Case Note

Citation(2014) 26 SAcLJ 280
Published date01 December 2014
Date01 December 2014

THE PRINCIPLE OF GOOD FAITH IN THE ENFORCEMENT OF PERFORMANCE GUARANTEES

bs Mount Sophia Pte Ltd V Join-aim Pte Ltd [2012] 3 Slr 352

This case note analyses the Singapore Court of Appeal's decision in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd[2012] 3 SLR 352 and its implications for Singapore's jurisprudence on performance guarantees payable on-demand.

I. The facts, litigation and decision

1 BS Mount Sophia Pte Ltd (“Mount Sophia”) (a property developer) employed Join-Aim Pte Ltd (“Join-Aim”) (a builder) to construct a residential condominium in Singapore. As security for the performance obligations under the contract Join-Aim provided a performance bond payable on demand. A dispute arose between the parties relating to the time for completion of the construction works. Mount Sophia made a call on the bond alleging that it was entitled to liquidated damages from Join-Aim for delay in the completion of the works allegedly caused by Join-Aim. Join-Aim argued that Mount Sophia was not entitled to any liquidated damages because the delay certificate was not issued in accordance with the contract and that any delays were caused by Mount Sophia or its consultants. One of the preconditions that had to be fulfilled before the architect would certify that the works were complete and issue a completion certificate was that the electrical portions of the works had to pass certain tests. In order for the tests to be carried out the proper electrical connections and cables were necessary. Join-Aim argued that there had been indecision as to the necessary power specifications on the part of Mount Sophia and its consultants. The approved electrical working load under the contract was 276kVA; however, following various inspections and recommendations from Mount Sophia's consultants, this was subsequently varied to 138kVA. As a result of the time taken for this variation there was a delay in the installation of the particular electrical cables necessary to carry the specified electrical load. This in turn led to a delay in the subsequent testing of the power grid unit. It also argued that the demand under the guarantee was made in bad faith and for a collateral purpose because it was made in retaliation to the request for arbitration. It further argued that it was unfair for Mount Sophia to call under the guarantee when a progress claim remained due and outstanding.

2 The High Court judge ordered the interim injunction restraining Mount Sophia from calling under the guarantee to stand. The order was made on the ground of unconscionable conduct on the part of Mount Sophia calling under the guarantee. Referring to an e-mail on 4 October 2010 regarding the backdating of the completion date which resulted in Join-Aim incurring liquidated damages which formed the substantial basis of the call on the performance guarantee the High Court stated that:1

This exhibited a strong prima facie case of unconscionability and I was concerned that this was an abusive call on the bond. As I stated above (in [27]–[29]), the cross allegations of breaches of contract fell to be dealt with in the arbitration proceedings and so I did not consider them in coming to the conclusion that the 1st defendant acted unconscionably … I also kept in mind the oft repeated warning that the courts should guard against unnecessarily interfering with contractual arrangements freely entered into by the parties … Having considered this, I was of the view that the parties did not enter into a contract where the completion date could be, without good reason, unexpectedly pushed back by the Architect after having been previously confirmed by him.

It follows that the courts should be slow to intervene with contractual arrangements between commercial parties, and hence should respect the freedom of contract between the applicant and the beneficiary who are parties to the underlying contract. However, in circumstances where the conduct of the beneficiary calling under the guarantee evidenced unconscionability2 the court may look into the nature of the underlying contractual arrangement and/or breaches of contract between the applicant and the beneficiary. Thus, the High Court affirmed the Singapore position that judicial intervention is necessary to restrain abusive calls amounting to unconscionability.

3 Mount Sophia appealed to the Court of Appeal. Dismissing the appeal, the Court of Appeal was of the view that there was a strong prima facie case of unconscionability justifying the continuance of the

injunction restraining the call under the guarantee. Andrew Phang Boon Leong JA, delivering the grounds of decision, stated that:3

… it is settled law that unconscionability, as distinct from fraud, is a ground upon which the court can grant an injunction restraining a beneficiary of a performance bond from calling on the bond.

