Article

Factual Summary: As the main contractor on a building project worth SGD 47,000,000, Contractor/Applicant provided Developer/Beneficiary with a performance bond for SGD 4,700,000, issued by Issuer. The opinion did not indicate that it was subject to any practice rules.

Construction began in September 2011 and was scheduled to be completed in February 2014. After several months of smooth and prompt work, delays began in March 2012. Though Contractor/Applicant requested extensions, Developer/Beneficiary only granted a 9-day extension, moving the completion date to 9 March 2014, because it claimed that the delays were caused by Contractor/Applicant.

Contractor/Applicant encountered repeated financial difficulties because its 35 claims for payment between September 2011 and June 2014 were not paid in full. Developer/Beneficiary countered, however, that payments were made according to joint assessments of completed work established in the contract and referenced meeting notes and correspondence as evidence of Contractor/Applicant’s concession to this fact. Nonetheless, Developer/Beneficiary did give Contractor/Applicant two advance payments of SGD 500,000 and SGD 1,300,000, per Contractor/Applicant’s request.

After continued delays and an extension request from Contractor/Applicant, Contractor/Applicant and Developer/Beneficiary entered into a Supplemental Agreement that provided Contractor/Applicant with the funds to complete the project, subject to monitoring of where the payments were applied and an updated completion schedule. Under the Supplemental Agreement, Contractor/Applicant was required to raise SGD 1,000,000 from its shareholders within 5 days of the Supplemental Agreement being signed. However Contractor/Applicant did not raise the money until 12 days after the Supplemental Agreement, but did raise SGD 1,400,000. Furthermore, Contractor/Applicant was required to use the SGU 680,000 provided by Developer/Beneficiary only to pay outstanding debts related to the project. Instead it used some of the money to pay for materials related to the project.

In September 2014, when the architect involved in the contract terminated its relationship with Contractor/Applicant, Developer/Beneficiary subsequently did the same, and demanded payment of SGD 4,700,000 on the performance bond. Contractor/Applicant applied for and obtained an ex parte injunction against Developer/Beneficiary for the drawing on the performance bond on the ground that Developer/Beneficiary’s conduct was unconscionable. When Developer/Beneficiary applied to have the injunction set aside, the Judge granted the application, setting aside the injunction.

Legal Analysis:

  1. Bad Faith; Injunction. Contractor/Applicant argued that Developer/Beneficiary’s deviations in payment from the amount claimed contributed to the financial difficulty of Contractor/Applicant and to the subsequent delays in work. Developer/Beneficiary argued that payments were made based off of assessments of work done by parties agreed to in the contract and were justified. The Judge ruled that Contractor/Applicant did not establish Developer/Beneficiary’s bad faith in the course of the contract because Contractor/Applicant did not show that Developer/Beneficiary had fraudulently interfered with the assessments and certifications of payments made by the architect. Furthermore, the Judge gave weight to the fact that Contractor/Applicant had access to adjudication of disputes per the contract, but did not choose to use it and further acquiesced to the assessments made in subsequent meetings.

The Judge further ruled that Contractor/Applicant failed to demonstrate the delay in work was a result of Developer/Beneficiary’s conduct. Rather, the Judge agreed with Developer/Beneficiary’s argument that Contractor/Applicant was responsible for the delays. Furthermore, the Judge ruled that Developer/Beneficiary’s agreement to advance payments to Contractor/Applicant notwithstanding the delays evidenced a clear lack of the alleged bad faith on the part of Developer/Beneficiary.

  1. Unconscionability; Injunction. Contractor/Applicant argued that Developer/beneficiary’s demand on the performance bond was unconscionable because its conduct delayed payment, causing, delay in the project, exerted undue pressure which impeded progress, and threatened non-payment.

The Judge noted that unconscionability is a basis for interrupting payment on a demand guarantee. The Judge stated that “[u]nconscionability is an amorphous concept that is easily identifiable, but difficult to define” and that what constitutes unconscionability “depends on the facts of each case.” Genuine mistakes by the beneficiary, “mere breaches of contract by the beneficiary, or genuine disputes between the parties, are insufficient to constitute unconscionability.”

Noting that payment was predicated on the issuance of architects certificates and that there was no allegation of fraud or improper pressure on the architect the Judge ruled that there was convincing proof that Developer/Beneficiary had acted improperly or in bad faith.

Contractor/Applicant argued that discrepancies and lack of detail in the construction plans caused loss and delay which impeded performance and caused minor breaches. Considering the claims, the Judge concluded “mere breaches of contract by the beneficiary, or genuine disputes between the parties are insufficient to constitute unconscionability.”

Contractor/Applicant also contended that Developer/Beneficiary’s failure to make payments caused delays on payments to subcontractor, workers, and suppliers. Noting that advance payments had been made, the Judge indicated the opinion that the delays were attributable to the conduct of Developer/Beneficiary.

