Statutory adjudication and the standard building contract in Singapore Is the Final Payment referable to statutory adjudication?

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1 Statutory adjudication and the standard building contract in Singapore Is the Final Payment referable to statutory adjudication? Dr Philip Chan National University of Singapore The first case that went to the High Court in Singapore challenging the validity of an adjudicator s determination decided that the adjudicator s determination involving a final payment is valid. This case is important as it sets the guidelines on the interpretation of the provisions in the Building and Construction Industry Security of Payment Act regarding the relationship between the Act and the payment provisions in the standard form of building contracts. This paper examines the rationale of the decision of the High Court and concludes that it has unwittingly brought about legal uncertainty to the standing of a final payment. Statutory Payment Scheme, Contractual Payment Scheme, Final Payment, Statutory Adjudication, Building and Construction Industry Security of Payment Act 1. Introduction Payment disputes have been a common feature in most building and construction contracts and hence many forms of dispute resolution mechanisms have been spawned for use in the construction industry. Arbitration had been around for many years while mediation and dispute resolution boards are the more recent additions. These are largely divided into two categories, namely, litigation whish is available as of right and the others which operate under a consensual basis. Payment disputes generally pose one problem for the payee, that is, timely payment on an interim basis that facilitates cash flow. This could, at times means sudden death of the sole proprietorship, partnership or company by way of being insolvent and thus being made a bankrupt or being wound up. On the other hand, the paymaster s apprehension stems from the fact that he may be asked to pay in excess of the work properly done and otherwise not in breach of contract. The two main items that regularly feature in a defence, set-off and counterclaim of a paymaster in resisting payment are defective works and delay in completion leading to potential liability in liquidated damages. The paymaster s right to set-off is a very powerful legal tool. It enables the paymaster to resist making payment without a due process verification of this right. Thus, an application for summary judgment in the courts could be successfully resisted by raising a defence based on triable issues. The alternative route of the traditional arbitration would usually be blocked by 1

2 the agreement that it should only start after the completion of the works or with consent of the paymaster. In any event, the winds of change came in the form of legislative regulation to facilitate payment starting with the United Kingdom ( UK ) where the Housing Grants Act starting the trend of regulating not just consumer contracts as in the past but business-to-business contracts thereby attacking further the credibility of the already artificial concept of freedom of contract. Arising from the UK Act, the family of security of payment legislation is formed and is still growing in the Commonwealth. A notable difference is that when the UK Act was enacted, any dispute may be referred to adjudication that was incorporated into the contract by way of the statute. In the case of the Australian Acts, and in particular the New South Wales ( NSW ) Building and Construction Industry Security of Payment Act ( SOP Act ), the statute limits the dispute to a payment claim dispute that could be referred to a statutory adjudication. The Singapore Act of the same name as the NSW s Act and modelled after it was enacted in 2004 and the first case that went to the High Court was reported in This paper examines the rationale for the decision in the light of a decision from NSW on the same point that appears to be inconsistent with the decision of Tiong Seng. Essentially, the decision was arrived at after applying the various rules of interpretation of statutes. From the learned judge s quotation at paragraph 52 above, it would appear to be clear and unambiguous. However, this paper looks also at the application of this interpretation to the facts before the court in the light of the inter-play between the statutory payment scheme as prescribed by the SOP Act and the contractual payment scheme as agreed by the parties, and it is argued in this paper is allowed by the SOP Act. This paper intends to establish that the decision could have given a better guide as regards what amounts to a final payment claim under the SOP Act as the Singapore Act does not require the claimant to state in his payment claim that it is served pursuant to the SOP Act. 2. Facts of the Case This case involves a main contractor and a sub-contractor concerning earthworks. Under the SOP Act, the sub-contractor would be the claimant and the main contractor would be the respondent. However, before the court, the respondent contractor is the plaintiff who had applied to set aside the adjudication determination by way of an originating summons, thereby challenging the validity of the adjudication determination. Accordingly, the claimant subcontractor is the defendant in this case. 2

