TOPIC 7: PERFORMANCE BONDS

Introduction to Independent Guarantees

Independent An undertaking by the issuer, made at the request of the applicant, to pay a sum of money to the beneficiary provided a certain event takes place The terms independent or autonomous from the underlying debt, or unconditional in the sense of not being conditioned upon proof of default of the principcal. The terms independent, autonomous or unconditional, when used in relation to guarantees, generally refer to the relationship between the banks undertaking to pay on the one hand, and proof of default in the underlying contract on the other. The bank will not investigate whether A has really defaulted on his loan to B, as long as the requirements for payment, such as the production of a written demand, are met. Requiring proof of default would defeat the purpose of the independent guarantee as providing the B with quick redresss Undesirable as it would require bank to make investigations and assessments beyond its normal sphere of operation which is time consuming and uncertain HOWEVER, though the B may obtain payment as long as he makes a valid demand, the intention of the parties would usually be that he should call on the guarantee only if he believes that the applicant has defaulted on the underlying contract. What happens when the B asserts a call wrongly? If B did not believe in his assertion, the fraud exception might apply issuer does not need to pay him If B honestly believed there was a default but it turns out he was wrong, h would have to refund the amount claimed under the guarantee Possible for LOC to fit into this definition Generally the same legal principles apply as in commercial LCs Event that takes place in a LOC is the presentation of docs Usually the event that takes place in an independent guarantee will be a demand by the beneficiary What are they used for? International construction projects: Construction company has to give an independent guarantee which the employee. Guarantee for performance of the contract. Can also be used for guarantee of payment of the contract International sale contract LOC can be given to the seller But if seller were to breach any performance, buyer will be able to claim under independent guarantee I.e. any situation in which one party wants to guarantee the performance by another party Who are the parties? Issuer, applicant and beneficiary Correspondent bank may also be involved (not the focus here) LOC situation Performance bond situation paying bank can pay the beneficiary on the performance bond but paying bank will get indemnity from the issuing bank all the way from the indemnity from the instructing party Issuer will pay the beneficiary upon a certain event Behind the scenes, applicant will reimburse the issuer Applicant will then be out of pocket until trial. He will be out of pocket immediately his liquidity is damaged. Even if applicant wins, B might not be able to pay (might be insolvent by the time the action is tried) Any dispute between the applicant and the beneficiary in the underlying contract will have to be settled later

 Purpose? Primary purpose of using an independent guarantee? For the beneficiary to get paid quickly and easily by a reliable paymaster, without having to engage in protracted arguments This will be at the expense of the applicant, who will have to pay first and argue later Beneficiary is in an advantageous position as he will be put in funds pending the adjudication of the merits of his underlying dispute with the applicant How many related contracts are there? Underlying contract between applicant and beneficiary Applicant and Issuer Issuer and beneficiary Terminology is inconsistent International/neutral terminology: independent guarantees Most commonly terminology used in UK, Spore: performance bond Other names: performance guarantees; demand guarantees; first-demand guarantees; ondemand guarantees; demand bonds; first-demand bonds etc Cf secondary liability guarantee Specialised form: standby letters of credit (originated in USA) Origin is that they would have been used to guarantee a payment obligation Now more broadly used, not just payment obligation but a performance obligation Compare with (Traditional Common Law) Guarantees/ Secondary liability guarantees Under a traditional guarantee, liability of guarantor is dependent on default of the debtor Primary debtor has to be found liable first in order for guarantor to be liable (secondary liability) Protection for guarantor? Indemnity from debtor in respect of any payment that the guarantor is required to make (also provided for independent guarantees) Cf independent guarantee No need to prove there is any default in the underlying contract. Only a demand has to be made. But how can the bank be called to pay on demand without any default on the part of the applicant? But this is the whole point. Issuer has to pay on a stipulated event i.e. a demand, regardless and whether having to check whether the applicant has breached the contract as such. Commercial LCs Difference 1: Function of LOC is a mode of payment for intl sale of goods. Commercial credit is used in the sale of goods to assure the seller that he will be paid by a trustworthy source once he has shipped the goods and presented conforming documents. Cf independent guarantee. Used in a wide range of transactions to protect the beneficiary against default by the applicant in the underlying contract. Operate as some form of security. Purpose is a guarantee but the obligation of the issuer is a primary one (no need for beneficiary in order to claim on the independent guarantee to show that the applicant has breached the contract) However, although he does not have to show applicant has breached contract, he may have to assert that there was a breach (some form of moral/minor safeguard for the applicant) What is a valid demand? Sometimes contract will say demand will have to be accompanied by a statement of the beneficiary that there has been a breach by the applicant All he has to do is to say there was a breach but dont have to show (there is a difference)

A fraud sort of action may lie of there was in fact no breach and beneficiary said there was a breach Difference 2: Expectation of the parties in relation to a claim for payment is different. In a LOC, parties intend that the seller should look, in the first instance, to the issuing bank rather than the buyer when he seeks payment for the goods Commercial credit serves as the primary form of payment for goods sold Parties fully expect that the B would make a claim under the credit in normal circumstances In contrast, an independent guarantee is usually intended to be activated only if the applicant has failed to perform his obligations in the underlying contract If things go well, it may not need to be called at all Difference 3: Difference in the amount typically covered by the banks undertaking A commercial credit is usually for the full price of the goods sold In an independent guarantee, the amount of the banks undertaking si usually a percentage of the underlying contract Difference 4: Requirements of a valid claim A beneficiary who seeks payment under a commercial credit willhae to present conforming docs, including the BOL or other transport doc, insurance cert and commercial invoice. Rarely required under an independent guarantee Payment under an independent guarantee could be made merely against the Bs written demand, or a written demand coupled with the Bs statement that there has been a breach of the underlying demand Easier for B to perpetuate a fraud Note also that independent guarantees are often used as the counterparts of commercial credits A seller who is the B under a commercial credit procured by his buyer in his favour may in turn procure an independent guarantee in favour of the buyer to guarantee the performance of the sellers obligations under the sale contract. Note importance of terms of the contract Cannot take the label of being conclusive If something is labeled as a performance bond, may not be one must look at the substance. Also note that the rights and obligations in each transaction would depend on the precise terms of each transaction, unlike in commercial credits, where the contract almost always includes the UCP, there is much less uniformity in the content of independent guarantees

When is beneficiary entitled to claim on PB?

Terms of the performance bond (with the issuer) Conditional versus unconditional bonds PBs: unconditional, no proof of default required Whether it is conditional upon prof of applicants default depends on construction of the contract. Requirements of a valid demand: compliance with terms of the bond (later) Terms of the underlying contract (with the account party) Understanding that the employer (the beneficiary) will only call upon the PB in a case where there is breach But in the case where the employer calls upon the PB where there is no breach , This will be a breach of the underlying contract (could be a repudiatory breach and applicant can terminate the contract) Also note fraud exception which is also applicable in PB case HOWEVER, in a dispute, everyone will think they are right In the end, LC ensures that people get the money first even before the resolution of the dispute and in the end it was wrongly paid, there will be accounting between the parties

Cases

Construing the Performance Bond

(1) Demand guarantee or normal guarantee?
Gold Coast Ltd v Caja de Ahorros del Mediterraneo and Others *2002+ 1 Lloyds Rep 617 Conditional or unconditional bond? (Refund guarantee) Clause 1: .In consideration of your payment . . . of the . . . instalment . . . under the Shipbuilding Contract we do hereby irrevocably and unconditionally undertake . . . that we will pay to you within five (5) days of your written demand . . . amounts due to you under this Guarantee . . . This Guarantee is subject to the following conditions: 1. We shall pay any amount payable under this Guarantee upon receipt of a certificate issued by LLOYDS BANK PLC [assignee of the guarantee] stating the amount of the Instalment paid to the Builder under the Agreements, the date of such payment [,] that you have become entitled to a refund pursuant to the Agreements and that the Builder has not made such refund. Just have to state that the beneficiary has paid the amount of the instalment ot the builder and that the builder has not made a refund Is this an independent guarantee or an ordinary guarantee? This was an independent guarantee as a performance bond just need to state there was a default Label was not conclusive Court took into account Irrevocably and unconditionally undertake Pay on written demand The only condition of payment stated in the instrument was that the demand be accompanied by the requisite cert issued by Lloyds Banks stating that the builder had not refunded the money Comment: Seems to be more stringent on the buyer than the typical requirement where the Bs assertion of the applicant breach was sufficient. Indeed, if the bank had any doubts as to whether the buyer was entitled to a refund, it could withhold the cert in which case the condition for payment under the instrument would not have been satisfied The presence of a cause restricting the banks defences e.g. any alteration would not release the surety from libability, may result in the court construing the instrumtn as one that imposes sec liability rather than primary one See Trafalgar House Consturction. However, as shown in this case, it is not conclusive Languge here indicated an unconditional obligations cf Tralfalgar where the instrument contained other indicators of suretyship such as language of suretyship Econ Piling Pte Ltd v Aviva General Insurance Pte Ltd and Another [2006] 4 SLR 501 Default bond or on demand bond? NOW THE CONDITION of the above-written Bond is such that it shall be void only in either of the following cases namely: (1) if [Econ] or [its] successors or assigns shall well and truly perform, fulfil and keep all and every of the terms, covenants, conditions, clauses, provisos and stipulations of the Contract on the part of [Econ] or [its] successors or assigns to be observed, performed, fulfilled and kept according to the true purport, intent and meaning thereof; or (dependent on non-performance) (2) if, on failure or default by [Econ] or [its] successors or assigns so to do, [Aviva] shall, without proof or conditions, pay to [JTC] the full amount of the above-written Bond. (suggests possibly an independent guarantee) Court held that this was a default bond not a demand bond and default had to be established by the beneficiary (See clause 1) Here limitation period had passed so that primary party was not liable Since cannot claim against primary party, guarantor will also not be liable (secondary

liability)

JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 True indemnity performance bond (secondary liability) or on demand (deferred demand) performance bond (primary liability)? 1. In the event of [Gammon] failing to fulfil any of the terms and conditions of the said contract, [the Bank] shall indemnify [JBE] against all losses, damages, costs, expenses or [sic] otherwise sustained by [JBE] thereby up to the sum of Singapore Dollars One Million, One Hundred and Fifty One Thousand and Five Hundred Only (S$1,151,500.00) (the Guaranteed Sum) upon receiving your written notice of claim made pursuant to Clause 4 hereof 4. This guarantee is conditional upon a claim or direction as specified herein being made by [JBE] by way of a notice in writing addressed to [the Bank] and the same being received by [the Bank] (mode of demand) 5. [The Bank] shall be obliged to effect the payment required under such a claim or direction within 30 business days of [its] receipt thereof. [The Bank] 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 *it+ as final and conclusive. (seems to be primary liability) Court held that it was a true indemnity performance bond In Cl 1, seems that losses must be sustained before indemnity would arise Only indemnified against actual losses Acknowledged that there was some ambiguity in the bond If there is any ambiguity, they would be entitled to treat the guarantee as a secondary guarantee rather than a primary guarantee Significant. Different from the approach taken by the English cases IE Contractors: Court there held that where there was ambiguity This idea was stated in different strengths throughout the case. Court entitled to treat the guarantee as sec court should treat the guarantee as sec But even if it had been an independent guarantee, they felt that nevertheless a call on this would have been unconscionable anyway Beneficiary would have lost anyway

Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 Facts Build a ship in China for Liberaian buyer and buyer was financed by the Greek bank. Bank had guaranteed the payment obligation of the buyer. Ship building contract was payable in installments. Question was the second installment whether the bond or guarantee was one of suretyship or a demand guarantee? Relevant because the bank had given a bond to guarantee the payment of second installment in the ship building contract. Second instalment was payable whent eh first piece of steel was cut in the shipyard. Buyer stated that hey were okay with the cutting of the steel int eh shipyard. Also, refund had to be made to buyer under a refund guarantee guarantee given by ship builder. Enable the buyer who has paid installments should something happen and you dont get the ship in the end. Before buyer pays instalment, he would want to get a refund guarantee in case something goes wrong So here, payment of contract was subject to a performance bond by the bank AND a refund guarantee. Questions Was the first piece of steel even cut in the shipyard? Was a refund guarantee even given? Here not sure if the first piece of steel even cut. So important to ask the question what kind Contract of suretyship or demand guarantee?

