Performance Bond

1
Performance Bond

 An undertaking or guarantee
 Given by a bank, insurance company or
other financial institution (Bondsman)
 On behalf of its customer (Account Party)
 To a third party (Beneficiary)
 To indemnify the third party
 Up to a specified amount
 In the event of the customer’s failure to
perform his obligation under the contract
with third party
2
Performance Bond

 A well entrenched feature in construction

industry
 Serve as security for the performance of
the contract by the contractor (esp.
insolvency)
 Most construction contracts contain a
provision requiring contractor to furnish
performance bond in favor of Employer
 Common: 5 to 10% of Contract Sum
 In some cases, Condition Precedent to
Contractor’s entitlement for payment
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Type of Performance Bond

 Conditional (default) Bond

 Unconditional (on demand) Bond
 Whether a bond is unconditional or conditional
is a matter of construction. So long as clear
express words exist that the bondsman has to
pay on demand, the courts will construe it as
such. The problem arises when there is doubt
on the meaning of words used as evidenced in
Trafalgar House Construction (regions) Ltd v
General Surety and Guarantee Co Ltd. What
was intended to be on demand bond was ruled
by HL as conditional bond.
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York International Pte Ltd v
Voltas Ltd [2013] SGHC124
 York agreed to supply, deliver, test and
commission 5 chillers for a district cooling
plant.
 York procured the PG under the contract.
 Disputes arose when some motors in the
chillers had ceased to function and York
carried out urgent repairs.
 The parties could not agree on the cause
of the problem and whether it resulted
from any breach by York.

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York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 York claimed 10% of the purchase price
due upon the expiry of the DLP and
costs of repairs.
 These claims were referred to
arbitration.
 Voltas requested that the PG be
extended. York refused to extend the
PG’s validity.
 Volta then proceeded to make a
demand under the PG.
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York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 The terms of the PG:
In the event of York failing to fulfill any
of the terms and conditions of the said
Purchase Agreement, we shall indemnify
Voltas against all losses, damages, costs,
expenses or otherwise [sic] sustained by
Voltas thereby up to the sum of
S$523,000.00 (the guaranteed sum) upon
receiving your written notice of claim for
payment made pursuant to Clause 4
hereof. 7
York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 This was further reinforced by Para 5 of
PG which stated as follows:
We shall be obliged to effect 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 8
hereof) as final and conclusive.
York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 The Court found that the wording of the
PG was ambiguous and ultimately
concluded that the PG was conditional in
nature.
 Consequently, a breach of the underlying
contract leading to loss was required
before Voltas could make a demand on
the PG.
 Voltas could only make a demand on the
PG if and when York was found liable in
the arbitration proceedings between
Voltas and York arising from the 9

underlying contract.
York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 In reaching its conclusion, the Court
considered the underlying contract as
extrinsic evidence to assist in the
interpretation of the terms of the PG.
 The Court also considered the discussions
between the parties.

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York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 The rationale for the Court’s decision that the
PG was conditional was as follows:
 Clause 26 of Appendix 2 of the Purchase
Agreement explicitly states that the PG
shall be unconditional.
 However, the word “unconditional” is
nowhere to be found in the terms of the
PG.
 The omission of the word “unconditional”
here is an even stronger indicator that the
PG is conditional in nature.
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York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 This is also fortified by the parties
having had the discussion on the terms
of the PG, and the defendant having
had the opportunity to vet the terms
of the PG and suggest changes which
were subsequently adopted.
 The defendant did not suggest the
retention of the stipulation in Clause
26 that the PG was to be
unconditional.
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York International Pte Ltd v
Voltas Ltd [2013] SGHC1
 The demand made by Voltas was also
defective in that it had failed to state that it
had suffered loss.
 This would have constituted an additional
ground on which am injunction would have
been granted.
 The Court emphasized that the doctrine of
strict compliance applied to PG.
 An appeal was filed by Voltas against this
decision. There has as yet been no published
decision by the Court of Appeal.
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Conditional Bond