3 The ground of challenge is that the adjudicator does not have the necessary jurisdiction to make a determination as the SOP Act does not apply to a final payment claim. An important point to note at this juncture is that neither the parties and the adjudicator nor the court had identified the nature of the final payment claim as regards whether it was part of the statutory payment scheme as imposed by the SOP Act or whether it was part of a contractual payment scheme as agreed by the parties. In any event, it was reported in the case at paragraph 4 that, After earthworks had commenced, the defendant raised claims which included the Final Claim dated 25 January 2007 and Progress Claim No. 10 dated 26 February 2007 respectively. The basis of the Progress Claim No 10 arose from the failure of the plaintiff to pay the defendant the whole of the amount sought under the Final Claim and essentially comprise the unpaid balance. There was no explanation given in the judgment as regards why a progress claim could make its appearance after a final claim although on the face of it the progress claim would not appear to be regular. Accordingly, the Progress Claim No 10 became the subject matter of adjudication and a determination was given although it was objected to by the plaintiff as respondent before the adjudicator but to no avail. 3. SOPA and contractual payment scheme The failure to distinguish between whether a Final Claim is contractual in nature or statutory in nature is a fundamental error, it is submitted, which would affect the proper determination of the legal remedies available to the defendant claimant subcontractor. Thus, whereas under the SOP Act, the claimant is entitled to pursue adjudication, he is allowed to do so in respect of the statutorily provided for progress payment only. However, as the SOP Act is tolerant of the existence of a parallel contractual payment scheme, it is further submitted that the adjudicator would have no power to make a statutory adjudication determination in respect of a contractual claim whether progress or final. 4. Main Issues in the Case 3

4 As is typical of all judicial decisions concerning the interpretation of an Act, there are two parts, namely, (a) to establish the meaning of the given provision and (b) to determine the legal outcome by the application of the established meaning to the proven facts of the case. The provision requiring interpretation is the term progress payment to which the SOP Act applies. This is defined in section 2 as: a payment to which a person is entitled for the carrying out of construction work, or the supply of goods or services, under a contract, and includes - (a) a single or one-off payment, or` The facts of the case and the attendant issues have been set out above. 5. Interpreting the Act In the analysis of this decision which concerns the interpretation of the SOP Act, the basic rule concerns the common law rules of construction of statutes. In particular, the rule concerning whether a foreign case precedent could be used to guide the decision making of the Singapore court is also applicable when the SOP Act had been modelled after the NSW Act of the same name. The court in this case was guided by three rules. First, the literal interpretation was applied to the provision in issue. Second, this was followed by a purposive construction was taken. Third, the court considered policy implications including the looking at the legislative history of the SOP Act as traced to the source which is the NSW Act of the same name. 5.1 Literal interpretation The High Court proceeded to apply the literal rule of construction in the context of the definition given to the term progress payment by section 2. This essentially followed the approach laid down by the Court of Appeal although reference was not made to the abovementioned case. For its purpose, the court divided the definition into two limbs with the main limb giving a generic meaning while the supplementary essentially sets out two examples. Adopting a literal perspective, such an interpretation is justified by the unambiguous wording of the Act, which defines progress payments as a 4

5 payment to which a person is entitled for the carrying out of construction work or the supply of goods or services, under a contract ( the main limb ). Such a definition expressly includes a single or one-off payment or a payment based on an event or date ( the supplementary limb ). 1 Accordingly, the learned judge held that whilst the definition gave two examples, it is not an exhaustive list as it is preceded by the word includes thereby suggesting the examples given should not form an exhaustive list of examples....first, the word includes alludes to the non-exhaustive nature of the subprovisions that follow. From this perspective, the operative definition of progress payment should be centered on the main limb rather than the supplementary limb. 2 Therefore, the omission of the term final payment from the list does not necessarily mean that progress payment does not include final payment. Indeed, it could not be proper to infer that final payment is excluded should there be no such express provision. Hence, the court relied on the main limb to determine whether progress payment should include final payment. Looking at the structure and wording of the provision, it appears that an exclusion of final payments from the ambit of the Act can only be justified by express wording to that effect. It would not suffice to infer a legislative intention to exclude simply on the basis that final payments were not included in a nonexhaustive supplementary definition, ostensibly provided for clarification. If the legislature had intended to exclude final claims from the adjudicatory ambit of the Act, it could have clearly included a proviso or provision to that effect. In the absence of such express exclusion, the primary broad ranging definition in the main limb must be determinative. 3 Further, the learned judge held at paragraph 28 that the supplementary limb clearly encompasses final payments. To support this finding, the learned judge observed that the Act did not distinguish final claims from non-final claims and that it would be against the spirit of the Act to imply such a distinction into the definition. 1 See paragraph See paragraph See paragraph 27. 5