 Court held: 6 things that it is an independent guarantee and 4 things that say it is a suretyship. But cannot weigh by numbers. Everything in the end depends ont eh words actually used int eh doc by the parties There is a presumption that if certain elements are present, the docs will be construed in one way or another. Presumption raised when: th Guidance from Pagets Law of Banking (11 ed): Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay on demand (with or without the words first and/or written) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee. Here, it was a demand bond. th Even though 4 requirement here was not satisfied. Reasoning Important for parties to know what to expect when they enter into international sale transactions with each other

(2) What obligations are covered under the bond?

Chip Hua Poly Construction Pte Ltd v Housing & Development Board [1997] 2 SLR 797 Which obligations are covered under the bond? Contract between Chip Hua & HDB for Jurong West project Clause 1: provided for unconditional PB; Clause 3: provided that HDB may demand payment of a sum or sums under this Bond in satisfaction of moneys due from the Contractor to the Board under the provisions of [ the said Contract or+ any other contract made between the Contractor and the Board. Question: Chip Hua had liabilities under contracts where it was a party jointly with others could HDB call on Jurong West PB to satisfy these claims under the joint contracts? Held (reversing the TJs finding): Although clause 3 extended the scope of the bond beyond the Jurong West Project to cover also other contracts between Chip Hua and HDB Only covers contracts that Chip Hua has made independently with orders but not when it was a party jointly with others Hence, court decided Comments: Practically speaking, not always easy for an issuer to assess whether a demand made by the B is within the scope of the guarantee. Chip Hua - difference in opinion where the CA overturned the TJs finding on this issue An issuer could be in a dilemma whether to pay on the guarantee when it is unsure whther a call falls within the scope of its undertaking If it refuses to pay, it might not succeed in claiming reimbursement from the applicant should its assessment turn out to be wrong cos a court finds the call was beyond the scope of the guarantee (Note that unlikely to happen in a well-drafted guarantee) Further, issuer may not be aware that facts exist which might take a call on a guarantee outside its scope Normally all that is needed is a written demand from the B and the bank will pay Often it is the applicant who finds out the potentially incalid call and who alerts the issuer not to pay and./or applies to injunction to restrain payment OR if it is too late, take an action against he B under the underlying contract for calling ot eh guarantee when eh was not entitled to do so Undermines certainty if court uses this reason i.e. outside scope of the guarantee to award injunctions, in absence of the fraud exception

Autonomy and the fraud exception

 Cases on performance bonds have been borrowed by courts in LOC cases to borrow on principles Governing principle: Autonomy Independent guarantees are irrevocable undertakings by banks that are independent form te underlying contract they are meant to secure Issuers obligation to honour an independent guarantee is not affected by the issuers rights and obligations under its contract with the applicant IN the absence of fraud, issuer must honour its obligations provided conforming demand is made, regardless of dispute in the underlying contract or of the effectiveness of the issuers reimbursement arrangements with the applicant

(1) General Principles

Principle of autonomy The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions The only exception is when there is a clear fraud of which the bank has notice Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 Lloyd's Rep 166 Facts PB there was given by the seller. Normal sale contract i.e. for the supply for glass houses in Libya. Buyer to pay by irrevocable confirmed LC; Supplier arranged PB payable on demand without proof or conditions; Buyer (also beneficiary of PB) did not comply with LC requirement, yet called on PB; S sought injunction to stop bank paying CA Held: Bank must honour PB. Only exception clear case of fraud of which the bank has notice. Here it was only sharp practice, not fraud. Denning LJ: PBs are virtually promissory notes payable on demand. It stands on similar footing to a L/C. Key Principles It has many similarities to a letter of credit It has long been established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit satisfied Any dispute between the buyer and seller must be settled between themselves All this leads to the conclusion that the performance guarantee stands on the same footing as a letter of credit A bank which gives a performance guarantee must honour that guarantee according to its terms It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier had performed his contracted obligation or not; nor with the question whether the supplier is in default or not The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions The only exception is when there is a clear fraud of which the bank has notice Comments Seems that English courts take principle of autonomy very seriously Court will only interfere in exceptional circumstances E.g. Clear case of fraud Harbottle (R.D.) (Mercantile) Ltd v National Westminster Bank Ltd [1977] 3 WLR 752 It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce.Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the

merchants to settle their disputes under the contracts by litigation or arbitration. A bank issuing a performance guarantee was not obliged to inquire into whether there was a breach of the parties underlying contract Howe Richardson Scale Co Ltd v Polimex-Cekop [1978] 1 Lloyd's Rep 161 Significance the banks position in a PB is the same as in a confirmed irrevocable L/C A bank issuing a performance guarantee was not obliged to inquire into whether there was a breach of the parties underlying contract Facts The plaintiffs agreed to sell equipment worth $500k to Polimex Payment under the contract was to be made in 3 separate instalments of $25k, $50k and $425k The plaintiffs provided a performance bond for $25k on their first demand in case of nondelivery of the ordered goods The buyers made substantial payments under the contract but failed to give instruction to the sellers for the shipment of goods and as such they were not delivered Buyers called for payment under the performance bond The plaintiffs applied for an injunction to restrain the buyers from making a call for payment Held: the bank issuing a performance guarantee was not concerned with the dispute between the buyers and sellers over the underlying contract of sale Roskill LJ: The bank in principle, is in a position not identical with but very similar to the position of a bank which has opened a confirmed irrevocable letter of credit Where the obligation arises under a letter of credit or under a letter of guarantee, the obligation of the bank is to perform that which is required to perform by that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to the sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen The bank takes the view that the time has come and it is compelled to pay; it would be quite wrong for the Court to interfere with Polimexs apparent right under this guarantee to seek payment from the bank, because to do so would involve putting upon the bank an obligation to inquire whether or not there had been timeous performance of the sellers obligations under the contract of sale

The Bhoja Trader *1981+ 2 Lloyds Rep 256 PBs are in the nature of LCs. Thrombosis would occur if, unless fraud is involved, the cts intervene to disturb practice of treating rights under PB as being equivalent of cash in hand. Bolivinter Oil v Chase Manhattan Bank [1984] 1 All ER 351 PBs unique value: banks undertaking to pay despite disputes in the underlying contract. Injunction would undermine banks reputation. Exception: where there is knowledge of the bank that there is clear fraud .

(2) Singapore position clarified in:

Bocotra Construction Pte Ltd v A-G (No 2) [1995] 2 SLR 733 (READ) Principles stated: The autonomy principle the guarantee constitutes a separate contract from the underlying transaction. The cash in hand principle reflecting the importance of promoting commercial efficacy and certainty in the use of letters of credit, guarantees and bonds. This ties in with the autonomy

principle. In essence, court wont touch/interfere with the banks obligation to pay. The fraud exception the sole exception to the autonomy and cash in hand principles arises where the plaintiff can establish fraud in the circumstances of the call or payment. This permits injunctive relief. There is no distinction between cases where an injunction is to restrain a bank (on payment) or the beneficiary under the guarantee (on calling for payment). Comments Birth of unconscionability Cases after Bocotra have held that unconscionability is different from fraud

(3) Must fraud be in relation to the documents?

Letters of Credit (Yes) Brody White v Chemet Handel Trading: for L/C, fraud must relate to the documents United City Merchants case fraud exception applies where beneficiary fraudulently presents to bank documents that contain material representations of fact that he knows are untrue But contrast cases like Czarnikow v Rionda *1999+ 3 Lloyds Rep 187 (departing from the principle) For Performance Bonds? Idea of documentary fraud might not be applicable in PB; banks do not deal with shipping documents which might contain material representations of fact that are untrue

(4) What constitutes fraud in relation to Performance Bonds?

Chartered Industries v DBS [1999] 4 SLR 655 Fraud: involves dishonesty; absence of an honest belief that there was a breach of contract when demand on PB was made State Trading Corp of India v ED & F Man [1981] Com L.R. 235 the buyer, when giving notice of default, must honestly believe that there has been a default on the part of the seller If there is no honest belief, it may be evidence of fraud. If there is sufficient evidence of fraud, the court might intervene and grant an injunction.

(5) Standard of proof for fraud

Fraud must involve dishonesty. However, the absence of an honest belief in the entitlement to call on the independent guarantee is difficult to test Even if it turns out the Bs call on the guarantee was misguided becayse a court later finds out tha there was no breach of contract by the account party, this does not mean that B was not entitled to call on the guarantee at the itme tha the did Important purpose of an independent guarantee is to put the B in funds without waiting for a trial hence, B should be entitled to call on the bond as long as he honestly believes that the account party is in breach of contract Should not be prejudice the B if he turns out to be honestly wrong in his assessment This could pose some danger to the applicant at the mercy of Bs judgment Applicants may therefore build a buffer into the price they charge the B under the contract and this could operate like a discount or lead to the B paying a higher price, to take into account this risk that the IG may be called upon in the event of dispute even tho the contract had not been breached rd Also to inject greater objectivity into the process, the IG can provide for input by a neutral 3 party, by requiring for example, a cert from an arbitrator certifying the applicants default. Note that this does not turn the IG into a conditional undertaking because the trigger for the issuers obligation is still presentment of the required docs and not proof of the applicants default

To reduce the moral hazard of an unmeritorious call, the condition of payment under the IG could be for the B to assert in a written demand that there has been a breach of contract byt eh applicant Deterrent against fruaulent calls Such a statement might expose the B to an action in deeit and/or obtaining property by deception if he did not believe in its truth When fraud exception applies, issuer will be absolved from making payment under the IG even fi the B makes a facially conforming demand HOWEVER, issuing bank is unlikely to refuse payment by relying on the fraud defence (more so here than in LOC situation) LOC hard to assess wehther docs presented under credit contained false representation. Even harder in IG sitautaion to asses if a person is being honest in making a demand Hence, fraud case involving IG will most commonly be initiated by an injunction by an applicant to stop an issuer from paying or the B from calling on the IG. UK cases: Edward Owen Engineering [1978] UK CA Significance: need a clear case of fraud of which the bank has notice Facts Pf entered into contract to supply and install glass houses for customers in Libya. Contract was to be governed by Libyan law. Payment under the contract was to be made by means of an irrevocable confirmed letter of credit. Pfs provided buyers with a performance bond authorising the df bank to make payment in demand without proof or condition. The buyers bank issued a letter of credit in favour of the pfs but refused to add their confirmation. The pfs thereupon repudiated the contract on the ground that the buyers failed to open a confirmed letter of credit. Confirmation of letters of credit have the effect of granting the applicant of the letter the individual promises of 2 banks, one issuing and the other in the receiving jurisdiction for payment once the conditions in the letters are satisfied. Usually applied for when the applicant of the letter is concerned about the political or economic stability of the buyers country; or with the issuing banks financial reputation. Buyers made a call for payment under the performance bond. Pfs applied for an injunction to restrain the bankers from making payment under the performance bond. Held: The court would not interfere with a banks obligations to pay under a performance bond unless there was a seriously arguable case of fraud. Lord Denning: Any dispute between buyer and seller must be settled between themselves To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank The bank ought not to pay under the credit if it knows that the documents are forged or that the request for payment is made fraudulently in circumstances when there is no right to payment. So long as beneficiary makes a honest demand, the bank must pay; banks will rarely be in a position to know whether a demand is honest or not; at any rate they must prove that it is dishonest; so they will have to pay Poh: fraud usually means dishonesty party has no honest belief that he has legal entitlement United Trading Corporation v Allied Arab Bank [1985] 2 Lloyd's Rep 554 Ackner LJ for CA: not necessary to rule out every innocent explanation; need strong corroborative evidence; usually require beneficiary to be given opportunity to answer and failed to provide adequate explanation; it must be seriously arguable that on the material before the court, the only realistic inference is fraud

