RESTRAINING A CALL ON A PERFORMANCE BOND : SHOULD FRAUD OR UNCONSCIONABILITY BE THE NEW ORTHODOXY?

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1 132 Singapore Academy of Law Journal (2000) RESTRAINING A CALL ON A PERFORMANCE BOND : SHOULD FRAUD OR UNCONSCIONABILITY BE THE NEW ORTHODOXY? I. INTRODUCTION A performance bond is most commonly used in the construction industry where a contractor puts up such a bond to the owner to secure his performance of the building contract. The purpose of such a performance bond is usually to meet any claims for contractual damages that the owner might have as a result of any breaches of the construction contract. 1 Typically, a bank or guarantor will issue the performance bond in favour of the owner or employer ( beneficiary ) for or on the account of the contractor ( account party ). A performance bond may or may not be made subject to conditions. For a conditional bond, satisfaction of any condition precedent to the right to call on the bond is required before the beneficiary is entitled to call on and receive the moneys guaranteed under the performance bond. 2 Under a simple demand or unconditional bond, however, once a valid demand or call is made, the guarantor is obliged to pay the beneficiary according to the terms of the bond or guarantee. 3 As stated by the Malaysian Federal Court in China Airlines Ltd v Maltran Air Corp Sdn Bhd: There are two types of performance bond (sic). The first type is a conditional bond whereby the guarantor becomes liable upon proof of a breach of the terms of the principal contract by the principal State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor [1980] Com LR 235, at 235; Cargill International SA v Bangladesh Sugar and Food Corporation [1998] 1 WLR 461, at 468, 470; I E Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd s Rep 205, at 207 (decision reversed by the English Court of Appeal on a point of fact: [1990] 2 Lloyd s Rep 496). I E Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd s Rep 205, at 207; Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd [1993] 3 SLR 350, at ; Nik Sharifuddin Bin Nik Kadir v Mohaiyani Securities Sdn Bhd [1994] 4 CLJ 402, at 409; Development Bank of Singapore Ltd v Eng Keong Realty Pte Ltd & Anor [1990] 3 MLJ 89, at 92. Siporex Trade S A v Banque Indosuez [1986] 2 Lloyd s Rep 146; I E Contractors Ltd v Lloyds Bank plc [1990] 2 Lloyd s Rep 496, at 499; Nanyang Insurance Co (Malaysia) Bhd v Chin Kim Hin & Anor [1992] 1 CLJ 454, at 457. There is a rebuttable presumption that a performance bond is unconditional if there is a clear statement that the amount guaranteed is payable upon demand. The presumption applies even though there may be some contrary indications elsewhere in the document: Bocatra Construction Pte Ltd and Ors v Attorney General (No 2) [1995] 2 SLR 733, at 738; Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd s Rep 546, at 549. Ultimately, it is a question of construction of the performance bond. Cf Alexander Loke, Injunctions and Performance Bonds A Return to English Orthodoxy: Bocatra Construction Pte Ltd v Attorney-General (No 2) [1995] SJLS 682, at

2 12 S.Ac.L.J. Restraining a Call on a Performance Bond 133 and the beneficiary sustaining loss as a result of such breach. The guarantor s liability will therefore arise as a result of the principal s default. The second type is an unconditional or on demand performance bond which is so drafted that the guarantor will become liable merely when demand is made upon him by the beneficiary with no necessity for the beneficiary to prove any default by the principal in the performance of the principal contract. 4 [emphasis mine] Speaking extra juridically, LP Thean JA once said that the legal position in Singapore [concerning how to restrain a call on a simple demand performance bond] has been settled by the decision of the Court of Appeal in Bocatra Construction Pte Ltd and Ors v Attorney General (No 2). 5 Unfortunately, differing interpretations of the Bocatra decision 6 by subsequent High Court cases have spawned two opposing views as to what grounds may be tendered by the account party to restrain a call. In a few decisions of the Singapore High Court, fraud or unconscionability were expressly approved as alternative grounds for the restraint of a call on a performance bond. The judges, who decided these cases, premised their view on their interpretation of Bocatra. The opposing judicial view, which is firmly rooted in a long line of English precedents and also allegedly derived from Bocatra, is that only proof of fraud would suffice. In the recent decision of GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor, 7 the Singapore Court of Appeal acknowledged this divergence of opinion and attempted a resolution. There, in addition to bestowing judicial imprimatur on several novel points of law, the court also explicitly held that Bocatra revolutionised the law and departed consciously from the English position. With respect, this writer is unable to agree with the pronouncements in the GHL decision. This paper will therefore strive to lay out, what in this writer s humble view, are the true parameters of the holding in the Bocatra case, and present a survey of relevant cases, some of which were not cited to the court in the GHL case. Secondly, the requisite standard of fraud [1996] 2 MLJ 517, at 534. For an unconditional bond, after a valid demand has been made, the guarantor must pay within reasonable time: Ramal Properties Sdn Bhd v East West-UMI insurance Sdn Bhd [1998] 5 MLJ 233, at 244. LP Thean JA, The Enforcement of a Performance Bond: The Perspective of the Underlying Contract (1998) 19 Sing LR 389, at 390. [1995] 2 SLR 733. Civil Appeal No 20 of 1999, 14 August 1999, 8 August 1999, unreported. The views of LP Thean JA in his article The Enforcement of a Performance Bond: The Perspective of the Underlying Contract (1998) 19 Sing LR 389 were substantially imported into the GHL judgment by the Court of Appeal.

3 134 Singapore Academy of Law Journal (2000) sufficient to warrant an interlocutory restraint on a call on a performance bond will also be discussed. This is another related matter that requires a definitive answer in view of certain pronouncements in GHL. Recently, English courts have expressly held that implicit in the nature of a performance bond, there must be an accounting of rights and obligations between the parties after a call on the bond. This interesting development will also be explored since it has been recently imported into Singapore by the High Court. II. FRAUD AS THE SOLE GROUND FOR AN INTERLOCUTORY INJUNCTION A. General It is well-established by case-law, prior to Bocatra, that fraud is the sole ground that can be raised by the account party for interlocutory, injunctive relief to either prevent a beneficiary from calling on a demand bond, or the guarantor from paying according to the terms of the bond. 8 In the leading case of Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor, 9 Lord Denning MR said:... the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms.... 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. 10 [emphasis mine] Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyd s Rep 256, at 257; Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor [1978] 1 QB 159, at 169; RD Harbottle Mercantile Ltd v National Westminster Bank Ltd [1978] 1 QB 146, at 155; Malaysia Overseas Investment Corp Sdn Bhd v Sri Segambut Supermarket Sdn Bhd [1986] 2 MLJ 382, at 384; Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anor [1989] 1 MLJ 190, at 192; Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ 198, at The fraud exception is an incarnation of the maxim ex turpi causa non oritur actio, or fraud unravels all : United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, at 183. The courts have consistently held that there is no distinction between, on the one hand, cases where an injunction is sought to restrain a bank or guarantor from making payment under a bond and, on the other hand, cases where an interlocutory injunction is sought to restrain the beneficiary from calling on the bank to pay under the bond: Group Josi Re v Walbrook Insurance Co Ltd and Ors [1996] 1 WLR 1152, at ; New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374, at para 26, 28; Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ 198. [1978] 1 QB 159. Ibid, at 171. See also Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165. As will be discussed, the fraud exception though applicable when an injunction is sought against the beneficiary operates in a slightly different manner; infra, n 39 and the accompanying main text.

4 12 S.Ac.L.J. Restraining a Call on a Performance Bond 135 B. Bocotra Construction Pte Ltd v Attorney General (No 2) Before considering the Bocatra decision in some detail, it is important to emphasise the issue that needs to be resolved did Bocatra really depart from the English position outlined above? This author respectfully submits that in Bocatra, the court simply re-affirmed the English position. In fact, as the ensuing discussion will show, the Court of Appeal clearly held that an interlocutory injunction restraining a beneficiary from calling on a performance bond will only be granted on the ground of fraud. The facts of Bocatra are refreshingly simple. The Director-General of the Public Works Department ( PWD ) appointed the appellant as contractor for certain works to be done on the Central Expressway from Bukit Timah Road to Chin Swee Road. Under the construction contract, the appellant furnished to the Director-General a performance guarantee. The appellant, unfortunately, did not meet the deadline for completing the works and this prompted the Director-General to notify the appellant of his intention to call on the guarantee. Thereupon, the appellant initiated proceedings against the PWD. By reason of s 27(1)(a) of the Government Proceedings Act, 11 the appellant could not seek an interlocutory injunction against the Government; and so it sought, inter alia, a declaration that the Director- General was not entitled to call on and receive the sum under the performance guarantee, until the dispute between the parties had been resolved by arbitration. An important point to note is that the appellant did not allege that the respondent acted without honest belief of its entitlement to make a call. What this means is that there was no allegation of fraud on the part of the respondent as beneficiary of the unconditional bond. 12 On appeal, the Court of Appeal affirmed the trial judge s decision and found for the respondent. Karthigesu JA, delivering the collective judgment of the Court of Appeal, firstly noted that [the appellant] relied on Eveleigh LJ s statements in Potten Homes..., which were followed... in Royal Design.... 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. It was suggested that there was a distinction between the Cap 121, 1985 Rev Ed. [1995] 2 SLR 733, at 742. Infra, n 38 and the accompanying main text, on the definition of fraud.

5 136 Singapore Academy of Law Journal (2000) applicable principles in cases where the injunction sought to restrain banks from making payment, and those where the intended injunction was on the beneficiaries under the bond. 13 [emphasis mine] Reacting strongly to these arguments, Karthigesu JA bestowed judicial imprimatur to the following principles: The respondent undertook a comprehensive and judicious survey of the relevant case law on the restraint of calls or payment on bonds from a variety of common law jurisdictions. Of the various propositions of law suggested by the respondent, four principles may be extracted: (a) (b) (c) (d) The autonomy principle the guarantee constitutes a separate contract from the underlying transaction. The appellants are not privy to the guarantee. The cash in hand principle reflecting the importance of promoting commercial efficacy and certainty in the use of letters, guarantees and bonds. This ties in with the autonomy principle. The fraud exception the sole exception to the autonomy and cash in hand principle 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 (n payment) or the beneficiary under the guarantee (on calling for payment). Principles (a) to (c) above were all alluded to and supported by the judge below. The weight of authority suggests that these principles are well entrenched.... [C]ontrary to the appellants submissions, there is no distinction between the principles to be applied in cases dealing with attempts to restrain banks from making payment or those dealing with restraint of calls from calling for payment. This principle has been consistently endorsed by English authorities... and was similarly endorsed by our Court of Appeal in Brody, White & Co Inc v Chemet Handel Trading (S) Pte Ltd. 14 [emphasis mine] Thus, the extract above makes it is very clear that Karthigesu JA rejected the broad approach suggested by the appellant to look at the underlying transaction based on Potten Homes and Royal Design. His Honour clearly held that fraud was the sole exception which permitted injunctive relief Supra, n 6, at 743. Supra, n 6, at 744.

6 12 S.Ac.L.J. Restraining a Call on a Performance Bond 137 Karthigesu JA then went on to clarify Donaldson MR s views in Bolivinter Oil SA v Chase Manhattan Bank, 15 which were relied upon by the appellant to support its contention that, besides fraud, a substantial challenge as to the validity of the guarantee would be a sufficient basis for an injunction. His Honour said: Donaldson MR was not suggesting that there should be a new category of exception.... Contrary to what the appellants suggested, we do not think that the mere fact that the validity of the guarantee was substantially challenged in other proceedings will automatically provide a basis for an injunction to be obtained restraining an intended call for payment. It will still be in the wholly exceptional case of fraud that an injunction can be granted. 16 [emphasis mine] Again, Karthigesu JA starkly reiterated that fraud was the sole exception to the autonomy principle. His Honour then went on to scrutinise, in detail, the local decision of Royal Design Studio Pte Ltd v Chang Development Pte Ltd, 17 which relied heavily and approved of Eveleigh LJ s infamous comments in the Potten Homes Ltd v Coleman Contractors Ltd. 18 As aptly summarized by Karthigesu JA, [essentially, Eveleigh LJ opined that he did not think the fraud exception was the sole basis for an [interlocutory] injunction to be granted. 19 [emphasis mine] [1984] 1 Lloyd s Rep 251, at 257. [1995] 2 SLR 733, at 745. [1990] SLR For criticisms of this decision, see Locknie Hsu, Autonomy of Performance Bonds in Singapore: Royal Design Studio v Chang Development [1992] LMCLQ 297. (1984) 28 BLR 19, at Eveleigh LJ said: As between buyer and seller the underlying contract cannot be disregarded so readily. If the seller has lawfully avoided the contract prima facie, it seems to me he should be entitled to restrain the buyer from making use of the performance bond. Moreover, in principle I do not think it 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 of consideration between buyer and seller for which the seller undertook to procure the issue of the performance bond, I do not see why, as between seller and buyer, the seller should not be unable to prevent a call upon the bond by the mere assertion that the bond is to be treated as cash in hand. It is true that in Edward Owen Ltd v Barclays Bank it was unsuccessfully submitted that the failure of the buyer to procure a letter of credit in accordance with the contract terms should entitle the plaintiffs to an injunction against the bank. That case, however, was not concerned with the position as between buyer and seller, and any statements as to the irrelevance of the failure to provide the letter of credit must be seen in that context... [emphasis mine] [1995] 2 SLR 733, at 745.

7 138 Singapore Academy of Law Journal (2000) Finding unsurprisingly on the evidence... [in Royal Design that] there was no allegation or finding that the circumstances were such as to establish fraud [emphasis mine], His Honour declared that Royal Design was a conscious departure from [the] principle... that the sole exception to the general rule denying injunctions in such circumstances is where fraud is established. 20 [emphasis mine] It is this writer s humble opinion that Karthigesu JA s constant emphasis on fraud as the sole ground for an interlocutory injunction and his obvious rejection of the broad approach based on Potten Homes and Royal Design, effectively consigned both cases into the abyss of judicial error. Specifically, the problem with Royal Design is the foundational assumption in Thean J s judgment that the principles governing the restraint of the guarantor and those regarding the restraint of a call on a bond differ. 21 In Royal Design, Thean J adopted the obiter dicta of Eveleigh LJ in Potton Homes that where the dispute is solely between parties to the underlying contract, the court can take into consideration relevant facts, apart from fraud, in deciding whether to prevent a demand on the bond. His Honour said: All that these [English] cases established is that... the bank s performance of its obligations is in no way dependent on the outcome of the resolution of such dispute [ autonomy principle ]. Such dispute is solely between the two parties and is of no concern of the bank. None of these cases, however, were concerned with the disputes between the contracting parties under their underlying contract.... In such a case, I do not see why the court should be inhibited from... restraining the [beneficiary] from calling on the bond, if the facts warrant it, merely because the bond is like a letter of credit.... All relevant facts of the case must be considered. 22 [emphasis mine] This assumption is, however, entirely contrary to established authorities. As noted by Staughton LJ in Group Josi Re v Walbrook Insurance Co Ltd and Ors: 23 [I]t is argued by Mr Bartlett for the reinsurers that the case is altogether different, and the [fraud] rule which I have been discussing does not apply, when an injunction is sought not against the bank but against the beneficiary of a letter of credit. In my opinion that cannot be right. The effect on the lifeblood of commerce will be precisely the same whether the bank is restrained from paying or the [1995] 2 SLR 733, at 746. This assumption was noted by Karthigesu JA in Bocatra, supra, n 13, and the accompanying main text. [1990] SLR 1116, at 1123, [1996] 1 WLR 1152, at

8 12 S.Ac.L.J. Restraining a Call on a Performance Bond 139 beneficiary is restrained from asking for payment. That was the view of Sir John Donaldson MR in Bolivinter Oil SA v Chase Manhattan Bank NA (Practice Note) [1984] 1 Lloyd s Rep 251, 254, of Donaldson LJ in Intraco Ltd v Notis Shipping Corporation [1981] 2 Lloyd s Rep 256, of Lloyd LJ in the Dong Jin Metal case, 13 July 1993, and of both Clarke and Phillips JJ in the present case. [emphasis mine] Furthermore, since Karthigesu JA in Bocatra stated unequivocally that there is no distinction between the principles to be applied in cases dealing with attempts to restrain banks from making payment or those dealing with restraint of callers from calling for payment, 24 there is no way one can argue that Royal Design survived the judicial scrutiny of the court in Bocatra. It becomes clear, therefore, when one closely considers the methodology employed by Karthigesu JA, that the Court of Appeal in Bocatra did not introduced a new ground for the granting of interlocutory injunctions on calls on performance bonds. The judgment was specifically tailored to dispel the notion that fraud was not the sole ground for an interim injunction. Furthermore, there is no indication whatsoever that the facts in Bocatra made it necessary for the Court of Appeal to introduce a new exception of unconscionability to the autonomy principle. The court plainly found for the respondent on the ground that there was no fraud involved in the call on the performance bond. 25 Thus, it is in this light that the following passage from Bocatra must be construed: In our opinion, whether there is fraud or unconscionability is the sole consideration in applications for injunctions restraining payment or calls on bonds to be granted. 26 [emphasis mine.] The Court of Appeal was not saying that unconscionability is a separate ground for an interlocutory injunction, as proponents of the heterodox view of Bocatra would argue. In reality, the terms fraud and unconscionability were simply used by Karthigesu JA interchangeably without any conscious intention of making a legal distinction between the two terms, as shown by a careful reading of Bocatra [1995] 2 SLR 733, at 744. Ibid, at 748. Supra, n 6, at 746.

