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Housing Authority v Bank of Baroda [2012] FJHC 955; HBC348.2010 (16 March 2012)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION


Civil Action No. HBC 348 of 2010


BETWEEN :


HOUSING AUTHORITY
a statutory body established by the Housing Authority (Cap. 267)
having its registered office at Suva
in the Republic of Fiji Islands.
PLAINTIFF


AND:


BANK OF BARODA
a body corporate duly incorporated in India,
having its Head Office at Mandvi, Baroda, India and duly registered in Fiji
under Part X of the Companies Act and
having its Head Office at 86 – 88 Marks Street, Suva, Fiji.
DEFENDANT


BEFORE : Master Deepthi Amaratunga


COUNSEL : Mr. V. P. Maharaj for the Plaintiff

Ms. Devan R. S. S for the Defendant


Date of Hearing : 28th February, 2012

Date of Ruling : 16th March, 2012


DECISION

Summary Judgment


  1. INTRODUCTION
  1. This is the Plaintiff's summons seeking summary judgment for a sum pursuant to a Performance Bond. The Plaintiff has on 16th November 2011 filed a Summon pursuant to Order 14 of the High Court Rules in which it sought judgment in the sum of $670,119.30 in pursuant to Performance Bond. The Performance Bond in issue is silent on the issue of demand. The demand of performance bond is essential and the requirements of such demand are not contained in the bond. The bond is valid for a specific period and no demand for money was made during the time of validity and only a copy of a letter of suspension of work of the contractor was communicated during the validity of the said period of the Performance Bond which expired on 9th May, 2010. In the said letter addressed to the contractor, there was no mentioning of performance bond, but now the Plaintiff state that by replying to the said letter the Performance Bond was extended. The extension on 'merits' as per the condition was allowed, but there was no request to extend, and no evidence of extension was available to me in this application. The demand notice was given only on 15th October, 2010 soon after the contractor was evicted from the construction premises. This is after the expiry of the validity period of the Performance Bond. So, the application for summary judgment for the recovery of the said sum stated in the performance bond, cannot be granted and the defence of expiration of the bond cannot be considered as a 'sham' defence. There was no request for the extension of the bond, any extension has to be done by the parties to the bond and the Plaintiff being only a third party (beneficiary) cannot unilaterally extend the bond based on a copy of a letter that did not contain anything about Performance Bond and a letter of inquiry by the bank as to the status of the suspension of work of the contractor.
  1. FACTS
  1. The Plaintiff has on 16th November 2011 filed a Summon pursuant to Order 14 of the High Court Rules in which it seeks judgment in the sum of $670,119.30 in pursuant to a Performance Bond between the Bulileka Hire Services (hereinafter referred as the contractor) and the Defendant (Bank).
  2. The Summons is supported by an affidavit of Jagdish Prasad sworn on 5th December 2011. The affidavit in support sets out the basis of the claim.
  3. The Defendant, through its Labasa branch Manager, namely, Vinod Prasad filed in opposition in which the Defendant opposed the application, essentially on one ground, in that, the Performance Bond pursuant to which the Plaintiff has brought the claim, had expired on 9th May, 2010 as stipulated in the said bond and there was no extension of it and no demand was made during that time period of validity for payment of the sum stated in the bond.
  4. On 15th February 2012 Housing Authority (Plaintiff herein) through its Manager Corporate Governance, namely, Jagdish Prasad filed a Reply to the affidavit in opposition of Vinod Prasad.
  5. The Plaintiff's claim against the Defendant is based on the Performance Bond dated 17th February 2009 issued by the Bank of Baroda (Defendant) in favour of the Plaintiff for a specific period of time which expired on 9th May, 2010.
  6. The cause of action is based on the Performance Bond and what the Plaintiff is seeking is a claim based on the refusal of the Defendant to pay the agreed sum under the Performance Bond when called upon to do so by a demand in 15th October, 2010.
  7. By a letter dated 25th March 2010 the Plaintiff had suspended the works of the contractor and that letter of suspension was copied to the General Manager of the Defendant Bank's Suva branch, but failed to mention anything regarding the performance bond save any request of demand and or any extension.
  8. That letter of suspension was only copied to the General Manager, Bank of Baroda, Suva but the performance bond indicate the Bank of Baroda of Main Street, Nasekula Road, Labasa as the surety.
  9. The demand of the Plaintiff for the release of the money was made on 15th October, 2010 to the Branch Manager, Bank of Baroda, Main Street, Nasekula Road, Labasa as indicated in the performance bond as the surety.
  10. The Plaintiff's contention is that the Defendant by replying to the said letter of 25th March, 2010 extended the Performance Bond.
  11. The Performance Bond contained a validity period and stated that it can be extended on 'merits'.

