Construction performance bonds: “extend or pay” | White & Case LLP

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“Extend or pay” provisions are typinamey Utilized in enhancement efficiency bonds and financial institution guarantees as a Method of making sure that efficiency safety is currentd for the interval It is wanted. Can a beneficiary be ceaseped from invoking an “extend or pay” provision if the procurer of it (e.g. the contractor) believes the beneficiary has no entitlement To take movement? A Singapore case from January 2022 currents some perception into this important problem.

“Extend or pay” provisions

An “extend or pay” provision in a time-restricted efficiency bond or financial institution guarantee is one which entitles the beneficiary of the bond or financial institution guarantee (typinamey the employer) to require the bondsman (typinamey a financial institution or completely different monetary institution) To enhance the interval of the validity of the bond or financial institution guarantee, or, alternatively, to make cost for The quantity specified Inside the bond or financial institution guarantee. The want for This Sort of provision comes about As a Outcome of of hazard thOn the anticipated interval of a enterprise Shall be prolonged (for numerous causes) So as To Guarantee thOn the bond or financial institution guarantee Is out there To fulfill any claims in the direction of it By way of the related enterprise interval.

Sometimes the entitlement of a beneficiary to invoke an “extend or pay” provision Might Even be contested by the celebration who currentd The safety. For event, the place a enterprise has been delayed and, Inside the contractor’s opinion, the delay is the obligation of the employer, the contractor might take the view thOn the employer Isn’t entitled to require the related bond or financial institution guarantee to be prolonged (On the expense of the contractor) Since the want for the extension arises from employer-triggered delay.

Can a contractor search And buy an injunction in the direction of an employer to restrain it from invoking an “extend or pay” provision in a bond or financial institution guarantee? There is A substantial physique of regulation involved with when a contractor might acquire an injunction in the direction of an employer from making A requirement beneath a bond or financial institution guarantee however So far There was no case regulation relating to whether or not a contractor might restrain an employer from invoking an “extend or pay” provision. However, a current case from Singapore has thought-about this very problem.

Goldbell Engineering Pte Ltd v Etiqa Insurance coverage Pte Ltd v Differ Construction Pte Ltd [2022] SGHC 1

Differ Construction Pte Ltd (“Differ”) was engaged as contractor by Goldbell Engineering Pte Ltd (“Goldbell”) for The enhancement of a workshop and an ancillary office in Singapore. 

  • Differ currentd to Goldbell a efficiency bond (the “Bond”) Inside The quantity of 20 % of the contract worth (SGD 3.8 million), which was problemd by Etiqa Insurance coverage Pte Ltd (“Etiqa”). The Bond was expressed To expire on 30 November 2019 till it was further renewed or prolonged by Etiqa.
  • Clause 6 of the Bond includeed an “extend or pay” provision. This gave Goldbell The selection to demand, at any time, that Etiqa both extend the validity interval of the Bond or, in lieu of such extension, make cost of the secured quantity. 
  • Pretty A pair of disputes arose over the course of the enterprise, collectively with in relation to delay and alleged defective work, which finally Outcomeed in Goldbell’s request that Etiqa extend the validity of the Bond (the “Extend or Pay Request”). 
  • Etiqa Did not Obtain this. Its rationale was that it had not acquired a current indemnity from Differ So as that it could Adjust to such an extension. The events then turned involved in a collection of proceedings Referring to interim injunctions and the influence of the Bond.
  • In The current case, Definitely one of many questions for the courtroom To imagine about was whether or not A mannequin new injunction stopping any cost beneath the Bond Ought to be granted.

In refusing to order an injunction, the courtroom confirmed that Goldbell had Truly made A respectable request beneath the “extend or pay” provision includeed Contained in the Bond. This was clear, as Goldbell had repeated the wording Utilized in clause 6 in its Extend or Pay Request.

Differ had tried to argue that Goldbell’s demand for cost beneath the Bond was unconscionable, However the courtroom’s view was that this argument was Truly an argument Regarding the unconscionability of the Extend or Pay Request. The courtroom rejected the argument thOn the Extend or Pay Request was Really a name on the Bond. It adopted that Etiqa’s obligation to make cost arose from the Extend or Pay Request itself.

Upon receipt of the Extend or Pay Request and in accordance with clause 6 of the Bond, it was then As a lot as Etiqa To choose whether or not To enhance the validity of the Bond or to make cost of the secured sum to Goldbell. It was not open for Differ to complain Regarding The Outcomes of the “extend or pay” provision being operated, as this Outcome mirrored the allocation of hazard thOn the events had agreed by choosing To make the most of this Type of safety and collectively with the “extend or pay” provision.

Enterprise Implications

“Extend or pay” provisions in efficiency bonds and financial institution guarantees can serve a useful objective, i.e. making sure that a delayed enterprise Is satisactualityorily coated When it Includes the efficiency safety which Is out there to the employer. However, provisions of this nature are probably open to abuse, or A minimal of They might give rise to disagreement the place (as in Goldbell) an employer Desires to enhance a time-restricted safety, the placeas the contractor might take the view that an extension of The safety is unjustified in view of employer delay, till the contractor is completely differentwise compensated for The worth of The safety being prolonged.

Under the widespread regulation, the courtrooms will intervene in sure circumstances to restrain an employer from making what seems to be an abusive demand for cost beneath a safety Similar to a bond or financial institution guarantee.

  • The basic event of the place This will happen is the place the demand is characterised as fraudulent in nature. 
  • Other circumstances embrace the place the making of the demand breaches a provision of the beneathlying enhancement or engineering contract that prohibits A requirement from being made. 
  • In Singapore and Australia, A requirement on a bond or financial institution guarantee May even be restrained the place It is unconscionable for the employer to make the demand.

Certainly, in Goldbell, the contractor sought to Rely upon “unconscionability” as a basis for looking for To cease Etiqa from making cost To vary. In refusing to grant an injunction on such a basis, the Singapore courtroom made a essential distinction between:

  • An employer’s demand for cost beneath a bond or financial institution guarantee; versus
  • An employer’s requirement thOn the bondsman “extend or pay“.

The courtroom reasoned thOn The requirements for stopping A requirement on a bond (e.g. due to the demand being unconscionable) Do not apply the place an “extend or pay” provision is activated. This strategy, if extensively adopted, highlights An monumental hazard for contractors who current efficiency bonds and financial institution guarantees which include “extend or pay” provisions. If the courtrooms are unwilling (or A minimal of reluctant) to intrude with a beneficiary’s requirement thOn the time period of a bond be prolonged or cost be Made from The quantity of the bond, the performance for abusive behaviour is prolonged.

1 The enhancement contract currentd thOn the secured sum Can be held as safety by Goldbell till the expiry of the Bond (i.e. the interval of extension as requested by Goldbell).

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