AXA Insurance Pte Ltd v Chiu Teng Construction Co Pte Ltd

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 24 June 2021
• Neutral Citation: [2021] SGCA 62
• Published date: 29 June 2021
• Docket Number: Civil Appeal No 151 of 2020
• Year: 2021
• Hearing Date: 17 May 2021
• Plaintiff Counsel: Ganesh Bharath Ratnam (Gurbani & Co LLC)
• Citation: [2021] SGCA 62
• Defendant Counsel: Lee Peng Khoon Edwin and Jayaraman Sanjana (Eldan Law LLC)
• Court: Court of Appeal (Singapore)
• Subject Matter: Performance bond,Credit and Security

Steven Chong JCA (delivering the grounds of decision of the court): Introduction

Not infrequently, financial institutions, including insurance companies, who issue performance bonds seek to avoid liability on grounds which do not appear on the plain reading of such bonds. In so doing, they purport to invoke various legal principles in aid of their efforts to read defences into such bonds.

It cannot be overlooked that the use of performance bonds is an integral feature of the construction industry. One of the principal reasons for its widespread usage is for the allocation of the risk of non-payment in the event of default. Insurance companies respond to this need by agreeing to issue performance bonds for a fee. However, it is open to the insurance company to define its risk appetite by the terms of the performance bonds. What insurance companies cannot do is to rewrite the bargain between the parties with the benefit of hindsight. This was amply illustrated by the facts of this appeal which was against the decision of the High Court judge (“the Judge”) in Chiu Teng Construction Co Pte Ltd v AXA Insurance Pte Ltd [2020] SGHC 234 (“the GD”). It was therefore unsurprising that the attempt by the insurance company failed and consequently we dismissed this appeal with brief grounds on 17 May 2021. These are our detailed grounds.

Facts Parties

The respondent, Chiu Teng Construction Co Pte Ltd (“CTC”), is a company in the building construction business. It was the main contractor for a project for upgrading and refurbishment works at the Nanyang Technological University (“the Project”). QBH Pte Ltd (“QBH”), presently in liquidation, was also a company in the building construction business. CTC engaged QBH as a subcontractor for the Project on 1 August 2016 under a subcontract (the “Subcontract”). The appellant, AXA Insurance Pte Ltd (“AXA”), is an insurance company. At QBH’s request, AXA issued Performance Bond No LBP/P1821315 dated 25 July 2016 (“the Bond”) in favour of CTC. The Bond was for the amount of $397,687.50.

In the interests of clarity, we begin by defining some of the terms we employ in the course of our analysis. We refer to (a) the party in whose favour a bond is issued as the “beneficiary”; (b) the party who requests the issuance of the bond and who has an account with the party issuing the bond as the “account party”; and (c) the party issuing the bond as the “issuer”. We also refer to the contract between the beneficiary and the account party as the “principal” or “underlying” contract, the performance of which is secured by the performance bond, to distinguish it from any contract between the account party and the issuer and from the bond itself. In these terms, CTC was the beneficiary, QBH was the account party, AXA was the issuer, and the Subcontract was the principal or underlying contract.

Background to the dispute

The dispute in this case centred on AXA’s obligation to pay under the Bond in response to CTC’s call on the Bond, which in turn was predicated on CTC’s claims for breaches of the Subcontract by QBH. To properly situate the present dispute, it is necessary to consider some background facts concerning the relationship between QBH and CTC.

In the course of the Project, a dispute had arisen over QBH’s Payment Claim No 23, which was served on CTC on 25 August 2018. Payment Claim No 23 sought payment of $1,108,739.94 for work done up to 25 August 2018. In Payment Response No 23 dated 4 September 2018, CTC asserted instead that QBH should pay $805,843.13 to CTC. On 14 September 2018, QBH submitted this dispute for adjudication under the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) by way of an adjudication application. On 5 October 2018, the adjudicator determined in an Adjudication Determination that CTC owed QBH a sum of $386,856.21. On 30 October 2018, however, CTC served a Notice of Termination of the Subcontract on QBH.

At around the same time as this dispute over Payment Claim No 23, CTC purported to call on the Bond on 14 September 2018 (“the First Call”). On 9 October 2018, QBH commenced HC/OS 1239/2018 (“OS 1239/2018”) to restrain AXA from making and CTC from receiving any payment under the Bond. On 23 April 2019, QBH was put into liquidation, pursuant to winding-up proceedings in HC/CWU 318/2018. This was filed by Dormakaba Singapore Pte Ltd which is unrelated to CTC. On 3 July 2019, the judge who heard OS 1239/2018 (who was also the Judge below in this case) held that the Bond was an indemnity performance bond and that, as CTC had not provided evidence of actual loss, the First Call was defective. The Judge therefore granted the injunction sought.

