Case Summaries

AXA Insurance Pte Ltd v Chiu Teng Construction Co Pte Ltd [2021] SGCA 62


24 June 2021

Case summary

AXA Insurance Pte Ltd v Chiu Teng Construction Co Pte Ltd   [2021] SGCA 62
Civil Appeal No 151 of 2020


Decision of the Court of Appeal (delivered by Justice Steven Chong):

Outcome: CoA dismisses appeal by insurer against decision of the High Court ordering the insurer to pay under performance bond.  


1 This was an appeal by AXA Insurance Pte Ltd (“AXA”) against the decision of the High Court judge (“the Judge”) ordering AXA to pay $397,687.50 plus interest to the respondent, Chiu Teng Construction Co Pte Ltd (“CTC”), under a performance bond (“the Bond”) issued by AXA in favour of CTC.

Background to the appeal

2 CTC was a company in the building construction business. It was the main contractor for a project for upgrading and refurbishment works at the Nanyang Technological University (“the Project”). CTC engaged QBH Pte Ltd (“QBH”) as a subcontractor for the Project under a subcontract (“the Subcontract”). At QBH’s request, AXA issued the Bond in favour of CTC on 25 July 2016.

3 Disputes arose between CTC and QBH. CTC first made a call on the Bond on 14 September 2018 (“the First Call”). On an application by QBH to the High Court prior to the present proceedings, the High Court held that the Bond was an “indemnity performance bond” and that the First Call was defective as CTC had not provided evidence of actual loss. The High Court granted an injunction restraining AXA from making and CTC from receiving payment under the Bond.

4 In the meantime, QBH had been put into liquidation. On 18 February 2020, CTC wrote to QBH’s liquidators claiming that QBH had breached the Subcontract and itemising the losses that it had suffered (“the 18 February Letter”). QBH’s liquidators did not reply. On 13 March 2020, CTC wrote to AXA purporting to call on the Bond on the basis of the breach and losses detailed in the 18 February Letter (“the Second Call”). AXA refused to make payment under the Bond. On 19 June 2020, CTC applied to the High Court for an order that AXA make payment of $397,687.50 pursuant to the Bond.

5 The Judge held that CTC was entitled to payment of the amount secured under the Bond. He held that he could undertake the determination of whether QBH had breached the Subcontract and whether CTC had suffered loss, and that, on the evidence before him, CTC had adequately proved its total losses exceeding the sum secured by the Bond. He therefore made the order for AXA to make payment of the sum with interest to CTC.

Decision on appeal

6 AXA appealed to the Court of Appeal. It argued primarily that QBH’s breach of the Subcontract and any loss suffered by CTC had to be established by an independent determination by a court or tribunal in proceedings between CTC and QBH, or by an admission by QBH, before CTC could call on the Bond. AXA argued in the alternative that even if this was not required, the Judge should not have gone on to determine that CTC had proved QBH’s breach of the Subcontract and loss suffered by CTC, and that the Judge had misapplied the burden of proof.

7 It was common ground between the parties that the Bond was an indemnity performance bond. However, the court made some observations about the terminology used in this area and the proper characterisation of performance bonds: at [19].

  1. The essential distinction between a guarantee and an indemnity was that a guarantor under a guarantee only had a secondary liability, whereas an indemnifier had a primary liability. The former meant that the guarantor’s liability was subject to the principle of co-extensiveness, such that the scope of the guarantor’s liability was affected by the scope of the liability of the party whose obligation was guaranteed. However, for both a guarantee and an indemnity, in the absence of specific terms in the instruments, there was nothing preventing a beneficiary from proceeding either against a guarantor or an indemnifier directly without first proceeding against the account party: at [21] and [22].
  2. The court doubted the utility of relying on the term “performance bond” and the categories of “on-demand” and “indemnity” performance bonds in the legal analysis of the effects of such instruments. The term “performance bond” was a practical term arising from commercial practice and contracts in certain industries like the construction industry. The term did not say anything about the legal character of the instrument. When categorising these bonds in terms of their legal effect, it might be more helpful to shed the language of “performance” bonds as that language risked giving the impression that such bonds were always tied to the performance of the underlying contract. Instead, what they were depended on the construction of their terms and effect, not on the words or labels used: at [20] and [23].
  3. On-demand performance bonds were just demand bonds, that is, bonds payable on demand: at [24].
  4. The classification of so-called conditional performance bonds had not always been clear. They had sometimes been treated as guarantees, while others had been treated as true indemnities, as in JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47 (“JBE”) and other authorities: at [26].
  5. The court highlighted certain issues which may call for more detailed consideration in the future. First, the question of how to characterise conditional performance bonds in legal terms, ie, as guarantees or indemnities, may need to be revisited. The court observed that the conditional nature of such bonds could be construed as strong grounds in favour of characterising them as guarantees. Second, if the above issue was to be revisited, the court may have to consider how to distinguish between an indemnity and a guarantee where the obligation to pay was conditional on breach of the underlying contract: at [35] and [36].
  6. These observations, however, would not introduce any significant degree of uncertainty in practice, as long as it was understood that the court was discussing conditional bonds. In most cases, the distinction between a guarantee and an indemnity would not be significant, given that breach and loss would need to be established either way (subject, as always, to the specific terms of each bond), and there was no difference as to when the beneficiary could proceed directly against the guarantor or indemnifier without first suing the account party: at [37].

8 Nothing in the present appeal turned on the characterisation of the Bond as an indemnity instead of a guarantee. Instead, the appeal turned entirely on a proper construction of the terms of the Bond and the conditions that needed to be satisfied before payment on the Bond was required: at [38].

