Ryobi Tactics Pte Ltd v UES Holdings Pte Ltd and another and another matter

• Jurisdiction: Singapore
• Judge: Kannan Ramesh J
• Judgment Date: 22 January 2019
• Neutral Citation: [2019] SGHC 11
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 726 and 727 of 2018
• Published date: 17 August 2019
• Year: 2019
• Hearing Date: 27 November 2018
• Plaintiff Counsel: Steven John Lam Kuet Keng and Madeline Choong (Templars Law LLC)
• Defendant Counsel: Ang Minghao, Looi Ming Ming and Goh Ee Hua (Eldan Law LLP),Wu Lennon Leong Chong (Gurbani & Co LLC),Daryl Ong Hock Chye (LawCraft LLC)
• Subject Matter: Building and Construction Law,Building and construction related contracts,Guarantees and bonds,Credit and Security,Performance bond,Whether call on performance bond was unconscionable
• Citation: [2019] SGHC 11

Kannan Ramesh J: Introduction

Originating Summons No 726 and 727 of 2018 (“OS 726” and “OS 727” respectively) were applications by the plaintiff for injunctions to restrain the first and second defendants from calling on various performance bonds or from making payment under those performance bonds, as the case may be. The first defendant was the beneficiary and the second defendants were the issuers of the relevant performance bonds. The questions for determination in both applications essentially related to: (a) whether the relevant performance bond could extend to projects under subcontracts other than the subcontract pursuant to which the performance bond was given, and (b) whether the calls were unconscionable.

After hearing submissions from the parties, I allowed the plaintiff’s applications in both OS 726 and OS 727, save with respect to performance bond GH000284 in OS 727. The first defendant has since filed appeals against the outcome of both applications, and I now give the grounds for my decision.

Background facts

The plaintiff was engaged by the first defendant as a subcontractor for three different construction projects, for which a total of four subcontracts were entered into between the plaintiff and the first defendant. Under cl 5.2 of the respective subcontracts, the plaintiff was required to furnish the first defendant with a performance bond in lieu of a cash deposit. Eventually four performance bonds were issued by the second defendants in OS 726 and OS 727, AXA Insurance Pte Ltd (“AXA”) and Tokio Marine Insurance Singapore Ltd (“Tokio Marine”) respectively. A summary of these projects and the relevant performance bonds is as follows:

Project	Performance Bond	Sum insured	Issuer	Application
Second Changi NEWater Plant (“the Changi project”)	P1589424	$722,683.89	AXA	OS 726
GG017457	$130,000.00	Tokio Marine	OS 727
Jurong Water Reclamation Plant Project (“the Jurong project”)	GG017454	$503,332.80	Tokio Marine
Chestnut Avenue Waterworks Project (“the Chestnut project”)	GH000284	$234,000.00	Tokio Marine

The Changi project had two performance bonds because there were two subcontracts.

All the performance bonds were on-demand bonds and in the form prescribed by the first defendant, containing in all material aspects the following clause:

AND WHEREAS the Sub-Contractor is required under the Sub-Contract to pay … of the total value of the Sub-Contract as a Security Deposit for the performance of his obligations under the Sub-Contract.

Now in consideration of the Main Contractor not insisting on the Sub-Contractor paying … of the total value of the Contract as a security deposit for the said Sub-Contract, we [AXA/Tokio Marine] (at the request of the Sub-Contractor) hereby agree as follows: 1. We unconditionally and irrevocably undertakes and covenants [sic] to pay in full forthwith upon demand in writing any sums or sums that may from time to time be demanded by the Main Contractor up to a maximum aggregate sum of … without requiring any proof that the Main Contractor is entitled to such sum or sums under the Sub-Contract or that the Sub-Contractor has failed to execute the Sub-Contract or is otherwise in breach of the Sub-Contract. Any sum or sums so demanded shall be paid forthwith by us unconditionally, without any deductions whatsoever and notwithstanding the existence of any differences or disputes between the Main Contractor and the Sub-Contractor arising under or out of or in connection with the Sub-Contract or the carrying out of work thereunder or as to any amount or amounts payable thereunder and notwithstanding that such differences or disputes have been referred to arbitration or are the subject of proceedings in court or is in the midst of any other means of dispute resolution.

On 14 May 2018, the first defendant wrote to both AXA and Tokio Marine to call on the four performance bonds. The calls were for the full value of the performance bonds.