Has the Performance Bond being extended.


  1. The performance bond is a guarantee to the principal for the payment of money in the event of default by the contractor of the contract between the Principal (the Plaintiff) and the Contractor. The contracting parties are the Contractor and a financial institute (Bank). In this instance the parties to the contract are the contractor (Bulileka Hire Services Ltd) and Bank of Baroda of Main Street, Nasekula Road, Labasa. The Plaintiff is only a beneficiary of the said contract and not a contracting party to the bond.
  2. In the said Performance Bond which is annexed as 'A' to the affidavit in support contains an express clause that deals with the extension of the contract and it states as follows

'6. This bond is valid up to 9th May 2010 and may be extended on merits.'


  1. The Plaintiff is not a contracting party, and only a beneficiary of that bond. So, a beneficiary of a bond who was not a party to the contract would not be in a position to extend it and by the same token, the Plaintiff cannot extend the said contract as any extension may need additional guarantee or payment of money which the contractor will be obliged to provide. Any extension will also depend on the intention of the parties to the contract, to continue with each other's obligations under the contract for a specific time period.
  2. The Plaintiff has copied a letter dated 25th March, 2010 to the General Manager of Bank of Baroda, Suva. The said letter was addressed to the Contractor and the heading read as follows

'Re: Suspension of the Whole Works under the Contractual Agreement in the Wainibuku Sub-Division.'


