Judges limit grounds for restraining calls or demands made on unconditional performance bonds

Court of Appeal has issued a landmark decision that affects the entire construction industry in Singapore, which commonly uses unconditional performance bonds in many contracts for building works. A finding either way would have far-reaching consequences on employers and developers who seek to call on unconditional performance bonds in the event of a dispute with their main contractors.

Performance bonds are issued by an insurance company or bank as a surety to guarantee the satisfactory completion of a project by a contractor. If the contractor breaches the contract, the employer can seek recourse against the performance bond to recoup his losses that arise and/or may arise from the breach. Performance bonds can be conditional or unconditional. In the case of unconditional bonds, or on-demand bonds, the position in Singapore is that such bonds are payable on demand and the contractor is only entitled to restrain any demands or calls made provided he can prove fraud or unconscionability. Fraud connotes dishonesty in making of the call and is harder to prove than unconscionability, which generally refers to unfair or reprehensible conduct.

In this landmark case, pursuant to the main contract between Asplenium Land Pte Ltd (the developer) and CKR Contract Services Pte Ltd (the main contractor), CKR was not entitled to restrain a call on the unconditional performance bond on any ground other than fraud, i.e. including unconscionability.

In a nutshell, after the commencement of the works, a dispute arose between CKR and Asplenium relating to CKR’s slow progress and unsatisfactory performance on site. Consequently, Asplenium terminated CKR’s employment and called on the performance bond. In response, CKR sought an injunction to restrain Asplenium from calling on the bond on the ground of unconscionability. This was notwithstanding that CKR had agreed not to restrain Asplenium’s call on the bond on any ground, except for fraud.

CKR argued that the effect of such a clause was to oust the jurisdiction of the courts and therefore, this clause was void and unenforceable because it was against public policy. This argument was accepted by the High Court which also found that the clause was contrary to the development of the law of unconscionability as a separate ground to restrain calls on performance bonds in Singapore.

On appeal, the Court of Appeal overturned this part of the High Court’s decision and clarified that where the clause limits the rights and remedies available to parties, the court will respect their right to mutually agree such terms in their contract. Such limitation clauses will not be viewed as attempts to oust the court’s jurisdiction. On the facts of this case, the Court of Appeal noted that the contract and bond had been freely entered into and mutually agreed by parties, and there were other means of recourse open to both parties in the event of a dispute.

Christopher Chuah, who heads the Infrastructure, Construction & Engineering Practice of law firm WongPartnership, said:

"Unconditional performance bonds are now a fairly standard feature in building and construction contracts in Singapore. The rationale behind the use of unconditional bonds is to enable the employer to have quick, ready access to funds to recoup any losses or expenses which may be occasioned by the contractor’s breach. Nonetheless, the courts have recognised the risk of oppressive or abusive calls on bonds and have sought to guard against this by providing that an injunction may be granted to restrain a call if the contractor can show proof of fraud or unconscionability. The threshold of fraud is higher than unconscionability. In recent years, we have seen many instances in our courts where contractors have sought to restrain demands based on unconscionability. This landmark decision by the Court of Appeal is significant because it would mean that it is now possible for employers to exclude or limit the grounds for an injunction to fraud only in the case of unconditional bonds."