In detail

The factual background to this case is summarized below:

• Ten-League Corporations Pte Ltd. ("Ten-League") engaged Tradesmen Pte Ltd. ("Tradesmen") as the main contractor to undertake certain design and construction works for a building project. The parties’ contract ("Contract") was based on the Real Estate Developers' Association of Singapore Design and Building Conditions of Main Contract (4th Edition, 2022) ("REDAS Conditions")
• Pursuant to the Contract, Tradesmen procured a performance bond ("Performance Bond") from Liberty Insurance Pte Ltd. ("Liberty") in favor of Ten-League.
• Disputes arose between the parties, which eventually led to Ten-League terminating the Contract. The parties are in disagreement as to whether Ten League's termination of the Contract was wrongful.
• Around six months after its termination of the Contract, Ten League called on the full amount of the Performance Bond ("Bond Call"). The Bond Call only demanded payment, but neither asserted any breach of the Contract on the part of Tradesmen nor that Ten-League had suffered any losses.
• Ten-League Tradesmen applied for an injunction to restrain Ten-League from doing so.

Applicable principles for construing the Performance Bond

The key issue in this case was whether, on its proper construction, the Performance Bond was an indemnity bond or an on-demand bond. If the Performance Bond was an indemnity bond, the form of the Bond Call would render it defective or invalid, warranting an injunction. Conversely, if the Performance Bond was an on-demand bond, the Bond Call would suffice, and an injunction would not be successful.

In this regard, the court applied the following principles in construing the Performance Bond:

• In construing a performance bond, it is the parties' objective intention, based on a holistic reading of the documents embodying the bond and informed by the surrounding context, that is relevant.
• If the parties' objective intention appears ambiguous based on the express language of the performance bond, it is necessary to turn to extrinsic evidence (such as the underlying construction contract) and to consider the parties' conduct (i.e., the beneficiary and the obligor) when the performance bond was procured. These extrinsic and circumstantial evidence could be admitted to clarify the parties' objective intention.
• Where the express language of the performance bond is ambiguous, the court would be entitled to interpret the performance bond as being conditioned upon facts rather than upon documents or upon a mere demand, and any ambiguity in the language of a performance bond should be construed against the beneficiary.

Applying the principles set out above, the court determined that the Performance Bond was an indemnity bond for the following reasons:

• The parties' intention was ambiguous based on the express language of the Performance Bond as the Performance Bond contained clauses suggesting that it could be either an indemnity bond or an on-demand bond. For example, Clause 1 of the Performance Bond provided that Liberty:

… irrevocably and unconditionally undertakes [sic] and covenants [sic] to pay in full immediately upon demand in writing any sum or sums that may from time to time be demanded by [Ten-League].

On the other hand, Clause 2 of the Performance Bond provided as follows:

In the event of [Tradesmen] failing to fulfil any of the terms and conditions of the said Contract, [Liberty] shall indemnify [Ten-League] against all losses, damages … sustained by [Ten-League] up to the sum of the Guaranteed Sum upon receiving [Ten-League's] written notice of claim for payment.

• Consequently, the court went on to consider the terms of the Contract, and held that the parties intended for the Performance Bond to operate as an indemnity bond. Among other things, the court noted that the parties deliberately amended the specimen on-demand bond in Appendix 6 of the REDAS Conditions by including Clause 2 as set out above (which had the effect of an indemnity bond). Further, the court also noted that the Performance Bond was given in lieu of cash that would have served as a 10% security deposit or retention sum. This was intended to indemnify Ten-League against actual losses pursuant to Clause 2.1.3 of the REDAS Conditions. As such, the Performance Bond that was given in lieu of the security deposit or retention sum would also serve a similar purpose.
• The court noted that its conclusion (i.e., that that the Performance Bond should be construed as an indemnity bond) was bolstered by the principle that any ambiguity in the language of a performance bond should be construed against the beneficiary.

Given the court's determination that the Performance Bond should be construed as an indemnity bond (as opposed to an on-demand bond as contended by Ten-League), based on the terms of the Performance Bond, a call on the bond should, at the bare minimum, contain the following allegations:

• Tradesmen has failed to fulfill any of the terms of the Contract; and
• Ten-League has suffered loss as a consequence of any such failure by Tradesmen.

As the Bond Call was a bare demand for payment, it did not meet the requirements stated in the Performance Bond and was therefore invalid.

Key takeaways

Based on the court's analysis in this case, the key takeaways are as follows:

• It is critical for parties to the underlying construction contract (e.g., the employer and the main contractor) to be aligned on the nature of the performance bond (e.g., indemnity or on-demand) to be provided. As a matter of good practice, we would recommend that parties expressly state their understanding and agreement regarding the nature of the performance bond in writing when exchanging and finalizing the form of the performance bond. As seen above, where there is ambiguity in the performance bond, this extrinsic evidence becomes relevant and necessary to shed light on the parties' objective intention.
• When drafting and negotiating the terms of the performance bond, it is important for parties to ensure that the terms are inherently consistent and are not potentially contradictory — particularly if the parties have decided to adopt but modify a standard form. As seen in this case, it is the apparent inherent inconsistency of the clauses in the performance bond that have given rise to ambiguity regarding the nature of the performance bond in question. For example, language to the effect that payment is to be made "on demand" or "unconditionally" should be avoided if the parties' intention is to provide for an indemnity performance bond. Parties should also strive for consistency between the terms of the underlying construction contract and the performance bond.
• Where there is ambiguity regarding the nature of the performance bond, the beneficiary would generally be well advised to treat the performance bond as an indemnity bond to minimize the risk of its call on the performance bond being found to be defective or otherwise invalid. At a minimum, the beneficiary should, if possible, assert that the obligor breached the contract and that the beneficiary has suffered losses as a result of the obligor's breach.

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