  1. There is nothing in the body of the said letter that refers to a performance bond between the contractor and the Defendant and in the circumstances the said letter cannot be considered as even a proper notice save any demand and or any extension of it as alleged by the Plaintiff.
  2. The said letter of 25th March, 2011 was addressed to General Manager of Bank of Baroda, Suva as opposed to the Bank of Baroda, of Main Street, Nasekula Road, Labasa as named in the Performance Bond. It is to be noted that the notice of demand where the Plaintiff demanded the sum stated in the Bond, was made on 15th October, 2010 and that is addressed to the said address, Bank of Baroda, of Main Street, Nasekula Road, Labasa as stated in the Bond as the surety. No explanation is provided by the Plaintiff for the change of the address.
  3. This indicates that the letter written of 25th March, 2010 was only a communication between the contractor and the Plaintiff regarding the suspension of the work to the contractor and by copying it to the General Manager of Bank of Baroda, Suva, the Defendant cannot now take a view that the said copying of the letter to the Defendant, and subsequent inquiry is by the Defendant of the status of the suspension of the work, as an extension of the contract.
  4. The validity of the bond is clearly restricted to the 9th May, 2010 and if the Plaintiff desired an extension of that beyond the time period it could have requested so prior to the expiry of the Bond, by requesting to do so by the contractor and or from the Defendant, who were parties to the said bond. This is more pertinent when the Plaintiff had already suspended the work of the contractor.
  5. A diligent principle who is the beneficiary of the Performance Bond, would have easily demanded the money secured by the Performance Bond from the Defendant before the expiry of the time period stated in the bond. The Plaintiff did not do so and only communication to the Defendant before the expiration of the time period is the copy of the letter of suspension of work by the Plaintiff. That communication is not a demand though there is no specific form of demand required in the Bond.
  6. There is nothing contained in the said letter indicating the existence of the performance bond and has not even referred to it once and it only addressed to the contractor and deals with only the suspension of the work. Under the circumstance how such a copy of letter addressed to the contractor which is silent on the issue of performance bond, be regarded as having any legally binding notice or demand, has not been addressed by the Plaintiff.
  7. The Defendant has written a letter on 29th June, 2010 to the Plaintiff seeking advice on the status of the contract cannot be considered as an extension of the Performance Contract. The Defendant cannot unilaterally extend the performance bond. The time period of validity in any Performance Bond is vital for the discharge of its obligations and any communication between the beneficiary and the Defendant bank cannot extend the clear and unambiguous time period of validity of the bond unless the contracting parties have agreed to do so under terms and conditions agreeable to them at the time of extension if that is granted.
  8. So, this letter of Defendant, by its letter of 29th June, 2010 inquiring the status, of the contract by between the Plaintiff and the contractor, can only indicate that there was a knowledge of the suspension of building contract by the Plaintiff and it had inquired it from the Plaintiff.
  9. The Defendant is not obliged to pay the money until a demand is made. Having knowledge of the suspension is not as same as making a demand and without a demand an issue of payment would not arise. In this case no demand for payment was made till the conclusion of the contract.
  10. Even after the said letter of 29th June, 2010 where the Defendant inquired the status of the building contract between the Plaintiff and the contractor, the Plaintiff did not make a demand of money from the Defendant and only reaffirmed that the contract between the Plaintiff and the contractor had been suspended, and then waited more than 3 months before making a demand from the Defendant on 15th October, 2010. This action of the Plaintiff clearly indicates that they cannot blame anybody but themselves for their gross negligence and to claim the money due on Performance Bond, during the time period of validity of the said bond.
  11. It is also clear from the contents of the letter of 15th October, 2010 that the demand was made after the contractor being evicted from the premises and had obtained possession of the premises. The Plaintiff waited so long to demand after the expiration of the Performance bond without realizing that by time the demand is made, the Performance Bond has expired.

"Re: Performance Bond for Wainibuku Residential Subdivision by Bulileka Hire Services Ltd.


We refer to our attached copy of letter dated 14th instant addressed to the contractor, Bulileka hire Services Ltd in the above matter wherein the Authority as principal has expelled the contractor and had taken possession of the above site due to non-compliance by the contractor as specified in our said letter.


The Authority as principal hereby demand payment from your Bank in the sum of $670,119.30 held by you as surety in respect of the above contract pursuant to Bond dated 17th February 2009." (emphasis is added)


