INTRODUCTION

1. The article aims to examine the interaction between the doctrines of subrogation and strict compliance in performance bonds. While the doctrines individually are relatively common, their interaction does not appear to have been judicially considered until the recent case of Sompo Insurance Singapore Pte Ltd v Royal & Sun Alliance Insurance plc [2021] SGHC 152 (“Sompo Insurance”). The case of Sompo Insurance was argued by the authors before Judicial Commissioner Philip Jeyaretnam by way of a registrar’s appeal and will be discussed in this article.

2. Party A, as the insurer of goods, enters into a contract for the provision of transportation services by Party B. Party A is entitled to and requires an on-demand performance bond to be procured by Party B in favour of Party A. Party B procures a performance bond by Party X in favour of Party A, providing specifically that Party X will irrevocably and unconditionally pay a fixed sum upon the demand of Party A in writing on or before the performance bond expiry date. Party A further procures insurance from an insurer, Party Y, covering the same carriage of the goods.

3. There has been a breach of the contract by Party B resulting in loss and/or damage to the goods. Party A makes a claim under its insurance policy with Party Y. Party Y makes payment under the insurance policy to Party B but does not ask Party B to enter into an agreement of subrogation, as would be usual in such circumstances. Party Y then calls on the performance bond before the expiry date in its own name and in the name of Party B. The question thus arises: Did Party Y have the right to call on the performance bond under the common law doctrine of subrogation (also crystallised in Section 79 of the Marine Insurance Act)?

THE DOCTRINE OF STRICT COMPLIANCE IN PERFORMANCE BONDS

4. In Master Marine AS v Labroy Offshore Ltd [2012] 3 SLR 125 (“Master Marine”), the Court of Appeal observed that the doctrine of strict compliance applies equally to on-demand bonds. The reasons for this were numerous:

a. This safeguards Party B from abusive calls by the beneficiary, Party A, where a simple demand by the beneficiary would be sufficient to bring about an obligation to make payment under the bond especially as the performance bond issuing party, Party X, may know nothing about the details of the underlying transactions;

b. This allows the issuing party to complete its assessment quickly, with little expenses and little need to exercise its individual discretion, thus furthering the function of performance bonds, which is to provide prompt payment to the beneficiary; and

c. Strict compliance is necessary to ensure certainty for both the account party and the beneficiary as the account party can protect his interests by inserting in the performance bond all necessary requirements before monies can be paid out and the beneficiary in turn benefits from the certainty that he will be paid if he strictly complies with the conditions, if any, of the performance bond.

5. As such, where a performance bond specified that the demand could only be made by Party A in writing, it is clear that only Party A would be entitled to make the demand. In Sompo Insurance, the demand was made by Party Y’s solicitors acting on behalf of Party Y on the basis that they were subrogated to the rights of Party A.

THE DOCTRINE OF SUBROGATION

6. The doctrine of subrogation was famously described in Castellain v Preston (1883) 11 QBD 380:

“…as between the underwriter and the assured, the underwriter is entitled to the advantage of every right of the assured, whether such a right consists of contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such a right could or could not be enforced by the insurer in the name of the assured, by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished.”

7. Despite the apparently wide scope of subrogation enunciated by Brett L.J. above, there are limits to subrogation at common law, such as:

a. the doctrine of subrogation only arises when the insurer has fully indemnified the assured;

b. the doctrine of subrogation is limited to the rights and remedies of the assured which would diminish the insured loss and as such, does not extend to gifts; and

c. the cause of action remains with the assured and the insurer cannot commence an action in its own name unless it is assigned the rights of the causes of action by the assured.

INTERACTION BETWEEN THE DOCTRINES OF SUBROGATION AND STRICT COMPLIANCE OF CALLS ON PERFORMANCE BONDS

8. Despite the best efforts of the authors, no reported case on this issue could be found in Singapore, the United Kingdom, and Australia prior to the decision made in Sompo Insurance, recently argued by the authors. However, they disagree with the holding in Sompo Insurance and are of the opinion that in the scenario set out above, Party Y or its solicitors would not have the right to make the demand on the performance bond in the name of Party B for a number of reasons.

(i) Decision in Sompo Insurance
9. The case concerned a contract between the Government of Singapore (the “Government”) and Geometra Worldwide Movers Pte Ltd (“Geometra”) to transport military cargo. As contractually required, Geometra undertook to provide an unconditional performance bond for 5% of the contract amount. This was subsequently issued by Sompo in favour of the Government. The Government had also entered into an insurance policy with the Royal & Sun Alliance Insurance plc (“RSA”) to insure the cargo.

