1. What is an "Extend or Pay" clause?

A standard performance BG / Bond says:

Expiry Date: 30.11.2019 unless renewed or extended.
Clause 6 - Without prejudice, the Beneficiary shall be at liberty to demand at any time that the Guarantor either extend the validity period of the Bond or, in lieu of such extension, make payment forthwith.

Purpose: Project gets delayed beyond original BG validity. Employer needs security to continue. So instead of a straight call for payment under Clause 1, Employer can invoke Clause 6 and give the Issuer a choice: Extend or Pay.

This is also recognized in URDG 758 Article 23: If requested in the demand, guarantor can extend validity for not exceeding 30 calendar days following receipt of demand as alternative to immediate payment.

2. The Handling Gap

The Gap is procedural and substantive:

A. Not a Demand vs. Demand confusion
Under classic law, a demand for payment under BG is independent, unconditional. Contractor can only get injunction if fraud, irretrievable injustice, or special equities.

But is an "Extend or Pay" request a call? Singapore High Court in Goldbell Engineering Pte Ltd v Etiqa Insurance Pte Ltd v Range Construction Pte Ltd [2022] SGHC 1 held: No.

The court rejected the argument that the Extend or Pay Request was in truth a call on the Bond. It followed that Etiqa’s obligation to make payment arose from the Extend or Pay Request itself.

Consequence: If it is not a call for payment, the well-established tests for restraining a call - fraud, unconscionability - do not apply.

The court reasoned that the criteria for preventing a demand on a bond [e.g. due to demand being unconscionable] do not apply where an "extend or pay" provision is activated.

This is the Gap.

B. Bank's Dilemma

1. Upon receipt of Extend-or-Pay notice, bank has to choose within 5 days whether to issue fresh bond.
2. To extend, bank needs fresh indemnity / counter-indemnity and premium from Contractor.
3. Contractor refuses to give indemnity, saying Employer delay is causing need for extension.
4. Bank cannot extend, so it must pay. In Goldbell, Etiqa did not extend because it had not received fresh indemnity from Range. Then Employer sued Bank for payment.
5. Contractor then tries to injunct Bank from paying, but his injunction is treated as injunction against extension request, not payment demand, and fails.

So Risk Allocation shifts entirely to Contractor: You agreed to this form of security, you bear cost of extension even if delay is Employer's fault.

3. Case Law Evolution

Lead Case: Goldbell v Etiqa [2022] SGHC 1

Facts: Range provided SGD 3.8M performance bond expiring 30 Nov 2019. Project delayed, defects alleged. Goldbell invoked Clause 6 to extend till end of maintenance. Range obtained ex-parte injunction restraining Goldbell from requesting extension and receiving money. Court set aside injunction, held:

• Goldbell repeated wording of Clause 6, valid Extend-or-Pay Request
• Upon receipt, it is up to Etiqa to choose extend or pay, not open for Range to complain as this reflects allocation of risk

2. Arab Banking Corp (B.S.C.) v Boustead Singapore Ltd [2016] SGCA 26
Pre-cursor. ODAC (Libyan beneficiary) issued extend or pay notice on 16 May 2011 in respect of APG and PG. SGCA held unconscionability is distinct ground in Singapore, separate from fraud, and that Libyan revolution + cessation of underlying contract made demand unconscionable. Shows where extend-or-pay can be restrained if unconscionable circumstances.

3. Indian Law - Strict Autonomy Principle:

India does NOT have separate unconscionability exception like Singapore. Indian position:

U.P. State Sugar Corporation v. Sumac International - (1997) 1 SCC 568, NTPC v. Flowmore - (1984), SKS Power Generation v Canara Bank (Bombay HC 2017): Court can interfere only if fraud of egregious nature, irretrievable injustice, special equities.

GAIL India Ltd v UCO Bank - Delhi HC RFA(OS)(COMM) 5/2024: BG initially expiring Oct 2012, extended till 25 April 2013. GAIL invoked by letter 15 April 2013. Court examined whether invocation within validity.

Harji Engineering Works Pvt Ltd v Punjab & Sind Bank - Delhi HC: Justice V. Kameswar Rao held where BG provides 90 days from expiry of defect liability period, invocation after that not permissible merely because BG was extended. Mere extension of BG does not by itself extend claim period.

Kerala HC - Right to invoke only during currency, not extended claim period of 1 year. Bombay HC similarly held expired BG cannot be enforced if no written claim lodged within validity.

CTUIL v IDBI Bank - Supreme Court 2024: IDBI refused payment contending guarantee not invoked within stipulated period and no extension sought. SC declined to interfere, reinforcing strict compliance with invocation timeline.

The Indian Gap: If Beneficiary sends Extend-or-Pay notice on last day of validity, but Bank neither extends nor pays immediately, and validity expires, is it a valid invocation? Indian courts treat Extend-or-Pay notice itself as not a demand for payment under Clause 1, so Beneficiary must also make a separate compliant demand within validity. Many PSUs fail this.

4. Why Employers Use It & Why Contractors Hate It

• Employer: Ensures continuous security without proving breach. Avoids fraud argument.
• Contractor: Pays premium indefinitely for Employer-caused delay. No judicial remedy because Goldbell says unconscionability test for payment demands does not apply to extend-or-pay.

Commercial implication noted in JD Supra: Provisions are potentially open to abuse.

5. Best Practice to Close the Gap

For Contractor / Bidder:

1. Delete Clause 6 or cap it: "Beneficiary may request extension only once for max 6 months"
2. Add: "Extension request only if Employer grants EOT and pays cost of extension at 1.5% per annum"
3. Require: Extend-or-Pay notice must be in same form as demand under Clause 1 and state amount.

For Beneficiary / Employer:
Draft demand exactly replicating Clause 6 wording to avoid invalidity - Goldbell won because it repeated wording.

For Bank / Insurer:

1. Incorporate URDG 758 Art 23 explicitly: 30-day window to extend.
2. Take evergreen counter-indemnity at issuance covering all extensions.

For Legal Handling:

• Do NOT file injunction against "payment". File against "Extend or Pay Request" and argue it is in breach of underlying construction contract term prohibiting demand - the only exception recognized in England and Singapore.