  1. The Plaintiff has waited till the contractor was evicted from the premises to demand from the Defendant on the said bond, without noticing that by that time the bond had already expired. No extension of communication of a request for extension of the bond was produced in this hearing. Without a request a Performance Bond cannot be extended either by Plaintiff or by the Defendant.
  2. The Plaintiff did not address this vital issue adequately either in the written submission or in the oral hearing. Their contention is that the Performance Bond was extended by Defendant's letter of 29th June, 2010 inquiring as to the status of the suspension of work by the Plaintiff cannot be accepted as any extension has to be done on the request of the contractor and there was no such request. The Plaintiff being the beneficiary of the said bond is a third party to the said performance bond and would have been cautious and would have requested extension from the contractor prior to the expiration of the Performance Bond, instead it waited till the bond expired and now seek refuge in a copy of the letter of suspension of work on 25th March, 2010 and the letter of the Defendant inquiring the status of the said suspension in 29th June, 2010. This is nothing but, a futile effort to revive an expired Performance Bond which clearly indicted a date of expiry and no evidence of extension or even a request to extend was made available to me for consideration at this hearing.
  3. The Plaintiff state that the bond cannot be cancelled without notice to the Plaintiff, this is clearly not correct. There is no provision for the cancellation of the Bond, but clearly indicated that it was valid only up to 9th May, 2010. So, there was no cancellation, as alleged by the Plaintiff, but the Performance Bond expired as per the terms of the Bond on 9th May, 2010 unless it was extended. The alleged requirement of notice to the Plaintiff would not arise in the circumstances as the Performance Bond expired not due to request or other intervening circumstances, but as per the condition stipulated in the Performance Bond. There is no requirement of additional notice as per the conditions laid down in the Performance Bond. The Plaintiff was unable to provide any case which had decided otherwise.
  4. "Performance bonds, standby letter of credit and such other guarantees are used in international supply and construction contracts. Thus once the beneficiary has made a demand, part from fraud on the part of the beneficiary, under a duty to pay" Halsbury's Laws (4th Edn) para 1388 and 41 Halsbury's Laws (4th Edn) para 960
  5. They used to ensure the financial standing of the supplier or contractor and are a guarantee that he will fulfill his contractual obligations. Like documentary credits, they enable a Contracting party to rely on the honor of the Bank, rather than on that of the other party to the contract. Like documentary credits, a bank, at the request of its customer, promises to pay the beneficiary a sum of money in the happening of an event. The event may be a simple demand for payment by the beneficiary, or it may involve the presentation of documents, for example architects certificates (in a Performance Bond) to the Bank (Atkins Court Forms (2nd Edn) para 49, page 261)
  6. The Lord Justice Lord Denning MR in Edward Owen Engineering Ltd v Barclay's Bank International Ltd [1978] 1 Q.B. 159 at 169 in paragraphs A, B, C stated as:

A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credits, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credits. That was clearly stated in Hamzeh Malas & Sons v British Imex Industries Ltd [ 1958] 2 Q.B. 127. Jenkins L.J giving the judgment of his court, said at p 129:


".... it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and in my judgment, it would be wrong for this court in the present case to interfere with the established practice."

To this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the bank. (emphasis is added)


  1. So, there is no absolute right to the Plaintiff to claim money upon a Performance Bond, the payment is subject to terms of the bond and the essential feature is that the payment is not dependent on any outstanding dispute as to the performance of the obligations between the principal (the Plaintiff) and the contractor. This position was assured in Edward Owen Engineering Ltd v Barclay's Bank International Ltd [1978] 1 Q.B. 159 at 169 . There is no allegation of fraud against the Bank and the exception to rules has no application in the case before me, but what is preliminary to payment of money stated in the bond is the existence of valid performance bond at the time of the demand. In the said judgment of Lord Denning MR at page 171 after analysis of Performance Bond /Performance Guarantee as against letter of credit stated

'All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms.' (emphasis is mine)


  1. So, what is paramount in consideration at the preliminary stage is whether the Performance Bond is valid at the time of the demand is made. The bank will only obliged to pay at the time of the demand is made as per the terms of the bond and when the bond specifically indicates a time period a demand should be made before the expiry of the validity of the bond. The letter of 25th March, 2010 which suspended the work of the contractor was primarily aimed at the contractor and the said letter is silent on the performance bond and was copied to the General Manager, of the Suva branch of Bank of Baroda though the Performance Bond indicates the Labasa branch of the Bank of Baroda as the surety. There is no explanation given by the Plaintiff for the said change. In any event, even if that letter was communicated to the surety it cannot be elevated even to a notice of default as the said letter was not addressed to the Defendant and the body of the letter did not contain anything regarding the performance contract. Even assuming that the letter was copied to the proper surety as indicated in the Performance Bond, still the letter could not be considered as proper notice as it has failed to mention the reason for copying the letter to the Defendant and it is completely silent on the performance bond. The Defendant being one of the leading commercial bank in Fiji cannot expect to go through all their transactions to see the relevance of the letter to one particular transaction, when the body of the letter did not indicate the Defendant's involvement or did not indicate the reason for copying the said letter. Even assuming that the bank knew the reason for copying the said letter, as the Bank has made further inquiries as to the status of the suspension of the contract, that inquiry would indicate that there was knowledge of the suspension of work by the Plaintiff. The notice of suspension of work would by itself would not amount to any demand of money from the Defendant as it was only the first step in the cancellation of work. So, the responsibility of making a demand lies fairly and squarely on the Plaintiff and that it was done only on 15th October, 2010. This letter had been addressed to the Labasa Branch of Bank of Baroda, as indicated in the Performance Bond as surety and has made reference to the said bond and has made demand for the specific amount as per the bond. Unfortunately, the Performance Bond has expired on 9th March, 2010 and no extension of it was granted.
  2. In the case of I.E.Contractors v Lloys [1990] Lloyd's Law Report 496 at p 499 stated as follows

