Bocotra Construction Pte Ltd and Others v Attorney General (No 2)

• Jurisdiction: Singapore
• Judge: Karthigesu JA
• Judgment Date: 23 May 1995
• Neutral Citation: [1995] SGCA 50
• Docket Number: Civil Appeal No 168 of 1994
• Date: 23 May 1995
• Year: 1995
• Published date: 19 September 2003
• Plaintiff Counsel: Michael Khoo, Josephine Low and Cheah Kok Lim (Michael Khoo & BB Ong) and Ho Chien Mien (Allen & Gledhill)
• Citation: [1995] SGCA 50
• Defendant Counsel: Lee Seiu Kin and Lionel Yee (Attorney General's Chambers)
• Court: Court of Appeal (Singapore)
• Subject Matter: Principle of autonomy of guarantees from underlying contract,Need to establish clear case of fraud or unconscionability,Call for payment on bank guarantee,Credit and Security,Interim injunction to restrain intended call,Civil Procedure,Fraud or unconscionability as exception,Guarantees and indemnities,Injunction to restrain intended call on bank guarantee,Whether balance of convenience test applied in cases involving bank guarantees,Guarantee serving function of performance bond,Interim injunction,Whether guarantee properly construed to be a demand bond,Availability of interim declaratory relief in lieu of injunction,Performance bond,Injunctions,Construction of guarantee,Whether balance of convenience test relevant,Whether proof of default in performance of contract required before guaranteed sum payable,Whether court could examine disputes relating to underlying contract

Cur Adv Vult

This is an appeal against the order of Goh Joon Seng J made on 28 October 1994, dismissing the appellants` application for declaratory relief pursuant to an order made in arbitration proceedings between the parties on 25 February 1994. In a related matter which was concurrently heard before this Court of Appeal as CA 132/94 [reported in [1995] 2 SLR 523 ] (also referred to hereinafter as `the related appeal`), the learned judge had held that the interim order relating to the letter of guarantee No 957/88/875 made by Tun Mohamed Suffian, the arbitrator appointed, was not binding on the respondent because the award was invalid or void. At the conclusion of the hearing, we reserved judgments on both appeals. The factual background in respect of both appeals was similar, and we will refer to the facts as set out in our judgment in respect of CA 132/94. The abbreviated terms and references used in that judgment are also employed here.

The proceedings from which this appeal arose

The present appeal, like the related appeal, arose from a dispute relating to the arbitrator`s order on 25 February 1994 in the following terms:

... I hereby declare that the respondent is not entitled to demand or otherwise take any steps to call for payment of any sum under the letter of guarantee No 957/88/875 dated 13 August 1988 until such time as the respondent`s entitlement to make such or any call for payment under the said letter of guarantee has been determined in this arbitration.

On 22 March 1994, the appellants filed an originating summons praying for declaratory relief in terms and effect which reflect those provided by the arbitrator`s order. The appellants prayed for the following reliefs:

(1) A declaration that the defendant whether acting by itself, its officers, servants or agents of any of them or otherwise howsoever is not entitled until after final award in the arbitration between the abovenamed parties has been made and published to the parties to:

(a) give, furnish or provide any written notice pursuant to the letter of guarantee No 957/88/874 for $31,288,888.80 (the guaranteed sum) dated 13 August 1988 issued by Standard Chartered Bank (the guarantee) to Standard Chartered Bank; and

(b) claim, collect, obtain, acquire or receive the guaranteed sum or any part thereof from the Standard Chartered Bank, its officers, servants or agents or otherwise howsoever.

(2) A declaration that on the true construction of the guarantee and in the circumstances the guaranteed sum or any part thereof is payable only on proof by the defendant of the plaintiffs` default under the contract dated 27 November 1987 made between the plaintiffs and the defendant.

...

(6) A declaration that the arbitrator was and is empowered to make an order pursuant to the agreed SIAC (sic) rules and particularly r 18(g) that the money payable under the bank`s letter of guarantee is property or a thing under the control of the defendant pending the final award and r 20.5.

The present proceedings were heard by Goh Joon Seng J immediately after the conclusion of the hearing in the related appeal. Upon hearing the parties in that appeal, Goh Joon Seng J declared that the order of the arbitrator did not bind the PWD, founding his decision on three grounds: the arbitrator was not seised of the dispute relating to the guarantee, interim declaratory relief was unknown in law, and r 18(g) which the arbitrator relied on as the source of his power to make the order had been misinterpreted by the arbitrator. Consistent with that ruling and his grounds thereof, in dealing with the present appeal, Goh Joon Seng J dismissed the above prayers sought by the appellants and awarded the respondent the costs of both the proceedings.

