On 18 May 2020, the Singapore High Court in CEX v CEY and another [2020] SGHC 100 granted an injunction to restrain a call by an employer on an on-demand performance bond. The High Court ruled that the call was unconscionable as the call involved elements of unfairness and conduct lacking in good faith.

Background

On 9 May 2017, CEX took over a project as its main contractor and provided a performance bond in favour of the employer.

The project was beset with delays, with the employer of the view that the delays were caused by the main contractor’s persistent failure to carry out the contract with due diligence and expedition. On the other hand, the main contractor argued that the delays were beyond its control and in particular the death of the architectural qualified person for the project. Despite there being no new architectural qualified person formally appointed until 27 February 2019, a termination certificate was issued on 19 February 2019.

Relying on the termination certificate, the employer issued a notice of termination on 20 February 2019 and called on the performance bond on 19 July 2019.

The High Court’s Decision

The nature of the performance bond and its terms were not disputed. The performance bond was an on-demand performance bond. The issue was whether an injunction restraining the call ought to be granted on the ground of unconscionability.

Ruling in favour of the main contractor, the High Court found that the call on the performance bond was unconscionable. The High Court declined to decide who was to blame for the delays as this was an issue ultimately for arbitration. However, the High Court highlighted reasons for its position, including the following:

• Employer was responsible for delays
  • The employer was responsible for at least part of the delays faced by the project. The employer failed to appoint an architect as it was obliged to under s 8(2)(a) of the Building Control Act, to replace the original architectural qualified person who took ill on 7 January 2019, before passing away on 24 January 2019. The permits issued under s 6 of the Building Control Act automatically lapsed and there was no valid permit under which the main contractor could continue works legally. The employer having contributed to the delay it complained of, should be restrained from having the benefit of the performance bond.
• Illegality when calling on the performance bond
  • More importantly, the High Court held that the employer was effectively relying on an illegality – there being no valid permit under which the main contractor could continue works legally – and the employer could not penalise the main contractor for failing to continue works when it was illegal to do so. The High Court considered this unconscionable and accordingly restrained the call.

In arriving at its decision, the High Court cautioned that a beneficiary to a performance bond should at all times examine its entitlement and conduct prior to calling on the bond, to avoid a situation where there is basis for a restraint on the call.

The High Court held that unconscionable conduct were commonly found in the scenarios such as:

• Calls for excessive sums
  • The High Court cited a scenario where a beneficiary simply cannot point to any loss suffered and “excessiveness” may be measured either by reference to (a) the total cost of the project or (b) the actual or potential losses allegedly suffered by the beneficiary.
• Calls based on contractual breaches which the beneficiary itself is responsible for
  • The second scenario involves situations where the beneficiary called on the performance bond, relying on alleged contractual breaches which were in truth, caused by or substantially connected to the beneficiary’s own conduct. The High Court cited the present case of the employer’s own conduct as an example of such a scenario, where the employer penalised the main contractor for failing to continue works when it was illegal to do so.
• Calls tainted by unclean hands
  • This may manifest where there is less than full and frank disclosure during the hearing for an injunction or losses which are inflated to justify calling on the performance bond. The High Court noted that it was a “common tactic” in the construction industry to inflate the alleged damages when calling on performance bonds and such conduct was evidence of dishonesty and may very well even qualify as fraud.

Our Comments

By its decision in CEX v CEY and another [2020] SGHC 100, the High Court has provided a timely framework for cases involving applications to restrain calls on performance bonds due to unconscionable conduct and further clarified the approach in deciding such applications. The Grounds of Decision would assist genuine litigants applying to restrain unconscionable calls on performance bonds.