'We were told, and Iam quite prepared to accept, that some performance bonds are payable merely upon a demand being made, without requiring presenting of any other document or the assertion of any fact (unless the demand itself contains and implied assertion that the money is due). It was suggested that even an oral demand would be sufficient; but I would hesitate long before construing a performance bond as having that effect.' (emphasis is added)


  1. The above quoted passage indicates the importance of the demand, and the courts have yet to declare a letter of suspension of work without referring to performance bond, but copied to an address other than what was indicated in the performance bond as the surety as a proper demand. This communication at the maximum, can be regarded as informing the suspension, but falls short of any notice of demand. Even assuming that the said letter being a notice of intended demand, unless a demand is made before the expiry the copy of the letter cannot elevated to anything more than what was contained in the said letter. The said letter is silent on the issue of performance bond and or any demand of it.
  2. In Gold Coast v Caja de Ahorros [2002] Vol1 p 616 at p 622 at paragraph 22 stated as follows

'There is nothing unusual about such a condition in a first demand guarantee where often it is simply the contracting party who has to state that he is entitled to be paid the amount guaranteed in order to trigger payment.'


Further at paragraph 24 stated


'....It is the contract which creates rights and obligations......'


  1. So, the liberty of the parties to arrive at a contract desirable to parties was emphasized. Though the beneficiary is not a party to the contract, it is a fact that the Performance Bond is issued to secure the beneficiary at the time of entering in to the contract between the Principal and the contractor and the request for such a security is from the principal. So, the Plaintiff had the liberty to request for a performance bond with sufficient guarantee contained, in the terms of the Performance Bond, though Plaintiff was not a party to the Performance Bond and only a beneficiary to it. Once, it is made and accepted by the Plaintiff as sufficient surety, it cannot deviate from the conditions contained in the bond which it had consented and accepted as surety.
  2. I do not intend to elaborate on the principles of summary judgment, but suffice to state that summary judgment can be obtained if the facts are not disputed on a valid performance bond at the time of the demand. The defence of expiry of the bond at the time of demand, cannot be considered as a 'sham' defence and not without merits. In the analysis contained in this decision, by any stretch of imagination, the said defense contained in the statement of defence cannot be considered as a defence that would doomed to fail and or without merit. In the absence of valid performance bond at the time of the demand and no evidence of extension of it, this application for summary judgment should be struck off.
  1. CONCLUSION
  1. This is an application for summary judgment. Summary judgment is granted when the defence is without merit and can be regarded as 'sham' defence and considered as it would doomed to fail. If not the summons should be dismissed. The Defence of the Defendant is that at the time of the demand on 15th October, 2010 the Performance Bond between the Defendant and the contractor has expired. The condition 6 contained in the Performance Bond expressly state the time of validity. The bond expired on 9th May, 2010 and no evidenced of extension was made available to me. The letter of 29th June, 2010 of the Defendant inquiring the status of the suspension of work by the Plaintiff cannot extend the Performance Bond that entered between the contractor and the surety (Defendant). The application for summary judgment is struck off. The cost of this application is cost in the cause.
  1. FINAL ORDERS
  1. The summons dated 16th November 2011 filed in pursuant to Order 14 of the High Court Rules for summary judgment is struck off.
  2. Cost in the cause.

Dated at Suva this 16th day of March, 2012.


.................................................
Mr. Deepthi Amaratunga
Master of the High Court
Suva

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