Eltraco International Pte Ltd v CGH Development Pte Ltd

• Judge: Chao Hick Tin JA
• Judgment Date: 18 September 2000
• Neutral Citation: [2000] SGCA 51
• Citation: [2000] SGCA 51
• Defendant Counsel: Stanley Wong Hoong Hooi (Jing Quee & Chin Joo)
• Published date: 19 September 2003
• Plaintiff Counsel: Christopher Chuah and Lawrence Tan (Drew & Napier)
• Date: 18 September 2000
• Docket Number: Civil Appeal No 67 of 2000
• Court: Court of Appeal (Singapore)
• Subject Matter: Whether restraint of call on performance bond can be limited to excessive part,Performance bonds,Whether calling on bond unconscionable,Whether breach to be established before calling on bond,Main contractor calling on performance bond in building contract,Banking

(delivering the judgment of the court): This is an appeal against a decision of the High Court refusing the appellants` application for an injunction to restrain the respondents from receiving payment under a performance bond for a sum of $2,438,800 (the bond) issued by an insurer, the QBE International Insurance (`QBE`), pursuant to a building contract entered into between the appellants and the respondents.

Facts

The essential facts giving rise to the problem in hand are largely undisputed. The appellants were the main contractors for the super-structure works of a proposed service apartment cum shops development (`the project`) on lots 30-1, 30-2 and 31 of TS 20, at the junction of Killiney Road/Lloyd Road. The contract sum is $24,388,000 (`contract sum`). The contract between the parties incorporated the 1990 Singapore Institute of Architects Conditions (`SIA Conditions`).

The project was completed on 29 August 1998 and a completion certificate was issued by the architect. Clause 27 of the building contract provides for a maintenance period of 12 months. On this basis the maintenance period would expire on 29 August 1999. However, the contract also provides for an extension of the maintenance period in the following situation:

For defects which occurred at more than two complaints of the same trade over at different place (sic), such liability to extend for a further period of 6 months.

Thus, if the extended maintenance period were to apply, it would only expire on 29 February 2000.

Clause 27(2) provides that within 14 days of the expiry of the maintenance period, the architect would deliver a schedule of defects specifying all remaining defects or faults and the contractors were to make good the same. Under cl 27(4), the architect is empowered, in lieu of rectification works being carried out by the contractors, to direct that there be a reduction in the contract sum. Once all defects have been attended to (or a reduction was directed to be made) the architect would, under cl 27(2), issue a maintenance certificate.

Under the building contract the respondents as employers are entitled to retain up to 5% of the contract sum as retention moneys. On the completion date, the amount so retained by the respondents amounted to $1,219,400. Upon the issue of the completion certificate, half of the retention sum is required to be released to the contractors. Thus, after 29 August 1998, the respondents only retained half the retention sum, ie $609,700.

In the meantime, on 28 August 1998, the appellants submitted progress claim No 32 for $1,605,574.43 being the value of the work done up to completion. Included in this sum is a figure of $200,000, being the value of the balance of variation works assessed by the quantity surveyor (`QS`) to be due to the appellants. However, the architect did not certify progress claim No 32. This was because the QS was of the view that claim No 32 could not be recommended because the defective works had not been fully rectified and the final accounts had yet to be finalised. The QS confirmed this view in his letter to the architect of 21 March 2000. The appellants replied to state that claim No 32 was a claim for interim payment, it being for work carried out before the issue of the completion certificate, and it had nothing to do with the final accounts.

There was further correspondence between the architect, the appellants and the QS on the question of defects, during the period September 1999 to February 2000, on which more will be said later.

In the meantime on 18 February 2000 the respondents, through their solicitors, made a written demand on QBE for the full amount of the bond, namely, $2,438,800. The appellants, through their then solicitors` letters of 21 and 25 February 2000, objected to the respondents` call on the bond. As QBE did not pay on the bond as demanded by the respondents, on 7 April 2000, the latter instituted Suit 129/2000 against QBE to claim for the sum under the bond. In turn on 27 April 2000 the appellants instituted the present action (Suit 214/2000) against the respondents seeking an injunction to restrain the respondents from receiving the $2,438,800 under the bond. The appellants also sought a stay of the action taken by the respondents against QBE. On the same day the appellants sought an ex parte interim injunction. The hearing of that application was adjourned to be heard inter partes. In the meantime the court ordered that no payment out on the bond should be made until the inter partes hearing.