9 140 Singapore Academy of Law Journal (2000) C. New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor In the Singapore High Court decision of New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor, 27 despite earlier comments to the contrary, 28 Lee Seiu Kin JC came down strongly on the view that in Bocatra, unconscionability was introduced as a new ground for injunctive relief. There, the first defendant was the main contractor for the Tanglin Regency condominium project ( the project ). Part of the works of the project, being structural and architectural works for the main and ancillary building and external works, were sub-contracted to the plaintiff. As usual, pursuant to the sub-contract, the plaintiff arranged for the second defendant to furnish a performance bond for 10% of the whole contract sum in favour of the first defendant. The demand bond was eventually called upon by the first defendant who alleged that the plaintiff breached the sub-contract. Pending trial, the plaintiff argued that it had substantially fulfilled all its obligations under the sub-contract such that only rectification and minor works remained, and obtained an ex parte interlocutory injunction restraining the first defendant from calling on the performance bond. Lai Siu Chiu J, who heard the application for injunctive relief, also ordered that the second defendant be restrained from making payment to the first defendant according to the terms of the bond. Thereupon, the first defendant commenced proceedings to discharge the injunction. Lee Seiu Kin JC discharged the interlocutory injunction on primarily two grounds. According to the learned judicial commissioner, the injunction ought to be discharged because the plaintiff failed to make full and frank disclosure of material facts. His Honour said: A strict duty is placed on the applicant in such instances because of the ex parte nature of the application and the risk of injustice to the other party who is not represented. Although it is true that the court will not automatically discharge an injunction in every case of material non-disclosure and will look at all the circumstances before exercising its discretion, I am of the view that the burden generally rests on the [1999] 1 SLR 374. L & B Engineering (S) Pte Ltd v Monocrafts Pte Ltd, Originating Summons No 520 of 1998, 1 July 1998, 2 May 1998, unreported. At para 14, Lee Seiu Kin JC opined that although he had reservations about whether unconscionability could constitute an adequate ground for an interlocutory injunction, he accepted that there was some basis for this contention in view of certain remarks of the Court of Appeal in the Bocatra case, [emphasis mine] This view is surprising, considering the fact that Lee Seiu Kin JC was then one of the counsels for the respondent in the Bocatra case.

10 12 S.Ac.L.J. Restraining a Call on a Performance Bond 141 plaintiffs to persuade the court that it should not do so In the present case, I found that the plaintiffs ought to have placed [certain] facts before the court in their ex parte application and there were no circumstances that justify their not doing so. This ground alone would have been sufficient for me to discharge the injunction. 30 [emphasis mine] The second ground cited by Lee Seiu Kin JC was that since there was no allegation or evidence of fraud, the plaintiff was not entitled to the injunction. Finding that since Bocatra, it [was] clear law that an injunction will be granted only where fraud is alleged, 31 his Honour then undertook an admirable exploration of the law of performance bonds in his judgment. Before Lee Seiu Kin JC, counsel for the first defendant argued that the injunction should be dissolved because the plaintiff had not alleged fraud. In reply, counsel for the plaintiff agreed that while there was no plea of fraud, the injunction ought to be upheld because it was unconscionable for the first defendant to make the call. The cases of Bocatra, Royal Design and Potten Homes were cited as authorities allowing unconscionability to operate as a separate ground for injunctive relief. Unsurprisingly, this argument did not find favour with the learned judicial commissioner. His Honour said: The Court of Appeal [in Bocatra] held that the weight of authority suggested that fraud was the sole exception to the principles that: (i) the guarantee (or bond) constituted a separate contract from the underlying transaction [ autonomy principle ]; 32 and (ii) the bond was to be treated as cash in hand, 33 reflecting the importance of promoting commercial efficacy and certainty. The court also held In Lagenes Ltd v It s At (UK) Ltd [1991] FSR 492, Ferris J continued an ex parte injunction even though the misstatements made in the application were grossly negligent and highly reprehensible. The learned judge was prepared to accept that there was no deliberate attempt to mislead the court. [1999] 1 SLR 374, at para The duty to disclose material facts is not discharged by simply exhibiting any material document concerned without pointing it out in the affidavit: Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of His Royal Highness Sheikh Sultan Bin Khalifa Bin Zayed Al Nahyan, High Court Suit No 587 of 1999, 2 August 1999, 30 April 1999, unreported, at para 22; Siporex Trade SA v Comdel Commodities [1986] 2 Lloyd s Rep 428, at 437. Ibid, at para 18. See also Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor [1978] 1 QB 159, at 171; RD Harbottle Mercantile Ltd v National Westminster Bank Ltd [1978] 1 QB 146, at ; Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165; Syarikat Perumahan Pegawai Kerajaan Sdn Bhd v Bank Bumiputra Malaysia Bhd [1991] 2 MLJ 565, at ; Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149, at 157. See also Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyd s Rep 256, at 257.

11 142 Singapore Academy of Law Journal (2000) that it was well established that there was no distinction between cases where the injunction was to restrain a bank [or guarantor] and to restrain the beneficiary. 34 [emphasis mine] Lee Seiu Kin JC then re-visited the Bocatra decision in great detail, and concluded that Bocatra did not introduce unconscionability as a separate ground for injunctive relief, in the following terms: At no point did the court [in Bocatra] discuss the scope of this concept of unconscionability.... It is well established that banks cannot be restrained other than for fraud. Therefore the Court of Appeal had held in the Bocatra case that the same position obtains where the application is in respect of the caller.... Given that the Court of Appeal had stated that the weight of authority had suggested that fraud as the sole exception was well entrenched, I do not understand the court as having changed the law without a discussion of the basis for it. 35 [emphasis mine] It is respectfully submitted that Lee Seiu Kin JC s analysis of Bocatra is impeccable. Proponents of unconscionability as a separate ground for injunctive relief fail to realise that had Bocatra intentionally chose to depart from the English position, it would have stated the reasons for doing so. The absence of any such reason or indication that unconscionability bore a meaning separate from fraud is a clear indication that the Court of Appeal, in fact, did not intend to change the law, but had merely used the two labels interchangeably. 36 Furthermore, Lee JC s observation that fraud alone can justify an injunction against a bank from making payment and therefore the same position obtains when the injunction is sought against the beneficiary demonstrates a good appreciation of the implications of Bocatra. This writer submits that this is one of the strongest arguments against unconscionability. Unfortunately, even though the court in GHL disapproved of New Civilbuild, the court there did not meet Lee JC s objection to unconscionability on this point [1999] 1 SLR 374, at para 26, 33. Cf supra, n 14 and the accompanying main text. Ibid, at para 33, 35. See also Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of His Royal Highness Sheikh Sultan Bin Khalifa Bin Zayed Al Nahyan, High Court Suit No 587 of 1999, 2 August 1999, 30 April 1999, unreported, at para 27. Ibid, at para 43.

12 12 S.Ac.L.J. Restraining a Call on a Performance Bond 143 D. What Constitutes Fraud? From the perspective of the beneficiary of a performance bond, a beneficiary s demand may be fraudulent only if the beneficiary has no right to payment under the bond, and he has no honest belief in such a right. On this point, Lord Denning MR, in State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor, 37 said: Honest belief is enough. 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. But otherwise not. So long as the buyer honestly believes there is a default on the part of the seller, that is sufficient ground for a notice of default to be given. 38 [emphasis mine] Fraud therefore essentially means presenting a claim which the beneficiary knows to be an invalid claim. As confirmed in GKN Contractors Ltd v Lloyds Bank plc and Anor, Parker LJ held that fraud meant fraud at common law: In those cases the fraud considered was a fraud on the part of the beneficiary, and in my view plainly refers to what may be called common law fraud, that is to say, a case where the named beneficiary presents a claim which he knows at the time to be an invalid claim, representing to the bank that he believes it to be a valid claim. 39 [emphasis mine] [1980] Com LR 235. Ibid, at 235. See the following cases where this definition has been adopted with approval: United Trading Corp SA v Allied Arab Bank [1985] 2 Lloyd s Rep 554, at 561; Star Trans Far East Pte Ltd v Norske Tech Ltd [1995] 3 SLR 631, at ; Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of His Royal Highness Sheikh Sultan Bin Khalifa Bin Zayed Al Nahyan, High Court Suit No 587 of 1999, 2 August 1999, 30 April 1999, unreported, at para 24; Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore, High Court Suit No 485 of 1990, 30 April 1992, unreported, at 35 of the transcript; New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374, at para 26, 39. If the beneficiary has an honest belief, it does not matter whether the belief is justified or not (1985) 30 BLR 48, at 63. See Agritrade International Pte Ltd v Industrial and Commercial Bank of China [1998] 3 SLR 211, at para 33, where Selvam J held: [f]raud in the context of letters of credit means common law fraud. Its elements are the same as those of the tort of deceit. To clarify, it does not mean fraud and dishonesty in equity when the act of a fiduciary is under consideration as in Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378. [emphasis mine] It is submitted that this definition applies equally to the situation of common law fraud with regards to calls on performance bonds. Refer also to Lambias (Importers & Exporters) Co Pte Ltd v Hongkong & Shanghai Banking Corporation [1993] 2 SLR 251 for a similar definition.

13 144 Singapore Academy of Law Journal (2000) Another instructive local decision on the meaning of fraud is Rajaram v Ganesh t/a Golden Harvest Trading Corp. 40 There, Kan Ting Chiu J correctly observed that since a performance guarantee is usually payable without the presentation of any documents, [t]he operative fraud... [is] fraud in receiving payment. 41 [emphasis mine] In the recent case of Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of His Royal Highness Sheikh Sultan Bin Khalifa Bin Zayed Al Nahyan, 42 Lee Seiu Kin JC was of the view that to demonstrate that the beneficiary was not motivated by a bona fide belief but a collateral purpose, direct evidence, such as a communication, written or oral, to the effect that such was not the [beneficiary s] belief [may be adduced]. Or it may be done by circumstantial evidence, such as the lack of any complaint by the [beneficiary] concerning the [account party s] performance [of the principal contract]... until before the call on the [g]uarantee. 43 E. Standard of Fraud i. Proving Fraud at the Interlocutory Stage In the Singapore Court of Appeal decision of Brody, White & Co Inc v Chemet Hendel Trading (S) Pte Ltd, 44 the court held that there was no difference between legal principles applicable to the restraint of a guarantor to pay and the restraint of a beneficiary. 45 This observation means that the following principles, some of which are distilled from cases where the guarantor is sought to be restrained from payment, also apply to cases where the beneficiary is to be prevented from calling on the bond: 1. The beneficiary must be given the opportunity to answer the allegation of fraud [1995] 1 SLR 159. Ibid, at 163. High Court Suit No 587 of 1999, 2 August 1999, 30 April 1999, unreported. Ibid, at para 25. [1993] 1 SLR 65, at 72. This proposition was endorsed in Bocatra Construction Pte Ltd and Ors v Attorney General (No 2) [1995] 2 SLR 733, at 744. See also Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyd s Rep 256, at 257; Group Josi Re v Walbrook Insurance Co Ltd and Ors [1996] 1 WLR 1152, at Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd s Rep 251, at 257.

14 12 S.Ac.L.J. Restraining a Call on a Performance Bond The fraud must be established or obvious. 47 The evidence, together with the beneficiary s explanation must be such that fraud is the only realistic explanation. 48 Ackner LJ in United Trading Corporation S A and Anor v Allied Arab Bank and Ors 49 succinctly summarised the principles above ( The Ackner standard ):... The evidence of fraud must be clear, both as to the fact of fraud and as to the bank s knowledge. The mere assertion or allegation of fraud would not be sufficient (see Bolivinter Oil SA v Chase Manhattan Bank NA, [1984] 1 Lloyd s Rep 251 per Sir John Donaldson, MR, at p 257). We would expect the Court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the [beneficiary]. In general, for the evidence of fraud to be clear, we would also expect the [beneficiary] to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. If the Court considers that on the material before it the only realistic inference to draw is that of fraud, then the [account party] would have made out a sufficient case of fraud. 50 [emphasis mine] In lines with these established principles, local decisions, since Bocatra, have generally insisted that on a high standard of fraud before a court would issue an interlocutory injunction restraining the call on a performance bond. 51 It must be stressed that while a clear case of fraud R D Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] 1 QB 146, at ; Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd s Rep 251, at 254; Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor [1978] 1 QB 159, at 169. GKN Contractors Ltd v Lloyds Bank plc and Anor [1985] 30 BLR 53, at 63. [1985] 2 Lloyd s Rep 554. Ibid at 561. The Ackner standard was cited with approval by the High Court in Brightside Mechanical and Electrical Services Group Ltd v Standard Chartered Bank [1989] SLR 519, at (per Chan Sek Keong J), and specifically approved by the Singapore Court of Appeal in Korea Industry Co Ltd v Andoll Ltd [1989] SLR 134, at Although Korea Industry involved a letter of credit, Bocatra, by adopting principles enshrined in Brody, makes it clear that principles governing letters of credit apply, mutatis mutandis, to performance bonds. Similarly, in United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, at 183, the House of Lords approved of principles laid down in Edward Owen, even though the former involved a letter of credit while the latter concerned a performance bond. Star Trans Far East Pte Ltd v Norske Tech Ltd [1995] 3 SLR 631, at 643; Chip Hua Poly Construction Pte Ltd v Housing Development Board [1997] 2 SLR 797, at 803 (per Rubin J).

15 146 Singapore Academy of Law Journal (2000) must be established, a claim of fraud need not be proven beyond reasonable doubt. In Bains Harding (Malaysia) Sdn Bhd v Arab-Malaysian Merchant Bank Bhd & Ors, 52 Richard Talalla J said: Bearing in mind that this is an interlocutory application... for an order for an injunction restraining the defendants from receiving moneys under the bank guarantees, there is no question of pleading or proof as such, but a question of the plaintiff placing sufficient affidavit evidence before the court, so as to enable the court to be satisfied, not necessarily beyond reasonable doubt, that a case of fraud or the likelihood of fraud being committed has been established to an extent sufficient for the court to be minded to order the injunction sought. 53 [emphasis mine] It is, thus, clear that the fraud rule has a very narrow scope of application. Furthermore, many performance bonds contain a conclusive evidence clause, which reinforces the beneficiary s position. Such clauses, which received judicial imprimatur in Bache & Co (London) Ltd v Banque vernes et Commerciale de Paris SA, 54 usually stipulate that the giving of default notice by the beneficiary to be conclusive evidence that liability under the performance bond has accrued. It has, however, been argued that: It must be remembered that practically in all cases the injunction is sought at the interlocutory stage, where only affidavit evidence is adduced. At that stage, as the evidence of the deponents to the affidavits has not been tested at a trial, it is almost impossible to prove established fraud or obvious fraud. None of the English cases have ever considered this practical aspect of the matter. 55 [emphasis mine] In Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore, High Court Suit No 485 of 1990, 30 April 1992, unreported, at of the transcript, Chan Sek Keong J was of the view that the less onerous standard of strong prima facie case of fraud would suffice. His Honour was probably wrongly influenced by the American Cyanamid principles. Infra, nn and the accompanying main text. Furthermore, it is respectfully submitted that since in Bocatra Construction Pte Ltd and Ors v Attorney General (No 2) [1995] 2 SLR 733, at 747, the court held that [an] applicant will be required to establish a clear case of fraud or unconscionability in... interlocutory proceedings, Chartered Electronics Industries cannot be correct. Cf LP Thean JA, The Enforcement of a Performance Bond: The Perspective of the Underlying Contract (1998) 19 Sing LR 389, at 419. [1996] 1 MLJ 425. Ibid, at 443. [1973] 2 Lloyd s Rep 437, at 440. See also Dobbs v National Bank of Australia (1935) 53 CLR 643; Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore, High Court Suit No 485 of 1990, 30 April 1992, unreported, at of the transcript. LP Thean JA, The Enforcement of a Performance Bond: The Perspective of the Underlying Contract (1998) 19 Sing LR 389, at

16 12 S.Ac.L.J. Restraining a Call on a Performance Bond 147 With utmost respect, whilst English cases may not have specifically considered this point, Selvam J in Star-Trans Far East Pte Ltd v Norske- Tech Ltd 56 appears to have considered the issue. There, the plaintiff obtained, inter alia, ex parte orders restraining the defendants from calling and paying on a performance bond issued on behalf of the plaintiff. On appeal, Selvam J allowed the defendants application to set aside the ex parte injunction. In his judgment, his Honour said:... [T]he principles under English law applicable to the granting or refusing an application for an injunction to refrain a call on a performance bond by the beneficiary may be summarized as follows: [An] injunction would be granted only in exceptional circumstances. As a general rule the court having regard to the purpose of the bond will be disinclined to granting it. Secondly, given that the application is of an interlocutory nature and even though then evidence will be by affidavits, the party making the application must come up with compelling evidence to establish the exceptional circumstances. 57 [emphasis mine] The reason for requiring such a high standard of fraud is so that the value of performance bonds and guarantees would not be undermined. 58 Moreover, given that [t]he primary function of a court is to enforce contractual rights, when an application to restrain a call upon a performance bond is made, the applicant is actually asking the court to rewrite [the] contract by granting the injunction, 59 [emphasis mine] and therefore the applicant should be allowed to succeed only when there is established fraud. Similarly, in Chip Hua Poly-Construction Pte Ltd v Housing Development Board, 60 the plaintiff applied for a continuation of an ex parte interlocutory injunction which restrained the defendant from calling on a performance bond. The plaintiff s main contention was that the defendant was not entitled at law or in equity to call on the bond. Applying principles enunciated in Bocatra, Rubin J dismissed the application and held that: [1995] 3 SLR 631. Ibid, at The appeal to the Singapore Court of Appeal ([1996] 2 SLR 409), which was allowed by Karthigesu JA on other grounds, did not overturn Selvam J s pronouncements with regards to the law of performance bonds. Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd s Rep 251, at 254; Group Josi Re v Walbroke Insurance Co Ltd and Ors [1996] 1 WLR 1152, at ; Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyd s Rep 256, at 257; Continental Illinois National Bank and Trust Co of Chicago v Papanicolaou [1986] 2 Lloyd s Rep 441, at 445. Star Trans Far East Pte Ltd v Norske Tech Ltd [1995] 3 SLR 631, at 643. Infra, nn and the accompanying main text. Cf Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] SLR 1116, at [1997] 2 SLR 797 (High Court, Singapore).

