Singapore Court of Appeal: Arbitration against Stay on Invocation of an Un-Conditional On-Demand Payment Bond
In Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd [2024] SGCA 30, the Singapore Court of Appeal dealt with an on-demand unconditional payment bond wherein the Court of Appeal reiterated the position of law as to when an injunction against its invocation can be granted by the Court and in case its invocation is stayed then whether invoking arbitration under the underlying contract is an appropriate remedy. While doing so, the Court of Appeal also dealt with the issues of fraud in invocation of such bond as an exception which permits court interference, stay of court proceedings in favour of arbitration and chances of parallel proceedings if a lis related with payment under bond is referred to arbitration vis-a-vis a court injunction against its invocation.
Factual Matrix
Parties entered into an EPC Contract as per which the Appellant (‘Contractor’) furnished an on-demand unconditional performance bond to the Respondent (‘Employer’) that was issued by is Great Eastern General Insurance Ltd. (‘Great Eastern’). It is noteworthy that the EPC Contract and the bond contained different dispute resolution clauses. While the bond provided that “the parties agree to submit to the non-exclusive jurisdiction of the Singapore Courts”, the EPC Contract provided that any dispute between the parties shall be referred to arbitration.
The bond provided that any dispute which the Contractor has in relation to a call or demand on the bond, receipt, payment or the Employer’s utilisation of the cash proceeds shall be resolved in accordance with the arbitration clause of the EPC Contract. The bond further provided that interference with a demand for payment under the bond was only permitted on the ground of fraud and any such interference should be sought from the court pursuant to the dispute resolution clause in the bond. Furthermore, as per bond, “any dispute” in relation to the call, demand, receipt, payment or utilisation of the cash proceeds would be resolved by an arbitrator who would determine whether the Employer had received cash proceeds from Great Eastern greater than the amount of loss or damage actually incurred by it after it had received the cash proceeds.
Disputes arose between the parties and the Employer invoked payment under the bond. In response, the Contractor filed proceedings in the Singapore Court seeking restrainment of Employer from invocation of bond and from making any further demands. The Contractor further sought restrainment against Great Eastern from making any payment under the bond. The Contractor secured an ex parte temporary restraining order against the Employer from the High Court.
The Employer albeit has not applied for vacation of stay order, filed a separate application seeking stay of the court proceedings initiated by the Contractor in favour of arbitration. The Employer’s application was dismissed which resulted in the Employer filing an appeal. The appeal was allowed by the Singapore High Court and the proceedings initiated by the Contractor were stayed in favour of arbitration and the Court also passed a case management stay against Great Eastern. This decision of the Singapore High Court was appealed and decided by the Singapore Court of Appeal in the present proceedings.
Note: A case management stay is a stay granted in a situation where the particular issue to be resolved under the arbitration proceedings is different from that raised in the court proceedings.
Parties Contentions
The Contractor primarily contended that the bond had been made fraudulently and further that the issues under the bond would not fall within the arbitration agreement provided under the EPC Contract. The Contractor also believed that the disputes between the three parties are overlapping and if they are referred to different dispute resolution mechanisms there are high chances of inconsistent findings leading to undermining of confidence in the judicial administration. The Contractor also highlighted that Employer’s case of invoking arbitration is immature as the Employer has not even commenced arbitration and has not even formulated its claims, quantified its losses or filed any notice of arbitration. The Contractor justified its action of not invoking emergency arbitration since as per the Contractor even if emergency arbitration would have been invoked, Great Eastern being a third party would not have been bound by injunction, if any, granted by it more so when the demand for payment has already been invoked by the Employer.
Per contra, the Employer denied fraud and contended that Contractor’s objection to the payment demand raised by the Employer falls squarely within the arbitration agreement. As per Employer, it is immaterial that Great Eastern is not a party to the arbitration agreement because it is a mere functionary and has no direct interest in the outcome of the dispute between the parties to the EPC Contract. Further, the Employer argued that there is no sufficient reason why the matter should not be referred to arbitration and there was no urgency that would prejudice the Contractor to the extent that it would warrant a breach of the arbitration agreement. As per the Employer, the High Court was correct in its findings and the issues between the parties could be dealt with in arbitration. The Employer also contended that as per the terms of bond, the Employer is not required to justify its demand under the bond and does not need to commence arbitration to establish that it is entitled to call on the demand.
