CALL ON PERFORMANCE BOND STOPPED – NOT UNCONSCIONABILITY OR FRAUD
In Chian Teck Realty Pte Ltd v SDK Consortium and another [2023] SGHC 210, a call on a performance bond was successfully restrained. But not on the grounds of unconscionability or fraud. How was the call restrained?
Background. Chian Teck Realty Pte Ltd (“Chian Teck”) was engaged by SDK Consortium (“SDK”) to carry out works for a project.
In accordance with its subcontract obligations, Chian Teck procured a performance bond from Lonpac Insurance Bhd (“Lonpac”) in favour of SDK.
It was undisputed that unconscionability was not a ground that can be relied upon for restraining a call on the performance bond as the parties had agreed that a call on the performance bond could not be restrained on the ground of unconscionability.
The bond. The wording of the bond in this case is important. We duplicate [10] of the judgment, which sets out the wording of the bond, below:
“1. [Lonpac] shall unconditionally pay to [SDK] any sum or sums up to a maximum aggregate sum of Singapore Dollars One Million One Hundred Twenty Three Thousand One Hundred Fifty Two and cents Fifty Five Only (S$1,123,152.55)(“the Guaranteed Sum”) upon receiving [SDK’s] written notice of claim for payment made pursuant to Clause 4 of this Guarantee without any proof of actual default on the part of [Chian Teck] and without need to satisfy any other condition.
…
3 [Lonpac’s] liability under this [Bond] shall continue and this [Bond] shall remain in full force and effect from 01/07/2018 until 01/08/2022 provided always that the expiry date of this [Bond] and [Lonpac’s] liability under this [Bond] shall be automatically extended for successive periods of 6 months unless [Lonpac] give[s] [SDK] 90 days’ written notice prior to the expiry of [Lonpac’s] liability (the “Notice Period”) of [Lonpac’s] intention not to extend this [Bond] in respect of any future extension and provided further that [SDK] shall be entitled,
(a) upon receiving such notice of [Lonpac’s] intention either to:
(i) make a claim under this [Bond]; or
(b) direct [Lonpac] (within the Notice Period) to extend the validity of this [Bond] for a further period not exceeding 6 months (and this [Bond] shall then expire at the end of such further period).
4. This [Bond] is conditional upon a claim being made by [SDK] at any time and as many times as [SDK] may deem fit by way of a notice in writing addressed to [Lonpac] and the same being received by [Lonpac] at 300 Beach Road #17-04/07 The Concourse Singapore 199555 before the end of 90 days from the expiry of this [Bond].
[emphasis in original]”
At first blush, the wording of the bond appears to be relatively clear. It appears to be a “standard” on-demand performance bond, which can be triggered by SDK making a demand in writing as required under the bond on Lonpac.
What was held. Yet Chian Teck managed to restrain SDK’s call on the performance bond. How did Chian Teck do so without relying on either unconscionability or fraud?
How the call was made. The answer is that this case turned on how SDK called on the bond.
When SDK called on the bond, SDK did not indicate what is the basis for its call. The exact wording used by SDK is found in [24], which we set out below:
“1. We refer to performance bond no. Z18BP00047925, which is an irrevocable and unconditional on-demand guarantee issued by you in favour of us (the “Performance Bond”). A copy of the Performance Bond is enclosed[.]
2. Pursuant to Clause 4 of the Performance Bond, we hereby make a claim for the sum of S$1,123,152.55. Please treat this letter as our notice in writing of our claim pursuant to Clauses 4 and 5 of the Performance Bond.
3. Pursuant to Clause 5 of the Performance Bond, kindly let us have payment of the above-mentioned sum within 30 business days of your receipt of this notice. Kindly acknowledge receipt of this letter by signing and returning a duplicate copy to us.
4. This letter does not set out our full position at law and all of our rights and remedies remain expressly reserved.
[emphasis in original omitted]”
As Justice Lee noted at [25], this letter from SDK did not identify the ground on which SDK was making the call. Clause 4 is not a ground for making a demand on the bond: it simply sets out how the demand is to be made.
