Picking Your Battlefield – Is a Call on a Performance Bond Based on Back-Charges Withdrawn in Adjudication Unconscionable?

Introduction

On-demand unconditional performance bonds are a common feature in the construction industry – these are performance bonds that allow the beneficiary to demand payment without needing to prove that the counterparty has breached their contractual obligations. A frequent issue arises when the beneficiary seeks to use the bond to recover back-charges incurred on behalf of the counterparty. However, when these back-charges have been previously raised in adjudication proceedings, can it be said that a call on a bond in respect of the same back-charges is unconscionable (or even fraudulent)? Would it make a difference if the back-charges were previously withdrawn from the adjudication proceedings?

The recent case of Ee Hup Construction Pte Ltd v China Jingye Engineering Corp Ltd (Singapore Branch) and another [2025] SGHC(A) 3 provides clarity on this issue. The Appellate Division of the High Court (“AD“) upheld the lower court’s decision, refusing to grant an injunction to restrain a call on an unconditional on-demand performance bond. The AD clarified that the call on the bond for back-charges raised but withdrawn in adjudication proceedings in this case was not unconscionable.

This Update summarises the key findings of the AD as well as the implications for the construction industry and other sectors where performance bonds are commonly used.

Background Facts

China Jingye Engineering Corporation Limited (Singapore Branch) (“CJY“) was the main contractor for the Bedok South Mass Rapid Transit train station and tunnels for the Thomson-East Coast train line. CJY engaged Ee Hup Construction Pte Ltd (“EH“) as a sub-contractor for excavation and earthworks. The sub-contract required EH to procure an irrevocable and unconditional on-demand performance bond for 10% of the sub-contract amount (S$501,163.80) in favour of CJY. The bond, issued by India International Insurance Pte Ltd (“III“), was valid until 31 May 2024 (“Bond“).

The parties were involved in various payment disputes, leading to two sets of adjudication proceedings. CJY disputed EH’s payment claims, citing various back-charges. These back-charges were withdrawn by CJY in the adjudication proceedings, and the adjudicators awarded various sums in favour of EH.

On 16 April 2024, CJY called on the Bond, claiming costs and expenses totalling S$598,015.19, including: (i) S$499,864.67 for back-charges for equipment, services, materials, manpower, and safety lapses; and (ii) S$98,150.52 for Temporary Land Occupation fees and charges (collectively, “TOL Fees“). EH sought an injunction to restrain CJY from calling on the Bond, arguing that the call was unconscionable and fraudulent. The Judge in the General Division of the High Court (“HC Judge“) partially allowed EH’s injunction application, granting it only in respect of the TOL Fees but refusing it for the back-charges. EH’s Erinford injunction application was also dismissed. EH appealed, but the AD dismissed the appeal with costs.

AD Decision

Whether to Restrain the Bond Call on the Ground of Unconscionability

1. EH argued that the HC Judge had erred in applying a “subjective” test of unconscionability: This was rejected by the AD. The AD observed that the legal authorities do not describe the test of unconscionability as either subjective or objective, and found that the HC Judge’s formulation of the test of unconscionability was not wrong, insofar as he had: (i) taken the view that the court must consider the bond beneficiary’s (subjective) perspective; and also (ii) analysed the (objective) relevant facts in the context of the case.

2. EH argued that CJY breached its “duty to speak” under section 15(3) of the Building and Construction Industry Security of Payment Act 2004 (“SOPA“) by failing to put forward its back-charges claim for adjudication: This was rejected by the AD. The AD clarified that:

• • What a respondent’s “duty to speak” requires is that the respondent has to raise in its payment response any objection which it intends to rely on before the adjudicator. Section 15(3) of the SOPA neither mandates the respondent to raise all potential objections to a claim, nor prevents the respondent from withdrawing an objection once raised.

• • Flowing from this, CJY was at liberty to pursue its objections (including the back-charges that were withdrawn from the two adjudication proceedings) at a later stage in another forum such as arbitration, as contractually provided for. 

3. EH argued that CJY’s call on the Bond negated the two adjudication determinations: EH’s argument relied on [48] of Samsung C&T Corp v Soon Li Heng Civil Engineering Pte Ltd [2020] 2 SLR 955 (“Samsung C&T“), where the Court of Appeal had commented that “if a beneficiary [of a performance bond] were to deliberately avoid making a claim before an adjudicator simply to preserve its right to claim under a performance bond, that might itself be evidence of unconscionability“. This was rejected by the AD:

• • The AD pointed out that the Court of Appeal in Samsung C&T recognised that “each case is fact-sensitive“. Whether or not a bond call has the effect of “negating” or “undermining” an adjudication determination prior to final determination of the parties’ disputes depends on the facts of the case. 

