Stay In Favour Of Arbitration For Call On Performance Bond

Performance bonds are commonly given in the construction industry in Singapore. So, what happens if a performance bond provides for disputes to be heard in court, the underlying main contract provides for disputes to be heard in arbitration, and a party applies to court to restrain the call on the performance bond? This issue arose in the case of Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd & Anor [2024] SGHC 137.

Facts. The applicant, Star Engineering Pte Ltd, was engaged by the 1st respondent, Pollisum Engineering Pte Ltd, as its contractor for the design, construction and maintenance of works for a project titled "Proposed Design and Build New Erection of 4-Storey Building on Lot 01876W MK 13 at 41 Senoko Way" ([3] Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd & Anor [2024] SGHC 137 ("Star Engineering")).

This contract was based on the REDAS Design and Built Conditions of Contract (3rd Ed, October 2010) (the "REDAS Conditions") ([4] Star Engineering).

The applicant had to provide an unconditional on-demand bond pursuant to Cl. 2.1.1 of the REDAS Conditions ([4] Star Engineering) for $856,000.00, which the applicant did by giving an unconditional on-demand performance bond ("PB") ([4] Star Engineering). The PB was issued or insured by the 2nd respondent, an insurance company ([4] Star Engineering).

The contract between the applicant and the 1st respondent provided for arbitration as the choice of dispute resolution ([5] Star Engineering).

Significantly, in the Particular Conditions of Contract (the "Particular Conditions"), Cl. 2.1.3C.2 provided that "[a]ny dispute which the Contractor has in relation to such call, demand, receipt, payment ... shall be resolved in accordance with clause 33 [of the REDAS Conditions]": i.e., that any disputes between the applicant and 1st respondent relating to the PB were to be referred to arbitration ([5] Star Engineering).

In contrast, the PB itself provided that "the parties agree to submit to the non-exclusive jurisdiction of the Singapore Courts" ([5] Star Engineering).

On 30 October 2023, the 1st respondent made a call on the PB ([6] Star Engineering), and the applicant took up court proceedings in OA1135 for, among others, an injunction to restrain the 1st respondent from receiving the sum of $856,000.00 pursuant to the PB ([7] Star Engineering) and for the 2nd respondent to be injuncted from making payment of $856,000.00 or any part thereof pursuant to the PB ([7] Star Engineering).

The 1st respondent then took up an application to stay OA1135 in favour of arbitration ([9] Star Engineering).

This application was dismissed by the learned Assistant Registrar ("AR"), and the 1st respondent then appealed ([9] Star Engineering).

AR's reasoning. It appeared that the key factor for the learned AR's decision is that the 2nd respondent was not a party to the arbitration agreement ([16] Star Engineering), and therefore, given the "the existence of a related action against [the 2nd respondent] which [was] not governed by the arbitration agreement", and that there were "clear overlaps between the issues in dispute", thee was hence the "clear overlaps between the issues in dispute" ([17] Star Engineering).

The appeal. But the High Court disagreed and allowed the appeal.

Clearly within arbitration agreement. The High Court found that the dispute between the applicant and the 1st respondent clearly fell within the scope of the arbitration agreement ([24] Star Engineering).

In particular, as the High Court stated at [24] Star Engineering:

The significance of Cl. 2.1.3C.2 of the Particular Conditions cannot be understated.

As the High Court observed at [27] Star Engineering, "[i]t bears repeated emphasis that the REDAS Conditions was specially modified to provide that disputes relating to the PB would also be referred to arbitration."

What purpose, then, does the non-exclusive jurisdiction clause in the PB serve?

The answer is given by the High Court at [28] Star Engineering, stating that the purpose of this clause is to address disputes between the 1st respondent and 2nd respondent. But as between the 1st respondent and the applicant, "... it was abundantly clear that the issue of a fraudulent Payment Demand by the 1st respondent and the consequent injunctive reliefs sought against the 1st respondent fell squarely within the scope of the arbitration agreement between the applicant and the 1st respondent".

No sufficient reason. The High Court further found that there was no sufficient reason to stay the dispute in favour of arbitration.

While the High Court accepted that the learned AR's course of action could eliminate the risk of inconsistent findings ([31] Star Engineering), the High Court held that equally, a stay in favour of arbitration could also obviate such a risk ([31] Star Engineering).

The High Court agreed that the 2nd respondent was a "mere functionary" ([32] Star Engineering), such that the real dispute was between the applicant and 1st respondent ([32] Star Engineering). As such, the High Court found that "the applicant adopts a very weak position if it insists that the court jurisdiction clause in the PB was the key reason why the dispute should be determined in court and the parties' express agreement to arbitrate should be ignored" ([32] Star Engineering).

Urgency? The applicant also submitted that it was entitled to take its case to court due to the urgency of the matter ([34] Star Engineering).

This, too, was rejected by the High Court, who pointed out to the Singapore International Arbitration Centre's emergency arbitrator option ([34] Star Engineering), and stated that this ought to have been the applicant's first port of call.

The High Court accepted that whilst such an award could not directly bind the 2nd respondent, nonetheless, "[t]here was no evidence that the 1st respondent would have flouted or ignored any such order. That would have given the applicant sufficient time to then seek a further court order to bind the 2nd respondent" ([34] Star Engineering).

And the High Court then re-iterated that if the applicant was concerned over the short time frames, then the applicant "should not have agreed to arbitration under the Contract, and specifically, arbitration with respect to the call on the PB" ([35] Star Engineering).

Conclusion. In the end, the High Court granted an arbitration stay between the applicant and the 1st respondent, and a case management stay between the applicant and the 2nd respondent.

It is clear from the reporting that a key factor (if not the key factor) weighing on the High Court's find was Cl. 2.1.3C.2 of the Particular Conditions. It is possible that, without this condition, a different result may have been reached.

Hence, for parties in the position of the applicant, it is important to ensure that you review your contract carefully.

If you see clauses similar to Cl. 2.1.3C.2, think carefully about what happens if the performance bond is called: would you want to agree to only send the dispute for arbitration, or would it be more efficacious if the matter is dealt with in court?

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