Article

Factual Summary: Developer/Beneficiary contracted with Contractor/Applicant to build a condominium. The two-year contract was to be completed on 20 January 2015 for a total sum of SGD 88,063,838.00. The contract between the parties required Contractor/Applicant to provide Developer with “an on-demand performance bond” of 10 percent of the contract sum. Clause 3.5.8. of the contract provided that Contractor/Applicant could not prohibit Developer from calling on the performance bond, except in the case of fraud. At the request of Contractor/Applicant, a bond for a total of SGD 8,806,383.80 was issued by DBS Bank Ltd. (Issuer) in favor of Developer/Beneficiary.

After contract performance began, Developer/Beneficiary complained of poor work and slow progress. Developer/Beneficiary then allegedly terminated the main contract on 24 October 2014, and drew on the performance bond on 4 November 2014 for its full amount. The following day, Contractor/Applicant applied ex parte for an injunction, which was issued, to restrict Developer/Beneficiary from receiving payment on the performance bond.

After holding a hearing, the Trial Judge dismissed Contractor/Applicant’s application to enjoin Developer/Beneficiary’s call on the performance bond. Contractor/Applicant appealed this decision, and applied for, and obtained, an Erinford injunction to prevent Developer/Beneficiary from receiving payment on the performance bond pending the appellate decision. Developer/Beneficiary cross-appealed the trial court decision. The appellate court ruled that the clause limiting the right to seek extraordinary relief was enforceable, which made the unconscionability argument moot, and allowed the appeal on this issue, but denied the appeal on the fraud issue.

Legal Analysis:

Legal Analysis: The trial court had ruled that (1) cl 3.5.8. was unenforceable because it was an attempt to oust the jurisdiction of the court since it interfered with the court’s freedom to grant injunctions; (2) the contract could not limit the court’s ability to grant injunctions; and (3) that there are policy considerations for which the unconscionability exception on calls on performance bonds cannot be contracted around. Contractor/Applicant argued that the clause was unenforceable because it limited the court’s power and the doctrine of unconscionability was a matter of public policy.

The appellate court stated that injunctive relief is available against a drawing on a demand guarantee in the case of fraud or unconscionability. It framed the issue as “whether parties can agree to exclude the unconscionability exception as a ground for restraining a call on a performance bond.” The opinion noted that courts may disregard certain contractual freedoms which contracting parties might enjoy if they would be against public policy; one example being contracts that oust the jurisdictions of the courts. The opinion observed, however, that “given the inherently nebulous nature of public policy, such occasions will be the (rare) exception.”

The appellate opinion noted that “limitations placed on the rights and remedies available to the parties have not been treated as an ouster of the court’s jurisdiction.” In the present case, the opinion noted that cl 3.5.8 does not restrict a party’s right to recover damages at common law, but only seeks to restrict a party’s ability to receive equitable relief “in a particular situation.” As a result, the appellate court viewed cl 3.5.8 as an exclusion or exception clause, rather than a clause that ousts the jurisdiction of the court, with the effect that neither party has been deprived of access to the court, so there was no ouster per se because the court’s jurisdiction to hear the matter had not been impacted. Further, the opinion stated that, while a clause in a contract cannot force a court to grant an injunction where it otherwise would not, parties may agree to limit their contractual rights to seek certain types of relief in a court, which is what cl 3.5.8 did. The opinion concluded that “[i]f so, then there is no pressing reason in either principle or policy why a clause such as cl 3.5.8 should be considered as somehow being contrary to public policy (in particular, in the context of purporting to oust the jurisdiction of the court).”

Moreover, the opinion stated that cl 3.5.8 should not be deemed contrary to public policy, because Developer/Beneficiary could easily have asked for a cash deposit instead of a performance bond. “[T]he policy underlying the operation of performance bonds (which was also referred to by the [Trial] Judge) does point (on a prima facie level at least) in favour of the reasonableness of such clauses.”

The appellate court further ruled that there was no fraud involved in Developer/Beneficiary’s call on the performance bond, so Developer/Beneficiary was justified in calling on the performance bond and the unconscionability argument was immaterial.

The appellate opinion distinguished the Australian case of Bateman Project Eng’r Pty Ltd and others v. Resolute Ltd and others,1 noting that, in that case, “the defendants’ entitlement to call on the guarantee only accrued upon the satisfaction of certain preconditions. There were unresolved disputes as to whether those preconditions were satisfied. The prohibition…therefore affected contractual rights arising under the contract, namely, ‘the entitlement of the defendants to call on the Guarantee and the right of the plaintiffs to have the Guarantee called on only in strict accord with the relevant terms of the Contract’ [emphasis added].” In regard to the guarantee before it, however, the court noted that “[Developer/Beneficiary’s] right to call on the performance bond is not contingent on the satisfaction of any preconditions.”

Comment by Professor James E. Byrne:

The contract clause designed to keep the applicant from seeking an injunction against honor for unconscionability, unfairness, or bad feelings (I call it a “positive stipulation”) is a natural response to the silly line of cases involving unconscionability and beyond and the even sillier practice of giving an effect to a so-called negative stipulation in which a beneficiary’s promise not to behave badly becomes a basis for undoing a complying drawing for breach of contract even though there is no fraud.

All of these oddities can be traced to the overly strict interpretation of “fraud” espoused by English courts and mimicked by some former colonies.

The result has been a raft of litigation resulting in the lack of certainty, destruction of the credibility of Australian guarantees in the mind of any sane beneficiary, and unhappy ripples throughout Southeast Asia.

We now see the inevitable backlash from beneficiaries and their lawyers who, of course, have more leverage than applicants. Otherwise, there would not have been an independent undertaking issued but a mere promise, if that.

Texts: The opinion contained the following excerpts from the contract:

3.5 Performance bond

3.5.1 Within fourteen days from the date of the Letter of Award, the Contractor shall at his own expense provide a cash payment as a security deposit or in lieu of the cash deposit, an on-demand performance bond which shall be in the form attached as an Appendix to the Contract Documents ... as security for the proper and due performance and observance by the Contractor of his obligations under the Contract. ... Should any performance bond issued pursuant to this Clause cease in any way to be valid, the Contractor shall immediately deposit with the Employer the cash deposit or procure that a new performance bond be issued in the same form prescribed by and in accordance with the terms of this Clause.

3.5.2  The Employer may use the Security Deposit to make good any cost, expense, loss or damage sustained or likely to be sustained as a result of any breach of or default under the Contract by the Contractor, or in satisfaction of any liquidated damages payable under the Contract or any sum due from the Contractor to the Employer under the Contract…If the amount of the Security Deposit used to make good any cost, expense, loss or damage is greater than the amount of the cost, expense, loss or damage actually incurred by the Employer, the Employer shall pay the difference, interest free, to the Contractor or the issuer, as may be appropriate within ninety (90) days after the date the Maintenance Certificate is issued pursuant to the Contract.

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

(a) the Employer from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or

(b) the obligor under the performance bond from paying any cash proceeds under the performance bond

on any ground including the ground of unconscionability.

[JLN]

1
[2000] WASC 284.

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