York International Pte Ltd v Voltas Limited

• Jurisdiction: Singapore
• Judge: Andrew Ang J
• Judgment Date: 01 July 2013
• Neutral Citation: [2013] SGHC 124
• Court: High Court (Singapore)
• Hearing Date: 05 March 2013
• Docket Number: Originating Summons No 123 of 2013
• Plaintiff Counsel: Ng Kim Beng, Hazel Tang and Zheng Sicong (Rajah & Tann LLP)
• Defendant Counsel: Nakul Dewan and Loong Tse Chuan (Allen & Gledhill LLP)
• Subject Matter: CREDIT AND SECURITY
• Published date: 04 July 2013

Andrew Ang J: Introduction

This was an application by the plaintiff, York International Pte Ltd, pursuant to s 31(1)(d) of the Arbitration Act (Cap 10, 2002 Rev Ed), for an injunction to restrain the defendant, Voltas Limited, from receiving payment from Citibank NA, Singapore (“the Bank”) on a performance bond until (and unless) the plaintiff is adjudged to be liable in the arbitration proceedings between the plaintiff and the defendant. I granted the plaintiff’s application. I now set out the grounds for my decision.

Background

The plaintiff and the defendant entered into a purchase agreement dated 3 April 2008 (“the Purchase Agreement”) under which the plaintiff was to supply, deliver, test and commission five chillers for a district cooling plant in Sentosa Island.

Clause 26 of Appendix 2 of the Purchase Agreement (“Clause 26”) obliged the plaintiff to provide a performance bank guarantee. I set out the relevant parts of Clause 26:¹ 26. Performance Bond: a) A Performance Bank Guarantee totalling 10% (ten-percent) of the Price shall be provided by [the plaintiff] in the Employer’s format.: [sic] The Performance Bank Guarantee shall be valid from the date of delivery until 180 days after the end of the Defects Liability Period (DLP). DLP shall end 18 months from the date of Substantial Completion b) The Performance Bank Guarantees shall be unconditional, without any demur, without recourse to [the plaintiff] and with a provision for automatic renewal as stated in the Employer’s format. The Performance Bank Guarantees shall be in the Employer’s format and the bank should have presence in Singapore. ...

[emphasis added]

In October 2008, the parties engaged in discussions on the terms of the performance bond to be executed. Towards the end of the discussions, the defendant vetted the terms of the performance bond to be executed and made some corrections. This is evidenced in an e-mail dated 17 October 2008 from the defendant to the plaintiff, wherein the regional financial controller of the defendant wrote: “Attaching the PB with the corrections required. Kindly arrange to issue the PB to us with the corrections immediately.”²

The plaintiff duly procured the issuance of a letter of guarantee (“the Guarantee”) from the Bank dated 4 November 2008.³ The material terms of the Guarantee as last renewed are as follows:

…

And whereas [the plaintiff] is required under the contract to pay 10 per cent of the total value of the [Purchase Agreement] as a security deposit for the performance of his obligations under the contract.

Now in consideration of [the defendant] not insisting on [the plaintiff] paying ten (10) per cent of the total value of the [Purchase Agreement] as a security deposit for the said contract, [the Bank] hereby agree[s] as follows: 1) In the event of [the plaintiff] failing to fulfil any of the terms and conditions of the said [Purchase Agreement], we shall indemnify [the defendant] against all losses, damages, costs, expenses or otherwise [sic] sustained by [the defendant] thereby up to the sum of Singapore Dollars five hundred twenty three thousand only (SGD523,000.00) (“the guaranteed sum”) upon receiving your written notice of claim for payment made pursuant to clause 4 hereof. … 3) Our liability under this guarantee shall continue and this guarantee shall remain in full force and effect from the date hereon until 31 January 2013. 4) This guarantee is conditional upon a claim as specified herein being made by you by way of a notice in writing addressed to us and the same being received by us at [the Bank’s address] within 90 days from the expiry of this guarantee. … 5) We shall be obliged to effect the payment required under such a claim within 30 business days of our receipt thereof. We shall be under no duty to inquire into the reasons, circumstances or authenticity of the grounds for such claim or direction and shall be entitled to rely upon any written notice thereof received by us (within the period specified in clause 4 hereof) as final and conclusive. …

[emphasis added]

There was initially some dispute as to when substantial completion occurred. Nevertheless, in a letter dated 5 October 2011 from the defendant to the plaintiff, the defendant conceded that the date of substantial completion was 31 October 2009.⁴

A remaining ten percent of the purchase price was due upon completion of the Defects Liability Period (“DLP”). The plaintiff alleged that this was not paid (hereinafter “the non-payment claim”).

