Singapore court declares "unconscionable" a beneficiary's call on a bond where it undermines the temporary finality of an adjudicator's decision

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Singapore court declares "unconscionable" a beneficiary's call on a bond where it undermines the temporary finality of an adjudicator's decision

October, 2020
Ben Bury
Stephanie Yu

Overview

An adjudicator's decision on a dispute is binding until that dispute is finally determined by a court or tribunal appointed according to the dispute resolution clause in the underlying contract[1]

The Singapore Court of Appeal was asked to consider a case where the unsuccessful party to an adjudication paid the amount he was ordered to pay by the adjudicator, and subsequently sought to recover the amount paid by making a call on the applicant's 'on-demand' bond. 

In granting an injunction restraining the beneficiary from recovering money under the bond, the Court of Appeal said the beneficiary's call on the bond was "unconscionable" because it sought to undermine the temporary finality of an adjudicator's decision. If the beneficiary disagreed with the adjudicator's decision, he should refer the dispute to a court or tribunal under the dispute resolution clause in the applicable contract. 

Background

In Samsung C&T Corporation v Soon Li Heng Engineering Pte Ltd[2], a main contractor on an underground railway project in Singapore engaged a subcontractor to undertake excavation works. The subcontractor (the applicant) guaranteed his obligations under the subcontract by way of an 'on-demand' bond for the benefit of the main contractor (the beneficiary). Under the on-demand bond, a bank had agreed to pay a lump sum to the beneficiary on production of a demand, or 'call', without proof of breach being required.

Adjudicator's Decision

In August 2018, the applicant served a payment claim under the subcontract, which was disputed by the beneficiary. The dispute was referred to adjudication under Singapore's Building and Construction Industry Security of Payment Act (Ch. 30B) ("SOPA")[3] and the adjudicator awarded around SG$2.5 million in additional costs to the applicant. The beneficiary paid the amount awarded by the adjudicator to the applicant, but indicated that he considered it an "overpayment" in breach of the subcontract. 

What should have happened next?

In accordance with the SOPA, the beneficiary was entitled to disagree with and challenge the adjudicator's decision, but the appropriate way to resolve this disagreement was by commencing final dispute resolution proceedings before a court or tribunal according to the dispute resolution clause in the subcontract[4]. If the court or tribunal made a determination that differed from the adjudicator's decision, the applicant would be ordered to return some or all of the "overpayment". 

What did happen next? Beneficiary called on the bond

The beneficiary did not refer the dispute to a court or tribunal. Some months later, in April 2019, a second adjudication was commenced by the applicant regarding another disputed payment claim. The beneficiary reacted by making a call on the on-demand bond to recover the alleged "overpayment" he had previously made in compliance with the adjudicator's decision in the first adjudication. He said he was entitled to make the call because the bond was an 'on-demand' bond and, in any event, the alleged "overpayment" rendered the applicant in breach of the subcontract.

High Court proceedings

The applicant commenced proceedings in the Singapore High Court[5] seeking an injunction restraining the beneficiary from receiving money under the bond. In Singapore, an injunction can be granted in such circumstances if the call on the bond was either fraudulent or "unconscionable"[6]. Mr Justice Ang Cheng Hock granted an injunction on the basis that the call was "unconscionable" as it was motivated by the improper purpose of overturning the adjudicator’s decision[7]. The beneficiary appealed.

Court of Appeal Decision

The Court of Appeal dismissed the beneficiary's appeal and upheld the injunction. The court agreed that it was unconscionable for the beneficiary to call on the bond. It said that if the beneficiary was allowed to receive the bond money, it would effectively reverse the adjudicator's decision and the temporary finality of the decision would be undermined. 

Relevance

The legislative scheme embodied in SOPA provides for an unsuccessful party to an adjudication to refer his dispute to final determination by a court or tribunal. In Samsung C&T Corporation v Soon Li Heng Engineering Pte Ltd, the Singapore Court of Appeal sent a clear message that it will not tolerate any attempts to circumvent this legislative scheme by relying on alternative contractual instruments, such as an on-demand bond. This is consistent with the general prohibition on parties 'contracting out' of the SOPA adjudication process. 

Ben Bury is a Partner and Stephanie Yu a Senior Associate at Holman Fenwick Willan

 

[1] For Singapore, see Building and Construction Industry Security of Payment Act (Ch 30B), section 21(1).

[2] [2020] SGCA 79.

[3] Cap 30B, 2006 Rev Ed.

[4] SOPA, section 21(1)(b).

[5] [2019] SGHC 267.

[6] For an analysis of the principles in law relating to the issue of unconscionability as a ground for obtaining an injunction to restrain a beneficiary from calling on a bond, see Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 3 SLR(R) 198, BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352, and Tactic Engineering Pte Ltd v Sato Kogyo (S) Pte Ltd [2017] SGHC 103.

[7] [2019] SGHC 267 at para 103.

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