Banking Law

• Citation: (2021) 22 SAL Ann Rev 128
• Publication year: 2021
• Date: 01 December 2021

I. Performance bonds

A. No preliminary requirement for separate determination or arbitration before indemnity performance bond can be called on

5.1 The Court of Appeal case of AXA Insurance Pte Ltd v Chiu Teng Construction Co Pte Ltd1 (“AXA v CTC”) involved a refurbishment and upgrading project at the Nanyang Technological University (“the Project”) of which Chiu Teng Construction Co Pte Ltd (“CTC”) was the main contractor and QBH Pte Ltd (“QBH”) a subcontractor. Pursuant to the terms of the subcontract, QBH applied for a performance bond in favour of CTC, and this was issued by AXA Insurance Pte Ltd (“AXA”). Disputes arose between QBH and CTC, leading CTC to make a first unsuccessful call on the bond, which need not be discussed here. The subject of the dispute in the current case is the second call on the performance bond by CTC on 13 March 2020. By this time, QBH (the account party) had been put in liquidation, and the action was between CTC (the beneficiary) and AXA (the issuer). It was common ground between the parties that the bond in question was an indemnity performance bond. AXA refused to pay on the bond, arguing, inter alia, that QBH's breach of the subcontract and any loss suffered by CTC had to be established by an independent determination by a court or tribunal in proceedings between CTC and QBH, or by an admission by QBH, before CTC could call on the bond. The Court of Appeal dismissed this argument, deciding that it was not necessary for the beneficiary to present a separate determination or admission before a valid call on the bond could be made. The Court of Appeal upheld the High Court's finding that CTC had sufficiently proven the breach and loss, and that AXA was liable to CTC under the bond.2

5.2 Clause 1 of the bond provided as follows:3

In the event of the Sub-Contractor failing to fulfil any of the terms and conditions of the said contract, we shall indemnify [CTC] against all losses, damages, costs, expenses or otherwise sustained by [CTC] thereby up to … [the Guaranteed Sum] upon receiving your written notice of claim for payment made pursuant to Clause 4 hereof.

The Court of Appeal interpreted this clause to mean that CTC needed only to establish that QBH had breached the subcontract and caused loss to CTC in order to call on the bond. The Court of Appeal pointed out that there was no reference in the bond to a determination by a court or tribunal or an admission from QBH. Breach of the subcontract by QBH and loss to CTC could be proved by other means, not necessarily by way of an independent determination, arbitral award or admission.4 The Court of Appeal took the opportunity to clarify a statement made in the court below, where Lee Seiu Kin J stated that “an independent determination, arbitral award or admission [was] necessary for [CTC] to definitively prove its losses”.5 The Court of Appeal stated that this statement should not be construed to mean that AXA's liability as the issuer would only be definitively established by a determination obtained by CTC (the beneficiary) against QBH (the account party) or an admission by QBH.6 The Court of Appeal explained that, instead, Lee J's intended contrast was between a determination or admission between the beneficiary and issuer (which could be undertaken by the court hearing the application to enforce the bond) on the one hand, and the mere provision of documents on the other, which, “regardless of the volume and specificity, is insufficient to conclusively prove the matter”.7 The Court of Appeal referred with approval to Lee J's observation that:8

… [a] beneficiary under such a bond is always entitled to call on the bond if, in its opinion, it has suffered actual losses. Accompanying such a call will naturally be the provision of sufficient documents and evidence adduced to prove the breach of the underlying contract and the consequential losses suffered. If the guarantor under the bond accepts such documentation and pays the amount secured under the bond, that is the end of the matter. If the documents are not accepted as proof, the parties would inevitably have to proceed to an independent

determination, as in the present instance. … [emphasis added by the Court of Appeal]

The Court of Appeal highlighted that in using the words “in the present instance”, Lee J was stating that he was making that independent determination himself and was not referring to a requirement for a separate independent court or arbitral determination as between the beneficiary and the account party.9

