Under Singapore law, contractors can seek to restrain calls on on-demand bonds based on “unconscionability”. This is where the call is said to be made in bad faith or involves abusive, unfair or dishonest conduct. Unconscionability is a broader and less stringent standard than the traditional ground of fraud which is applied under English law.

The recent Singapore High Court decision in Shanghai Chong Kee Furniture & Construction Pte Ltd v Church of St Teresa [2024] SGHC 5 reinforces the position that the Singapore courts will be slow to restrain calls on on-demand bonds on the grounds of unconscionability, including even where a bond call is based on a contract administrator’s mistaken (but honest) overcalculation of delay liquidated damages.  This is a welcome decision for the beneficiaries of bonds, such as Owners/Employers and main contractors.

Facts

The Church of St Teresa engaged Shanghai Chong Kee Furniture & Construction Pte Ltd (SCK) as the contractor for restoration works at the Church’s premises. The Contract was based on the Singapore Institute of Architect’s Minor Works Contract 2012. SCK provided an unconditional performance bond for 10% of the contract sum.

The Contract required SCK to complete the works within a year. Completion was delayed by almost three years, due to various issues including COVID-19 pandemic restrictions.  Relevantly, SCK had submitted a notice of relief under the Singapore Covid-19 (Temporary Measures) Act 2020 (COTMA).

The Church called on the entire performance bond to recover delay liquidated damages, the cost of outstanding warranties and rectification works, and further anticipated losses relating to delayed completion.

SCK applied to the Singapore High Court for an injunction restraining the Church from receiving payment under the bond.  SCK claimed that the call was unconscionable as it was based on an inflated claim for delay liquidated damages that ignored SCK’s entitlement to COTMA relief and purported to recover the cost of works that were omitted from SCK’s scope.

Bond call was not unconscionable

SCK’s application was dismissed. The Court found that SCK did not satisfy the test of demonstrating a “strong prima facie case” that the Church’s call on the bond was unconscionable. The Court made these key observations:

Evidentiary threshold

  • The threshold of unconscionability under Singapore law is high. Additionally, injunction applications are interlocutory proceedings where Singapore courts will not appraise the merits of the parties’ decisions leading up to the bond call. Applicants are therefore expected to present clear evidence of unconscionability.
  • In this case, SCK failed to clearly prove the alleged omissions to its scope of works. If anything, SCK acknowledged in correspondence that it would undertake the works it argued were omitted. While the Church’s evidence did not fully support its counterargument, the Court would nonetheless refrain from delving deeply into the evidence and determining the merits.

Attribution of a contract administrator’s error

  • SCK argued that the contract administrator failed to account for COTMA relief when calculating the delay liquidated damages payable, thereby inflating the Church’s entitlement. The Court found this to be immaterial.
  • First, neither party challenged the correctness of the contract administrator’s calculations before the bond call. Even if incorrect, the Church’s demand was not made in bad faith as it would have been based on an honest, though mistaken, belief as to its delay liquidated damages entitlement.
  • Second, the contract administrator’s error (if any) is not automatically attributable to the Church. Under the Contract, the contract administrator acts independently and its conduct in determining payment deductions is “simply irrelevant in determining whether [an employer] had acted unconscionably“. That said, it may be unconscionable had the Church been informed about the contract administrator’s error and proceeded to call on the bond regardless. That was not the case here.

Divergent positions

Unlike English and Hong Kong law which typically only allow parties to restrain calls on on-demand on the grounds of fraud or where the employer is clearly precluded from making a call by the terms of the underlying contract, Singapore law allows for an additional ground of unconscionability.  The decision in Shanghai Chong Kee Furniture & Construction Pte Ltd shows that the unconscionability exception does not necessarily make it easier for contractors to restrain bond calls as they will still be held to exacting standards.

In practice, Singapore courts have only found unconscionability in limited circumstances and more frequently where the call is:

  • For sums well in excess of the quantum of the beneficiary’s actual or potential loss, or where a bond guarantees a previous, higher contract price. Even if the sum called was excessive, Singapore law does not require the bond call to be restrained in its entirety.
  • Based on contractual breaches for which the beneficiary making the bond call is responsible.
  • Tainted by “unclean hands”, e.g. supported by inflated estimates of damages or mounted on the back of selective and incomplete disclosures.
  • Made for ulterior motives, e.g. a call made to ameliorate the employer’s cash flow difficulties or to claw back sums paid under an unfavourable adjudication decision.
  • Based on a position which is inconsistent with the stance that the beneficiary took prior to calling on the performance bond.

Nevertheless, the range of circumstances that the Singapore courts would consider when determining unconscionability is still wider than the factors considered by the English courts.

Practical takeaways

Consideration should be given to the terms of on-demand bonds, particularly in relation to the governing law to be specified:

  • Owners (and main contractors dealing with sub-contractors) should consider whether to adopt English law as the governing law instead to limit the ability of contractors (or sub-contractors) to resist calls.
  • Alternatively, if Singapore law is chosen, it is also possible to contractually exclude the unconscionability exception (CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and another and another appeal and another matter [2015] SGCA 24). In principle, the Singapore courts should uphold such clauses, subject to the test of reasonableness.
  • Contractors (and sub-contractors) may wish to resist the above to maintain the ability to rely on the unconscionability principle.

Parties should also consider carefully circumscribing in their construction contracts the circumstances in which a bond can be called, as well as how the proceeds should be treated.  Providing this additional clarity is useful to ensure a clear allocation of risk.

For further information, please contact Dan Waldek, Tse Wei Lim or your usual Herbert Smith Freehills contact.

Daniel Waldek
Daniel Waldek
Partner, Singapore
+65 6868 8068
Tse Wei Lim
Tse Wei Lim
Senior Associate, Singapore
+65 6868 8069

Disclaimer

Herbert Smith Freehills LLP has a Formal Law Alliance (FLA) with Singapore law firm Prolegis LLC, which provides clients with access to Singapore law advice from Prolegis. The FLA in the name of Herbert Smith Freehills Prolegis allows the two firms to deliver a complementary and seamless legal service.