Respecting the role of the performance bond – Court of Appeal reverses decision of the High Court in Singapore

In March 2015, we reported on the decision of CKR Contract Services Pte Ltd -v- Asplenium Land Pte Ltd, ¹ where the Singapore High Court struck down a clause purporting to limit the grounds on which a call on a performance bond could be made. The Court of Appeal has recently reversed that decision.² In this briefing, Rob Palmer and Baldev Bhinder consider the implications for commercial parties.

Performance bonds

As discussed in our earlier briefing, performance bonds serve a vital role, typically in construction projects, for providing access to quick and ready cash to beneficiaries (such as employers) in the event of an applicable default by contractors.

In keeping with the role of a performance bond as being "as good as cash", there are limited grounds on which a call on a bond can be restrained, depending on the governing law concerned. Under English law, a party needs to cross the high threshold of establishing fraud. Singapore law recognises an additional basis for restraining a call on a bond, premised on the grounds of "unconscionability". This has been developed largely to guard against an unscrupulous beneficiary calling on a bond without being entitled to do so.

The decision of the High Court – restrictive clause held unenforceable

In CKR Contract Services Pte Ltd -v- Asplenium Land Pte Ltd and another, the contractor (CKR) sought to restrain a call on the performance bond by the property developer (Asplenium). The performance bond covered the obligations under the construction contract and limited the right to call on the bond to fraud only (the Fraud Clause). In other words, the parties had contractually agreed to exclude unconscionability as grounds to call on the performance bond. The High Court held that the Fraud Clause was unenforceable as it amounted to an ouster of the Court's jurisdiction and was against Singapore's policy in developing the doctrine of unconscionability to guard against abusive calls on bonds. It therefore struck down the Fraud Clause as unenforceable.

Notwithstanding the Fraud Clause being unenforceable, the High Court held that CKR had not on the facts satisfied the threshold required for restraining the call on the bond on the grounds of unconscionability.

The Court of Appeal reverses the decision – restrictive clause held enforceable

Both parties appealed the decision to the Court of Appeal (CA). The CA reversed the earlier decision, holding that the Fraud Clause did not oust the jurisdiction of the Court and hence was enforceable. The parties' intention to limit the grounds of restraining a call on the bond to fraud was therefore respected.

While agreeing that parties cannot contractually agree to oust the court's jurisdiction, the CA held that the Fraud Clause did not have that effect. It was instead a restriction of an equitable remedy. The CA drew parallels with common clauses in contracts that have the effect of excluding or limiting damages claimable by an innocent party in the event of breach and commented that "such clauses have never been treated as being void and unenforceable as clauses seeking to oust the jurisdiction of the court; after all neither party has been denied access to the court as such".

The Australian case of Bateman Project Engineering Pty Ltd and others -v- Resolute Ltd and others was argued before the CA as being an example of a clause that ousted the jurisdiction of the court.³ In that case, a clause in the underlying contract that contained the following wording was held to amount to an ouster:

"Failing resolution by the [plaintiffs] [within] the 14- day period, the [defendants] shall be entitled to proceed with the conversion of the security for the amount claimed and the [plaintiffs] shall not hinder, obstruct, restrain or injunct the Principal from so doing…"

The CA distinguished Asplenium from the Bateman case. The clause in Bateman prevented a party from enforcing its rights (i.e. restraining a call) by precluding it from invoking the jurisdiction of the court in the first place. In the Asplenium case, CKR had in contrast agreed to restrict its rights of restraining a call to fraud only, and in doing so was not precluded from seeking the court's assistance to enforce that limited right.

Practical consequences

In confirming the ability of parties to contract out of the unconscionability ground, the CA's decision reinforces the role of a performance bond in giving employers access to quick and ready funds and addresses concerns that had been raised in response to the earlier High Court decision.

Of course, it remains vital for commercial parties to be alive to differences between jurisdictions, both when negotiating the law to govern a performance bond and when assessing whether to apply for, or to resist, an injunction against a call on a bond.

Our suggestions when drafting or assessing performance bonds include:

• Study the governing law and jurisdiction of the bond so as to ascertain the extent of rights to restrain a call on the bond.
• Consider whether the rights of a party to call on a bond may be contractually restricted as a form of risk allocation between employer and contractor, similar to how certain damages for a breach may be capped or excluded.
• Pay attention to the applicable rules of contractual interpretation, when seeking to limit or exclude grounds for restraining a call. For example, in many jurisdictions, an exclusion clause will be construed narrowly against the party relying on it.

Notes

¹ See: [2014] SGHC 266.

² See: CKR Contract Services Pte Ltd -v- Asplenium Land Pte Ltd [2015] SGCA 24.

³ See: [2000] WASC 284.