CASE UPDATE: SULZER PUMPS V HYFLUX [2020] SGHC 122
In Sulzer Pumps Spain S.A. v Hyflux Membrane Manufacturing (S) Pte Ltd [2020] SGHC 122 ("Sulzer Pumps v Hyflux"), the Singapore High Court considered what amounted to unconscionability in resisting a call on an unconditional performance bond, and in particular whether it would be unconscionable for one party in a near-liquidation scenario / undergoing restructuring to make a call on such a performance bond.
Brief facts. This case concerned a project for the design and construction of a desalination plant in Oman. The contract between the parties was for Sulzer Pumps Spain, S.A. (“Sulzer Pumps”) to supply and install pumps for Hyflux Membrane (S) Pte Ltd (“Hyflux”) (at [3] Sulzer Pumps v Hyflux). Under the terms of the contract, Sulzer Pumps provided Hyflux with an unconditional first demand bank guarantee as security for Sulzer Pumps’s warranty obligations owed to Hyflux (at [4] Sulzer Pumps v Hyflux).
Hyflux experienced repeated failures with the pumps provided (at [5] Sulzer Pumps v Hyflux) and called on the bond in October 2019 (at [6] Sulzer Pumps v Hyflux).
In response, Sulzer Pumps made an ex parte application for an injunction to prevent Hyflux from calling on the bond, and the injunction was granted until the next hearing and/or until another order of court was made, on the expectation that an inter partes hearing would be held soon after (at [6] – [7] Sulzer Pumps v Hyflux).
However, it was several months before the parties appeared before the High Court judge for the hearing (at [8] Sulzer Pumps v Hyflux).
Applicable principles. In its judgment, the Court began by reiterating several basic principles regarding performance bonds at [27] – [29] Sulzer Pumps v Hyflux. In this regard, it is important to note that the case only concerns the exception of unconscionability (at [29] Sulzer Pumps v Hyflux).
Regarding the ground of unconscionability in particular, the High Court applied the well-known decision of the Court of Appeal in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 (“Mount Sophia”), holding that there is a high threshold for establishing unconscionability: an applicant seeking to resist a call must establish a strong prima facie case, and a Singapore court would be slow to interfere unnecessarily with the parties' contractual arrangements (at [31] Sulzer Pumps v Hyflux).
Holding. On the facts of this case, the Court found in favour of Hyflux and discharged the injunction preventing Hyflux from calling on the performance bond. This was for several reasons.
No lower threshold. Firstly, the Court rejected Sulzer Pumps' argument that there should be a lower threshold for granting an injunction against a call on a performance bond.
The Court explained that paragraph [10] of JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 (“JBE”) (where the Court of Appeal stated that “… a less stringent standard (as compared to the standard applicable vis-à-vis letters of credit) can justifiably be adopted for determining whether a call on a performance bond should be restrained …”) has to be read in context. In other words, it must be understood that the “… Court of Appeal, in trying to depart from the UK position and adopt a broader position allowing unconscionability as grounds for injunction, explained that a less stringent threshold should be imposed for performance bonds… Allowing unconscionability as grounds for injunction was in itself the lower threshold…” (at [37] Sulzer Pumps v Hyflux).
Thus, the Court found that the reasoning in JBE does not contradict with the findings in Mount Sophia as they concern different issues (at [38] Sulzer Pumps v Hyflux).
The Court also held that the later Court of Appeal decision in Mount Sophia made by three judges should be followed rather than the earlier Court of Appeal decision in GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 3 SLR(R) 44 made by two judges. Among others, the former judgment provided “a more accurate, recent and comprehensive exposition of the approach to be taken towards injunctions for the restraint of calls on performance bonds” (at [39] – [40] Sulzer Pumps v Hyflux).
Unfairness not a separate ground. Secondly, the Court rejected unfairness as a separate ground for restraining a call on a performance bond, and refused to equate unfairness with unconscionability (at [42] Sulzer Pumps v Hyflux).
In the Court's view, "[u]nfairness is only one factor amongst other factors, albeit an important one, in determining unconscionability" ([42] Sulzer Pumps v Hyflux), and unconscionability refers to "conduct lacking bona fides, and not unfairness in a loose sense as contended by the applicant" (at [43] Sulzer Pumps v Hyflux).
Genuine dispute. Thirdly, the Court rejected Sulzer Pumps' argument that calling on the bond when there was a genuine dispute between the parties would amount to unconscionability. This would not be consistent with the general principle that it is for the applicant to show a prima facie case of unconscionability, and furthermore case law has already established that calling on a bond when there is a genuine dispute does not amount to unconscionability (at [45]).
Relevance of restructuring proceedings. Fourthly, the Court held that the mere fact that the party making the call on the performance bond was in restructuring – or even (hypothetically) on the verge of insolvency – was not a reason to grant an injunction if unconscionability is not established (at [53] Sulzer Pumps v Hyflux).
This was because the Court would be slow to disrupt parties' bargains and contractual arrangements and would do so only on grounds of fraud or unconscionability (at [53] Sulzer Pumps v Hyflux).
Did not lack bona fides. Fifthly, the Court found that the call did not lack bona fides. It found that there was a genuine dispute between parties on, inter alia, the root cause of the pump failures, which affects whether Sulzer Pumps breached its warranty obligations (at [67] – [68] Sulzer Pumps v Hyflux).
Furthermore, the Court found no delay which rendered Hyflux’s conduct unconscionable. Even though the call was only made about two years after the pump failures began and about six months after the pumps were fixed, the Court accepted that Hyflux needed some time to verify if the pumps were fully fixed, and the correspondence shows an “ongoing genuine dispute” (at [69] Sulzer Pumps). In addition, the Court stated that the the mere fact that the call was made just prior to expiry does not ipso facto indicate any “untoward conduct” (at [70] Sulzer Pumps v Hyflux).
No full and frank disclosure. Lastly, the court found that Sulzer Pumps had not made full and frank disclosure in its ex parte application for the injunction. The court identified several material facts not disclosed, including:
That Hyflux had notified Sulzer Pumps about the basis for the call (at [97(a)] Sulzer Pumps v Hyflux);
That Hyflux had provided Sulzer Pumps with evidence that the faulty pumps were due to the latter's poor design (at [97(b)] Sulzer Pumps v Hyflux); and
That Hyflux had not waived its contractual rights when it made full payment for the spare parts (at [97(c)] Sulzer Pumps v Hyflux).
It should be noted that while the fact that the contract was subject to an arbitration agreement was not disclosed, which resulted in the Court not considering the requirements under s 12A of the International Arbitration Act before issuing the injunction, the Court found that this was not material as the injunction would have been granted even if there was disclosure of the arbitration agreement (at [99] – [102] Sulzer Pumps v Hyflux).
Significance of decision. The decision by the High Court in Sulzer Pumps v Hyflux shows that it remains difficult for a party seeking to resist a call on a performance bond to show a strong prima facie case of unconscionability.
Although what amounts to unconscionability will depend on the facts of each case, parties would do well to refer to the guidance contained in case authorities on this issue, such as the seminal decision by the Court of Appeal in Mount Sophia.
This decision has also clarified that the mere fact that the party making a call on a performance bond is in a difficult financial situation is not ipso facto a valid reason for resisting the call. It also illustrates the importance of on-demand performance bonds, and parties should read the contractual provisions governing performance bonds carefully before entering into a contract.
Tags: Performance bonds; Unconscionability; Restructuring and Insolvency
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