JBE Properties Pte

• Jurisdiction: Singapore
• Judgment Date: 03 December 2010
• Date: 03 December 2010
• Docket Number: Civil Appeal No 63 of 2010
• Court: Court of Appeal (Singapore)

JBE Properties Pte Ltd

Plaintiff

and

Gammon Pte Ltd

Defendant

[2010] SGCA 46

Chan Sek Keong CJ

,

Andrew Phang Boon Leong JA

and

V K Rajah JA

Civil Appeal No 63 of 2010

Court of Appeal

Credit and Security—Performance bond—Interim injunction restraining call on performance bond—Unconscionability standard—Rationale and distinction between performance bonds and letters of credit—Determining nature of performance bond which was ambiguous as to whether it was payable on demand

The appellant developer (“JBE”) awarded the construction of a building (“the Building”) to the respondent (“Gammon”). They entered into a contract (“the Building Contract”) whose value was $11.515m.

Gammon's obligations under the Building Contract was secured by a performance bond (“the Bond”) granted by BNP Paribas Singapore (“the Bank”) in favour of JBE. The Bond was for $1.1515m, ie, 10% of the contract price. Clause 1 of the Bond provided that the Bank was obliged to indemnify JBE only against “all losses, damages, costs, expenses or otherwise sustained by [JBE]” as a result of Gammon's breach of the Building Contract. Clause 5 provided that the Bank “shall be under no duty to inquire into the reasons, circumstances or authenticity of the grounds for [a] claim [on the Bond] ... and shall be entitled to rely upon any written notice thereof received by [it] ... as final and conclusive”. It was also provided that the Bank was “obliged to effect the payment required under ... a claim ... within 30 business days of [its] receipt [of the claim]”.

The cladding of the Building turned out to be defective. The cladding defects were described in the completion certificate issued by the superintending officer as “minor”. Before Gammon could rectify the cladding defects, JBE solicited bids from other contractors to do the same. Four bids were received, quoting prices between $2.2m and $2.7m. The bids were made on the basis of replacing the existing cladding of the Building and installing new cladding. JBE accepted the lowest bid and on this and other bases made a call on the Bond.

Gammon applied to restrain JBE's call on the Bond. The High Court directed Gammon to obtain bids for rectifying the cladding defects. The highest quotation obtained was $0.56m. The High Court held that the Bond was an on-demand performance bond and granted an interim injunction restraining the call on the grounds of unconscionability bordering on fraud. The High Court also made certain ancillary orders for the rectification of the works and for a joint tender if the defects remained. JBE appealed.

There were other sums owing between the parties and they proceeded on the basis that, without the $2.2m cost alleged to be necessary for rectifying the cladding defects, JBE would not be able to call on the Bond at all.

Held, dismissing the appeal against the High Court's decision to grant the interim injunction and setting aside the ancillary orders:

(1) It was now well established that, apart from fraud, unconscionability was a separate and independent ground for the grant of an interim injunction restraining a beneficiary from making a call on a performance bond. This was wider than the English position, which required fraud to be clearly proved before a call on a performance bond could be restrained: at [6].

(2) The English position, laid down in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, was influenced by the well-established autonomy principle applicable to letters of credit. The Singapore courts' rationale in departing from the English position laid in the difference between a performance bond and a letter of credit. The letter of credit was a form of payment, and interfering was tantamount to interfering with the primary obligation of the obligor to make payment. In contrast, a performance bond was merely security for the secondary obligation of the obligor to pay damages if it breached its primary obligations. Thus, a less stringent standard could justifiably be adopted in restraining a call on a performance bond. Further, where the wording of a performance bond was ambiguous, it should be interpreted as being conditioned upon facts rather than documents: at [10].

(3) Even where a performance bond was expressed to be payable on first demand without proof or conditions, there was no reason why fraud should be the sole ground for restraining a call. Fraud was often difficult to prove and to adopt it as the sole ground for restraining payment would virtually assure the beneficiary of immediate payment. This would cause undue hardship to the obligor: at [11].

(4) The fact that the beneficiary had sacrificed a cash deposit for a performance bond could not justify a different approach. In principle, the utilisation of a cash deposit provided as security should not be treated differently from a call on a performance bond. While it was practically more difficult to restrain the use of a cash deposit, this would be the case no matter what test was adopted. Moreover, the beneficiary would have had a reason for accepting a performance bond rather than a cash deposit: at [12].

