Article

Factual Summary: Contractor/Applicant and Developer/Beneficiary agreed to develop three blocks of residential flats in Singapore. The preliminaries to the party's main contract provided, "In keeping with the intent that the performance bond is provided by the [Contractor/Applicant] in lieu of a cash deposit, the Contractor[/Applicant] agrees that except in the case of fraud, the Contractor[/Applicant] shall not for any reason whatsoever be entitled to enjoin or restrain...(emphasis added [in text of opinion])".

To assure payment, Contractor/Applicant secured a performance bond from Guarantor for SGD 8,806,383.80, 10% of the total contract sum. Contractor/Applicant received four notices from the project architect for failure to proceed diligently with the project and for non-compliance with directions. Following Contractor/Applicant's failure to comply with the notices, the architect issued two termination certificates and the next day, Developer/ Beneficiary issued a notice terminating the contract. The day after engaging a replacement contractor in a SGD 59,941,539.21 contract for outstanding work on the project, Developer/Beneficiary drew on the performance bond, sending a letter of demand to Guarantor.

Contractor/Applicant sued Developer/Beneficiary for wrongful termination of a contract and asked for an injunction against drawing on the guarantee.

The issue of wrongful termination was referred to arbitration by trial court, and this litigation was limited to granting an injunction, which the trial court did grant, and which the appellate court reversed.

Legal Analysis:

1. Limitation of Remedies

The district court ruled that a remedial limitation clause was clear and unequivocal in its intent, and that there was no public policy reason to keep courts from enforcing the clause. The appellate court reversed the district court's ruling on remedial limitation clauses and ruled that the clause in its case "[s]everely curtail[ed] the court's jurisdiction and discretion to grant an injunction and would therefore be contrary to public policy."

The appellate court noted that it was the purpose of the unconscionability exception to the principle of arbitration to strike "a balance between the principle of party autonomy and the court's concern in regulating dishonest and unconscionable behaviour." The appellate judge noted the "importance of unconscionability as a ground to seek an injunction against the call on a performance bond," and ruled that, "an attempt to oust the court's jurisdiction on the significant ground of unconscionability...represents a severe incursion on the court's freedom to grant injunctive relief." The appellate judge also noted that a court's ability to grant injunctions is founded in its equitable jurisdiction, which cannot be limited by party's contracts.

2. Unconscionability

Contractor/Applicant argued the drawing was unconscionable because Developer/Beneficiary had no genuine lack of funds and attempted to draw more than the amount owed, and that honor of the draw would cause Contractor/Applicant irreparable harm. The appellate court summarily rejected all Contractor/Applicant's arguments and did not find Developer/Beneficiary's drawing to be unconscionable. In reviewing, the appellate judge stated that "Unconscionability includes elements of abuse, unfairness and dishonesty," but noted that unfairness per se, genuine disputes between the parties, and mere breaches of contract are not unconscionable. Instead, the appellate court noted that the performance bond did not require Developer/ Beneficiary to show financial need to draw on its proceeds, ruled that Developer/Beneficiary's miscalculation of the amount drawn was an innocent mistake, and discounted Contractor/Applicant's submission of irreparable harm. The court ruled that "the focus of the inquiry here is on the [Developer/] Beneficiary's alleged unconscionable conduct and not the purported effect of financial hardship that it may have on the [Contractor/Applicant]." As such, the appellate court did not grant the injunction.

Text of Preliminaries to Contract:

Clause 3.5.8

"In keeping with the intent that the performance bond is provided by the [Contractor/Applicant] in lieu of a cash deposit, the Contractor[/Applicant] agrees that except in the case of fraud, the Contractor[/ Applicant] shall not for any reason whatsoever be entitled to enjoin or restrain:-

(a) the [Developer/Beneficiary] from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or

(b) the [Guarantor] under the performance bond from paying any cash proceeds under the performance bond

on any ground including the ground of unconscionability. (emphasis added [in text of opinion])."

[MJS]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.