Clifford Chance

Bank restrained from demand call on grounds of fraud and unconscionability

20 May 2016

The Singapore High Court's decision in Boustead Singapore Ltd v. Arab Banking Corp (B.S.C.) [2015] 3 SLR 38 sounds a note of caution to those acting as guarantors in back-to-back guarantees – a guarantor must take care to ensure that the beneficiary's demand for payment is valid, and accords with the terms of the guarantee, before making a corresponding demand for payment from the account party

On the facts, the High Court found that BCD's demand for payment under the guarantee was invalid and had been made fraudulently, and that ABC must have or ought to have known of this. The High Court further found that ABC's corresponding demand for payment under the facility agreement had been made in reckless disregard of the invalidity and fraudulent nature of BCD's demand and as such, was itself fraudulent.

Accordingly, the High Court granted two injunctions preventing ABC from paying BCD or receiving payment from Boustead. It is also significant to note that the High Court went on to hold that even if it was wrong in its findings of fraud, it would still have granted the injunctions; this was because it would be unconscionable to require Boustead to pay on ABC's demand. In so doing, the High Court extended the unconscionability exception, developed in the context of performance bonds, to demands for payment by a bank against its customer under a facility agreement.

The High Court's decision was recently upheld by the Singapore Court of Appeal in Arab Banking Corp (B.S.C.) v. Boustead Singapore Ltd [2016] SGCA 26.

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