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Performance bonds project-specific, Singapore High Court rules

Out-Law News | 07 Feb 2019 | 10:01 am | 3 min. read

A recent decision by the High Court in Singapore has emphasised the extent to which performance bonds are project-specific, an expert has said.

Engineering company UES Holdings Pte (UES) had sought to call in four performance bonds secured in relation to three separate projects with its subcontractor, Ryobi Tactics Pte (Ryobi), after a dispute arose in relation to one of the projects. The High Court granted an injunction sought by Ryobi in relation to three of the bonds (13-page / 116KB PDF), finding that the calls on the bonds granted in respect of the unrelated projects were "unconscionable".

"This case makes it clear that a performance bond is contract or project specific," said construction disputes expert Hai Song Tan of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law.com. "This should bring some comfort to a contractor working on multiple projects concurrently with the same employer."

"Conversely, for employers, if the parties' common intention is that he should be entitled to dip into any performance bond issued by a contractor working on a few projects concurrently, even if the performance bond was issued for a project in respect of which there was no allegations of breach by the contractor, that ought to be made very clear in the bond instrument and not just the underlying contract," he said.

UES has since appealed the ruling.

Performance bonds are an important feature of construction projects, typically providing the beneficiary with security payable unconditionally on-demand. The other party may be able to 'restrain' a call on an on-demand performance bond where a court finds that the call was made either fraudulently or 'unconscionably'. Unconscionability, as defined by the courts in Singapore, generally covers acts involving abuse, unfairness and dishonesty.

UES engaged Ryobi as a subcontractor on three different construction projects under four subcontracts. Each of these subcontracts was guaranteed by a performance bond. In May 2018, UES called in the four performance bonds after claiming that defective work by Ryobi on one of the projects had caused losses estimated at over $4.5 million.

Ryobi sought an injunction, claiming that UES had really made the calls because it was in "dire" financial difficulties and that therefore they were fraudulent and/or unconscionable. It also argued that the way that the bonds were structured did not give UES the right to call in the bonds on the unrelated projects.

The High Court first considered the performance bond granted over the disputed project. It held that UES was entitled to call in the bond. When ruling on 'unconscionability', the court is only required to "consider whether the overall tenor and context of the parties' conduct point to a strong prima facie case of unconscionability". In this case, there was "no evidence" that the call "was motivated by anything other than [UES'] desire and entitlement to recuperate its perceived losses in relation to [the disputed project", the judge said.

The court then turned to the three bonds granted in respect of the two unrelated projects. Firstly, it noted that UES was entitled to call in the bonds on demand. However, the bonds in this case were project-specific, and could not therefore be called in "on the basis of other contractual relationships", the judge said.

"[W]here a performance bond arises expressly out of a particular contractual relationship, calls made on the basis of other contractual relationships would clearly fall outside of the scope of the performance bond as this would not have been within the contemplation of the parties at the time of contracting unless the terms specifically allowed for it," the judge said. "Such a call should be restrained on the basis that it is invalid, just as a call on a performance bond which stipulates formal requirements would be restrained in the absence of strict compliance with those requirements."

"For the avoidance of doubt, this approach should not be taken as undermining the principle that on-demand performance bonds are generally seen as readily realisable security and that courts should be slow to disturb the allocation of risk bargained for by commercially-minded parties," he said.

The judge noted that it was clear and unambiguous from the terms of each of the performance bonds that they related only to "particular subcontracts for the respective projects, and not to other subcontracts for other projects".

"Thus, it was clearly contemplated by the parties that [UES] would only be able to call on a particular performance bond in connection with matters arising out of the corresponding subcontract," he said.

The judge was also convinced that the calls on the unrelated performance bonds were unconscionable because "[UES] was in essence attempting to dip into the security of other projects when it only had the belief that it had legitimate claims in respect of the Chestnut [disputed] project", according to the judgment.