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Note: WyWy Development Pte Ltd (Principal) hired Wyse Pte Ltd (Contractor/Beneficiary) for the construction of a commercial development project in Singapore. Contractor in turn engaged AES Façade Pte Ltd (Subcontractor/Applicant) to perform all work and maintenance related to the building façade. To assure its performance, Subcontractor/Applicant obtained a SGD 496,500 performance bond issued by Liberty Insurance Pte Ltd (Issuer) in favor Contractor/Beneficiary. Insisting that it had substantially performed, Subcontractor/Applicant issued a payment claim to Contractor/Beneficiary which Contractor/Beneficiary refused to pay. In response, Subcontractor/Applicant initiated proceedings with the Singapore Mediation Centre against Contractor/Beneficiary resulting in a determination in favor of Subcontractor/Applicant for SGD 1,077,151.37.

When Contractor/Beneficiary refused to pay the mediation award citing liquidated damages owed to it for late completion of the subcontract, Subcontractor/Applicant applied for and obtained an enforcement order. Subsequently, Contractor/Beneficiary initiated arbitration proceedings against Subcontractor/Applicant to recover the purported liquidated damages. Before conclusion of arbitration, but after Contractor/Beneficiary had failed in its application to set aside the enforcement order, Contractor/Beneficiary made a full demand on the performance bond. In response, Subcontractor/Applicant sued for and obtained an ex parte interim injunction preventing Contractor/Beneficiary from receiving the performance bond proceeds. Subcontractor/Applicant applied to continue the injunction until the resolution of arbitration. The High Court of the Republic of Singapore, Lee Seiu Kin, J., denied the application and discharged the interim injunction.

Subcontractor/Applicant claimed that a restraint on the performance bond was warranted because the attempted draw was unconscionable. Contractor/Beneficiary argued, however, that “the performance bond represents a contractually bargained allocation of risk that courts should be slow to disturb.” The Judge began noting that “the terms and nature of an instrument such as the Performance Bond depends not on the label adopted by the parties but the substance of the rights and obligations established by its terms.” After review, the Judge found that the performance bond was “unconditional” and that “[Contractor/Beneficiary] [was] not expressly required to establish any breach on the part of [Subcontractor/Applicant] before calling on the Performance Bond”.

The Judge then considered whether an injunction was appropriate based on unconscionability noting that “the concept covers acts involving abuse, unfairness and dishonesty” and that unconscionability “is broader than the notion of fraud.” Subcontractor/Applicant argued that Contractor/Beneficiary’s draw was made in bad faith within the context of the unresolved arbitration and prior refusal to pay Subcontractor/Applicant. The Judge disagreed, concluding that “[t]he mere fact that parties are in disagreement as to losses suffered cannot mean that the call was unconscionable.” “[Contractor/Applicant] made the call in order to recuperate liquidated damages which it legitimately believed to be owing, and was not motivated by any improper purpose or bad faith.”

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