 if bank has already paid on the credit, and applicant alleges breach by bank, then evidence of fraud must be clear, both as to the fact of fraud and the banks knowledge before payment Note: The standard of proof of fraud set out in this case, concerning performance bonds, has been applied in documentary credit cases. Singapore cases: Chartered Industries v DBS [1999] 4 SLR 655 (SGHC, Chan Sek Keong originally decided in 1992) Significance Standard of proof in fraud should be less stringent in PB cases than LC cases Chan JC preferred a strong prima facie case (less onerous than Ackner standard of only realistic inference being fraud) Reasons for applying Ackner std in PBs not as compelling as for LCs. PB (a security) does not serve same function as LC ( a form of payment. Thus, less hardship if temporary restraining order granted in a PB case. A temporary restraining order does not affect the security mor the beneficiarys rights in it. It merely postpones the realisation of the security until the Pf is given an opportunity to prove his case IN principle, no reason why the Pf is required at the interlocutory stage, to establish fraud or prove that the only realistic inference that can be drawn before the materials before the court is that of fraud Profs book: Even if the inunction is granted to restrain payment, does not cause undue hardship because B merely has to wait longer for compensation. If he proves his case at trial, he will get his money eventually (also highlighted again in GHL)) On facts of case, both standards satisfied Based its decision on the English CA case of Potton Homes Ltd v Coleman Contractors Ltd (1984) 28 Build LR 19 : Significance: Highlights that a performance bond need not always be treated like a LOC Obiter dicta of Eveleigh: As between buyer and seller the underlying contract cannot be disregarded so easily. If the seller has lawfully avoided the contract prima facie, it seems that he should be entitled to restrain the buyer from making use of the performance bond Moreover, in principle the judge was of the view that it is not possible to say that in no circumstances whatsoever, apart from fraud, will the court restrain the buyer The facts of each case must be considered. IF the contract is avoided or if there is a failure o consideration between buyer and seller for which the seller undertook the to procure the issue of the performance bond, I do not see why, as between the seller and buyer, the seller should not be unable to prevent a cll upon the bond y the mere assertion that the bond is to be treated as cash in hand Note that actual decision conformed to the orthodox cash in hand principle Comments: Eveleigh LJs statements in Potton Homes Ltd v Coleman Contractors (Overseas) Ltd, at p 28, which were followed by LP Thean J (as he then was) in Royal Design Studio Pte Ltd v Chang Development Pte Ltd, at p 234. These statements suggest that the court, in exercising its equitable jurisdiction to grant an injunction restraining a call or payment on performance bonds, should not be precluded from adopting a broad approach, if the facts warrant it, to examine disputes relating to the underlying transaction as well. This passage has been quoted in Singapore cases which put forward the idea that there was a distinction between the applicable principles in cases where the injunction sought to restrain banks from making payment, and those where the intended restraint was on the beneficiaries under the bond. Also been used to support the development of an unconscionability and lack of faith exception to the autonomy pricniple

Chan Js standard of a strong prima facie case in Chartered Industries v DBS was endorsed by Singapore Court of Appeal in Dauphin International Engineering v HRH Sheikh Sultan bin Khalifah [2000] 1 SLR 657: Summary of English Position cf Singapore position?: English courts only recognize the fraud exception English courts seek to maintain confidence in the performance bond system Gives commercial parties confidence in the performance of the performance bond More exceptions would undermine confidence in the system Principle of non-interference is well established It seeks to maintain confidence in the system of payment

Quare: Different principles where injunction is sought against the beneficiary and not against the bank?
Generally, courts show a reluctance to interfere with a beneficiarys demand for payment under a performance bond if there is no clear evidence of fraud In principle, there is no real difference between trying to restrain a bank and trying to restrain a beneficiary for demanding payment from a bank because the granting of the restraint will severely damage confidence in this system of payment English authorities have consistently decided that the same principles are applicable when an attempt is made to restrain payment under a performance bond, and it does not matter whether the target of the restraint is against the bank or the beneficiary of the bond Earlier cases in Singapore HC: Yes. E.g. 1 Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1991] 2 MLJ Significance: Case concerned dispute between beneficiary and applicant, so court can look at underlying contract in order to decide whether to grant an injunction; Case not concerned with whether the bank is to be prevented from fulfilling its obligations Rule of non-interference did not apply when a dispute involved a bond applicant and a beneficiary over their underlying contract as no bank was involved Facts Df engaged the pf to build 9 3-storey houses on a piece of land belonging to df. Pf agreed to bear cost of construction, in return the df agreed to convey 3.5 units of the houses to the pf. Pf provided the df with a performance bond for $165k but the amount of the bond was later reduced to $120k. Subsequently, a dispute arose between the pf and the df over their contract. Df terminated the contract and sought to evict the pf. Pf obtained an ex parte injunction to restrain the df from making a call for payment under the performance bond and from evicting the pf. Df contended that pf should not be allowed to do so as this would constitute an interference with the banks obligations to make payment under the performance bond. Held: the rule against interference with the banks obligations to make payment under the performance bond did not apply when the dispute involved the applicant of the bond and the beneficiary over their underlying contract. LP Thean J.A., following Eveleigh L.J.s observations in Potton Homes: We are not concerned with the irrevocable nature of the obligation as sumed by the relevant bank; we are concerned with the relationship between the parties under the main or underlying contract they made and the dispute arising from such relationship. In the present case, the pf is not restraining the insurance company from paying on the bond, and therefore the question of the insurance coy not being able to honour its obligations does not arise. The dispute is only between the pf and the df and relates solely to the main or underlying contract made between them . In such case, I do not see why the court should be

inhibited from exercising its equitable jurisdiction and restraining the df from calling on the bond, if the facts warrant it, merely because the bond is like a letter of credit. Criticisms: Distinction is not entirely sound if the primary object of the rule of non-interference is to preserve confidence in this system of payment. Need to preserve confidence in this system of payment is equally significant in both situations. If an applicant of a performance bond is not allowed to interfere with a bankers obligations to make payment under the bond because confidence in this system of payment would be threatened by the interference, it seems illogical to allow the applicant to achieve the same object through an indirect route, applying restraint on the beneficiary instead of the banker. Furthermore, one of the basic principles operating in a letter of credit transaction is that the letter of credit constitutes a separate transaction form the underlying contract . To treat a performance bond and the underlying contract as part of the same transaction will nullify the basic principle that they are to be kept separate. E.g. 2 Kvaerner Singapore Pte Ltd v Shipbuilding (S) Pte Ltd [1993] 3 SLR 350 Buyer did not open LC yet called on performance bond provided by the seller Principle of autonomy did not apply where injunction is sought against a party to the underlying contract who seeks to take advantage of the PB where by his own volition he fails to perform a condition precedent Where B had no honest belief that S failed to perform, demand under the PB by B is a dishonest act that justifies restraint Final position of the Singapore Court of Appeal: No Bocotra Construction v AG (No2) 1995 2 SLR 733 Significance: No distinction between the principles applicable when injunction is sought against the beneficiary as opposed to against the bank. Rule of non-interference was equally applicable. Facts Appellants were engaged by the respondent, the Director-General of Public Works, to construct and maintain Phase II of the CTE. In accordance with the terms of the contract, the appellants were required to furnish a performance guarantee to the respondent to ensure the due performance of the works. Guarantee furnished by the appellants provided that the bank will pay forthwith on demand any sums not exceeding ($31,288,888.80) upon receipt of any written notice. There were delays in the project and a dispute arose between the parties. Dispute referred to arbitration. Respondent then made a call for payment; appellants sought to restrain the respondent from making the call for payment until the dispute had been duly resolved in the arbitration. Held: The performance guarantee constituted a separate and distinct transactions from the underlying contract. Karthigesu J.A.: It was not disputed that the guarantee was in substance a performance bond which had been issued by the bank to secure the appellants due performance under the contract. The tendency of the English Courts has been to treat performance bonds as unconditional provided there is a clear statement that the amount guaranteed is payable by the bank simply upon a written demand being made even though there may be some indications to the contrary elsewhere in the document. It is important to bear in mind the commercial role that performance bonds are intended to perform. The underlying purpose of a performance bond is to provide a security which is to be readily, promptly and assuredly realisable when the prescribed event occurs The arguments for certainty and commercial efficacy must surely prevail here, otherwise banks will bear the onerous burden of deciding whether payment demanded has to be made. Also, the principle of non-interference with the payment obligations of a performance guarantee was equally applicable when the restraint was sought against a beneficiary.

 Note: (Later cases explained the earlier decisions of Royal Design and Chartered Industries as being based on unconscionability) Contrast UK approach in Themehelp v West : Yes [1996] QB 84 (UKCA) This case has been criticised by later English cases. Facts Sale of shares in TV co. Payment in instalments guaranteed by PB. Alleged fraud: S concealed information. B did not pay 3rd instalment, wanted to rescind, and applied for injunction to restrain S from claiming on PB. Held (2:1): Where fraud is raised at an early stage, ct can grant injunctn restraining benfy from enforcing PB Autonomy of PB not threatened, as bank not involved Merely equity acting to restrain benfy from enforcing legal rights until his conscience stands trial at the main hearing Consequences of granting versus not granting injunctn Distinct from case where benfy has already tried to claim under PB: then doctrine of autonomy applied

Autonomy and the fraud exception

Singapore position: Unconscionability Singapore has departed from the English position which holds that only fraud can prevent a bank from paying under a performance bond or guarantee In Singapore, unconscionability now constitutes an additional ground for restraining payment under the performance guarantee GHL a conscious departure from the conventional English law position Rationale: Concern over the abusive calls on bonds. Must not be forgotten that a performance bond can operate as an oppressive instrument and in the event that a B 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 The restraint is directed at the beneficiarys conduct and not the bank Poh: this undermines the confidence commercial parties would have in the system of payments under performance bonds Unfortunately this principle has been applied in countless cases this is a conscious departure from established principles rather than as having its origins in Bocotra Bocotra decided specifically that no distinction was to be made between the bank and the beneficiary What possible implications would there be if the courts freely interfered with a banks payment obligations apart from fraud? Implication loss of confidence in the payment system. If you have more grounds, means SG bonds will be undesirable. Parties will choose a different forum E.g. There was a recent case where the Pf doesnt want the law governing the contract to be SG law, they wanted Enlgish law. Not in line with the purpose of performance bonds Non-interference principle has been well-established IF you have more grounds i.e. unconscionability, you have more grounds to go to court. Not the purpose of performance bonds purpose is to have quick efficient payment.

 Causes a divide in restraining a bank and restraining a beneficiary Bocotra / Walbrook Insurance: says no difference between restraining a bank and restraining a beneficiary. English courts have taken this position. SG we have this divide. Unconscionability only applies to restrain a beneficiary from calling on a bond.

(1) Definitive Singapore Ct of Appeal decision:

Bocotra Construction v AG (No2) 1995 2 SLR 733 (turning point in the law) Exception to autonomy: fraud or unconscionability (first mentioned)

(2) Unconscionability after Bocotra (No 2): Same as fraud? No

Injunctions have been granted in a number of SG cases on the basis that the call on the PB was unconscionable, and even older cases that did not use the term have been re-interpreted to have been based on unconscionability In GHL, the court opined that Royal Design and to an extent Kvaerner were decided based on unconscionability GHL v. Unitrack [1999] 4 SLR 604 (Ct of Appeal) Unconscionability was a separate exception from fraud; this was a conscious departure from the UK position Reinforced in JBE Properties Pte Ltd v Gammon Pte Ltd (2011) Note the reasons why this position was taken CA decision in BS Mount Sophia v Join Aim [2012] 3 SLR 552 Sheds lights on the thinking of the courts to their thinking regarding the grant of the injunction Need to guard against unnecessary interference Eltraco International v CGH Development (partial restraint) SIgnificance Court showed concern with this idea, and also were able to put this principle into practice, by only partially restraining the call on the PB. Held Court held that call in relation to some installments were unconscionable (B was holding retention monies and money was due to the account party under certain variation works); in relation to others not unconscionable. The facts of this case lends itself to the possibility that a partial restraint may be made. Order was appropriate here because under the terms of the bond, the B could call on the bond from time to time up to the stated maximum sum. Comments But arguably this principles isnt applicable in a different situation such as where a lump sum payment is at stake. See Cargill: Beneficiary in that case had to demand for full sum cos there the clause did not permit part demand or more than one demand. In those circumstances, a call for the entire sum was in order, with an accounting between the parties taking place at a later stage.

