The Underlying Contract
8.35 The discussion above emphasised the relevance of the parties' expectations in the underlying contract as a factor influencing the court's decision whether to grant an injunction based on the fraud or unconscionability exception.
This section examines two situations where the courts had to decide whether to grant injunctions based on the express terms of the underlying contract: the first where the demand on the bond was contrary to the terms of the underlying contract, and the second where the application for an injunction by the beneficiary was not permitted under the terms of the underlying contract.A. Demand in Breach of the Underlying Contract
8.36 Even in the UK, which has been very strict with the grant of injunctions, the idea that an injunction will be granted to restrain a beneficiary from being paid where the demand is in breach of a provision in the underlying contract that restricted the circumstances in which a performance bond might be called upon, has taken root independently of the fraud exception.
In Sirius International Insurance Corp v FAI General Insurance Co Ltd (‘Sirius v FAΓ)," the applicant and beneficiary agreed that the beneficiary would not draw down on the letter of credit unless certain conditions were satisfied. The English Court of Appeal was of the view that the conditions were not satisfied, and stated, obiter, that had the beneficiary demanded payment under the letter of credit in breach of the underlying contract despite not having satisfied these conditions, the Court would have granted an injunction to restrain the beneficiary from getting paid.
When the case went up on appeal, the House of Lords was of the view that the conditions were satisfied, and did not consider the question whether a court may grant an injunction to restrain a beneficiary from demanding payment under a letter of credit on the basis that the demand would be a breach of a term in the underlying contract between the applicant and the beneficiary.[808] [809] The Court of Appeal's opinion in Sirius v FAI was, however, relied upon in Simon Carves Ltd v Ensus UK Ltd,[810] where one of the conditions in the underlying contract was that the beneficiary would issue an Acceptance Certificate subject to the plant passing various performance tests. In connection with this, Special Condition 3.7 of the underlying contract stated: ‘Upon the issue of the Acceptance Certificate the performance bond shall become null and void (save in respect of any pending or previously notified claims).' The English Technology and Construction Court decided that, where the parties had agreed to a provision that expressly prevented a beneficiary calling on the bond in certain circumstances and those circumstances had arisen, the call on the bond could be restrained by injunction.8.38
The cases discussed in the paragraphs above show that this exception to the autonomy principle, based on a demand in breach of the underlying contract, is capable of standing alone without having to rely on arguments based on fraud. Nevertheless, a typical fact situation in a case of this type might also support an application for an injunction based on fraud. This is because it is arguably a type of fraud when a beneficiary seeks to call on a performance bond when it knows, or can be taken to know, that the underlying contract forbids it from doing so (for example, because a condition precedent for the call is not satisfied, or because the entitlement to call has come to an end).[811] Making a demand in breach of the underlying contract is an exception that could potentially grow in importance as an alternative to the fraud exception, and this would free the applicant from having to show dishonestly on the part of the beneficiary.
name=bookmark1039>B. Contractual Clauses Excluding Unconscionability
8.39
One development in Singapore has been the use of contractual clauses in which the applicant agrees not to apply for an injunction to restrain payment on a performance bond except on grounds of fraud.
The intention of such a clause is to prevent the applicant from seeking an injunction on the basis of Unconscionability, although their effect is not limited to this situation. These clauses attracted widespread attention after the High Court and Court of Appeal decisions in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd (‘Aspleniumr).[812] Clause 3.5.8 of the underlying construction contract provided as follows: ‘The [applicant] agrees that except in the case of fraud, the [applicant] shall not for any reason whatsoever be entitled to enjoin or restrain (a) the [beneficiary] 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.’[813] The applicant nevertheless applied for an injunction to restrain the beneficiary from being paid on the performance bond, claiming that the call was unconscionable, and justifying its action by arguing that Clause 3.5.8 was unenforceable. The High Court accepted the applicant’s argument, but the Court of Appeal overturned the decision and decided that the clause was valid.[814] This meant that the applicant could only restrain a call on the performance bond in the event of fraud and was not entitled to do so on the ground of unconscionability. As there was no suggestion that any fraud was involved, the Court of Appeal allowed the beneficiary to claim payment on the bond.8.40 Three propositions put forward in the High Court to show that the clause was unenforceable were rej ected by the Court of Appeal. The first proposition was that the clause ousted the jurisdiction of the court and therefore should not be enforced for reasons of illegality and public policy.
Whilst the Court of Appeal agreed that a clause which sought to oust the jurisdiction of the court would be void for public policy, it was of the view that the clause in question did not have this effect.[815] The clause merely placed limitations on the remedies the parties could seek, in the same way that exclusion clauses restricted the aggrieved party’s rights to seek damages, which had never been treated as an ouster of the court’s jurisdiction. For the same reason, the second proposition, that the power to grant injunctions flowed from the court’s equitable jurisdiction which could not be circumscribed or curtailed by contract, was also rejected.[816] The parties had not been denied access to the court as such. The third argument was that the unconscionability exception was based on important policy considerations designed to strike a balance between party autonomy and the regulation of dishonest and unconscionable behaviour, and this could not be brushed aside by agreement. As this argument was made in the context of ousting the jurisdiction of the court, the Court simply highlighted that the policy reasons for developing the unconscionability exception in the context of abusive calls on performance bonds were quite different from the conceptions of public policy that led to contracts that sought to oust the jurisdiction of the court being found to be void and unenforceable.[817] However, the Court did not examine the question of whether the substance of the clause was against the public policy of regulating unconscionable behaviour in relation to performance bonds.The Court of Appeal highlighted that the clause was something that the parties had voluntarily agreed to.[818] Further, the Court pointed out that the clause could potentially be subject to the usual common law and statutory controls that apply to exclusion clauses, such as the need for incorporation, or the Unfair Contract Terms Act (‘UCTA’).[819] This suggestion was put forward by the Court as an idea for further discussion, and it did not express any definite view on the matter, because the issue was not before it.[820]
8.42
Asplenium decided that clauses in which the applicant agrees not to seek an injunction to restrain a call on a performance bond on grounds of unconscionability will not be struck down as being contrary to public policy. This meant that these clauses would only potentially be controlled by the law applying to exclusion clauses.
