Tech-System Design & Contract (S) Pte Ltd v WYWY Investments Pte Ltd

• Jurisdiction: Singapore
• Judge: Edmund Leow JC
• Judgment Date: 31 March 2014
• Neutral Citation: [2014] SGHC 57
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 785 of 2013
• Year: 2014
• Published date: 11 April 2014
• Hearing Date: 01 November 2013,20 January 2014
• Plaintiff Counsel: Lee Chay Pin Victor (Chambers Law LLP)
• Defendant Counsel: Tay Wei Heng Terence (Terence Tay)
• Subject Matter: Banking,Performance Bonds
• Citation: [2014] SGHC 57

Edmund Leow JC: Introduction

The defendant is a property developer. On 29 October 2009 it engaged the plaintiff as its main contractor for the development of three blocks of apartments at Oei Tiong Ham Park. Under the main contract, the plaintiff was required to and did provide two performance bonds for the sum of $988,888.80 (10% of the total contract price) in lieu of a deposit as security for performance of its obligations.

A dispute arose between the parties, which was subsequently referred to arbitration. Arbitration had not yet begun when on 14 August 2013 the defendant issued demands to the insurer for the total amount of the performance bonds. The plaintiff claimed the calls were unconscionable and filed this application for an injunction to restrain the defendant from calling on the performance bonds “until the determination or outcome of the arbitration hereto”.

I heard the application on 1 November 2013 and dismissed it the same day with costs of $10,000 to the defendant. On 5 November 2013 the plaintiff wrote in to request for further arguments to be made. I agreed and heard the plaintiff’s further arguments on 20 January 2014 but saw no reason to disturb my earlier decision.

I thereupon dismissed the application and awarded costs of the hearing of $4,000 to the defendant. The plaintiff has now appealed and these are the grounds for my decision.

Background to the dispute

Under cl 41 of the main contract, the plaintiff was required to pay 10% of the contract price to the defendant as security deposit for the due performance and observation of its obligations under the contract. In lieu of the security deposit, the plaintiff procured two performance bonds from EQ Insurance Company (“the insurer”): the first, for the sum of $542,128.80 was dated 16 November 2009; and the second dated 4 February 2010 was for the remaining sum of $446,760, for a total of $988,888.80.

The plaintiff commenced work under the main contract in November 2009. The original completion date was set for 3 July 2011. However, in the course of excavation works, there was an incident of soil slippage which resulted in the Building and Construction Authority (“the BCA”) issuing a stop work order on 15 January 2010. On 14 September 2010, the stop work order was lifted and work was recommenced and completed in January 2012.

Following two inspections by the BCA, a temporary occupation permit was finally issued on 13 August 2012.

There were two main areas of dispute between the parties.

The first involved the defendant’s entitlement to liquidated damages under the main contract. This was stated to run at a rate of $6,000 a day beyond the original completion date unless an extension of time was granted. The plaintiff made a first application for extension of time on 8 May 2011 and continued to make further applications as work progressed.

In the event, on 10 July 2013, the architect informed the plaintiff that he was unable to assess several of the plaintiff’s applications for extension of time. An extension of only 56 days was granted in the end. This meant a total of 351 days of delay not covered by extensions of time and according to the defendant, this rendered the plaintiff liable to about $2.1m in liquidated damages. The plaintiff claimed that the architect had wrongly failed to consider its applications for extensions of time.

The second source of dispute was the plaintiff’s obligations under the main contract to remedy defects that arose during the one-year defects liability period. This period expired on 13 August 2013. The architect arranged for a site inspection on 2 August 2013 for the purpose of ascertaining the defects that had to be rectified.

The plaintiff claimed that on that day no inspection was carried out and it was presented with a fait accompli in the form of a list of 567 items of allegedly defective works. The plaintiff’s main complaint was that in failing to carry out the site inspection the architect had compromised his professional independence; in any case, the list of defects would have cost only $14,676 to rectify. The defendant on the other hand claimed the defects would cost $22,000 and further that this was a gross underestimation based only on an incomplete survey.

These two disputes were to be referred to arbitration pursuant to cl 37(1) of the main contract. However the defendant said it was still entitled to call on the performance bonds because it was claiming from the plaintiff more than the sum secured by the bonds. The relevant clauses (cll 5) in the terms of the two performance bonds were materially the same and stated that the insurer was:

… obliged to effect the payment in full forthwith or the direction within 30 business days of our receipt thereof [of a demand on the bond], without requiring any proof that your entitlement to such sum or sums under the Contract or that the Contractor has failed to execute the Contract or is otherwise in breach of the Contract, and notwithstanding the existence of any differences or disputes between yourself and the Contractor arising under or out of or in connection with the Contract or the carrying out of work thereunder or as to any amount or amounts payable thereunder and notwithstanding that such differences or disputes have been referred to arbitration or are the subject of proceedings in Court or is in the midst of any other means of dispute resolution or any request or instruction which may have been given to us by the Contractor not to effect the payment.

It was not disputed that pursuant to cl 5 the defendant was entitled to call on the bonds and the insurer had the corresponding obligation to pay on them “without requiring any proof” as to the defendant’s entitlement to such sums.

Issues before the court and parties’ arguments

The sole issue in this case was whether the defendant’s call on the performance bonds was unconscionable. Unconscionability has been held to include the elements of abuse, unfairness and dishonesty and the applicant for equitable relief has to establish this to the high threshold of a strong prima facie case: BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 (“BS Mount Sophia”) at [19]–[21].

The plaintiff said the call was unconscionable for the following three broad reasons: The architect had wrongly failed to grant extension of time because: he had been unduly pressured by the defendant; if extensions had been given as was clearly warranted, the plaintiff was owed about $1.4m being the final contract price less the sums already paid out; The plaintiff was under the impression that extensions of time would be granted because the defendant had consistently deducted 10% of the liquidated damages they were entitled to at each progress payment which induced the plaintiff to complete the works and which had given the plaintiff the impression that the defendant would not be insisting on the full amount of liquidated damages or would accept or approve extensions of time in regard thereof; The plaintiff completed variation works even after the original date of completion and without a formal order or agreement on extension of time which had resulted in further delays, in the expectation that the extensions of time would be forthcoming; The defendant’s conduct in claiming for over 500 defects to be rectified in the defect liability period was unconscionable because: The defendant had not come up with any evidence to support its claim that it was due more than $22,000 as the cost of rectifying the defects that arose during the one-year defects liability period; Further the architect had wrongly failed to carry out site inspections to ascertain the extent of the alleged defects. The plaintiff further said that if the defendant was not enjoined from calling on the performance bonds it would meet financial ruin and be penalised for acting on good faith, so that it would be unable to make a claim for the sum of $1.4m which it said was owed by the defendant.

The defendant said the call could not be unconscionable because: It claimed to be owed more than the amount secured by the performance bonds and it was therefore entitled to call on them; The defendant said that the final contract sum after variations amounted to $10,322,371.54; a total of $9,200,159.11 had already been paid to the plaintiff but this had to be set off against liquidated damages of $2,106,000 and cost of rectification of at least $22,000. The net result was that the defendant was owed $983,787.57 and this was not inclusive of rectification costs which, the defendant said, had yet to be finally ascertained; The performance bonds were contractual documents that represented obligations as between the issuer and the defendant and could not be affected by any dispute...