Sulzer Pumps Spain, SA v Hyflux Membrane Manufacturing (S) Pte Ltd and another

• Jurisdiction: Singapore
• Judge: Aedit Abdullah J
• Judgment Date: 17 June 2020
• Neutral Citation: [2020] SGHC 122
• Date: 17 June 2020
• Docket Number: Originating Summons No 1323 of 2019
• Published date: 23 June 2020
• Plaintiff Counsel: Anparasan s/o Kamachi and Sumyutha Sivamani (WhiteFern LLC)
• Defendant Counsel: Sandosham Paul Rabindranath and Joan Peiyun Lim-Casanova (Cavenagh Law LLP),the second respondent unrepresented.
• Court: High Court (Singapore)
• Hearing Date: 27 February 2020,23 October 2019
• Subject Matter: Credit and Security,Performance bond,Injunctions,Jurisdiction to award,Unconscionability,Discharge,Full and frank disclosure

Aedit Abdullah J: Introduction:

This is an application to discharge an ex parte injunction obtained by the applicant, Sulzer Pumps Spain, S.A.¹ The injunction restrained the first respondent, Hyflux Membrane Manufacturing (S) Pte Ltd, from calling on a bond made by the second respondent, Deutsche Bank AG, in favour of the first respondent.² The bond was meant to be a guarantee to ensure that the applicant fulfilled its contractual obligations to the first respondent.³ The second respondent did not participate in these proceedings.

Having heard the parties at the inter partes hearing, I am persuaded that the injunction should be discharged.

Background

The first respondent was the sub-contractor for its related company, Hydrochem Pte Ltd, for a project concerning the design and construction of a desalination plant in Oman (the “project”).⁴ The owner of the project is a company owned by the Oman government (the “project owner”).⁵ The first respondent in turn engaged the applicant as its sub-contractor, through two purchase orders in 2015, which incorporated a term sheet, a document entitled “Section 2 - General Terms and Conditions” (the “General Terms and Conditions”), and some exhibits (collectively the “contract”).⁶ Pursuant to the contract, the applicant was to supply and install pumps for the first respondent.⁷

Clause 10 of the General Terms and Conditions is titled “Warranty” and sets out the warranty obligations of the applicant. Under cl 10.6 of the General Terms and Conditions, the applicant was to provide an unconditional first demand bank guarantee to the first respondent as security for its warranty obligations owed to the first respondent.⁸ In September 2017, the applicant obtained the guarantee from the second respondent in favour of the first respondent, and delivered the guarantee to the first respondent.⁹ The guarantee took the form of an unconditional first demand bond.¹⁰

The applicant manufactured the pumps, delivered them to the first respondent, and installed them under the first respondent’s supervision.¹¹ However, the first respondent soon encountered difficulties with the pumps, which repeatedly failed between November 2017 and May 2019.¹² The first respondent alleges that the recurring failure of the pumps was caused by design flaws which were only rectified by the applicant in May 2019, and that the applicant was hence in breach of its warranty obligations.¹³ In contrast, the applicant denies the existence of such design flaws, contending instead that the failures were caused by the first respondent’s use of the pumps outside of the recommended and permitted flow and speed range.¹⁴

In October 2019, the first respondent called on the bond.¹⁵ The applicant tried to negotiate with the first respondent by suggesting that the first respondent withdraw its call on the bond in exchange for an extension of the same. However, the first respondent did not respond favourably to this proposal.¹⁶ The applicant thus made an ex parte application for an injunction to prevent the first respondent calling on the bond.¹⁷

The ex parte injunction application

I heard the applicant’s ex parte application for an injunction on 23 October 2019.¹⁸ The applicant argued that the injunction was urgent and hence although they had already informed the first respondent of the application, notice had not been given.¹⁹ It was argued that the injunction was urgent as the first respondent had already made the call on the bond and there was an impending payout.²⁰ Further, the first respondent is part of the Hyflux group of companies which is presently involved in restructuring proceedings before me, and it was feared that any payment made would be irretrievable due to Hyflux’s financial difficulties.²¹ Due to the circumstances, I granted the injunction; it was to be in force only until the next hearing and/or until another order of court was made.²² This was in the expectation that an inter partes hearing would be held fairly soon after.

However, parties did not come back before me until several months later. A part of the lapse of time was presumably caused by the first respondent’s change in solicitors.²³ It is unclear if the delay might have been caused by issues arising out of Hyflux’s restructuring.

The first respondent’s arguments to discharge the injunction

The first respondent raises some jurisdictional and preliminary arguments against the injunction.

