TWO DECADES OF RESTRAINING UNCONSCIONABLE CALLS ON PERFORMANCE GUARANTEES

• Published date: 01 December 2011
• Date: 01 December 2011
• Citation: (2011) 23 SAcLJ 504
• Author: Kelry C F LOI LLB (Hons) (National University of Singapore), LLM (London); Assistant Professor, Faculty of Law, National University of Singapore.

From Royal Design to JBE Properties

Singapore courts have expressly departed from the English position by recognising unconscionability as a separate ground for restraining a beneficiary from demanding payment under a performance guarantee. The power to issue interlocutory injunctions upon a strong prima facie case of unconscionability is a valuable tool for mitigating the injustice occasioned by abusive calls; but it must be wielded with care so as not to nullify the commercial utility of performance guarantees. The key objections raised against the recognition of unconscionability are addressed herein; yet pragmatic clarification of the core content of unconscionability by the judiciary is necessary.

I. Trite propositions

1 It is hornbook law that documentary letters of credit and performance guarantees (or performance bonds) share three related features under English and Singapore law, all of which are based on the policy of preserving the established commercial utility of such instruments. Citation of authorities for such trite propositions serves no purpose save to accentuate the symptoms of endemic cititis plaguing lawyers; and the interested reader should instead refer to the many staple discussions in the modern literature.1 First, the payment obligation of issuers of both instruments is typically predicated upon

purely documentary demands, rather than the objective ascertainment of external facts. Second, the issuer pays against presentment of strictly conformant documents. Third, the issuer‘s payment obligation is independent of the commercial transaction underlying the credit or guarantee; thus, issuers pay upon an apparently conformant demand without being concerned with disputes between the beneficiary and the account party (on whose account the guarantee or credit has been issued) over the underlying transaction. This third feature is referred to as the “autonomy” or “independence” principle; it emphasises the autonomy of the issuer‘s payment obligation towards the beneficiary under the guarantee or credit, which is separate from the underlying commercial transaction between the account party and beneficiary.

II. Autonomy: Letters of credit and performance guarantees

2 That the autonomy principle is fundamental to letters of credit is a point repeatedly emphasised in courts and treatises, and is reflected by the rule that the courts will not interfere with the beneficiary‘s right to demand payment except in cases of clear fraud. English law applies the same idea to performance guarantees, so that fraud remains the sole basis upon which the autonomous payment obligations under both letters of credit and performance guarantees could be interfered with.2 On the other hand, fraud provides the sole basis for judicial intervention in Singapore only in relation to letters of credit. In this respect, the Singapore courts have adopted a more nuanced approach which distinguishes between letters of credit and performance guarantees.3

3 The chief reason why Singapore courts distinguish performance guarantees from letters of credit is that they have different commercial

characters.4 A letter of credit serves as an accepted mode of payment of price in international trade; it is thus the lifeblood of international commerce with which courts should not interfere save in clear cases of fraud. On the other hand, performance guarantees serve the different function of securing the account party‘s obligation to pay damages upon commission of a breach. Since letters of credit and performance guarantees can both be used in: (a) the domestic or international contexts; and (b) transactions where either the account party or beneficiary may be more vulnerable, over-generalisations for either instrument would obviously be unhelpful. Much therefore turns on the circumstances, particularly the commercial purpose served by the credit or guarantee, in each case.5 Suffice to say that much6 of the relevant Singapore case law on unconscionable calls on performance guarantees, including JBE Properties Pte Ltd v Gammon Pte Ltd7 (“JBE Properties”), concerns domestic construction disputes far removed from the international sale transactions which give rise to letters of credit. Short of commencing expensive litigation in an overseas forum, an international seller (beneficiary) has no choice but to look almost exclusively to a letter of credit for payment once he has shipped goods to a foreign buyer (account party) and surrendered his bill of lading.8 On the other hand, a local employer is not so vulnerable for he merely makes interim stage payments to his construction contractor as and when certified milestones have been reached. The contractor (account party) often has no choice but to get his bank to provide the employer (beneficiary) with a performance guarantee as security for damages occasioned by possible construction defects. It is in fact the contractor who relies almost exclusively for his cash flow on the employer‘s interim payments. An employer who makes a call on the contractor‘s performance guarantee exerts enormous financial pressure on the contractor; calls, if abused, may be extremely oppressive.9

