Limits of Unconscionability and No-Injunction Clauses
A. Unconscionability Not Applicable to Commercial LCs
8.60
Will the unconscionability exception come to be applied in commercial LC cases in Singapore in future, and should it be? This author's view is that it will not, and should not be.
The policy reasons for the development of the unconscionability exception in Singapore are based purely on the nature of performance bonds and will not justify applying the same exception to commercial LCs. Commercial LCs have been regarded for hundreds of years as ‘the lifeblood of international commerce'[852] and treated as ‘cash in hand',[853] and interfering with payment under a commercial LC would be equivalent to interfering with the primary obligation of the debtor to make payment under its contract with the beneficiary. For these reasons, the Singapore courts have reiterated that ‘payment under a letter of credit should not be disrupted or restrained by the court in the absence of fraud',[854] and the author would respectfully agree. This is, however, different from the situation in countries like Australia, where the unconscionability exception applies to both performance bonds and commercial LCs.B. Unconscionability only Applicable to Injunctions
8.61
Three common situations in which the fraud exception in performance bonds might be relevant, and the different legal rules that apply to each situation, were discussed earlier in this chapter.[855] In contrast, it can be argued that the unconscionability exception is of more limited application in Singapore, as the rationale behind the exception suggests that it will only apply in situations where the applicant applies for an injunction to restrain payment on a performance bond despite a conforming demand by the beneficiary.
This argument is supported by the view that the Singapore courts developed the unconscionability exception ‘because in certain circumstances, even where the account party could not show that the beneficiary had been fraudulent in calling on the bond, it would nevertheless be unfair for the beneficiary to realise his security pending resolution of the substantive dispute’.[856] On this view, the unconscionability exception would not be relevant for settling the final dispute between the parties. Nor, as was postulated by Arab Banking Corp (BSC) v Boustead Singapore Ltd,[857] would it be applicable where the substantive dispute under the primary contract had been finally resolved. In the latter situation, there would no longer be any question of whether it would be fair to allow the beneficiary to receive payment under the performance bond, and the only remaining question would be whether the beneficiary is entitled to such payment.[858] Extrapolating from this, the unconscionability exception will not apply where the beneficiary is suing the bank for non-payment or where the bank is seeking reimbursement from the applicant after paying the beneficiary on the performance bond.C. Excluding the Fraud Exception?
8.62 Asplenium confirmed that a beneficiary can enforce a clause in the underlying contract which prevents the applicant from applying for an injunction to restrain a call on the performance bond on grounds other than fraud. It is interesting to contemplate the parameters of this type of clause. In particular, would a clause that prevents the applicant from restraining a call on a performance bond based on the fraud exception be upheld by courts in Singapore or elsewhere? The possibility of a clause excluding an application for an injunction based on fraud was neither mentioned nor analysed in the Asplenium case.
It has been suggested that indirect support for the position that a clause restricting a call on a bond on the basis of fraud would not be enforceable may be found in the principle that exclusion clauses would not naturally be construed to exclude liability for fraud.[859] However, this argument, based on the proper construction of exclusion clauses, is not squarely applicable in a situation where there is an express clause that prohibits injunctions based on the fraud exception. A direct argument would be that a contractual clause prohibiting the application for an injunction even where there is fraud will itself offend public policy because of the inherent egregious nature of fraud, and therefore be unenforceable. However, even if a clause excluding fraud was found not to be contrary to public policy, it is likely to fail at the next hurdle, which is that it must be found to be reasonable under UCTA.[860] On the other hand, if we return to the rule established in Asplenium, that the effect of this type of clause is to exclude a remedy, a contrary argument would be that a clause excluding the applicant from seeking the equitable remedy of an injunction based on the fraud exception may not be entirely objectionable as the applicant might still be able to seek other remedies to obtain redress for the beneficiary’s fraud. Despite the theoretical arguments about whether a clause related to fraud would be enforceable, it would seem most unlikely that a clause to this effect would find its way into many contracts. Such a clause is likely to cause the relationship between the parties to start off badly, and also will hardly be necessary given how difficult it is to obtain an injunction based on the fraud exception.VII.
More on the topic Limits of Unconscionability and No-Injunction Clauses:
- Limits of Unconscionability and No-Injunction Clauses
- Hare C., Neo D. (eds.). Trade Finance: Technology, Innovation and Documentary Credit. Oxford University Press,2021. — 417 p., 2021