17 148 Singapore Academy of Law Journal (2000)... an injunction will only be granted to restrained a beneficiary from calling on a performance bond in exceptional cases where the party seeking the injunction presents to the court compelling evidence of fraud or unconscionability.... [A] higher degree of strictness applies, as the applicant will be required to establish a clear case of fraud or unconscionability in interlocutory proceedings. 61 [emphasis mine] The plaintiff appealed against Rubin J s decision. 62 Before the Court of Appeal, the main issue was whether the defendant was entitled to call on the bond. LP Thean JA, who delivered the collective judgment, held that the defendant did not have the right to make a valid call and allowed the appeal. Emphasising that the court reached its decision based on its construction of the provisions of the bond, 63 LP Thean JA said: Having regard to the recital and the wording of cl 3, it seems to us that the bond was intended to secure the liability of Chip Hua alone to HDB and not the joint liability of Chip Hua and another party to HDB.... It follows that HDB was not entitled to make a demand for payment of moneys from Chip Hua in satisfaction of... joint liabilities [emphasis mine] What is clear and significant is that the Court of Appeal did not overturn Rubin J s interpretation of Bocatra. The appeal was allowed strictly because the defendant did not have the right to make a call under the terms of the performance bond. However, it is noteworthy that in the recent case of Themehelpe Ltd v West and Ors, 65 the majority of the English Court of Appeal consciously departed from the well-established view that the consequences and principles associated with the restraint of the bank or issuer of a bond and restraining the beneficiary from making a call are the same. There, the plaintiff agreed to purchase the defendant s business. The purchase price was payable by instalments, of which payment of the last two instalments were secured by a performance bond issued by a third party. After the first instalment had been paid, the plaintiff brought an action against the defendant alleging fraudulent misrepresentations by the defendant. The defendant denied the allegations and threatened to give notice to the third party and call on the bond. On application by the Ibid, at para 12, 14. [1998] 2 SLR 35 (Court of Appeal, Singapore). Ibid, at para 6. Ibid, at para 10, 11. The court drew an analogy from a related principle in the law of set off that is, a debtor is not entitled to set off a joint debt due to him and another party against an amount due from him to a creditor. [1996] QB 84. The court was comprised by Waite LJ, Balcombe LJ and Evans LJ (dissenting).

18 12 S.Ac.L.J. Restraining a Call on a Performance Bond 149 plaintiff, the judge at first instance granted an interim injunction against the defendant on the ground that the evidence was sufficient to raise a seriously arguable case that the only reasonable inference that could be drawn from the circumstances, was that the defendant had been fraudulent. On appeal, it was held by majority that the judge was entitled to draw such an inference. Balcombe LJ said: It is well established by the authorities... that performance bonds and irrevocable letters of credit are the lifeblood of international commerce and that, save in the case where the demand for payment under the bond is fraudulent and the bank has notice of the fraud, the courts will not intervene and disturb the mercantile practice of treating the rights of the beneficiary as the equivalent of cash in hand. However, the same considerations of policy do not apply where the beneficiary has not yet made a demand upon the bank and where, as here, injunctive relief is sought to stop the beneficiary from making such a demand pending the trial of the action in which the issue of his fraud will be determined. In such a case I see no reason why the ordinary principles for the grant of interlocutory injunctive relief should not apply. 66 There are several reasons why Themehelp should not be followed in the local context. Firstly, Themehelp is not universally accepted even in the English context and was doubted in a subsequent English Court of Appeal decision Group Josi Re v Walbrook Insurance Co Ltd and Ors. 67 Secondly, Themehelp is in conflict with the Singapore Court of Appeal pronouncement in Bocatra that there is no difference between the consequences and therefore the legal principles applicable to the restraint of a guarantor to pay and the restraint of a beneficiary to call on a performance bond or guarantee. 68 As a matter of strict stare decisi, local courts are bound to follow Bocatra. Moreover, there are also English authorities which maintain the same position as Bocatra but were not cited to the Court of Appeal in Themehelp. Furthermore, the injunction was granted on the basis that a seriously arguable case of fraudulent misrepresentation by the defendant was established on the facts, with regards to the underlying contract. This is a serious misunderstanding of what the fraud exception involves in such a context. As discussed, to invoke the fraud exception, the beneficiary must present an invalid claim without an honest belief in his right to make a call Ibid at 106. [1996] 1 WLR 1152, at [1995] 2 SLR 733, at 744.

19 150 Singapore Academy of Law Journal (2000) Even if Themehelp is given a restricted reading that the pronouncements of the majority apply only to cases where a demand has yet been made on the guarantor or before any question of enforcement of the bond arises 69, it should not be adopted in Singapore. This is because, as noted by the High Court in Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor, 70 there are three distinct contracts involved when a performance bond is procured by the account party for the beneficiary there is, of course, the underlying contract between these two parties. But there are also two other contracts autonomous from this contract namely, (1) the contract between the account party and the guarantor for the provision of the bond and (2) the contractual bond or guarantee between the guarantor and the beneficiary. 71 Thus, even if it is argued that an application for injunction is based on the underlying contract and not the bond, the injunction should not and cannot restrain the beneficiary from enforcing the guarantee between the guarantor and the beneficiary, since it is autonomous and independent from the underlying contract. It must be stressed that the account party is not privy to the contractual guarantee between the guarantor and the beneficiary, 72 even though it is clear that the enforcement of the guarantee adversely affects his interests. The injunction, if granted, can and should only suspend the underlying contract until trial. Thus, it is questionable how Waite LJ in Themehelp can opine that there is not even the slightest threat involved to the autonomy of the performance guarantee if the beneficiary is injuncted from enforcing it in proceedings to which the guarantor is not a party. 73 One might ask: Why then is the account party able to restrain the beneficiary or the guarantor when there is fraud? The simple answer is because, despite the lack of privity, the law applies the maxim ex turpi causa non oritur actio, or fraud unravels all and enables the fraud rule to function as an exception to the privity rule. 74 It is therefore certainly debatable whether, in the absence of fraud, proposed or actual injunctive restraint of the beneficiary by the account party is justifiable, and whether such an act may constitute the tort of unlawful interference with contract. This is because where a contract creates rights and obligations enforceable by the contracting parties, in the case of the performance bond, the guarantor and the beneficiary, the contract also incidentally imposes a tortious duty on third parties not to unjustifiably interfere with the [1996] QB 84, at 90-91, (per Waite LJ). [1999] 3 SLR 732. Ibid, at para 7. Supra, n 6, at 744. [1996] QB 84, at 99. Supra, n 8. Cf Thai Kenaf Co Ltd v Keck Seng (S) Pte Ltd [1993] 2 SLR 92, at

20 12 S.Ac.L.J. Restraining a Call on a Performance Bond 151 contracting parties in performing the contract. 75 What is certain is that to invoke the defence of justification for this tort, the advancement of one s own interests will not suffice. 76 ii. Are the American Cyanamid Principles Applicable? Balcombe LJ s assertion in Themehelp that ordinary principles governing interlocutory injunctive relief should apply in cases involving the restraint of calls on performance bonds throws up an interesting issue are the principles enunciated in the seminal decision of American Cyanamid Co v Ethicon Ltd, 77 applicable in such cases, as far as the law in Singapore is concerned? In order to answer this question, a brief survey of the American Cyanamid principles is necessary. In Reed Exhibitions Pte Ltd v Khoo Yak Chuan Thomas & Anor, 78 the Singapore Court of Appeal confirmed the American Cyanamid principles as part of Singapore law with regards to general applications for interlocutory injunctions. According to American Cyanamid, the applicant for an interlocutory injunction must show that his action is not frivolous or vexatious; 79 or that there is a serious question to be tried; 80 or that he has a real prospect of success in his claim for a permanent injunction at the trial. 81 Once one of these grounds are established, the court will then decide, on a balance of convenience (or the balance of the risk of doing injustice), 82 whether the injunction should be granted. Some of the considerations that go into weighing this balance are: whether the applicant (plaintiff) could be adequately compensated in damages without the injunction, should he succeed at the trial; if so, injunctive relief must be denied; whether the defendant would be able to pay damages if the plaintiff should be successful; As noted in Quinn v Leathem [1901] AC 495, at 510, [a] violation of a legal right committed knowingly is a cause of action, and... it is a violation of a legal right to interfere with contractual relations recognised by law if there be no sufficient justification for the interference. Greig v Insole [1978] 1 WLR 302; Camden Nominees Ltd v Forcey [1940] Ch 352. [1975] AC 396, at [1995] 3 SLR 657, at 663. Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 All ER 751, at 754. Fellowes & Son v Fisher [1976] QB 122, at 138. [1975] AC 396, at Doubts as to whether a permanent injunction will be granted at the trial does not, as a matter of law, preclude an interlocutory injunction from being granted: Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349. Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 672, at 680; Cayne v Global Natural Resources plc [1984] 1 All ER 225, at 237 (per May LJ).

21 152 Singapore Academy of Law Journal (2000) whether the defendant would be adequately compensated by an award of damages, should the interlocutory injunction be granted, but the plaintiff fails at trial; whether there is a need to preserve status quo, 83 where all factors are equally balanced. It must be emphasised that each case is to be decided on the basis of what is fair and just, according to common sense, in relation to the whole of the issues of fact and law. 84 Naturally, in no case will the court grant an interlocutory injunction as of right. Returning to the main thrust of our enquiry, the position in Singapore currently appears to be that the ordinary principles governing applications for interlocutory injunctions, embodied in American Cyanamid, are inapplicable in cases involving interlocutory injunctions concerning performance bonds. 85 This was clearly laid down in Star-Trans Far East Pte Ltd v Norske-Tech Ltd by Selvam J:... the rules in American Cyanamid Co v Ethicon Ltd that it is sufficient for the plaintiff to establish that he has a good arguable claim to the right he seeks to enforce and that, because the court cannot decide the claim on affidavit evidence, it is enough if the plaintiff shows that there is a serious question to be tried, do not apply to the injunction sought in this case. 86 In Bocatra, the court expressed similar sentiments, citing Brody with approval on this point: The judge below in the present case went on to observe that the balance of convenience did not favour the appellants. This is a conscious application of the American Cyanamid test.... In [Brody], it was held that the balance of convenience test propounded in the Eastern Trust Co v McKenzie, Mann & Co Ltd [1915] AC 750, at 760. As to the meaning of status quo, refer to Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130, at 140. Hubbard v Vosper [1972] 2 QB 84, at 98. Other instances where American Cyanamid is regarded as inapplicable are, inter alia, when: (a) the injunction sought is mandatory in nature (De Falco v Crawley Borough Council [1980] QB 460); (b) the action as a whole is of an interlocutory nature such that the grant or refusal of the injunction would dispose of the matter (Bryanston Finance Ltd v De Vries (No 2) [1976] 2 WLR 41, at 55-56; applied in Holt Southey Ltd v Catnic Components Ltd [1978] 1 WLR 630); (c) there is a clear breach of covenant (Doherty v Allman (1878) 3 App Cas 709, at 720, approved in Hampstead & Suburban Properties Ltd v Diomedous [1969] 1 Ch 248, at 259), or no arguable defence (Official Custodian for Charities v Mackey [1985] Ch 168, at 187); (d) there is no dispute as to the facts and the law is clear (Office Overload Ltd v Gunn (1977) FSR 39, at 44); (e) the loss is unquantifiable and in a state of flux (Lewis v Heffer [1978] 1 WLR 1061, at 1078). [1995] 3 SLR 631, at 643.

22 12 S.Ac.L.J. Restraining a Call on a Performance Bond 153 American Cyanamid case would not be applicable to cases involving irrevocable letters of credit. Lai Kew Chai J observed (at p 70):... [T]he balance of convenience test propounded in American Cyanamid Co v Ethicon Ltd is generally not applicable in cases involving irrevocable credits.... The only exception to the autonomy of the documentary credit transaction, therefore, is the fraud rule.... [Emphasis added] The statement in Brody... indicates that cases involving such transactions are virtually sui generis.... In our opinion, whether there is fraud or unconscionability is the sole consideration in applications for injunctions restraining payment or calls on bonds to be granted. Once this can be established, there is no necessity to expend energies in addressing the superfluous question of balance of convenience. It does not lie in the mouth of the defendant to claim that damages would still somehow be an adequate remedy. 87 [emphasis mine] Karthigesu JA consciously rejected certain English 88 and Singapore cases 89 that have suggested or employed a double-barrelled approach that is, to consider whether there is fraud as well as the balance of convenience. It is submitted that the rejection is legally sound. 90 Afterall, the established principle is clearly that an interlocutory injunction would only be granted in the exceptional circumstance of fraud for an unconditional bond. Thus, apart from fraud, when granting injunctive relief, the court should not [1995] 2 SLR 733, at 746. Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165 (per Roskill LJ). See also RD Harbottle Mercantile Ltd v National Westminster Bank Ltd [1978] 1 QB 146, at 155; United Trading Corp SA v Allied Arab Bank [1985] 2 Lloyd s Rep 554, at 561; Themehelpe Ltd v West and Ors [1996] QB 84. Rajaram v Ganesh t/a Golden Harvest Trading Corp [1995] 1 SLR 159, at Rajaram, on this point, appears to have been specifically overruled in Bocatra. See also the following Singapore cases which have employed the double-barrelled approach: Hong Kong Teakwood Ltd v Hyundai Engineering & Construction Pte Ltd [1987] 2 MLJ 575; Brightside Mechanical and Electrical Services Group Ltd v Standard Chartered Bank [1989] SLR 519, at ; Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore, High Court Suit No 485 of 1990, 30 April 1992, unreported, at 26, 32 of the transcript; Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] SLR 1116, at 1125; L & B Engineering (S) Pte Ltd v Monocrafts Pte Ltd, Originating Summons No 520 of 1998, 1 July 1998, 2 May 1998, unreported, at para 4 5, 14 (per Lee Seiu Kin JC). See the following cases where the courts accepted that Bocatra formulated the broad principle that the balance of convenience test propounded in American Cyanamid is not applicable to cases involving performance bonds or bank guarantees: Unitrack Building Construction Pte Ltd v GHL Pte Ltd & Anor [1999] 3 SLR 621, at para 22; Four Seas Construction Pte Ltd v The Tai Ping Insurance Company Limited, High Court Suit No 2118 of 1997, 30 Decomber 1998, 17 September 1998, unreported, at para 57; GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor, Civil Appeal No 20 of 1999, 14 August 1999, 8 August 1999, unreported (Court of Appeal, Singapore), at para 15.

23 154 Singapore Academy of Law Journal (2000) be influenced by factors extrinsic to the bond itself, since the autonomy principle is the overriding rule. 91 The American Cyanamid principles, however, have the opposite effect, and motivate the court to compromise the autonomy principle by enquiring into the facts, circumstances of the parties and disputes regarding the underlying transaction or contract when the court exercises its discretion to grant or withhold injunctive relief. Bocatra and Brody, by holding that American Cyanamid is inapplicable in cases involving performance bonds and letters of credit, are merely upholding and taking the autonomy principle to its logical conclusion. 92 The inapplicability of the American Cyanamid principles should not be startling for as cautioned by the English Court of Appeal in Cambridge Nutrition Ltd v British Broadcasting Corp: [i]t is important to bear in mind that the American Cyanamid case contains no principle of universal application. The only such principle is the statutory power of the court to grant injunctions when it is just and convenient to do so. 93 The American Cyanamid case is no more than a set of useful guidelines which apply in many cases. It must never be used as a rule of thumb, let alone a straitjacket... The American Cyanamid case provides an authoritative and most helpful approach to cases where the function of the court in relation to the grant or refusal of interlocutory injunctions is to hold the balance as justly as possible in situations where the substantial issues between the parties can only be resolved by trial. 94 [emphasis mine] The views of the English Court of Appeal confirm that the American Cyanamid principles are not universal in application and immutable. 95 But more fundamentally, Cambridge Nutrition also defined what situation attracts their application namely, when the function of the interlocutory injunction is to maintain status quo between the parties Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165; Bolivinter Oil SA v Chase Manhattan Bank NA [1984] 1 Lloyd s Rep 251. Cf Lau Yaw Seng v Cooperativa Ceramica D Imola [1990] SLR 1315, at 1320, where Chao Hick Tin J (as he then was) appears to accept that American Cyanamid principles apply to an interlocutory application for injunction to restrain payment under a letter of credit. It is respectfully submitted that this view cannot be correct. The English position is implied in the Singapore Civil Law Act (Cap 43, 1994 Rev Ed.), s 4(8) of the Act provides that: [a] mandamus or injunction may be granted... by an interlocutory order of the court, either unconditionally or upon such terms and conditions as the court thinks just and convenient that such order should be made. [emphasis mine] [1990] 3 All ER 523, at 534 (per Kerr LJ). See also Series 5 Software v Clarke [1996] 1 All ER 853. See also similar comments by Warren Khoo J on the American Cyanamid case in Remus Innovation Forschungs-Und AP Mbh v Hong Boon Siong [1995] 2 SLR 148, at 150.