6 In addition, a plain reading of a payment that is based on an event or a date or a single or one-off payment clearly encompasses final payments. Such a conclusion is vindicated by the fact that the Act at no time makes any distinction between final claims and non-final claims. Implying such a distinction from the supplementary limb would severely impair the protection afforded by the Act, as it would create a carte blanche for contractors to renege on the final stages of payment, which would have an equally deleterious effect on cash flow affecting other ongoing construction projects. 4 Related to this point of literal interpretation would be looking at case precedents that have given meaning to the term currently under consideration. As the Singapore SOP Act was modeled after the NSW Act of the same name, reference was made to Jemzone Pty Ltd v Trytan Pty Ltd, 5 a NSW case that held that progress payment did not include a final payment. Indeed, the above extract appears to be in alignment with the holding in Jemzone Pty Ltd v Trytan Pty Ltd [2002] NSWSC 395 ( Jemzone ) which the plaintiff relied heavily on, in which Austin J held (at [37]) that the NSW Act (as it applied then) did not extend to claims for final payment: The definition of progress payment is unhelpful, because s 8 confers an entitlement to payment only for a progress payment, without further defining or explaining those words. In my opinion, the words progress payment when used in s 8 and other parts of the Act should therefore be given the meaning that they have under the construction contract. That accords with the structure of the Act itself, which generally leaves it to the construction contract to define the rights of the parties but makes default provisions to fill in the contractual gaps: see second reading speech, at p It also accords with the stated object of the Act. If the Act was intended to apply in the case of the final payment on practical completion, it would have been a simple matter for the drafter of the statement of the object of the Act in s 3(1) to refer to the entitlement to receive all payments due under the construction contract, rather than only specified progress payment. The minister s concern with the cash flow of subcontractors 4 See paragraph [2002] NSWSC

7 (second reading speech, at pp 1012 and 1013) also suggests that attention was focused on progress payments rather than the final balancing of account between the contracting parties. 6 Essentially Jemzone was not followed because it was distinguished as the term progress payment in the NSW Act was not defined whereas in the Singapore SOP Act, a definition was given. The usual alternative explanation would be to justify the reason not to follow the existing precedent on the ground that the precedent case interpreted a provision in another statute that is not in pari materia with the provision currently before the court. 44 I am of the view that Austin J s holding in Jemzone (above at [20]) loses its significance once we appreciate that s 8 of the NSW Act (as it then was) did not define or explain the term progress payment. Amidst such a statutory clean slate, it made eminent sense for Austin J not to preempt the legislature by judicially defining progress payments, but to simply attribute to the term the meaning that the words had under each individual construction contract. In contrast to the NSW Act (as it then was), our current version of the Act unambiguously defines progress payments as a payment to which a person is entitled for the carrying out of construction work, or the supply of goods or services, under a contract a definition which leans towards the adjudicatory ambit of the Act. 5.2 Purposive construction Although no mention was made to section 9A of the Interpretation Act which obliges the courts to use the purposive approach in the interpretation of statutes, the learned judge nevertheless applied the purposive construction to give meaning to the term progressive payment. Having looked at the Preamble and at the Parliamentary Debate Reports at the second reading of the then SOP Bill, the court held at paragraph 33 that, it appears that the Act is primarily directed at safeguarding the continued financial viability and it makes no sense to draw an artificial distinction between allegedly final and non-final payments, as the withholding of either would create the exact same downstream ripple effect intended to be deterred and weeded out by the Act. 6 See paragraph 20. 7

8 Construing the relevant provisions purposively leads to a similar conclusion. To begin with, the preamble of the Act describes itself as an Act to facilitate payments for construction work done or for related goods or services supplied in the building and construction industry, and for matters connected therewith. 7 The raison d etre of the Act has been similarly clarified by the then Minister of State for National Development at the second reading of the Bill as follows: [B]y upholding the rights of any party in the industry to seek payment for work done or goods supplied, this Bill will help to deter and weed out the practice of delaying or withholding payment without valid reasons. The speedy and low cost adjudication process will expedite the resolution of genuine payment disputes so that cashflow will not be disrupted. It will identify contractors who are facing financial difficulties early, before they cause more problems downstream. 8 From the above extract, it appears that the Act is primarily directed at safeguarding the continued financial viability of contractors who are victims of payment delays or disputes made in bad faith perpetuated by upstream contracting parties. From this perspective, it makes no sense to draw an artificial distinction between allegedly final and non-final payments, as the withholding of either would create the exact same downstream ripple effect intended to be deterred and weeded out by the Act. 9 The learned judge was happy to conclude that not to extend the meaning of progress payment to include final payment would be to infer an illusory distinction unjustified by the clear and unambiguous wording of the Act. These compelling considerations make eminent sense in view of the legislative intent and the structure of the Act as a whole. Final payments triggered by the issue of a completion certificate undeniably fall within the definition of a payment that is based on an event or a date. To exclude such final payments on the sole basis of their finality would be to infer an illusory distinction unjustified by the clear and unambiguous wording of the Act See paragraph See paragraph See paragraph See paragraph 36. 8