9 Contrary to AXA’s submissions, it was not necessary for the beneficiary to present a determination by a court or tribunal between QBH and CTC, or an admission by QBH before a valid call on the Bond could be made. The question was answered by examining the terms of the Bond. Clause 1 of the Bond was clear that it would suffice for CTC to establish that QBH had failed to fulfil any of the terms of the Subcontract and that CTC thereby sustained losses. There was no reference anywhere in the Bond to a determination by a court or tribunal or an admission from QBH: at [39] to [41].

10 AXA’s arguments conflated the facts to which the Bond responded and proof of those facts. Even more problematically, AXA’s submissions revealed that it was primarily concerned with proof as against QBH and not itself, which was premised on a misunderstanding of the nature of its obligations under the Bond. In a dispute between AXA and CTC, there was no rule of evidence requiring CTC to first prove its case against QBH: at [42] and [43].

11 Clause 5 of the Bond showed that AXA had contracted to protect itself, and it could not now argue that it was unable to assess the beneficiary’s claim on the Bond as a reason for reading the sought-after requirement into the Bond. Further, the language of cl 5 assumed that all that would be before the issuer when a call was made would be a claim on the Bond without a determination or admission, which AXA would be entitled to accept as final and conclusive. It followed that cl 1 could not have required such a determination or admission to be presented before a call could be made: at [44] and [45].

12 There was no room to read the proposed requirement in the Bond. The terms of the Bond were important given how risk was structured under such bonds. It was for the indemnifier to ensure that it was indemnified by the account party, and for it to define the precise circumstances under which the bond was payable. In this context, there was no basis for implying any additional requirement in the Bond. If the issuer’s intention was to issue a bond that was payable only upon a determination by a court or tribunal or an admission by the account party, then it was for the issuer to expressly spell that out in the terms of the bond. On the present terms of the Bond, the risk of the insolvency of the account party lay squarely with the issuer: at [46] to [49].

13 The court also did not find any of AXA’s arguments for imposing the requirement for a determination or admission to be obtained before a valid call could be made to be convincing.

  1. First, the court disagreed with AXA’s interpretation of the authorities, finding that the authorities did not justify imposing such a requirement on CTC: at [52] to [60].
  2. Second, the court did not agree that not imposing such a requirement would erode the distinction between a conditional bond (whether characterised as a guarantee or an indemnity) and a demand bond by making the bond conditional on documents and not facts. That distinction did not prevent documents from being used to establish or prove the facts of breach and loss: at [61]
  3. Third, the court did not give any weight to the “practical considerations” raised by AXA, as cl 5 already precluded AXA from making such an argument, and in any event, any practical difficulty arose from the very nature of a conditional bond. That was a matter which it had chosen to taken on by issuing, for a fee, a Bond under which payment was conditional on the facts of breach and loss: at [63] and [64].
  4. Fourth, implying such a requirement would result in a real risk of delay that would reduce the utility of the Bond and would rewrite the balance of risks between the parties: at [65].

14 The net effect of AXA’s arguments, if accepted, would have been to completely rewrite the terms of the Bond. In the absence of express terms in the Bond, it was not for the court to rewrite the terms of the Bond simply because certain risks, which ought to have been anticipated, had materialised. The court therefore concluded that there was no requirement in the Bond for CTC to present a determination or admission before making the Second Call: at [66].

15 The court then found that the Judge did not err in proceeding to determine whether CTC had sufficiently proved QBH’s breach of the Subcontract and loss caused to itself. First, there was no procedural irregularity in CTC commencing the application by way of an originating summons instead of a writ, and in any event, a mere procedural defect would not defeat the entire proceedings. Second, the objection that QBH was not before the court was misconceived: (a) there was no reason why the court’s determination would be not be final and conclusive as between AXA and CTC; (b) this was in keeping with AXA’s liability under the Bond, whether it was a guarantee or an indemnity; (c) CTC was not obliged to join QBH to the proceedings and any misjoinder would not defeat CTC’s claim; (d) CTC bore no fault for QBH’s absence in the proceedings; and (e) if AXA was concerned about an abuse of process, it could have made the necessary applications or arguments, which it did not. Third, the fact that QBH and CTC had agreed to submit any dispute to arbitration did not prevent the Judge from considering the claim against AXA and, in any event, there were no existing arbitral proceedings and no risk of inconsistent findings: at [70] to [72].

16 AXA’s case on appeal concerning the proof of loss was limited to the contention that the Judge had misapplied the burden of proof. However, this incorrectly characterised the Judge’s reasoning. The legal burden was on CTC at all times, but the Judge was entitled to conclude that the evidence adduced raised a sufficient case to call for a response from AXA. AXA offered no response, and therefore, had not met the evidential burden that had shifted to it: at [75] and [76].

17 On a review of the documents, the court was satisfied that there was enough objective evidence of losses caused by QBH’s non-performance or defective performance of the Subcontract which gave rise to a prima facie case that QBH had breached the Subcontract and had caused CTC to suffer loss of an amount that exceeded the sum secured by the Bond. As there was no evidence or submission to the contrary, the court accordingly upheld the Judge’s finding that the legal burden had been discharged and the requisite breach and loss had been proved. The court rejected AXA’s argument that it was not in a position to dispute CTC’s claims because it was not in possession of the facts. Therefore, CTC had established QBH’s breach of the Subcontract and losses of such a quantum as to justify the Second Call on the Bond for $397,687.50 and the appeal had to be dismissed: at [77] to [79].

18 The appeal was dismissed with costs: at [88].

This summary is provided to assist in the understanding of the Court’s grounds of decision. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s grounds of decision.