Can a contractor restrain a call on a performance bond made by the employer on the ground that the architect had failed to take into account the contractor's application for relief under the COVID-19 (Temporary Measures) Act 2020? This issue arose for consideration in Shanghai Chong Kee Furniture & Construction Pte Ltd v Church of St Teresa [2024] SGHC 5.
Background. The claimant was the contractor for a project to conduct restoration works at the premises of the defendant church ([1]).
The claimant provided a performance bond (the "Bond") issued by Lonpac Insurance Bhd in the amount of $629,998.70 ([1]).
Disputes arose between the parties, resulting in the defendant calling on the Bond ([9]).
In the present originating application, the claimant sought ([10]):
- A declaration that the defendant's call on the Bond was unconscionable in whole or in part; and
- An injunction to restrain the defendant from receiving payment under the Bond; and
- In the alternative, for a reduction in the Bond sum which the defendant was entitled to receive under the call.
The contract between the claimant and the defendant incorporated the Articles and Conditions of Contract for Minor Works 2012, First Edition, December 2012 published by the Singapore Institute of Architects (the "Conditions of Contract") ([3]).
Clause 26 of the Conditions of Contract required the claimant to provide a performance bond of $6,299,987.00 ([4]), which the parties were agreed was an unconditional performance bond ([5]).
While the claimant raised four issues to demonstrate unconscionability on the part of the defendant ([11]), this blog will focus on the first issue, where the claimant sought to rely on COVID-19 (Temporary Measures) Act 2020 (Act 14 of 2020) ("COTMA") to support its application.
Entitlement to liquidated damages. The claimant's argument was set out by the High Court at [12], which we duplicate below:
"12 The claimant asked me to infer unconscionability on the part of the defendant on the basis that the Architect's certification of liquidated damages payable by the claimant ("LDs") was wrong, the defendant knew the certification was wrong and that was the reason why there had not been any clear claims for LDs on the part of the defendant against the claimant until after the Bond had been called. One of the bases for the claimant's assertion that the LDs certification was wrong was based on s 6(5) of COTMA. The claimant argued that it had rightly made applications under COTMA for time relief in relation to COVID-19-related delays which fell within the prescribed periods set out in the COTMA (and the defendant had not contested these through the prescribed COTMA mechanisms). The claimant was consequently entitled to not just the time relief sought under the COTMA but also relief from liability for LDs pursuant to s 6(5) COTMA."
In other words, as summarised at [15], the claimant argued that:
- It had properly applied for COTMA relief for an extension of time;
- The defendant neglected to dispute the claimant's entitlement to such relief;
- The defendant knew that s 6(5) COTMA afforded the claimant relief against liquidated damages ("LDs") during the COTMA relief period;
- Based on the defendant's and the Architect's conduct, they knew that the defendant was not entitled to the LDs claimed or a substantial portion of the LDs claimed;
- Yet the defendant made the call on the Bond and sought to retrospectively justify it in a much later letter, which the claimant said was the first time that LDs had been mentioned to them;
- Therefore, the defendant acted unconscionably by making the call.
The defendant, unsurprisingly, disagreed ([17]).
Among others, the defendant argued that the Architect was contractually obligated to act independently with respect to extensions of time and LDs, and so the defendant was entitled to rely, and did so rely, on the Architect's decisions on the same ( [18]).
Law on unconscionability. The High Court then cited the Court of Appeal's decision of BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 ("BS Mount Sophia") as the leading case on the law on unconscionability in the context of calls on performance (on-demand) bonds in construction contracts ([35]).
For a finding of unconscionability, the conduct had to be one "which the court finds to be so lacking in bona fides such that an injunction restraining the beneficiary's substantive rights is warranted" ([36]). The threshold of unconscionability is a high one, requiring the claimant to demonstrate a strong prima facie case of unconscionability.
Importantly, even if the call was on the basis of a mistaken premise or belief that the counterparty was in breach, the court's role was not "to appraise the merits of the parties' decisions"; the key was whether there was a lack of bona fides in those decisions made at the time of calling on the bond ([37]).
The High Court stated that "[i]mplicit in the Court of Appeal's holding [was] that a mistaken but bona fide call on a performance bond would not fall foul of the doctrine of unconscionability" ([37]; emphasis in original).
The LDs claim. Turning back to the facts of the case, the High Court "was not convinced that an inference of unconscionability should be found because of the Architect's supposed error in the calculation of the LDs and the defendant's hesitancy in failing to expressly demand for those LDs" ([41]), even though the High Court found that "... the Architect and the defendant were not as cogent as they could have been with respect to an explicit claim for LDs" ([41]).
In particular, in relation to the claimant's argument that the Architect had erred in respect of s 6(5) of the COTMA, the High Court held that it was not required to rule on the interpretation of s 6(5) of the COTMA. We set out [42] below:
"42 In that regard, the claimant felt that it had a stronger case with respect to its submission that the Architect had either erred in their interpretation of s 6(5) of the COTMA or was unaware of its existence (see [12] and [15]), thus resulting in some sort of collusive unconscionable conduct as between the Architect and the defendant. I am not required to rule on the merits of whether the LDs claim was contractually and legally justified as part of this application, so I was not required to rule on the interpretation of s 6(5) of the COTMA. The Architect may well have been mistaken in not taking this into account when LDs were certified but the Architect's error does not equal unconscionability on the part of the defendant. ... The court does not engage in a detailed merits review when hearing an application to injunct the call on a performance bond. Such applications for an injunction are interlocutory proceedings, so the court would not be equipped to undertake a full, detailed, and exhaustive review of the merits of the parties' respective allegations."
(emphasis added)
The High Court noted that "the parties had agreed in the Contract for the Architect to act independently and to exercise its judgment on the certification of LDs and the defendant was entitled to and did rely on the Architect's decision in this regard ... even if the Architect had acted in error" ([43]), and that there was also "no evidence to suggest that the defendant had been put on notice about something improper about the Architect's certification process and had proceeded to call on the bond regardless." ([44])
The High Court also noted that there was evidence of meeting minutes recording that the issue of COTMA reliefs were expressly discussed; with the quantity surveyor confirming that COTMA claims and valid COTMA relief claims had already been taken into account, with the architect agreeing to issue a letter to state the same ([44])
Hence, the High Court held that "[t]he defendant should not be put in a position where it had to second guess the decisions of an independent architect in the absence of knowledge of a clear error." ([44])
Takeaway. It is generally difficult to restrain a call on the bond. As set out by the High Court, even a mistaken but bona fide call is unlikely to be unconscionable.
As illustrated by the case, the Court's role is not to assess the merits of whether the decision to call on the bond was correct, but whether the decision to call on the bond was made bona fide or not.
Hence, even if an architect failed to take into account a contractor's entitlement to relief under the COTMA, the employer may still be entitled to rely on the erroneous decision by the architect to impose liquidated damages and call on the performance bond.
Of course, it may be questioned to what extent an employer is entitled to rely on an architect's decision. If, as a question of fact, it is clear beyond any doubt that the employer knew that the architect's decision was carried out improperly, then the situation may be different.
And just because a contractor is entitled to relief under the COTMA, it does not automatically mean that the employer is not entitled to impose liquidated damages and call upon a performance bond. It all depends on the facts of the case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.