A recent Court of Appeal case (Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of HRH Sheikh Sultan bin Khalifa bin Zayed Al Nahyan  1 SLR 657) is causing practitioners to reconsider the enforceability of guarantees and indemnities. This has wide implications for both secured and unsecured credit facilities as the grant of a guarantee or indemnity is typically required. It will also impact on shipbuilding contracts, construction contracts and government contracts as guarantees are typically required as a condition precedent in such contracts.
The appellant was a shipbuilder and had entered into a contract with the respondent to build a luxury motor yacht at a price of $5,850,000. The contract provided for payment by instalments and the appellant was required to furnish an irrevocable confirmed bank guarantee upon receipt of the first instalment. This was a guarantee for the repayment of the first instalment should the appellant fail to fulfill its obligations under the contract. The respondent had duly paid the first instalment but when the second instalment was due, the respondent did not effect payment as was required. At a later date, the respondent gave the appellant notice of termination of contract citing instances of breaches of contract. The appellant was later informed by the bank that the respondent had made a demand on the performance guarantee.
The appellant immediately took out an ex parte application and was successful in obtaining an interim injunction to restrain the respondent from making the demand. The respondent applied to set aside the injunction and this was granted on the grounds that there was a lack of full and frank disclosure. It was not proven that there was fraud or a lack of good faith by the respondent in making a demand on the performance guarantee.
On appeal, the Court of Appeal upheld the lower court's decision that there was misrepresentation or a lack of full and frank disclosure on the part of the appellant.
The importance of this case rests on the following issues of law which were decided by the Court of Appeal:
- whether there is a separate ground of unconscionability for the grant of injunctive relief for performance bonds;
- the definition of unconscionability if it is a separate ground; and
- the standard of proof for unconscionability.
First, the question arose as to whether there was unconscionability on the part of the respondents and whether unconscionability is a separate exception from that of fraud, since the judge below found that there was no fraud when the respondents made a call on the guarantee. The Court of Appeal held that in Singapore, unconscionability is a separate ground in itself for granting injunctive relief insofar as a performance guarantee is concerned. The Court of Appeal reaffirmed its earlier decision in GHL Pte Ltd v Unitract Building Construction Pte Ltd  4 SLR 604, where Justice Thean said that the concept of unconscionability was adopted after deliberation, and was not inadvertently inserted, nor was it intended to be used synonymously or interchangeably with fraud. It was a conscious departure from the English position.
Second, the court takes the view that it is not possible to define 'unconscionability' other than to give some broad indications such as lack of good faith. The kind of situation which would constitute unconscionability would have to depend on the facts of each case. This is a question which the court has to consider on each occasion and there are no pre-determined categorizations. Examples where unconscionability has been held to apply include:
- where the beneficiary made a call based on a breach induced by their own default, and was not permitted to do so;
- where the beneficiary's call on the bond was based on delays in construction that were caused by the beneficiary's own default in failing to make timely payments on the interim certificates issued by the architect; and
- where the defendant-buyer was restrained from calling on the performance guarantee when the non-delivery of the rice was due to floods caused by typhoon and there was a force-majeure clause in the contract.
The court further affirms the view that while a failure to make full and frank disclosures which are material may warrant the discharge of an ex parte injunction, the court nevertheless has the discretion to continue it or to grant a fresh injunction in its place.
Lastly, it was decided that in proving unconscionability, mere allegations are insufficient and a strong case of unconscionability must be shown. It was said that a high degree of strictness applies, as the applicant will be required to establish a clear case of fraud or unconscionability in the interlocutory proceedings.
For further information on this topic please contact Petrus Huang at Drew & Napier by telephone (+65 531 2208) or by fax (+65 535 4864) or by e-mail ([email protected]). The Drew & Napier web site can be accessed at www.drewnapier.com . The assistance of Mr Andrew Quah is acknowledged with appreciation.
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