Singapore Court of Appeal upholds stay in favour of arbitration, affirms nature of unconditional on-demand performance bonds: Allen & Gledhill

27 September 2024

Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd & Anor [2024] SGCA 30

While affirming the nature of unconditional on-demand performance bonds, the Singapore Court of Appeal in Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd & Anor dismissed the appeal by Star Engineering Pte Ltd (“Contractor”) against the High Court’s decision to grant a stay of proceedings in favour of arbitration concerning its dispute with Pollisum Engineering Pte Ltd (“Employer”). The court also upheld a case management stay in relation to an insurance company (“Insurance Company”), being the issuer of an unconditional on-demand bond (“PB”) in favour of the Employer.

Background

The Employer engaged the Contractor for the design, construction, and maintenance of a construction project (“Contract”). Under the Contract, the Contractor provided the PB which was issued by the Insurance Company.

After disputes arose between the Employer and the Contractor, the Employer gave notice to terminate the Contract and made a demand for payment under the PB. The PB contained a non-exclusive jurisdiction clause in favour of the Singapore courts, while the Contract included a typical widely worded arbitration agreement between the Employer and the Contractor.

The Contractor then filed an application seeking orders to:

restrain the Employer from receiving payment under the PB;
restrain the Insurance Company from making any payment under the PB;
restrain the Employer from making any further demand under the PB; and
in the event the Employer receives any monies under the PB from the Insurance Company, restrain the Employer from using the sums received, and for those sums to be repaid to the Insurance Company.

The Contractor also obtained temporary restraining orders on these terms.

Subsequently, the Employer applied for a stay of the proceedings in favour of arbitration, which an assistant registrar dismissed. On appeal, the General Division of the High Court granted the stay sought by the Employer in favour of arbitration, and a case management stay in relation to the Insurance Company. The Contractor appealed against the stay orders.

Court of Appeal decision

The Court of Appeal dismissed the appeal, affirming the nature of unconditional on-demand bonds. Such bonds are independent contracts between the beneficiary and the issuer, and disputes under the underlying contract typically do not affect the issuer’s obligation to pay on demand.

The court noted that it would only grant an injunction interfering with the obligation of the issuer to honour the demand where the demand is made fraudulently or where it would be unconscionable for the party to make a demand under the performance bond, the latter ground having been contractually excluded in this case. The court further noted that when the Contractor sought and obtained the temporary restraining order, the Employer did not apply to set aside that order, which suggested that it accepted that there was strong prima facie evidence that it had acted fraudulently or unconscionably in making the demand. Instead, by seeking a stay in favour of arbitration, the Employer effectively treated the PB as a conditional bond, payable only upon proof of its entitlement.

In the circumstances, the court found no grounds to prevent the matter from proceeding to arbitration. It was also not relevant whether the demand for payment under the PB fell within the scope of the arbitration agreement, as the Employer did not seek immediate payment under the PB and was agreeable to have its ultimate entitlement resolved in arbitration.

The court stated that if the Employer wished to receive the amount it demanded, it should commence the arbitration proceedings seeking a declaration of its entitlement and in defence, the Contractor will have to adduce evidence to show that is not the case. On the other hand, if the Contractor claimed to be owed money, it had every reason to commence the arbitration expeditiously.

Comment

The Court of Appeal’s decision reaffirms the fundamental principles governing unconditional on-demand performance bonds, emphasising their independence from the underlying contract and related disputes and also reinforcing the certainty and reliability these financial instruments are designed to provide. This case also serves as an important reminder to parties to differentiate between a party’s right to receive payment under an unconditional on-demand performance bond, and parties’ entitlement under the underlying contract, so that appropriate relief may be sought from the court when a call on an unconditional on-demand performance bond has been made.

Reference materials

The judgment is available on the Singapore Courts website www.judiciary.gov.sg.