Article

Note: To secure its performance under four earth-works subcontracts regarding three distinct construction projects, Ryobi Tactics Pte Ltd. (Subcontractor/Applicant) obtained four performance bonds in favor of UES Holdings Pte Ltd. (Contractor/Beneficiary). AXA Insurance Pte Ltd. (First Issuer) issued one bond corresponding to the “Changi Project”, and Tokio Marine Insurance Singapore Ltd. (Second Issuer) issued three performance bonds corresponding to the Changi Project, the “Jurong Project” and the “Chestnut Project”. Cumulatively, the bonds were valued SGD 1,590,016.69.

A dispute arose concerning the Chestnut Project and Contractor/Beneficiary in turn demanded payment on all four performance bonds. Claiming that the demands were either fraudulent or unconscionable, Subcontractor/Applicant sued Contractor/Beneficiary for an injunction “from calling on various performance bonds or from making payment under those performance bonds”, joining First Issuer and Second Issuer in the lawsuit. The High Court of Singapore, Kannan Ramesh, J., granted a partial injunction.

Despite the parties having offered extensive arguments regarding unconscionability, the Judge noted that the first issue was “whether the terms of the performance bonds allowed for a call to be made for the consolidated liabilities under all four subcontracts for the Changi, Jurong and Chestnut projects.” Subcontractor/Applicant had not distinguished among the four performance bonds in its injunction application, although no party argued that the bonds were anything other than “on demand” bonds independent of the underlying subcontracts with substantially similar terms and conditions. Because there was “no evidence” that Contractor/Beneficiary’s demand on the bond securing performance under the Chestnut project was “motivated by anything other than [Contractor/Beneficiary]’s desire and entitlement to recuperate its perceived losses”, the Judge denied to enjoin the demand on that bond. As for the three remaining bonds, the Judge noted that it “was clear that the performance bonds were each issued in respect of a particular project and a particular subcontract”, drawing attention to the preamble of each bond and other text linking the bonds to their respective subcontracts. Moreover, no bond “mention[ed]…any right of [Contractor/Beneficiary] to call on the bond in satisfaction of sums due under other subcontracts.” Thus, the Judge stated:

it was clear, both on the face of the performance bonds as well as the subcontracts, that [Contractor/Beneficiary] was not entitled to call on the three performance bonds for the Changi and Jurong projects for its alleged losses suffered in relation to the Chestnut project. The calls on the three performance bonds thus ought to be restrained purely on an application of contractual principles.

Although having granted the injunction based the law of contract, the Judge was also “convinced that the calls on the three performance bonds were unconscionable because [Contractor/Beneficiary] was in essence attempting to dip into the security of other projects when it only had the belief that it had legitimate claims in respect of the Chestnut project.”

Performance Bond Text: “AND WHEREAS the Sub-Contractor is required under the Sub-Contract to pay … of the total value of the Sub-Contract as a Security Deposit for the performance of his obligations under the SubContract.

Now in consideration of the Main Contractor not insisting on the Sub-Contractor paying … of the total value of the Contract as a security deposit for the said Sub-Contract, we [First Issuer] (at the request of the Sub-Contractor) hereby agree as follows:

1. We unconditionally and irrevocably undertakes and covenants [sic] to pay in full forthwith upon demand in writing any sums or sums that may from time to time be demanded by…Contractor up to a maximum aggregate sum of … without requiring any proof that…Contractor is entitled to such sum or sums under the Sub-Contract or that the Sub-Contractor has failed to execute the Sub-Contract or is otherwise in breach of the SubContract. Any sum or sums so demanded shall be paid forthwith by us unconditionally, without any deductions whatsoever and notwithstanding the existence of any differences or disputes between … Contractor and the Sub-Contractor arising under or out of or in connection with the Sub-Contract or the carrying out of work thereunder or as to any amount or amounts payable thereunder and notwithstanding that such differences or disputes have been referred to arbitration or are the subject of proceedings in court or is in the midst of any other means of dispute resolution.”

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