Shanghai Electric Group Co Ltd v PT Merak Energi Indonesia and another

JurisdictionSingapore
CourtHigh Court (Singapore)
JudgeLee Seiu Kin J
Judgment Date06 January 2010
Neutral Citation[2010] SGHC 2
Citation[2010] SGHC 2
Docket NumberOriginating Summons No 273 of 2009
Hearing Date31 March 2009,09 March 2009,26 May 2009,13 August 2009
Date06 January 2010
Defendant CounselHri Kumar Nair SC, Tham Feei Sy and Kristine Ang Li Shan (Drew & Napier LLC)
Plaintiff CounselChristopher Chuah, Cindy Lim and Joanna He (WongPartnership LLP)
Published date14 January 2010
Subject MatterConflict of Laws
Lee Seiu Kin J :

This is an application by the first defendant (“PT Merak”) to set aside an ex-parte injunction (“the Injunction”) that I granted on 9 March 2009 to the plaintiff (“Shanghai Electric”). The Injunction ordered that PT Merak be restrained from receiving any monies from the second defendant (“the Bank”) pursuant to a call made on 6 March 2009 (“the Demand”) by PT Merak on the Advance Payment Security No 065-311-1-00479-0(001) (“the Bond”) issued by the Bank in favour of PT Merak, and from making any further calls thereon until further order.

This case involves an interesting point of law that has not arisen in previous decisions of the courts pertaining to on-demand bonds: whether Singapore law is the applicable law in an application to restrain a call on an on-demand bond which provides that English law is the governing law.

Background

Shanghai Electric is a company incorporated in China and is in the business of designing, manufacturing, sale and supply of, inter alia, equipment used in the generation, transmission and distribution of power. PT Merak is an Indonesian company with plans to commence operations in power plant development and management in 2010.

By a contract dated 10 August 2007 (“the Contract”), Shanghai Electric was engaged by PT Merak for the design, engineering, manufacturing, procurement, construction, start-up, testing, commissioning and completion of a 2 x 60 MW coal fired electricity and steam generating power plant (“the Power Plant”) located in West Java, Indonesia, for the sum of US$108m (“the Contract Price”). On 22 January 2008, PT Merak and Shanghai Electric (referred to collectively as “the Parties”) entered into an addendum to the Contract (“the Addendum”) which amended several clauses of the Contract.

The Contract provided for PT Merak to pay Shanghai Electric an advance payment of 10% of the Contract Price (“the Advance Payment”) amounting to US$10.8m. The Advance Payment was a condition precedent for the issuance of the notice to proceed. In turn, s 7.7(a) of the Contract required Shanghai Electric to procure the Bond for the sum of US$10.8m in favour of PT Merak. This was performed on 20 November 2007 with the issue of the Bond for the sum of US$10.8m by the Singapore branch of the Bank. On 1 April 2008, PT Merak effected payment of the sum of US$10.8m to Shanghai Electric. With this, Shanghai Electric commenced work under the Contract.

Under the Bond, the Bank undertook to pay to PT Merak the sum of up to US$10.8m (which is the amount of the Advance Payment) upon receipt of:

the Owners’ first written demand stating

the amount to be paid to the Owner, that such amount is due to the Owner pursuant to the Agreement, and that notice of default was previously given to the Contractor. Essentially, the substantive condition for payment was a letter by PT Merak to the Bank stating the amount to be paid, that this was due to PT Merak pursuant to the Contract and that Shanghai Electric had been given notice of default. This is the nature of an on-demand bond: that it is payable upon demand, often accompanied by a statement by the beneficiary as to the existence of a certain set of facts.

On 2 February 2009, PT Merak issued to Shanghai Electric a “Notice of Contractor Default” pursuant to s 19.2.2(b) of the Contract. PT Merak alleged that since 10 August 2007 (the date of the Contract), “very little progress was made on the construction of the Power Plant. Apart from the temporary site office, temporary warehouse, temporary site roads, test pilings, excavation and some lean concrete (levelling concrete) for the foundations of the Boiler and Turbine Buildings, there is nothing else on site. Significantly, [Shanghai Electric] failed to complete the work in respect of Payment Milestones 1 to 5. Further, [PT Merak] also encountered numerous difficulties with [Shanghai Electric]. Although [PT Merak] tried to resolve these difficulties through meetings and correspondence, this proved futile”.

On 11 February 2009, Shanghai Electric sent a letter (“the first Letter”) to PT Merak stating that: Shanghai Electric required more than the 10 days from receipt of the Notice of Contractor Default to prepare the full Contractor Remedial Plan, due to the length of the Notice of Contractor Default; a detailed reply from Shanghai Electric in respect of the Contractor Defaults set out in the Notice of Contractor Default will be furnished to PT Merak within 2 days from 11 February 2009; and the portion of the Contractor Remedial Plan relating to the “NCR and Remedial proposal” is set out in the attachments to the letter of 11 February 2009.