24 12 S.Ac.L.J. Restraining a Call on a Performance Bond 155 Where a performance bond is concerned, its utility lies in the fact that it functions, independent of the underlying transaction, as cash in hand usually for possible breaches of contract. In such a case, as the court is not confronted with a situation where it is required to maintain status quo, bearing in mind the purpose of a performance bond, the American Cyanamid principles can be convincingly argued to be inapplicable on this ground as well. The Malaysian courts, after the decision of Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd, 96 however upholds a unique double-barrelled approach, which this writer submits, weakens and even denies the autonomy principle. This, in turn, erodes the fraud exception the corollary of the autonomy principle from which there should actually be no derogation. A look at the developments in the Malaysian context will reveal why this is so. In Esso Petroleum, the appellant agreed to buy certain construction materials from the respondent. The contract specified that time of delivery of the materials was of the essence. 97 After the appellant paid the purchase price in exchange for two performance bonds, the respondent allegedly delivered the materials late. The appellant made a call on the unconditional guarantees but was restrained by an ex parte injunction obtained by the respondent from receiving any part of the moneys under the performance bonds. The respondent alleged, inter alia, that the delays were caused by the appellant s refusal to accept the goods. The appellant s application to set aside the injunction in the High Court was dismissed, but on appeal to the Supreme Court, the appeal was allowed. Peh Swee Chin FCJ, who delivered the judgment of the court, defended the autonomy principle and held, firstly, that performance bonds were independent of any underlying contract between the parties. The learned judge said: [I]n our view,... the present performance bonds [are] independent of any underlying contract, ie any contract between the buyer and the seller.... [I]t is not open to his Lordship in the court below to impart into this on demand guarantee, by implication, a requirement to have regard to, or inquire into any breach of any obligation of such underlying contract, and this seemed to have been done.... [T]he issuer should unquestionably pay on demand except in the case of fraud.... [On the facts, T]here was... no allegation of [fraud], let alone any evidence of it. 98 [emphasis mine] [1995] 1 MLJ 149 (Supreme Court, Kuala Lumpur, Malaysia). Ibid, at 152. Ibid, at

25 156 Singapore Academy of Law Journal (2000) Counsel for the appellant supplemented his case, in line with the reasoning in Bocatra, with the argument that the injunction should not have been granted in the lower courts on the ground that the American Cyanamid decision did not apply in a situation of restraint of payment on a bank guarantee. This view was surprisingly rejected by Peh Swee Chin FCJ: While agreeing that the... injunction... should have been discharged..., to say that American Cynamid (sic) could not be considered in exercising any discretion in granting or withholding such an interlocutory injunction in regard to a bank guarantee was wide off the mark. Except in the case of a few exceptions..., American Cynamid (sic) would apply to all interlocutory injunctions. 99 [emphasis mine] Peh FCJ then proceeded to discuss, using the American Cyanamid principles, why the injunction ought to be discharged on the facts of the case. The learned judge considered the various disputes over the performance of the sale contract and found that these were serious questions for trial. 100 With regards to the question of balance of convenience, Peh FCJ concluded that the balance of convenience tipped heavily against respondent. 101 Strangely the court also noted that: in the instant appeal, the interlocutory injunction was granted not against [the guarantor] but against the beneficiary [appellant] of the said performance bonds in an action against the same beneficiary.... The right of the seller [respondent] to... an interlocutory injunction could arise out of [an] alleged invasion of the right of the seller... [under the underlying contract]. Therefore, despite the resulting effect that it would restrain Bank Bumiputra, it could not prevent the seller from applying for an interlocutory injunction. 102 [emphasis mine] This writer is somewhat puzzled by the views of the Supreme Court quoted above. While Peh FCJ clearly upheld the autonomy principle earlier in his judgment, his Honour, when applying the American Cyanamid principles to the facts, appears to expressly contradict his earlier affirmation of the autonomy principle and the fraud exception. Furthermore, if the American Cyanamid test were indeed applicable, as asserted by Esso Petroleum, then, I venture to suggest that in most, if not all, cases involving the restraint of calls on performance bonds, no injunction order would be made. This is because the applicant must show that an injunction is necessary to protect him against irreparable injury Ibid, at 158. Ibid, at 159. Ibid, at 159. Ibid, at 158.

26 12 S.Ac.L.J. Restraining a Call on a Performance Bond 157 or loss. 103 In the case of a performance bond, any loss to the account party in the event of payment would, in most cases, be purely financial in nature and easily quantified and would hardly constitute irreparable harm or damage. So how can this requirement be fulfilled to allow the granting of injunctive relief? It is submitted that the lack of irreparable injury is certainly a factor that must tip the balance of convenience strongly, if not absolutely, against the applicant. 104 This conclusion illustrates the awkwardness, and certainly the inappropriateness, of applying the American Cyanamid principles in such cases. Furthermore, what if there is no fraud on the facts on a particular case but the American Cyanamid principles allow injunctive relief? The Supreme Court does not show how this conflict is to be resolved either. Thirdly, in applying the American Cyanamid test, the court in Esso Petroleum, while paying lip-service to the autonomy principle, made generous references to the facts and disputes involving the underlying contract of sale, even though there was no allegation of fraud. It is submitted that this is a clear weakening of the autonomy principle in Malaysia which strictly demands that the performance bond be treated as autonomous or as a separate contract from the underlying transaction. This is stark evidence of an internal inconsistency in the reasoning of the Supreme Court. Also, this writer is unable to understand why, despite earlier acknowledging that there was... no allegation of [fraud], let alone any evidence of it, 105 the court chose to ground its decision alternatively in its application of the American Cyanamid test to the facts. The absence of fraud alone would have been sufficient to discharge the injunction a proposition the Supreme Court itself appeared to have unreservedly accepted earlier in the judgment. 106 One solution to this mystery was offered by the Malaysian case of Bains Harding (Malaysia) Sdn Bhd v Arab-Malaysian Merchant Bank Bhd & Ors. 107 There, Richard Talalla J, after considering a passage from Bocatra where the phrase fraud or unconscionability was used, 108 cited Esso Petroleum with approval and offered an interesting defence of its orthodoxy: The Esso Petroleum case, being a decision of the Federal Court, (sic) binds me.... I see it as being dichotomous, envisaging on the one hand, a situation between the issuer of a pure on-demand Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130, at 153. Cf Bains Harding (Malaysia) Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1996] 1 MLJ 425, at 445. [1995] 1 MLJ 149, at 158. Supra, n 98 and the accompanying main text. [1996] 1 MLJ 425 (High Court, Malaysia). Supra, n 26 and the accompanying main text.

27 158 Singapore Academy of Law Journal (2000) performance bond on the one part and the beneficiary of the bond on the other part where the issuer should unquestionably pay the beneficiary on demand except in the case of fraud, and on the other hand, a situation between a person on whose order such a bond is issued on the one part and the beneficiary on the other part where upon that person making an application for an interlocutory injunction restraining the beneficiary from receiving any money under the bond the principle in the American Cynamid (sic) case is to apply [emphasis mine] This interpretation of Esso Petroleum however does not satisfactorily explain the inconsistencies in that case. This is because there is no basis in Esso Petroleum for proposing this dichotomy. However, this interpretation of Esso Petroleum, in effect, agrees with Balcombe LJ s assertion in Themehelp that the American Cyanamid rules apply to interlocutory proceedings concerning restraint of calls on performance bonds and that there is a distinction between restraining the issuer of a bond from payment and the restraint of a call on a bond. As pointed out above in the preceding discussion, these two propositions contradict, without sufficient justification, the autonomy principle and fraud exception enshrined in English and Singapore authorities. As such, this view of Esso Petroleum cannot apply in Singapore. Sadly, the doctrinal inconsistencies in the judgment in Esso Petroleum paved the way for unconscionability to eventually infiltrate into subsequent Malaysian authorities as a ground for injunctive relief when restraining calls on performance bonds. This is because the fraud exception now apparently applies only to injunctions restraining payment by the issuer, and not on calls on the bonds. III. FRAUD OR UNCONSCIONABILITY AS ALTERNATIVE GROUNDS FOR AN INTERLOCUTORY INJUNCTION A. General After Bocatra, subtle indications that unconscionability was being introduced as an alternative ground for injunctive relief first surfaced in the Malaysian case of Bains Harding (Malaysia) Sdn Bhd v Arab- Malaysian Merchant Bank Bhd & Ors, 110 where Bocatra was first expressly approved. In that case, the plaintiff entered into a contract with the defendants to provide certain highly specialised insulation and painting works. Pursuant to the contract, two performance bonds were provided by the plaintiff in Ibid, at [1996] 1 MLJ 425 (High Court, Malaysia).

28 12 S.Ac.L.J. Restraining a Call on a Performance Bond 159 favour of the defendants. After the plaintiff commenced work for some time, the contract was, however, terminated by the defendants allegedly pursuant to an express contractual power authorising the defendants to do so for whatever reason and at their absolute discretion. There was no allegation that the plaintiff s performance did not conform to the requirements of the contract. The plaintiff s work was then given to Meisei Corporation ( Meisei ). The defendants also demanded that payment be made to its creditors by the plaintiff, failing which the defendants would call on the performance bonds. On the other hand, the plaintiff argued that it was entitled to payment under the contract for meeting all contractual obligations up to the date of termination. Furthermore, the plaintiff also alleged that the contract was terminated so that Meisei, with which the defendants allegedly had a financial connection, could take over its work and enjoy the benefit of whatever profits that remained from the contract. Pending trial of all these issues, the plaintiff applied for an interlocutory injunction restraining the defendants from receiving payment under the bonds. In the High Court of Kuala Lumpur, Malaysia, Richard Talalla J granted the application, despite the strong resistance by the defendants, who relied heavily on Bocatra. The court also noted that the plaintiff carried out its contractual obligations impeccably and was even complimented by the defendants before. Holding that the defendants had used the contractual power of termination to put Meisei into the shoes of the plaintiff for their mutual benefit, at the expense of the plaintiff, his Honour decided that it constituted a fraud on the plaintiff and amount[ed] to the defendants acting in bad faith and in an unconscionable manner. 111 [emphasis mine] The learned judge was heavily influenced by the fact that the defendants, without providing any reason, refused to disclose to the court whether one or more of the defendants had an interest in Meisei. His Honour added: It has to follow that I must find that the defendants are guilty of fraud, have acted in bad faith and in an unconscionable manner.... The consequence is that the plaintiff on the authority of both the Bocatra case and the Esso case is entitled to the order it seeks in the application. 112 [emphasis mine] There are several observations to make here. For one, none of the leading cases dealing with fraud were cited to the court. Secondly, Richard Talalla J s conception of fraud is plainly inconsistent with the meaning of fraud derived from cases cited in the discussion above. The cases essentially defines fraud as the presentation of a claim which the beneficiary knows to be an invalid claim. But Richard Talalla J found, Ibid, at 443. Ibid, at 443.

29 160 Singapore Academy of Law Journal (2000) on the facts, that the defendants acted fraudulent, not in presenting a dishonest claim, but by their termination of the underlying contract to mutually benefit Meisei and themselves, at the expense of the plaintiff, as well as the defendants lack of disclosure concerning their relationship with Meisei. It is respectfully submitted that, in reality, Bains Harding was decided on the ground of unconscionability rather than fraud. At first glance, the decision is hard to comprehend but it does follow from Richard Talalla J s mistaken view of Bocatra and Esso Petroleum, and the dichotomy which was allegedly established by the latter case. 113 B. The Radio & General Trading Co Sdn Bhd v Wayss & Freytag (M) Sdn Bhd The first Malaysian case to expressly cite Bocatra as authority for the proposition that unconscionability may operate as a ground for injunctive relief is the High Court decision of The Radio & General Trading Co Sdn Bhd v Wayss & Freytag. 114 While this case is not binding on the Singapore courts, its potential influence cannot be underestimated. In many ways, it pre-figured the decision of the Singapore Court of Appeal in GHL. In that case, Kamalanathan Ratnam JC granted an interim injunction restraining the defendant from making a call. The facts of the case were as follows: the plaintiff had contracted with the defendant to perform certain sub-contract works on the Kuala Lumpur Telecommunications Tower. In accordance with the terms of the sub-contract, the plaintiff placed with the defendant a performance bond for RM1,530,000. However, as a result of disputes over certain allegedly incomplete works, the defendant eventually made a demand for payment under the performance bond. The plaintiff argued that the sub-contract works were substantially completed, that the defendant did not have the right to call on the bond and sought an injunction to restrain the defendant. The plaintiff relied on Eveleigh LJ s comments in Potten Homes and argued that apart from fraud, the plaintiff was still entitled to prevent payment under the bond. This argument surprisingly found favour with Kamalanathan Ratnam JC, who chose to depart from, without justification, a long line of Malaysian cases establishing fraud as the sole ground for an interlocutory injunction, 115 in favour of Eveleigh LJ s dicta in Potten Supra, n 109 and the accompanying main text. [1998] 1 MLJ 346. Malaysia Overseas Investment Corp Sdn Bhd v Sri Segambut Supermarket Sdn Bhd [1986] 2 MLJ 382, at 384; Patel Holdings Sdn Bhd v Estet Pekebun Kecil & Anor [1989] 1 MLJ 190; Kirames Sdn Bhd v Federal Land Development Authority [1991] 2 MLJ 198, at 202; Sri Palmar Development & Construction Sdn Bhd v Transmeric Sdn Bhd [1994] 1 CLJ 224, at 227; Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149, at 157.

30 12 S.Ac.L.J. Restraining a Call on a Performance Bond 161 Homes. Asserting that Royal Design survived the scrutiny of the court in Bocatra and that unconscionability as a ground for injunctive relief received the approval of both these cases, Kamalanathan Ratnam JC held that, on the facts, [it] was plain... that the call on the performance bond [was] inequitable.... [and] it [was] unconscionable on the part of the defendant... to call on the performance bond. 116 [emphasis mine] Several observations have to made here. For one, the scope of the concept of unconscionability was never defined by the learned judicial commissioner. Thus, how it was actually evinced by the facts of the case remains a mystery. The facts of The Radio & General Trading Co Sdn Bhd v Wayss & Freytag are hardly different from cases in which previous courts, both English and local, have refused injunctions. Such cases almost invariably involve an assertion by the account party that the beneficiary has no right to call on the bond and a corresponding allegation, on the part of the beneficiary, that the account party had breached its contractual obligations. Secondly, Bocatra was not given sufficient in-depth consideration. In support of his view that unconscionability was a ground for injunctive relief, the learned judicial commissioner conveniently extracted a passage from Bocatra where the Singapore Court of Appeal used the terms fraud and unconscionability interchangeably. 117 However, what his Honour clearly failed to appreciate was the context in which the terms were used. It is respectfully submitted that Kamalanathan Ratnam JC gravely misunderstood the actual implications of the Bocatra case. Moreover, it is hard to understand why his Honour abandoned a long tradition of cases finding fraud to be the sole ground for an injunction, in favour of the alternative ground of unconscionability without much discussion as to the grounds for doing so. One possibility, suggested in the judgment, is the influence of the dichotomy proposed in Bains Harding this is because Kamalanathan Ratnam JC held, on the authority of Esso Petroleum, that while an injunction cannot be issued against a bondsman, the account party could not be prevented from applying for an injunction against the beneficiary. 118 This view is however untenable as pointed out in the preceding discussion. 119 Another cardinal sin committed by Kamalanathan Ratnam JC is the fact that he also found that the defendant should be restrained from receiving the monies under the on demand bond 120 because it failed to comply Supra, n 114, at 357. Supra, n 26 and the accompanying main text. [1998] 1 MLJ 346, at 357. Supra, n 109 and the accompanying main text. [1998] 1 MLJ 346, at 351.