(3) Meaning of unconscionability as opposed to fraud

Fraud: Chan Sek Keong JC in Chartered Electronics Industries

Involves dishonesty, absence of an honest belief that there was a breach of contract when the demand on the PB was made. Difficult to prove. Injunction would hardly be granted. Unconscionability Lai J in Raymond Construction (unreported) Involves (1) unfairness, as distinct from dishonesty or fraud; or (2) conduct of a kind so reprehensible or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party. (Mere breaches of contract would not by themselves be unconscionable.) Ct of Appeal in Dauphin Offshore Engineering [2000] 1 SLR 657 It was not possible to define unconscionability other than to give very broad indications such as a lack of bona fides, what was unconscionable would depend on the facts of each case and there was no predetermined categorisation Ct of Appeal in Eltraco [2000] 4 SLR 290 In every instance of unconscionability there would be an element of unfairness, but the reverse is not necessarily true. In other words, unfairness might not necessarily amount to unconscionability. Need to refrain from unduly interfering with the obligations of the parties What are some examples of decided cases in which the applicants claim of unconscionability resulted in an injunction being granted or refused? Injunction granted in these cases. Kvaerner cf Edward Owen (evidence of sharp practice but not fraud) Both cases, buyer supposed to open LOC but did not do so and called on PB Here it was held to be fraud but lower standard because injunction was against B and not the bank. Principle of autonomy did not apply where injunction is sought against a party to the underlying contract who seeks to take advantage of the PB where by his own volition he fails to perform a condition precedent Comments: Perhaps now unconscionability will be the basis for the court in Kvaerner where there perhaps was not a strict sense of fraud can reconcile these two cases Royal Design B made a call on a performance bond based on delays in construction that were caused by their own default in failing to make timely payments on interim certifcates issued by the architect Substantial sum of money due to ccount party was retained by B and the B had the benefit of a personal guarantee issued by a director of the account party Min Thai Holdings v Sunlabel (1999) 2 SLR 368 Force majuere clause + event (severe flooding); but claimant still tried to claim on the bond. Question of whether the events fell within the force majuere clause so as to excuse the seller from performance (no breach of contract). Court decided that this was unconscionable. Straight-forward e.g. Factual examples: JBE Properties BS Mount Sophia A beneficiarys unconscionable conduct constituted a ground for restraining him from obtaining payment under a performance guarantee: Raymond Construction Pte. Ltd. v. Low Yang Tong & Anor. (Suit No. 1715 of 1995, 11 July 1996, unreported) Facts st Pfs were building contracts who agreed to erect a 2-storey detached bungalow for the 1 df and his wife for $808,381. Under the contract, the pfs provided the df with a performance guarantee for $40,419,05,

representing 5% of the contract price, as security for the due performance of the contract. The guarantee was payable unconditionally on demand. Df and his family moved in and complained that there were several defects in the construction of the house and made a demand for payment. Pf sought to restrain him from receiving payment. Held, Lai Kew Chai J. delivering, The concept of unconscionability to me involves unfairness, as distinct from dishonesty or fraud, or conduct of a kind so reprehensible or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party. Mere breaches of contract by the party in question (in this case, the first defendant) would not by themselves be unconscionable. The demand for payment was unconscionable in the circumstances because: The conduct of the first df from first to last was most unfair. He could not be allowed to get at the money and add insult to injury at trial. There was strong evidence that he would postpone meeting his financial commitments by tactics of all sorts. The way he drew his cheques and the delays in payments were legendary and habitual, if one took into account the fact the has the unusual hallmark of being the subject of bankruptcy notices and suits for defaults in meeting his commitments. Although temporary occupation had been issued he claimed that the bungalow was no in a liveable condition. The claims also kept escalating. Unconscionability principle was applied yet again by Justice Lai Kew Chai: Min Thai Holdings v. Sunlabel [1999] 2 S.L.R. 368 Facts Sellers provided a performance guarantee to buyers of Chinese rice to cover a default in delivery of the rice. Contract incorporated the Force Majeure conditions under the ICC rules and regulations. Sellers were unable to supply the rice owing to severe flooding in China reported not to have been experienced in the past 100 years. Sellers sought to restrain the buyers from calling for payment under the performance guarantee. Held: the demand for payment in those circumstances would be unconscionable. Lai Kew Chai J.: In those circumstances it was unconscionable for Sunlabel to attempt to receive payment under the performance guarantee. They were perfectly entitled to make a call on the guarantee, seeing that there was an expiry date, but they should have in all good conscience offered to let the money remain, say, in Allied Irish Banks plc to be held to the order of Sunlabel and Min Thai pending the resolution of disputes between Min Thai and Sunlabel and the disputes, if any, between Finorgan and Sunlabel. Beneficiary could be restrained from obtaining payment under a performance bond if the demand was unconscionable: GHL Pte Ltd v. Unitrack Building Construction Pte Ltd. & Anor. [1999] 4 S.L.R. 604 (SGCA) Facts Unitrack furnished GHL with a performance bond for $578,140, representing 10% of the contract sum. Contract price was later revised downwards to $1,961,400 after GHL undertook to pay the sub-contractors directly. A dispute arose between GHL and Unitrack and GHL called for payment under the performance bond. Unitrack contended that the demand was unconscionable owing to the downward revision of

the contract price. Held: the demand by the beneficiary was unconscionable. LP Thean J.A.: Referred to New Civilbuild and commented that these are not the point involved with which we are concerned. We are concerned with abusive calls on the bonds. IT should not be forgotten that a performance bond can operate as an oppressive instrument, and in the event that a beneficiary calls on the bond in the 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. It should not be forgotten that a performance bond is basically a security for the performance of the main contract, and as such we see no reason, in principle, why it should be so sacrosanct and inviolate as not to be subject to the courts intervention e xcept on the ground of fraud. We agree that a beneficiary under a performance bond should be protected as to the integrity of the security he has in case of non-performance by the party on whose account the performance bond was issued, but 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 . The matter of unconscionability must be approached pragmatically considering all facts. There was a drastic revision of the contract sum downwards by about 65% after sub-contract costs taken out. Difference between 10% of the new sum and the previous sum amounted to about 30% of the whole new sum. It was therefore unconscionable for them to call on such a bond. NB: The court interpreted Bocotra as recognising unconscionability as a ground for restraining the beneficiary from receiving payment; observed that Bocotra did not seek to overrule Singapore cases like Chartered Electronic Industries where Chan Sek Keong J used fraud in the broader sense than the common law definition of fraud Common law definition of fraud mere lack of bona fides is insufficient as it involves an element of deceit on the part of the beneficiary; namely he presents a claim which he knows to be invalid or false

A beneficiary could be restrained from receiving payment under a performance guarantee if the demand was unconscionable.: Dauphin Offshore Engineering & Trading Pte Ltd v. The Private Office of HRH Sheikh Sultan bin Khalifa bin Zayed Al Nahyan [2000] 1 S.L.R. 657 (not proven on the facts) Facts Dauphin, Singapore shipbuilders, agreed to construct a luxury motor yacht for US$5,850,000 for a company in the United Arab Emirates (HRH). Dauphin provided HRH with an irrevocable on demand confirmed bank guarantee for US$877,500 to cover the repayment of the first two instalments. HRH failed to pay the second instalment and it served a notice to terminate the contract listing some 19 breaches of contract. It also called for payment under the bank guarantee. Held, CA upheld in part that Dauphin had not made full and frank disclosure. However, unconscionability was a separate ground, apart from fraud, for restraining a beneficiary from receiving payment. On the evidence, Dauphin had not established that it was entitled to the injunction. Chao Hick Tin J.A.: Accordingly, we would reaffirm the views expressed in GHL v. Unitrack that in Singapore unconscionability has been accepted as and is a separate ground in itself for granting injunctive relief in so far as a performance guarantee is concerned. (1) The bond was not an on-demand bond but an indemnity performance bond and; (2) proof of such actual loss was essential for a valid call for payment under the bond:

JBE Properties Pte. Ltd. v. Gammon Pte. Ltd. [2011] 2 S.L.R. 47 (SGCA) (see facts) Facts There were various defects in the construction of the Building, and it was in respect of the alleged cost of rectifying some of these defects that JBE made a call on the bond. Gammon applied for an interim injunction to restrain JBE from receiving payment under the bond from the issuing bank. The High Court directed Gammon to obtain bids for rectifying the cladding defects. The highest quotation obtained was $0.56m. The High Court held that the Bond was an ondemand performance bond and granted an interim injunction restraining the call on the grounds of unconscionability bordering on fraud. The High Court also made certain ancillary orders for the rectification of the works and for a joint tender if the defects remained. JBE appealed. Held, dismissing the appeal against the High Court's decision to grant the interim injunction and setting aside the ancillary orders: Apart from fraud, unconscionability was a separate and independent ground for the grant of an interim injunction restraining a beneficiary from making a call on a performance bond. This was wider than the English position, which required fraud to be clearly proved before a call on a performance bond could be restrained: at [6]. The English position, laid down in Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159, was influenced by the well-established autonomy principle applicable to letters of credit. The Singapore courts' rationale in departing from the English position laid in the difference between a performance bond and a letter of credit. The letter of credit was a form of payment, and interfering was tantamount to interfering with the primary obligation of the obligor to make payment. In contrast, a performance bond was merely security for the secondary obligation of the obligor to pay damages if it breached its primary obligations. A performance bond is not the lifeblood of commerce, whether generally or in the context of the construction industry specifically. Thus, a less stringent standard could justifiably be adopted in restraining a call on a performance bond. Further, where the wording of a performance bond is ambiguous, the court would be entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand , contrary to the dictum of Staughton LJ in IE Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd's Rep 496 at 500. (See above) Even where a performance bond was expressed to be payable on first demand without proof or conditions, there was no reason why fraud should be the sole ground for restraining a call. Fraud was often difficult to prove and to adopt it as the sole ground for restraining payment would virtually assure the beneficiary of immediate payment. This would cause undue hardship to the obligor: at [11]. For instance, where a call is made in bad faith, especially a call for payment of a sum well in excess of the quantum of the beneficiary's actual or potential loss, the beneficiary will gain more than what it has bargained for. Furthermore, if the amount paid to the beneficiary pursuant to a call is subsequently proved to be in excess of the quantum of its actual loss, the obligor runs the risk of being unable to recover any part of the excess amount should the beneficiary become insolvent. Yet another relevant consideration is that an excessive or abusive call can cause unwarranted economic harm to the obligor. This is particularly relevant in the context of the construction industry, where liquidity is frequently of the essence to contractors. In this regard, while the sum stipulated to be paid under a performance bond is usually pegged at only 5% to 10% of the contract price, this typically amounts to one or more progress payments under a building contract. In very large building contracts, the deprivation of a whole progress payment might well be fatal to the contractor-obligor's liquidity. These concerns are by no means fanciful, as evidenced by the mechanisms evolved by the construction industry to ensure the quick settlement of disputes relating to progress payments

In Ellinger & Neo (at p 326), the authors argue, in the context of the construction industry, that where the employer-beneficiary has sacrificed a stronger position for a weaker one ( eg, where it has accepted a performance bond in substitution for security in the form of a cash deposit, which is the position in the present case (see cl 11(b) of the Building Contract, which is reproduced at [15] below)), it would be justifiable to apply the autonomy principle to the performance bond and treat it as though it were a letter of credit. BUT the court here is of the view that the fact that the beneficiary had sacrificed a cash deposit for a performance bond could not justify a different approach. First, as a matter of principle, the utilisation of a cash deposit provided as security for the performance of the contractor-obligor's obligations under a building contract should be treated no differently from the making of a call on a performance bond, which is "third-party" security in that it is always provided by an entity other than the contractorobligor. It is true that it will be more difficult (if not impossible) in practice to restrain the use of a cash deposit than it will be to restrain the (third-party) paying bank from paying out on a performance bond. But, this will be the case no matter what test is adopted for restraining a call on a performance bond. Moreover, the greater ease, in practical terms, of restraining a call on a performance bond (as compared to restraining the utilisation of a cash deposit provided as security for contractual performance) is a factor which the employer-beneficiary must be taken to have considered and accepted in preferring a performance bond to a cash deposit. In other words, the employer-beneficiary would have a reason for accepting, as security for the contractor-obligor's contractual performance, a performance bond rather than a cash deposit. One reason could be that the contractor-obligor might have priced its bid for the building contract differently if it had to provide a cash deposit as security for its performance of the contract. In our view, the mere fact that the employerbeneficiary agreed to accept a performance bond in lieu of a cash deposit should not be material in determining whether a call on a performance bond should be restrained.