On 18 February 2020, CTC wrote to QBH’s liquidators, claiming that QBH had failed to complete the works required under the Subcontract and/or had carried out defective works, and had therefore breached the Subcontract (the “18 February Letter”). Annexed to the 18 February Letter was a breakdown of CTC’s claims against QBH, together with supporting documents. The total amount of losses claimed to have been suffered was $484,108.28. QBH’s liquidators did not reply.

On 13 March 2020, CTC wrote to AXA, purporting to call on the Bond again (“the Second Call”), on the basis of the claims stated in the 18 February Letter. The Second Call was the subject of the dispute in this case. On 31 March 2020, AXA replied that the Second Call was defective and that it was not obliged to make payment.

On 19 June 2020, CTC applied to the High Court in HC/OS 603/2020 (“OS 603/2020”) for an order that AXA make payment of $397,687.50 to CTC pursuant to the Bond, and, further and/or alternatively, a declaration that the Bond’s validity was extended to 24 December 2020.

The decision below

The Judge held that CTC was entitled to payment of the amount secured under the Bond. Following his earlier decision in OS 1239/2018, the Judge found that the Bond was in pari materia with the bonds in JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 (“JBE”) and York International Pte Ltd v Voltas Ltd [2013] 3 SLR 1142 (“York International”) (see the GD at [13]–[14]). The Judge found that the prior cases had left open the question of how a party calling on an indemnity performance bond ought to prove its losses, and accepted AXA’s contention that “an independent determination, arbitral award or admission [was] necessary for [CTC] to definitively prove its losses” (see the GD at [16]–[17]). For the purposes of these grounds, we refer to “independent determination, arbitral award or admission” as “determination or admission”. As we will go on to discuss, however, the Judge’s holding must be carefully understood in its context (see [86]–[87] below).

The Judge disagreed with AXA’s contention that the court could not undertake an independent determination of whether CTC had suffered actual losses, observing that this court had done so in JBE. The Judge reasoned that while the two parties to the underlying contract were present before the court in JBE, the absence of QBH in the proceedings before him did not prevent him from considering and deciding on CTC’s claims. While such a determination was not done in York International, that was because the relief sought was only for a stay pending the completion of arbitral proceedings (which were already afoot). Finally, the mere fact that CTC and QBH had previously entered into an arbitration agreement did not benefit AXA as AXA could not insist on an independent determination but then require CTC to proceed by way of an arbitration. Neither CTC nor QBH had commenced arbitration or could be compelled to do so (see the GD at [21]–[24]).

On the facts, the Judge found that CTC had adequately proved its total losses of $475,940.74 and an additional $8,167.54 due to administrative charges under the Subcontract. He observed that AXA’s counsel was unable to make any submission as to the accuracy of CTC’s claim. However, the Judge was satisfied that there was sufficient evidence of loss which justified the Second Call (see the GD at [26]–[27]). Turning to the issue of the time limits, the Judge found that the time period for AXA’s liability was extended to 24 June 2020, which AXA also accepted. As the Second Call was made before that date, it was made within the validity period of the Bond (see the GD at [32]–[33]). No issue has been taken with the time limits on appeal and we do not need to say anything further about this.

Therefore, the Judge found that AXA was liable to CTC under the Bond for the sum of $397,687.50 plus interest at the rate of 5.33% per annum from 19 June 2020, the date of commencement of OS 603/2020. The Judge also ordered costs fixed at $9,000 (all-in) to CTC (see the GD at [35]).

The parties’ submissions on appeal

It was common ground between the parties that the Bond in this case was an indemnity performance bond (however, see the discussion at [34]–[36] below). On appeal, AXA maintained its argument that QBH’s breach of the Subcontract and any loss suffered by CTC had to be established by a determination or admission before CTC could call on the Bond. On the facts of this case, CTC had not established its claims against QBH by way of a determination or admission, and so AXA was not liable to pay under the Bond. In the absence of such determination or admission, it was inappropriate for the Judge to have proceeded to determine whether CTC had suffered actual loss in this case and to find that it could call on the Bond on the basis of such “proved” loss. It therefore sought an order for the sum of $397,687.50 plus interest at the rate of 5.33% per annum from 19 June 2020 to be refunded to AXA.

In response, CTC argued that there was no requirement at law or in the Bond that breach and actual losses could only be proved by a final judgment or determination. In this case, CTC had proved its losses by way of...