31 162 Singapore Academy of Law Journal (2000) with certain conditions under the sub-contract. 121 It is respectfully submitted that this act of legal heresy is in direct opposition to the established position that a performance bond constitutes a separate and autonomous contract from the underlying transaction ( autonomy principle ). 122 Moreover, it is repugnant to the nature of an on-demand bond to hold that it is conditional upon the satisfaction of the underlying contract. For the reasons mentioned above, it is humbly submitted that The Radio & General Trading Co Sdn Bhd v Wayss & Freytag is a poorlyreasoned decision that should not be upheld in future, at least in Singapore. C. Raymond Construction Pte Ltd v Low Yang Tong In the New Civilbuild case, after explaining that Bocatra merely reiterated that fraud was the sole ground for an interim injunction, Lee Seiu Kin JC surprisingly opined that there was a possibility that... Bocatra... left an opening for the concept of unconscionability as distinct from fraud, to find its way into the law. 123 Unfortunately, counsel for the plaintiff in New Civilbuild was unable to cite any authorities which dealt with the ground of unconscionability for the court to scrutinise. However, prior to in New Civilbuild, there was, in fact, a case decided in Singapore where an ex parte interlocutory injunction was expressly maintained on the ground of unconscionability. This High Court decision was not, unlike the Malaysian cases discussed, the result of the application of the principles in American Cyanamid. In Raymond Construction Pte Ltd v Low Yang Tong and AGF Insurance (Singapore) Pte Ltd, 124 under a construction contract, the plaintiff undertook to build a double-storey detached house for the first defendant. Pursuant to the contract, the plaintiff furnished to the first defendant a performance bond. Unfortunately, when the house was practically completed, the first defendant complained of breaches of contract. It was alleged, inter alia, that the plaintiff had failed to rectify defects and the first defendant therefore called on the guarantee. The plaintiff immediately initiated proceedings against the first defendant and obtained, ex parte, an interim injunction restraining the guarantor (second defendant) from paying on the bond and the first defendant from receiving the sum under the bond. No evidence of fraud, as noted by the [1998] 1 MLJ 346, at 357. Siporex Trade S A v Banque Indosuez [1986] 2 Lloyd s Rep 146, at 158; Bocatra Construction Pte Ltd and Ors v Attorney General (No 2) [1995] 2 SLR 733, at 744; New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374, at para 26; Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd [1995] 1 MLJ 149, at 157. [1999] 1 SLR 374, at para 44. High Court Suit No of 1995, 11 July 1996, unreported.

32 12 S.Ac.L.J. Restraining a Call on a Performance Bond 163 High Court, was led by the plaintiff. The attack against the first defendant was directed at his bad conduct and bad faith. 125 It was also averred that the first defendant owed the plaintiff a substantial sum of money. As expected, the first defendant applied for the discharge of the injunction, but the application was dismissed in the Singapore High Court by Lai Kew Chai J. On the facts before him, Lai J referred to Bocatra as authority for the supposed rule of law that unconscionability can be a ground on which an injunction order can be made, and found that it was unconscionable for the first defendant to call on the guarantee. Most interestingly, His Honour defined unconscionability as involving 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. 126 [emphasis mine] It is respectfully submitted that nowhere in Bocatra, as also noted by Lee Seiu Kin JC in New Civilbuild, can this or any definition of unconscionability be found. As a result, one can only be forced to the conclusion that Lai J introduced this definition of unconscionability on his own accord. The learned judge further noted that the plaintiff had adduced considerable compelling evidence that the first defendant had to be restrained from acting in an unfair, harsh and unconscionable manner 127 by insisting on his strict legal rights. At this juncture, it must be emphasised again that no evidence of fraud was led by the plaintiffs. 128 [emphasis mine] Some of the evidence introduced by the plaintiff were instead that: (a) (b) the first defendant deliberately and frequently failed to honour his financial commitments under the construction contract, for instance, by his repeated, defective drawing of cheques; 129 the first defendant unlawfully and oppressively interfered with the work of the architect; and demanded the withdrawal of Certificate of Interim Payment No. 8, which was validly issued by the architect; Ibid, at para 2. Ibid, at para 5. This definition was approved in Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor [1999] 3 SLR 732, at para 22. Supra, n 124, at para 7. Ibid, at para 2. Ibid, at para 11. Ibid, at para

33 164 Singapore Academy of Law Journal (2000) (c) (d) the first defendant wrongfully stopped the issue of Certificate of Interim Payment No. 9; 131 the first defendant unreasonably obstructed the plaintiff s progress of work on many occasions; 132 In support of his view of Bocatra, Lai J referred to Royal Design and Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd 133 as illustrative of instances of unconscionability, 134 and opined that: Having considered all the evidence, [his Honour] was driven to the conclusion that evidence was strongly suggestive that the conduct of the first defendant from first to last was most unfair and it was against the court s conscience to... [allow] him to insist on his pound of flesh. Plainly he [should] not be allowed to get at the money and add insult to injury until 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 his payments were legendary and habitual, if one took into account the fact that he has the unusual hallmark of being the subject of bankruptcy notices and suits for defaults in meeting his commitments. 135 [emphasis mine] It is easily observable that Raymond Construction Pte Ltd v Low Yang Tong attempts to modify three established principles in the law governing performance bonds. Firstly, Lai J clearly held that unconscionability, as opposed to fraud alone, could be a ground for injunctive relief. Secondly, by deliberating on the conduct and character of the first defendant, his Honour has also contradicted the autonomy principle which provides that the performance bond stands aloof from the underlying transaction. Thirdly, the learned judge has also ignored the cash in hand principle which makes a performance bond as good as cash for answering any claim for contractual damages. Bearing in mind that these three cardinal rules were all expressly approved in Bocatra, 136 it is respectfully submitted that Lai J s interpretation of the ramifications of the Bocatra case cannot be correct Does Kvaerner support Lai J s conclusion, despite the fact Bocatra does not? To determine this issue, I now turn to the decision of Selvam JC (as he then was) in Kvaerner Singapore Pte Ltd v UDL Shipbuilding (Singapore) Pte Ltd. In that case, the plaintiff sold to the defendant a Ibid, at para 17. Ibid, at para 20. [1993] 3 SLR 350. High Court Suit No of 1995, 11 July 1996, unreported, at para 5. Ibid, at para 35. Bocatra Construction Pte Ltd and Ors v Attorney General (No 2) [1995] 2 SLR 733, at 744. Supra, n 14 and the accompanying main text.

34 12 S.Ac.L.J. Restraining a Call on a Performance Bond 165 pumping system and a valve control system for the sum of $1 m. Under the contract, the plaintiff delivered to the defendant a performance guarantee worth 30% of the purchase price. The defendant made a deposit of $300,000 but subsequently failed to open a letter of credit as payment of the remainder of the purchase price. 137 Instead, the defendant demanded payment under the performance guarantee. The plaintiff instituted proceedings against the defendant and obtained, ex parte, an injunction restraining the defendant from receiving the proceeds of the performance. Selvam JC held that the defendant breached their contractual obligation to open the letter of credit and the plaintiff was therefore not obliged to deliver the two systems. The letter of credit was a condition precedent to the obligation of delivery and the time for establishing credit was essential to the contract of sale. 138 In response to the defendant s arguments that the call should not be restrained, the learned judicial commissioner noted that: The credit was also a condition precedent to [the defendant s] right to call on the performance bond. And [it] failed to fulfil the condition precedent. Accordingly it was eminently just and convenient to restrain a party from taking advantage of his own wrong.... The defendants invoked the principle in Edward Owen Engineering Ltd v Barclays Bank International Ltd that except in cases of established fraud known to the issuer of the performance guarantee he cannot be restrained from making payment on the ground that the party to the underlying contract disputes liability. Later cases show that it is not an immutable principle of universal application. And in my view it has no application where the injunction is sought against a party to the underlying contract who seeks to take advantage of the performance guarantee where by his own volition he fails to perform a condition precedent in the sense I have described. 139 [emphasis mine] The learned judicial commissioner went on to confirm that the call on the bond was actually fraudulent as well: Furthermore, a demand under the performance guarantee can be made only when the seller has failed or refused to fulfil his obligations under the contract. The seller s failure or refusal is a condition precedent to the buyer making a demand. An assertion to that effect is implied in a demand made by the buyer. In circumstances In Trans Trust SPRL v Dannbian Trading Co Ltd [1952] QB 297, it was held that damages for failure to open an irrevocable credit would, in view of the fact that the buyers, in that case, knew that the sellers could not get the goods unless the credit was opened, include loss of profits. [1993] 3 SLR 350, at 352. Ibid, at 353.

35 166 Singapore Academy of Law Journal (2000) where it can be said that the buyer had no honest belief that the seller has failed or refused to perform his obligation, a demand by the defendant/plaintiff in my view is a dishonest act which would justify a restraint order. On the facts of the case a demand made by the buyer was utterly lacking in bona fides. 140 [emphasis mine] What is clear from these observations of Selvam JC is that the call on the bond in Kvaerner was restrained on two grounds. Firstly, the defendant failed to satisfy the condition precedent to the right to call on the bond namely, the provision of the letter of credit. With respect, I have some doubts as to the correctness of this finding, 141 but if the bond was indeed conditional in the manner laid down by Selvam JC, then the injunction was correctly granted. This is because the call would have been invalid. Secondly, as observed by the learned judicial commissioner, it was obvious that the defendant did not possess an honest belief in its right to call on the bond. And yet, an assertion that the plaintiff was in breach of contract was impliedly made in the demand made on the bond by the defendant. As such, even if the bond had been unconditional, the call would have still been fraudulent. 142 Since there is therefore clear fraud on the facts, the interim injunction is again justifiable on this ground. 143 Therefore, despite Kvaerner s apparent approval of Eveleigh LJ s dicta in the Potten Homes case, which was noted in Bocatra, 144 the holding in Kvaerner is, in fact, in complete conformity with established English principles, and entirely defensible. As such, I am of the humble opinion that Kvaerner was not decided, even implicitly, on the ground of unconscionability. D. Sin Kian Contractor Pte Ltd v Lian Kok Hong Another case in which unconscionability was approved as a separate ground for injunctive relief against a beneficiary is the High Court decision of Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor. 145 There, in support of his holding and substantially influenced by the reasoning in Raymond Construction, Lim Teong Qwee JC opined that in Kvaerner, Ibid, at 354. Supra, n 3. In Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd s Rep 546, at 549, with regards to a similarly-phrased bond, Ackner LJ felt that if such a performance bond were conditional, then the entire purpose of the bond to enable prompt and certain payment would be defeated. Supra, n 39 and the accompanying main text. Cf Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of His Royal Highness Sheikh Sultan Bin Khalifa Bin Zayed Al Nahyan, High Court Suit No 587 of 1999, 2 August 1999, 30 April 1999, unreported, at para 34, where Lee Seiu Kin JC proposed a similar interpretation of Kvaernar. [1995] 2 SLR 733, at 746. [1999] 3 SLR 732.

36 12 S.Ac.L.J. Restraining a Call on a Performance Bond 167 there was already a conscious departure from the fraud exception. 146 It is respectfully submitted, in light of the preceding discussion, that this view is untenable. Another problem with Lim Teong Qwee JC s opinion of Kvaerner is the fact that his Honour thought that the material circumstances [in Kvaerner] were not different from those in [the] Edward Owen Engineering [case]. 147 [emphasis mine] It is respectfully submitted that a closer examination of Edward Owen 148 is required. There, English suppliers entered into a contract with buyers in Libya to erect a greenhouse. Under the contract, a performance guarantee of up to 10% of the contract price was to be issued to secure the performance of the contract by the suppliers. The defendant bank, at the request of the suppliers, issued the performance guarantee to a Libyan bank which in turn issued a performance guarantee to the buyers; both guarantees were expressed to be payable on demand without proof or condition. Payments by the buyers were to be made by a confirmed letter of credit. However, no confirmed letter of credit was opened by the buyers in compliance with the terms of the contract. The plaintiffs treated the failure of the buyers to open the confirmed letter of credit as a repudiation of contract and asserted that the guarantee issued was of no effect. The buyers called on the guarantee issued by the Libyan bank, which in turn called on the guarantee issued by the defendant bank. The plaintiffs obtained an ex parte injunction restraining the defendant bank from paying on the guarantee. At the hearing, inter partes, the injunction was discharged by Kerr J. The plaintiffs appealed and the appeal was dismissed by the Court of Appeal because there was no clear proof of fraud on the part of the defendant bank. Three material differences from Kvaerner are immediately apparent. Firstly, the guarantee in Edward Owen was obviously unconditional 149 whereas the one in Kvaerner was found by Selvam JC to be conditional. Even if Selvam JC s factual finding was incorrect, both cases are still fundamentally different. In Edward Owen, it was the defendant bank that was sought to be restrained and not the beneficiary, as in Kvaerner. Since the injunctive relief is sought against different parties in both cases, how can any comparison be made between Edward Owen and Kvaerner, to prove that Kvaerner departed from the fraud exception? The fraud exception, in cases seeking the restraint of payment by the guarantor, though applicable, operates differently from instances where a restraint of the beneficiary is desired. As observed in Bolivinter Oil SA v Chase Manhattan Bank Ibid, at para 20. Ibid, at para 21. [1978] 1 QB 159. Supra, n 3. [1984] 1 Lloyd s Rep 251, at 257.

37 168 Singapore Academy of Law Journal (2000) [t]he wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank s knowledge. What this passage makes clear is that, besides establishing fraud on the part of the beneficiary, there is an additional requirement that the account party show that the bank knows of the fraud, before injunctive relief would be granted against the bank. 151 Thus, even if, hypothetically, the beneficiary in Edward Owen had been fraudulent as in Kvaerner, injunctive relief would still be withheld by the court as long as the bank does not have knowledge of the fraud. But if the injunction was sought against the fraudulent beneficiary, the fraud exception would be successfully invoked. The conclusion to draw from this example is that there is no basis for comparison between the holding in Edward Owen and Kvaerner, since the fraud exception operated differently in these two cases. Furthermore, as noted by Selvam J in the High Court decision of Star- Trans Far East Pte Ltd v Norske-Tech Ltd: Kvaerner... was a case decided on its own facts. In that case the circumstances were exceptional. The applicants induced the breach and relied on it to call on the performance bond. There was clear and unrefuted evidence that the applicants relied on their own wrong. 152 [emphasis mine] Thus, while there was obvious and unrefuted evidence of fraud on the part of the beneficiary in Kvaerner, such evidence was lacking in Edward Owen as there was not even an allegation of fraud. This crucial fact accounts for why the English Court of Appeal denied injunctive relief in Edward Owen. Thus, Kvaerner cannot be understood as having departed from the fraud exception, as alleged in Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor. It is noteworthy that in Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor, the High Court, though referred to the New Civilbuild case, disapproved of it in the following terms: [F]ollowing Bocatra... the rule in this jurisdiction is that the courts will not interfere with the machinery of obligations assumed by the issuer of a performance bond except in cases of fraud and also in See also Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor [1978] 1 QB 159, at 169, 173, 175; R D Harbottle (Mercantile) Ltd v National Westminster Bank Ltd [1978] 1 QB 146, at 155. [1995] 3 SLR 631, at 643.

38 12 S.Ac.L.J. Restraining a Call on a Performance Bond 169 cases where it is unconscionable for the issuer to pay or the beneficiary to call on or receive payment under the performance bond. I think it is clear that [Bocatra]... approved both Royal Design and Kvaerner and added unconscionability to fraud as exceptions and did not use these terms interchangeably. In Potten Homes Eveleigh LJ said that in principle he did not think it was possible to say that in no circumstances whatsoever apart from fraud would the court restrain the buyer. I respectfully agree and I think Bocatra..., Royal Design and Kvaerner represent a welcome development of this branch of the law. 153 With respect, several reservations have to be made here about the orthodoxy of the views above. It is submitted that Sin Kian Contractor has taken too wide a reading of the authorities cited before the court. Bocatra, Royal Design, Kvaerner, and Potten Homes were cases involving the restraint of the beneficiary to call on and receive moneys under a performance bond. Even if unconscionability was indeed introduced via these cases as a separate ground for injunctive relief a proposition which the preceding discussion has hopefully demonstrated to be false unconscionability cannot apply in cases where the guarantor alone is sought to be restrained. This is because both Eveleigh LJ s dicta in Potten Homes and Thean J s judgment in Royal Design were premised on the assumption that the principles applicable to cases where payment is sought to be restrained and cases where calls or receipt of payments are to be prevented differ. 154 According to the reasoning employed in Royal Design, unconscionability is an additional ground for injunctive relief only when the beneficiary is sought to be restrained from receiving payment. It should not available in cases where the guarantor is sought to be restrained as suggested in the extract above. 155 Secondly, with respect, the court s dismissal of New Civilbuild is disappointing. The New Civilbuild case was not given a fair scrutiny by the court in Sin Kian Contractor at all. Its wisdom was simply rejected without any discussion and careful appreciation of the merits of the New Civilbuild case. On the facts, the court in Sin Kian Contractor held that the application for injunctive relief did not automatically fail by reason of the fact that there was no allegation of fraud. The injunction order was withheld [1999] 3 SLR 732, at para 23. Supra, n 18. Eveleign LJ in Potten Homes did not question the orthodoxy of Edward Owen, which established the fraud exception as the sole ground for injunctive relief. His Lordship merely opined that it should be restricted to cases where the guarantor was to be restrained, like in Edward Owen itself, Refer to similar comments by Kan Ting Chiu J in Rajaram v Ganesh t/a Golden Harvest Trading Corp [1995] 1 SLR 159, at 164

39 170 Singapore Academy of Law Journal (2000) because the applicant also failed substantially to establish that it would be unconscionable for the beneficiary to call on the bond. 156 However, a fundamental question presents itself. Assuming that Raymond Construction and Sin Kian Contractor were correctly decided, and that unconscionability was indeed a ground for interlocutory injunction introduced via Bocatra, such a development can only have one result. It automatically renders the existence of the fraud exception redundant. This is because since Lai J s definition of unconscionability is so wide and nebulous encompassing any unfairness, reprehensible behaviour or conduct lacking in good faith on the part of the beneficiary, which would be repugnant to a court of conscience 157 the fraud exception is, de facto, entirely subsumed into this broad exception of unconscionability. As such, I respectfully believe it is self-deceiving to talk of exceptions to the autonomy principle, as in Sin Kian Contractor, instead of the exception of unconscionability. Did Bocatra really intend this radical development without any discussion why the English experience regarding performance bonds should be rejected? This writer humbly submits that Bocatra did not endorse such a development. E. Min Thai Holdings Pte Ltd v Sunlabel Pte Ltd v Anor The latest High Court decision in which Lai J substantially repeated his views in Raymond Construction regarding unconscionability is Min Thai Holdings Pte Ltd v Sunlabel Pte Ltd & Anor. l58 Unfortunately, the judgment of Lee Seiu Kin JC in the New Civilbuild case was not brought to the court s attention. In Min Thai, the first defendant entered into a contract with the second defendant to buy white rice from China. The plaintiff alleged that in addition to its contract with the second defendant to supply the China origin rice for the sale, it also had a collateral contract with the first defendant. 159 Lai J accepted that in the light of all the connecting factors..., it must be implied that all the terms of the contract [between the defendants]... apply to and bind [the plaintiff] and [the first defendant] with the necessary changes. 160 Therefore, pursuant to the terms of the agreement between the defendants, the plaintiff furnished a on demand performance guarantee of US$255,000 in favour of the first defendant [1999] 3 SLR 732, at para 24, 31. Supra, n 126 and the accompanying main text. [1999] 2 SLR 368. Ibid, at para The plaintiff, through its agent, signed and applied its stamp to every page of the contract between the first and second defendants. Ibid, at para 10.4.