The nature of the Bond: an on-demand performance bond or an indemnity performance bond? (5) The crucial determining factor vis--vis the nature of the Bond was cl 1 thereof, which stated that the Bank was obliged to indemnify JBE only against "all losses, damages, costs, expenses or otherwise sustained by [JBE]" as a result of Gammon's breach of the Building Contract. Therefore, the obligation of the Bank under the Bond was limited to indemnifying JBE against actual losses which it sustained due to Gammon's breach of the Building Contract. Since the payment obligation of the Bank was so limited, the Bond, in our view, had the character of a true indemnity performance bond. In this regard, it is arguable that cl 5 of the Bond (viz, the provision that the Bank was "under no duty to inquire into the reasons, circumstances or authenticity of the grounds [of any call on the Bond]") would not affect the requirement that JBE could only call on the Bond if and when it actually suffered loss arising from any breach by Gammon of its obligations under the Building Contract. At the very least, the Bond could be said to be ambiguous as to whether payment under it was conditioned upon demand or upon proof of actual loss arising from Gammon's breach of contract, and, therefore, the court should construe it as a true indemnity performance bond Recall: where the wording of a performance bond is ambiguous, the court would be entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand Was the Judge right to restrain JBE from making a call on the Bond? (6) Given the cladding defects were described as minor and not proven to be otherwise, it was incongruous for JBE to rely on quotations for replacing the cladding of the whole of the Building. Even if this was necessary, the costs were prima facie grossly inflated in light of the quotations obtained by Gammon: at [29].

(7) The appeal should therefore be dismissed on the alternative grounds that (a) the Bond was a true indemnity performance bond and JBE had failed to prove an actual loss that was necessary to recover under such a bond, and (b) even if the Bond was an on-demand performance bond, JBE's call on it was unconscionable given the grossly inflated costs given by it: at [30].

There was a strong prima facie case of unconscionability justifying the continuance of the injunction. BS Mount Sophia Pte. Ltd. v. Join-Aim Pte. Ltd. [2012] 3 S.L.R. 352 (SGCA) Significance: No single factor was conclusive but the entire chronology of the case, showed that a strong prima facie case of unconscionability had been established. The circumstances surrounding the call on the Bond and the contractual disputes between the parties related to the time for completion of the construction works. Alleged liability of the Respondent to pay the Appellant liquidated damages. Facts The appellant property developer was the beneficiary of an on-demand performance bond provided by the respondent contractor to secure the performance of the respondent's obligations under a building contract. Contractual disputes pertaining to the time for completion of the construction works and the consequent alleged liability of the respondent to pay the appellant liquidated damages arose between the parties, which disputes were to be arbitrated pursuant to the contract. Before the parties could proceed to arbitration, the appellant called on the bond because it allegedly believed that it was entitled to those liquidated damages. The respondent applied to the court for injunctive relief. The judge in the proceedings below ("the Judge") granted the injunction on the basis of an email of 4 October 2010 ("the 4 October e-mail") sent from the Architect engaged for the works, to the appellant, respondent, and other consultants. The Judge held that this e-mail suggested that there had been an understanding between the Architect and the appellant to manipulate the time for completion so as to increase the amount of liquidated damages payable by the respondent. This constituted a strong prima facie case of unconscionability on the part of the appellant which justified the grant of the injunction. Before the Judge, the respondent had canvassed three other arguments based on its interpretation of the sequence of events preceding the call on the bond. The first related to the parties' dispute on the time for completion; the second was that a progress payment due from the appellant to the respondent remained outstanding at the time the bond was called on; and the third was that the appellant had earlier demanded the respondent extend the validity of the bond failing which the appellant would call on the bond, with which the respondent complied. The Judge was of the view that these were "run of the mill construction disputes which were properly the subject of the arbitration" and thus did not make any findings on them, preferring (as noted above) to base his decision on the 4 October e-mail. Held, dismissing the appeal: The high threshold for unconscionability (1) It was settled law that the necessary threshold of unconscionability that had to be established before the court would exercise its discretion to grant an injunction was a high one. The burden that the applicant had to discharge was to demonstrate a strong prima facie case of unconscionability: at [20]. (2) The entire context of the case had to be thoroughly considered, and an injunction granted only if the entire context was particularly malodorous. It should not be easy for an applicant to establish a strong prima facie case: at [21]. (3) The high threshold for unconscionability was necessary to strike the appropriate balance between the conflicting positions of the obligor and beneficiary of a performance bond. The raison d'tre of performance bonds - that they were to secure the performance of

the obligor's obligations - would be undermined if injunctive relief was liberally granted: at [24]. The perennial tension (4) Abusive calls on performance bonds could oppress the obligor by damaging its liquidity; but, depriving the beneficiary of its right to call on the bond could be equally detrimental to its own liquidity. Liquidity was particularly important to participants in the construction industry; and, furthermore, a lack of liquidity could hamper the parties' abilities to defend themselves at the substantive resolution of the dispute : at [26] to [31]. On the one hand, there is ample reason for allowing injunctive relief for the obligor on the grounds of unconscionability. Calls made in bad faith on a performance bond would result in the beneficiary receiving something that he was not entitled to, and would, instead, damage the liquidity of the obligor who would have to compensate the issuer of the bond. It was in part this concern that a performance bond could be used as an instrument of oppression that prompted the development of unconscionability, as distinct from fraud, as a ground justifying the grant of injunctions restraining a beneficiary of a performance bond from calling on that bond. Two learned commentators have also perceptively observed, in a similar vein, thus (see Quentin Loh & Tang Hang Wu, "Injunctions restraining calls on performance bonds - is fraud the only ground in Singapore?" [2000] LMCLQ 348 (at 353)): In the construction industry, the provision of a performance bond can leave the principal at the mercy of an unscrupulous beneficiary. In certain cases, it is not unforeseeable that an abusive call may effectively cripple the principal financially. Arbitration or litigation is expensive business. An abusive call may render the principal insolvent or incapable financially to proceed to arbitration or litigation , a fortiori if the principal's directors have executed counter indemnities in their personal capacities and these have also been called upon by the guarantor. The principal would have to give up legitimate claims due to the fact that it is financially incapable of mounting an arbitration or litigation proceedings to recover what is due to him. A tactical call on a performance bond would probably force the principal either to give up his claim entirely or to settle the claim unfavourably. [emphasis added in bold italics] It might be thought that since such an injunction is only meant to subsist until resolution of the substantive issues by a court or arbitral tribunal, that the harshness of the remedy can be mitigated by its reversibility, should the merits of the case shift in favour of the beneficiary at the substantive hearing. Chan Sek Keong J held in the important Singapore High Court decision of Chartered Electronics Industries Pte Ltd v Development Bank of Singapore [1992] 2 SLR(R) 20, as follows (at [37]): A temporary restraining order does not affect the security nor the beneficiary's rights in it. It merely postpones the realisation of the security until the plaintiff is given an opportunity to prove his case. This is probably true of other interim injunctions to restrain calls on performance bonds, but we should not be so quick to say that the same reasoning can be applied in its entirety to the context of performance bonds in the construction industry. Liquidity, or cash flow, is particularly important to participants in the construction industry, and, as we observed in JBE at [11] (reproduced above at [18]), the construction industry has developed several mechanisms to effect the quick resolution of disputes related to progress payments. 29 Looking at the other side of the coin, so to speak, whilst we noted in that case that considerations of liquidity were often of crucial significance to the obligor; the deprivation of the beneficiary's right to call on the performance bond could equally well be very detrimental to its liquidity as well as detrimental to its prospects pending the resolution of the substantive dispute. 30 The perennial tension that exists (as set out in the preceding paragraphs) has been succinctly captured in the following observation in a leading work (see Peter Ellinger & Dora Neo, The Law and Practice of Documentary Letters of Credit (Hart Publishing, 2010) ("Ellinger & Neo") at pp 325-326):

... The right message should be communicated: that the courts will not condone any form of dishonesty or unconscionable behaviour on the part of beneficiaries. On the other hand, much has been said in the courts about the importance of the principle of autonomy in international commerce. It is vital that contracting parties in international and national transactions should be able to rely on the integrity of a bank's promise to pay upon an independent guarantee regardless of disputes in the underlying contract. The argument that the principle of autonomy is not as important in performance bonds as in commercial credits might appear an attractive one, but it must be examined with caution. A counter-argument is that an injunction should not be granted lightly even in relation to an independent guarantee as this would put the beneficiary in precisely the position he sought to avoid by asking for an independent guarantee in the first place - that he can be paid first and talk later. It should be noted that the beneficiary might sometimes have sacrificed a stronger position when he agreed to take an independent guarantee. An example might be in the case of a repayment guarantee or a warranty guarantee in the construction industry, where the beneficiary might have been entitled to hold on to the retention money had he not been persuaded to substitute this for an independent guarantee. When the primary rationale for procuring an independent guarantee in the beneficiary's favour is considered, it would seem that autonomy is equally important in independent guarantees as in commercial credits, and that a case can be made for the law to confine exceptions to the autonomy principle to a narrow limit. [emphasis added] 31 It is clear from the perceptive observations just quoted in the preceding paragraph that a balance needs to be struck. Hence, whilst there are persuasive reasons why, in addition to fraud, unconscionability may, in an appropriate case, result in the grant by the court concerned of an injunction restraining a beneficiary of a performance bond from calling on that bond, the actual grant of such injunctions should be kept within a very narrow compass.

