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Applicant appealed Singapore trial court decision granting partial injunction on performance bond.
To support its excavation obligations for a train-line project, Ee Hup Construction Pte Ltd. (Subcontractor/Applicant) applied for and obtained an SGD 501,163 on-demand performance bond issued by India International Insurance Pte Ltd. (Issuer) in favour of China Jingye Engineering Corp. (Contractor/Beneficiary). Contractor/Beneficiary was engaged by the Land Transport Authority of Singapore (Principal) for construction of the Bedok South Mass Rapid Transit station and related tunnels. Performance bond value constituted 10% of the subcontract “lump sum” due to Subcontractor/Applicant upon completion. The bond expired 31 May 2024 and contained an auto-extension clause whereby it would extend for successive 180-day periods absent 90-day notice prior to expiration that Issuer would not extend. Judgment silent as to practice rules and choice of law.
Around March 2023, a dispute arose concerning alleged back-charges incurred by Contractor/Beneficiary regarding equipment, materials, manpower and “safety lapses”. While Subcontractor/Applicant issued a Payment Claim for SGD 1,909,794.65 for works allegedly completed, Contractor/Beneficiary issued its Payment Response acknowledging payment of only SGD 63,938.87, citing SGD 327,656.17 in back-charges.
Multiple instances of arbitration ensued whereby Subcontractor/Applicant forwarded Payment Claims alleging sums due and Contractor/Beneficiary raised Payment Responses alleging back-charges and other expenses due to fault by Subcontractor/Applicant. First instance adjudicator determined Contractor/Beneficiary owed Subcontractor/Applicant SGD 642,307.63; that decision did not consider back-charges as Contractor/Beneficiary withdrew those allegations therein. A request by Subcontractor/Applicant to review that determination was dismissed.
Thereafter, more Payment Claims and Payment Responses were exchanged. 16 April 2024, Contractor/Beneficiary made a demand on the performance bond, stating in its demand 1 that it incurred costs of SGD 598,015.19 “[a]rising from [Subcontractor/Applicant’s] default in the performance of its obligations under the Sub-Contract and/or matters arising from/ pertaining to the Sub-Contract”. While most of the costs related to alleged back-charges, SGD 98,150.52 sought by Contractor/Beneficiary regarded fees assessed by the Singapore Land Authority, referenced as Temporary Land Occupation (TOL) charges.
Subcontractor/Applicant sued Contractor/Beneficiary seeking an injunction to restrain the demand; separate arbitration was ongoing. The trial court granted a partial injunction, restraining the demand insofar as the TOL charges. In a subsequent hearing, the trial court denied Subcontractor/Applicant’s request for a stay of execution pending appeal. Subcontractor/Applicant appealed. The High Court of Singapore, Appellate Division, Tay Yong Kwang, See Kee Oon and Mavis Chionh Sze Chyi, JJ., dismissed the appeal.
Subcontractor/Applicant raised several points on appeal, critically that the trial court (1) erred in not finding the demand unconscionable; (2) applied an incorrect standard of review; (3) erred in not finding the entire demand unconscionable when entering a partial injunction; and (4) incorrectly denied a stay of execution pending appeal (i.e. “Erinford injunction”). Subcontractor/Applicant also belatedly alleged fraud. The appellate court began by citing the leading case, BS Mount Sophia Pte Ltd. v. Join-Aim Pte Ltd., 2 noting the burden of proof is high, and the party seeking an injunction on a performance bond must demonstrate a strong prima facie case of unconscionability.
Generally, this involves “unsatisfactory conduct tainted by bad faith.” The Singapore courts have taken this position to “strike the appropriate balance between the conflicting positions of the obligor and beneficiary of a performance bond”. Two policy positions support this balancing: (1) deference to the parties’ agreed allocation of risk; and (2) maintaining “the commercially valuable autonomy principle”, such that parties can rely on independent guarantees.
