[1999] SGHC 196

In the High Court of the Republic of Singapore

[1999] SGHC 196

Suit 460/1999, SIC 1836/1999

Between

Sin Kian Contractor Pte Ltd

… Plaintiff

And

Lian Kok Hong
another

… Defendant

grounds of decision

Civil Procedure — Injunctions; Contract — Contractual terms

This judgment is subject to final editorial corrections approved by the court and/or redaction pursuant to the publisher’s duty in compliance with the law, for publication in LawNet and/or the Singapore Law Reports.

Sin Kian Contractor Pte Ltd v Lian Kok Hong and Another

[1999] SGHC 196

Suit 460/1999, SIC 1836/1999
Lim Teong Qwee JC
31 July 1999

1 LIM TEONG QWEE JC

Performance Bond

The contractor shall within 14 days from the date of award, furnish the employer, an approved banker`s guarantee or insurance bond in accordance with the format in the contract as a security deposit for the due performance and observance of the contract works.

5 (b). the architect issued a termination certificate on 17 March 1999. This was served on the contractor on 18 March 1999 and the employer terminated the employment of the contractor on 19 March 1999.

7 (b). the employer has acted unconscionably in demanding payment.

1 In consideration of the employer not insisting on the contractor paying ten percent of the total value of the contract as a security deposit for the contract, the guarantor hereby guarantees the due and faithful performance of the contract by the contractor. 2 In the event of the contractor failing to fulfil any of the terms and conditions of the contract, the guarantor shall indemnify the employer against all losses, damages, costs, expenses or otherwise sustained by the employer thereby up to the sum of Dollars Two Hundred And Seventy Seven Thousand only ($277,000.00) (hereinafter called `the guaranteed sum`). The guaranteed sum shall be paid to the employer in full immediately upon demand for payment in writing and notwithstanding the existence of any dispute between the employer and the contractor in relation to the contract or any amount payable thereunder.

10 (b). identify the default by reference to the particular terms or conditions of the contract; and

11 (c). prove the `factual existence of a default` but not necessarily the `validity or nature of the default`.

... under cl 2 of the guarantee, we demand immediate payment of the outstanding amount SGD 277,000 (exclude GST 3%) under the building works due to defaults by the contractor, M/s Sin Kian Contractor Pte Ltd within seven (07) days.

14 Cargill International SA & Anor v Bangladesh Sugar & Food Industries Corp [1998] 2 All ER 406[1998] 1 WLR 461. Finally there is the contract between the contractor and the guarantor. If the guarantor pays under the guarantee otherwise than in accordance with its terms it does so at its own peril and may be unable to recover under its contract with the contractor.

20 New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374 where Lee Seiu Kin JC said at [para ] 33:

... the [Court of Appeal] [in Bocotra Construction Pte Ltd & Ors v A-G (No 2) [1995] 2 SLR 733 ] first stated (at p 744) that the weight of authority suggested that the sole exception permitting injunctive relief was fraud and held that there was no difference between the principles to be applied in dealing with attempts to restrain banks from paying and callers from calling for or receiving payment. It is well established that banks cannot be restrained other than for fraud.

I can only conclude that the Court of Appeal had used the term `unconscionability` interchangeably with `fraud`.

22 Bocotra Construction (No 2) Karthigesu JA (delivering the judgment of the Court of Appeal) said at p 744:

The respondent undertook a comprehensive and judicious survey of the relevant case law on restraint of calls or payment on bonds from a variety of common law jurisdictions. Of the various propositions of law suggested by the respondent, four principles may be extracted:

(a) The `autonomy` principle - the guarantee constitutes a separate contract from the underlying transaction. The appellants are not privy to the guarantee. (b) The `cash in hand` principle - reflecting the importance of promoting commercial efficacy and certainty in the use of letters, guarantees and bonds. This ties in with the `autonomy` principle. (c) The `fraud` exception - the sole exception to the `autonomy` and `cash in hand` principles arises where the plaintiff can establish fraud in the circumstances of the call or payment. This permits injunctive relief. (d) There is no distinction between cases where an injunction is to restrain a bank (on payment) or the beneficiary under the guarantee (on calling for payment).