 Proof of the breach of the terms of the

contract by the contractor is a
precondition to the guarantor’s liability
under the bond
 Conditional bonds are not favored by
employers in construction industry as they
do not wish to encounter difficulties and
uncertainties when calling on the bond.
 Most if not all of performance bonds
under most building contracts in
Singapore are of on-demand or
unconditional type.
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Unconditional Bond

 The guarantor will become liable merely

upon demand being made without the
beneficiary having to show any breach of
contract or the actual loss suffered
resulting from the breach.
 Once demand is made, Guarantor is
obliged to pay without any regard to the
dispute between the Parties in the
underlying contract. He is not required to
conduct any inquiry as to there was any
actual breach of contract by the
Contractor.
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Unconditional Bond
 The Court will not intervene to prevent
the guarantor from paying under the bond
unless there is clear evidence of fraud
 In the case of Edward Owen
Engineering Ltd v Barclays Bank
International[1978] 1QB 159 Lord
Denning M.R. held that:
A performance bond…has many
similarities to a letter of credit,…All
this leads to the conclusion that PG
stands in a similar footing to a
LC…These PGs are virtually promissory
notes payable on demand.
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Unconditional Bond
 The Ngee Ann Kongsi v The Tai Ping
Insurance Company Limited [1997]
 C procured PG from D in favor of E.
 Substantial delays in the works and A
proceeded to certify delays in
completion by C
 On 16 Oct 1997, E made demand on
the PG
 D refused to pay contending proof of
fault was required.
 The Court found that as matter of
construction, PG was on-demand bond.
D’s liability to pay was triggered by E’s17
call.
Unconditional Bond
 Call upon bond has serious repercussions
on the contractor.
 Guarantor issuing PG will seek payment
from C by debiting C’s account or
exercising rights under counter-
indemnity obtained from C.
 Usual for insurance company issuing
bond to obtain counter guarantees and
indemnities from directors or partners
of C as security.
 C may suffer liquidity problems if the
sum under the bond is substantial.
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Remedies available upon call

 Where the Contractor feels that the call

upon the bond is unjustified, there would
be 2 courses of action open to him.
 Seekinjunction from Court to prevent
Guarantor from paying under the Bond
 Seek injunction from Court to restrain
the Beneficiary from making call on
bond or prevent him from receiving
monies under Bond
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Seek injunction to prevent
Guarantor from paying
 The attitude of the Courts is that unless there is a
clear evidence of fraud, they will not grant an
injunction order restraining Guarantor from
paying out under Bond
 In the case of Edward Owen Engineering Ltd v
Barclays Bank International[1978] 1QB 159 Lord
Denning M.R. held that:
 The bank must pay according to its guarantee
on demand if so stipulated without proof of
conditions. The only exception is when there is
a clear fraud of which the bank has notice.
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Seek injunction to prevent
Guarantor from paying
 Autonomy Principle
A bond constitutes a separate and
autonomous contract from the
underlying contract between
Beneficiary & Account Party
 Where bond is an on-demand bond,
there is a separate and autonomous
undertaking on the part of bondsman
to honor its payment obligation
regardless of disputes in the underlying
contract. 21
Seek injunction to restrain
the Beneficiary from making
call
 Attempts were made by some to try and
circumvent the autonomous principle and
the narrow fraud exception by seeking
injunction not against the bondsman but
against the beneficiary.
 Argument: the court would not be
interfering the sacrosanct nature of
bondsman’s obligations under the bond
but would be at liberty to examining the
underlying contract between the parties.

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 Seek injunction to restrain
the Beneficiary from making
call
 Potton Homes v Coleman Contractors (Overseas)
[1984] 28 BLR 19
 Dicta of Eveleigh LJ: If the contractor were
unable to perform because the employer failed to
provide the finance (advance payment), it would
seem wrong to me if the court was not entitled to
have regard to the terms of the underlying
contract and could be prevented from considering
the question whether or not to restrain the
employer by the mere assertion that a
performance bond is like a letter of credit……The
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facts of each case must be considered.