9 5.3 Policy implications The learned judge then justified her decision further under the heading of policy implications in respect of four issues raised during the hearing. First, it was argued that final payment dispute may not be appropriately resolved by way of adjudication. In response, the learned judge held at paragraph 39 that, the Act is meant to ease contracting parties through interim periods of constricted cash flow by providing a platform for swift and efficient adjudications of protracted payment disputes, without prejudice to other available enforcement mechanisms. It was concluded by the court that if final claims are excluded from the scope of the SOP Act, the legislative objective of protecting claimants from unfair delays in payment would be undermined. Adopting the plaintiff s position of excluding final claims from the scope of the Act would undermine the legislative objective of protecting sub-contractors from unfair delays in payment, resulting in potentially adverse downstream effects on other projects, as upstream main contractors favouring delay could easily allege the finality of certain payments, in an attempt to exclude it from the ambit of the Act. Indeed, in a worst case scenario, our courts could potentially be beset with tactical applications seeking to set aside adjudication determinations based on finality. 11 Second, final payments, unlike progress payments, should not be subjected to the pressure of timeliness in processing as the risks associated with non-payment are generally less likely to threaten the delivery and completion of the works. The learned judge was un-persuaded and held that the distinction between the repercussions of delays in payment claims, whether final or non-final, is irrelevant because of the interwoven nature of construction contracts. Whilst a final payment claim is arguably subject to less pressing timelines than interim progress payments, such a perspective appears to be premised on the assumption of discrete and independent stand-alone construction projects, which hardly reflects commercial reality these days. The truth is that contractors undertake a multitude of construction projects for which a stoppage of cash flow on one will undoubtedly have an adverse effect on another. Because of the interwoven nature of construction contracts (and not discrete construction 11 See paragraph 40. 9

10 projects), the distinction between the repercussions of delays in payment claims, whether final or non-final, is irrelevant. The construction industry cannot allow a semantic narrow definition of progress payments to impair the financial protection afforded by the Act. 12 Third, the omission of final payment in the definition can be cured by a whole host of literal, purposive and policy considerations. 13 Fourth, there is unlikely to be a difference in the complexity of the case as regards whether final claims would involve a greater degree of substantial disputes of fact than that of progress payments. The court was of the opinion that, substantial disputes of fact are likely to be equally prevalent and inherent in payment disputes regardless of whether claims are characterized as final or non-final. The final concern to be addressed is underscored by the case of BC v BD [2006] SGSOP 10 (above at [29]), which suggested the possibility that final accounts encompassing substantial disputes of fact were not susceptible to be dealt with under the Act. To begin with, substantial disputes of fact are likely to be equally prevalent and inherent in payment disputes regardless of whether claims are characterized as final or non-final. It makes no sense to draw an artificial distinction between progress payments and final claims on the basis that the Act s platform is inadequate for purposes of the latter. Indeed, the highly technical and complicated nature of claims coming up for adjudication was specifically recognized during the second reading of the Bill, when the Minister in charge reiterated the need for well qualified and experienced professionals as adjudicators Applying interpretation to the facts From the judgment, it is clear that having classified the facts before the court as undisputed, the learned judge did not return to the facts in the application of the meaning given to the term progress payment. This may be seen in the two paragraphs of her honour s conclusion. 12 See paragraph See paragraph See paragraph