5.3 The decision in AXA v CTC usefully explores the main differences between a guarantee and an indemnity on the one hand, and between an on-demand bond and a conditional bond on the other. In brief, the essential difference between a guarantee and an indemnity is that the guarantor under a guarantee only has a secondary liability, whereas the indemnifier under an indemnity has a primary liability. A secondary liability is one that is subject to the principle of co-extensiveness, in the sense that the scope of the guarantor's liability is affected by the scope of the liability of the party whose obligation is guaranteed, that is, the principal, whereas this principle does not apply in relation to an indemnity.10 The essential difference between on-demand bonds and conditional bonds is that an on-demand bond is payable upon a mere demand or a presentation of documents, whereas a conditional bond is conditioned upon facts, usually that the account party has breached the contract and the beneficiary has suffered loss.11 In AXA v CTC, the parties were in agreement that the relevant bond was an “indemnity bond” and not an on-demand bond. This is consistent with the decision in JBE Properties Pte Ltd v Gammon Pte Ltd12 (“JBE Properties”), where the Court of Appeal decided that a performance bond that was in pari materia with the one in AXA v CTC was an indemnity bond rather than an on-demand bond. In AXA v CTC and JBE Properties, the term “indemnity bond” was used interchangeably with “conditional bond” (and in contrast to “on-demand bond”) to refer to a bond which requires the beneficiary to prove actual loss in order to recover under the bond. Although the Court of Appeal in AXA v CTC adopted the term “indemnity performance bond” to refer to the type of bond in the case before them, the court made clear that it was not necessarily endorsing this terminology. In the view of the Court of Appeal, the legal character of conditional performance bonds, including one in pari materia with the bond in JBE Properties and AXA v CTC, may have to be re-examined to see whether they should be characterised as guarantees or indemnities, but the court did not want to prejudge the

issue.13 The Court of Appeal felt that it was “potentially odd” to describe a conditional performance bond as an indemnity when the obligation to pay under the bond was conditional on proof of breach by the account party and loss suffered by the beneficiary,14 and that the conditional nature of such bonds “could arguably be construed as strong grounds in favour of characterising them as guarantees”.15 The Court of Appeal also suggested that if the classification of conditional bonds were to be revisited, the courts might have to consider how to distinguish between an indemnity and a guarantee where the obligation to pay was conditional upon breach of the underlying contract.16 The Court of Appeal did not think that such re-examination would introduce uncertainty in practice as the legal classification of conditional bonds would not be significant in most cases. A conditional bond would usually require breach and loss to be established regardless of whether the bond was characterised as an indemnity or guarantee.17 Further, regardless of whether an indemnity or a guarantee was involved, the beneficiary could proceed directly to sue the guarantor/surety or the indemnifier without first suing the account party.18 The Court of Appeal was of the view that legal characterisation of conditional bonds would not affect the commercial operation of such instruments in most cases and the courts could address any issues arising in the limited situations where the distinction was relevant.19 These questions will have to be further considered in future cases. It may be that the answer depends on the construction of the individual conditional performance bond concerned: some conditional bonds might be in the nature of guarantees, others in the nature of indemnities, and yet others neither of these. In this connection, it is useful to note that on-demand performance bonds have been said to be distinct from both guarantees and indemnities.20 An argument might be made that conditional performance bonds too are distinct from both guarantees and indemnities: they should not be classified as guarantees as they impose a primary and not a secondary liability, and they should not be classified as indemnities because they are conditional on proof of breach and loss. Given that there is some controversy about whether a conditional

performance bond is to be classified as a guarantee or an indemnity,21 and also that this distinction often has no relevance to the resolution of the cases concerned, one step towards regularising the position could be for the courts and the legal community to stop using the potentially misleading term “indemnity performance bond” to refer to a conditional performance bond. Ultimately, it might be unnecessary to embark on the task of legally classifying a conditional performance bond in individual cases unless the resolution of an issue in the case at hand turns upon the difference between a guarantee and an indemnity.

B. Other issues relating to performance bonds

5.4 A few other 2021 decisions on performance bonds were published on LawNet. The High Court decision of Sompo Insurance Singapore Pte Ltd v Royal & Sun Alliance Insurance Ltd22 (“Sompo v RSA”) concerned a call on a...