Subcontractor/Applicant argued the trial court applied an incorrect standard when reviewing its unconscionability allegation. The trial court stated the test was a “subjective one, with the inquiry focusing on the bona fides” of the demand. Subcontractor/Applicant insisted the inquiry ought to be objective. The appellate court disagreed. Relevant authorities do not refer to either an objective or subjective approach; nevertheless, the trial court did not err in considering the prospective of Contractor/Beneficiary when demanding payment: “[t]his was because if the beneficiary had a genuine belief in its contractual entitlement but was actually mistaken about its entitlement, the call would still be legitimate if it was an honest mistake”. Nor did the trial court solely consider Contractor/Beneficiary’s perspective; as is true of unconscionability actions, the analysis is necessarily fact intensive and requires consideration of the “entire context of the case.”
Much of Subcontractor/Applicant’s assertion of bad faith and unsatisfactory conduct went to Contractor/Beneficiary’s withdrawal of its claims of back-charges within the arbitration proceedings. Subcontractor/Applicant argued that Contractor/Beneficiary essentially withdrew consideration of those claims and subsequently demanded payment on the bond to “claw-back” the “adjudicated amounts without final determination of the back-charges.” In this way, Subcontractor/Applicant sought to rely on Samsung C&T Corp. v. Soon Li Heng Civil Engineering Pte Ltd. 3 The court therein considered that beneficiary who “deliberately avoid[s] making a claim before an adjudicator simply to preserve its right to claim under a performance bond” might be said to have acted unconscionability.
In Samsung C&T, the beneficiary had alleged overpayment in making a bond demand while relying on reasons already rejected by the adjudicator; to allow such would undermine the finality of an adjudicated decision. In the instant action, the appellate court noted that Contractor/Beneficiary withdrew consideration of its back-charges claims because it was unclear whether its claims fell within the relevant legal framework, i.e. Building and Construction Industry Security of Payment Act (SOPA) (2020 Rev. Ed). Moreover, withdrawing the claims was not evidence of bad faith as the trial court considered the statutory framework and accepted Contractor/Beneficiary’s reasoning to “save time and costs.”
The appellate court also noted the back-charges appeared to be supported by evidence, although courts do not “engage in detailed merits review when considering an application” to enjoin a performance bond. The court also reasoned the trial Judge “was justified in finding that [Subcontractor/Applicant] had not discharged the burden of establishing a strong prima facie case that the back-charges were excessive and without merit, and that [Contractor/Beneficiary] was aware of this.” Also without merit was Subcontractor/Applicant’s suggestion that the trial court erred in not finding a strong prima face case of unconscionability regarding the entire demand when it enjoined the TOL portion thereof on the basis of a potential lack of bona fides.
Subcontractor/Applicant’s argument that the trial court ought to have “preserved the status quo” by enjoining the performance bond pending resolution of arbitration and the disputed back-charges was also baseless. The appellate court noted this approach “would fly in the face of the very rationale for an on-demand performance bond.” Beneficiaries of such a bond anticipate having an immediate means of payment granted a compliant demand is made: “In this connection, the on-demand performance bond differs from the conditional performance bond which is predicated on the existence (and/or proof) of a breach and/or the occasioning of loss and damage on the underlying contract.”
The appellate court lastly agreed that the trial court properly denied entry of an Erinford injunction, as there was no proof that the judgment would ultimately become nugatory, i.e. that Contractor/Beneficiary would not be able to pay were the decision reversed on appeal. Accordingly, the appellate court dismissed the appeal and ordered Subcontractor/Applicant to pay Contractor/Beneficiary SGD 35,000 in costs.
Presumably, Contractor/Beneficiary made a full demand; it is unclear if the performance bond value was increased by amendment. ↩
[2012] 3 SLR 352 [Singapore]. ↩
[2020] 2 SLR 955 [Singapore]. ↩
Landlord sued Lessee for use and occupancy of commercial lease.
On appeal, Court considered whether trial court: erred in holding that Subcontractor/Applicant was contractually precluded from relying on the unconscionability exception; correctly held that Contractor/Beneficiary’s demand was not fraudulent; and erred in declining to discharge the injunction.
A recent Singapore case highlights the potential inherent risks for banks that take credit insurance policies as security.
Appeal of denied bill of costs obtaining supersedeas LC.
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