10. The cargo was damaged during discharge and RSA indemnified the insured for the full quantified loss. On 17 March 2017, Clyde & Co LLC (“C&C”) then wrote to Sompo (“C&C letter”). The material paragraphs of the C&C letter are reproduced here in full:

“By way of introduction, we are the English solicitors acting on behalf of owners of, and those entitled to sue in respect of, the above-referenced Cargo, including subrogated underwriters and the Ministry of Defence of Singapore, being part of the Government of the Republic of Singapore.”

“Accordingly, on behalf of the Government of the Republic of Singapore, we hereby claim payment of SGD 200,945.56 within 30 days of today’s demand under performance bond no. DB3/341/92494 (see copy enclosed).”

11. None of the matters relating to the loss and/or damage to the cargo, including that it was insured and the claim was paid by insurers, were known to Sompo prior to the receipt of the C&C letter on the day prior to the expiry of the performance bond.

12. On 28 March 2017, Sompo wrote to C&C declining to make payment on the call for two reasons:-

a. First, that RSA, even if they were the subrogated cargo insurer, had no right to call on the performance bond as the Government was the only party entitled to demand payment on the bond based on the express wordings of the bond.

b. Second, that the performance bond had expired as it was not called upon by the Government within the validity period.

13. RSA argued that as the underwriter of the Government, it was entitled to exercise its right of subrogation by calling upon the performance bond.

14. Sompo contended that RSA was not entitled to call on the performance bond for the following reasons:-

a. Under the terms of the performance bond, only the Government was entitled to make a valid call.

b. Subrogation only extends to the insured’s rights against the person liable for the loss and does not extend to other means – such as the calling on the performance bond – by which the insured may recover his loss.

15. On the issue of whether the call on the performance bond was valid, the judge considered the C&C letter in light of Sompo’s argument on the principle of strict compliance. Sompo argued that cl 1 of the performance bond obliged payment to be made “upon receipt of the Government’s first demand in writing”. The judge rejected this argument on the ground that the wording of the performance bond did not require accompanying evidence of authority and that the C&C letter was sufficient as C&C derived their authority from RSA by virtue of subrogation and did not purport to act on the Government’s express authority. The judge found that this was sufficient to satisfy the requirements for a call on the performance bond which was a demand in writing from “the Government”.

16. On the issue of the extent of subrogation, the judge considered whether RSA was subrogated to the Government’s rights under the performance bond. Sompo argued that the doctrine of subrogation was only limited to the rights and remedies of the assured against the person liable for the loss, and that Sompo was not the party liable for the loss and/or damage to the goods. The judge found that upon payment to the insured, an insurer would be subrogated to the insured’s rights even on a contract that was not given by the party liable for the loss such as the performance bond given by Sompo. It would be sufficient so long as the contract concerns the subject-matter of the insured loss.

(ii) Authors’ commentary on decision in Sompo Insurance
17. The decision made in Sompo Insurance has essentially set the position in the novel area of an insurer’s right of subrogation in relation to performance bonds. Specifically, that the insurer’s right of subrogation extends to the right to call upon a performance bond issued to the insured even where the performance bond unequivocally states that the call is to be made by the named beneficiary in the bond only and makes no mention of the beneficiary’s insurer. The decision has also confirmed that insurers are not limited to recovering against only the person liable for the loss and/or damage to the goods but are able to use all of the rights and remedies available to the insured, including calling on the performance bond under rights of subrogation.

18. However, the authors respectfully disagree with the holding in Sompo Insurance. Specifically, on the validity of the call on the performance bond.

19. On the issue of whether the call on the performance bond was valid, the judge considered the C&C letter in light of Sompo’s argument on the principle of strict compliance. Sompo argued that cl 1 of the performance bond obliged payment to be made “upon receipt of the Government’s first demand in writing”. The judge accepted that C&C did not provide Sompo with any evidence of its authority from the Government to make the call on the Government’s behalf (i.e., warrants to act or any other documents or correspondence evincing instructions or authority to call on the performance bond). His honour further accepted that if C&C were relying on RSA having been subrogated to the Government’s rights, it also had not provided documents showing how it was entitled to exercise its subrogated rights (i.e., evidence of the insurance contract or its payment thereunder). The judge found that C&C did not provide any evidence of authority given to it by RSA.

20. However, in light of the abovementioned findings on the lack of documentation provided to Sompo, the judge still held that the call was valid as the wording of the performance bond did not state that “the demand must be accompanied by proof of authority of the person making the demand on the Government’s behalf”. The judge went on to mention if such proof of authority were required, “that stipulation would have been included as a term of the Performance Bond”.

21. The authors argue that this would go against the principles of strict compliance as it is arguably clear on the face of clause 1 that the demand had to be issued by the Government. Whilst there was no explicit mention of the requirement of accompanying evidence of authority, such must surely be expected in order to give effect to the rationales behind the principles of strict compliance as mentioned earlier in this article.

