Tactic Engineering Pte Ltd (in liquidation) v Sato Kogyo (S) Pte Ltd [2017] SGHC 103

This was a dispute involving an on-demand bond dated 18 February 2014 (“Bond”) taken out by Tactic Engineering Pte Ltd (“Tactic”) in favour of Sato Kogyo (S) Pte Ltd (“Sato Kogyo”). Tactic has appealed against my decision dated 17 February 2017 to set aside the injunction restraining Sato Kogyo from inter alia calling on the Bond (“Injunction”). I now set out the reasons for my decision.

Sato Kogyo was the Land Transport Authority’s main contractor for the “construction of the Mattar Station and its associated tunnels as part of Downtown Line 3”. Under a letter of award, and a subcontract dated 2 February 2012 (“Subcontract”), Sato Kogyo appointed Tactic as its subcontractor. The Subcontract sum was $24,468,800.00, and its clause 25 entitled Sato Kogyo to retain up to 5% of this figure (ie, $1,223,440.00).

By the end of 2013, Tactic was experiencing difficulties in completing its outstanding works. To ease Tactic’s cash flow, Sato Kogyo agreed to release the monies being retained under clause 25 (“Retention Monies”) in exchange for an on-demand bond. On 18 February 2014, Tactic procured the Bond, which was an on-demand bond worth $1,223,440.00 (“Bond Amount”). The salient parts of it read as follows:

The parties discovered that, under another project, “MCE 487”, Tactic owed Sato Kogyo $226,960.73 (“MCE Monies”). As evidenced in a letter dated 11 March 2014, the parties agreed to set-off the MCE Monies against the Retention Monies. However, on 13 March 2014, Tactic sent an invoice to Sato Kogyo seeking the release of $1,183,408.29, which was the amount of Retention Monies at that time. Due to an administrative lapse, Sato Kogyo released the full sum of $1,183,408.29 (without deducting the MCE Monies), and hence the MCE Monies remained unpaid by Tactic.

At the relevant time, Tactic’s financial woes meant that it could not complete its works, and Sato Kogyo had to make arrangements to complete them, thereby incurring back charges. In this connection, Sato Kogyo indicated that it would call on the Bond on 20 May 2014. Thereafter, on 8 December 2015, Sato Kogyo claimed a sum of $1,351,574.89 from Tactic and stated that it would call on the Bond if Tactic did not make payment. Sato Kogyo subsequently made demands on 28 June 2016 and 19 August 2016 as well. On 3 October 2016, Sato Kogyo called on the Bond and demanded payment of the Bond Amount. No payment was made, and Sato Kogyo called on the Bond again on 18 October 2016, seeking payment of the Bond Amount by 21 October 2016. On 20 October 2016, Tactic applied for the Injunction, which Andrew Ang SJ granted on the same day.

In the proceedings before me to set aside the Injunction (filed by Sato Kogyo), Tactic initially relied on both fraud and unconscionability as grounds for sustaining the Injunction. But it eventually abandoned its case on fraud, focusing instead on showing that Sato Kogyo’s call on the Bond was unconscionable. Tactic essentially brought the court through an accounting exercise, deploying various computations to demonstrate that Sato Kogyo’s claim fell short of the Bond Amount and thus unconscionability was manifested. In doing so, Tactic relied on three main grounds. First, it argued that Sato Kogyo could not include the MCE Monies to justify the call on the Bond. Second, Sato Kogyo was not contractually entitled to impose “Administrative Charges”. Third, Sato Kogyo’s computation of the back charges was unconscionable.

As part of its case, Tactic also highlighted that Sato Kogyo had claimed four different sums from Tactic since December 2015, as follows:

According to Sato Kogyo, its claims in June and August 2016 were reduced because the parties were negotiating a settlement, and it “was prepared to offer [goodwill] discounts on condition that the final amount [was] settled amicably”. Negotiations between the parties eventually fell through, and Sato Kogyo took the position that it was “entitled to claim the full sum” as represented by its 11 November 2016 claim. However, Sato Kogyo’s “bottom line” was its 8 December 2015 claim to justify its call on the Bond. I therefore set out Sato Kogyo’s claim as of that date in the context of the following table (which I examine below from [10]):

Before turning to the arguments, I pause to recount some principles in law relating to the issue of unconscionability as canvassed in Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 3 SLR(R) 198 (“Eltraco”) and BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 (“Mount Sophia”):

(a) First, parties were expected to “abide by the deal they have struck”: see Eltraco at [30]. Hence, courts “should be slow to upset the status quo and disrupt the allocation of risk which the parties had decided upon for themselves” [emphasis added]: see Mount Sophia at [25].

(b) Second, an applicant had to establish a strong prima facie case of unconscionability, and the “threshold is a high one”. A finding of unconscionability must be supported by “the whole context of the case” [emphasis in original] and a “prima facie strong piece of evidence does not make a strong prima facie case”: see Mount Sophia at [20] and [39]–[40].

