 of the [Underlying] Contract, the Owner shall be entitled to make a written demand (which demand shall be referred to hereinafter as the "New Demand") for the sum claimed under the Initial Demand (if made) and stating that the Builder has failed to furnish a replacement guarantee (such statement to be final and conclusive) and we shall pay the Owner the said sum claimed under the New Demand immediately upon our receipt of the New Demand irrespective of whether or not the claim under the New Demand is disputed by the Builder or has been referred to arbitration or there is an arbitration claim pending; subject always to the New Demand being received by us on or before the Expiry Date ... .

For the avoidance of doubt, the Owner may make only one Initial Demand and one Deferred Demand and/or one New Demand under this Refund Guarantee and we will make payment in the manner described above for each such demand upon our receipt of the Initial Demand or the Deferred Demand or the New Demand, provided always that any such demand is received by us on or before the Expiry Date ... For the purpose herein, "banking days" shall be the days (other than a Saturday or Sunday) on which banks are open for business in Singapore.
...
5. Our liability under this Refund Guarantee shall not be affected by any alteration to or variation of the terms of the Contract which the Owner may hereafter agree with the Builder, or by any other matter or circumstances, including bankruptcy or insolvency of the Builder, which might otherwise discharge our liabilities as guarantor of the Builder's obligations as aforesaid.
...
7. After the Expiry Date, this Refund Guarantee shall be null and void whether or not it is returned to us for cancellation.

[emphasis added [in the opinion] in italics and bold italics] (¶ 4)

Beneficiary's demand stated:

"... In accordance with the terms and conditions of the Refund Guarantees issued by you as per above, Owner [ie, MM] hereby makes a demand for payment ("New Demand") of all instalments guaranteed under the above listed Refund Guarantees + interest thereon at the annual rate of 6% from the date when such instalments were paid until the date of refund as aforesaid, on the basis that the Builder [ie, Labroy] has failed to provide extended guarantees no later than 14 Working Days before expiry as per Article3.8 of the Construction Contract [ie, the Underlying Contract] and/or to provide replacement guarantees no later than 14 Singapore Banking Days before the Expiry Date as per the terms of the Refund Guarantees...

Further and/or alternatively, Owner hereby makes a demand for payment under the above Refund Guarantees issued by yourselves, on the basis that the Construction Contract is rescinded by the Owner in accordance with the terms of the Construction Contract ("Initial Demand")." (¶ 10)

[JEB/ds/ak/dm]

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