In Ryobi Tactics Pte Ltd v UES Holdings Pte Ltd and another and another matter [2019] SGHC 11, the Court considered whether a performance bond could extend to a contract or project other than the contract or project pursuant to which the performance bond was given.
The plaintiff subcontractor was engaged by the defendant main contractor for three different construction projects, for which a total of four subcontracts were entered into between the parties. Under each of the subcontracts, performance bonds had to be furnished. Although there was a dispute in only one of the subcontracts, the defendant sought to call on all four of the performance bonds. The plaintiff then applied for an injunction to restrain the calls on the grounds of fraud and unconscionability. The defendant, on the other hand, argued that it had a contractual right to call on the other performance bonds to set off against any moneys due to the plaintiff by relying extensively on Clause 17.1 of the underlying subcontracts, which provided as follows:
17. Right of Set-off
17.1 The Main Contractor shall notwithstanding anything contained in this Sub-Contract Agreement be entitled to deduct from or set-off against any monies due or become due to the Sub-Contractor under the Sub-Contract (including without limitation any Retention Sum) or under any other contract whatsoever between the Main Contractor and the Sub-Contractor for any sum or damage..., charges, expense..., liability, debt or financial loss suffered by the Main Contractor due to or arising from the negligence, default, breach or omission of the Sub-Contractor arose [sic] under the Sub-Contract or any other contract whatsoever between the Main Contractor and the Sub-Contractor.
In granting the injunction, the SGHC held that "a prior crucial issue which had to be resolved before one even considered the question of unconscionability ... was whether the performance bonds in question were engaged in the first place". In this regard, it was held that "where a performance bond arises expressly out of a particular contractual relationship, calls made on the basis of other contractual relationships would clearly fall outside of the scope of the performance bond", unless the terms specifically allowed for it. Turning its attention to the terms of the performance bonds in question, the Court concluded that it was clear from the terms that the performance bonds could only be called for matters arising out of the corresponding underlying contract.
The Court then proceeded to consider the defendant's reliance on Clause 17.1 and held that "there was no room to expand the scope of those performance bonds by reference to cl 17.1 or other provisions in the underlying subcontracts" since the performance bonds were not ambiguous. Further, Clause 17.1 would not even be applicable as it is not a set-off of moneys due from defendant to the plaintiff. In fact, the defendant was the beneficiary of the performance bonds, and not the plaintiff.
The key takeaway from this case is therefore that a performance bond can only be called under the terms within the four corners of the performance bond. The terms in the underlying contracts will also have no effect on the scope and applicability of the performance bonds, unless parties have clearly and expressly included any such terms within the performance bond.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