Parties’ cases Plaintiff’s case

The plaintiff firstly argued that the calls on the performance bonds were fraudulent and/or unconscionable. The calls were fraudulent and unconscionable because the real reason for the calls on the performance bonds was the first defendant’s dire financial situation, and not because there were defects with the plaintiff’s work. The plaintiff emphasised that it was engaged to carry out temporary earth works for the three projects. The temporary earth works had been replaced subsequently by permanent structures. Accordingly, with the erection of the permanent structures and the removal of the plaintiff’s temporary works, there could no longer be any defects relating to the work performed by the plaintiff.

The Changi project in particular had been completed in August 2016, and the plaintiff had not been notified of any breach of its obligations under the two subcontracts. The plaintiff’s works in relation to the Jurong project had similarly been completed sometime in February 2018, and the first defendant had made no claims save for requests that the plaintiff reinstate the road curbs and paint the road surface. The plaintiff had tried to comply with those requests but could not do so, as the first defendant had failed to respond to certain queries from the plaintiff. Further, even if the plaintiff was required to pay the first defendant for any reinstatement works in relation to the Jurong project, this would only be in the sum of $79,077.02, rendering the call on the full value of the performance bond (GG017454) unconscionable.

As for the Chestnut project, the plaintiff objected to the first defendant’s claim that the plaintiff had breached its obligations and caused losses estimated at over $4.5m, as the works that the first defendant had required the plaintiff to carry out were beyond the scope of the Chestnut project subcontract. The alleged losses caused to the Chestnut project were also a result of the collapse of sheet piles on site, which was caused by the first defendant’s own breaches. In any case, the first defendant still owed the plaintiff a sum of at least $158,502.79 for outstanding invoices and a further $234,000.00 in retention moneys, and as such the call on GH000284 for its full value was unconscionable.

The plaintiff also argued that to the extent the first defendant was seeking to call on all four performance bonds to set off its claims against the plaintiff in respect of the Chestnut project, it was not entitled to do so, as the three subcontracts for the Changi and Jurong projects did not confer on the first defendant the right to call on the performance bonds issued under those subcontracts for losses suffered in relation to other projects. Thus, the first defendant was not entitled to call on the performance bonds for the Changi and Jurong projects to recover losses suffered in relation to the Chestnut project, even though the four subcontracts for all three projects were similarly worded. The first defendant’s reliance on cl 17.1 of the Special Conditions of the subcontracts (“cl 17.1”, see below at [31]) was equally misguided, as the right to set-off therein was limited to moneys due to the plaintiff under the subcontract or other contracts but did not extend to calling on the performance bonds.

Further, the plaintiff argued that the terms of the performance bonds also made clear that they were only meant to secure performance of the plaintiff’s obligations under the respective subcontracts. The plaintiff relied on the decision of the Court of Appeal in Chip Hua Poly-Construction Pte Ltd v Housing and Development Board [1998] 1 SLR(R) 544 (“Chip Hua Poly-Construction”) to argue that performance bonds must be construed within their four corners, and could not extend to other subcontracts between the plaintiff and first defendant. The plaintiff also pointed to AXA and Tokio Marine’s confirmation that they did not as a matter of practice provide cross-guarantee performance bonds.

The second defendants, AXA and Tokio Marine, took positions that seemed to be largely aligned with that of the plaintiff’s. AXA and Tokio Marine pointed out that when the plaintiff approached them to obtain the performance bonds, the proposal pertained to only the specific projects concerned, and as such the performance bonds were issued pursuant to the specific subcontracts for those projects. In other words, the performance bonds were project-specific. AXA also argued that the first defendant’s reliance on cl 17.1 was misplaced, as it was a clause in the subcontracts, to which AXA was not a party, and not the performance bonds. Thus, the first defendant could not rely on cl 17.1 as against AXA and Tokio Marine.

First defendant’s case

The first defendant argued that the calls on the four performance bonds were not unconscionable or fraudulent, and emphasised that they were on-demand bonds, which should be treated as good as cash.

As regards the Chestnut project where the plaintiff was a specialist subcontractor for earth retaining stabilising structure works, the first defendant highlighted that the plaintiff’s incomplete backfilling had caused a sheet pile collapse which in turn led to the Building and Construction Authority issuing an immediate stop-work order that was lifted only about three months later. This caused a delay of at least five months to the Chestnut project. Thus, the plaintiff was liable to compensate the first defendant for all losses flowing from the sheet pile collapse, including liquidated damages for delay and rectification costs, the sum total of which was at least $4,581,463.24.

The first defendant’s argument in substance appeared to be as follows. An on-demand performance bond was as good as or equivalent to cash. The calls on the four performance bonds therefore had the effect of converting the...