Introduction
8.01 Independent guarantees are used in many fields, including international trade, to guarantee the performance of one party’s obligations under a contract.
The term ‘independent guarantee’ is a broad one which encompasses ‘performance guarantees’, ‘performance bonds, and similar obligations known by various names, including ‘demand guarantees’, ‘on-demand bonds’, and ‘standby letters of credit’, depending on their precise use and geographical context.1 These terms can often be used interchangeably, although more precise usage may be appropriate if the intention is to refer to a particular type of independent guarantee because its detailed and distinctive features are relevant to the transaction at hand.2 In essence, they all refer to an autonomous obligation by the issuer of the guarantee or bond to pay a sum of money to the beneficiary provided that certain requirements are met (usually the making of a conforming demand). Without intending to connote any difference in the nature of the relevant obligations, this chapter uses the term ‘independent guarantee’ when discussing the general features of these instruments (to reflect generic terminology) and the term ‘performance bond’ when discussing Singapore and UK law (to reflect the terminology that is commonly used in these two jurisdictions).8.02 The earliest UK cases on performance bonds established the proposition that the principles relating to these instruments are similar to those relating to commercial letters of credit (‘commercial LCs’).3 In a commercial LC, the issuing bank must pay as long as the beneficiary presents documents that comply with the requirements of the credit,4 regardless of any dispute between the buyer and the seller in the underlying sale contract.
The equivalent principle in a performance bond is that the bank must honour its obligations under thebond when a conforming demand is made, regardless of any dispute in the underlying contract between the obligor (referred to hereafter as the ‘applicant’) and the beneficiary. The parallel of presenting complying documents (such as bills of lading, insurance certificates, and commercial invoices) in a commercial LC is the making of a conforming demand (a simple written demand may be sufficient) by the beneficiary under a performance bond. This reflects the autonomy principle, traditionally to be departed from only in the event of fraud.[714] Where this exception applies, a court may grant an injunction to restrain the beneficiary from being paid on the bond even when he has presented a conforming demand.
8.03
In Singapore, the development of the unconscionability exception is a departure from the traditional position outlined above, a variation which the courts felt was justified by the special features of performance bonds, as discussed below. There is arguably no legal reason to apply exactly the same principles to performance bonds as to commercial LCs.[715] Performance bonds are relatively new instruments that first came to be used in the 1970s,[716] compared to commercial LCs with their hundreds of years of history. Within the broad framework of autonomy, courts should be able to refine the principles applying to commercial LCs to suit the different nature of the performance bond. As a Singapore judge has observed, ‘[a] performance bond is as good as cash as between [applicant] and [beneficiary] only because that is the effect of the English decisions and not because it is the cause of such decisions’.[717] It must be noted, as should be clear from the foregoing discussion, that the unconscionability exception in Singapore is applicable only to performance bonds and not to commercial LCs.
8.04
This chapter examines the grant of injunctions to restrain calls on performance bonds on the basis of unconscionability,[718] focusing on the law and practice developed by the Singapore courts, and exploring this comparatively, particularly in relation to UK law.
Because of Singapore’s legal history, English cases are widely cited in Singapore, and the law is largely similar in many areas of commercial practice, save for differences in detail.[719] One area of distinction is the willingness of the Singapore courts to grant injunctions to restrain calls on performance bonds based on unconscionability, which is a deliberate departure from the UK position where fraud is the only clearly established ground for doing so.II.