Ryobi-Kiso (S) Pte Ltd v Lum Chang Building Contractors Pte Ltd and another

Quentin Loh J:

[2] The plaintiff is a piling specialist (“the Plaintiff”) while the first defendant is a civil and building contractor (“the 1 Defendant”). The second defendant is an insurance company (“the 2 Defendant”) which issued the performance bond that is the subject of this application.

[3] The 1 Defendant is the main contractor for Contract 912 viz the “Design and Construction of Station at Bukit Panjang and Tunnels for Downtown Line Stage 2 at Woodlands Road and Upper Bukit Timah”. The employer of the 1 Defendant for Contract 912 is the Land Transport Authority (“LTA”), pursuant to a contract dated 17 June 2009 which the latter entered into with the 1 Defendant (“the Main Contract”).

[4] The Plaintiff was engaged by the 1 Defendant under a sub-contract dated 11 February 2010 (“the Sub-Contract”). The Sub-Contract was for part of the works under the Main Contract.

[5] Pursuant to cl 3(a) of the Sub-Contract, the Plaintiff provided the 1 Defendant with an unconditional performance bond in the sum of $1.88m which was issued by the 2 Defendant on 1 June 2010 (“the Performance Bond”). The Performance Bond was 10% of the Sub-Contract price of $18.8m.

[6] The scope of the works covered by the Sub-Contract is detailed in cl 1 of Part 1 of the Schedule in the Sub-Contract:

The works therefore involved carrying out piling and associated works under the existing Bukit Panjang Light Rail and alongside or nearby busy road junctions and a station box for a future MRT line and station. The road junctions involved busy traffic intersections of Upper Bukit Timah, Woodlands, Bukit Panjang and Choa Chu Kang Roads.

[7] I shall refer to the general scope of the Plaintiff’s works as “the Sub-Contract Works”. The two locations where the Sub-Contract Works were to be performed are described as Donut & Peanuts and Zone 2 Station Box. The completion times for the Sub-Contract Works are spelt out in Part 3 of the Schedule. Work for Donuts & Peanuts was to be completed within 1 April 2010 to 30 September 2010, while work for Zone 2 Station Box was to be completed within 1 March 2010 to 31 May 2011. Clause 5 of Part 3 of the Schedule sets out the liquidated damages for delay in completion of works for Donuts & Peanuts and Zone 2 Station Box.

[8] According to the 1 Defendant, the works for Donuts & Peanuts and Zone 2 Station Box exceeded the maximum time stipulated for completion by 152 days and 332 days respectively. If the Plaintiff is liable for the total number of days which exceeded the relevant completion dates, its total liability would be $7.26m. The 1 Defendant’s Project Director filed an affidavit setting out the delays caused by the Plaintiffs. These include delays in submitting Method Statements and drawings (which were required before approvals could be obtained from the various authorities for works to be carried out), poor planning and mobilisation, 3-months delay in the foregoing for the LTA Development & Building Control Division clearance for works under the Bukit Panjang Light Rail viaduct, using less powerful and slower low-headroom piling equipment where there were no headroom restrictions. Of course, the Plaintiff denied liability for the late completion.

[9] In or about May 2012, the 1 Defendant’s project manager, Mr K S Rao (“Mr Rao”), called the Plaintiff twice, asking them to submit a programme for the next phase of the Sub-Contract Works (“the Stage 4 Works”). Under cl 22(a) of the Sub-Contract, the Plaintiff was obliged to provide information, or programmes, of the arrangements and sequence which it proposed to adopt for the execution of the Sub-Contract Works. It should be noted that the 1 Defendant had already previously asked the Plaintiff for such a programme, for instance, by a letter dated 12 April 2012. The Plaintiff’s reply then was that pursuant to a letter by the 1 Defendant dated 12 July 2011 (“the 12 July 2011 Letter”), the Stage 4 Works had been deleted from the Sub-Contract Works. A series of correspondence then followed in April in which the 1 Defendant insisted that there was no deletion and the Plaintiff insisted the converse. However, at the time of Mr Rao’s telephone calls, the Plaintiff stood by its position that it was not carrying out the Stage 4 Works as those works had been deleted from the Sub-Contract Works unless they were treated as a variation for which additional payment would be required (see [11] below).

