Article

Factual Summary: Subcontractor obtained an on-demand performance bond (“bond”) from Issuer/Guarantor as security for due performance of the contracted concrete work through its Agreement with Contractor/Beneficiary.

Beneficiary called a meeting to address concerns about Subcontractor/Beneficiary being unable to finish work on time. During this meeting, the officials for the Subcontractor and Beneficiary created a written Supplementary Agreement that set out a new timetable for the Subcontractor and a new payment schedule for the Beneficiary.

The bond that was initially set to expire was extended and allowed demand to be made at any time up to ninety days after its expiration. Beneficiary drew on the bond claiming that the contracted work was not carried out by the Subcontractor in compliance with the Agreement. The Subcontractor then sued for an interim injunction to stop the Beneficiary from calling on the bond and to stop the Issuer from issuing the bond. The High Court of Singapore, Kan Ting Chiu, SJ, denied Subcontractor’s request for interim injunction and Erinford injunction pending appeal.

Legal Analysis:

1. Unconscionability

The Subcontractor’s director claimed that there was an oral understanding that the Beneficiary would not call on the bond until a Final Accounts Agreement was created and that he would not have agreed to the extension on the bond otherwise. The Beneficiary’s project manager stated that the meetings were merely to create new timetables for work and payments and was the full extent of the negotiations and terms agreed to by both parties.

The Subcontractor argued that the Beneficiary’s quantification of back-charges is unconscionable because it caused the Subcontractor’s final account to be in the negative and created a basis for the Beneficiary to make a demand on the Bond.

The Judge stated that the documents produced by the parties show that there had been continuous communication and discussion on the state of the works and payments. The contractual documents showed that there was no requirement that back-charges be quantified and made known as they arose, so long as that was done at the time of the final assessment.

The Judge looked to precedent in determining whether unconscionability is a basis for restraining Beneficiary’s call on the bond. The Judge determined that unconscionability, as distinct from fraud, is a ground upon which the court can grant an injunction and restrain a beneficiary from calling on the bond. However, the standard is high and the evidence must be uncontroversial. The Judge cautioned that such injunctions must be sparingly exercised and should only be used when an applicant presents a strong prima facie case. The Judge further stated that a determination of unconscionability is a question which the court must consider on a case by case basis where its jurisdiction is invoked.

Ultimately, the Judge dismissed the Subcontractor’s claim for a failure to establish a strong prima facie case of unconscionability. The Judge reasoned that there was no recorded express undertaking or agreement not to call on the Bond. Further, the Subcontractor never complained of unethical conduct in regards to the back-charges when it received the Final Claim Assessment and, instead, requested quantity reconciliation. Finally, the Judge stated that the absence of the understanding in the Supplementary Agreement and the subsequent correspondence between the parties undermine the Subcontractor’s assertion and reliance on the understanding.

2. Erinford Order

Subcontractor’s Counsel sought an Erinford Order after the court dismissed its application for an injunction. An Erinford Order is an injunction that restrains the successful party from either interfering with the subject matter of the dispute pending appeal or restraining the successful party from acting on their success pending appeal.

Subcontractor’s Counsel stated that Subcontractor would be denied its primary remedy if its appeal is successful because payment will have already been made. However, the Judge stated that this is not correct because if the appeal was successful, an interim injunction would be granted and any amount disbursed must be paid back.

Secondly, Subcontractor’s Counsel argued that the Subcontractor will suffer substantial prejudice if the Erinford Order is not granted because the disclosure of a successful call on the Bond would prejudice its chances of securing projects. However, the Judge stated that reputation is not contemplated by an Erinford Order because the its purpose is to ensure that an appellant will not end up with a “pyrrhic victory” if it succeeds in an appeal. The Judge ruled that for such an order to be granted, “the risk of negation must relate to the appeal or the dispute between the parties” and the potential prejudice to the Subcontractor in securing other projects is not related to either. Consequently, the Judge denied Subcontractor’s application for an Erinford Order.

[JK]

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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 the ICC or Coastline Solutions.