4 However, the Court of Appeal came to a finding of unconscionable conduct on the part of the beneficiary calling under the guarantee after taking into account a far broader set of facts than the High Court. The reasoning of the Court of Appeal states as follows:4

The 4 October 2010 e-mail per se, no matter how robust a peg it was, was not, in our view, sufficient to establish a finding of unconscionability. It was far more important to read the 4 October 2010 e-mail in the context of the sequence of events at the time as well as in relation to the exchange of correspondence between the parties in order to ascertain whether a strong prima facie case of unconscionability existed in the context of the present appeal.

Thus the Court of Appeal's reasoning indicate that the presence of unconscionability cannot be decided on a single piece of evidence read without the benefit of the entire context surrounding the demand under the guarantee —“the entire chronology of the case, viewed in relation to all the relevant factors (set in their context)”,5 that established a strong prima facie case of unconscionability on the part of the beneficiary calling under the guarantee. With reference to the events relating to the power grid unit testing the Court of Appeal noted that “these events cast a shadow over the appellant's bona fides in so far as its call on the Bond was concerned”.6 In taking into account these events leading to the call under the guarantee the Court of Appeal was careful not to make any findings as to the merits of these matters relating to the underlying contract between the parties, but emphasised its role “to be alive to the lack of bona fides” in those matters.7

II. Analysis of the decision

A. An unconscionable call — A call made in bad faith

5 The Court of Appeal's decision is to be welcomed, not only in its affirmation of unconscionability as a separate ground from that of fraud for restraining the beneficiary calling under the guarantee, but also in providing some clarity on the substantive content of the concept of unconscionability in the context of performance guarantees payable on demand.8

6 The meaning of unconscionability in the context of performance guarantees can be distinguished from the general contract law doctrine of unconscionable conduct which vitiates the consent to enter into a contract.9 In a contractual setting exploitation of a person's special vulnerability amounts to unconscionable conduct; hence, there are two key components that underpin this notion —“power” and “vulnerability”. In the context of performance guarantees it simply means lack of bona fides on the part of the beneficiary calling under the guarantee. The Court of Appeal noted this fundamental difference and provided a detailed discussion of the meaning of unconscionability in the context of performance guarantees.10

7 By way of comparison, it is to be noted that the previous case law has indicated the types of behaviour of the beneficiary that would be caught by the concept of unconscionability rather than an account of its constituent elements. For example, in Min Thai Holdings Pte Ltd v Sunlabel Pte Ltd,11 it was held that a demand under a guarantee stemming from non-delivery of goods due to natural disasters despite a force majeure clause in the underlying contract amounts to unconscionable conduct; in GHL Pte Ltd v Unitrack Building Construction Pte Ltd12 (“GHL”), it was held that in the light of the revision of the value of the contract, demand under the performance guarantee for the full amount amounts to unconscionable conduct; and in JBE Properties Pte Ltd v Gammon Pte Ltd13 (“JBE Properties”), it was

held that prima facie gross exaggeration of the costs of rectification in support of the beneficiary's call under the guarantee amounts to unconscionable conduct. The judicial pronouncements in Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of HRH Sheikh Sultan bin Khalifa bin Zayed Al Nahyan14 (“Dauphin Offshore”) and Eltraco International Pte Ltd v CGH Development Pte Ltd15 provide some guidance in understanding the defining elements of unconscionable conduct in the context of demand guarantees. These cases indicate that in the context of performance guarantees unconscionability is just one type of unfairness. These cases also suggest that a beneficiary's conduct in calling under a performance guarantee that is so reprehensible or lacking in good faith would constitute unconscionable conduct on his part and that the existence of unconscionability depends largely on the facts of each case.

8 In relation to the elements that constitute unconscionability in the context of demand performance guarantees Phang JA in the present appeal observed as follows:16

Unconscionability is a distinct and separate ground from fraud, and as stated earlier (at [19]), includes conduct such as unfairness and abuse that are broader than the conduct that would constitute fraud. In other words, the availability of unconscionability acknowledges that conduct exhibited by the beneficiary other than fraud might be...

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