Jurisdiction - Singapore
News
Singapore – Distinguishing Between An Ouster Clause And A Limitation Clause In Performance Bonds.

11 May, 2015

 

 
In February this year, we commented on a High Court decision that held that a contractual clause, which stipulated that a main contractor was not (except in the case of fraud) entitled to restrain a call on the performance bond on any ground, was unenforceable based on, amongst others, public policy considerations.

In a significant judgment in April 2015, CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] SGCA 24 (“CKR Contract Services”), the Court of Appeal reversed this decision, holding that the clause was valid and enforceable as it did not oust the jurisdiction of the Court and was therefore not contrary to public policy. The clause merely restricted the right of the obligor under the performance bond to apply for an injunction to restrain the beneficiary from calling on that bond, except in a case of fraud.
 
Facts
 
A property developer, Asplenium Land Pte Ltd (“Asplenium”), engaged CKR Contract Services Pte Ltd (“CKR”) as the main contractor for the construction of a condominium along Seletar Road for some SGD 88m for a two-year period from 21 January 2013. When Asplenium terminated CKR’s services for unsatisfactory performance, it called on its unconditional performance bond of about SGD 7.7m (“the Bond”).
Clause 3.5.8 of the preliminaries to the main contract stated that CKR was not entitled to restrain Asplenium from calling on the performance of the Bond on any ground, except in the case of fraud.
 
Specifically, Clause 3.5.8 was drafted as follows:
 
“In keeping with the intent that the performance bond is provided by the Contractor 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 Employer from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or
 
(b) the obligor under the performance bond from paying any cash proceeds under the performance bond on any ground including the ground of unconscionability.”
 
Issue
 
It is well-established in Singapore law that a court may grant an injunction to restrain a call on an on-demand performance bond where the call is made either fraudulently or unconscionably. As noted in an earlier Court of Appeal decision, BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352, “[u]nconscionability is a distinct and separate ground from fraud, and … includes conduct such as unfairness and abuse that are broader than the conduct that would constitute fraud”.
 
The broad issue in CKR Contract Services was whether parties can agree to exclude the unconscionability exception as a ground for restraining a call on the Bond.
The High Court had held the parties could not make such an agreement as, amongst others, Clause 3.5.8 was an attempt to oust the jurisdiction of the Court to restrain a call on an on-demand performance bond where the call is made unconscionably.
 
Summary Of Decision
 
In a judgment delivered by Justice Andrew Phang on behalf of the Court of Appeal, he held that Clause 3.5.8 did not oust the jurisdiction of the Court, but only attempted to restrict or limit a contracting party’s right to obtain an equitable remedy. Here, the equitable remedy referred to CKR’s right to apply for an injunction to restrain Asplenium from calling on the Bond, on the ground that the call was made unconscionably.
 
Clause 3.5.8 restricted CKR’s right to obtain such an equitable remedy as it restrained Asplenium from calling on the Bond to the single scenario where it made the call fraudulently. As CKR did not suggest that there was any fraud involved in Asplenium’s call on the Bond, Asplenium was entitled to call on the Bond. Moreover, Asplenium’s right to call on the Bond was not subject to the satisfaction of any preconditions, unlike a situation where a right was conferred on CKR but could not be enforced because CKR was precluded from invoking the Court’s jurisdiction in the first place.
 
In short, while an ouster clause (a clause that seeks to oust the jurisdiction of the Court) would almost certainly be struck down as being contrary to public policy, a limitation clause (a clause that limits the right to an injunction in equity) such as Clause 3.5.8 would not automatically be void and unenforceable. A limitation clause may only be unenforceable if, for example, it was held to be unreasonable under the relevant provisions of the Unfair Contract Terms Act (Cap. 396).
 
A Supporting Reason – The Option of a Cash Deposit
 
Another reason supporting the Court of Appeal’s decision was the practical point that Asplenium could have asked for a cash deposit instead of a performance bond. Noting that Clause 3.5.8 stated that “the performance bond is provided by [CKR] in lieu of a cash deposit”, Justice Phang observed that “there is no pressing reason in either principle or policy why a clause such as [Clause] 3.5.8 should be considered as somehow being contrary to public policy”. Even though CKR argued that it would not have entered into the agreement with Asplenium if the latter had required a cash deposit, Justice Phang stated that his view was taken “from the perspective of general principle”, which was what the Court of Appeal was concerned with.
 
Comment
 
The CKR Contract Services decision suggests that the Court of Appeal will, given the overriding principle of freedom of contract, be slow to characterize a contractual clause as an ouster clause unless clear words are used. If the clause in question is a limitation clause, it does not offend public policy as it is within the contracting parties’ purview to limit their rights and remedies, subject to certain parameters.
 
Where no preconditions are imposed on the right to call on a performance bond, the line between an ouster clause and a limitation clause may not always be easy to draw, as each clause seeks to prevent the Court from ordering an injunction on an established ground (such as unconscionability). However, careful drafting should avoid the danger of parties inadvertently making a contract that is contrary to public policy, which would jeopardise the recovery of funds in the case of the contractor’s breach.
 
RHTLTWlogo+slogan-RGB

 
For further information, please contact:
 

Sandra Han, Partner, RHTLaw Taylor Wessing

sandra.han@rhtlawtaylorwessing.com
 
Chen Yiyang, RHTLaw Taylor Wessing
yiyang.chen@rhtlawtaylorwessing.com

 

Comments are closed.