Banking Law

• Published date: 01 December 2013
• Citation: (2013) 14 SAL Ann Rev 95
• Author: POH Chu Chai LLB (Singapore), LLM, LLD (London); Advocate and Solicitor (Singapore).
• Date: 01 December 2013

Performance bond

Conditional bonds

5.1 Before a beneficiary of a performance bond is entitled to receive payment under the bond, he has to make a call on the issuing bank to make payment on the bond. In making a call, the beneficiary has to comply with the terms which allow him to make the call on the bond. Where a performance bond is made payable subject to conditions, the beneficiary may not be able to obtain payment under the bond unless those conditions are met. In York International Pte Ltd v Voltas Ltd[2013] 3 SLR 1142, the plaintiff, York International Pte Ltd, agreed to supply, deliver, test and commission five chillers for a district cooling plant on Sentosa Island, to the defendant, Voltas Ltd. Under the contract, the plaintiff was to provide a performance bank guarantee for 10% of the contract price. Clause 26 of the contract stipulated that the ‘Performance Bank Guarantees shall be unconditional, without any demur, without recourse to [the plaintiff]’. The bank guarantee that was eventually issued stipulated (at [5]) that:

[i]n the event of [the plaintiff] failing to fulfil any of the terms and conditions of the said [Purchase Agreement], we shall indemnify [the defendant] against all losses, damages, costs, expenses or otherwise [sic] sustained by [the defendant] thereby up to the sum of Singapore Dollars five hundred twenty three thousand only (SGD523,000.00) (“the guaranteed sum”) upon receiving your written notice of claim for payment.

On or about 25 May 2011, the defendant informed the plaintiff that some of the motors in the chillers had ceased to function and requested the plaintiff to undertake urgent repairs. The plaintiff duly performed and completed extensive work in reinstating the functionality of the motors. However, the two parties could not agree on what caused the chillers to fail. The dispute between the parties eventually led the defendant to make a call upon the bank guarantee. The defendant wrote to the bank as follows (at [14]):

Please be notified that [the plaintiff] has failed to fulfill certain terms and conditions of the Purchase Agreement dated April 3, 2008 and we therefore invoke the guarantee.

The plaintiff filed an originating summons seeking to restrain the defendant from receiving payment under the guarantee from the bank pending the outcome of arbitral proceedings. Andrew Ang J decided that where a performance guarantee was properly construed as a conditional performance guarantee, a call for payment under the guarantee must at least assert a breach of the underlying contract and state the loss incurred by the beneficiary. The court found that the performance guarantee was conditional in nature and the demand for payment had not complied with the conditions stated in the guarantee. Ang J said (at [38], [39] and [40]):

In sum, the deliberate omission of the word “unconditional”, coupled with the contra proferentem rule, led me to the inexorable conclusion that the Guarantee was conditional in nature and was premised on there in fact having been a breach of the underlying contract leading to loss.

Assuming arguendo that the Guarantee is not conditional in nature, the Guarantee is, at the bare minimum, of a type whereby the written claim must assert a breach of both the underlying contract and of loss incurred. …

The use of “In the event of … we shall indemnify” clearly indicates that the written notice of claim must, at the bare minimum, contain allegations that: (a) the plaintiff has failed to fulfil any of the terms of the underlying contract; and (b) that the defendant has thereby suffered loss. This was not done. The defendant merely stated that the Purchase Agreement was breached but did not go on to further state that it had thereby suffered loss. …

[emphasis in original omitted]

Unconscionable demand

5.2 In Singapore...