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RESTRAINING A CALL ON PERFORMANCE BONDS

 

Shannon Rajan provides an update on recent developments on restraining a call on performance bonds.

INTRODUCTION

The Malaysian Courts have now adopted the Singaporean and Australian approach in recognising unconscionability, apart from the fraud exception, as a separate and distinct ground to restrain a beneficiary from making a call on an on-demand performance bond.1 The rationale for embracing this equitable exception is premised on the notion that "a person should not be permitted to use or insist upon his legal right to take advantage of another's special vulnerability or misadventure for the unjust enrichment of himself." 2

There are concerns that this new approach would open the floodgates of plaintiffs challenging the beneficiary's conduct of calling upon an on-demand performance bond and cause unwanted interference with the machinery of irrevocable obligations assumed by the banks, which has been described as the "life-blood of international commerce".

In the recent Singaporean case of CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and another [2014] SGHC 266, the High Court had to consider the effect of a clause in a contract which expressly excluded unconscionability as a ground to restrain a party from making a call on or receiving cash proceeds under the performance bond. In other words, the clause operates to counter the common law position on performance bonds in Singapore. This case would therefore be instructive in the Malaysian context of performance bonds.

BACKGROUND FACTS

The First Defendant, a property developer, engaged the Plaintiff as its main contractor for the development of three blocks of residential flats. Pursuant to the terms of the main contract, the Plaintiff provided a performance bond, which was issued by the Second Defendant, a bank.

The First Defendant, being dissatisfied with the Plaintiff's performance under the contract, issued a notice of termination and called on the performance bond. In turn, the Plaintiff filed an injunction application to restrain the First Defendant from calling on the performance bond on the ground that the call was unconscionable. In opposing the injunction application, the First Defendant relied on Clause 3.5.8 ("Clause 3.5.8") of the preliminaries (which were incorporated into the main contract), which prohibited the Plaintiff from seeking injunctive relief on the ground of unconscionability. In other words, the Plaintiff's right to seek injunctive relief was limited to the ground of fraud only.

The main issue to be determined by the High Court was whether Clause 3.5.8 was unenforceable as being an attempt to oust the court's jurisdiction.

DECISION

Clause 3.5.8 provided:

"In keeping with the intent that the performance bond is provided by the [plaintiff] in lieu of a cash deposit, the Contractor agrees that except in the case of fraud, the Contractor shall not for any reason whatsoever be entitled to enjoin or restrain:-

(a) The [first defendant] from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or

(b) The [second defendant] under the performance bond from paying any cash proceeds under the performance bond,

on any ground including the ground of unconscionability." (Emphasis provided)

The First Defendant relied on the above clause to argue that the Plaintiff could only apply for injunctive relief on the ground of fraud. The First Defendant argued that the Court should have regard to the parties' intention and relied on the District Court decision of Scan-Bilt Pte Ltd v Umar Abdul Hamid [2004] SGDC 274. In that case, the District Court considered a similar clause, which reads as follows:

"Except only in the clear case of fraud, the Contractor shall not be entitled to enjoin or restrain the Employer from making any call or demand on the performance bond or receiving monies under the performance bond, on any ground including the ground of unconscionability" (Emphasis added)

The District Court in Scan-Bilt held that there were no grounds to strike down the clause on account of public policy and that the clause was clear and unequivocal in its intent. The Judge also observed that the parties dealt at arm's length and that there was no reason not to give full effect to the clause. The Judge further held that "justice required that the parties be held to the terms of the bargain which they had struck."

The High Court in CKR Contract Services disagreed with the District Judge's reasoning and conclusion in Scan-Bilt for the following reasons.

First, giving effect to Clause 3.5.8 would severely curtail the court's jurisdiction and discretion to grant an injunction and would therefore be contrary to public policy. The Judge relied on the Malaysian Federal Court case of AV Asia Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd [2014] 3 MLJ 61 in which clause 15 of a non-disclosure agreement entered into by the parties provided that the appropriate remedy for a breach of the respondent's duty of non-disclosure would be injunctive relief instead of monetary damages. The Federal Court held that the existence of clause 15 did not ipso facto entitle the appellant to injunctive relief and did not fetter its jurisdiction and discretion to decide whether to grant such relief. The High Court, whilst acknowledging that the clause in AV Asia was different from Clause 3.5.8, stated that the general principle expressed in AV Asia was relevant because Clause 3.5.8 was similarly an attempt to oust the court's jurisdiction, which is a severe incursion on the High Court's freedom to grant injunctive relief.