Seek injunction to restrain
the Beneficiary from making
call
 Royal Design Studio Pte Ltd v Chang Development Pte
Ltd [1991] 2MLJ 229
 P agreed to build 9 3-storey houses on land
belonging to D
 P agreed to bear construction costs in return for
which D agreed to convey 3.5 units to P
 P gave D a PG for $165,000
 Disputes arose between P and D on delay in payment
of PP certificates by D and late completion of works.
 D terminated agreement and asked P to vacate land
 P applied injunction to restrain D from calling on PG
and from evicting him from the land. 24
Seek injunction to restrain
the Beneficiary from making
call
 Royal Design Studio Pte Ltd v Chang
Development Pte Ltd [1991] 2MLJ 229
 Held: Injunction granted. Where the
injunction is directed against the
beneficiary and not the guarantor, the
Court will not be concerned with the
“irrevocable nature of the obligation
assumed by the relevant bank” under
the bond but with the “relationship
between the parties under the main or
underlying contract and the dispute
arising from such relationship.” 25
 Seek injunction to restrain the
Beneficiary from making call
 Royal Design Studio Pte Ltd v Chang Development Pte Ltd
[1991] 2MLJ 229
 There was a dispute between P and D on the underlying
contract as to whether P were actually in default. The
court could and did look into the dispute in considering
whether to grant the injunction.
 Considerable sum of money still held by D. P’s director
also issued personal guarantee of $1m as additional
security.
 The learned judge considered that D had large sums and
other security in their hands and assuming that damage
was suffered by them, they had adequate funds to
cover these losses. Consequently, it was inequitable
26 for
D to call on the Bond.
Current Position

 Bocotra Construction Pte Ltd v Attorney

General [1995] 2SLR 733
 A was appointed as contractor by PWD
for construction of Ph II of the CTE
 A furnished BG as security for due
performance of the Works
 Dispute arose between A and R over
delays and defects and arbitration
proceedings were commenced.
 R made a call on the BG.

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Current Position

 Bocotra Construction Pte Ltd v Attorney

General [1995] 2SLR 733
 Dispelled the misconception that
different principles should apply when
dealing with restraints on banks and
those dealing with restraints of callers
from calling of payment.

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Current Position

 Bocotra Construction Pte Ltd v Attorney General

[1995] 2SLR 733
 Karthigesu JA: “In our opinion, whether there is
fraud or unconscionability is the sole
consideration in applications for injunctions
restraining payment or calls on bond to be
granted. ……….. It does not lie in the mouth of
the defendant to claim that damages would still
somehow be an adequate remedy. ”

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Current Position

 Fraud Exception
 The position remains that there are few if
any reported cases in England or the
commonwealth where enforcement of an
unconditional performance bond in a
construction contract has been prevented on
the ground of “the fraud exception” despite
the frequently expressed acknowledgment
of the principle of such an exception by the
courts. (Hudson’s “Bldg & Engg Contracts”)

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Current position

 Unconscionability
 Even after Bocotra, there was still some
uncertainty as to whether the Court of Appeal
had intended unconscionability as a separate
limb or whether it was used interchangeably
with fraud. There were conflicting High Court
decisions on this point.
 The debate has now been laid to rest in a
recent pronouncement of the CA in GHL Pte
Ltd v Unitrack Building Construction Pte Ltd.
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Current Position

 GHL Pte Ltd v Unitrack Building Construction Pte

Ltd [1999] 4SLR 604
 GHL were developers of a property at Geylang
 Engaged Unitrack to be MC for the project
 Contract Sum was $5.78m, which included
$3.8m for nominated sub-contract works
 Performance bond at 10% of contract sum
 AGF issued PB in favor of GHL. This was kept
by Unitrack and not handed over to GHL.

32
Current Position
 GHL Pte Ltd v Unitrack Building Construction Pte
Ltd [1999] 4SLR 604
 On 30 Apr 1998, Unitrack and GHL executed a
variation of the MC. They agreed that NSC
would receive payment directly from GHL and
contract sum revised downwards to $1.96m.
 A dispute subsequently arose.
 GHL purported to call on PB for $578k.
 Unitrack commenced action against AGF &
GHL, claiming injunction restraining GHL from
seeking payment from AGF on PB on the basis
that in light of revision of contract sum, such
action would be unconscionable on the part of
GHL.
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Current Position
 GHL Pte Ltd v Unitrack Building Construction
Pte Ltd [1999] 4SLR 604
 Interim injunction applied and granted.
 Appellants appealed.
 Appeal dismissed. CA held that
unconscionability was a separate ground
apart from fraud for restraining a
beneficiary of PB from enforcing it. CA also
found on the facts of the case that GHL’s
call on PB was unconscionable.

