An exercise in restraint: Singapore Court of Appeal confirms courts will give effect to agreements limiting the circumstances in which a contractor can restrain a call on performance bonds

The Singapore Court of Appeal (the "CoA") recently delivered its judgment in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and Another [2015] SGCA 24. In a landmark ruling, the CoA found that where parties to a construction contract agree to limit the circumstances in which a contractor is entitled to seek an injunction restraining a call on a performance bond, Singapore courts will respect the parties' freedom to agree to such terms and enforce the restriction where it is reasonable.

Background

In January 2013 Asplenium Land Pte Ltd ("Asplenium") employed CKR Contract Services Pte Ltd ("CKR") as the main contractor for the construction of condominiums in Singapore for a sum of S$88,063,838.00. The contract stipulated that CKR was to provide an on-demand performance bond in Asplenium’s favour for 10% of the contract sum (c.S$8,000,000). A specific clause in the contract stated that CKR was unable to restrain Asplenium from calling on the performance bond on any ground, except only in the case of fraud.

Shortly after work commenced, disagreements arose between Asplenium and CKR in relation to what Asplenium perceived to be sub-standard work and slow progress on the project which ultimately led to the termination of the contract. In November 2014, Asplenium made a call on the performance bond.

CKR applied for and obtained an ex parte injunction restraining Asplenium from receiving payment on the grounds that the call was unconscionable. CKR's argument was that the clause in question was unenforceable as it ousted the jurisdiction of the court to grant injunctions by preventing CKR from relying on unconscionability as a ground for relief.

The first instance court agreed with CKR holding that the clause was a restriction on the court's jurisdiction and was therefore unenforceable. CKR's application to restrain Asplenium's call on the bond was however dismissed as on the facts of the case it did not meet the high standard of proof required to establish unconscionability. Both sides appealed the decision.

The Decision of the Court of Appeal

The CoA rejected the findings of the first instance court. The CoA emphasised that a key principle in all commercial contracts is that of freedom of contract. It held that clauses which seek to restrict or exclude a remedy are permissible as long as they do not oust the jurisdiction of the court or, in other words, restrict a party's access to court (which would be contrary to public policy and therefore unenforceable). 

In this case, the CoA held that the parties' agreement was merely a restriction on the availability of an equitable remedy which is more akin to an exclusion or exception clause. It may have been subject to the reasonableness provisions of the Unfair Consumer Terms Act, but no such argument was advanced. Therefore, in the absence of any alleged fraud, Asplenium was entitled to call on the performance bond.

Comment

This case serves as an illustration of how the courts in Singapore will seek to give effect to parties' commercial agreements to limit the circumstances in which an employer can call on a bond as long as the clause is reasonable. This should provide comfort to employers with a strong negotiating position to reinforce the strict enforcement of on demand security. 

Further, although this case concerned a limitation on the ability to restrain a call on a bond, the outcome is still consistent – albeit by analogy – with recent decisions of the English courts giving effect to parties' agreements to restrict the ability to call on a bond in the first place. For example, in Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 the English courts held that if the parties agree on conditionality to make a call on a bond in the underlying construction agreement, then the courts will give effect to that agreement such that the contractor can rely on the clause to restrain a call where the call is made contrary to the conditions stipulated in the underlying contract. 

Finally, unlike Singapore law, English law does not recognise 'unconscionability' as a ground to restrain a call. However, the English courts' willingness to respect conditionality in the right to call on bond is perhaps analogous to recognising unconsionability in all but name. After all, would it not be unsconscionable to allow a party to call on a bond in circumstances where it had agreed not to do so? 

Clearly this continues to be a developing area of the law and future decisions of the English and Singapore courts, particularly on the enforcement of conditional bonds, will be closely watched. 

Practical consequences 

• In principal, the Singapore courts should uphold clauses that restrict the ability of a contractor to restrain a call on a bond.
• Such clauses will most probably be subject to a test of reasonableness. Clauses that try to exclude fraud as a ground to restrain a call on a bond are therefore unlikely to be upheld.
• Contractors should approach such clauses with caution, to ensure adequate protection from abusive calls.

For more information please contact Alastair Henderson, Partner, Daniel Waldek, Senior Associate or your usual Herbert Smith Freehills contact.