But the Court of Appeal left open the question of whether such clauses would fall under section 3 of UCTA so as to be subject to the reasonableness test.[821] To bring no-injunction clauses within UCTA, the applicant (unless it is a consumer) must be dealing with the beneficiary’s written standard terms of business. The beneficiary cannot, when itself in breach of contract (for example by calling on a bond when it is not entitled to do so), exclude or restrict the applicant’s liability in respect of the breach, except in so far as the contract term satisfies the requirement of reasonableness.[822] Under UCTA, exclusion of liability includes excluding or restricting any remedy,[823] so the statute would potentially apply to excluding the applicant’s right to seek the equitable remedy of an injunction based on unconscionability.[824] Assuming that UCTA applies, whether the no-injunction clause is reasonable will depend on all the circumstances of the case.[825] An indication of the potential judicial receptiveness to such a clause can be seen from the Court of Appeal's reaction to the clause in Asplenium, where no negative comments were made about it. Further, in that case, the Court of Appeal commented that ‘the policy underlying the operation of performance bonds... does point (on a prima facie level at least) in favour of the reasonableness of such clauses', subject to the precise language and context of the clause.[826]8.43 One puzzling aspect of the Asplenium case is the contradictory attitude of the Court towards unconscionability in two scenarios. An important policy reason for the unconscionability exception in Singapore was to protect the applicant against abusive calls on performance bonds. Yet at the same time, the indication from the Asplenium decision is that the Singapore courts will uphold a provision that allows the beneficiary to call on a bond even if this is unconscionable.
One could argue that the policy of discouraging unconscionable behaviour is one that should be applicable to the question of whether to grant an injunction, as well as the question of whether to uphold a contractual clause that prevents the application for an injunction. However, under the principle of freedom of contract, contractual provisions will generally be upheld unless they fall into well-established situations that are policed by the courts. One of these is under the unfair contract terms legislation, discussed above. Contractual obligations that are against public policy will be policed under the general category of common law illegality. While it may be desirable for the courts to incorporate the policy of protection against abusive calls on performance bonds when it exercises its equitable jurisdiction to grant injunctions, it may not be equally justifiable to do so in order to render unenforceable a contractual provision that has been agreed to by the parties. The differing treatment of the two situations (the grant of an injunction versus the striking out of a contractual clause) confirms the assertion made earlier in this chapter that the courts look at the expectations of the parties in the underlying contract when deciding whether an injunction should be granted. In the absence of a restrictive clause, the applicant is entitled to expect the beneficiary to act in good conscience. On the other hand, if the applicant agrees for a restrictive clause to be included in the contract, he expects and accepts that it may be possible that the beneficiary may act unconscionably, but he is voluntarily giving up his rights to be protected against bad behaviour by the grant of an injunction on this basis. The inclusion of a no-injunction clause does not necessarily mean that the beneficiary has an intention to behave unconscionably, or that it wishes to give itself the option of doing so. Having to defend injunction proceedings which may be ill-conceived wastes time and resources, and it is understandable that a beneficiary may wish to avoid being subject to this.8.44 Asplenium gives useful insight into the way in which the Singapore courts approach their jurisdiction to grant injunctions as well their attitude towards balancing fairness with the party autonomy and commercial certainty. The decision is a very significant one. It means that where a ‘no-injunction' clause is incorporated into the underlying contract, the applicant will not be able to restrain the beneficiary's call on the performance bond even if this is unconscionable, the only remaining ground of restraint being fraud. If the use of this type of
2 SLR 497 (CA) [37] that ‘whether or not a clause is (or is not) reasonable under the UCTA would depend not only on the various factors enunciated in the UCTA itself as well as in the case law... but also (and perhaps more importantly) on the precise facts of the case itself'. clause becomes widespread (which is a likely scenario, given that beneficiaries, who typically have more bargaining power, will favour it), the unconscionability exception may gradually lose its relevance in Singapore. However, a no-injunction clause of this type might not be as successful in other j urisdictions where the rule against unconscionability is a statutory one, depending on whether one is allowed to contract out of the relevant provision.
New Roman">The use of this type of clause has potentially wider consequences than merely displacing 8.45 the unconscionability exception. Because of the way in which the clause in Asplenium was drafted, the application for an injunction based on any ground other than fraud was excluded. This meant that other exceptions, such as the grant of an injunction to restrain the beneficiary from calling on the bond in breach of the underlying contract, as well as future exceptions that might be established or developed, were also excluded.[827] The effect of a clause such as the one in Asplenium is that fraud will have to be shown if an applicant is to be successful in obtaining an injunction in these other situations.
V.