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Contracting out of unconscionability

In CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and another and another appeal and another matter [2015] SGCA 24, the Singapore Court of Appeal (CA) has ruled that parties can contractually exclude the unconscionability exception to calls on on-demand bonds.

Under Singapore law, a party may seek the assistance of the Courts to restrain calls on on-demand bonds on two grounds - on the ground of fraud, or on the separate ground of unconscionability.

In contrast, under English law, unconscionability is not a ground to restrain calls on bonds and a party may do so only on the single ground of fraud.

By this ruling, the CA has upheld the right of parties to a construction contract to expressly agree to limit the circumstances in which a contractor is entitled to seek an injunction restraining a call on a performance bond to fraud only. The Singapore Courts will respect the parties' freedom to agree to such terms and enforce the restriction where it is reasonable.

It should be noted that this decision comes in the wake of an earlier decision by the High Court, which in effect allowed parties to try and contract out of the unconscionability exception by providing for the performance bond to be governed by English law instead of Singapore law (See Shanghai Electric Group Co Ltd v PT Merak Energi Indonesia & Anor (2010)).

The CA's decision in the present case in effect acknowledges that parties are free to expressly contract for what they could previously do only indirectly.

Going forwards, it is to be expected that a clause which similarly seeks to bar challenges to the security of an on-demand bond on the ground of unconscionability, will become as ubiquitous as the use of performance bonds in the Singapore construction industry.

The facts of the case

A clause in the construction contract between Asplenium Land Pte Ltd (Asplenium, the developer of a residential project in Singapore) and CKR Contract Services Pte Ltd (CKR, the main contractor in that project) stipulated that CKR was not entitled to restrain Asplenium on any ground except in the case of fraud (see relevant clause, in box).

Disputes arose between Asplenium and CKR, and Asplenium called upon the bond provided by CKR. In the face of the Clause, CKR sought to restrain Asplenium's call on the ground of unconscionability.

This raised the intriguing legal question of whether the courts would uphold an agreement between parties to exclude the unconscionability exception to calls on on-demand bonds.

At the first instance, the High Court (HC) held that the Clause was unenforceable for three reasons:

(a) the Clause was an impermissible attempt to oust the equitable jurisdiction of the court;

(b) the Courts' equitable power to grant injunctions could not be curtailed by contract; and

(c) the unconscionability exception was based on policy considerations which cannot be brushed aside by contract.

The HC's view was perhaps predicated on the policy reaction to the inequitable results that may sometimes arise from a strict adherence to the contractual position under the bond. This had led to the creation of the unconscionability exception to on-demand bonds.

Given its obvious implications on industry practice, the decision by the CA was closely watched.

The CA decision

On appeal, the CA overturned the HC on the part of the HC's decision that the Clause was unenforceable.

CKR's arguments on appeal were two-fold :

a) First, the Clause was an ouster of the jurisdiction of the court; and

b) Second, Singapore law had "developed a public policy" of protecting contractors from oppressive calls on on-demand bonds which could not be contracted out of.

The CA held that the Clause did not oust the court's jurisdiction, but rather limited the equitable remedies (of injunction) available to CKR. It was therefore akin to an exemption clause, which is not void per se.

The CA also held that public policy will void contracts only on rare occasions. The "policy" that underlies the unconscionability exception is different from the "public policy" which renders contracts void and unenforceable. There was therefore no reason to find that the Clause is unenforceable as it is contrary to public policy.

At the same time, the CA was careful to highlight that such a Clause could potentially be unenforceable, if, depending on the facts, it were to be unreasonable under the Unfair Contract Terms Act (Cap 396) (the UCTA). This was not an issue which arose in the appeal.

What this means for the construction industry

On-demand or unconditional performance bonds are an ubiquitous mode of security for parties "up the line" in construction contracts in Singapore.

The Clause in question:

In keeping with the intent that the performance bond is provided by [the contractor] in lieu of a cash deposit, [the contractor] agrees that except in the case of fraud, [the contractor] shall not for any reason whatsoever be entitled to enjoin or restrain:

(a) [the employer] from making any call or demand on the performance bond or receiving any cash proceeds under the performance bond; or

(b) [the bank] under the performance bond from paying any cash proceeds under the performance bond

on any ground including the ground of unconscionability.

(the Clause)

The availability of a potential avenue to sidestep the unconscionability exception (subject to unfair contract terms legislation) further strengthens the position of the beneficiary of the bond.

It is to be expected that, going forwards :

a) employers will be keen to include in their construction contracts a clause which seeks to bar challenges to the security of an on-demand bond on the ground of unconscionability; and

b) this will lead to a chilling effect on parties seeking to restrain payment upon on-demand bonds on the ground of unconscionability.

That said, there is a need to be careful with the language of the clause to be inserted, which will need to be carefully tailored and calibrated to the facts. In particular, they will need to come up with a way to try and avoid the clause being held to be unreasonable under the UCTA.