[10] I digress for the moment to explain the significance of the 12 July 2011 Letter. That letter was sent by the 1 Defendant to remind the Plaintiff to complete certain piles by 30 September 2011. This was just another letter in a series of letters from the 1 Defendant to the Plaintiff recording the poor performance of the Plaintiff which was causing delays. The 12 July 2011 Letter ended with:

The Plaintiff treated the 1 Defendant’s employment of Zap Piling Pte Ltd (“ZPPL”) pursuant to the 12 July 2011 Letter to do part of the Sub-Contract Works as a breach of contract. Nevertheless, the Plaintiff and ZPPL continued to carry out their respective parts of the Sub-Contract Works.

[11] However, some 10 months later, when it came to the Stage 4 Works (which were part of the Sub-contract Works), the Plaintiff told the 1 Defendant that the scope of the Sub-Contract Works had been varied as a result of the 1 Defendant’s employment of ZPPL such that the Stage 4 Works would be considered a variation for which additional payment was required. The Plaintiff forwarded to the 1 Defendant its proposed quote and schedule of the programme for the Stage 4 Works on 4 June 2012 which showed that the works would extend to mid-August 2012. On the same day, the 1 Defendant terminated the Sub-Contract with the Plaintiff. The Plaintiff commenced the first adjudication application on 7 June 2012 for security of payments of $5.37m as the total sum of Progress Payment No 27 under the Sub-Contract (“AA SOP 52”). The Plaintiff commenced a second adjudication application for another $4.52m in relation to payments for another subcontract relating to the construction of diaphragm walls (“AA SOP 53”). I shall refer to AA SOP 52 and AA SOP 53 collectively as “the Adjudications”.

[12] The 1 Defendants point out that they were initially forced to take some work out of the Plaintiff’s hands and engage ZPPL as the Plaintiff was seriously delayed in the performance of their obligations. When it came to the Stage 4 Works, it was due to commence on the 11 June 2012. There was a planned major road diversion, arranged with the various authorities, from 10 June 2012 which involved the busy Upper Bukit Timah, Woodlands, Bukit Panjang and Choa Chu Kang road junction. It appears that these works around this diversion had to be completed by July 2012. Yet, at this crucial point in time, according to the 1 Defendant’s case, the Plaintiff held them to ransom by making a claim that the Stage 4 Works was a variation and which they said would extend into mid-August 2012.

[14] On 13 July 2012, the 1 Defendant called on the Performance Bond (“the Call”) on the grounds of the Plaintiff’s breaches of the Sub-Contract. The Plaintiff then commenced these proceedings to restrain the 1 Defendant from receiving the proceeds of the Call.

[15] On 27 July 2012, the Plaintiff commenced the present proceedings seeking, inter alia, a declaration that the 1 Defendant be restrained from receiving payment under the Call, and that the 2 Defendant be restrained from making payment pursuant to the Call. I should just add that the substantive dispute(s) between the parties is subject to an ongoing arbitration which was commenced on 27 September 2012. When I dismissed the application, I did say to counsel that the substantive dispute(s) in this matter has to be resolved by arbitration.

[16] The Plaintiff contended that the Call was unconscionable as there was a genuine dispute as to whether the 1 Defendant had breached the Sub-Contract either by removing part of the works under the Sub-Contract Works to be performed by ZPPL, or by terminating the Sub-Contract altogether. The Call, in the Plaintiff’s view, was not in good faith, clearly oppressive, and should be construed as a bullying tactic. Even though the Plaintiff insisted that it did not know the reason why the 1 Defendant issued the Call, it speculated that the Call appears to be vindictive. The Plaintiff pointed to the decisions from the Adjudications on 10 and 12 July 2012 in which the 1 Defendant was ordered to pay the Plaintiff $1.86m as a possible trigger for the Call which happened on 13 July 2012, the day after the second adjudication decision.

[18] Whatever label the Plaintiff attached to the 1 Defendant’s conduct in making the Call, it is clear that the Plaintiff’s case is founded on unconscionability. The concept of unconscionability in the context of restraining calls on performance bonds, as accepted in Singapore by the Court of Appeal in Dauphin Offshore Engineering & Trading Pte Ltd v The Private Office of HRH Sheikh Sultan bin Khalifa bin Zayed Al Nahyan [2000] 1 SLR(R) 117 (“Dauphin Offshore”) at [45], involves:

[19] Instances of when it would be considered unconscionable to call on a performance bond were helpfully summarised by the Court of Appeal in Dauphin Offshore (at [46]):

