E-briefing: Adjudications under the SOP Act and Performance Bonds

E-briefing: Adjudications under the SOP Act and Performance Bonds
24 Jun 2019

Adjudications under the SOP Act and Performance Bonds: Can Progress Claims be Made to Recover Performance Bond Proceeds Only? 

Introduction

  1. The High Court gave valuable guidance on whether adjudications under the Building and Construction Security of Payments Act (“SOP Act”) are suitable platforms to resolve construction disputes relating to performance bond proceeds: China Railway No 5 Engineering Group Co Ltd Singapore Branch v Zhao Yang Geotechnic Pte Ltd [2019] SGHC 130.
  2. The present case was distinguished from SH Design & Build Pte Ltd v BD Cranetech Pte Ltd [2018] SGHC 133 (“SH Design”), where the Court decided that an adjudicator “had jurisdiction to account for the Bond Proceeds because these were included in the Payment Response”.

Key Takeaways

  1. Key takeaways would be as follows:
    • A progress claim made exclusively to recover performance bond proceeds is invalid under the SOP Act.
    • Such progress claims are not in accordance with s 10(1) of the SOP Act, which requires a progress claim to be made for construction work done, or goods or services supplied.

Background

  1. A main contractor engaged a sub-contractor to perform works in relation to the “design and construction of Lentor station and construction of tunnels for Thomson line”.
  2. On 25 September 2018, the sub-contractor issued Payment Claim 35 (“PC 35”) for $848,584.93. Parties disputed PC 35, and this matter was submitted to adjudication. The adjudicated sum of $692,051.21 was paid in full by the main contractor.
  3. On 20 December 2018, the main contractor called on the on-demand performance bond (procured by the sub-contractor) for a sum of $281,441.95.
  4. On 25 December 2018, the sub-contractor served Payment Claim 36 (“PC 36”) for a sum of $301,142.89, which was the value of the performance bond called and 7% GST.
  5. The main contractor issued its payment response disputing the validity of PC 36 as there was “no claim for any new works under PC 36 which is a repeat claim” and it was “not even a claim for construction work under the SOP Act but rather an attempt to recover the [sums paid] … under the unconditional performance bond”.
  6. This matter was referred to adjudication. The adjudicator determined that he had jurisdiction to adjudicate on PC 36, relying on SH Design where the Court decided that the adjudicator therein had jurisdiction to account for the bond proceeds in that case.
  7. The adjudicator determined the main contractor was to pay the sub-contractor $281,441.95 (excluding GST) (“2nd AD”), essentially reversing the call on the performance bond.
  8. The main contractor applied to set aside the 2nd AD.

The High Court’s Decision

  1. The High Court ruled in favour of the main contractor and set aside the 2nd AD. In so doing, the Court considered the following issues:
    • Whether s 10(1) of the SOP Act, which defines the scope of a payment claim under of the SOP Act, is a mandatory provision, breach of which would result in the corresponding adjudication determination to be set aside;
    • If s 10(1) of the SOP Act is a mandatory provision, whether a payment claim solely for performance bond proceeds is valid under s 10(1) of the SOP Act.

Whether s 10(1) of the SOP Act is a Mandatory Provision

  1. The Court identified two criteria in s 10(1) of the SOP Act for a payment claim to be valid.
    • First, it must be “in respect of a progress payment” only.
    • Second, it may only be served to (a) persons who are or may be liable to make payment under the construction contract, or (b) any other persons identified for this purpose in the construction contract.

Frivolous payment claims that breach either of the two criteria are considered invalid and ought to be dismissed entirely.

  1. The Court explained that such stipulations were required to prevent the misuse of the SOP Act’s adjudication framework for disputes outside the ambit of the SOP Act, and preserve the original purpose of the SOP Act adjudication framework, which “facilitates cash flow by establishing a fast and low cost adjudication system to resolve payment disputes”.
  2. Given the importance of ensuring that only valid payment claims are resolved using adjudications under the SOP Act, the Court concluded that s 10(1) of the SOP Act is a mandatory provision, a breach of which would mandate that the corresponding adjudication determination be set aside.

Whether PC 36 is a Valid Payment Claim

  1. The main contractor argued that PC 36 was not a valid claim as it did not claim for monies for construction work done but rather for the recovery of the performance bond proceeds.
  2. The sub-contractor relied on SH Design to prove the validity of PC 36.
  3. However, the Court distinguished the present case from SH Design. The Court explained that in SH Design, the payment response and final adjudicated amount accounted for bond proceeds, but the original payment claim was for work done, hence the claim was valid.
  4. In the present case, PC 36 was a payment claim made solely for the recovery of the performance bond, and was therefore not valid.

A Payment Claim Must Relate To Construction Work, Or Goods Or Services Supplied

  1. The Court emphasised that a contractor’s entitlement to progress payment is contingent on it having carried out construction work or supplied any goods or services (under s 5 of the SOP Act).
  2. As PC 36 was in relation to a performance bond (typically called when there is an alleged failure by the sub-contractor to carry out construction works or supply goods or services as stipulated in the contract), it was absurd that the sub-contractor could issue a payment claim for work that was not done.

Allowing The Payment Claim Defeats The Purpose Of A Performance Bond

  1. The Court also pointed out that PC 36 essentially sought to alter the terms of the contract between the parties by re-claiming the performance bond as this would defeat the bargain struck when the sub-contractor agreed to provide the said performance bond.
  2. This would directly contravene s 36(4) of the SOP Act which makes clear that it does not seek to reconfigure, alter or amend the effect of the terms of the underlying contract (unless they prejudice the regime set out in the SOP Act). Hence, PC 36 should not be allowed.

Conclusion

  1. In light of the above, the Court set aside the 2nd AD in its entirety as:
    • PC 36 is an invalid claim as it claims for performance bond proceeds rather than for work done or goods or services supplied and was in breach of s 10(1) of the SOP Act,
    • PC 36 was also invalid as it reverses the payment of the performance bond proceeds guaranteed in the underlying contract, breaching s 36(4) of the SOP Act.
  2. In reaching this conclusion, the Court reinforced the importance of establishing the validity of payment claims and ensuring that adjudication decisions do not alter the terms of the underlying contracts. 

For further information, contact:

Tan Chau Yee

Partner, Eversheds Harry Elias

Head, Construction and Engineering

chauyeetan@eversheds-harryelias.com

+65 6361 9850

Justin Tan

Senior Associate, Eversheds Harry Elias

Construction and Engineering

justintan@eversheds-harryelias.com

+65 6361 9877 

 

For more information, please contact our Business Development Manager, Ricky Soetikno at rickysoetikno@eversheds-harryelias.com

 

Contact: 

Tan Chau Yee

Partner
Head, Construction and Engineering
T: 
+65 6361 9338
F: 
+65 6438 1788
E: 
ChauYeeTan@eversheds-harryelias.com
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