INDEMNITY PERFORMANCE BOND VS. ON-DEMAND PERFORMANCE BOND

Performance bonds are an important feature in many construction contracts. In Tradesmen Pte Ltd v Ten-League Corporations Pte Ltd [2025] SGHC 114, the High Court made clear the distinction between an indemnity performance bond versus an on-demand performance bond.

 

The Background. Tradesmen Pte Ltd (the “Applicant”) was engaged by Ten-League Corporations Pte Ltd (the “Respondent”) for an additions and alterations project at Tuas (Judgment [1]).

The contract between the Applicant and the Respondent included, among others, a letter of acceptance as well as the Real Estate Developers’ Association of Singapore Design and Build Conditions of Main Contract (4th Ed, 2022) (the “REDAS Conditions”) (Judgment [4]), and the Applicant was required to provide a performance bond (the “PBond”) pursuant to the terms of the contract (Judgment [1]).

 

The dispute. The Respondent called on the PBond, and the Applicant sought to restrain the call. The key issue turned on whether the PBond was an on-demand performance bond, or an indemnity performance bond (Judgment [2]).

The distinction between the two is set out by the High Court at Judgment [20]. In short:

  1. If the bond is an on-demand bond, then “the guarantor must pay the beneficiary the bonded sum when the demand is made in the manner provided for, and the beneficiary need not prove a breach of the underlying contract or that it has suffered loss”.

  2. But if it is an indemnity performance bond, i.e., a conditional performance bond, then “the guarantor only becomes liable to the beneficiary for the bonded sum on proof of a breach of the underlying contract, or on proof of both breach and loss resulting from the breach, depending on the terms of the performance bond”.

 

The Performance Bond. It is therefore clear that the wording of the PBond was crucial to the case. The High Court carefully analysed the wording of the relevant provisions in question, and concluded that the PBond was an indemnity performance bond. In particular, the High Court made the following findings.

  1.  The High Court found that the clauses in the PBond itself had contradictory effects. While Clause 1 of the PBond resembles the clause in Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 3 SLR(R) 198 and suggested that the bond was an on-demand bond, Clause 2 of the PBond was worded almost identically to clause 1 of the performance bond in JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47, which was an indemnity performance bond (Judgment [30] – [31]). So, the PBond was ambiguous as to whether it was an on-demand or indemnity performance bond.

  2.  Given this, the High Court turned to the terms of the contract between the Parties (Judgment [32]). The High Court noted that while Appendix 6 of the REDAS Conditions contained a specimen performance bond, which was “unequivocally worded as an on-demand bond … the parties chose not to use the specimen on-demand bond and decided to word the [PBond] differently… and instead inserted a new cl 2 into the [PBond]… [which] suggests that the parties intended for the [PBond] not to have an effect like that of the specimen performance bond” (Judgment [32(a)]).

  3.  The High Court further noted that while Clause 2.1.3 of the REDAS Conditions permitted that the Respondent could use the monies obtained from a call on the bond to “set-off any loss or damaged incurred or likely to be incurred”, which “… differs from the wordings in an indemnity performance bond, which could only be called upon when the Respondent actually incurred loss”, nonetheless, despite Clause 2.1.3 of the REDAS Conditions, the “parties in this case deliberately omitted to state that the bond moneys could be used to make good losses that were “likely to be incurred”, but were not yet incurred, in the [PBond]. This omission suggests that the parties intended to limit the effect of the [PBond], to only indemnify actual losses (ie, to operate as an indemnity performance bond).” (Judgment [32(b)]).

  4.  The High Court also observed that the PBond was given in lieu of cash that would have served as a 10% security deposit or retention sum (Judgment [32(c)]). Given this, “[s]ince the retention sum was, practically speaking, meant to indemnify against actual losses, the performance bond given in lieu of it would also serve a similar purpose. It is only because of the clear wording of the specimen performance bond in Appendix 6 that the performance bond provided for in the REDAS Conditions ultimately had the effect of an on-demand bond. In this case, the [PBond] does not contain clear and unequivocal language providing for an on-demand bond, as in Appendix 6 of the REDAS Conditions” (Judgment [32(c)]).

 Based on the above, and bearing in mind that “any ambiguity in the language of a performance bond should be construed against the beneficiary” (Judgment [33] citing York International Pte Ltd v Voltas Ltd [2013] 3 SLR 1142 at [35]), the High Court concluded that the PBond ought to be construed as an indemnity performance bond.

 

Implication. On the facts of the case, when the Respondent called on the PBond, the Respondent had stated the following (taken from Judgment [18]):

 “We refer to the Performance Bond … dated 27 March 2024 issued by [Liberty], in favour of [the Respondent].

 Pursuant to Clause 1 of the Bond, we hereby give you notice of our claim and demand full payment of the Guaranteed Sum (as defined in the Bond) of $570,000.00.

 Please make payment of the said sum of $570,000.00 as soon as possible.

 Our rights remain fully reserved.”

 The High Court found at Judgment [34] that the Respondent did not validly call on the PBond, as the bond call did not state that the Applicant had breached the contract, or that the Respondent had suffered loss due to the Applicant’s breach of contract. Given this, the High Court found that the call did not meet the conditions set out in Clause 2 of the PBond, and was thus invalid.

 

Conclusion. While the legal principles behind a call (and restraining a call) on a performance bond are well-established, this case is a reminder that it is dangerous to assume that the wording of performance bonds are always the same. Given that a performance bond often represent a significant portion of the contract sum, careful attention should always be paid to the contractual provisions relating to the performance bond and the wording of the performance bond itself.

 

This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.

Xian Ying Tan