11 Conclusion Having regard to the clear and unambiguous definition of progress payments read in the context of the objectives sought to be achieved by the Act, I am of the view that the ambit of adjudication under the Act should extend to both final and non-final payments. 15 Consequently, the plaintiff s attempt to set aside the Adjudication determination by the OS is dismissed with costs to the defendant to be taxed unless otherwise agreed. 16 However, a scrutiny of the facts given in paragraphs 4 and 5 of her honour s judgment and as set out below for convenience of reference ought to attract certain queries ought to have been raised. After earthworks had commenced, the defendant raised claims which included the Final Claim dated 25 January 2007 and Progress Claim No. 10 dated 26 February 2007 respectively. 17 Under the Final Claim, the defendant sought payment of S$481, In response to this claim, the plaintiff made a preliminary payment of S$210,553.68, based on a preliminary evaluation of the work done at that time, leaving S$270, unpaid ( the unpaid balance ). The defendant responded by raising Progress Claim No. 10 for the unpaid balance. 18 First, as each payment claim has a limitation period to serve, is it possible to validly serve a payment claim based on Progress Claim 10 dated one month after the Final Claim and which represents the unpaid amount claimed in the Final Claim. It is humbly submitted that, without further scrutiny of other points, a payment claim based on more than a month old Final Claim would have been time barred. Second, under the SOP Act, the claimant ought to seek the claimed amount as defined in section 2. According to section 2, the claimed amount comprises the whole or part of the progress payment and interest under section 8(5) which is for any unpaid amount of progress 15 See paragraph See paragraph See paragraph See paragraph 5. 11

12 payment. This begs the question as to whether, if the payment claim is served based on the Final Claim, would it not be pre-mature as there is no default in payment as yet as required by section 8 in respect of which the due date for progress payment is prescribed. Before turning to the third point, it is now clear that there is no information before the court as recorded in the judgment as regards whether a payment claim was served under the SOP Act was served based on the Final Claim or the Progress Claim 10. This is critical to determine whether the payment claim served is valid, Third, whilst the judgment records Final Claim and Progress Claim 10, there is no explanation as regards whether these are served by the claimant on the respondent as part of their contractual payment scheme for in accordance with the SOP Act s statutory payment scheme. This could have been avoided if the Singapore Act had retained the NSW Act provision of stating that the payment claim is made under the Act Observations As a case precedent, it is the first case to be tested in the High Court. It is an important case as it gives meaning to the term progress payment as used in the SOP Act. It is clear that all statutory progress payments as against contractual progress payments would be regulated by the SOP Act. Accordingly, it does not matter whether it is the first statutory progress payment or the last statutory progress payment or even if this last statutory progress payment is known as the final payment. As what the learned judge had mentioned, the main limb of the definition should be the determinative test, that is, it should be a payment which a person is entitled for the carrying out of construction work as found in section 2. Contrast the concept of the last statutory progress payment [statutory final payment] which requires the evaluation to be based on construction work that has been carried out and the usual contractual Final Payment based on a contractual Final Certificate that is issued long after the completion of all construction works and usually after the contractually prescribed defects liability period/maintenance period and therefore long after the last contractual progress payment certificate recording works done up to and including the certified contractual date of completion. Essentially the contractual Final Certificate captures the final 19 See section 13(2)(c). 12

13 accounting of sums owed payable by the employer to the contractor and vice versa including any employer s claims in respect of liquidated damages incurred, defects not required to be rectified etc on the one hand and any contractor s claims in respect of claims for loss and expense, disputed variations etc. It is submitted that the statutory term of progress payment in the SOP Act must mean all progress payments including the last progress payment for works done up to and including the completion date. This is found in the statutory payment scheme. However, if a claimant attempts to serve a payment claim based on a contractual Final Claim that is basically claiming an amount not representing work carried out up to and including the date of completion, the adjudicator would have no jurisdiction to make a determination in respect of such a payment claim. Alternatively, if a claimant did not serve a payment claim within the limitation period given to serve a payment claim in respect of work done in a particular duration, again, the adjudicator would have no jurisdiction to make a determination in respect of the payment claim. 8. Conclusion There are two lessons to be learned from the case. First, in statutory interpretation, the purposive approach is likely in most cases to prevail over the literal interpretation as seen in the case. Second, if the respective counsel in the case does not present the case with the necessary care, the learned judge who remains guided by them may miss an important fact for a proper determination of the issues in dispute. In this case, it is not known whether the final claim is one that is made in accordance with the contract or in accordance with the SOP Act. Accordingly, the construction industry is none the wiser after the decision has been delivered. The parties walked away with a decision that told them that the SOP Act would be applicable to a Final Claim but fell short in telling the world whether the SOP Act applies to a statutory final claim or a contractual final claim or both. 13