We turn now to consider the statements of Eveleigh LJ in [ Potton Homes Ltd v Coleman Contractors (Overseas) Ltd [1984] 28 Build LR 24] (at p 28) which were relied upon by LP Thean J (as he then was) in [ Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1991] 2 MLJ 229 ] (at p 234). Eveleigh LJ said:

`... in principle I do not think it possible to say that in no circumstances whatsoever, apart from fraud, will the court restrain the buyer. The facts of each case must be considered. If the contract is avoided or if there is a failure of consideration between buyer and seller for which the seller undertook to procure the issue of the performance bond, I do not see why, as between seller and buyer, the seller should not be unable (italics added) to prevent a call upon the bond by the mere assertion that the bond is to be treated as cash in hand.`

Essentially, Eveleigh LJ opined that he did not think the `fraud` exception was the sole basis for an injunction to be granted.

25 Royal Design Studio the contract was for the plaintiff to construct nine units of terrace houses on the defendant`s land and on completion the defendant was to convey 31/2 units to the plaintiff. A performance bond in the sum of $120,000 issued by an insurance company and a personal guarantee of a director of the plaintiff in the sum of $1m were given to secure the due completion of the construction by the plaintiff. Owing to disputes between the parties the contract was terminated by the defendant and the plaintiff applied ex parte for and was granted an injunction to restrain the defendant from calling on the performance bond. The defendant applied for an order to discharge the injunction. LP Thean J (as he then was) said at p 234:

We are not concerned with the `irrevocable nature of the obligation assumed by the relevant bank`; we are concerned with the relationship between the parties under the main or underlying contract they made and the dispute arising from such relationship ... The dispute is only between the plaintiff and the defendant and relates solely to the main or underlying contract made between them. In such case, I do not see why the court should be inhibited from exercising its equitable jurisdiction and restraining the defendant from calling on the bond, if the facts warrant it, merely because the bond is like a letter of credit ... All the relevant facts of the case must be considered. Having considered them, in my judgment, the status quo ought to be preserved ...

27 Bocotra Construction (No 2) . Karthigesu JA said at p 746:

On the evidence, however, there was no allegation or finding that the circumstances were such as to establish fraud on the defendant`s part. In this connection, there was a conscious departure from principle (c) outlined earlier - that the sole exception to the general rule denying injunctions in such circumstances is where fraud is established.

28 Potton Homes the main or underlying contract was for the supply of prefabricated buildings by the plaintiff to the defendant for the due performance of which the plaintiff provided a performance bond. The plaintiff claimed about 90,000 for balance of the price due and this was admitted. It also claimed a further 140,000 for extras and variations which was disputed except as regards 3,300 which was conceded. The defendant counterclaimed about 230,000 for defects. It made a call on the performance bond and received about 68,000 under that. The court below ordered that the 68,000 be paid into a joint account in the names of the solicitors for both parties and this order was discharged on appeal. No fraud was alleged but there was also nothing unconscionable about the defendant being entitled to call on the performance bond.

29 Edward Owen Engineering Ltd v Barclays Bank International Ltd & Anor [1978] QB 159 the underlying contract which was governed by Libyan law was for the supply of green houses by the plaintiff to a buyer in Libya. The contract provided for a confirmed irrevocable letter of credit to be opened in favour of the plaintiff for payment of the price. It also provided for a performance bond to be furnished by the plaintiff. The English bank gave a performance bond to the Libyan bank and the Libyan bank in turn gave a performance bond to the buyer. The letter of credit for the price was not opened and the plaintiff informed the buyer that it accepted the buyer`s conduct as repudiation of the contract. At the buyer`s request the Libyan bank called on the performance bond given by the English bank. The plaintiff failed in its application to stop that. Lord Denning said that the performance bond stood on a similar footing as a letter of credit and the bank issuing it must honour it according to its terms and the only exception was clear fraud of which the bank had notice. See at p 171.

Mr Ross-Munro`s `basic submission` (as he described it) was that there had been in this case no default on the part of the plaintiffs nor even any suggestion of default; both the [buyer] and the [Libyan bank] knew that there had been no default by the plaintiffs, and there could not therefore have been any honest demand by the [buyer] on the [Libyan bank] or by the [Libyan bank] on [the English bank] ... Like Kerr J [in the court below], I am prepared to assume (a) that the plaintiffs are right in saying that the [buyer] failed to comply with their contractual obligation as to the letter of credit; and (b) that as a result the plaintiffs were entitled to treat the contract as repudiated by the [buyer] and to cancel it ... But in my view, even if these assumptions are right, this does not come anywhere near establishing fraud on the part of the [buyer] or the [Libyan bank].

