Article

Note: Sato Kogyo (S) Pte Ltd (Contractor) was awarded a contract from Singapore’s Land Transport Authority for the construction of a rail station and several tunnels. Contractor then engaged Tactic Engineering Pte Ltd (Subcontractor) under a SGD 24,468,800.00 subcontract. As part of the subcontract, Contractor could “retain up to 5% of this figure (ie, [SGD]1,223,440.00).” Additionally, Subcontractor owed Contractor SGD 226,960.73 from work related to another project. While the work was still being done under the contract, Subcontractor began experiencing financial difficulties, and was at times unable to meet its work goals. In order to alleviate this interruption, Contractor agreed to release the 5% retained portion of the subcontract “in exchange for an on-demand bond.”

Between 2014 and 2016, Subcontractor continued to fall behind on payments and missed work deadlines. Contractor made demands on the bond several times. No payment was made, however. After a demand made in October 2016, Subcontractor obtained an interim injunction to prevent payment. The High Court of Singapore, Foo, J., set aside the injunction and, on appeal affirmed the earlier ruling and explained his rationale.

Subcontractor had argued that an injunction was the proper remedy for three reasons: (1) Contractor improperly included the money owed to Contractor by Subcontractor related to another project both were involved in;(2) Contractor was not entitled to include “Administrative Charges” in its call on the bond; and (3) Contractor’s “computation of back charges was unconscionable.”

Relying on the decision in Eltraco International Pte Ltd v. CGH Development Pte Ltd ([2000] SLR(R) 198), the Judge reviewed “some principles in law relating to the issue of unconscionability,” concluding “[Subcontractor] could not show that it was reasonably apparent that there was unconscionable conduct on [Contractor’s] part”.

The Judge concluded that Contractor had a potentially valid claim to Administrative Fees because of that language in the contract. However, The Judge noted that the agreement to create the bond was also to offset the debts under an earlier contract. The Judge further noted that the contract allowed Contractor to “set-off ‘such loss or damage’ incurred because of [Subcontractor]’s failure to carry out its works with diligence or due expedition.” The Judge stated Subcontractor “essentially brought the court through an accounting exercise, deploying various computations to demonstrate that [Contractor’s] claim fell short of the Bond Amount and thus Unconsionability was manifested.”

The Judge also concluded that “the back charges claimed by [Contractor] were not so excessive or abusive as to establish that it was unconscionably bloating the numbers to justify the call on the Bond.”

Finally, the Judge determined that unconscionability needed to be viewed in the context of the subcontract itself, and thus found that Subcontractor had not proved its case for unconscionability when it claimed SGD 1,351,574.89 for back charges.

The Appellate Judge also noted that the bond was independent (an on-demand bond); therefore, the existence of a genuine contractual dispute weakened the claim of unconscionability.

Legal Analysis:

Comment: While the decision (denial of injunction) is comforting, the comments in the decision are not. What prevents a court from reviewing the entire contractual agreement from the prism of equity? The beneficiary thought that such inquiry would occur after it had received the proceeds. Only an extraordinary departure from fairness – like LC fraud – should justify that judicial review occur before the beneficiary is paid.

Excerpts of Demand Bond Text

  1. In consideration of you releasing the retention money to the Subcontractor we hereby irrevocably and unconditionally undertake, covenant and firmly bind ourselves to pay you on demand any sum or sums which from time to time may be demanded by you up to a maximum aggregate of Singapore Dollars One Million Two Hundred Twenty-Three Thousand Four Hundred and Forty Only ([SGD]1,223,440.00) (“the Guaranteed Sum”).

  1. Should you notify us in writing at any time prior to the expiry of this Guarantee, by notice purporting to be signed for and on your behalf that you require payment to be made of the whole or any part of said sum, we irrevocably and unconditionally agree to pay the same to you immediately on demand without further reference to the Subcontractor and notwithstanding any dispute or difference which may have arisen under the subcontract or any instruction which may be given to us by the Subcontractor not to pay the same.[Emphasis Added]

[ARB]

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