The appeal

The issues which required consideration in the present appeal did not correspond entirely with those which arose in the related appeal, notwithstanding that the factual background was similar. Where appropriate, we shall make the relevant references to our reasons in respect of the related appeal. In this judgment, we shall deal with the appeal according to the specific prayers sought by the appellants.

(1) Prayer 2 - proof of default as a precondition for a call

In relation to prayer 2, the question was whether proof of the appellants` default in performance was required before the guaranteed sum (or part thereof) under the contract would become payable. The judge below declined to declare that this was the true construction of the guarantee. He held that the guarantee was not subject to any finding of default in performance on the appellants` part by the arbitrator. The judge opined that the guarantee was essentially a demand bond under which the bank would have to pay on demand the amount demanded up to the limit of the guaranteed sum.

On appeal, the appellants contended that the judge below had erred in so holding. First, it was contended that the judge had failed to consider the relevance of the fact that the recital to the guarantee referred to cl 9 of the conditions. The recital states:

... whereas by cl 9 of the conditions of contract, the contractor must provide a bank guarantee for a sum equal to ten per cent (10%) of the contract sum, for the due performance of the contract.

On this basis, the appellants submitted that the contract itself had qualified the right of the respondent to make a demand on the guarantee. Second, cl 1 contained an agreement by the bank to pay the respondent `forthwith on demand any sums not exceeding in the aggregate Singapore Dollars Thirty One Million Two Hundred and Eighty Eight Thousand Eight Hundred and Eighty Eight Cents Eighty only ($31,288,888.80) ... upon receipt of any written notice...`. Clause 5 in turn subjected the guarantee to a condition that a claim had to be made upon the bank by notice in writing, `within six (6) months from the expiry of this guarantee`. On this basis, the appellants submitted that on its face, this is not an unqualified absolute right to demand. Moreover, the determination of the validity of the guarantee was crucial for the purpose of ascertaining whether the respondent has made a claim within the inbuilt limitation period of six months under cl 5. Clause 4 specifies thus:

This guarantee is valid from the date hereof up to the date the engineer issues the maintenance certificate in accordance with cl 55 of the conditions of the contract.

The appellants therefore appeared to maintain that on account of the necessity to refer to the conditions to ascertain the expiry date of the guarantee, the contract and the guarantee were inextricably interlinked and should not be treated as independent contracts.

Finally, it was contended that cl 2 did not make the guarantee an unconditional one. It would only operate after the receipt of the money following the call and must be read to refer to the determination of quantum by the respondent, rather than to the issue of liability. Clause 2 states:

On receipt of the guaranteed sum from us, you shall be entitled to utilized (sic) it to satisfy such liability of the contractor as you may determine, arising from or due to the default of the contractor. The balance of the guaranteed sum, if any, shall be refunded to us.

In short, the appellants contended that the guarantee should not be construed as a demand bond as its terms indicate otherwise.

A preliminary point was raised by the respondent in the written case, raising jurisdictional objections to the appellants` locus standi in such an action. It was submitted that the guarantee is an independent contract between the bank and the respondent, the appellants not being parties to the guarantee. As no arguments in this respect were raised before us at the hearing of the appeal, we shall address our minds only to the submissions as presented.

As regards the substantive issues arising under prayer 2, some analysis of the terms of the guarantee was required at the outset. It was not disputed that the guarantee was, in substance, a performance bond which had been issued by the bank to secure the appellants` due performance under the contract. The tendency of the English courts has been to treat performance bonds as unconditional provided there is a clear statement that the amount guaranteed is payable by the bank simply upon a written demand being made, even though there may be some indications to the contrary elsewhere in the document. In the present case, the judge below adopted the reasoning of the court in . In this case, the bank undertook `to pay the said amount on your written demand in the event that the supplier fails to execute the written performance`. The court held that the reference to the stipulated `event` of default in execution did not alter the fact that the money would become payable upon a written demand being made. The beneficiary of the bond was under no obligation to show a failure to perform by the supplier in order to call for payment. It may be noted that the court held this to be an unconditional performance bond despite the absence of any provision that contractual liability (or default) was to be determined by the beneficiary.

In , Staughton LJ opined that in cases of ambiguity there was `a bias or (rebuttable) presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts` (at p 500). In the case of unconditional bonds, this would simply require the making of a written demand rather than proof of the facts, for example, of default or failure to perform. Ultimately, this raises a question of construction, and of examining the intent of the document. This approach is clearly borne out in numerous cases, including the two cited above. A recent authority for this proposition emanating from a source closer to home is that of the Malaysian Supreme Court in . Peh Swee Chin SCJ, delivering the court`s judgment, opined...