Articles

A. Introduction

1. The Building and Construction Industry Security of Payment Amendment Bill 2018 (the "Amendment Bill") was passed on 2 October 2018 on the heels of extensive consultations with stakeholders over the last five years. This highly anticipated Amendment Bill will effect the most extensive changes to the Security of Payment Act (the "SOP Act") since its inception in 2005.

2. The changes to the SOP Act are aimed primarily at streamlining and enhancing the adjudication process, and to return the focus to resolving the merits of payment disputes fairly and effectively.

3. This article will highlight some of the key amendments to the SOP Act which are anticipated to bring with them significant practical impact to the building and construction industry when they come into force.

B. Expansion and clarification of the scope of the SOP Act in relation to prefabrication works

4. The current iteration of the SOP Act provides that it generally does not apply to any contract for construction work outside Singapore. It does not explicitly address the issue of, and is therefore unclear as to whether it covers (a) prefabrication work carried out in Singapore for overseas projects; and (b) prefabrication work carried out overseas for projects in Singapore.

5. Cognisant of the growing trends towards internationalisation, and in line with the Construction Industry Transformation Map launched in October 2017, the Amendment Bill introduces two new provisions that seek to expand and clarify the scope of the SOP Act in relation to prefabrication works.

6. First, the new Section 4(2)(d) effects that the SOP Act applies to contracts for prefabrication of components to be used in construction outside Singapore where parties to the contract are Singapore-incorporated companies.

7. Second, the new Section 4(2A) clarifies that the SOP Act will apply to prefabrication works carried out overseas for construction work in Singapore.

8. These new provisions are reflective of Parliament's sensitivity to the market needs of Singapore-based businesses and the realities of the local construction industry where materials are sourced internationally, and are a welcome development. The extension in scope also presents more businesses the avenue of resolving their payment disputes quickly and at low cost through the adjudication process.

C. Introduction of 30-month limitation period for payment claims

9. The new Section 10(2)(b) of the SOP Act introduces a 30-month limitation period for issuing payment claims commencing from:-

1. In relation to supply contracts, the date on which the goods and services to which the payment claim relates were last supplied;
2. In relation to construction contracts, the latest of the following dates:-
   1. The date on which the construction work indicated in the payment claim was carried out;
   2. The issuance date of the last document certifying completion of the construction work under a contract; or
   3. The issuance date of the last temporary occupation permit.

10. This new provision may perhaps be traced to the observation by the Singapore High Court in Admin Construction v Vivaldi [2013] 3 SLR 609 that a payment claim served 10 months after the works had been completed was an "ambush" and could potentially amount to an abuse of process. The court however was constrained to uphold the payment claim given the absence of any express limitation period in the SOP Act, and considered that what would be a reasonable time for the submission of payment claims was a question to be addressed by Parliament and not the courts.

11. In response to these observations, the Singapore Academy of Law Reform Committee (2015) suggested that a limitation period of 1 year be imposed for issuing payment claims. Feedback from the industry stakeholders however was that more time is usually needed to settle final payment claims. To balance these views, Parliament settled on the current 30-month period to take into account defect liability periods.

12. This amendment is a welcome change. The purpose of the SOP Act, which is to facilitate cash flow and to ensure that downstream parties are timeously paid for work done or materials supplied, can hardly be said to be advanced by allowing claimants to bring payment claims for work done long after the works have been completed. The 30-month limitation period encourages the timely submission of payment claims, and affords upstream parties the comfort that they will not be subject to adjudication for payment claims long after the conclusion of the project. It however remains to be seen as to how the courts and adjudicators alike will deal with the situation where claimants are prevented by the respondents from bringing their claim within this strict limitation period.

D. Introduction of deeming provision for service date of payment claims

13. The current SOP Act provides, in Section 10(2), that a payment claim shall be served "at such time as specified in or determined in accordance with the terms of the contract". The controversy and practical difficulties that this provision creates is given clear expression in the case of Audi Construction v Kian Hiap Construction [2018] 1 SLR 317.

14. In that case, the contract provided for service of the payment claim on the 20th day of each calendar month. The claimant was faced with a conundrum, as the 20th day of November 2016 fell on a Sunday, and it was not feasible to serve a payment claim that day not least because the payment claim was voluminous and the respondent's office was closed. The claimant therefore decided to serve its payment claim 2 days earlier, on 18 November 2016, but post-dated its claim to 20 November 2016.

15. The Singapore Court of Appeal agreed with the decision of the Singapore High Court that where a contract provides that a payment claim must be served "on" a stipulated date, a payment claim must be served on that date and not by that date. However, it disagreed with the Singapore High Court's conclusion that payment claim in question was invalidly served, as it found that (a) the claimant had good reasons to serve its payment claim early and (b) there was no confusion as to the payment claim's operative date given that it was dated 20 November 2016.

