7 May, 2015
In CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd & Anor [2015] SGCA 24, the Singapore Court of Appeal allowed a cross-appeal brought by Asplenium Land Pte Ltd against the High Court’s decision that a clause limiting injunctive relief to the ground of fraud amounted to an attempt to oust the jurisdiction of the courts, and was therefore void and unenforceable as against public policy.
Facts
The first respondent, a property developer, engaged the appellant as its main contractor for the development of three blocks of residential flats. Pursuant to the terms of the main contract, the appellant provided an unconditional performance bond of SGD 8.8m (i.e., 10% of the total contract sum). Throughout the course of the project, the appellant’s performance was unsatisfactory and, consequently, the first respondent terminated the appellant’s employment under the contract and called on the performance bond.
The appellant applied to restrain the first respondent’s call on the performance bond on the basis that the call was unconscionable. In response, the first respondent relied on clause 3.5.8 of the main contract which provided that the appellant could not restrain a call on the performance bond, except on the ground of fraud.
The clause in full states:
“In keeping with the intent that the performance bond is provided by the [plaintiff] in lieu of a cash deposit, the Contractor agrees that except in the case of fraud, the Contractor shall not for any reason whatsoever be entitled to enjoin or restrain:
(a) the [first defendant] from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or
(b) the [second defendant] under the performance bond from paying any cash proceeds under the performance bond
on any ground including the ground of unconscionability.”
The High Court at first instance found that clause 3.5.8 amounted to an attempt to oust the court’s jurisdiction and was therefore void and unenforceable as being against public policy. Notwithstanding, the High Court also found that the allegation of unconscionability was not made out on the facts.
The appellant appealed against the High Court’s finding that there was no unconscionability and the first respondent cross-appealed against the finding that clause 3.5.8 was void and unenforceable as being against public policy.
The Court Of Appeal’s Decision
On appeal, the Court of Appeal overturned the High Court’s decision in respect of the enforceability of clause 3.5.8. In so finding, the Court of Appeal clarified that where the clause limits the rights and remedies available to parties, the court will respect their right to mutually agree such terms in their contract. Such limitation clauses will not be viewed as attempts to oust the court’s jurisdiction.
Furthermore, the Court of Appeal also pointed out that on the facts, the contract and the performance bond had been freely entered into and mutually agreed to by the parties and, also, there were other means of recourse open to both parties in the event of a dispute.
Our Comments / Analysis
Performance bonds are issued by an insurance company or bank as a surety to guarantee the satisfactory completion of a project by a contractor. If the contractor breaches the contract, the employer can seek recourse against the performance bond to recoup his losses that arise and/or may arise from the breach. Performance bonds can be conditional or unconditional. In the case of unconditional bonds, or on demand bonds, the position in Singapore is that such bonds are payable on demand and the contractor is only entitled to restrain any demands or calls made provided he can prove fraud or unconscionability. Fraud connotes dishonesty in making of the call and is harder to prove than unconscionability, which generally refers to unfair or reprehensible conduct.
The effect of the Court of Appeal’s decision is to re-focus on the rationale underlying performance bonds, that is, to enable the employer to have quick, ready access to funds to recoup any losses or expenses which may be occasioned by the contractor’s breach. This has to be balanced against the risk of oppressive or abusive calls on bonds, which is the objective of the doctrine of unconscionability. Notwithstanding, this decision enables employers to contract out of the unconscionability doctrine by excluding or limiting the grounds for an injunction to fraud only and this provides a contractual mechanism to allocate risk as between the employer and contractor.
For further information, please contact:
Christopher Chuah, Partner, WongParntership
christopher.chuah@wongpartnership.com
Lay Theng Kua, Partner, WongPartnership
laytheng.kua@wongpartnership.com