On or about 25 May 2011, the defendant informed the plaintiff that some of the motors in the chillers had ceased to function, and requested the plaintiff to undertake urgent repairs. The plaintiff duly performed and completed extensive work in reinstating the functionality of the motors. The plaintiff and defendant could not agree on what caused the chillers to fail.

The defendant wrote to the plaintiff on 12 March 2012:⁵

In the interest of an amicable resolution and without prejudice to the respective parties’ positions, we propose the joint appointment of an Independent Expert to investigate and report, on a non-binding basis, the root cause of the Chiller Motor failures in respect of the Project on which all concerned parties have different views. …

In its reply dated 16 March 2012, the plaintiff alleged that the chillers satisfied the requirements of the Purchase Agreement, and that the malfunction in the chillers was not attributable to any breach by the plaintiff:⁶

We would highlight that two rounds of tests have in fact already been conducted on a similar basis, the objective results of which consistently supported certain findings. …

As matters stand, we are satisfied that the earlier tests establish that our equipment were [sic] not at fault. ...

Consequently, the plaintiff alleged that the defendant was liable for the cost of repair (hereinafter “the repair claim”).

Both the non-payment claim and the repair claim are the subject of ongoing arbitral proceedings, and need not be canvassed further here.

On 19 October 2012, the defendant requested for a renewal of the Guarantee as it was due to expire on 31 January 2013, taking the position that the plaintiff had agreed to automatic renewal (pursuant to Clause 26(b)).⁷ The defendant explicitly stated: “Please let us know within 7 days of the date of this letter if you are agreeable to renewing the [Guarantee], failing which, we reserve our right to call on the [Guarantee]”.⁸ The plaintiff replied on 1 November 2012 and refused to extend the Guarantee, taking the position that the parties had agreed that the Guarantee would only be extended if the DLP was extended.⁹

On 24 January 2013, the defendant again requested for a renewal of the Guarantee, stating “you are under an obligation to extend the guarantee failing which we have no option but to invoke the same”. The plaintiff replied on 29 January 2013, and repeated the objections stated in the 1 November 2012 letter.

On 29 January 2013, the defendant proceeded to invoke the guarantee. In a letter to the Bank, the defendant wrote: “Please be notified that [the plaintiff] has failed to fulfill certain terms and conditions of the Purchase Agreement dated April 3, 2008 and we therefore invoke the guarantee”.

In response, the plaintiff filed an originating summons on 6 February 2013 seeking the aforementioned injunction. I pause now to make an observation. The plaintiff was merely seeking to restrain the defendant from receiving payment from the Bank pending the outcome of arbitral proceedings (see the text in italics at [1] above). The plaintiff had not taken the more far-reaching step of seeking a declaration that the defendant’s call on the Guarantee was invalid. Such a declaration, if granted, would have had the effect of depriving the defendant entirely of the security provided by the Guarantee (because the Guarantee has since expired). The plaintiff had, in actuality, taken a position that was eminently reasonable. If the plaintiff were to be found to be liable in arbitral proceedings, the defendant would still be able to receive payment from the Bank in satisfaction of any award rendered. Put simply, the defendant is not prejudiced (except for the time value of money, if at all) by the grant of the injunction.

Issues arising

Two issues arise for my consideration: First, is the Guarantee conditional or unconditional in nature? Second, was there unconscionable behaviour on the defendant’s part? Both issues are considered below.

The nature of the Guarantee

Performance bonds are broadly of two types: conditional performance bonds and on demand performance bonds. Chitty on Contracts, vol 2 (Sweet & Maxwell, 31st Ed, 2012) at para 37-127 summarises the main features of the two categories:

Conditional performance bonds exist where the guarantor only becomes liable to the party entitled to claim the bonded sum (the beneficiary), on proof of breach of the terms of the underlying building contract, or on proof of both breach and loss as a result of the breach. Unconditional or (more usually) “on demand” bonds exist where, on a true construction of the words used in the bond, the guarantor is liable to pay the beneficiary the bonded sum when the demand is made in the manner provided for in the bond, without the need for the beneficiary to prove breach of the underlying building contract or damage (or both). …

It is immediately evident that there is a potential conflict between the underlying Purchase Agreement and the Guarantee. Clause 26(b) of the former obliges the plaintiff to furnish a performance bond that is “unconditional” and “without any demur”. On the other hand, the Guarantee contains no words to such effect, with cl 1 merely stating that, in the event of the plaintiff failing to fulfil the terms of the Purchase Agreement, the defendant shall be indemnified...