In the cases cited above where the call of the bond was considered unconscionable, either the beneficiary of the performance bond had by its own default contributed to the circumstances which founded the call, or both parties were wholly innocent. Evidently, it takes more than a mere default (ie mere breaches of contract) by the beneficiary to sustain an argument on unconscionability. In this regard, I note the high and strict standard of proof required of the applicant seeking the injunction which has been consistently applied by the Court of Appeal (Anwar Siraj and another v Teo Hee Lai Building Construction Pte Ltd [2003] 1 SLR(R) 394 at [11] citing Dauphin Offshore at [57]):

[20] That said, I am cognisant of the severity of calls on performance bonds, and how the court must be mindful of abuse. In GHL Pte Ltd v Unitrack Building Construction Pte Ltd and another [1999] 3 SLR(R) 44, the Court of Appeal said (at [24]):

[21] Ultimately, the juridical basis for an injunction to restrain a performance bond on the ground of unconscionability lies in equity. The key consideration in ascertaining whether a call on a performance bond should be restrained is achieving a fair balance between the interests of the beneficiary and those of the obligor: JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 at [13].

[22] In the present case, having regard to what is a fair balance between the interests of the beneficiary 1 Defendant and the obligor Plaintiff, I took the view that there was no unconscionability on the part of the 1 Defendant in making the Call. The 1 Defendant provided evidence to support its case, inter alia, that the Plaintiff was in serious delay, was using inappropriate equipment outside the appropriate reserve areas which slowed them down, were late in their submissions of Method Statements and drawings, had over-bored some holes and had gone far beyond the contract periods allowed for their Sub-Contract Works. Further, the 1 Defendant showed that the Plaintiff had, in AA SOP 52, made an extravagant claim for of $5.37m for Progress Claim No 27 as the adjudicator only determined a sum of $0.98m due (less than 20% of the claim). Whilst I am not making any decision on these allegations, it does appear to me that there were genuine construction disputes of the type that do arise in such contracts between the parties.

[23] At the outset, I find that the Call falls squarely within the key terms of the Performance Bond read with the Sub-Contract. Clauses 1 and 2 of the Performance Bond provides that it is an unconditional bond which is payable on demand by the 1 Defendant:

[24] Clause 5 further provides:

[25] Clause 3(c) of Sub-Contract provides the purpose for which the proceeds of the Performance Bond may be utilised:

[26] The 1 Defendant has compiled a list of its losses which it says it has suffered as a result of, inter alia, the Plaintiff’s delays in the performance of the Sub-Contract Works and refusal to perform the Stage 4 Works. The total value of these losses, $8.59m, far outstrips the value of the Performance Bond viz $1.88m. Based on the particulars provided in the 1 Defendant’s affidavit evidence, there is no reason for me to disbelief the accuracy of the 1 Defendant’s quantification of its losses. The Plaintiff has alleged that some of these losses, such as the liquidated damages claims, have not crystallised as there is no evidence that the LTA has claimed liquidated damages from the 1 Defendant. Be that as it may, cl 3(c) explicitly states that the performance bond may be used to make good not just losses that have been sustained, but also losses that are “likely to be sustained”. Given that the works were indeed delayed, and that the LTA did not grant any extensions of time, there was no basis for me to infer that the 1 Defendant was not likely to be exposed to a claim for liquidated damages from the LTA.

[27] Certainly, notwithstanding the terms of the Performance Bond and the Sub-Contract, if the Call was actuated under unconscionable circumstances, it may still be restrained. However, I was not convinced that the making of the Call was unconscionable.

[28] The Plaintiff’s allegations of bad faith, oppression, bullying by the 1 Defendant are, even by the Plaintiff’s own case, guesswork. This plainly fails the high and strict standard of proof required of the Plaintiff applicant of the injunction. The strongest allegation by the Plaintiff, viz, that the Call was a retaliatory move by the 1 Defendant following the decision of the adjudicator in the Adjudications to award the Plaintiff a total of $1.86m, was unsubstantiated. While the timing of the Call calls for closer scrutiny, that alone cannot support a claim of unconscionable conduct. More evidence is required. On that premise, I did not find the circumstances, particularly the conduct of the 1 Defendant in the lead up to the Call, to be, in the words of the Court of Appeal in Dauphin Offshore, so “reprehensible or lacking in good faith” (see [18] above).

