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Singapore High Court: 'not unconscionable' for main contractor to call on performance bond

A recent decision by the Singapore High Court provides useful guidance about the circumstances in which a party will be prevented from calling on a performance bond, an expert has said.16 Jun 2017

The High Court rejected Tactic Engineering's claim that the call on the bond was 'unconscionable'. In his judgment, Judicial commissioner Foo Chee Hock said that Tactic's arguments "fell far short of a strong prima facie case of unconscionability".

On-demand performance bonds are usually built into construction contracts. Often, the employer is entitled to call on the bond on demand, even if the contractor or subcontractor disputes the amount.

Under Singapore law a court injunction to stop payment on an on-demand performance bond will be granted where the call is made fraudulently or 'unconscionably'. The threshold to establish unconscionability and fraud is a high one, and Singapore case law says that the courts would be "slow to upset the status quo and disrupt the allocation of risk which the parties had decided upon for themselves".

Sato Kogyo had been engaged by the Singapore Land Transport Authority to construct the new Mattar MRT Station. Tactic was the subcontractor on the project. By February 2014 Tactic had fallen into financial difficulties and Sato Kogyo agreed to release some additional money to Tactic in exchange for a $1.2 million on-demand bond. Tactic was unable to complete the works. Sato Kogyo thus made alternative arrangements to complete them, at additional expense.

In December 2015, Sato Kogyo claimed approximately $1.3 million from Tactic, stating that it would call on the bond if Tactic did not pay. Sato Kogyo made additional demands in June 2016 and August 2016, eventually calling on the bond in October 2016. Tactic successfully applied for and obtained a court injunction on the basis that Sato Kogyo's call was unconscionable. Sato Kogyo applied to discharge the injunction.

In discharging the injunction, the High Court said that Tactic "essentially brought the court through an accounting exercise, deploying various computations to demonstrate that Sato Kogyo's claim fell short of the bond amount and thus unconscionability was manifested".

The High Court said that it "should not engage in a minute examination of both parties' cases in the present proceedings" and that it was not ""reasonably apparent' that there was unconscionable conduct on Sato Kogyo's part".

Sato Kogyo provided “reasoned responses” to Tactic’s arguments that Sato Kogyo had inflated the amounts to justify the call on the bond,

"The legal principles relating to an argument of unconscionability are not new," said Singapore-based construction law expert Ang Wee Jian of Pinsent Masons MPillay, the Singapore joint venture partner of Pinsent Masons, the law firm behind Out-Law.com. "Neither is it new that the Court expressed caution in restraining a call on an on-demand performance bond. After all, as the Court noted, an on-demand bond is a mechanism by which parties allocate risk".

"However, it is the way in which the court applied such principles – and the language it used – that may provide guidance to practitioners - i.e. in the appropriate factual circumstances, a court would grant an injunction restraining payment on an on-demand performance bond where it is "readily apparent" that a party has excessively inflated the amounts allegedly owed to it to call on a bond, and failed to provide "reasoned responses" for such inflation," he said.