This was followed by a second letter from Shanghai Electric dated 13 February 2009 (“the second Letter”) setting out its response to various items of alleged “Contractor Defaults” contained in the notice of contractor default. On 16 February 2009, PT Merak replied – acknowledging receipt of the “Contractor Remedial Plan” attached to the letter of 11 February 2009 and stating that it was “currently reviewing the Contractor Remedial Plan and will revert with [its] response in accordance with s 19.2.2(b) of the Contract”.

On 19 February 2009, PT Merak sent a second letter to Shanghai Electric, stating, amongst other things, that “until such time as [PT Merak has had] the opportunity to evaluate [Shanghai Electric’s] Contractor Remedial Plan, [Shanghai Electric’s] request for a meeting is unnecessary”. By a letter dated 27 February 2009 (“the third Letter”), Shanghai Electric furnished further details of the Contractor Remedial Plan to PT Merak.

On 6 March 2009, three events occurred: first, PT Merak delivered a notice of termination to Shanghai Electric to terminate its appointment under the Contract (“the Notice of Termination”); second, Shanghai Electric wrote to PT Merak, accepting the termination and alleging that such termination amounted to a repudiation of the Contract by PT Merak; third, after delivery of the notice of termination to Shanghai Electric, PT Merak delivered a letter of demand to the Bank calling for payment under the Bond (“the Demand”).

On 9 March 2009, Shanghai Electric filed the Injunction application on an ex parte basis, which I heard and granted on the same day. On 26 March 2009, PT Merak filed the present application to set aside the Injunction.

The Issue of Law

As alluded to at the outset of this judgment, there is an issue as to the applicable law governing the restraint on the calling of an on-demand bond. The Contract itself is governed by English law, it being an express provision in s 26.8 thereof. Section 25.1 provides for disputes to first be attempted to be resolved by good faith negotiations. Failing this, s 25.2.1 provides such dispute to be submitted to arbitration at the Singapore International Arbitration Centre (“SIAC”) to be conducted in accordance with the ICC Rules. It is also expressly provided in the Bond that the governing law is English law. Although the Bond is an agreement between the Bank and PT Merak, it was given pursuant to s 7.7(b) of the Contract which required Shanghai Electric to procure an advance payment security in the form annexed in exhibit N-2 of the Contract. The terms of the Bond essentially mirrored the form in exhibit N-2. The governing law clause in the Bond – which also provides that Singapore courts have non-exclusive jurisdiction over any proceedings arising out of it – states as follows:

This [Bond] shall be governed by and construed in accordance with the laws of England. We hereby irrevocably submit to the non-exclusive jurisdiction of the courts of [Singapore] for the purposes of any … proceedings arising out of this [Bond].

PT Merak submitted that, as the Contract and, especially, the Bond expressly provide that English law is the governing law, this court should apply English law in relation to the decision whether to restrain PT Merak from making a demand under the Bond. Shanghai Electric, on the other hand, submitted that notwithstanding that English law is the governing law of the Bond, this application was governed by the procedural law of the forum and therefore Singapore law would apply. This is an important point as Singapore law and English law diverge on whether fraud is the only basis upon which the court would restrain a call on an on-demand bond.

This divergence was brought about by the decision of the Court of Appeal in Bocotra Construction Pte Ltd v Attorney-General (No 2) [1995] 2 SLR 733 (“Bocotra”). I would note that nowhere in the judgment in Bocotra was it said that the court had departed from English law. Indeed, Bocotra cited the leading English precedents on the issue without any suggestion that Singapore law was different. The expression “fraud or unconscionability” appeared three times in Bocotra without any explanation for the inclusion of the latter word or elaboration as to what it meant. I had pointed this out in my decision in New Civilbuild Pte Ltd v Guobena Sdn Bhd [1999] 1 SLR 374 (“New Civilbuild”), in which I argued at [33] that the court in Bocotra had, in all likelihood, used the expression “unconscionability” interchangeably with “fraud” because it could not have made such a drastic departure from English law without giving any reason for it. I pointed out at [45] of New Civilbuild that, while the fraud exception was justified on the ground that it must be presumed that the caller must always act in good faith (I add here that this is also the doctrine that fraud unravels all: see United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 at 184), there was no basis for the introduction of the ground of unconscionability to frustrate the clear intention of the parties that the issuer would pay the beneficiary upon written demand. However, in the subsequent Court of Appeal decision of GHL Pte Ltd v Unitrack...

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