Articles

23 August 2022

Introduction

Performance bonds have oft been used in the construction industry as a means of security to assure the performance of contractors or to afford an employer with the means to recover for damages arising out of breaches attributable to contractors. 

In many ways, the evolution of on-demand performance bonds should mean that there would be fewer disputes concerning the beneficiary’s entitlement to call on the bond as compared to a conditional bond. In the case of conditional bonds, it is natural that litigation would arise over the myriad of issues surrounding, for example, the scope of the condition, its phrasing and whether this has been triggered. 

Similar issues do not arise in the case of on-demand bonds, where such pre-conditions are not required to be demonstrated on the terms of the bond before a beneficiary can make its call. However, on the flip side, such an approach can have potentially draconian effects for contractors, who would already have to put up other forms of “security” in the form of bonds or retention sums. As such, the law allows limited circumstances in which a call on an on-demand bond may be restrained. 

In Singapore, apart from an allegation of fraud, a party may seek to enjoin the call on an on-demand bond on the ground of unconscionability.  In general, the threshold for establishing such an allegation is high (i.e. to the level of a strong prima facie case) and a fair body of jurisprudence has developed over the years.  The recent case CEX v CEY [2021] 3 SLR 571 (“CEX v CEY”) is one such case where an injunction on a call was granted.  In that case, the Court also undertook a review of the applicable cases and set out a framework for analysis the unconscionability exception.

Brief facts of CEX v CEY

In CEX v CEY, CEX was the main contractor and CEY was the developer for six strata detached houses. The project’s architectural qualified person was one Mr John Seah.  In early January 2019, Mr Seah unfortunately took ill and was hospitalised. He authorised one Mr Ng Hoe Theong to cover his duties before he passed away.

In mid-February 2019, Mr Ng issued a termination certificate to CEX stating that CEX failed and was still failing to proceed with due diligence or expedition in the construction works. By that time, the project was already beset with delays. Thereafter, CEY issued a notice of termination, relying on the termination certificate and on account of CEX’s “persistent failure to carry out the … works with due diligence and expedition”.

CEX denied any breaches and argued that many of the delays were beyond its control.  It pointed to, amongst other things, the hospitalisation and subsequent passing of Mr Seah.  CEX thus promptly served a notice of arbitration on grounds that, amongst others, its employment had been wrongfully terminated.

CEY then sought to recover losses amounting to just under $4 million arising from CEX’s alleged breaches of contract. CEX refused to pay and CEY called on the performance bond. It is material to note that even up till such time, no new architectural qualified person was formally appointed.

Holding

Ultimately, the Court held that CEX’s call on the bond was unconscionable because CEY itself was responsible for “at least part of the delays faced by the Project”. Moreover, CEY cannot rely on an illegality (namely carrying on construction works absent a valid permit) when calling on a performance bond. This was because the permit to carry out structural works lapsed when Mr Seah was hospitalised and it was illegal to carry on work after.

Framework set out in CEX v CEY

In coming to the decision on unconscionability, the Court set out a framework for unconscionability in the context of the calling of an on-demand performance bond. There are three steps.

1. First, identify the nature of the performance bond. This is a matter of contractual interpretation where it has been decided that the courts will be slow in introducing extrinsic evidence or contexts. The only exception is where there is patent ambiguity or if the plain wording of the contract suggests a meaning inconsistent with the obvious external context.
2. Second, ascertain whether the call falls within the terms of the bond. This rule stipulates that the formal requirements stipulated in the on-demand performance bond must be strictly complied with.
3. Third, evaluate whether the overall tenor and entire context of the conduct of the parties support a strong prima facie case of unconscionability. Only this third step was in issue in the present case.

As a starting point, the Court’s exhortation in CEX v CEY was that the threshold to meet before the Court will exercise its discretion to grant an injunction is a high one.  In fact, the Court broadly affirmed the “merits principle” – i.e. that in determining if an injunction should be granted, the Court will not be involved in a protracted consideration of the merits.

That said, it has been recognised that some examination in the merits can be relevant, for instance where it is shown objectively by the obligor that it had not breached any underlying contract, that would lend weight to its asserts that the beneficiary had acted unconscionably. 

Further, the court cited five non-exhaustive elements of unconscionability that have most frequently manifested in past cases:

1. calls for excessive sums;
2. calls based on contractual breaches that the beneficiary of the call itself is responsible for;
3. calls tainted by unclean hands;
4. calls made for ulterior motives; and
5. calls based on a position which is inconsistent with the stance that the beneficiary took prior to calling on the performance bond.

In spite of the useful articulation of the five elements above, the Court ultimately stressed that this list was non-exhaustive and would probably never be closed.  Further, the weight of each factor will vary from case-to-case depending on the strength of the evidence and the absence of any given factor does not necessarily exculpate the beneficiary’s conduct.

Comments

The case of CEX v CEY did set out a useful framework for the analysis of such cases moving forward.  On the facts, there are also several pertinent considerations for contractors and employers. 

On a superficial reading of the case, a contractor (i.e. obligor of a bond) may argue in favour of restraining a call on the bond by an employer (i.e. the beneficiary) as long as the employer itself was responsible “for at least part of the delays faced”. This will not be difficult to establish in practice especially as issues of delay are often complex and, inevitably, there may be delays caused by both employer and contractor.  If the judgment of CEX v CEY were to be taken at face value, there will invariably be many contractors who will try to absolve themselves of responsibility under a bond by alleging delays “at least in part” by the employer.

However, it bears repeating that every case should stand on its own facts. On the side of an employer, the argument will be that the Court in CEX v CEY did not abandon the “merits principle”. Instead, the Court had expressly identified that “the disputes about who was responsible for the delays faced by the Project were not relevant here.” This was in recognition of the fact that, at this interlocutory stage, the Court should not and cannot undertake the process of allocating blame for the delays. 

Instead, one could argue that the true ratio in this case was that CEY had relied on an illegality here in calling on the performance bond. This was because it would have been illegal for CEX to continue the works in the absence of a duly appointed qualified person, and CEY was simply not capable of insisting that it do so.  In fact, it was CEY which failed to appoint a replacement for Mr Seah and to uphold the call on the bond would effectively have permitted CEY to have benefitted from its own wrong.

Nonetheless, the arguments above (either for the contractor or for the employer) have not been tested and it would be interesting to see how parties can seek to use CEX v CEY as a benchmark for finding unconscionability. If nothing else, the framework provided by the Court in this case will be a convenient and useful reference point for future cases to come. 

Contributed by:

Kelvin Kek - Partner, Allen & Gledhill LLP

Ng Si Ming - Partner, Allen & Gledhill LLP

Alisa Toh - Associate, Allen & Gledhill LLP