(5) The crucial determining factor vis- -vis the nature of the Bond was cl 1 thereof, which stated that the Bank was obliged to indemnify JBE only against “all losses, damages, costs, expenses or otherwise sustained by [JBE]” as a result of Gammon's breach of the Building Contract. Since the payment obligation of the Bank was so limited, the Bond had the character of a true indemnity performance bond. At the very least, the nature of the Bond was ambiguous, which justified interpreting it as a true indemnity performance bond: at [19].

(6) Given the cladding defects were described as minor and not proven to be otherwise, it was incongruous for JBE to rely on quotations for replacing the cladding of the whole of the Building. Even if this was necessary, the costs were prima facie grossly inflated in light of the quotations obtained by Gammon: at [29].

(7) The appeal should therefore be dismissed on the alternative grounds that (a) the Bond was a true indemnity performance bond and JBE had failed to prove an actual loss that was necessary to recover under such a bond, and (b) even if the Bond was an on-demand performance bond, JBE's call on it was unconscionable given the grossly inflated costs given by it: at [30].

(8) The ancillary orders were not sought by either party and it was not proper for the High Court to have made those others, even if they represented the best way to resolving the issues between the parties: at [31].

Bocotra Construction Pte Ltd v AG [1995] 2 SLR (R) 262; [1995] 2 SLR 733 (refd)

Chartered Electronics Industries Pte Ltd v Development Bank of Singapore [1992] 2 SLR (R) 20; [1999] 4 SLR 655 (refd)

Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 (not folld)

GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 3 SLR (R) 44; [1999] 4 SLR 604 (refd)

IE Contractors Ltd v Lloyds Bank plc and Rafidain Bank [1990] 2 Lloyd's Rep 496 (refd)

Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] 2 SLR (R) 520; [1990] SLR 1116 (refd)

Chelva R Rajah SC (Tan Rajah & Cheah) and Edwin Lee and Dawn Noeline Tan (Eldan Law LLP) for the appellant

Ho Chien Mien and Lim Dao Kai (Allen & Gledhill LLP) for the respondent.

Chan Sek Keong CJ

(delivering the grounds of decision of the court):

Introduction

1 This is an appeal by the appellant, JBE Properties Pte Ltd (“JBE”), against the decision of the High Court judge (“the Judge”) to grant an interim injunction restraining JBE from receiving any money under a performance bond numbered “00001BGG0601600” (“the Bond”) on the ground that JBE's call on the Bond was unconscionable. The Judge's decision is reported in Gammon Pte Ltd v JBE Properties Pte Ltd [2010] 3 SLR 799 (“the GD”). After hearing the parties, we dismissed JBE's appeal against the grant of the aforesaid interim injunction (“the Interim Injunction”), but set aside certain ancillary orders made by the Judge (“the Ancillary Orders”). We now give the reasons for our decision.

Background

2 The background to the present proceedings is as follows. JBE is the developer of an eight-storey residential building at Handy Road, Singapore (“the Building”). JBE awarded the construction of the Building to the respondent, Gammon Pte Limited (“Gammon”), on 19 January 2006. On 3 August 2006, JBE and Gammon entered into a building contract (“the Building Contract”). The value of the Building Contract was $11,515,000.

3 There were various defects in the construction of the Building, and it was in respect of the alleged cost of rectifying some of these defects that JBE made a call on the Bond. Gammon then applied (via Summons No 1224 of 2009 (“SUM 1224/2009”)) for an interim injunction to restrain JBE from receiving any payment under the Bond from the issuing bank, BNP Paribas Singapore (“the Bank”).

4 In the court below, Gammon argued that the Bond was not an on-demand performance bond, but was instead an indemnity performance bond, and, thus, payment under it could only be made upon proof of loss, and not at this interim stage of the proceedings when its (Gammon's) alleged liability for failing to rectify construction defects had yet to be determined. JBE, in contrast, contended that the Bond was an on-demand performance bond. The Judge decided (at [5] of the GD) that the Bond was an on-demand performance bond, and proceeded to consider whether JBE should be restrained from receiving payment thereunder on the grounds of either fraud or unconscionability, the two established grounds under Singapore law for restraining...