16. Indeed, the differing opinions of the Singapore High Court and the Court of Appeal in Audi Construction only serve to underscore the difficulties in interpreting the current Section 10(2) of the SOP Act.

17. The new Section 10(2A) seeks to address the issue by providing that payment claims served before a stipulated date for service are deemed to have been served on that stipulated date. In other words, early service of payment claims is permitted and timelines begin to run only from the stipulated date for service. What this also means is that payment claims served after the stipulated date for service may no longer be challenged on the basis that they were served out of time, as they can arguably be deemed to be served in the next payment claim interval.

18. In practical terms, this amendment may spell the death knell for procedural challenges to the time of service of payment claims. However, this must be viewed as a welcome change, as it removes such technical challenges from the respondents' arsenal, and returns the focus to the substantive merits of payment claims served.

E. Requirement that payment responses must state all objections

19. Thus far, the experience of many has been that respondents would frequently raise procedural and jurisdictional objections for the first time in adjudication responses or at the adjudication hearing in attempts to resist claims.

20. To curb the belated introduction of new arguments in the adjudication process, the Singapore courts through a series of cases clarified that a respondent should raise any such objections at the earliest possible opportunity: e.g. in Grouteam v UES Holdings [2016] 5 SLR 1011 and Audi Construction v Kian Hiap Construction [2018] 1 SLR 317.

21. In line with the courts' approach, the new Section 15(3) of the SOP Act codifies and clarifies this early notice requirement by expressly providing that adjudicators can only consider a respondent's objections set out in its payment response. The only exception to this rule is where the circumstances of the objection (a) had not arisen or (b) could not have been reasonably known when the payment response was submitted.

22. As with the other amendments to the SOP Act, the new Section 15(3) seeks to curtail the scope for ambush by respondents to payment claims, and return the focus of adjudication proceedings to the substantive merits of payment claims served. What this means for respondents, however, is that they must now consider all objections early and comprehensively, and convey them in their payment responses. To this end, it would be essential for employers and contractors alike to equip their teams with the necessary knowledge, awareness and support to prepare payment responses appropriately and robustly.

F. Codifying limits on claims for damages and loss and expense

23. The current SOP Act contains no express provisions relating to claims for loss and expense. In light of Section 5 which effects that a claimant may only submit claims for work done, it has long been accepted that adjudication proceedings generally would not cover claims for loss and expense. This is not however reflective of practice, as recovery of damages for loss and expense nevertheless contribute to a party's cash flow in a project, and it is not uncommon for parties to seek to circumvent the issue by re-packaging their claims for loss and expense as variation claims or the like.

24. To bring the SOP Act closer in line with practice, the new Section 17(2A) of the SOP Act provides that claims for damages and loss and expense may be included in adjudication proceedings, but are subject to the express limitation that an adjudicator must disregard any claim for damages and loss and expense that is not supported by: (a) any document showing agreement between parties on quantum of the claim; or (b) any certificate or other document that is required to be issued under the contract.

25. The motivation behind the limitations imposed was explained in Parliament, citing a previous adjudication which lasted 129 days because a large portion of the claimed amount was prolongation costs. The Minister of State for National Development, Mr Zaqy Mohamad, explained that the new provision is intended to streamline the issues an adjudicator may consider and avoid prolonged adjudications, to ensure that the adjudication process serves its intended purpose – to resolve payment disputes quickly and cost effectively.

26. In practical terms, this means that while claims for damages and loss and expense can now be included in payment claims, claimants must take care to:-

1. Record all agreements on the quantum of the claim in writing; and
2. Where the contract provides for such damages or loss and expense to be certified, to apply for and obtain certification of its loss and expense claims timeously and ahead its payment claim submission.

G. Other changes to the SOP Act

27. Other notable changes to the SOP Act include:

1. Clarification that the SOP Act applies to terminated contracts (new Section 4(2)(c), 4(2A)(b));
2. Revision of interest rates for late payment (new Section 8(5));
3. Clarification that repeat claims are permitted under the SOP Act (new Section 10(4) and (5));
4. Default timeline for submission of payment responses increased from 7 to 14 days if contract does not state otherwise (new Section 11(1)(b));
5. Appointment procedures to replace adjudicators and review adjudicators (new Section 14A and 18A);
6. Confirmation that parties are allowed to raise objections relating to "patent errors" (new Section 17(4A)(c));
7. Adjudicated amount to be paid to Singapore Mediation Centre instead of respondent in adjudication review (new Section 18);
8. Review adjudications now open to both claimants and respondents (new Section 18);
9. Non-exhaustive grounds for setting aside adjudication determinations codified (new Section 27(8)); and
10. List of permitted modes of service under the SOP Act now exhaustive and includes email service (new Section 37).

Contributed by: Joanna Seetoh and Chan Yong Neng - Pinsent Masons MPillay