In the case of Master Marine AS vs. Labroy Offshore Ltd Ors [2012] SGCA 27, Singapore’s Court of Appeal allowed an appeal against the grant of an injunction restraining the call on various Refund Guarantees, a type of performance bond commonly used in construction contracts. 

The case illustrates the importance of first considering the commercial attributes of the contract under interpretation and gives important guidance on the application of the principles of contractual interpretation restated in the seminal case of Zurich Insurance (Singapore) Pte Ltd vs. B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029. In Zurich, the Court of Appeal recognized that the modern approach to contractual interpretation takes a more permissive approach to the use of extrinsic evidence.

The Court of Appeal also made some useful obiter remarks on what falls beyond the scope of unconscionability as a ground for restraining a beneficiary of a performance bond. The Singapore Court of Appeal diverged from the English position when they unequivocally recognized unconscionability as a separate ground from fraud in GHL Pte Ltd vs. Unitrack Building Construction Pte Ltd and Another [1999] 4 SLR 604.

Background

The Appellant entered into a Shipbuilding Construction Contract with the 1st Respondent. Advances paid by the Appellant were secured by Refund Guarantees. The Rig was not delivered by the contractual delivery date in 2010 and extensions of the Refund Guarantees were procured by the 1st Respondent monthly. In April 2011, the 1st Respondent failed to furnish the relevant extensions within the stipulated deadline provided in the Refund Guarantees. They furnished the extension one day late. Before the extensions were furnished, the Appellant rescinded the Shipbuilding Construction Contract and called on the Refund Guarantees. The rescission was not accepted by the 1st Respondent. The 1st Respondent applied for an injunction, to restrain the Banks from making payment to the Appellant. The High Court granted the injunction. On appeal, the Court of Appeal reversed the High Court’s judgment.  

The Refund Guarantees provided for three types of demands the Appellant could serve on the Banks for repayment of their advances, namely the “Initial Demand”, the “Deferred Demand” and the “New Demand”.

The central issue in the appeal was whether or not the conditions precedent for making a valid New Demand were met. .

Nature of Performance Bonds

The Court of Appeal began by examining the difference between a first demand performance bond and a conditional performance bond. 

The Court of Appeal explained that a first demand bond performance bond is an undertaking by the bond issuer to pay a specified sum to the beneficiary immediately upon receipt of a compliant demand without an examination of the merits of the underlying dispute. On the other hand, a conditional performance bond is one that is predicated on the existence and/or proof of a breach or loss and it might require the need to verify or attest to the facts before a compliant demand is deemed made.

The Court of Appeal was of the view that the Refund Guarantees in this case were first demand performance bonds.

Contractual Interpretation

The Court of Appeal then identified the relevant conditions precedent for making a valid New Demand under the Refund Guarantees by interpreting the contract.

The Court of Appeal highlighted that the process of interpretation begins with considering the essence and attributes of the document being examined.

The Court held that first demand performance bonds are a genre of documents where the Court should be restrained in its examination of external context and extrinsic evidence. Given the primary role of performance bonds in commerce is to ensure expediency in payment, parties need to be able to determine the validity of the demand quickly by looking at the document itself without reference to the underlying contract. Furthermore, a first demand performance bond is a document most commonly used by experienced commercial men who can appreciate that the bond and the contract are two autonomous contracts. It is thus reasonable to expect that each of these contracts contain all terms of the respective parties’ agreements.

This does not mean that extrinsic evidence has no role to play. The Court of Appeal said where the express wording of the bond is (1) patently ambiguous or (2) suggests a meaning inconsistent with the obvious external context, the Court will look beyond the document in question, to the most immediately relevant material, which in performance bond cases is the underlying contract.

In this case, the Court of Appeal refrained from using the underlying contract which contained a draft Refund Guarantee and correspondence between parties during negotiations on the wording of the Refund Guarantees as a source for understanding the express terms of the Refund Guarantee. They were of the view that the wording of the New Demand clause is clear on its face and the Appellant had made a valid New Demand.

Unconscionability

The 1st Respondent submitted it was unconscionable for the Appellant to call on the Refund Guarantees on the basis that they were one day late in furnishing the extensions to the Refund Guarantees since the Appellant knew the delay was due to the 1st Respondent’s inadvertent failure to take into account a public holiday. The Court of Appeal rejected the argument. They were of the view that time was of the essence in the New Demand clause and more generally, they said courts will not ordinarily exercise its jurisdiction to restrain the beneficiary in instruments of this genre, when the consequence of an occurrence has been expressly provided for, because that would create uncertainty.