Position of Law
In this regard, the Court of Appeal reiterated the settled position of law as under:-
• Under an unconditional on-demand bond, a financial institution, such as a bank or insurance company, undertakes to pay a certain sum of money under certain conditions, the most common of these being a simple demand for payment made by the beneficiary of the bond (Chian Teck Realty Pte Ltd v SDK Consortium and another [2024] 3 SLR 1031 (“Chian Teck”)
• An on-demand bond has been described as being “as good as cash” because it is intended to provide certainty of payment (Chian Teck at [1] citing Shanghai Electric Group Co Ltd v PT Merak Energi Indonesia and another [2010] 2 SLR 329.)
• It is essentially a promissory note payable on demand. The bank issues such a bond on the instructions of its customer (the bond applicant and account holder) who, in turn, furnishes security to the bank for the full amount. The account holder procures such a bond to act as good security for due performance of the underlying contract between itself and the beneficiary. As such, a performance bond acts as a “risk distributing device” which transfers the risk of default from the beneficiary to the account holder. (Master Marine AS v Labroy Offshore Ltd and others [2012] 3 SLR 125 (“Master Marine”)
• Bank’s obligation to pay in accordance with the terms of the agreement is entirely independent of the underlying contract between the bank’s customer and the beneficiary; the two are autonomous contracts vis-à-vis different parties (albeit with obligations that are closely related).
• As a general rule, the bank will not concern itself with the merits of any underlying dispute between the beneficiary and its customer, or with the factual accuracy or otherwise of any statement made to it by the beneficiary or the genuineness of any document presented to it in order to obtain payment. (G Andrews and R Millett, Law of Guarantees (Sweet & Maxwell, 6th Ed, 2011 at para 16-001)
• When payment is to be made against documents, there is no requirement that any assertion in the documents be correct in law. (Meritz Fire and Marine Insurance Co Ltd v Jan de Nul NV [2011] 2 Lloyd’s Rep 379).
• The court will only grant an injunction interfering with the obligation of the financial institution to honour the demand where the demand is made fraudulently, on the ground that “fraud unravels all” (Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd [2016] 3 SLR 557 (“Arab Banking”) or where it would be unconscionable for the party to make a demand under the performance bond (GHL Pte Ltd v Unitrack BuildingConstruction Pte Ltd and another [1999] 3 SLR(R) 44.
• The burden of proof falls on the party seeking to restrain payment being made pursuant to a demand to establish a clear case of fraud or unconscionability and mere allegations will not suffice (Bocotra Construction Pte Ltd and others v Attorney-General [1995] 2SLR(R) 262 (“Bocotra”)
• In order to avail the fraud exception, the aggrieved party must establish a strong prima facie case that the beneficiary called on the bond:
• with the knowledge that its demand was invalid;
• without belief in the validity of its demand; or
• with indifference to whether the demand was valid or not (Bintai Kindenko Pte Ltd v Samsung C&T Corp and another [2019] 2 SLR 295 (“Bintai Kindenko”)
• The standard of proof for fraud requires the plaintiff to show that the only realistic inference to be drawn on the available evidence was that the beneficiary had no honest belief that it was entitled to receive payment or was recklessly indifferent as to whether it had a right to receive payment (Arab Banking).
• It is equally impermissible to interfere with payment under a performance bond by seeking an injunction against the financial institution, as it would be to interfere by restraining the beneficiary from seeking or receiving payment.
• 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. (Royal Design Studio Pte Ltd v Chang Development Pte Ltd [1990] 2 SLR(R) 520)
• Where a temporary restraining order is sought, often without notice to the other party, which interferes with the performance of the rights and obligations arising under an unconditional bond, the burden falls on the party seeking the restraining order to show that it has grounds for so interfering.Those grounds are strictly limited and require proof of the matters to a strong prima facie standard.
Held
As per the Court of Appeal, the lis between the parties has become needlessly tangled because of erroneous positions taken on both sides explained by the Court of Appeal as under:-
• On a true construction of the terms of the bond, it is clear that the bond was an unconditional bond payable on demand and the Great Eastern as the issuer of such bond was not under any duty to inquire into the circumstances.
