INJUNCTING CALLS ON PERFORMANCE BONDS: RECONSTRUCTING UNCONSCIONABILITY

Citation(2003) 15 SAcLJ 30
Date01 December 2003
Publication Date01 December 2003
AuthorARVIN LEE
Introduction

1 At English common law, fraud is the sole ground for restraining a beneficiary from calling on a performance bond or a surety from paying out on the same.1 The position in Singapore diverges from the English position. The most authoritative assertion of the divergence emanated from the Court of Appeal in GHL Pte Ltd v Unitrack Building Construction Pte Ltd and Another,2 where LP Thean JA (delivering the judgment of the Court) held unequivocally3 that unconscionability exists as a separate ground (the other being fraud) for restraining a beneficiary of a performance bond from enforcing it.4

2 It is evident that the additional limb of ‘unconscionability’ plays a pivotal role in the decision-making processes of those who would call on (or resist such calls on) performance bonds. It has taken on added practical significance in the recent regional economic downturn, the precursor of an increased number of calls on performance bonds in the construction industry.5

3 As such, the divergence has interested both practitioners and academics. However, the Singaporean courts have not provided enough concrete guidance on what constitutes unconscionability and commentators have similarly failed to do so in sufficient depth or to provide a sound normative basis to guide the divergence to maturity.

4 The purpose of this article is to provide a basic framework for evaluating the proper scope of unconscionability. Ancillary to this objective, it offers a reasoned case for the circumscribing of this new ground to instances of patently oppressive calls. This article approaches these tasks in two parts. Part I reviews the causes that have prompted the Singapore judiciary on the road to divergence, as well as the critiques of the divergence. It then shows that both the judicial pronouncements and the current critical commentary may have missed the point in that both have based themselves on two inconsistent frames of reference that should have been considered in their totality. A comprehensive treatment would have taken into account the full spectrum of possible call situations, from the patently abusive call on the one end to the call that has already been anticipated and the risk factored into the contract price on the other.

5 Part II shows that the divergence is critical only when fraud is absent and that the scope of unconscionability therefore has to be elucidated in tandem with that of fraud. This is a subtle dimension that has been missed in the debate thus far. On this analysis, it takes the debate a step forward and considers what unconscionability

should actually entail. The analysis also draws comparative lessons from Australia, where the Victorian Supreme Court in Olex Focas Pty Ltd v Skodaexport Co Ltd6 had in effect laid down similar grounds for granting injunctions. Drawing on commentary of that case, it then suggests that both the courts and their critics can be reconciled if unconscionability is treated not as a broad policy factor underlying a cause of action, but as a ground pertaining narrowly to clearly oppressive calls.

I Divergence of Singapore Law: Causes and Commentary Reviewed

6 It is not within the scope of this article to go into an exposition of the line of cases bringing about the divergence. This has been carried out comprehensively elsewhere,7 and for the purposes of its remit, this article isolates the causes for such divergence, and thereafter, briefly reviews the major lines of criticism of the case-law. Such an analytic trajectory would be more instructive in understanding why the Singaporean judiciary embarked on this enterprise, and in aiding critical evaluation of the divergence.

Causes

7 Of all the Singaporean decisions that have come from the High Court and the Court of Appeal in this area, the most candid and substantial indication of the reasons for the divergence is to be found in the LP Thean JA’s cost-benefit analysis in the Court of Appeal’s decision in GHL Pte Ltd v Unitrack Building Construction Pte Ltd and Another, which merits quoting in full:

“We agree that performance bonds are used frequently in the construction industry; that they are provided by and to parties who deal at arm’s length; that the use of performance bonds has resulted in substantial benefits to the parties and also in savings; that the courts should give effect to the intention of the parties; and that the law in relation to performance bonds should be placed on ‘a clear and unambiguous footing’ so that they could be accepted by parties whether in Singapore or abroad. [a]But, with respect, these are not the points involved with which we are concerned. [b]We are concerned with abusive calls on the bonds.

