Chiu Teng Construction Co Pte Ltd v AXA Insurance Pte Ltd

• Jurisdiction: Singapore
• Judge: Lee Seiu Kin J
• Judgment Date: 02 November 2020
• Neutral Citation: [2020] SGHC 234
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 603 of 2020
• Published date: 07 November 2020
• Year: 2020
• Hearing Date: 13 August 2020
• Plaintiff Counsel: Lee Peng Khoon Edwin and Sanjana Jayaraman (Eldan Law LLP)
• Defendant Counsel: Ganesh Bharath Ratnam (Gurbani & Co LLC)
• Subject Matter: Credit And Security,Performance bond
• Citation: [2020] SGHC 234

Lee Seiu Kin J: Introduction

This was an application in which the plaintiff sought to trigger the defendant’s liability to pay under a performance bond. While not factually complicated, this required a re-examination of the propositions relating to indemnity bonds set forth 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”). It also required a consideration of exactly how a party calling on such a bond ought to prove its losses. I allowed the application and the defendant has since appealed. I now give my grounds of decision.

Background facts

The plaintiff is a company incorporated in Singapore, in the business of building construction. It was employed as the main contractor in a project for refurbishment and upgrading works at Hall of Residence 4, Nanyang Technological University (the “Project”). On 1 August 2016, the plaintiff appointed QBH Pte Ltd (“QBH”), a Singapore company also in the business of building construction, as a sub-contractor for the Project. Under this sub-contract, QBH was responsible for a large part of the works in the Project.

In connection with the sub-contract, the defendant, an insurance company, issued Performance Bond No. LBP/P1821315 dated 25 July 2016 (the “Bond”) in favour of the plaintiff. This was done at the request of QBH, who was the account party under the Bond. The amount secured under the bond is S$397,687.50.

Disputes subsequently arose regarding the plaintiff’s certification of QBH’s payment claim. The plaintiff also contended that QBH had breached various obligations under the sub-contract and sought payment of monies from QBH. The dispute was then submitted for an Adjudication Determination SOP/AA 342/2018, pursuant to the Building and Construction Industry Security of Payments Act (Cap 30B, 2006 Rev Ed). On 5 October 2018, the adjudicator determined that the plaintiff owed QBH a sum of S$386,859.21.

Notwithstanding this, the plaintiff proceeded to call on the Bond on 14 December 2018 (the “First Call”). In response, QBH commenced originating summons no 1239 of 2018 (“OS 1239/2018) in an attempt to restrain the defendant from paying, and the plaintiff from receiving, any payments under the Bond.

I heard OS 1239/2018 on 3 July 2018 and held that the Bond is in pari materia with the bond in JBE ([1] supra). The Court of Appeal in JBE had held that the bond was an indemnity bond, rather than an on-demand bond. As the plaintiff had, at that time, failed to provide substantive evidence of an actual loss, the First Call was defective, and the defendant had no obligation to make any payments under the Bond.

For completeness, I note that during the course of OS 1239/2018, QBH’s subcontractors had made an application to wind-up QBH. This was granted by Choo Han Teck J in companies winding up no 318 of 2018, who ordered on 23 April 2019 that QBH be placed under liquidation.

Following these events, the plaintiff wrote to QBH’s liquidators on 18 February 2020, setting out various heads of claim purportedly for QBH’s alleged breaches of the sub-contract (the “18 February 2020 Letter”).¹ No reply was received from QBH’s liquidators.

The plaintiff then wrote to the defendant on 13 March 2020 to call on the Bond for a second time (the “Second Call”). In this letter, the plaintiff informed the defendant that it had written to QBH’s liquidators to put them on notice of its claim, attaching the 18 February 2020 Letter. On the basis that almost a month had passed since the 18 February 2020 letter, the plaintiff indicated that it was “of the view that [QBH’s liquidators] accepted [the plaintiff’s] claims against [the defendant] and our claims against [the defendant] have been proven”.²

The defendant responded on 31 March 2020 indicating that the demand for payment was defective and that they were not obliged to make payment.³ In the defendant’s view, this was because beneficiaries under indemnity bonds were entitled to make a demand for payment “only upon proving” that it had suffered losses, damages, costs and expenses as a result of the account party’s breach. Referring to the sub-contract, the defendant noted that the plaintiff had to refer the claim to arbitration and obtain an award thereunder.

