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Note: Leighton Contractors (Asia) Ltd. (Contractor/Beneficiary) hired CLA Engineering Ltd. (Subcontractor/Applicant) to perform landscaping and façade work as part of Contractor/Beneficiary’s casino resort project in Macau, Hong Kong. To secure its performance, Subcontractor/Applicant obtained a HKD 8,200,000 performance bond issued by DBS Bank (Hong Kong) Ltd. (Issuer) in favor of Contractor/Beneficiary. The opinion is silent as to whether the bond was subject to practice rules. After the expiry date of the performance bond was extended several times, Subcontractor/Applicant consented to a final expiry date of 26 February 2018.

On 21 February, Contractor/Beneficiary made a full demand on the performance bond. Issuer then notified Subcontractor/Applicant that “if no instructions were received from [Subcontractor/Applicant] by 27 February, it would ‘debit’ [Subcontractor/Applicant]’s account with the sum of [HKD]8.2 million together with ‘all related charges’”. When Subcontractor/Applicant received no response from Issuer after Subcontractor/Applicant “reluctantly” offered to extend the expiry date, Subcontractor/Applicant sued Issuer for and was granted an ex parte temporary injunction preventing Issuer from honoring the demand. Not knowing whether Issuer had paid, Subcontractor/Applicant joined Contractor/Beneficiary seeking an “order compelling [Contractor/Beneficiary] to hold the sum as security and on trust for [Issuer]”. Contractor/Beneficiary brought a summons to discharge the injunction. The High Court of Hong Kong, Keith, J., discharged the temporary injunction.

The Judge reviewed the law of performance bonds, noting that “if a performance bond provides for payment on demand, and the bank’s obligation to make that payment is unconditional, it is obliged to make that payment save in very limited and exceptional circumstances such as fraud.” In its ex parte hearing, before a different judge, Subcontractor/Applicant had argued that the performance bond was “conditional”, not “on demand” (without explaining the significance of that distinction), and that it would be “unconscionable” for Issuer to pay Contractor/Beneficiary. The Judge reviewed the “key paragraph” of the performance bond which provided:

[Issuer]…hereby irrevocably and unconditionally guarantee the payment to [Contractor/Beneficiary]…of a sum…of…$8,200,000.00 (the ‘Guaranteed Sum’) and accordingly…agree that upon receipt of a written demand in the manner specified below, and notwithstanding any objection made by [Subcontractor/Applicant] and without any right of set-off or counterclaim, we shall pay you…such amount…as shall have been so demanded…up to, but not exceeding, in the aggregate the Guaranteed Sum.

The Judge concluded that the bond was “on demand” and that Issuer was “not concerned with the commercial relationship between the contractor and subcontractor, nor with the question whether the subcontractor has performed its obligations under the subcontract.” Another provision indicated that the bond would be “valid and in force” until either Contractor/Beneficiary confirmed to Issuer that Subcontractor/Applicant had fully performed or until such date that the performance bond was extended beyond a “Long Stop Date”, i.e. 26 February 2018, the amended expiry. Subcontractor/Applicant agreed that the demand made by Contactor/Beneficiary was complying but argued that the bond was “conditional” because Contractor/Beneficiary had not met the conditions for extending the performance bond beyond 26 February. Subcontractor/Applicant based its argument on a provision beginning with the terms “[n]otwithstanding the foregoing” followed by three conditions: (1) that Subcontractor/Applicant had not executed a “Release Document” whereby indicating that it had no claims against Contractor/Beneficiary; (2) that Subcontractor/Applicant had not provided Contractor/Beneficiary with another form of security; and (3) that Contractor/Beneficiary had requested in writing an extension of the performance bond at least one year beyond the “Long Stop Date”. Subcontractor/Applicant argued that because Contactor/Beneficiary had not requested an extension pursuant to condition (3), Issuer was not obligated to pay. The Judge rejected Subcontractor/Applicant’s argument because the conditions relied on dealt not with conditions for demanding payment but rather “the circumstances in which the validity of the Bond had to be extended.”