Critique of unconscionability exception (and the courts reasons for the exception) Prof Enonchong has pointed to a number of possible pitfalls with the unconscionability exception and has therefore concluded that, notwithstanding the advantages that it brings the English courts ought not to adopt such an exception. 33 The first argument is that "recognition of the exception may lead to easy availability of injunctions restraining calls on demand guarantees" and that there would be a concern "that easy availability of injunctions would destroy confidence in [performance] bonds as the equivalent of cash in hand and undermine their utility as the lifeblood of commerce" (see Enonchong's article at 104 and Enonchong's book at para 7.34). This is a very valid concern that has already been referred to and which we addressed above at [23]-[24] (see also below at [37]-[40] in the context of our view that unconscionability must be applied in a nuanced manner). Indeed, the learned writer proceeds to observe that "[i]t is perhaps for this reason that the courts in Singapore now appear to be attempting to roll back the ground covered by the unconscionability exception" (see Enonchong's article at 104-105 and Enonchong's book at para 7.34). With respect, this fact of a limited application of the unconscionability exception is itself ambiguous. The key question is whether or not such limited application has been arrived at in a principled manner, having regard to the facts of the case at hand - a crucial point to which we shall return below (see [39]-[40]). Reference may also be made to a recent article, where the learned writer observes, as follows (see Kelry C F Loi, "Two Decades of Restraining Unconscionable Calls on Performance Guarantees - From Royal Design to JBE Properties" (2011) 23 SAcLJ 504 ("Loi") at 508-509): One could conceivably suppose that [the] response [to Prof Enonchong's objection] might have been that a performance guarantee (unlike a letter of credit which comprises the mode of payment of price for goods or services) is not the lifeblood of commerce as it is merely security against damages for defective performance. In any case, although the recognition of unconscionability as an additional ground of relief (apart from fraud) means relief would be more readily available, that is not to

say that injunctive relief would be easily or readily available - not unless unconscionable behaviour were rampant amongst beneficiaries of performance guarantees and provable on strong evidence. Furthermore, confidence in, and utility of, commercial instruments such as performance guarantees cannot possibly be promoted by habitual judicial enforcement of unconscionable payment demands made under oppressive circumstances. [emphasis in original] 34 The second argument is that "recognition of the unconscionability exception may lead to the courts getting involved in disputes arising from the underlying contract when such disputes should be resolved in separate proceedings and in accordance with any arbitration or jurisdiction clause in the underlying contract " (see Enonchong's article at 105 and Enonchong's book at para 7.35). This possible pitfall was precisely what the Judge anticipated in the present case and he dealt with it - if we may say so - in a very appropriate and practical manner (see the GD, especially at [29]). We must also emphasise the prima facie nature of the inquiry, as elaborated on below in [40]. In addition, reference may also be made to the article cited in the preceding paragraph, in which the learned author observes, as follows (see Loi at 510-511): However formidable this objection [by Prof Enonchong] might originally have been, it must have lost all traction when Anglo-American law took that first step upon the slippery slope, many decades ago, when recognising fraud as an exception to the autonomy principle. Whatever commercial value might be attached to the autonomy principle, just as the courts will not countenance the law and the court's own offices being perverted into instruments of fraud, the courts will likewise not allow the law or its offices to become instruments of unconscionable conduct. In Enonchong's book, the learned author argues (at para 7.35) that the whole point of a performance bond is to "provide the beneficiary with payment pending resolution of disputes" and is therefore "a mechanism of risk allocation". This may be true, but as we observed on numerous occasions (see above at [27]-[29] and below at [39]; see also JBE ([3] supra) at [11] and GHL ([19] supra) at [24]), the lack of liquidity can have very drastic consequences on parties in the construction industry. Therefore, if an unconscionable call on a performance bond is made pending the resolution of the substantive dispute between the parties, ostensibly to provide the beneficiary with cash in hand in the meantime, that call itself might suffice to leave the obligor high and dry, and cripple its ability to defend itself in the resolution of that substantive dispute. 35 The third argument is that "unconscionability is an imprecise and vague ground for relief" and that "[i]f recognized it will inject considerable uncertainty in [an] area of commercial activity where clarity and certainty are highly valued", with the result that "[s]uch uncertainty [would] increase litigation on the enforceability of demand bonds and deprive them of their unique quality as the equivalent of cash" (see Enonchong's article at 105 and Enonchong's book at para 7.33). This concern, whilst a valid one, is, in our view, far too pessimistic. As has already been pointed out above (see Ellinger & Neo ([30] supra), the courts are equipped to ascertain whether or not there has been unconscionability (though cf Loi at 512-514 and 515-516). While it is generally desirable to have crisp definitions of legal doctrines to guide behaviour, we do not think that relief for unconscionable conduct should be categorically rejected simply because a neat and tidy definition of the same is not forthcoming.

More on the prescise definition of unconscionability: (5) A precise definition of unconscionability would not be useful. Its value lay in its flexibility as a label to capture a wide range of conduct demonstrating a lack of bona fides. The lack of a crisp definition should not preclude deserved relief on this ground, and everything hinged on the manner of its application. The elements of unconscionability were fairly settled, and from the beneficiary's point of view, what constituted unconscionable conduct should be reasonably apparent: at [19], [35] to [38] and [41] to [45]. In any event, Prof Enonchong's concern that unconscionability is a vague ground of relief is not an argument for the proposition that unconscionability should not be a ground of relief. Everything hinges on the manner of its application. As mentioned above

(at [33]), the unconscionability exception must be applied in a principled manner, having regard to all the facts of the case at hand . This brings us back full circle to the crucial point which we have already referred to and to which we now turn - that unconscionability must be applied in a nuanced manner in order that a balance may be struck between preventing the abusive calling on performance bonds on the one hand and the undermining of the very raison d'tre of performance bonds on the other. Resolving the tension - the importance of a high threshold for establishing unconscionability: (6) Because of the prima facie nature of the inquiry, the court was not required to engage in a protracted consideration of the merits of the case. It was all the more important that the overall tenor and entire context of the conduct of the parties supported a strong prima facie case of unconscionability. A prima facie strong piece of evidence did not make a strong prima facie case, since the court in interlocutory proceedings could not place this seemingly strong piece of evidence in context and assess its probative value: at [40], [41] and [45]. (7) The Judge's decision was upheld, but on the back of different reasons. The e-mail of 4 October 2010 per se was insufficient evidence; it was more important to read this e-mail in the context of the sequence of events at the time as well as in relation to the exchange of correspondence between the parties in order to ascertain whether a strong prima facie case of unconscionability existed. Whilst no single factor was conclusive, the entire chronology of the case, viewed in relation to all the relevant factors, led the court to the conclusion that a strong prima facie case of unconscionability had been established: at [40] and [47] to [53]. [Observation: Unconscionability in the context of performance bonds was not a formulaic doctrine with definite elements and had to be distinguished from the general contract law doctrine of unconscionability, which was concerned with conduct at the time of the formation of the contract: at [41].] Note: Many opinions on what constitutes unconscionability but not fully defined. Seems to be intended that way. See Dauphin at p. 321 of Readings.

(4) Development in the UK lack of good faith

One recent case where lack of good faith was recognized as a ground for the grant of an injunction restraining a B from calling on a PB or from receiving the proceeds of a bond: TTI Team Telecom v. Hutchison 3 G[2003] 1 All ER (Comm) 194 [UK Technology Ct] Held: Injunction would be granted against the beneficiary where there had been fraud in setting up or calling the bond, or where there was a lack of, or breach of faith by the beneficiary in threatening a call The basis of contention of a breach of faith must be established by clear evidence even for the purposes of interim relief Only if the issuer is about to make payment to the B in circumstances where fraud, dishonesty or bad faith in relation to the demand is shown to exist or where the original issue of the documentary credit was procured by fraud, or possibly, where the underlying transaction itself procured by fraud will the court intervene to restrain payment by issuer to B. On the facts htough, no lack of faith on the part of the B calling on the bond Reasoning: Judge quotes Morison J in Cargill case saying that the court will not grant an injunction against the bank or the beneficiary in a PB unless there has been a lack of good faith. Refers to 3 Singapore cases on unconscionability Examples of breach of faith: A failure by the beneficiary to provide an essential element of the underlying contract on which the bond depends; a misuse by the beneficiary of the guarantee by failing to

act in accordance with the purpose for which it was given; a total failure of consideration in the underlying contract; a threatened call by the beneficiary for an unconscionable ulterior motive; or a lack of an honest or bona fide belief by the beneficiary that the circumstances, such as poor performance, against which a performance bond had been provided, actually exist. Comments: Profs book: A few of these situations can be supported by existing authority. Lack of honest belief that poor performance actually existed brings situation within the recognized fraud exception Where there is total failure of consideration of failure of the B to provide an essential element of the underlying contract Seems to be supported by Eveleigh Js judgment in Potton (see quote earlier) also: E.g. employer may agree to provide finance (perhaps by way advance payments) to enable contract to undertake works. Contractor will provide PB. If the contractor was unable to perform because employer did not provide finance, court should be entitled to consider the terms of the underlying contract and consider whether the employer should be restrained from asserting that a PB is like a LOC But in Edward Owen, the English CA allowed the B buyer to call on the While this is not as serious as a situation where no LOC is opened at all, the buyers failure to procure a confrmed credit could still arguably amount to a failure by the beneficiary to provide an essential element of the underlying contract o which the bond depends (part of the TTI Team Telecon list of instances of bad faith) Yet the CA in Edward Owen displayed no concern about the possible lack of faith on the part of the B in calling on the bond HOWEVER, unlikely to be influential Has not been referred to Other cases state fraud exception without any mention of relevance of lack of faith Summary of positions in SG and the UK: In the area of unconscionability, the SG courts are clearly leading the way. But this idea of unconscionability itself isnt accepted in UK, no clear indication. Exception of one case TTI Team. Talked about the relevance of a lack of good faith, but isnt a case that has been followed or really paid attention by other cases.

(5) Analysis of Unconscionabiltiy

Right message is communicated courts will not condone any form of dishonesty or unconscionable behavior on the part of beneficiaries However, Principle of autonomy is important contracting parties must be able to rely on the integrity of a banks promise to pay upon an independent guarantee regardless of disputes in the underlying contract Injunction should not be granted lightly because it would put the beneficiary in precisely the position he sought to avoid that he can be paid first and talk later Should be noted that the beneficiary might sometimes have sacrificed a stronger position when he agree to take an independent guarantee. E.g. in the construction industry where a repayment or warranty guarantee has been given, a beneficiary may have been entitled to hold on to the retention money had he not been persuaded to substitute this for a independent guarantee Hence, law should confine exceptions to the autonomy principle to a narrow limit

Making a valid demand on the bond

(1) How does beneficiary make a valid demand on the bond?

Usually payment would be due against the beneficiarys written demand Would an oral demand be sufficient? Indications are that unless this is clearly stated as being allowed, unlikely that the court would interpret agreements as requiring oral demands. (IE Contractors) The form of the demand may matter, especially in cases where PB refers to the event of default or the object of the facility: must beneficiary state the basis of his demand? When an independent guarantee makes reference to the underlying obligation or to the beneficiarys default, the court would seem to be quite willing to construe it as requiring the B to go beyond making a mere demand, and to also state basis of the claim ( IE Contractors) Esal Any accompanying documents? Usually no documents required but may require a statement or certificate from B that the applicant has committed a default on the underlying contract and the amount demand is due. rd rd Sometimes other docs issued by 3 parties are required. E.g. certificate of a neutral 3 party, like an architect or engineer, or a judgment or arbitration award containing a finding that the applicant has breached the contract

(2) Strict compliance ?