(c) Third, the concept of unconscionability imported notions of unfairness and bad faith: see Mount Sophia at [36]–[37]. Where there was a genuine dispute, it could not be said that there was unconscionability because a party was “entitled to protect [its] own interest”: see Eltraco at [32].

(d) Fourth, it was not necessary for the court to carry out a detailed examination of the minutiae and “engage in a protracted consideration of the merits of the case”. In such proceedings, the focus was on “breadth rather than depth” and the court’s role was simply to “be alive to the lack of bona fides” [emphasis in original]: see Mount Sophia at [40], [45] and [52].

I address the salient arguments now. Tactic argued that Sato Kogyo could not utilise the MCE Monies to justify calling on the Bond because these monies were due under a separate contract. That aside, Tactic did not have persuasive arguments to clinch the point. On the other side, it was undisputed that Tactic owed the MCE Monies to Sato Kogyo. It should be remembered that the Bond was taken out in consideration of Sato Kogyo releasing the Retention Monies (see [3] above), and the parties had agreed to set-off the MCE Monies against the Retention Monies (see [4] above).

In any event, as seen in the table above (at [8]), even without the MCE Monies, Sato Kogyo’s claim was $1,278,169.94 (excluding GST), which was well in excess of the Bond Amount.

Per arguendo, even if we explored the position without the Administrative Charges, Sato Kogyo still had a claim for back charges amounting to $1,065,141.62 (excluding GST and excluding the MCE Monies) (see [8] above). I acknowledged that this fell below the Bond Amount (of $1,223,440.00), but the shortfall must be seen in the context of the Subcontract’s value of $24,468,800.00. That said, the artificiality inherent in Tactic’s approach of slicing off parts of Sato Kogyo’s claim to depress it below the Bond Amount was not lost on me. In my judgment, the unconscionability that Tactic sought so casually to impute to Sato Kogyo was not supported by the whole context of the case (see [9] above), and looking at matters in the round, I was of the view that the alleged shortfall was contrived and not of such character as to make out a strong prima facie case of unconscionability.

Indeed, I was of the view that the back charges claimed by Sato Kogyo were not so excessive or abusive as to establish that it was unconscionably bloating the numbers to justify the call on the Bond. Tactic contended that Sato Kogyo had inflated the back charges and included items of work falling outside Tactic’s scope of works. In my view, the court should not engage in a minute examination of both parties’ cases in the present proceedings (see [9(d)] above). Additionally, Tactic could not show that it was “reasonably apparent” that there was unconscionable conduct on Sato Kogyo’s part: see Mount Sophia at [37].

In relation to the alleged inflation of back charges, Tactic relied significantly on a “Statement of Account” dated 30 November 2014. According to Tactic, this statement showed that the “Future Estimated Backcharges” amounted to only $110,082.76 at that time. It was thus “shocked” to learn in December 2015 that Sato Kogyo had “grossly inflat[ed]” the claim to $1,351,574.89. But as Sato Kogyo was quick to point out, Tactic omitted to note that the “Statement of Account” clearly indicated that the total back charges already amounted to about $600,000 as of 30 November 2014. Tactic’s reliance on the “Statement of Account” was thus misplaced, and it failed to show that Sato Kogyo had “grossly inflat[ed]” the back charges. In this regard, I also took into account Sato Kogyo’s submission that its claim would naturally increase as “works are completed and as more backcharges or loss and damages crystalise [sic] and become ascertained”. The fact that Sato Kogyo had not yet determined the full extent of the back charges could be gleaned from a letter dated 22 July 2015 which indicated that Sato Kogyo was still in the midst of “compil[ing] and finaliz[ing] all the backcharges of materials, labours and other miscellaneous items”.

In sum, after considering the evidence holistically, it was apparent that Tactic’s case fell far short of a strong prima facie case of unconscionability. Rather, it appeared to be clutching at straws to make out a case by disputing various components of Sato Kogyo’s claim. In my judgment, the overall tenor of the evidence pointed to a genuine contractual dispute (see [9(c)] above) between the parties.

Moreover, as noted in Mount Sophia at [37] and [45], the parties’ conduct leading up to a call on a bond and the presence of notice were all relevant considerations. And in the present case, the fact that Sato Kogyo had negotiated with Tactic over this entire period and offered to discount its claim in June 2016 and August 2016 strongly militated against any finding of bad faith (see [8] above). It also could not be said that Tactic was ambushed by Sato Kogyo’s demand on 3 October 2016 given that Sato Kogyo had indicated that it might call on the Bond since May 2014 (see [5] above).

As a parting point, it ought to be emphasised that the Bond was an on-demand bond (see [3] above) that Sato Kogyo had the right to call on, subject to limited exceptions like fraud and unconscionability. As noted in York International Pte Ltd v Voltas Ltd [2013] 3 SLR 1142 at [32], a performance bond was a mechanism by which parties redistributed the risk of inter alia insolvency. Where the parties had agreed on the allocation of risk, the court should not lightly interfere with the parties’ agreement (see [9(a)] above). This principle applied here where one of the parties was undergoing liquidation, which was the case for Tactic.