32 Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd [1993] 3 SLR 350 GP Selvam JC (as he then was) distinguished Edward Owen Engineering on the ground that in the case before him the injunction was sought against the buyer to prevent it from making a call on the performance guarantee and not against the party giving it. See at p 353. This does not appear to be consistent with principle (d) referred to in Bocotra Construction (No 2) . See also Brody, White & Co Inc v Chemet Handel Trading (S) Pte Ltd [1993] 1 SLR 65 , a decision of the Court of Appeal. I think in Kvaerner there was again a `conscious departure from principle (c)` that fraud is the sole exception.

GP Selvam JC (as he then was) in Kvaerner Singapore Ltd v UDL Shipbuilding (Singapore) Ltd, opined that the `fraud` exception is not `an immutable principle of universal application`. Relying mainly on Eveleigh LJ`s dicta in Potton Homes, GP Selvam JC found the defendant`s conduct in calling for payment to be `utterly lacking in bona fides` (at p 354B). He opined that the injunction should not be discharged as the defendant had sought `to take advantage of the performance guarantee where by his own volition he (had failed) to perform a condition precedent ...`

34 Edward Owen Engineering .

35 Raymond Construction Pte Ltd v Low Yang Tong & Anor (Unreported) the underlying contract was for the plaintiff to construct a detached dwelling house for the first defendant. A performance bond in the sum of about $40,000 issued by the second defendant, an insurance company, was given to secure due performance of the plaintiff`s obligations. Lai Kew Chai J said at [para ] 5:

At the conclusion of the adjourned hearing on 26 Jan 96, this court observed as follows:

` Bocotra Construction Pte Ltd v AG (No 2) [1995] lays down the rule of law that there must be compelling evidence capable of proving fraud or unconscionability before an injunction may be granted restraining payment under instruments which contain unconditional and irrevocable obligations to pay on demand. The concept of "unconscionability" to me involves unfairness, as distinct from dishonesty or fraud, or conduct of a kind so reprehensible or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party.`

... the conduct of the first defendant from first to last was most unfair and it was against the court`s conscience to have allowed him to insist on his pound of flesh.

37 Bocotra Construction (No 2) the rule in this jurisdiction is that the courts will not interfere with the machinery of obligations assumed by the issuer of a performance bond except in cases of fraud and also in cases where it is unconscionable for the issuer to pay or the beneficiary to call on or to receive payment under the performance bond. I think it is clear that the Court of Appeal approved both Royal Design Studio and Kvaerner and added unconscionability to fraud as exceptions and did not use these terms interchangeably. In Potton Homes Eveleigh LJ said that in principle he did not think it was possible to say that in no circumstances whatsoever apart from fraud would the court restrain the buyer. I respectfully agree and I think Bocotra Construction (No 2) , Royal Design Studio and Kvaerner represent a welcome development of this branch of the law.

... from as early as 10 January 1999, the [employer and his wife] have had on various occasions assumed the initiative in taking on the architect`s job of highlighting alleged defective tiling works to the [contractor].

3.15 Defects and Outstanding Works 3.15.1 All defects and outstanding works as noted during the site inspections on the 20/01/99 and 22/01/99 and other works are to be rectified to the satisfaction of the [employer] and [the architect]. [The contractor] were to submit the schedule of defects no later than noon of 27/01/99.

In view of the above and your poor progress on the rectification of defects works, you are required to submit a schedule of works to be carried out daily, commencing on Monday 1 February 1999 ...

(2) Without prejudice to any right of the employer in an appropriate case to treat the contract as repudiated by the contractor under the general law, the employer may at any time within one month of the receipt of a certificate of the architect (in this contract called a `Termination Certificate`) give Notice of Termination of the employment of the contractor, which Notice shall take immediate effect ... (3) The architect may issue a Termination Certificate on any one of the following grounds: ... (d) If the contractor has wholly suspended work without justification or is failing to proceed with diligence and due expedition, and following expiry of one month`s written notice from the architect to that effect has failed to take effective steps to recommence work or is continuing to proceed without due diligence or expedition, as the case may be. (e) If the contractor has failed or unreasonably delayed in complying with a written direction of the architect requiring the removal and replacement of any work, materials or goods under sub-cl 11(1) or (3) of these Conditions, or with any written direction or instruction of the architect under cl 11(2) of these Conditions, and following receipt of 14 days notice in writing from the architect has failed to take any effective steps to do so. (h) If the contractor has refused or failed following one month`s written notice by the architect to comply with any written direction or instruction of the architect which he is empowered to give under any clause of these Conditions.

Lim Teong Qwee JC

Glenn Cheng (Myint Soe Mohamed Yang & Selvaraj) for the plaintiff
Gan Kam Yuin and Rodney Keong (Bih Li & Lee) for the first defendant