Autonomy is the same principle in LC and PB. Under LC, principles of strict compliance are iportant. But strict compliance doesnt apply to its full extent wrt PB. Siporex Trade SA v Banque Indosuez [1986] 2 Lloyd's Rep 146, esp. p. 159 Strict compliance need not apply in its full severity to PBs Argument was that exact compliance with documentary requirements was imperative in documentary credit, whereas precise wording was not essential in performance bonds, especially where the bond merely contained a general requirement for the beneficiarys declaration to that effect TJ accepted this principle Only if: Demand acceptable if there was no ambiguity in it, provided there was no risk of the bank being misled or prejudiced IE Contractors v Lloyds Bank [1990] 2 Lloyd's Rep 496 (UK CA) Significance (Staughton LJ): demand must comply with terms of PB, but less need for doctrine of strict compliance in PBs Facts Plaintiffs applied for an injunction to restrain Lloyds Bank from making payment under its counter-guarantees. Bond: We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the above named principal. Plaintiffs contended that the call for payment was invalid because it did not constitute a claim for damages under the bonds. Trial judge held that a call for payment under the performance bonds must be in respect of a claim for damages and that the demand for payment in this case did not constitute a claim for damages. CA reversed on the ground that even though the beneficiary s demand did not expressly state that it was a claim for damages, the substance of the claim was one for damages. CA: construe PB; construe call and related documents. Twofold approach: (1) Construe the PB. To see what it provides for and what the beneficiary has to do for the purpose of making a valid demand under it. Then look at the call itself. (2) Construe the call + related documents given in making the call. Looking at both, construe

whether the requirements have been met; matching the two to see if a valid demand has been made. Staughton L.J.: nd The 2 general principle said to be applicable to [performance bond] transactions is the doctrine of strict compliance. It is very well established for letters of credit: the documents presented must be precisely those which the letter of credit calls for. The court was not referred to any decision that the doctrine of strict compliance applies with equal force to performance bonds; and there is one case where its application was questioned there is less need for a doctrine of strict compliance in the case of performance bonds, since they are used less frequently than letters of credit, and attract attention at a higher level in banks. They are not so much part of the day-day mechanism of ordinary trade Comment: Not very convincing argument. But even if this is true, their use is widespread enough such that it would not be reaalistc for banks to give them special attention at a higher level. Further, it might not be easy for these higher-level bank personnel to gauge what degree of compliacne would be sufficient in a PB if strict compliacne was not reuqired Hence, Staughton LJ should not be taken to have meant the principle of strict compliacne does not aply to PB The degree of compliance required by a performance may be strict, or not so strict. It is a question of construction of the bond. Whether strict compiacne is required depends on the terms of te bond This seems to mean that if the PB is worded generally, it would be sifficient for a B to comply in a way that conforms to the general words o the bond But if the bond provides very detailed requirements (i.e. stating the exact form of words that must be used in making the demand), B would have to comply strictly with this In other words, principle of strict compliance always allplies but what is needed to satisfy the strict standard may vary Generally stated rquirement just need to fulfill in substance? Specifically worded reuqiremnet complied only in exact temrs Comment: Doctrine of strict compliacne applies equally to independent guarantees as to commercial credits, although depending on the wording of the independent guarantee, there might be more limited scope for application of the doctrine If that view of the law is unattractive to banks, the remedy lies in their own hands. Holding that the beneficiary had in substance complied with the terms of the bond and that therefore the call for payment was valid: Did the demand comply with the requirements of the bonds as I have construed them? It certainly asserted breaches of contract, but it did not in terms mention damages. It is here that the degree of strict compliance necessary becomes important. I resolutely decline to interpret these bonds as saying that Rafidain will pay if, but only if, the precise words in par. 3 are to be found in the demand. They were issued by one Iraqi concern to another, written in both English and Arabic, in language which is both prolix and vague. I cannot attribute to the parties an intention that there had to be a strict degree of compliance. In my judgment, the demand made did say in substance, although not in express words, that what it claimed was damages for breach of contract. Accordingly, I would hold that it was a sufficient demand upon the performance. PCCs criticisms: The rationale given is that letters of credit are much more common than performance bonds, and were therefore likely to be scrutinized at a higher level in the banks. However, this might not be true today because we already know that performance bonds are being used increasingly widely. Also, the reasons given do not appear to justify a time-tested practice of strict compliance which has worked extremely well with respect to letters of credit as it provides a high degree of certainty for those who have to deal with the transactions.

(3) Must beneficiary inform bank of basis of claim or alleged breach?

Courts likely to construe that it will be necessary to state basis of claim where an IG makes reference to the underlying obligation or Bs default. Esal v Oriental Credit [1985] 2 Lloyd's Rep 546 We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance CA: Beneficiary must say basis for demand and provide an explanation of failure. But the bank was not obliged to establish that a default had actually taken place If the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a competent Court of jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment. Edward Owen cited to reemphasise the point that a bank is not in the least bit concerned with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the banks knowledge of that fraud Requirement of the statement of basis of demand This does not make it harder to claim payment from the issuing bank, requirement easily satisfied Useful in an indirect way May help prevent the B from seeking, whether honestly or dishonestly, to apply the PB to the wrong contract, and help prevent abuses of the bond, usch as a claim under the bond by the B when in fact none is justified Further deterrent? The making of such of statement may expose the B to a charge of obtaining oney by deception if it is untrue to his knowledge (IE Contractors) Chartered Industries DBS hereby guarantee, debit the true fulfilment by *the pfs+ of the stipulations of the contract This guarantee shall be payable.. of the first demand notwithstanding any contestation Demand must state basis IE Contractors v Lloyds Bank We undertake to pay you, unconditionally, the said amount on demand, being your claim for damages brought about by the above named principal. Held: Valid demand includes informing bank of basis of claim. But NOT necessary to use the exact words in the clause. What was impt to court was that beneficiary made it clear to the bank that the other party had breached its contract + caused damage, even though the words werent used. Comments: This constitutes a pitfall for the unwary cant just make demand but state basis of claim. Reason? Stating basis of claim + found out not to be true, party could be held liable for deception. Note that B will be required to state the basis of his claim if the provisions of the URDG or the ISP 98 are incorporated into the undertaking

Relevance of the underlying contract

The contract between the applicant and the beneficiary will usually provide, express or impliedly that the B can only call on the bond when there has been a rbeach fo the underling contract or when the B honestly believes that there has been a breach of the underyling contract Where there has been no breach: Potentially fraudulent when the B does not believe that there has been a breach of the underlying contract B will have committed a breach of the underlying contract by calling on the guarantee when he is not entitled to do so Beneficiary will have to return the money to the applicant (who has reimbursed the issuer) If the applicant suffers a loss as a result, the B will be liable for damages for breach of contract Might just be interest payments from the applicants having to be out fo pocket for ht amount of the guarantee between the time he reimburses te issuer, and the time the B returns the money following the courts ruling that the callw as unjustified Normal rules for breach of contract would apply. Consequences of a wrongful call will be quite serious for the B. Magenta Resources v China Resources *1996+ 3 SLR 62 (Spore High Court), *1997+ 1 SLR 707 (appeal on another point) Facts: Sale of urea, Ss perf secured by PB. S shipped late. B called on PB; got paid. S argued: force majeure, hence there was no breach and thus B should not have claimed. (S to procure a bond which shall cover performance of delivery of goods in accordance with specification as stated in this contract) Held: HC Buyer could exercise its rights to call on the bond only if delivery of the goods were not in accordance with the sale contract. Here, sellers late delivery was excusable under the force majeure clause For a benfy to call on a PB where there has been no breach by the principal can amount to repudiatory breach of the underlying contract. CA Specific ruling was not evaluated, discussion was on whether the force majeure clause was applicable Reasoning: Seller had continuing obligation to sell. Buyer calls. Seller then wants to terminate contract because buyer calls on PB when he had no right to call. Therefore, wrongful calling (existence of force majuere clause excused the sellers late delivery) can lead to repudiatory breach in itself. Under common law, not every breach of contract entitles the injured party to terminate the contract Allowed only when the breach has resulted in serious consequences, or where the term that has been breached has been designated by the parties (or where the court in interpreting the terms of the contract) as a condition of the contract The bond that seller had to procure, was one to cover perf + specification. If seller has to give beneficiary a bond to cover that, then this would a bond on which buyer can call only when there has been a breach of the specific clause. No difficulty put on buyer calling on bond for breach of that. Comments: We have to be careful of a situation like this. Here, the court decided no breach because of force majeure clause. They mustve been convinced that buyer called when there had been no breach. BUT the problem is that you cant always be so sure. Many times, buyer may only

think theres a breach. Thats the point of the PB to be able to have cash in hand in case of perceived breach. This rule in general (not sure about facts of this case) may be particularly harsh on beneficiary. Recall that the issue here isnt primary liability and payment to beneficiary per se. Even if the court subsequently finds that the beneficiary was wrong in his assessment and in fact the applicant had not breached the underlying contract, this should not operate to turn the original bona fide call by the B into a breach of contract by the beneficiary Fairness and balance between the B and the applicant could be achieved by the accounting process (next section). E.g. a beneficiary who ahs been paid under an independent guarantee following an honest call could be ordered to refund this amount to the applicant if a court finds later that the applicant was not in breach of the contract. If repudiatory breach, B not only has to pay back the applicant, but also damages Note that once the contract is repudiated, the bank cannot recover money from beneficiary, but it will be indemnified from applicant anyway as long as it correctly paid out. Potentially, making the call itself without payment having been made to the beneficiary may in itself amount to repudiatory breach when beneficiary knows there was no breach. Therefore, court could decide that there was a fraud and grant an injunction to restrain the call in the first place recall Min Thai

Accounting for surplus monies

Question: Can a B call on a PB even if he has suffered no loss, and can he keep the payment he has received under the bond even if this exceeded his loss? Cargill International v Bangladesh Sugar [1996] 4 All ER 563, [1998] 2 All ER 406 (Morison J in the English High Court, affirmed by CA) Facts Dispute between the parties arose out of a sale of 12,500 tonnes of sugar to the Bangladesh Sugar and Food Industries Corporation, a state enterprise. Sellers provided the buyers with a performance bond which is liable to be forfeited by the BUYER if the SELLER fails to fulfil any of the terms or conditions of this contract . Issuing bank undertook: To make payment of US$526,273.15 to the Corporation in writing without any questions whatsoever. The guarantee is unconditional and it is expressly understood that the sole judge for deciding whether the suppliers have performed the contract and fulfilled the terms and conditions of the contract will be the df. The goods ordered did not arrive before Sept 15 and the goods were more than 20 years old. Therefore a breach was alleged and the buyers demanded payment. Sellers denied that they were in breach, contending that even if there was the buyers had suffered no real loss. This was because after rejecting the goods, the buyer was able to buy replacement sugar at a lower price Issues: (1) A preliminary issue was whether the moneys paid could be recovered if the beneficiary of the performance bond suffered no real loss. (2) Accounting when there is excess? (3) Buyer relied on the word forfeit and argued that this showed that the parties intended to oust the usual implication as to any subsequent accounting and to negative any later obligation on the aprt of the buyer to return excess funds if the amount claimed under the PB exceeded the damage it had suffered as a result of the sellers breach Held On the issue of whether a B can make a call on the bond if he did no suffer real loss Buyer was entitled to make a call on the full amount of the bond even if the sellers breach of contract had caused the buyer no loss Similarly entitled to do so if the loss caused was more than, less than, or equal to the

amount in the performance bond On the issue of accounting: If the buyer had obtainined payment under the PB as a result of such call as it was entitled to make, it could not retain all the money, but only such amount as was equal to the amount of loss suffered by it Where bond is called, there will be accounting at some stage between parties Implicit in a bond If amount insufficient: beneficiary can claim damages; if surplus: principal can recover overpayment when a payment received by a beneficiary under a performance bond was in excess of his actual loss, there was an implied duty by the beneficiary to hold the excess payment for the benefit of the applicant of the bond (recoverable by the applicant)

Reasoning: Potter LJ The performance bond is a guarantee of performance Its purpose is to provide security to the buyer for the fulfilment by the seller of his contractual obligations Its purpose is also that the buyer may have money in hand to meet any claim he has for damage as a result of the sellers breach It confers a considerable commercial advantage upon a buyer not only does the buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the bond, but payment can be obtained from the sellers bank on demand without pro of of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages In these circumstances the obligation to account later to the seller , in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties forfeit Morison J: much plainer words required Upheld by the CA: The term forfeit was merely used as a shorthand for the exercise of the buyers right to call for payment under the bond and referred to the position between the seller and the bank and not to seller and the buyer Sellers interpretation of the bond accorded more with reason, fairness and good commercial sense Lower courts reasoning, Morison J.: After considering the commercial purpose of a performance bond, he concluded that the beneficiary was entitled to call for payment in accordance with the terms of the bond but if the payment exceeded his actual loss, he had to account for the excess payment. There is a wealth of authority concerned with the question whether and in what circumstance an interlocutory injunction may be granted. (1) Against the bank which issued the bond to restrain it from paying in accordance with the terms; (2) Against the beneficiary of the bond to prevent it from calling the bond. The Court will not grant an injunction in either case unless there is a lack of good faith. The justification for this lies in the commercial purpose of the bond. Such a bond is effectively as valuable as a promissory note and is intended to affect the tempo of the parties obligations in the sense that when an allegation of breach of contract is made (in good faith), the beneficiary can call the bond and receive its value pending the resolution of the contractual disputes. He does not have to await the final determination of his rights before he receives some moneys. The concept that money must be paid without question, and the rights and wrongs argued about later, is a familiar one in international trade, and substantial building contracts

I take the view that if there has been a call on a bond which turns out to exceed the true loss sustained, the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank, (where for example, the bank had not been paid by him) but that does not affect his right to bring the claim in his own name. In the normal course of events, the bank will have required its customer to provide it with appropriate security which would be called upon as soon as the bank was required to pay. In principle, the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary. ... The basis upon which recovery may be made in respect of an overpayment is contractual rather than quasi contractual. It seems to be that it is necessary to imply into the contract that moneys paid under the bond which exceeded the buyers actual loss would be recoverable by the seller.