Second, the Court's powers to grant injunctions flow from its equitable jurisdiction and cannot be curtailed by clauses in a contract.3

Third, there are important policy considerations underpinning the doctrine of unconscionability, which cannot be lightly brushed aside by the parties' agreement. It must be noted that the Plaintiff's argument fails to consider the conscious choice made by the Singaporean Courts in moving away from the English position. The recognition of the ground of unconscionability was a considered and deliberate decision by the Singaporean Courts in striking a balance between the principle of party autonomy and the Court's concern in regulating dishonest and unconscionable behavior on the part of the beneficiaries.4 Thus, the Court's supervisory role of scrutinizing the possible unconscionable conduct in the context of performance bonds cannot be summarily displaced by an agreement.

COMMENTARY

The High Court in arriving at its decision had the unenviable task of balancing between competing principles and policies. On one hand, the Court will as far as possible uphold the parties' entrenched right to freedom of contract by interpreting the clauses of the contract to give effect to the parties' mutual intention as it existed at the time of entering into the contract. On the other hand, the Court possesses an inherent jurisdiction to do justice between the parties and apply such principles as are necessary for attaining this objective and for giving decisions which conform with the requirements of social conditions of the community. In this case, the High Court applied the latter principle to place limitations on the parties' freedom to contract and the reasons proffered by the High Court must be examined in greater detail.

First, the High Court's application of the general principle propounded in AV Asia may be questionable. It must be noted that clause 15 only limited the appropriate remedy for a respondent's breach. The said clause did not extend to say that the injunctive relief shall be automatic or as of right upon a respondent's breach, which would mean that the Court's jurisdiction was ousted completely. Therefore, the Malaysian decision has to be read within the context of the peculiar wordings of the said clause. The Federal Court did not deal with the issue as to whether the parties could, by agreement, exclude an injunctive relief, which would in effect fetter the Court's jurisdiction. An answer to this question may give rise to a general principle, which may have been applied in the manner suggested by the High Court.

Second, the principle that the parties cannot by agreement exclude the Court's inherent jurisdiction to grant injunction may have been overstated by the High Court. There was no attempt by the parties to do so as they merely agreed to restrict the available grounds in common law to resist a call of a performance bond. Such a right is recognised in law. For instance, the contracting parties are able to agree to exclude a common law right or remedy by a clearly worded term in a contract (so long as it does not contravene public policy).5 Next, a party who is contracting at arm's length, having agreed to exclude the common law ground of "unconscionability" by contract, may be estopped from reneging on its contractual obligations. This approach is consistent with the well-known maxim 'modus et conventio vincunt legem', which means that the manner and agreement of the parties overrides the strict letter of the law.6

Last, the Malaysian policy consideration for adopting unconscionability as a separate and distinct ground to restrain a beneficiary from making a call on an on-demand performance bond appears to be different from the Singaporean position. The Malaysian position is essentially premised on "good commercial sense" and there is no express declaration by our Courts that it is a conscious (and deliberate) departure from the English position. It must be noted that the English position is still very much alive and applicable when it comes to restraining a bank from paying out on a performance bond. It remains to be seen whether the Malaysian policy consideration for recognising unconscionability would be a sufficient ground for disallowing parties (who are trading at arm's length) from excluding unconscionability as a ground to resist a call on an on-demand performance bond.

Whilst the Singaporean decision would undoubtedly be persuasive and have an impact in Malaysia, there are some policy differences between the two jurisdictions, which may result in a different outcome in Malaysia. Thus, the Malaysian Courts may still have a hand in striking a uniquely different balance between ensuring certainty in irrevocable security instruments and maintaining fairness in respect of abusive calls on performance bonds.

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POSTSCRIPT

Subsequent to the completion of the above commentary, the Court of Appeal of Singapore released its judgment wherein it overturned the High Court's decision in the above case. It would appear from the Court of Appeal's judgment that the present position in Singapore is that the parties may, by agreement, exclude unconscionability as a separate and distinct ground for resisting a call on an on-demand performance bond. The Court of Appeal's judgment will be discussed in the next issue of Legal Insights.

Endnotes:

1 Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining Company Sdn Bhd [2012] 3 CLJ 401.
2 Stern v McArthur (1988) 165 CLR 489.
3 The High Court referred to the following in support of its decision: Ian C F Spry, "The Principles of Equitable Remedies" (Sweet and Maxwell, 9th Ed., 2014) at p.333 and JBE Properties Pte Ltd v Gammons Pte Ltd [2011] 2 SLR 47.
4 BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] SGCA 28.
5 In Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, the Court recognised the parties' ability to expressly exclude the common law right to terminate by clear terms of their contract.
6 Binions and another v Evans [1972] 2 All ER 70 and Bruner v Moore [1904] 1 Ch. 305.

 
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