Contractor/Applicant alleged that claims regarding application of funds, adherence to a time table, and replacement of personnel were unconscionable. The Judge noted that there were genuine disputes, none of which suggested unconscionable conduct. Nor did the Judge agree that the demands for proof of use of funds and threats of nonpayment were unconscionable in light of the relationship and agreement.

Contractor/Applicant also asserted that the termination of the contract was unconscionable. The Judge noted that Developer/Beneficiary terminated the agreement on receipt of a certificate from the architect and, so, was “entirely honest, reasonable, and genuine”.

  1. Breach of; Injunction. The Judge noted that “there is no requirement that the beneficiary (ie, the First Defendant) establishes any breach on the part of the obligor (ie, the Plaintiff) of the underlying contract on which the bond is based before the issuer (ie, the Second Defendant) comes under an obligation to pay out under the bond.”

  1. Injunction. Developer/Beneficiary moved to set aside an ex parte injunction that had been entered. The Judge noted that “[i]t is also well-established that the court may grant an injunction to restrain a beneficiary from calling on a performance bond on the ground of unconscionability.”

  1. Amount of Drawing. Contractor/Applicant argued that Developer/Beneficiary should only have drawn a portion of the performance bond. The Judge disagreed, concluding that the amount of the drawing fairly represented damages found by Developer/Beneficiary.

  1. Injunction; Threat of non-payment. Contractor/Applicant argued that Developer/Beneficiary exerted unjustified pressure on Contractor/Applicant in the course of the Supplement Agreement and that Contractor/Applicant put forth its best effort of compliance. It argued that Developer/Beneficiary’s withholding of payment impeded the progress of the work. Developer/Beneficiary argued that Contractor/Applicant’s delay in procuring the agreed-upon funds justified its threat of non-payment under the contract. Furthermore, Developer/Beneficiary contented that Contractor/Applicant’s lack of compliance with the terms of the Supplemental Agreement regarding dispensation of payment and failure to meet the deadlines updated schedule for work completion constituted material breaches and justified Developer/Beneficiary’s concern. The Judge ruled that Developer/Beneficiary’s willingness to enter into the Supplemental Agreement in the first place was evidence of conduct that was not unconscionable and that its subsequent behavior was merited given legitimate concern over Contractor/Applicant’s performance.

  1. Breach of Contract; Injunction of the Supplemental Agreement. Contractor/Applicant argued that the breach of the Supplemental Agreement was not material and did not justify the termination of its contract. Developer/Beneficiary argued that Contractor/Applicant’s delay in procuring the agreed-upon funds and lack of compliance with the terms of the Supplemental Agreement in the dispensation of payment, particularly after a series of delays and financial instability on Contractor/Applicant’s behalf constituted a material breach. The Judge agreed that the breach justified Developer/Beneficiary’s termination of the contract and call for the payment on the performance bond.

Comments:

  1. Classification. Although the undertaking noted that insurer undertook to “irrevocably and unconditionally warrant and guarantee the due and faithful performance of the Contract by the Contractor”, the court treated the undertaking as if it was independent. The opinion described it as an “on-demand performance bond” and noted that there was no dispute on this point.

  1. Existence of genuine disputes. The judge noted that “[t]he Court of Appeal also noted that the existence of genuine disputes between the parties did not make a call by a beneficiary on a performance bond unconscionable.”

Relevant terms from the performance bond, excerpted from the opinion:

“1 In consideration of the Employer not insisting on the Contractor paying ten percent (10%) of the Contract Sum as a security deposit for the Contract, we hereby irrevocably and unconditionally warrant and guarantee the due and faithful performance of the Contract by the Contractor.

2 We unconditionally and irrevocably undertake and covenant to pay in full forthwith upon demand in writing any sum or sums that may from time to time be demanded by the Employer up to a maximum aggregate sum of Singapore Dollars Four Million and Seven Hundred Thousand Only (S$4,700,000.00) (hereinafter referred to as “the Maximum Aggregate Sum”) without further reference to the Contractor and without requiring any proof that the Employer is entitled to such sum or sums under the Contract or that the Contractor has failed to execute the Contract or is otherwise in breach of the Contract. Any sum or sums so demanded shall be paid forthwith by us, unconditionally without any set- off deductions or counter-claims whatsoever and notwithstanding the existence of any differences or disputes between the Employer and the Contractor arising under or out of or in connection with the Contract or the carrying out of works thereunder or as to any amount or amounts payable thereunder and notwithstanding that such differences or disputes have been referred to arbitrator or are the subject of proceedings in Court and notwithstanding any instruction which may be given to us by the Contractor not to pay the same or any part thereof.

3 We hereby confirm and agreed [sic] that we shall be under no duty or responsibility to inquire into:-

(a) the reason or circumstance of any demand hereunder; or

(b) the respective rights, obligations and/or liabilities of the Contractor and the Employer under the Contract ...

...

5
Our liability hereunder shall not be discharged, affected or impaired or otherwise released in any way by reason of any modification, amendment or variation in or to any of the conditions or provisions of the Contract or by reason of any breach or breaches of the Contract by the Contractor, whether the same are made with or without our knowledge or consent.”

[ALC]

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