Comments: Difficult to persuade a court that parties to a PB intended to do away with the process of subsequent accounting and meant instead to allow the B to retain the full amount paid claimed under the bond even if this was in excess of his actual losses UNLESS: this conclusion was inevitable on the words of the bond Even so, where the account party and the B did intend that the B should be entitled to rain the full amount claimed under the PB regardless of actual losses suffered, there may eb onstraings on the enforceability of such a rpovsiion in the underlying contract Cargill Morison J: Unenforceable as a penalty which will have to be repayable (less any damage actually proven to have been suffered as aresult of non-completion (Workers Trust Bank Ltd v Dojap citing Commissioner of Public Works v Hills) Court will construe the PB in a way that they accord with the expectations of he parties in a typical bond Considering advts of the B under a PB, necessary to achieve commercial fairness, to require the B to account for overpayment under the bond (after damages have been quantified). Otherwise, the B would obtain an unjustificable windfall Would be substantial in any case where it had suffered no loss or relatively nominal loss, and would run counter to the general proposition that compensation or breach of contrat depends on proof of loss After Cargill? Oblgiation of B and acct party to have a final accounting after the Bs loss has been quantified imposed by the terms of the underlying contract If B has been overpaid, he has to refund the account party and not the issuing bank No concern to the issuing bank. Bank is entitled to reimbursement from the account party as long as it paid pursuant to a valid demand under a PB BUT if acct party goes insolvent and is unable to reimburse the issuing bank, issuing bank will have no grounds to seek repayment from the B even if the B has been overpaid under the PB Position may be different where the B has been dishonest in calling on the PB

Applied in Singapore in Pun Serge v Joy Head Investments Ltd [2010] 4 SLR 478; [2010] SGHC 182 (High Court) Significance: The performance bond functioned as a security and there was an inherent duty under the performance bond for mutual accounting between the parties Facts Agreement to purchase the interests of the defendant, Joy Head Investments Limited, in Winner Sight Investments Limited (WSIL), a company incorporated in Hong Kong, The main issue between the parties was whether the vendor was entitled to keep the full amount paid under the performance bond even though it had suffered no loss as a result of the purchasers breach of the agreed completion date of 9 December 2008. According to the defendant, the Performance Bond was twofold in purpose:

(a) as assurance for the defendant against the plaintiff for a multitude of contingencies that would have prevented completion of the sale of the defendant's interests in WSIL, and (b) as consideration for certain budget and capital proposal approvals ("the Approvals") to have been provided by the plaintiff. Held, granting judgment for the plaintiff: (1) Since a performance bond was not an estimate of damages that might flow from a breach of contract but rather a guarantee of due performance of a contract, it would be implicit in the nature of such a bond that there would at some future stage be an accounting between the contracting parties in the event that payment was made under the bond. Any shortfall or excess between the full amount of the performance bond and any loss suffered by the party calling on the bond would therefore remain to be accounted for: at [11], [12] and [37]. At this juncture, a proper consideration of the nature of the Performance Bond is in order. The Purchaser argues at para 14 of his Statement of Claim (Amendment No 1) that: ... there is an implied contractual term in the Agreement that the [Vendor] would account to the [Purchaser] for the proceeds received under the Performance Bond and would only retain the amount of any loss suffered by the [Vendor] in consequence of the [Purchaser's] failure to complete on the Completion Date. The Purchaser's contention finds support in Cargill International SA v Bangladesh Sugar and Food Industries Corp [1996] 4 All ER 563 ("Cargill"). In Cargill, it was established that since a performance bond was not an estimate of damages that might flow from a breach of contract but, rather, a guarantee of due performance of a contract, it would be implicit in the nature of such a bond that unless the contrary was expressly stated, there would at some future stage be an accounting between the contracting parties (hereafter referred to as a "subsequent mutual accounting") in the event that payment was indeed made under the bond. As was noted by Potter LJ in Comdel Commodities Ltd v Siporex Trade SA [1997] 1 Lloyd's Rep 424 ("Comdel") at 431, which applied the Cargill analysis in full: If the amount of the bond is not enough to satisfy the seller's claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand, if the amount of the bond is more than enough to satisfy the seller's claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller's damages. 12 Cargill was subsequently affirmed on appeal (see Cargill International SA v Bangladesh Sugar and Food Industries Corp [1998] 2 All ER 406 ("Bangladesh Sugar")), and the principle espoused therein has since been applied in numerous other cases. Notably, in the recent case of Tradigrain SA v State Trading Corporation of India [2006] 1 Lloyd's Rep 216, Christopher Clarke J employed at [26] the terminology of an implied contractual term, which terminology was also adopted by the Purchaser in the present case: In my judgment [Cargill] (and the citations in it) are authority for the proposition that there is an implied term in the contract of sale that the Buyers will account to the Sellers for any amount that has been paid under the bond to the extent that the amount paid exceeds the true amount of the Buyer's loss . The amount is due to the Sellers as a debt, whether or not the Sellers have indemnified either the paying bank or the indemnifier of the paying bank. In essence this is because, by calling for too much under the bond, the Buyers have procured payment to themselves from the paying bank (acting, for this purpose, on the Sellers' behalf) of an amount that is not due, and must, obviously, return it to their contractual counterparty from whom they should not have procured it in the first place. Otherwise they will have retained a windfall in the form of money to which they were not entitled since, to the extent of the overpayment, there has been either no breach or no loss entitling them to retain it. This conclusion appears to me to be correct in principle and has been approved by the Court of Appeal. [emphasis added]

14 It should be noted that in Cargill, Bangladesh Sugar and Comdel, the court referred to the subsequent mutual accounting (as defined at [11] above) as being " implicit in the nature of a performance bond" (Bangladesh Sugar at 406), and stated that the relevant parties concerned "very probably [would] have known that that [was] a general feature of performance bonds" (Bangladesh Sugar at 416). The distinction between the words "implicit" and "inherent" is slight, but, to my mind, it is preferable to regard the subsequent mutual accounting as something inherent in all performance bonds. This straightforward approach would elide the difficulty of determining whether the particular contract at hand requires the implication of an implied term in question.

Final points on accounting: Straightforward principle When PB is called, there will be accounting between parties. Beneficiary calls on the bond before the final determination of the dispute. At some point, this dispute will likely be adjudicated upon to see if beneficiary was at fault. Recall that PB itself is usually ~ 10% of the actual value If PB is 1mil, and damages decided by court is less, can applicant get back his money? Cargill yes. this is a matter of an implied term. How is this different from a liquidated damages clause? Liquidated damages clause: In the event of breach, monies payable is set. As long as the clause is valid, the court will enforce it regardless of how much/less damages is attempts to pre-estimate the loss for breach of contract. Different principle altogether. Amount under PB? Not meant to prejudge the issue, trial will establish the final liability of the parties. However, claim on PB will put the B at an advantage has the money in hand first Even if applicant wins at trial, he might not succeed in claiming a refund if by then the B is impecunious. NB: If the parties have to account, why do you need the concept of unconscionability? Cos eventually you have to account. If you have this concept of unconscionability i.e. injunction will be given more easily, you are only giving a reprieve of a few weeks to the other party. But at the end of day, the party has to account to the other for any issue of overpayment.

International Rules Affecting PBs and Standbys

UCP
UCP 500 and UCP 600: Art 1 states that the rules shall apply including to the extent to which they might be applicable, to standby letters of credit UCP 600 Art 2 definition: Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. UCP 500: Art 2 definition of credit in UCP includes both documentary credits & standby letters of credits Standbys: Some UCP provisions more relevant than others PBs: Not mentioned in UCP Comments: Not a lot of time spent on this. Suggestion that under UCP, it might be possible for PB/standbys to fall under, although some clauses dont apply. Unusual for PB to incorporate UCP, though this is possible.

International Standby Practices (ISP 98)

Rule 1.01a & b: ISP98 intended to apply to standby letters of credit or other similar undertakings, however named or described, referred to as standbys (could apply to PBs too)

 Used mainly by & in relation to US banks Like UCP, applies only if specifically incorporated

ICC Uniform Rules on Demand Guarantees 2010 rev (URDG758)

Applies to all guarantees payable upon presentation of one or more documents PBs: Outside USA, used more often than ISP

UNCITRAL Convention on Independent Guarantees and Standby L/Cs (1995)

Applies to both PBs and Standby LCs but not widely adopted Comments: Note that indep guarantees not sure what kind of set of rules will be used, unlike LCs, for which UCP will be used. Here, need to look specifically at the contract to determine. If any of these intl rules are incorporated in PBs, then it would be clearer as to how to go about it. Skim these rules and pick out the ones that would be relevant for the general problems/issues faced by PBs and independent guarantees in general. Potton Homes Ltd v Coleman Contractors Ltd (1984) 28 Build LR 19 Brightside Mechanical and Electrical Services Group Ltd v Standard Chartered Bank [1989] 3 MLJ 13

International Banking Law (2012-2013) Performance Bonds Questions for discussion

1.

It may be argued that whenever one party to a contract (the applicant) agrees to procure an unconditional performance bond in favour of the other party (the beneficiary), he is taking a risk. What is the nature of this risk and does the law provide sufficient protection for the applicant?

Risk Easy for B to call on the bond risk of abusive or improper call What are the repurcussions? Applicant has to reimburse the bank and has to fight it out in court. He will be out of pocket immediately his liquidity is damaged. Also even if applicant wins, B might not be able to pay (might be insolvent by the time the action is tried) Does the law provide sufficient protection for the applicant? On the demand performance bond require a statement that there is a breach of underlying contract Minor safeguard. Perhaps a moral safeguard. Certificate on the part of the applicant? How can this be used? (???) Applicant can use a term that requires him certify that the goods are valid Exceptions Fraud Unconscionability (wider) He can restrain the call - injunction Requires strong prima facie case. Wont be easily granted. BS Mt Sophia not a remedy the courts are going to lightly grant. Repudiatory breach If B wants to carry on the contract, they would not call on the bond abusively Accounting If you pay too much or little, the other party has to refund or top up the money. But might be cold comfort since you are out of money to begin with 2. Explain how the principles that apply to documentary credits are used also in performance bonds. Should the same principles apply to both types of transactions?

Depends on whether you are trying to achieve autonomy 3. Consider the main principles that apply to independent guarantees and discuss how these are treated under the international rules in this area. What are some differences and similarities between the positions taken in the ISP 98, the UN Convention and the URDG 758?

4.

What is your view of the principle of unconscionability that has been developed by the Singapore courts to supplement the fraud exception in performance bond cases? What is the meaning of unconscionability? Give examples from decided cases.

Why unconscionability in PB cases? LOC is a form of payment (JBE Contractors) hence need to be stricter. Cannot interfere with it But guarantee, is a form of a security Undue hardship to obligor in PB cases?