Jurisdiction - Singapore
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Singapore – Parties May Contractually Limit Their Right To Restrain Calls On Performance Bonds.

11 May, 2015

 

 
CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] SGCA 24
 
Introduction
 
In the recent case of CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] SGCA 24, the Singapore Court of Appeal (“CA”) was asked to consider whether a clause in a construction contract (“Contract”) between the main contractor, CKR Contract Services Pte Ltd (“Contractor”) and the developer, Asplenium Land Pte Ltd (“Employer”), was invalid and unenforceable, on the basis that it was contrary to public policy as an ouster of the jurisdiction of the court.
 
The clause in question expressly stated that except in the case of fraud, the Contractor was not entitled to restrain a call on the performance bond that it provided to the Employer on any ground, including the ground of unconscionability. In other words, the Contractor and the Employer had contractually agreed to exclude unconscionability as a ground for restraining a call on the performance bond. Such bonds are typically issued by an insurance company or a bank to secure the performance of the contractor’s obligations under a construction contract.
 
In its landmark decision in CKR, the CA upheld parties’ freedom to contractually agree to limit the circumstances in which a contractor is entitled to seek an injunction restraining a call on a performance bond.
 
Background
 
The Employer engaged the Contractor as main contractor for the construction of a condominium, for a contract sum ofSGD 88,063,838.00.
 
The Contract was for a two-year period commencing on 21 January 2013, with the completion date being 20 January 2015, and was based on the amended Singapore Institute of Architects Articles and Conditions of Building Contract (9th Ed, Reprint, August 2011).
 
The Contract required the Contractor to provide an on-demand performance bond in the Employer’s favour for 10% of the contract sum. The performance bond for SGD 8,806,383.80 was duly issued by DBS Bank Ltd. Clause 3.5.8 of the preliminaries to the Contract (“Clause 3.5.8”) further provided that the Contractor was not entitled to restrain the Employer from making any call or demand on the performance bond on any ground, except in the case of fraud. It was not disputed that the preliminaries formed part of the Contract.
After the commencement of the construction project, disputes arose between the Employer and the Contractor. These disputes culminated in the Employer’s purported termination of the Contract, based on two termination certificates issued by the architect for the project.
Subsequently, the Employer made a call on the performance bond for the full sum secured by the performance bond. In response, the Contractor applied for and obtained an injunction to restrain the Employer from receiving payment under the performance bond.
 
The Singapore High Court held that Clause 3.5.8 ousted the jurisdiction of the court and was therefore unenforceable. However, the Contractor’s application to restrain the Employer’s call on the performance bond was dismissed as unconscionability had not been established. Boththe Employer and the Contractor appealed against the decision of the Singapore High Court.
 
Decision Of The Court Of Appeal
 
Although the Singapore courts will ordinarily respect the principle of freedom of contract, they are, on occasion, prepared to override the contractual rights of the parties concerned if doing so would give effect to the greater public good. In particular, contracts that oust the jurisdiction of the courts have been held to be contrary to public policy and held to be void and unenforceable.
 
However, clauses that limit the rights and remedies available to the parties (that is, limitation clauses or exclusion clauses) have not been treated as an ouster of the court’s jurisdiction and have never been treated as void and unenforceable, given that neither party has been denied access to the court as such.
 
The CA held that Clause 3.5.8 was more in the nature of an exclusion or exception clause, which did not oust the jurisdiction of the court.
 
While Clause 3.5.8 sought to restrict the right of the Contractor under the performance bond to apply for an injunction to restrain the Employer from calling on the performance bond, in effect restricting an equitable remedy in a particular situation, it did not oust the jurisdiction of the courts as neither party was denied access to the courts.
 
Since there was no suggestion by the Contractor that there was any fraud involved in the Employer’s call on the performance bond, the effect of Clause 3.5.8 was that the Employer was entitled to call on the performance bond and the Contractor’s argument from unconscionability was immaterial to the proceeding.
 
Comments/Observations
 
The CA’s decision demonstrates that the Singapore courts will give effect to parties’ contractual agreements. In particular, in the context of a construction contract, the employer may contractually limit the grounds under which the contractor may apply for an injunction to restrain the call on an on-demand or unconditional performance bond to the case of fraud only.
 
We note that under the Contract, the Contractor was required to provide the performance security in cash, but was given the option of providing a performance bond in lieu of cash. Clause 3.5.8 emphasised this by explaining that the restriction on the right to call on the bond was “[i]n keeping with the intent that the performance bond is provided by the Contractor in lieu of a cash deposit”.
 
This “intensely practical” point impressed the CA. The CA noted that the Employer could have called for a cash deposit instead of a performance bond under the terms of the Contract and held that there was thus “no pressing reason in either principle or policy” why such a clause was contrary to public policy. This was so, even if the Contractor would not have entered into the Contract if the Employer had actually required a cash deposit.
 
Thus, while it may be somewhat impractical for a construction contract to require the contractor to put up a cash deposit, it appears that it is the contractual rights of the parties which the Singapore courts will have regard to in such an analysis. We note that the Public Sector Standard Conditions of Contract is an example of a local standard form which, in its current edition, imposes a similar requirement to provide a cash deposit or a guarantee in lieu of the cash deposit. The CA also noted, without deciding, that a clause like Clause 3.5.8 could potentially be subject to the Unfair Contract Terms Act (“UCTA”) and might be unenforceable if held to contravene the requirements of the UCTA. The CA, however, indicated that the policy underlying the operation of performance bonds points in favour of the reasonableness of such clauses.
 
It remains to be seen whether the Singapore courts will go so far as to uphold a clause in a contract that excludes fraud as a ground to restrain calls on the performance bond. If the position under the construction contract is that the employer is entitled to a cash deposit and alternative performance security is to stand in for such a cash deposit, such a clause could be seen as reasonable and held to be enforceable.
 
References:
 
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Drew & Napier
 
For further information, please contact:
 
Chau Ee Lee, Director, Drew & Napier
chauee.lee@drewnapier.com
 
Don Loo, Drew & Napier
don.loo@drewnapier.com
 

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