It should not be forgotten that a performance bond can operate as an oppressive instrument, and in the event that a beneficiary calls on the bond in circumstances, where there is prima facie evidence of fraud or unconscionability, the court should step in to intervene at the interlocutory stage until the whole of the circumstances of the case has been investigated. [c] It should also not be forgotten that a performance bond is basically a security for the performance of the main contract, and as such we see no reason, in principle, why it should be so sacrosanct and inviolate as not to be subject to the court’s intervention except on the ground of fraud. [d] We agree that a beneficiary under a performance bond should be protected as to the integrity of the security he has in case of non-performance by the party on whose account the performance bond was issued, but a temporary restraining order does not prejudice or adversely affect the security; it merely postpones the realisation of the security until the party concerned is given an opportunity to prove his case…”8

8 It encapsulates the two major concerns of the courts in recent years: first, the possibility of abusive and oppressive calls: [b] and [c], and second, the commercial context of the construction industry, where the owner would commonly provide finance to the contractor only when a performance bond was given as quid pro quo, and the parties cannot be said to have been dealing at arm’s length.9

9 The first concern apparently is the primary and overriding one. Unconscionability is very much a matter within a court’s equitable jurisdiction and hinges largely on the facts particular to each case. By definition, the clarity and unambiguity His Honour speaks of at [a] would undoubtedly be reduced, thereby suggesting that these countervailing factors are secondary to protection of abused and oppressed debtors.10

10 The second, alluded to at [d], underlies a theme that courts and commentators have long grappled with, — whether there is indeed symmetry between letters of credit and performance.11 Orthodoxy states that injunctions to restrain calls on obligations assumed by banks are granted only when fraud exists because they are not only collateral to,12 but independent of13 the underlying obligations between merchants. This has been held by the English Court of Appeal to apply with equal force to performance bonds in Edward Owen Engineering Ltd v Barclays Bank International Ltd and Another14 on the premise that ‘the performance guarantee stands on a similar footing to a letter of credit’.15 It is outside the

scope of this paper to evaluate the appropriateness of this analogy.16 The point to be made is that the GHL case has repudiated this premise: it holds that unlike letters of credit, performance bonds are not fully autonomous from their underlying contracts, but essentially securities for the latter.

The Current Commentary

11 The main analytical divide in the commentary to date pertains to the necessity and wisdom of the addition of the unconscionability ground. The divide is based on two considerations that are seemingly incommensurable with each other: equity and commercial certainty.

12 Hence while some felt that the courts were indeed fulfilling their mandate of doing justice to the parties before it,17 others expressed grave doubts as to the wisdom of introducing the notion of unconscionability when the very raison d’être of performance bonds was to provide immediate secured payment for contractual damages: would this not herald a return to the days of other forms of security that the performance bond was meant to supersede?18 They further argue that often, the debtor, who has taken legal advice and understands the risks involved, has actually freely undertaken to grant the bond; it would be unwise, and unsupported by legal principle, for the courts to ‘intervene and assist him

to go back on his promise when circumstances become unfavourable to him and he decides to go against what he originally contracted with the [beneficiary] to do’.19

13 On the practical dimension, three points have been made regarding the alternative ground. Firstly, it presents the danger of the court having to make an assessment on the basis of affidavit evidence, and in the absence of corroborative evidence, it would be most difficult to choose which of the conflicting versions of the factual matrix in the affidavits it ought to believe. If the courts were to conduct a full inquiry, which is time-consuming by definition, it would be antithetical to one of the most important purposes of the bond — that of letting the beneficiary immediately realise the moneys secured under it.20

14 Secondly, its practical advantage is attenuated when one considers that the fears of oppression and unjust enrichment are unjustified in the light of the fact that implicit in the nature of a bond that there would be an ‘accounting’ between the parties, such that payment under the bond would be commensurate to the actual loss suffered by the beneficiary.21

15 Thirdly, even those who agree, in principle, with the introduction of unconscionability as a separate ground and feel that the divergence would promote equitable outcomes have...

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