40 12 S.Ac.L.J. Restraining a Call on a Performance Bond 171 After the performance bond was issued, China was unfortunately subjected to exceptional rainfall, typhoons and floods. The plaintiff alleged that this led to its failure to deliver the white rice. The defendants asserted, in reply, that due performance of the contract was not in any way excused by the floods and typhoons. They said that the areas from which the rice was to be obtained were not affected by the floods and that the plaintiff had demonstrated that it was able to source for the white rice at all material times. 161 As the parties were discussing the possibility of alternative sources and other practical solutions to the flood problem, the first defendant made a demand for the sum under the guarantee. Thereupon, the plaintiff commenced proceedings to restrain the first defendant, arguing that the obligation for the delivery of rice was no longer binding by reason of certain express contractual provisions providing for force majeure. Counsel for the plaintiff further alleged that the first defendant s conduct was unconscionable in view of the facts, and therefore it should be prevented from making a call. As a result, the plaintiff obtained from Rajendran J, at the opposed ex parte application, inter alia, an interim injunction restraining the first defendant from calling on and receiving any sum whatsoever under the guarantee. The cases of Royal Design, Kvaerner, Bocatra and Raymond Construction were cited to substantiate the orthodoxy of arguing unconscionability as a ground for injunctive relief apart from fraud. Naturally, the first defendant applied to discharge the injunction. Lai J, who heard the application, repeated his definition of unconscionability in Raymond Construction with apparent approval, 162 and dismissed the first defendant s application. It is noteworthy that the learned judge did not elaborate how Royal Design, Kvaerner, Bocatra and Raymond Construction supported the plaintiff s case. Neither did Lai J explain why it was unconscionable for [the first defendant] to attempt to receive payment under the performance guarantee even though the first defendant was perfectly entitled to make a call on the guarantee... but should have in all good conscience offered to let the money remain... [with the guarantor]... pending the resolution of disputes [emphasis mine] It is respectfully submitted that even if there is a separate ground of unconscionability, it logically cannot be unconscionable for a beneficiary, who is entitled to make a call when there is no dispute that the call was bona fide, to receive moneys under the bond. This is because in Bocatra, Ibid, at para Ibid, at para 20. Ibid, at para 28.

41 172 Singapore Academy of Law Journal (2000) the appellant similarly did not dispute that the respondent s call on the performance bond was bona fide. 164 The fact that the injunction was discharged in Bocatra can only mean that the Court of Appeal in Bocatra, even if it had intended to introduce unconscionability as a new ground for injunctive relief, would have clearly regarded the behaviour of the beneficiary in Min Thai as consdonable. It is respectfully submitted that Min Thai is therefore at variance with the approach in Bocatra, no matter how one interprets the latter case. Furthermore, in Raymond Construction, Lai J accepted that mere allegations of breach of the underlying contract by the beneficiary cannot amount to unconscionability. 165 Therefore, on the facts of Min Thai, since there was merely evidence of a genuine dispute between the parties as to the performance of the underlying contract, how could the beneficiary in Min Thai have been unconscionable? Moreover, Lai J dismissed the application to set aside even though he acknowledged that: (a) (b) (c) there was a serious issue whether there was any breach of contract for failure to ship the white rice, for which the first defendant would have been entitled to damages; 166 there was a question as to whether the performance of the contract was really adversely affected by force majeure; 167 there was a question of whether the provisions for force majeure applied on the facts. 168 Since these are proper issues to be resolved at trial, it is hard to understand how the evidence in Min Thai showed that the first defendant acted unconscionably, in view of the circumstances, in calling on the bond. As stated in Raymond Construction, Lai J himself opined that: Bocatra... lays down the rule of law that there must be compelling evidence capable of proving fraud or unconscionability before an injunction may be granted restraining payment [emphasis mine] Supra, n 6, at 742. High Court Suit No of 1995, 11 July 1996, unreported, at para 5, 6. [1999] 2 SLR 368, at para 24. Ibid, at para 26. Ibid, at para 24, 26. See generally Glahe International Expo AG v ACS Computer Pte Ltd and another appeal [1999] 2 SLR 620 (Court of Appeal, Singapore), for principles of construction with regards to force majeure clauses. High Court Suit No of 1995, 11 July 1996, unreported, at para 5. In Min Thai [1999] 2 SLR 368, at para 19, Lai J himself noted, after referring to Raymond Construction, that the Court of Appeal [in Bocatra] ruled that an applicant is required to establish a clear case of fraud or unconscionability to obtain an injunction restraining any payment under an unconditional bond or performance guarantee, [emphasis mine]

42 12 S.Ac.L.J. Restraining a Call on a Performance Bond 173 Thus, since Lai J raised so many queries with regards to the facts in Min Thai, how could there have been compelling evidence of unconscionability as mandated by Raymond Construction? It is humbly submitted that Min Thai clearly contradicted the rule of law enshrined in Raymond Construction. Secondly, Min Thai is at variance with established English authorities, involving similar facts, which have been accepted by local courts. The case of State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor 170 is clearly on point. There, the plaintiffs agreed to sell a quantity of sugar to the defendants. As security for the due performance of the contract, the plaintiffs provided to the defendants a performance bond. After part delivery of the sugar, the Indian Government barred any export of sugar and in consequence no further delivery was made. The buyer threatened to call on the bond but the seller denied that there was any breach or default. By relying on the doctrine of force majeure, the plaintiff obtained an ex parte interim injunction against the buyer. At a subsequent inter partes hearing, the injunction was discharged. On appeal, the English Court of Appeal affirmed the ruling and emphasised that honest belief of default alone, on the party of the beneficiary, was sufficient for a demand to be made, without the possibility of judicial restraint. 171 Thirdly, I am respectfully of the view that Min Thai is also open to the same criticisms as Raymond Construction. Despite the above reservations about Min Thai, Min Thai was subsequently affirmed on appeal. E. A Case for Unconscionability Nevertheless? i. GHL Pte Ltd v Unitmck Building Construction Pte Ltd & Anor The seed planted substantially by Raymond Construction and Min Thai recently germinated into the controversial Court of Appeal decision of GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor. 172 There, the Singapore Court of Appeal explicitly proclaimed unconscionability to be a separate ground for the injunctive restraint of a beneficiary from receiving moneys under a performance bond. If GHL was correctly decided, it would mean that Singapore has conclusively departed from the English position on this point. It is therefore my intention to review this decision in some detail [1980] Com LR 235. [1999] 2 SLR 368, at 235. Supra, n 38, and the accompanying main text. Supra, n 7.

43 174 Singapore Academy of Law Journal (2000) In GHL, the appellant awarded a building contract to the first respondent for the sum of about $5.78 million. Pursuant to the contract, the first respondent procured, in favour of the appellant, an unconditional performance bond for 10% of the then contract price, which was for about $578,140. However, neither the original bond, which was executed under seal, nor its duplicate was handed over to the appellant. This was, in part, because of the fact that shortly after the commencement of the contract, the parties agreed to revise the contract price downwards to about $1.96 million by excluding the works of sub-contractors. The first respondent therefore withheld the original bond for $578,140 as it was only obliged under the contract to procure a bond for $196,140 after the revision. The first respondent allegedly advised the appellant that the bond for $578,140 would be returned to the second respondent for cancellation in exchange for a fresh performance bond for $196,140. However, from the facts, it seemed as if the first respondent took no action towards cancelling the bond, until more than 15 months later. Meanwhile, the first respondent proceeded with the works. But after about a year, it became clear that the contractual completion date would not be met. Naturally, disagreement arose between the appellant and the first respondent as to the cause of the delay and which party should be blamed. Eventually, the first respondent suspended work on the project after failing to complete the construction works even though given an extension of time. The appellant produced the project architects delay certificate as proof that the first respondent was in default for not having completed the project in time. As a result of both these actions, the appellant made a demand on the bond for $578,140, which was not in its possession. The first respondent, after the demand was made, wrote to the architects for the project to aver that the $578,140 bond was null and void, because of the revision in contract price. It was only then that the first respondent forwarded the bond to the second respondent in an attempt to cancel the $578,140 bond. Furthermore, the first respondent commenced action against the appellant and the second respondent, claiming, inter alia, an injunction to restrain the appellant from seeking or claiming payment from the second respondent on the performance bond. The injunction order was granted by Lim Teong Qwee JC. It was only then that the appellant terminated the construction contract and counter-claimed for liquidated damages and the amount under the bond in separate proceedings. The appellant s position was that under the $578,140 bond, the second respondent irrevocably and unconditionally undertook to pay the appellant on demand. On appeal, MPH Rubin J in the High Court rejected the appellant s application for the interim injunction restraining the call on the bond to be discharged. Although counsel for the appellant raised the cases of Bocatra and New Civilbuild to support his contention that fraud was

44 12 S.Ac.L.J. Restraining a Call on a Performance Bond 175 the only basis on which an injunction could be granted, this argument did not find favour with Rubin J, who gave no grounds for his rejection of New Civilbuild. As noted by Rubin J, [m]y attention was... invited to the [four] lead principles enunciated by the Singapore Court of Appeal in Bocatra [emphasis mine] Surprisingly, even after acknowledging the four cardinal principles established in Bocatra, the learned judge, while noting that the allegations of fraud on the part of the appellant had no substance, nevertheless, felt that principles of fairness warranted the continuation of the injunction order. 174 After approving Lai J s definition of unconscionability in Min Thai, Rubin J dismissed the appellant s application for discharge on the following ground:... the present endeavour by GHL to enforce a bond which it did not even bother to take possession of, was unjustifiable as well as unconscionable. 175 [emphasis mine] The learned judge however ordered that the second respondent be restrained from cancelling the $578,140 bond until further order. This writer respectfully submits that Rubin J s reasoning is hard to accept. Firstly, it is difficult to understand why the failure to demand and take possession of the bond, even though for more than a year, amounted to conduct so reprehensible or lacking in good faith that a court of conscience would... restrain or refuse to assist the party. 176 Secondly, if one accepts the position established by case-law that the bond constitutes a separate contract by which the second respondent (guarantor) is obliged to pay the beneficiary according to the terms of the bond, 177 the actual bond or its duplicate is merely the guarantor s undertaking reduced to writing. Such a contractual undertaking, even though executed under seal, is still be valid and enforceable, even if it was never physically delivered into the hands of the appellant. Furthermore, in response to further arguments by the appellant, Rubin J clearly accepted that the delivery of a deed could be effected by words or conduct and that physical delivery of the bond to the appellant (beneficiary) was not essential to its efficacy as a deed Unitrack Building Construction Pte Ltd v GHL Pte Ltd & Anor [1999] 3 SLR 621, at para 13. Supra, n 14 and the accompanying main text. Ibid, at para 17. The same observation can be made with regards to Lim Teong Qwee JC s judgment in Sin Kian Contractor Pte Ltd v Lian Kok Hong [1999] 3 SLR 732, at para 14. Ibid, at para 24. Ibid, at para 23. Supra, n 126 and the accompanying main text. Supra, n 71 and the accompanying main text. Supra, n 173, at para While delivery of the sealed document was necessary for it to be effective as a deed, delivery may be by words or conduct, expressly or impliedly acknowledging an intention to be immediately and unconditionally bound

45 176 Singapore Academy of Law Journal (2000) As such, since physical delivery of the bond is not necessary either for the undertaking to be valid or enforceable against the second respondent, it is difficult to understand why Rubin J placed such importance on the appellant s failure to take possession of the bond. Although it is true that, on the facts, the parties probably intended to vary the quantum of the bond, the fact remains that the $578,140 bond was also consciously not returned to the second respondent by the first respondent for cancellation and the procurement of a fresh bond for over 15 months. As such, it was also due to the fault of the first respondent that the $578,140 bond remained valid and binding on the second respondent (guarantor) until the trial. Thus, it is therefore hard to see why, in the absence of fraud, the appellant cannot enforce the $578,140 bond because it was acting unconscionably. Furthermore, this writer is of the humble view that the first respondent acted even more unconscionably, on the facts, in comparison to the appellant. The first respondent failed to complete the project by the extended time and even purported to cancel the $578,140 bond only when it knew it was probably in breach of the construction contract. It must be emphasised that at the time of demand, the terms of the bond made it clear that the bond remained in full force and effect and would lapse only when the original of the bond was returned by the beneficiary to the second respondent. The strange conclusion reached by Rubin J demonstrates clearly the misleading ramifications of the nebulous definition of unconscionability approved in Raymond Construction and Min Thai. On further appeal, Rubin J s decision was regrettably affirmed by the Singapore Court of Appeal. There, the main issue before the Court of Appeal was whether the appellant acted, on the facts, unconscionably. Citing Bocatra as the authority by which fraud or unconscionability were affirmed as grounds on which an injunction could be based, the court in GHL reasoned that in Bocatra, because the term fraud or unconscionability was used on no less than three occasions, the concept of unconscionability was adopted after deliberation and was not inadvertently inserted as a result of a slip; nor was it intended to be used synonymously or interchangeably with fraud. There is nothing in that judgment which can be said to indicate or suggest that the Court did not decide that unconscionability alone is not a separate ground as distinct from fraud. We accept that to that extent, by the provisions therein, on the part of the grantor (guarantor). Even if the deed remains in the possession of the grantor, or a third party, the grantor is bound by the deed as long as he has done some act evincing an intention to be bound: Vincent & Anor v Premo Enterprises (Voucher Sales) Ltd & Anor [1969] 2 QB 609, at 619 (per Lord Denning MR).

46 12 S.Ac.L.J. Restraining a Call on a Performance Bond 177 Bocatra is a departure, and if we may respectfully say so, a conscious departure, from the English position. 179 [emphasis mine] With the utmost respect, the reasoning of the Court of Appeal in GHL is clearly unsatisfactory. For the reasons already mentioned, this writer is of the firm view that Bocatra affirmed, rather than departed from, the English position. Furthermore, the mere repetition of a certain phrase is meaningless in itself, if the judgment in Bocatra, as pointed out in New Civilbuild, is silent as to why and how the concept of unconscionability was introduced. Specifically, where is evidence of the deliberation which led to the introduction of unconscionability, as alleged by the court in GHL in the written judgment of Bocatra? Even more fundamentally, to argue that because Bocatra did not expressly disapprove of unconscionability as a separate ground for injunctive relief meant that Bocatra therefore approved of unconscionability is simply, with respect, non sequitur and fallacious. Silence is equivocal. The lack of disapproval for unconscionability probably stemmed from various reasons, the most probable being that unconscionability was not even argued before the court in Bocatra, as suggested by the written judgment in that case. Alternatively, the court in Bocatra, might have been convinced, as it mentioned, that the sheer weight of the authorities confirmed that fraud was the sole exception, 180 and therefore there was no need to expend energies on considering any other possible exception. What I have sought to demonstrate is that there is an obvious defect in the logic employed by the court in GHL on this point. As expected, the court in GHL expressly approved of the cases of Raymond Construction and Min Thai. The most formidable opponent that remained in the way of the Court of Appeal was the New Civilbuild case. Despite recognising, inter alia, that Lee JC quoted extensively passages from the judgment in Bocatra, 181 the court in GHL, disagreed with the learned judicial commissioner, for the reasons cited above, 182 that Bocatra did not decide that unconscionability was a separate exception. However, many of Lee JC s perceptive views of Bocatra were not rebutted by the court in GHL. For instance, why did Bocatra choose to depart from the English position without stating the justification for doing so, in clear language, especially in view of the legion of English cases which have consistently held that fraud is the sole exception? Were the facts in Bocatra so exceptional that the court had to depart from the established path of the eminent English courts? Although one can argue Supra, n 7 at para 16. [1995] 2 SLR 733, at 744. Supra, n 7 at para 19. Supra, n 179 and the accompanying main text.

