Can Unconscionability Be Excluded as a Ground to Restrain a Call on a Performance Bond?

07 September 2015

Shannon Rajan provides the latest developments on restraining a call on a performance bond. 
 
INTRODUCTION

The appeals to the Court of Appeal of Singapore in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and another [2015] SGCA 15 arose out of the main contractor’s application to restrain a call on an on-demand performance bond by a developer on the ground that the call was being made unconscionably. However, the contract between the parties contained a clause stipulating inter alia that the main contractor was not (except in the case of fraud) entitled to restrain a call on the performance bond on any ground, including the ground of unconscionablility (“the Clause”). The central question was whether the Clause was invalid and unenforceable because it was contrary to public policy as an ouster of the court’s jurisdiction.
 
The presiding judge, Edmund Leow JC, held that the Clause was unenforceable for three reasons. First, the Clause was an attempt to oust the court’s jurisdiction. In his view, it was a severe incursion into the court’s freedom to grant injunctive relief on the ground of unconscionability. Second, the power to grant injunctions emanated from the court’s equitable jurisdiction, which could not be circumscribed by contract. Third, the unconscionability exception was based on policy considerations, which could not be brushed aside by agreement. The acceptance by the Singaporean courts of the unconscionability exception was a “considered and deliberate” balance struck between party autonomy and regulating dishonest and unconscionable behavior.
 
The Judge held however that the high threshold necessary to invoke a restraint on the ground of unconscionability was not satisfied on the facts. He therefore dismissed the main contractor’s application to restrain the developer’s call. Both parties appealed against the Judge’s decision. The main contractor appealed against the Judge’s finding that the developer did not make the call unconscionably whilst the developer cross-appealed against the Judge’s holding that the Clause was unenforceable.
 
THE ARGUMENTS ON APPEAL
 
The developer put forward four arguments to support its position that the Clause was enforceable, namely that (i) clauses which restricted or excluded equitable remedies have been held to be enforceable even if they were to be construed strictly; (ii) the Clause was not an ouster clause as it merely restricted the grounds on which relief may be sought from the court rather than remove access to the court completely; (iii) the Clause should be upheld in order to give effect to party autonomy; and (iv) the Clause did not fall into any of the established categories of public policy that rendered it invalid.
 
The main contractor’s position was that the Clause was unenforceable because it was an ouster of the court’s jurisdiction as it fettered the court’s power rather than the parties’ rights, and Singapore law had “developed a public policy” of protecting contractors from oppressive calls on performance bonds.
 
COURT OF APPEAL’S DECISION
 
In dealing with the question of whether the parties can agree to exclude the unconscionability exception as a ground for restraining a call on a performance bond, the Court of Appeal stated that whilst freedom of contract is the norm, the courts are, on occasions, prepared to override the parties’ contractual rights if to do so would give effect to the greater public good. However, given the inherently nebulous nature of public policy, such occasions will be the (rare) exception.  One category of contracts which has been held to be contrary to public policy concerns contracts that oust the court’s jurisdiction as “[t]he right of access to the courts has always been jealously guarded by the common law, and the general principle remains that contracts which seek to oust the jurisdiction of the courts are invalid.” ¹
 
On the other hand, the Court observed that limitations placed on the rights and remedies available to the parties have not been treated as an ouster of the court’s jurisdiction, and cited the example of parties being at liberty to limit or even exclude altogether an innocent party’s right to damages in the event of a breach of contract by the other party. These are known as limitation or exclusion clauses and they seek to restrict or exclude a common law remedy. The Court opined that such clauses have never been treated as being void and unenforceable as there is no denial of access to the court by virtue of them.
 
The Court further observed that although the Clause does not attempt to restrict or limit an innocent party’s right to damages at common law, it does, nevertheless, attempt to restrict or limit a contracting party’s right to an injunction in equity. Specifically, the Clause sought to restrict the right of the obligor under the performance bond to apply for an injunction to restrain the beneficiary from calling on that bond except in a situation of fraud. This is in effect the restriction of an equitable remedy. Although such a clause may be potentially subject to the court’s scrutiny pursuant to common law principles (for example, the clause was not incorporated into the contract) or the provisions of the Unfair Contract Terms Act 1994 (“UCTA”) (for example, the clause is unenforceable because of unreasonableness), the Court concluded that both these situations appear to be inapplicable in the present case.  
 