• • The AD found that the facts of Samsung C&T could be distinguished. In Samsung C&T, Samsung made a demand on the performance bond and sought to resist a restraining order, by relying on reasons which had previously been rejected in the adjudication. This was not the case here – the adjudicators in the two adjudication determinations did not make any determination on CJY’s back-charges because CJY withdrew them from the adjudication proceedings. 

4. EH argued that there was a presence of “ulterior motives” behind the Bond call because CJY was trying to “rectify” its “failure” to take up the “option” of requesting a six-month extension of the Bond upon expiry of the Bond: This was rejected by the AD. While CJY had not requested this extension, CJY remained contractually entitled to demand payment on the Bond prior to 31 May 2024. There was no unfairness arising from its choice to do so, and consequently, no basis for inferring unconscionability.

5. EH argued that CJY had acted in bad faith when it withdrew the back-charges from the adjudication proceedings because CJY had the “intention” to “claw back” the adjudicated amounts via a subsequent call on the Bond: This was rejected by the AD. The AD pointed out that CJY’s reason for withdrawing the claim was to save time and costs, because its position was that the back-charges fell under section 17(3) of the SOPA such that they were not the appropriate subject of adjudication. The AD agreed with the HC Judge’s finding that CJY’s views in this regard were neither unreasonable nor without basis.

6. EH argued that the back-charges were excessive and without merit: The AD agreed with the HC Judge’s findings that EH had not discharged the burden of establishing a strong prima facie case that the back-charges were excessive and without merit and that CJY was aware of this. On this, the AD referred to the HC Judge’s observation that while some of the documentation was not “particularly complete” at this stage, there was some evidence to support the back-charges (e.g. timecards to support the claim for back-charges relating to the supply of manpower by CJY). 

7. EH argued that the HC Judge should have restrained the Bond call to preserve the status quo pending final determination of the back-charges claim: The AD found that:

• • EH’s status quo argument was without authority and would undermine the rationale for an on-demand performance bond, which: (i) provides the beneficiary with assurance of immediate payment, independent of the underlying contract between the beneficiary and the bank’s customer; and (ii) differs from a conditional performance bond, which is predicated on the existence and/or proof of breach and/or damage. 

• • While EH argued that it would suffer dire financial crisis or be rendered financially incapable of pursuing arbitration because of the call, EH provided neither evidence to substantiate this, nor any explanation on why this should compel an injunction.

Whether to Restrain the Bond Call on the Ground of Fraud

 For the same reasons relating to unconscionability, the AD found that EH’s arguments on fraud failed. 

Whether the HC Judge Erred in Refusing to Grant an Erinford Injunction

The AD also found that the HC Judge had not erred in waiving CJY’s non-compliance with paragraph 112 of the Supreme Court Practice Directions 2021 and allowing CJY’s further arguments. EH failed to explain how it was prejudiced by the waiver, and in any case, it had been given the opportunity to make its own submissions to the HC Judge.

Further, there was no prospect of the appeal being rendered nugatory, as there was no evidence that CJY would not be able to repay the Bond amount if the appeal was allowed. EH also failed to explain its basis for claiming it would be contractually obliged to put up a fresh bond to replace the expired one in the event that it succeeded on appeal.

Concluding Words

The AD’s decision is a welcome addition to the jurisprudence surrounding performance bonds in Singapore and is significant for two reasons.

First, it reaffirms the high threshold for restraining a call on a performance bond on the ground of unconscionability, which requires the applicant to show unsatisfactory conduct tainted by bad faith on the part of the beneficiary. This is underpinned by the policy considerations underlying the use of performance bonds in the construction industry, and the need to strike a balance between the conflicting positions of the obligor and the beneficiary of a performance bond. The AD has highlighted that such policy considerations include: (i) the need to respect the parties’ intentions and their decided allocation of risk in a building contract; (ii) upholding the commercially valuable autonomy principle, i.e. the importance of parties being able to rely on a promise to pay upon an independent guarantee regardless of disputes in the underlying contract; and (iii) the prevention of abusive and oppressive calls on bonds, particularly in the construction industry.

Second, it is a welcome reminder to users of adjudication to pick your battlefield wisely, and where applicable and appropriate, take a step back and consider the best and most strategic avenue(s) and/or forum(s) to determine and try your back-charges claims. Given the express prohibitions under section 17(3) of the SOPA, in a situation where a respondent in the adjudication proceedings may not be confident that the exceptions under section 17(3) of the SOPA can be met, it may be perhaps more strategic to withdraw its back-charges claim, and to preserve this for determination in a more appropriate forum (either in arbitration, in court or through a call on a performance bond, as in this case). The knee-jerk reaction and tendency to throw in the kitchen sink in adjudication proceedings (by raising any and all back-charges to reduce a claimant’s claim amount) may not actually work in your interest and may in fact taint any future call on a performance bond with unconscionability and/or bad faith.