• That prima facie standard is adopted for seeking restraining order against invocation of an unconditional bond because it is emphatically not the function of the court faced with such an application to make an ultimate determination of the substantive entitlement of the party demanding payment to receive and retain the money in question. That will depend on the resolution of the merits of the underlying dispute between the parties to the underlying contract.
• However, where a restraining order is sought that interferes with payment under a bond, the court is not concerned at all with that underlying dispute. It is rather concerned with the separate question of whether there is sufficient ground to interfere at all, even temporarily, with the beneficiary’s right to be paid under the bond.
• The presumptive position is that there will be no such interference unless sufficient evidence is adduced of the possibility of the demand itself being fraudulent or, where applicable, unconscionable in the sense described above.
• The Employer seems to have missed this distinction and therefore, when the Contractor sought an ex parte interim injunction against invocation of on-demand unconditional bond, the Employer should have applied to set it aside rather than invoking arbitration for deciding issue of right to be paid.
• By doing so, the Employer has in effect converted its position from that of a party holding an unconditional on-demand bond into something akin to that of a party holding a conditional bond payable only upon proof of its entitlement to receive payment thereunder.
• This is a consequence of its having sought a stay in favour of arbitration, seemingly to determine the question of its entitlement to be paid all or part of the sum demanded under the bond. Having taken that position, it is now too late for Employer to change course.
• However, it is incumbent on a party seeking a stay of proceedings to show that it stands ready to arbitrate the matter. Employer, having sought a stay of invocation of bond proceedings in favour of arbitration, have then added to the confusion of its situation by now saying in this appeal that it is for the Contractor to commence proceedings in arbitration. In doing so, it, as a practical consequence, further delays any entitlement it may have to receive payment under the bond.
• By the action of the Employer, the bond is in effect being treated by the parties as a conditional bond, payable upon proof that the Employer is actually entitled to payment of the sum demanded.
• There is in truth no longer any live dispute in relation to Great Eastern. In line with this, Great Eastern has not taken any position in these proceedings and has not filed any submissions.
• If the Contractor succeeds in the arbitration, by establishing that no part of the sums demanded are due to the Employer, that will be the end of the matter. If, on the other hand, the Contractor is found to owe part or all of the sums demanded, that will be when Great Eastern may be called on to make payment. There is therefore no real risk of inconsistent findings.
• Given that the substantive dispute is only between the Employer and the Contractor, and because of the stance taken by the former, there is no ground at all for the matter not to proceed to arbitration.
• The question as to whether the Employer is entitled to received payments under the on-demand unconditional bond is clearly within the scope of the arbitration agreement in the EPC Contract.
• This is in the face of the clear language of the overarching dispute resolution provision referring disputes under the Contract to arbitration, and the Particular Conditions, which deliberately modified the dispute resolution provision to specifically refer all disputes between the parties to the Contract relating to any demand on the bond to arbitration.
• As to who should commence the arbitration, if the Employer wishes to be paid the amount it has demanded, it should commence the proceedings seeking a declaration that it is entitled to be paid, and in defence, the Contractor will have to adduce evidence to show that is not the case.
• On the other hand, if the Contractor is out of pocket, as it claims, it has every reason to commence the arbitration expeditiously.
Accordingly, the Court of Appeal dismissed the appeal and upheld the decision of the High Court.
Comment
The approach adopted by the Singapore Court of Appeal manifests that parties should be vigilant about the correct remedy available to them in a particular situation. In this case, even though the Employer’s application to stay court proceedings in favour of arbitration succeeded yet the approach adopted by the Employer in this regard was tainted with fallacies. One of the ways of ascertaining as to whether the proceedings a party is intending to initiate are correct or not is to first analyse what is the ultimate remedy or relief that such party is seeking. In the present case, even though the Employer was invoking arbitration clause under the underlying contract for a dispute under the bond, the remedy the Employer should have been ideally seeking was that the demand raised by him under bond is not incorrect and is within the four corners of the on-demand unconditional bond. This could have probably saved him from arbitration costs which was not immediately required and could have been triggered only if such dispute would have been referred to arbitration by the Contractor. In certain limited scenarios, by adopting such “ill-advised” strategies (in the words of the Singapore Court of Appeal), a party may loose the otherwise available strategic advantage of being a claimant to an arbitration at times.