At the hearing, the court granted the injunction sought for by the appellants but limited it to that portion of the demand exceeding $1.6m. In other words, the respondents were allowed to receive only $1.6m under the bond. The appellants are dissatisfied with the partial restrain and have thus appealed against that order. They felt that the respondents should be completely restrained from receiving any sums under the bond.

Terms of the bond

The performance bond issued by QBE to the respondents is clearly a demand bond, as can be seen from the terms thereof, which read:

1 In consideration of you not insisting on the Contractor paying Singapore Dollars Two Million Four Hundred And Thirty Eight Thousand and Eight Hundred Only (S$2,438,800) as a security deposit for the Contract, we hereby irrevocably and unconditionally undertake, covenant and firmly bind ourselves to pay to you on demand any sum or sums which from time to time may be demanded by you up to a maximum aggregate of Singapore Dollars Two Million Four Hundred And Thirty Eight Thousand and Eight Hundred Only (S$2,438,800 [`the said sum`]).

2 Should you notify us in writing at any time prior to the expiry of this Bond, by notice purporting to be signed for and on your behalf or by notice from your solicitors that you require payment to be made of the whole or any part of the said sum, we irrevocably and unconditionally agree to pay the same to you immediately on demand without further reference to the Contractor and notwithstanding any dispute or difference which may have arisen under the Contract or any instruction which may be given to us by the Contractor not to pay the same.

3 We hereby confirm and agree that we shall be under no duty or responsibility to inquire into:

(a) the reason or circumstances of any demand hereunder,

(b) the respective rights, obligations and/or liabilities of yourselves and the Contractor under the Contract or otherwise, or whether there is any dispute between yourselves and the Contractor, or

(c) ...

but that we shall be entitled to and shall rely upon any written demand by you hereunder.

5 We agree that our liability hereunder shall not be discharged, affected or impaired in any way by reason of any modification, amendment or variation in or to any of the conditions or provisions of the Contract or the Contract Works or by reason of any breach or breaches of the Contract by the Contractor, whether the same are made with or without our knowledge or consent. ...

Decision below

The learned judge below held that whether the beneficiary under a performance bond is required to establish a breach before making a call on it must depend on the terms thereof. As far as the terms of the subject bond are concerned, he ruled that they do not require the respondents to establish a breach by the appellants before being entitled to call on the bond. It is a straightforward demand bond.

References were also made by counsel for the appellants to cll 42 and 43 of the contract to contend that the respondents were not entitled to call on the bond as yet. Again, the learned judge did not think that these clauses were applicable; nor should they be construed to modify the terms of the bond.

The trial judge also rejected the argument that the demand on the bond was unconscionable. The court below applied the decision of this court in GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 4 SLR 604 which held that unconscionability is a separate ground, apart from fraud, to restrain a beneficiary from calling or receiving moneys under such a bond. But on the facts he did not think there was anything unconscionable in the appellants calling on the bond, although he was of the view that the call should not exceed $1.6m.

Issues on appeal

Before us, counsel for the appellants repeated the same three main arguments he made to the court below. He contended that the court should have issued an injunction to restrain the respondents from receiving any sum under the bond for the following reasons:

(i) the respondents` right to claim for damages for defects under the contract has not accrued;

(ii) the right to have recourse to the bond for meeting any claim for defects has not accrued; and,

(iii) the respondents` call on the bond was not made in good faith. It is an unconscionable demand.

We shall now consider each of these grounds in turn.

No accrued rights to damages

On this ground, the argument of the appellants is that whether a piece of work is defective, or otherwise, only the architect could decide that. The architect has the power to issue directions/instructions requiring the contractor to make good the defects or, in lieu of rectification, to effect a reduction in the contract sum taking into account the defective works. Reference was made to cll 1(7) and 27(4) of the contract. But most importantly, the appellants contended that the pre- conditions specified in those two clauses permitting deduction from the amounts due to the contractor are not satisfied.

It seems to us that this argument, by itself, is not really a sufficient ground to challenge the propriety of the demand on the bond. The terms of the bond, which we have quoted above, are quite clear. As the learned judge held, this is a demand bond. It does not expressly require the beneficiary to establish any breach on the part of the contractor...