34
Current Position
 GHL Pte Ltd v Unitrack Building Construction Pte Ltd
[1999] 4SLR 604
 In particularly, they considered the fact that there
was a drastic revision of contract sum downwards by
65% and that after the revision the NSC works were
taken out of the contract and GHL entered into
direct contracts with the NSCs.
 Under the MC, GHL was only entitled to a PB of an
amount equal to 10% of the contract sum, and 10% of
the contract sum as revised was only $196k. By
calling on the PB for the full amount of $578k, GHL
was effectively seeking to obtain a sum which
represented about 30% of the revised contract
35 sum.
Current Position
 GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 4SLR
604
 L P Thean JA: “We are concerned with abusive calls on the
PB. It should not be forgotten that a PB can operate as an
oppressive instrument, and in the event that a beneficiary
calls on the bond in circumstances, where there is prima
facie evidence of fraud or unconscionability, the court should
step in to intervene at the interlocutory stage until the
whole of the circumstances of the case has been investigated
…a temporary restraining order does not prejudice or
adversely affect the security; it merely postpones the
realisation of the security until the party concerned is given
an opportunity to prove his case.”
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Standard of Proof Required
 Bocotra Case
 To warrant injunctive relief, fraud or
unconscionability must be clearly
established.
 “To allay these concerns, we need only to
note that dispensing with the consideration
of the balance of convenience test does not
make an injunction any easier to obtain.
Indeed, a higher degree of strictness applies,
as the appellant will be required to establish
a clear case of fraud or unconscionability in
interlocutory proceedings. It is clear that
mere allegations are insufficient.” 37
Cases After Bocotra
 San International Pte Ltd v Keppel Engineering
Pte Ltd [1996]
 D were main contractor for warehouse
project
 P was sub-contractor to D
 P had to procure PB for 10% of contract sum
 Disputes surfaced and P’s subcontract was
terminated
 D made a call on PB
 P sought to restrain the call. One of the
grounds was D had acted unconscionably.
 P sought to adduce evident that D held some
$3m belonging to P comprising certified and
uncertified sums of work done and retention
38
monies.
Cases After Bocotra
 San International Pte Ltd v Keppel
Engineering Pte Ltd [1996]
 At first instance, injunction was refused.
 Whilst P were entitled to require D to set
off certified sums due to them, the other
amounts in their hands were at best
uncertified claims which have yet to be
substantiated.
 It was not possible on the untested
affidavit evidence to find that D’s claim
was lacking in bona fides.
 P’s appeal was dismissed by CA.
39
Cases After Bocotra
 Four Seas Construction Co Pte Ltd v The Tai Ping
Insurance Company [1997]
 P contracted with YHS to build factory &
office
 Due to P’s financial problems, YHS agreed to
advance monies to P to pay their DSC.
 Loan made by YHS amounted to $5.98m
 Direct payment to DSC totalled $9.7m
 YHS made demand on PB issued by D for
$3.2m to cover loan made by YHS to P
 P applied for & obtained interim injunction
restraining payment out on bond. P alleged
demand made on bond was dishonest as YHS
knew that it was not made with regards to
the loan agreement. 40
Cases After Bocotra
 Four Seas Construction Co Pte Ltd v The Tai Ping
Insurance Company [1997]
 Interim injunction set aside by Tay Yong Kwang
JC
 On the affidavit evidence before him, there
was at best a commercial dispute between
parties
 Allegation by P concerning under-valuation and
under-certification were nothing extraordinary
 Unless P could demonstrate that YHS’s
assessment was so absurd or their documents
in support were concocted or so irrationally
done that no reasonable person could honestly
believe them, P were not even at the starting
gates of establishing a prima facie case of
fraud or unconscionability. 41
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR3
 Facts
A contractor had furnished an on-
demand PB issued by an insurance
company to a property developer
under a building contract.
 The developer made a partial call on
the PB as “it allegedly believe that it
was entitled to LD from the contractor
for delay in the completion works
allegedly caused by the contractor.
42
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR3
 Decision
 The CA considered the entire chronology of
events leading up to the beneficiary’s call and
found, inter alia, that the call was unjustified
because the beneficiary had not, before the call,
made any “complaints or allegations, whether in
writing or otherwise, of any delay” by the
obligor. Also, based on the evidence, it seemed
to the CA that the beneficiary “did not genuinely
believe that the [obligor] was responsible for the
delay”. 43
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR352

