In Star Engineering Pte Ltd v Pollisum Engineering Pte Ltd and another [2024] SGCA 30 (“Star Engineering”), the Singapore Court of Appeal emphasised the importance of arbitration clauses in construction contracts while upholding the independence of an unconditional on-demand performance bond’s enforceability. This decision highlights the limited grounds for judicial intervention in bond demands and clarifies the interplay between arbitration and immediate bond payment rights.
Subsequently, Pollisum made a demand on the bond, citing defects and delays in Star’s work.
Star sought an injunction to prevent Pollisum from collecting payment under the bond, alleging that Pollisum’s demand was fraudulent.
Star’s attempt to restrain Pollisum’s bond demand was initially stayed by the High Court in favour of arbitration, in line with the contract’s arbitration clause.
The Singapore Court of Appeal affirmed this stay, noting that disputes over the bond demand itself fell squarely within the contract’s arbitration provision. The Court of Appeal underscored that arbitration should handle the underlying issues of entitlement, such as alleged defects or delays, without delaying payment under an on-demand bond—except when fraud is substantiated.
This strict adherence to the contract terms highlights that courts will respect the parties’ intentions to limit judicial interference, even if this excludes unconscionability that might otherwise prevent perceived injustices. As a result, any allegations of unconscionable conduct by Pollisum could not provide grounds for an injunction against the bond demand, leaving fraud as the sole avenue for interference.
Case background
Pollisum Engineering Pte Ltd (“Pollisum”), acting as the employer, engaged Star Engineering Pte Ltd (“Star”) as the contractor for a building project governed by the REDAS Design and Build Conditions. As part of the contract, Star was required to provide an unconditional on-demand performance bond issued by Great Eastern General Insurance Limited to secure Pollisum against performance risks. Notably, the contract’s particular conditions (Clause 2.1.3C.2) explicitly limited grounds for restraining the bond payment to cases of fraud, thereby excluding unconscionability as a basis for interference.Subsequently, Pollisum made a demand on the bond, citing defects and delays in Star’s work.
Star sought an injunction to prevent Pollisum from collecting payment under the bond, alleging that Pollisum’s demand was fraudulent.
Star’s attempt to restrain Pollisum’s bond demand was initially stayed by the High Court in favour of arbitration, in line with the contract’s arbitration clause.
The Singapore Court of Appeal affirmed this stay, noting that disputes over the bond demand itself fell squarely within the contract’s arbitration provision. The Court of Appeal underscored that arbitration should handle the underlying issues of entitlement, such as alleged defects or delays, without delaying payment under an on-demand bond—except when fraud is substantiated.
Exclusion of unconscionability as a ground for restraint
A key feature of this case is the exclusion of unconscionability as a basis to challenge the bond demand. The Court of Appeal referred to GHL Pte Ltd v Unitrack Building Construction Pte Ltd [1999] 3 SLR(R) 44, as an example where unconscionability was recognised as a valid ground for restraining demands on bond. By contrast, the Court in Star Engineering upheld the parties’ explicit contractual intent to limit challenges to the bond solely to cases of fraud, reinforcing the principle of freedom to contract.This strict adherence to the contract terms highlights that courts will respect the parties’ intentions to limit judicial interference, even if this excludes unconscionability that might otherwise prevent perceived injustices. As a result, any allegations of unconscionable conduct by Pollisum could not provide grounds for an injunction against the bond demand, leaving fraud as the sole avenue for interference.
Procedural issues
Arbitration remains the correct forum to resolve entitlement issues, such as whether defects justify a bond call, but does not impact the immediate enforceability of the bond—except in cases of proven fraud or unconscionability. Unfortunately, in this case Pollisum appeared not to have understood the difference between its substantive dispute with Star and the distinct right to be paid under the unconditional bond. The Court noted that the unconditional bond had been converted into a conditional bond when Pollisum took the step of seeking to refer the dispute to arbitration instead of taking the usual step of setting aside the temporary restraining order so that it could be entitled to immediate payment.Conclusion
Star Engineering reinforces the autonomy of on-demand bonds, with limited grounds for judicial interference, and clarifies that entitlement disputes subject to arbitration do not delay bond enforceability unless fraud (or unconscionability in a case where this ground is not excluded) is substantiated. By upholding the contractual exclusion of unconscionability and limiting interference to fraud, the court preserved the autonomy of on-demand bonds while reinforcing Singapore’s arbitration-friendly approach.
For further information contact Danna ER, Partner, Eldan Law & Mi Sung Thach, Associate, Eldan Law