The Judge also rejected Subcontractor/Applicant’s argument that Contractor/Beneficiary’s demand was unconscionable, citing a legal treatise for the proposition that “unconscionability is not recognised by our courts as a sufficient basis to restrain a payment due under a performance bond.”

In response to Contractor/Beneficiary’s argument that the ex parte injunction had been made on the basis of a material non-disclosure, the Judge noted that an inexperienced counsel had argued on behalf of Subcontractor/Applicant in obtaining the ex parte injunction and had provided select sentences of the performance bond to the judge presiding over that hearing. (Regarding the non-disclosure, the only terms apparently provided to judge at the ex parte hearing are italicized in the final excerpted paragraph below). The Judge discharged the injunction and concluded that the omission was “entirely innocent”, being based on a “genuinely, albeit misguided, belief” that no more needed to be disclosed.

Comment: While the discussion of whether the bond was “unconditional” or “conditional” may be unsettling, that Issuer “irrevocably and unconditionally” issued the bond is more so. All guarantees and letters of credit are conditional. The critical questions are whether a particular undertaking is dependent or independent and whether presented documents comply with its terms and conditions.

Excerpts of Performance Bond:

[Issuer]…hereby irrevocably and unconditionally guarantee the payment to you [Contractor/Beneficiary]…of a sum…of…$8,200,000.00 (the ‘Guaranteed Sum’) and accordingly…agree that upon receipt of a written demand in the manner specified below, and notwithstanding any objection made by [Subcontractor/Applicant] and without any right of set-off or counterclaim, we shall pay you…such amount…as shall have been so demanded…up to, but not exceeding, in the aggregate the Guaranteed Sum.

[Demand must] be accompanied by a written statement signed by [Contractor/Beneficiary] … certifying that [Subcontractor/Applicant] had failed to perform all or any of its obligations under the [subcontract] (with the identification of such obligation which has not been performed) and the amount of the damages claimed by [Contractor/Beneficiary] as a result of such failure, which amount shall be paid to you in connection with such demand … (but not to exceed, in aggregate …, the Guaranteed Sum)… shall be conclusive evidence … [of](a) the occurrence or non-occurrence of any failure by [Subcontractor/Applicant] to perform any of its obligations under the [subcontract], and (b) the amount of any such damages …, and we shall have neither the right nor the obligation to challenge the accuracy or sufficiency of such statement.

This Bond shall remain valid and in force until, and our liability hereunder shall cease and terminate, … on whichever of the following first occurs:

(a) the date [Subcontractor/Applicant] has finally performed all of its obligations under the [subcontract] as confirmed by [Contractor/Beneficiary] in writing; or

(b) such date at it may be extended as provided below, the ‘Long Stop Date’ ie 26 February 2018

Notwithstanding the foregoing, we hereby irrevocably agree that if [the Release Document] is not [executed and] issued by [Subcontractor/Applicant]…on or before the date (the ‘Renewal Date’) that is thirty (30) days prior to the Long Stop Date then-in-effect, and if [Subcontractor/Applicant] has not provided to you a replacement or renewal letter of guarantee satisfactory to you…on or prior to the Renewal Date, then we shall, upon written request made by you not earlier than the Renewal Date, renew this Bond by extending in writing the Long Stop Date to a date that is no earlier than one year from such Renewal Date. We further agree that if we fail to so to extend the Long-Stop Date within three (3) business days following such request you may make demand for, and we shall immediately pay to you, the entire remaining balance of the Guaranteed Sum not theretofore advanced; provided that by making such demand you shall be deemed to have agreed that (i) the amounts so paid to you shall be held by you as security for the full and faithful performance of each of the obligations of [Subcontractor/Applicant] under the [subcontract], and (ii) subject to the full and faithful performance of such obligations, you will return such amounts (or the remaining balance thereof) to [Subcontractor/Applicant] upon the issuance of [the Release Document] in accordance with the [subcontract], or as otherwise required by applicable law. The provisions of this paragraph shall apply, and we hereby agree to continue to extend the Long Stop Date, until [the Release Document] is [executed and] issued in accordance with the [subcontract].

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