First, an injunction cannot be free standing but there must be an underlying cause of action; here, the applicant’s originating summons contained no underlying cause of action.²⁴

Second, the applicant breached its duty to make full and frank disclosure of all material facts to the court at the ex parte hearing (Tay Long Kee Impex Pte Ltd v Tan Beng Huwah (trading as Sin Kwang Wah) [2000] 1 SLR(R) 786 (“Impex”) at [21] and [24]).²⁵ Suppression of such information should lead to discharge of the injunction (Impex at [35]).²⁶ Furthermore, the applicant had suppressed the fact that the dispute between the parties was subject to an arbitration agreement.²⁷ This was material as the court would then have had to consider the requirements under s 12A of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“IAA”) in deciding whether to grant the injunction.

In addition, the applicant had blatantly misrepresented a number of material facts, including: that the applicant knew the basis of the first respondent’s calling on the bond; that the first respondent failed to challenge the applicant’s technical findings for the malfunctioning of the pumps; that the first respondent’s emails did not explain why the pump failures were due to the applicant’s fault; and that the first respondent had accepted that the pump failures were not covered by the applicant’s warranty obligations.²⁸ The first respondent argues that all of these allegations were untrue.

Third, under s 12A of the IAA, the court may grant an interim injunction if it is for the purpose of or in relation to an arbitration.²⁹ However, there was no arbitration commenced at the time the ex parte injunction was sought, and no arbitration had been commenced even at the time of the inter partes hearing, four months after the ex parte hearing.³⁰

Fourth, the applicant did not come to court with clean hands as it commenced the proceedings in repudiatory breach of the arbitration agreement.³¹

Fifth, no notice of the ex parte hearing was given to the first respondent, contrary to para 41(2) of the Supreme Court Practice Directions.³² This was not a case of extreme urgency such that no notice was required; there was thus no reason for the applicant not to have given notice to the respondents.³³

Based on the above, the first respondent argues that the injunction should be discharged even before dealing with the substantive merits of the injunction.³⁴

Further or alternatively, the first respondent argues that the injunction should also be discharged for substantive reasons.³⁵ The first respondent argues that it is undisputed that the bond is an unconditional first demand bond.³⁶ Such bond has to be paid on demand by the obligor to the beneficiary, even without proof of default.³⁷ The courts should be slow to interfere with contractual arrangements freely entered into by the parties (Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 3 SLR(R) 198 (“Eltraco”) at [30]; BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 (“Mount Sophia”) at [25]).³⁸ While unconscionability is a ground to seek an injunction to prevent the calling on an unconditional first demand bond, the applicant must show a strong prima facie case of unconscionability and the entire context of the case must be particularly malodorous (Mount Sophia at [20], [21] and [40]).³⁹ Calling on the bond where there is a genuine dispute between the parties does not meet the unconscionability threshold (Eltraco at [32]; Mount Sophia at [52]).⁴⁰

On the facts, there was no unconscionability.⁴¹ The correspondence and other documentary evidence showed that the first respondent genuinely and consistently believed that the applicant had breached its warranty obligations;⁴² the first respondent had consistently maintained that the pump failures were due to design flaws caused by the applicant. There was no evidence of mala fide or reprehensible conduct.⁴³ At best, the applicant is only able to show that there is a genuine dispute between the parties.⁴⁴

The applicant’s arguments to maintain the injunction

The applicant accepted that it is settled law that the courts would only intervene to prevent a beneficiary from calling on a performance guarantee if it could be shown that the call was either fraudulent or unconscionable (Bintai Kindenko Pte Ltd v Samsung C&T Corp and another [2019] 2 SLR 295 (“Bintai”) at [1]).⁴⁵ However, it argued that a less stringent standard should be adopted for determining when a call on a performance bond can be restrained, as compared to a letter of credit; this is because a letter of credit is fulfilment of the obligor’s primary obligation under the contract, whereas the performance bond is only security for the secondary obligation of the obligor to pay damages if it breaches its primary obligations (JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 (“JBE”) at [10]).⁴⁶

Under the unconscionability exception, an injunction should be granted if it would be unfair for the beneficiary to realise his security pending the resolution of the substantive dispute (Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd [2016] 3 SLR 557 (“Arab Banking”) at [104]). The unconscionability exception thus protects the obligor from the beneficiary taking the secured sum when there has not been a final determination as to whether he is entitled to that sum (Arab Banking at [104]), and prevents the performance guarantee from being used as an instrument of oppression (Mount...