4 Limited interference with payment under performance guarantees under such circumstances will not affect international trade. Thus, as Chan Sek Keong CJ points out in JBE Properties, a less stringent standard (as compared to the standard applicable vis-…-vis letters of credit) can justifiably be adopted for determining whether a demand for payment under a performance guarantee should be restrained.10 The differences between performance guarantees and letters of credit have been analysed in detail by Prof Debattista, who also argued that the autonomy principle which applies to letters of credit need not apply to the same extent to performance guarantees.11

III. Unconscionability

5 Delivering the Singapore Court of Appeal‘s judgment in December 2010 in JBE Properties, Chan CJ confirmed that Singapore law differed from English law in that apart from fraud, unconscionability provides an additional and separate basis under Singapore law for granting an interlocutory injunction restraining a beneficiary from making a call on a performance guarantee. In addition, it was also suggested in JBE Properties that where a performance guarantee is worded ambiguously, the court could interpret it as being predicated upon facts rather than documents.12

6 Chan CJ‘s judgment in JBE Properties, which is characteristically crisp, is the latest contribution to the Singapore case law spanning two decades including, inter alia, Royal Design Studio Pte Ltd v Chang Development Pte Ltd13 (in 1990); Chartered Electronics Industries v Development Bank of Singapore14 (in 1992); Kvaerner Singapore Ltd v UDL (Shipbuilding) Singapore Ltd15 (in 1993); Bocotra Construction Pte Ltd v AG16 (in 1995); Raymond Construction Pte Ltd v Low Yang Tong & AGF Insurance17 (“Raymond Construction”) (in 1996); Min Thai Holdings v Sunlabel18 (in 1998); GHL Pte Ltd v Unitrack Building Construction Pte Ltd19 (in 1999); Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of HRH Sheikh Sultan bin Khalifa bin Zayed Al Nahyan20

(“Dauphin”) (in 2000); Eltraco International v CGH Development21 (in 2000); Samwoh Asphalt Premix Pte Ltd v Sum Cheong Piling Pte Ltd22 (in 2001); McConnell Dowell Constructors v Sembcorp Engineers & Constructors23 (in 2002); Newtech Engineering Construction v BKB Engineering Constructions24 (in 2003) and Leighton Contractors (Singapore) Pte Ltd v J-Power Systems Corp25 (in 2009). Although Bocotra is sometimes regarded as the fountainhead, the Singapore Court of Appeal in GHL26 has attributed the origins of restraining unconscionable calls to earlier cases including Royal Design, Chartered Electronics and Kvaerner.

7 Case law development has been substantial and the preceding list does not purport to be comprehensive. Neither is it proposed to enter into a detailed analysis of JBE Properties for that would be superfluous. The reader should simply refer to Chan CJ‘s succinct exposition. Rather it would be more useful to examine some arguments which have been raised elsewhere against recognising unconscionability as a separate ground for injunctive relief. Prof Enonchong has identified three main objections.27

IV. Three objections

8 First, Prof Enonchong says that easy availability of injunctive relief would destroy confidence in performance guarantees as the equivalent of cash in hand28 and undermine their commercial utility.29 One could conceivably suppose that Chan CJ‘s response might have been that a performance guarantee (unlike a letter of credit which comprises the mode of payment of price for goods or services) is not the lifeblood of commerce as it is merely security against damages for defective performance.30 In any case, although the recognition of unconscionability as an additional ground of relief (apart from fraud)

means relief would be more readily available, that is not to say that injunctive relief would be easily or readily available - not unless unconscionable behaviour were rampant amongst beneficiaries of performance guarantees and provable on strong evidence. Furthermore, confidence in, and utility of, commercial instruments such as performance guarantees cannot possibly be promoted by habitual judicial enforcement of unconscionable payment demands made under oppressive circumstances. In any event, Singapore‘s departure from the English position has not gone unnoticed in England or Malaysia. Despite earlier signs of flirtation with the idea,31 English commentators32 and Malaysian courts33 have not enthusiastically embraced unconscionability as a separate ground for injunctive relief. Although the Australian courts have accepted unconscionability as a separate ground for injunctive relief, that is based not on the common law (as in Singapore) but on s 51AA of Australia‘s Trade...