Why basis of the call important. And as explained by Justice Lee at [22], “… notwithstanding that parties agree that the Bond is unconditional and on-demand, SDK must nonetheless make a claim on the Bond in accordance with the terms set out in the Bond.” (our emphasis added)
As such, as Justice Lee stated at [23]:
“23 There are thus two bases under which SDK is entitled to make a claim under the Bond. The first is under cl 1, where there is a default on the part of Chian Teck, or an honest belief on the part of SDK that Chian Teck is in default. In this situation, SDK is entitled to make a claim and cl 1 states that it may do so “without any proof of actual default”. Chian Teck can only obtain an injunction to restrain payment under such a claim if it can prove that the call was fraudulent, eg, that there was no honest belief on the part of SDK that Chian Teck was in default. The second basis is under cl 3 of the Bond. This is the situation where Lonpac has given 90 days’ written notice prior to the expiry of the Bond of its intention not to extend the Bond. Upon such written notice, SDK can elect to (a) make a claim under the Bond; or (b) direct Lonpac to extend its validity for a further period not exceeding six months, ie, SDK can force a final six-month extension of the Bond. If SDK elects to make a claim under cl 3, there is no requirement for there to be any default on the part of Chian Teck as the clear purpose of this provision is to preserve the security, either by way of obtaining a final extension or converting it to cash.”
Why did it matter?
If SDK had called on the bond pursuant to clause 3, then (as Chian Teck argued) the call was invalid because (in short) SDK was only entitled to call on the bond pursuant to clause 3 if the bond was not extended by Lonpac ([13]).
Conversely, if SDK had called on the bond pursuant to clause 1 (as SDK argued), then whether the bond had been extended by Lonpac (or not) was irrelevant as only fraud could restrain SDK’s call on the bond ([14]).
So, which ground did SDK call the bond on? On the facts of the case, Justice Lee examined the conduct of SDK at [26] – [30] and found that based on the contemporaneous documents and correspondence, SDK’s concern was whether the bond would be extended beyond the original expiry date. Hence, Justice Lee held that SDK had made the call on the basis of clause 3, i.e., that “Lonpac had given notice of non-renewal and SDK elected to make a claim on it.”
In doing so, Justice Lee also noted at [29] that “… nowhere in any affidavit from SDK is there an assertion that the claim was made because of a default on the part of Chian Teck. Indeed, [SDK’s contracts manager] had indirectly admitted that the impending expiry of the Bond was a reason for SDK’s Demand.“
However, as set out in [31] – [35], Lonpac did not validly provide notice of its intention not to extend the bond in accordance with clause 3. The effect of this is that since Lonpac did not validly serve its notice, the bond was automatically extended. Hence, since “… SDK had made the claim on the Bond on the basis of cl 3, but the condition under cl 3 that Lonpac validly serve a notice of non-renewal did not exist, that basis falls and the claim is not valid”
End result. So, the end result was that Chian Teck managed to obtain an injunction restraining Lonpac from paying out on SDK’s call on the bond made on 29 July 2022.
However, SDK was not restrained from making a fresh call on the terms of the bond.
Conclusion. This case is important because it makes clear that how a party calls on a bond is important. If a party calls on the bond in breach of the terms of the bond, this can, in and of itself, be a ground for restraining the call on the bond.
It is also important to note that Justice Lee was prepared to delve into the contemporaneous documents and correspondence between the parties to ascertain the basis for SDK’s call. This suggests that in similar situations, it would not be easy for a party seeking to call on the bond to simply assert that the bond was called on one ground, and not the other. This is likely to be more advantageous to parties who are seeking to restrain a call.
However, it can perhaps be questioned to what extent was this the result of the fact that, as Justice Lee noted at [29] of the judgment, “… nowhere in any affidavit from SDK is there an assertion that the claim was made because of a default on the part of Chian Teck.”
We leave our readers with this food for thought.
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