The Second Call was also made outside of the range of dates specified within the Bond. On this basis, the defendant also contended that the Second Call on the bond was defective.

Two broad issues thus arise here: whether the plaintiff is entitled to payment of the Bond monies; and whether the Second Call fell within the specified time limits for a demand for payment of the bond monies.

Whether the plaintiff is entitled to payment of the Bond monies

To recapitulate, I held on 3 July 2018 that the Bond is in pari materia with the bond in JBE ([1] supra). This is material because the Court of Appeal in JBE held that the bond there was an indemnity bond, instead of an on-demand bond. An identical bond was also considered in York International ([1] supra), with Andrew Ang J agreeing with the conclusions in JBE. Ang J also summarised the reasoning in JBE as follows at [21]: (a) Clause 1 of the guarantee in JBE stated that BNP Paribas Singapore (“BNP”) was obliged to indemnify JBE Properties Pte Ltd (“JBE”) only against “all losses, damages, costs, expenses or [sic] otherwise sustained by [JBE]” [emphasis in original]. The corresponding provision in the underlying contract stated that JBE could use the guarantee to make good “any loss or damage sustained or likely to be sustained as a result of any breach of contract whatsoever by [Gammon]”. The omission of the phrase “likely to be sustained” indicated that the obligation of BNP under the guarantee was limited to indemnifying JBE against actual losses which it sustained due to Gammon Pte Ltd’s (“Gammon”) breach of the underlying contract (at [19] of JBE). (b) Arguably, cl 5 of the guarantee would not affect the requirement that JBE could only call on the bond if and when it actually suffered loss arising from any breach by Gammon of its obligations under the underlying contract (at [19] of JBE). (c) Where the wording of a performance bond was ambiguous, the court was entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand (at [10] of JBE, analysed further below at [28]–[38] [of York International]).

The words in cl 1 of the Bond are identical in all material particulars to cl 1 of the bonds in JBE and York International. It can therefore hardly be argued that the situation here is distinguishable from JBE as regards the nature of the bond. This was accepted by both parties at the hearing for the present application.

The specific contention of the defendant in this instance is that a beneficiary to an indemnity bond must establish actual losses arising from any breach as a fact before it is entitled to call on the bond. It therefore argued that the provision of documentation is insufficient as such proof of losses must result from any independent determination, arbitral award or admission.

The previous cases have indeed left open the question of exactly how a party calling on a bond ought to prove its losses. For instance, it was stated in JBE at [19] that: “the Bond could be said to be ambiguous as to whether payment under it was conditioned upon demand or upon proof of actual loss arising from [the] breach of contract”.

In my view, the defendant was correct that an independent determination, arbitral award or admission is necessary for the plaintiff to definitively prove its losses. This flows from the nature of the Bond as an indemnity bond. In York International ([1] supra), Ang J considered at [24] that a similar bond was susceptible to four possible interpretations: First, that nothing more than a written claim is required. Secondly, that the written claim must assert a breach of the underlying contract. Thirdly, that the written claim must assert a breach of the underlying contract and sustained losses. Finally, that there must in fact have been a breach of the underlying contract and sustained losses.

Ang J then went on to conclude that:

… The distinction between the first three interpretations on the one hand, and the fourth interpretation on the other, is that the former was conditioned on documents (and would mean that the bond is of the on demand type) while the latter is conditioned on extant facts (and would mean that the bond is conditional in nature). …

A similar point was made in JBE ([1] supra) at [10] that the court would be “entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand”. I respectfully agree with the observations made in the extracts above. A beneficiary under an...