 The CA considered the evidentiary

threshold required to support an
application for injunctive relief to
restrain a beneficiary from calling for
payment under a PB on grounds of
unconscionability.
 The Court held that this threshold is a
high one, being the demonstration of a
strong prima facie case of
unconscionability.
44
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR352

 Delivering the Court’s judgment, Andrew Phang

JA stated that:
A high bar is necessary because the
prohibitive injunction essentially restricts the
beneficiary of the PB from enforcing a
substantive right which he has contracted for.
 Typically,the PB is a substitute for a cash
deposit placed with the employer to secure
the contractual performance of the
contractor.
45
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR352

 In the Court’s view,

 The elements of unconscionability
were fairly uncontroversial and have
been variously stated to include
elements of abuse, unfairness and
dishonesty.
 It is a label applied to describe
unsatisfactory conduct tainted by bad
faith.
46
BS Mount Sophia Pte Ltd v
Join-Aim Pte Ltd[2012]3SLR352
 If the beneficiary’s call on the PB is motivated by
improper purposes or cannot be justified with
clear evidence, or in any other situation where
the beneficiary is less than certain about his
entitlement to call on the PB and for what
amount, the beneficiary ought to take a step
back and re-examine its entitlement and conduct
prior to calling on the PB.
 The question as to whether or not notice was
afforded to the obligor of his alleged breach
before the beneficiary’s call on the bond would
also be a relevant consideration.
47
Oppressive Document
 Tins Industrial Co Pte Ltd v Kono Insurance Ltd
[1998] 2 HKLR
 Hunter JA said that a bond “can be an
oppressive document”.
 When disputes arise between E and MC, or
between MC and SC, there is always risk that
the beneficiary may resort to specious and
unjustified claims for payment under bond.
 Calls or threatened calls on bond are often
used by E or MC to great effect as tactical
weapon to advance their bargaining position
in disputes.
 To a C who is already beset by cash-flow
problems, a call on bond may be the final
nail on the coffin. 48
Ban on use of Performance
Bond?
 Concern with abusive calls has led some
quarters to demand for an outright ban on the
use of on-demand bond in Construction
Industry.
 UK Report “Constructing the Team”
recommended bond should not be on-demand
but should have clearly defined circumstances
set out in them for being called.
 While E may not intend to call on PB
irresponsibly, C cannot rely on this. C must
therefore increase tender price to cover cost of
something which is not really necessary.

49
Ban on use of PB?
 The calls for abolition of on-demand bonds are
more applicable in UK context where UK Courts
have shown marked reluctance to venture beyond
fraud exception.
 Singapore’s judiciary has taken a more robust
approach in enforcement of bond and judicial
vigilance can be counted on to check abuse by the
unscrupulous.
 By insisting on strict standard of proof whilst
preserving the latitude to intervene where there
is fraud or unconscionability, Singapore courts
have preserved the commercial efficacy of PB
without detracting from their duty to do justice in
deserving cases. 50
Accounting for surplus monies
 Where a beneficiary has successfully made a call
under bond and amount received was in excess of
actual loss, Question arises as to whether he can
keep it or can Contractor recover overpayment.
 English court in Cargill International SA and
Another v Bangladesh Sugar and Food Industries
Corp held that in the absence of clear words,
there would at some stage in the future be an
accounting between the parties. What has not
been clear is when accounting should be carried
out and completed. 51