[29] First, I did not accept that the 1 Defendant’s engagement of ZPPL or the subsequent termination of the Sub-Contract was unfair or lacking in good faith. While I am not making a judgment on the merits of whether the Plaintiff or 1 Defendant had through their respective actions breached the Sub-Contract, I would nevertheless state that on the facts, the 1 Defendant was, as a rational business-minded party, commercially justified in engaging ZPPL to perform a portion of the Sub-Contract Works in the light of the Plaintiff’s numerous and repeated delays in completing the works at Donuts & Peanuts and Zone 2 Station Box. I also bear in mind the obvious restrictions working around an existing viaduct carrying the Bukit Panjang Light Rail and the large traffic junctions and the obvious difficulties in obtaining traffic diversion clearances which would have been subject to strict periods of diversion. I shall refer to a handful of correspondence which is representative of the genuine frustration that the 1 Defendant was experiencing prior to the Call as a result of what it perceived to be the Plaintiff’s untimely performance of its obligations.

[30] The 1 Defendant (either directly or through their solicitors) had written to the Plaintiff on the following occasions, highlighting the former’s concerns over the latter’s delays and the consequences of those delays:

These pieces of correspondence, which are by no means exhaustive, demonstrate that the 1 Defendant had consistently taken the view that the Plaintiff was not meeting its obligations on time, and that the Plaintiff was liable to the 1 Defendant for the consequences of delayed completion. The 1 Defendant’s engagement of ZPPL to carry out the piling works on behalf of the Plaintiff (see [10] above) and termination of the Sub-Contract following the Plaintiff’s refusal to perform the Stage 4 Works must be seen in this context, as must the Call.

[31] Secondly, it ought also to be mentioned that the Plaintiff’s allegation – that the 1 Defendant’s conduct in disallowing the Plaintiff’s extension of time claims is evidence of the 1 Defendant’s bad faith – is contrary to the evidence before me. The Plaintiff’s claims for extension of time in its Claim Report dated 3 May 2011 (“the Claim Report”) were not accompanied with the relevant details, and despite being given time by the 1 Defendant to substantiate its Claim Report, the Plaintiff did not appear to have submitted any further details. This was not the first time that the Plaintiff was reminded to substantiate its claims for extension of time. In any event, the 1 Defendant had evaluated the Claim Report and found that the Plaintiff was not entitled for extension of time for all 16 items in the Claim Report.

[32] Thirdly, in the face of the Plaintiff’s insistence initially on not performing the Stage 4 Works and subsequently only on the condition that those works would constitute a variation, the 1 Defendant could reasonably have taken the view that it was entitled to terminate the Sub-Contract. Even if the 1 Defendant was misapprehended and had wrongfully terminated the Sub-Contract, the law is clear that generally mere breaches of contract by the beneficiary of the performance bond are not, by themselves, unconscionable: Raymond Construction Pte Ltd v Low Yang Tong [1996] SGHC 136 at [5].

[33] Fourthly, even if I had accepted (which I do not) the Call was indeed a “retaliation” by the 1 Defendant following the outcome of the Adjudications, the fact is that the 1 Defendant was entitled to exercise the Call in consequence of its view that the Plaintiff had breached the Sub-Contract. The Plaintiff did not bring to my attention any authority which stands for a proposition that even if a beneficiary is ordinarily entitled to call on a performance bond, it would be unconscionable to do so after the beneficiary has been ordered to pay certain sums to the obligor for other matters arising out of the same contractual relationship. In fact, I cannot see how a call on a performance bond in such circumstances can be considered to be so reprehensible. Taking the Plaintiff’s argument to its logical conclusion, the beneficiary’s right to call on a performance bond is extremely restricted. Not only would it be unconscionable if it the call is made after the beneficiary has been ordered to pay certain sums to the obligor, it could also be unconscionable before such sums were ordered. As long as the obligor had taken some steps to claim certain sums or payments from the beneficiary, the obligor would, if the Plaintiff’s proposition is accepted, be equally justified in asserting that a call then by the beneficiary would be unconscionable on the basis that it is “retaliatory” for the potential sums which the beneficiary might be liable to pay the obligor. I cannot think this is correct.

[34] Finally, I stand guided by the Court of Appeal’s holding in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352 (“BS Mount Sophia”) at [37]:

In my view and in the light of the context which I have illustrated above, the 1 Defendant’s conduct clearly did not fall into any of the above categories of potentially unconscionable conduct.

[36] I need only add, as a postscript, that in an unsuccessful application for a stay of the release of the monies under the Performance Bond pending appeal, Mr Irving Choh, counsel for the Plaintiff, very properly accepted that he could not in good conscience submit to me that if his client succeeds in its appeal, there would be a risk that his client could not recover the sum paid out under the Performance Bond.