The Court also turned its attention to the Malaysian Federal Court case of AV Asia Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd ² (“AV Asia”), which was relied upon by the High Court Judge and the main contractor to support the position that the clause was void and unenforceable. In AV Asia, the parties entered into a mutual non-disclosure agreement (“MNDA”), which prohibited the respondent from disclosing confidential information that it obtained from the appellant.
 
Clause 15 of MNDA provided that if there was disclosure or unauthorised use of confidential information, damages would “not be sufficient” to compensate for the breach and that “injunctive relief would be appropriate to prevent any actual or threatened use of disclosure” of the confidential information. The appellant relied on the alleged breaches of the MNDA and sought an interlocutory injunction. The appellant argued that the Court was obliged to give effect to Clause 15 and should therefore grant the injunction. The Federal Court rejected the appellant’s argument and stated that Clause 15 did not fetter the Court’s discretion.
 
The Court of Appeal held that there were material distinctions between AV Asia and the case before it. First, AV Asia was focused on the weight to be given to such clauses in the exercise of the court’s discretion when deciding whether or not to grant an injunction, and not the contractual validity or enforceability of those terms. Second and more importantly, the parties cannot by agreement force the court to grant an injunction where one would not ordinarily have been issued. The court cannot be obliged to exercise its discretion in a way that is contrary to the principles it would ordinarily apply to the grant of injunctive relief. However, this does not, in the opinion of the Court, preclude the parties from agreeing to limit their right to seek certain remedies or reliefs from the court, which is the effect of the Clause. Lastly, the Court observed that AV Asia did not expressly refer to the category of public policy relating to the contracts that oust the court’s jurisdiction.
 
The Court of Appeal therefore held that the Clause is not one which sought to oust its jurisdiction or severely curtail its equitable jurisdiction to grant injunctions. The Court observed that its jurisdiction to hear the matter was not impacted by the Clause, although the remedy it could grant has been sought to be limited or even excluded. This was something that the parties voluntarily agreed to and could in any event be (in appropriate circumstances) overseen by the court pursuant to, for example, the relevant provision of UCTA.
 
The Court acknowledged that the development of the doctrine of unconscionability in the context of (abusive) calls on performance bonds centered on policy considerations. It was motivated by the recognition that a performance bond could be used as an “oppressive instrument”,³ which may cause “undue hardship” or “unwarranted economic harm to the obligor”.⁴ The Court however clarified that the conception of policy that formed the basis for the unconscionability doctrine is quite different from the concept of public policy, which underpins that category of contracts which are void and unenforceable as being contrary to public policy as such contracts seek to oust the court’s jurisdiction.
 
For the reasons stated above, the apex court of Singapore held that the Clause was enforceable. Accordingly, it allowed the developer’s appeal and dismissed the main contractor’s cross-appeal.
 
CONCLUSION
 
The Court’s decision gave primacy to the parties’ freedom to contract where a party may contractually limit the grounds under which the other party may apply for an injunction to restrain the call on its performance bond to the case of fraud only. The rationale was an “intensely practical” one in that the developer could have called for a cash deposit instead of a performance bond under the terms of the contract and there was thus “no pressing reason in either principle or policy” why the Clause was contrary to public policy. 
 
It remains to be seen whether the Malaysian courts will go so far as to uphold a clause in a contract that excludes unconscionability as a ground to restrain a call on a performance bond. The position may be buttressed if the contract in question entitles the developer to a cash deposit and a performance bond as an alternative security to the cash deposit. Such a clause may, arguably, be valid and enforceable in Malaysia.  

Endnotes:
¹  R A Buckley, “Illegality and Public Policy” (Sweet & Maxwell, 3^rd Ed.,2013).
²  [2014] 3 MLJ 61.
³  See GHL Pte. Ltd. v Unitrack Building Construction Pte Ltd and another [1993] 3 SLR (R) 44.
⁴  See JBE Properties Pte. Ltd. v Gammon Pte. Ltd [2011] 2 SLR 47.