47 178 Singapore Academy of Law Journal (2000) that severing our dependence on English law is a welcomed first-step towards the development of our own unique jurisprudence, I venture to humbly suggest that any departure from English law must, at least, be clearly accounted for, explained and justified. The Court of Appeal in GHL, however, retorted that the concept and scope of unconscionability was not a novel one, indeed no more novel than fraud, even though it was admitted that Bocatra did not discuss its scope. Consequently, that was the reason why, both the scope and nature of fraud and unconscionability were not discussed in Bocatra. I am respectfully of the opinion that this view cannot be correct. Firstly, the definition of fraud in the context of cases involving performance bonds is unquestionably trite law. That was why Bocatra did not discuss the concept of fraud. The sheer avalanche of cases that have accepted the definition pronounced in the State Trading Corporation of India s case in England, Singapore and other parts of the Commonwealth testifies unequivocally to this proposition. 183 On the other hand, the first case to solemnly define unconscionability is Raymond Construction. If unconscionability was not a novel concept in the context of disputes involving performance bonds, then why did Lai J define unconscionability in Raymond Construction without the assistance of any prior authorities? The fact that no authorities were cited by Lai J to support the orthodoxy of his definition proves that the concept of unconscionability has never been defined and consciously applied in the context of performance bonds in Singapore prior to Raymond Construction. To date, the only case that has defined unconscionability remains Raymond Construction. Furthermore, this demonstrates that unconscionability is a post-bocatra concept, which cases like Raymond Construction, Min Thai, Sin Kian Contractor and even GHL have sought to justify through Bocatra. Thus, with utmost respect, I am of the view that it is unacceptable to talk of the scope of fraud and unconscionability in the same breath as if they were equally established and universally accepted. Such a proposition is clearly fallacious and not justified by the state of case authorities, Besides adopting Raymond Construction s interpretation of Royal Design and Kvaerner, as illustrative of unconscionability, the court in GHL also cited with approval the High Court case of Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore. 184 In that case, the plaintiff entered into a contract with overseas buyers for the supply of certain manufactured articles. As security for the performance of the contract, Supra, n 38 and the accompanying main text. High Court Suit No 485 of 1990, 30 April 1992, unreported.

48 12 S.Ac.L.J. Restraining a Call on a Performance Bond 179 the defendant bank, at the instance of the plaintiffs, issued a performance guarantee in favour of the buyers. After the contract had been substantially performed by the plaintiff, dispute arose between the plaintiff and the buyers. While the dispute was in progress, the buyers called on the bond and the plaintiff reacted by obtaining, ex parte, two interim injunctions against the defendant bank, restraining them from paying on the bond. At the inter partes hearing, Chan J continued the injunctions until trial on the ground of a strong prima facie case of fraud on the part of the buyers. His Honour said: In my view, there is no reason why the less onerous test of a strong prima case should not suffice for instruments given purely to secure the performance of contracts. This test has been accepted by the Divisional Court of Ontario in CDN RESEARCH & DEVELOPMENT LTD v BANK OF NOVA SCOTIA (1982) 136 DLR (3d) 656 (HC). In that case, the plaintiffs had contracted to sell goods to Iraq. They provided a performance guarantee which was to come into force after the buyers letter of credit was opened. The letter of credit was opened but it expired. Subsequently, the contract fell through, no delivery was made and the plaintiffs obtained an injunction to restrain the bank from paying under the performance guarantee. The Divisional Court held, on the evidence, that there was insufficient evidence to show a strong prima facie case of fraud.... It may well be that the test of clear fraud is too high for it takes us beyond the interlocutory into the realm of final determination. 185 [emphasis mine] Chan Sek Keong J consciously disagreed with English cases which have consistently required clear fraud also because His Honour felt that it would encourage the oppression of the account party by calls which were difficult to restrain, if the requisite standard of fraud was the Ackner standard. 186 This lower standard of fraud was implicitly approved in GHL, 187 even though there was no strict need there to discuss the requisite standard of fraud to invoke the fraud exception. This is because the first respondent did not contest that there was no evidence of fraud on the facts. 188 I am humbly of the view that Chartered Electronics Industries cannot be supported in terms of principle. It is respectfully submitted that Chan J was wrongly influenced by the American Cyanamid principles, which both Bocatra and GHL clearly deemed inapplicable to cases involving Ibid, at of the transcript. Ibid, at 33 of the transcript. Supra, n 7 at para 21. Ibid, at para 12.

49 180 Singapore Academy of Law Journal (2000) performance bonds. 189 This is because Chan J expressly rejected the requirement of clear fraud because it was inconsistent with the approach laid down in AMERICAN CYANAMID with respect to the grant of interlocutory injunctions. 190 [emphasis mine] The approval of Chartered Electronics Industries in GHL therefore demonstrates an internal inconsistency in the judgment of the court in GHL, where Bocatra was also reaffirmed. Several other reasons also make the approval of Chartered Electronics Industries by GHL questionable. Firstly, the Ackner standard or requirement of established fraud was accepted by the Singapore Court of Appeal in Korea Industry Co Ltd v Andoll Ltd. 191 GHL, by now affirming Chartered Electronics Industries, directly contradicts its own earlier decision in Korea Industry. In Korea Industry, the respondents contracted to purchase gas oil from the appellants. In pursuance of the contract of sale, the respondent arranged to open a letter of credit for the purchase price in favour of the appellant. However when the cargo arrived, the respondent rejected the cargo on the ground that it did not conform to the contractual description. The respondent also applied, ex pane, for an interlocutory injunction restraining the bank (guarantor) from making payment under the letter of credit, although no clear allegation of fraud was made. On appeal, the Court of Appeal dissolved the injunction granted against the bank on the ground that no evidence of fraud of the requisite standard was produced. Speaking on the fraud exception, Grimberg CJ said: Where fraud is alleged at an interlocutory stage in an action, there must be clear evidence to support the allegation. 192 [emphasis mine] The learned Chief Justice then specifically approved of Ackner LJ s proncouncements in United Trading Corp SA v Allied Arab Bank 193 by extracting a passage from the judgment, set out in the discussion above Ibid, at para 15. High Court Suit No 485 of 1990, 30 April 1992, unreported, at 32 of the transcript. [1989] SLR 134. The court was constituted by Grimberg CJ, Chan Sek Keong J and FA Chua J. Ibid, at 139. Ibid, at Supra, n 50 and the accompanying main text. Chan J in Chartered Electronics Industries stated that Korea Industry was not authority for the proposition that the Ackner standard was applicable in Singapore. His Honour was of the view that in Korea Industry, the injunction was dismissed because there was no unequivocal allegation of fraud. It is humbly submitted that this distinction is not tenable. Grimberg CJ in Korea Industry, supra, n 191, at 139, 140, made it clear that another ground for the injunction s dismissal was because the appeal turned on the issue as to whether there was any evidence which brought the case within the fraud exception... [and on the facts,] the respondent s evidence of fraud did not [even] begin to approach the required standard. Furthermore, Chan J himself approved of the Ackner standard in his earlier decision of Brightside Mechanical and Electrical Services Group Ltd v Standard Chartered Bank [1989] SLR 519,

50 12 S.Ac.L.J. Restraining a Call on a Performance Bond 181 Secondly, Raymond Construction, one of the foundational cases of GHL, itself mandates that... there must be compelling evidence capable of proving fraud or unconscionability before an injunction may be granted [emphasis mine] Thirdly, as shown in the discussion above, 196 post-bocatra cases in Singapore have also insisted on a high standard of fraud. The sole exception to this train of cases is Chartered Electronics Industries. Most importantly, in Bocatra, Karthigesu JA infallibly pronounced that [an] applicant will be required to establish a clear case of fraud or unconscionability in... interlocutory proceedings. 197 [emphasis mine] Thus, it is puzzling why GHL approved of Chartered Electronics Industries despite all these inconsistencies with established authorities. What is also unacceptable is the assertion that Chartered Electronics Industries was, as stated by GHL, considered (and presumably approved) in Bocatra, though not expressly referred to in the judgment. 198 If it had indeed been referred to and approved in Bocatra, the court there would not have insisted on a clear case of fraud but would have adopted the language used by Chan J and required a strong prima facie case of fraud, which actually points to a totally different standard of fraud from the Ackner standard. Again, one of my earlier objections to GHL s interpretation of Bocatra arise, mutatis mutandis, with regards to this point if Bocatra also intended to lower the standard of fraud necessary to invoke the fraud exception, why did the court not expressly cite Chartered Electronics Industries and adopt its reasoning for discontinuing the applicability of the Ackner standard in Singapore? Furthermore, GHL felt that in Chartered Electronics Industries, Chan J defined fraud in a manner broader than what the English courts have accepted in the past. 199 Presumably what the Court of Appeal is implying is that Chartered Electronics Industries was decided on the ground of unconscionability rather than fraud the latter, as correctly defined by GHL, involves more than a mere absence of bona fides in the claim but also an element of deceit in making a claim which the beneficiary knows to be unjustified High Court Suit No of 1995, 11 July 1996, unreported, at para 5. This passage was cited with approval in GHL, supra, n 7, at para 17. Supra, nn and the accompanying main text. [1995] 2 SLR 733, at 747. Supra, n 7 at para 20. Supra, n 7 at para 21. The definition in GKN Contractors Ltd v Lloyds Bank plc and Anor (1985) 30 BLR 48, at 63, was cited as authority for this proposition. Supra, n 39 and the accompanying main text.

51 182 Singapore Academy of Law Journal (2000) It is humbly submitted that the view of GHL on Chan J s definition of fraud is defective. While it is true that in an earlier part of his judgment, Chan J found that, on the facts, the demand for payment under the performance guarantee was not bona fide, his Honour also quickly elaborated subsequently in his judgment that the Ackner standard, if applicable, was concurrently satisfied namely, that the beneficiary could not have honestly believed that it was entitled to make the claim on the bond: In the circumstances, there was strong evidence that the demands for payment of US$407,040 under the performance guarantee was not made bona fide. There was no way that the Buyers could have justified the demand for that amount since they had retained the second shipment valued at US$759, (with interest thereon at 4% per annum payable after 12 months from date of presentation of documents). On these materials and having regard to the circumstances of the demands for payment, and the form and substance of such demands, I formed the view (a) that the plaintiffs had more than satisfied the test of a strong prima facie case of fraud, and (b) that if the Ackner standard were applicable, the only realistic or reasonable inference to be drawn from the materials before me was that the Buyers could not have honestly believed that they were entitled to the amount of the damages they had demanded. 201 [emphasis mine] Chartered Electronics Industries, therefore is not authority for the proposition that Chan J had applied unconscionability as distinct from fraud as a ground for injunctive relief in that case. Chan J s explanation of how the Ackner standard would also be satisfied is totally consistent with the established English definition of fraud. As stated in the State Trading Corporation of India v ED & F Man (Sugar) Ltd and Anor, [i]f there is no honest belief [of contractual default on the part of the account party], it may be evidence of fraud. 202 Moreover, this definition of fraud was specifically cited by Chan J and approved in Chartered Electronics Industries, 203 together with that found in GKN Contractors. This means that the two definitions are complementary rather than contradictory; and also illustrates the fact that Chan J obviously applied the English definition of fraud in that case. Some final comments on GHL are necessary. Although Rubin J had clearly alluded to the four cardinal principles established in Bocatra, 204 one of which is the fraud rule, the Court of Appeal in GHL noticeably refrained from making any reference to that part of the Bocatra judgment High Court Suit No 485 of 1990, 30 April 1992, unreported, at of the transcript [1980] Com LR 235, at 235, High Court Suit No 485 of 1990, 30 April 1992, unreported, at 25 of the transcript. Supra, nn 14, 173 and the accompanying main text.

52 12 S.Ac.L.J. Restraining a Call on a Performance Bond 183 and passed no comment on the unequivocal statement there that fraud was the sole ground for an injunction order. On a more practical level, now that the broad exception of unconscionability has been sanctioned by GHL, it no longer makes any sense for any argument for injunctive relief to be placed solely on the narrower ground of fraud, or the alternative grounds of fraud and unconscionability. This is because unconscionability alone suffices for the purposes of an application for interlocutory, injunctive relief and is wider in scope than fraud. Therefore, does GHL not starkly prophesise the demise for the fraud exception in Singapore as alluded to in the discussion above? Another alarming consequence of the holding in GHL is the fact that the court did not comment on the following proposition approved in Bocatra that there is no difference between the principles to be applied in dealing with attempts to restrain banks from paying and callers from calling for and receiving payment. 205 Thus, reading Bocatra and GHL together, it must therefore mean now that unconscionability is also a ground for the injunctive restraint of the bank or guarantor who furnishes a performance bond. But Chartered Electronics Industries, which was approved in GHL, makes it clear that [i]t is established law that court will not restrain a bank from meeting a demand made under... an unconditional performance guarantee unless the demand is fraudulent. 206 It is humbly submitted that this is another example of the problems generated by the GHL decision to the law of Singapore. This pessimistic view of GHL is reinforced when one recalls the English admonition that it is wrong for the account party to prevent the bank from discharging its obligation unnecessarily. This is because the guarantor or bank s reputation will be in jeopardy, if it is prevented from honouring its obligations. I humbly agree in this regard with Kerr J in R D Harbottle (Mercantile) Ltd v National Westminster Bank Ltd: Under the terms of the guarantees an absolute obligation to pay arose simply from a demand for payment by the buyers. The bank had given its own guarantee, and in effect pledged its own credit... to pay on demand. Its reputation depends on strict compliance with its obligations. This has always been an essential feature of banking practice [1995] 2 SLR 733, at 744. This principle conclusively renders the Malaysian decisions of Bain Harding and The Radio & General Trading Co Sdn Bhd inapplicable in Singapore because both establish that there is a difference in the principles applicable when a guarantor is sought to be restrained from meeting a demand, as opposed to when a beneficiary is sought to be injuncted by the account party. High Court Suit No 485 of 1990, 30 April 1992, unreported, at 25 of the transcript. [1978] 1 QB 146, at 151.

53 184 Singapore Academy of Law Journal (2000) Furthermore, economic thrombosis will occur if the courts intervene and disturb the mercantile practice of treating the rights of the beneficiary under a performance bond as secure, through an injunction granted on the ground of strong prima facie case of fraud or unconscionability brought to the knowledge of the bank or guarantor, as suggested by a concurrent application of the principles laid down in Bocatra and GHL. 208 As I have mentioned earlier, it has always been accepted by courts of the highest authority, like Bocatra, that there is an interchangeability of principles governing injunctive relief for demands on performance bonds and letters of credit. Does this mean, therefore, that GHL has inadvertently opened up the path for unconscionability to be a ground for an injunction to restrain a beneficiary from receiving payment under a letter of credit as well? The Court of Appeal decisions in Korea Industry and Brody firmly reject this possibility while GHL starkly suggests the contrary. ii. The Purpose and Use of a Performance Bond It has been argued that: As between the parties to the underlying contract, the performance bond is purely a security for the performance of that contract. There is no reason, in principle, why it should be so sacrosanct and inviolate as not to be subject to court s intervention except on the ground of fraud. Even if the bond is to be treated as cash, that is not a good reason for elevating such security to that privileged position. 209 To answer this objection, it is necessary to again explore RD Harbottle Mercantile Ltd v National Westminster Bank Ltd, 210 where Kerr J said: The plaintiffs may well be right in contending that the buyers have no contractual right to payment of any part, let alone the whole, of the guarantee in any of these cases... But all these issues turn on contractual disputes. They are a long way from fraud, let alone established fraud.... 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. Such Intraco Ltd v Notis Shipping Corp [1981] 2 Lloyd s Rep 256, at 257, approved in Brody, White & Co Inc v Chemet Handel Trading (S) Pte Ltd [1993] 1 SLR 65, at 70; New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374, at para 38. LP Thean JA, The Enforcement of a Performance Bond: The Perspective of the Underlying Contract (1998) 19 Sing LR 389, at 416. This view was subsequently reproduced in GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor, Civil Appeal No 20 of 1999, 14 August 1999, 8 August 1999, unreported (Court of Appeal, Singapore), at para 24. [1978] 1 QB 146, at See also Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165.