22. To reiterate, the reasons mentioned in the case of Master Marine would be instructive as to the reasons for the doctrine of strict compliance. The authors argue that despite there being no explicit reference to requiring accompanying evidence of authority, the mere fact that clause 1 stipulates that the demand had to be issued by the Government specifically and not “to the Government or its assigns”, would clearly require proof on the part of whomever is alleging to act on its behalf. This should be the position as per the principles of strict compliance in order to provide safeguards against abusive calls and to embolden issuing parties to make prompt payment. Moreover, there would also be little to no additional costs or hassle on the part of the party alleging to act on behalf of the beneficiary to produce evidence of authorisation.

23. As such, for the sake of certainty and to give effect to the reasons mentioned in Master Marine for the principles of strict compliance, it should necessarily follow that evidence of authorisation is required and the holding in Sompo Insurance should be revisited by the courts in future.

(iii) Authors’ proposals
24. Firstly, subrogation is to be distinguished from assignment of the insured’s right, which would give the insurer the right to call on the performance bond in its own name. Subrogation, on the other hand, does not extend to allowing the insurer to act in its own name. This is evinced by the fact that an insurer cannot commence an action in its own name without the permission of Party B. It was held in Castellain v Preston (1883) 11 QBD 380 that “… the underwriter is entitled to the advantage of every right of the assured”. As such, the authors are not suggesting that RSA was not entitled to recover the funds in Sompo Insurance, but rather, that RSA itself cannot make the call on the performance bond and needs the Government to make the call. There is no doubt that the insurer is entitled to the funds recoverable by the insured. However, the right of the insurer does not extend to the right to make a demand on the performance bond itself.

25. Secondly, it would be contrary to the doctrine of strict compliance to allow a party who has (1) not been named in the performance bond as a party with a right to make a demand on the performance bond and (2) no connection with the party that issued the performance bond, to now be allowed to make a call on the performance bond on the basis of subrogation rights. This would require the party that issued the performance bond to investigate and verify that the party making the demand on the performance bond has indeed been properly subrogated to the actual named beneficiary’s rights which would introduce uncertainty in the process and place the issuer of the bond under added obligations to investigate and verify that the call was made validly by some other part other than the named beneficiary in the bond.

26. Thirdly, the authors note that it is perfectly lawful for a party to insure any subject-matter in which he has an insurable interest as many times and under as many policies, as he wishes. This means that the insured could be indemnified by multiple insurers for an amount totalling his actual loss. In such an instance, to allow each of the insurers to claim under the performance bond for the amount that they have paid out would further create uncertainty and delays of payment. The authors contend that this will necessarily be the result in light of the holding in Sompo Insurance extending the extent of subrogation to calls by subrogated insurers under performance bonds.

CONCLUSION

27. The authors thus conclude that in the scenario set out in the above introduction, the insurer, Party Y does not have the right to make a call on the performance bond, either in its own name or Party A’s name of Party on the basis of subrogation. Instead, they would suggest that there is an obligation on Party A to make the call on the performance bond in its own name as part of its obligation to take all reasonable steps to preserve the efficacy of its remedy against the third party for the insurer upon subrogation. The issuer of the performance bond should not be burdened with investigating into or verifying such rights to call on a performance bond unless the bond by its express provisions permits it.

Authors:

Mr Govintharasah s/o Ramanathan
Managing Director
govin@gurbaniandco.com

Founding Partner and Manging Director of Gurbani & Co LLC. Practising primarily as a litigation and arbitration lawyer and arbitrator since 1989. Engaged mainly as Lead Counsel in civil litigation, international arbitration and occasionally as Arbitrator involving disputes in insurance, including marine insurance, cross-border, commercial and personal investments, infrastructure construction projects (power plants, hydroelectric dams oil rigs), shipbuilding, rig construction-sales and purchase, disputes related to carriage of goods by sea, air, road, freight forwarding, ship sales and purchase, chartering, all types of shipping casualties (sinkings, groundings/collisions, piracy, fire), personal injuries and death.

Advising on and engaged by international law firms in the cross-border enforcement of foreign judgments and arbitral awards in various jurisdictions in the ASEAN countries, India, and China through a well-established network of local correspondent firms.

Setting up of new corporate projects, companies, joint ventures, acquisitions, preparation of all types of commercial agreements including start-ups.

Ms Beverly Nah
Legal Associate
beverly@gurbaniandco.com

Beverly Nah is a legal associate and practises in a number of areas, mainly admiralty, corporate and insurance law. She has researched on novel points of law and drafted multiple written submissions and affidavits for matters at both the State and Supreme Courts as both a trainee and an associate. Beverly has learnt to adapt to legal methods as well as factor in efficient business practices in assisting clients with concluding matters to the satisfaction of all parties in a cost-efficient manner. Beverly’s practice also includes non-contentious matters such as reviewing and drafting agreements and contracts.