54 12 S.Ac.L.J. Restraining a Call on a Performance Bond 185 obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud..., the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. [emphasis mine] What Kerr J makes clear is the fact that, in granting of a performance bond to the beneficiary, the account party freely undertakes, often after seeking legal advice, to accept the risks involved in causing a bank to issue an unconditional bond. 211 It is this feature that makes the bond as good as cash in hand to the beneficiary, and accounts for the fundamental nature of the performance bond as an immediate and assured source of moneys, usually for any possible breaches of the underlying contract. If the account party voluntarily undertook the risk of unconditional payment, why should the courts intervene and assist him to go back on his promise when circumstances become unfavourable to him and he decides to go against what he originally contracted with the guarantor to do? Even if it is accepted that where the only parties in an action are the parties to the underlying contract, the underlying contract can be considered in an application by the account party for an injunction, the underlying contract still contains an implied, and often express condition, that the account party would procure for the beneficiary an irrevocable and unconditional bank guarantee payable immediately on demand. If that is the case, then there is no valid reason for the court to freely interfere in what the account party has himself contracted to do for the beneficiary except in accordance with established contractual principles. This writer is unfortunately unable to find any such justification, as a matter of legal principle. Moreover, there is also no recognised principle in contract law that can justify interference with a contractual relationship, in the absence of privity of contract, simply on the ground of unconscionability. 212 As reiterated in Esso Petroleum Malaysia Inc v Kago Petroleum Sdn Bhd, any argument of immediate disadvantage to the [account] party who caused such a [bond] to be in use is of no avail to the [account] party who must face the risks of such unquestioned payment. [emphasis mine] See also Edward Owen (Engineering) Ltd v Barclays Bank International Ltd and Anor [1978] 1 QB 159, at 171, 172, 174. Supra, nn and the accompanying main text. [1995] 1 MLJ 149, at

55 186 Singapore Academy of Law Journal (2000) Secondly, Lord Denning MR in State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor, 214 gave full expression to the established cash in hand principle: [The beneficiary] does not have to go to far away countries and sue for damages, or go through a long arbitration. He can get the damages which are due to him for breach of contract. The bond is given so that... the buyer can have his money in hand to meet his claim for damages for the [account party s] non-performance of the [underlying] contract, If [the beneficiary] receives too much, that can be rectified later at an arbitration. 215 The courts must see that these performance bonds are honoured. [emphasis mine] 216 What is clear from his Lordship s judgment is that the cash in hand principle, inextricably linked to the autonomy principle, ensures that damages for contractual breach may be made available immediately upon a valid call. This is in line with the usual function of a performance bond. Professor EP Ellinger also expressed a similar view with regards to the role of the performance bond. He said: First demand guarantees and performance bonds serve the same function as standby credits. All three facilities are usually opened in order to indemnify the beneficiary against a loss incurred as the result of the non-performance of a contract made between the beneficiary and the account party or a faulty performance of the same contract.... [The performance bond] may cover an amount of liquidated damages due from the seller if the goods are defective or supplied out of time, or it may cover the repayment of a deposit paid by the buyer at the initial stages. 217 [emphasis mine] Thus, if the courts are generally willing to uphold liquidated damages clauses by giving effect to the intentions of the contracting parties, there is no reason why a performance bond should be treated any differently [1980] Com LR 235, at 235. New Civilbuild Pte Ltd v Guobena Sdn Bhd & Anor [1999] 1 SLR 374, at para 39. This passage was approved by Morison J in Cargill International SA v Bangladesh Sugar and Food Corporation [1996] 4 All ER 563, at 569. Benjamim s Sale of Goods, 5th Ed (London: Sweet & Maxwell, 1997) at para As stated in Beihai Zingong Properly Development Co & Anor v Ng Choon Meng [1999] 2 SLR 283 (Court of Appeal, Singapore), at para 15, which is a case involving a liquidated damages clause, courts will generally preserve the sanctity of a contract freely entered into and will not grant relief lightly except in accordance with established principles. There is no reason why the same, strict approach is inapplicable in the case of performance bonds, although it must be emphasised that a performance bond is not intended to represent an estimate of the amount of damages for contractual breach like liquidated damages, but is a guarantee of due performance of the underlying transaction: Cargill International SA v Bangladesh Sugar and Food Corporation [1996] 4 All ER 563, at 568; The Ngee Ann Kongsi v The Tai Ping Insurance Company Limited, High Court Suit No 2033 of 1997, 28 June 1999, 26 April April 1999, unreported, at para 26.

56 12 S.Ac.L.J. Restraining a Call on a Performance Bond 187 To deny the beneficiary the use of moneys under a bond, in addition to circumstances involving fraud, will frustrate the very purpose for which a performance bond was created, procured and granted. As cautioned by the court in Bocatra, [i]t 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. 219 [emphasis mine] Clearly, not giving effect to the commercial purpose of a performance bond cannot be the function of the courts. If the courts adopt a liberal approach towards the restraint of calls on performance bonds, what residual utility can be left of the performance bond as an immediate form of secured payment usually for contractual damages? More likely than not, such liberalism may well force the construction industry and others who rely on the convenience and benefits of the performance bond to recoil and revert to greater use of security deposits or retention of progress payments in cash a practice from which performance bonds evolved in the first place. It is in this sense that I am unable to agree that [a] temporary restraining order does not affect the security nor the beneficiary s rights in it... [and that a] performance bond is as good as cash... only because that is the effect of the English decisions and not because it is the cause of such decisions. 220 [emphasis mine] To summarize, what I have sought to show is that the English courts have always been mindful of the purpose of a performance bond and that the cash in hand principle is inextricably linked to the nature and purpose of a performance bond. As pointed out in State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor and RD Harbottle Mercantile Ltd v National Westminster Bank Ltd, allowing an interlocutory injunction only on the ground of fraud does not prevent the account party from eventually settling any dispute regarding the underlying contract. Since the performance bond involves merely a sum of money, there is no reason why the account party would be irrevocably and unduly prejudiced if the interlocutory injunction is denied, pending trial, save in the case of established fraud. Any financial loss suffered by the account party is not irreparable and money would always be an adequate compensation should there be unjust enrichment of the beneficiary at the expense of the account party upon the making of a call [1995] 2 SLR 733, at 741. Chartered Electronics Industries Pte Ltd v The Development Bank of Singapore, High Court Suit No 485 of 1990, 30 April 1992, unreported, at of the transcript (per Chan Sek Keong J); GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor, Civil Appeal No 20 of 1999, 14 August 1999, 8 August 1999, unreported, at para 24.

57 188 Singapore Academy of Law Journal (2000) In Cargill International SA v Bangladesh Sugar and Food Corporation, 221 Morison J insightfully explained the reason for the requirement of fraud before granting injunctive relief. The learned judge said: The court will not grant an injunction... unless there has been 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. On an application for an injunction, it is, therefore, not pertinent that the beneficiary may be wrong to have called the bond because, after a trial or arbitration, the breach of contract may not be established; otherwise, the court would be frustrating the commercial purpose of the bond. 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. A performance bond may assume the characteristics of a guarantee, especially, if not exclusively, in building contracts, where the beneficiary must show, as a prerequisite for calling on the bond, that by reason of the contractor s non-performance he has sustained damage [emphasis mine] As correctly pointed out in the New Civilbuild case, the road may truly be too far travelled, and for good reasons too, to now admit unconscionability. 223 IV. IMPLIED TERM IN THE PERFORMANCE BOND ACCOUNTING BETWEEN THE PARTIES One of the factors that, consciously or unconsciously, influence courts to promote unconscionability as an alternative ground for injunctive relief is certainly the fear of unjust enrichment of the beneficiary. As noted in GHL, what gravely concerned the Singapore Court of Appeal were oppressive or abusive calls on performance bonds. 224 Specifically, on the facts in GHL, the court felt that it was clearly unconscionable for the appellant to call on a bond which represented 30% of the revised contract sum even though it was only entitled, under the construction contract, to a performance bond for an amount equal to 10% of the contract price [1996] 4 All ER 563. Ibid, at 568. [1999] 1 SLR 374, at para 45. Supra, n 7, al para 24. Ibid, at para

58 12 S.Ac.L.J. Restraining a Call on a Performance Bond 189 However, this writer respectfully submits that this fear of oppression and unjust enrichment is somewhat exaggerated. In Cargill International SA v Bangladesh Sugar and Food Corporation, 226 Morison J correctly held that it was implicit in the nature of a performance bond that there would be in the future, an accounting between the parties to determine their rights and obligations, after a call on the bond. 227 Thus, the full amount under a performance bond can be called, in the absence of fraud, even if the breach of contract by the account party has caused no loss to the beneficiary. This is because a performance bond is not an estimate of the amount of damages to which the beneficiary might be entitled for contractual breach but is a guarantee of due performance. 228 Where the amount received under the bond exceeds the true loss sustained, the account party is entitled to recover the overpayment. It is this writer s humble opinion that Cargill is one of the most illuminating decisions in recent times, to emanate from the English courts. To fully understand the holding in Cargill, we turn now to its facts. There, the plaintiff companies entered into a contract with the defendant governmental organisation to supply sugar. Pursuant to the contract, the plaintiffs issued an unconditional performance bond covering 10% of the total cost and freight value in favour of the defendant. The contract also expressly stipulated that: the cargo had to be transported in a vessel not more than 20 years of age; 229 the bond was liable to be forfeited or called upon if the plaintiffs failed to fulfil any of the terms and conditions of the contract; 230 time of arrival of the cargo was to be of the essence. 231 The vessel eventually used to effect delivery was more than 20 years old and the cargo arrived several days late. As expected, the defendant rejected the shipment and called on the performance bond. The plaintiffs thereupon commenced proceedings and sought, inter alia, an injunction restraining the defendant from drawing on the bond and a declaration that the defendant was not entitled to make any call on the bond or [1996] 4 All ER 563; affirmed on appeal in the English Court of Appeal, [1998] 1 WLR 461. In the Singapore High Court decision of Sin Kian Contractor Pte Ltd v Lian Kok Hong & Anor [1999] 3 SLR 732, at para 7, the English Court of Appeal decision affirming Cargill was expressly approved. [1996] 4 All ER 563, at 568, 573; The Ngee Ann Kongsi v The Tai Ping Insurance Company Limited, High Court Suit No 2033 of 1997, 28 June 1999, 26 April April 1999, unreporled, at para 26. [1996] 4 All ER 563, at 568. Ibid, at 565. Ibid, at 566. Ibid, at 566.

59 190 Singapore Academy of Law Journal (2000) retain any money so received on the ground that no loss has been suffered since the market for sugar had fallen. The plaintiffs further averred that the defendant replaced the rejected cargo at less than the contract price and therefore suffered no loss. Thus, the issues that confronted Morison J was: (1) whether the defendant was entitled to make a call for the full amount of the performance bond, if the breach or breaches of contract (a) caused no loss to the defendants, (b) caused some loss to the defendants which was less than the amount of the performance bond, or (c) caused some loss to the defendant which was equal to or greater than the amount of the performance bond; (2) whether, in the event of the defendant having obtained payment under the performance bond as a result of any such call as it was entitled to make, the defendant was entitled to retain (a) all of the moneys received by it, (b) only such amount as was equal to the amount of the loss suffered by it, or (c) some other, and if so what, amount. 232 [emphasis mine] The learned judge answered these questions of law in the following terms: [I]t seems to me implicit in the nature of a bond, and in the approach of the court to injunction applications, that, in the absence of some clear words to a different effect, when a bond is called, there will, at some stage in the future, be an accounting between the parties in the sense that their rights and obligations will be finally determined at some future date.... If the amount of the bond is not sufficient to satisfy the beneficiary s claim for damages, he can bring proceedings for his loss.... [T]he performance bond is not intended to supplant the right to sue for damages. Indeed, such a contention would conflict with what I believe to be the commercial purpose of these instruments.... I think, the court always recognised that [performance] bonds affected the tempo of the parties obligations but not their substantive rights.... I take the view that if there has been a call on a bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment... since his entitlement is founded upon the contract between himself and the beneficiary. 233 [emphasis mine] Ibid, at 567. Ibid, at 568, 569, 571. State Trading Corporation of India v E D & F Man (Sugar) Ltd and Anor [1980] Com LR 235, at 235; Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, at 454; Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335 were cited with approval by Morison J as establishing the principles in the quoted passage.

60 12 S.Ac.L.J. Restraining a Call on a Performance Bond 191 In addition, Morison J felt that the claim for repayment may be presented in the following ways: (a) (b) (c) an implied term in the underlying contract; or a collateral contract to account; or a claim in restitution based on the principles of unjust enrichment. 234 On the facts, the court implied a term into the sale contract that there was to be an accounting for the proceeds of the bond for any amount exceeding the loss suffered by the defendant, if any. 235 Interestingly, Morison J was also of the view that any term, express or implied, in a contract of sale which purported to enable the defendant to retain moneys received under the bond when he had no loss would be struck down as a penalty. 236 In conclusion, the learned judge repeated his view of the law: In my view, the answer to the questions which I have been asked to determine are as follows. (1) Whether the defendant was entitled to make a call for the full amount of the performance bond, if the breach or breaches of contract (a) caused no loss to the defendants, (b) caused some loss to the defendants which was less than the amount of the performance bond, (c) caused some loss to the defendant which was equal to or greater than the amount of the performance bond. Yes, in all cases. (2) Whether, in the event of the defendant having obtained payment under the performance bond as a result of any such call as it was entitled to make, the defendant was entitled to retain (a) all of the moneys received by it, (b) only such amount as was equal to the amount of the loss suffered by it, or (c) some other, and if so what, amount. The answer is (b). 237 [emphasis mine] I am of the humble opinion that the views of Morison J in Cargill are impeccable and most just. In Comdel Commodities Ltd v Siporex Trade SA, 238 the English Court of Appeal unanimously approved of Morison J s [1996] 4 All ER 563, at 570, 573. As observed by Lord Steyn in Banque Financière de la Cité v Parc (Battersea) Ltd [1998] 1 All ER 737, at 740, the law of unjust enrichment ranks next to contract and tort as an independent source of rights and obligations. These three branches of law now form the holy trinity of civil obligations. [1996] 4 All ER 563, at 573. It is submitted that this finding is most just and correct. Had the term to account been implied into the performance bond instead, the account party would not be able to enforce the term for lack of privity. [1996] 4 All ER 563, at 573. Morison J cited Lord Browne-Wilkinson s view in Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd[1993] AC 573, at 582, with approval. Ibid, at [1997] 1 Lloyd s Rep 424, at 431.

61 192 Singapore Academy of Law Journal (2000) views in Cargill. Potter LJ, with whom his brother judges concurred, described Cargill as an illuminating decision. 239 It is noteworthy that in Comdel Commodities, in response to the argument that Cargill did not apply where the performance bond was issued, as in Comdel Commodities, in respect to a buyer s obligation to pay the contract price under a contract of sale, Potter LJ found the argument unconvincing. Comdel Commodities therefore confirms that Cargill laid down general principles of law and cannot be simply distinguished on its facts. What is equally comforting to know is that, recently, in The Ngee Ann Kongsi v The Tai Ping Insurance Company Limited, 240 the English High Court decision of Cargill received the judicial imprimatur of Goh Joon Seng J in the Singapore High Court. 241 V. CONCLUSION What I have sought to establish in this paper are the following propositions. Firstly, fraud, on the authority of Bocatra and New Civilbuild, is the sole basis for restraining the payment of as well as a call on a performance bond. GHL s interpretation of Bocatra and New Civilbuild is, with respect, hard to accept in theory and even more difficult to put into practice. The introduction of unconscionability in the Malaysian context as an alternative ground for injunctive relief is substantially the result of the infiltration of the principles established in American Cyanamid into interlocutory proceedings involving performance bonds. Such a possibility in the Singapore context was clearly removed in Bocatra, and therefore Malaysian cases supporting this development are inapplicable in Singapore. Raymond Construction and Min Thai, cases of the Singapore High Court, are insupportable on principle because they conflict with the four cardinal principles of the law of performance bonds enshrined in Bocatra the autonomy principle ; the cash in hand principle; the sole exception of fraud as a ground for interlocutory, injunctive relief; and the principle that the rules of law applicable when restraining payment and, and on the other hand, restraining a call on a bond are the same. 242 These four principles are inextricably linked to one another and must be upheld concurrently in order for the performance bond to be functional as well Ibid, at 431. High Court Suit No 2033 of 1997, 28 June 1999, 26 April April 1999, unreported. Ibid, at para 26. Supra, n 226. See also The Ngee Ann Kongsi v The Tai Ping Insurance Company Limited, High Court Suit No 2033 of 1997, 28 June 1999, 26 April April 1999, unreported, at para 19, where Goh Joon Seng J expressed a similar view of Bocatra.

62 12 S.Ac.L.J. Restraining a Call on a Performance Bond 193 as useful to mercantile practice. Any departure from these well-entrenched principles will make the law of performance bonds unintelligible, and bring about legal chaos. While Min Thai, Raymond Construction, and GHL, were clearly premised on the desire of the court to do justice between the parties, by failing to call to mind the function and purpose for which the performance bond exists to serve namely, as a source of assured moneys usually for potential breaches of contract grave doctrinal inconsistencies in the law of performance bonds and letters of credit have now been unleashed into Singapore law. A performance bond is an immediate source of payment usually for contractual damages. Thus, if the courts take a liberal approach in restricting the payment or receipt of moneys under a performance bond, as long as the circumstances demand it, the commercial purpose of the performance bond will be totally frustrated. While not totally identical to a letter of credit, both instruments are similar because a letter of credit exists to serve as a means of assured payment of the contract price, even when there is, objectively, serious dispute as to the right of the beneficiary to claim payment under the underlying transaction. 243 If we consent to a liberal approach towards the restraint of the performance bond, then why not the letter of credit, which can also be an oppressive instrument? Why should the right to receive payment of the contract price be more sacrosanct? It is my humble opinion that preserving the sanctity of both the letter of credit and the performance bond achieve basically the same goal the beneficiaries in each case will be able to achieve cash-flow fluidity and better alternative transactional planning, without having to wait for moneys to be awarded after arbitration or judicial proceedings. It is in this sense that Cargill strikes at the heart of the matter by posing a timely reminder of the sensibility of the overriding primacy of the cash in hand principle. ADRIAN SP WONG* 243 * United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168, at 183 (per Lord Diplock); Howe Richardson Scale v Polimex-Cekop & Anor [1978] 1 Lloyd s Rep 161, at 165. LLB (NUS). I am heavily indebted to my friends Mr Chua Bor Jem, Ms Cheam Li Shenn, and Ms Tahirah Maisun Ara bte Saraj Din for their assistance in the research for this paper. Thanks are due to Mr Ho Chien Mien for sharing his thoughts on the topic and Mr Andrew Chan for alerting me to several unreported judgments emanating from the Singapore courts in Lastly, I am also grateful to Joseph, John and Raphael for their prayers. All errors, whether in terms of style or substance, remain solely mine.