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Are payment claims served after the construction contract is terminated precluded from adjudication under the SOPA? A review of Shimizu Corporation v Stargood Construction Pte Ltd

Abstract

Prior to Shimizu’s case, practitioners in the building and construction industry had assumed that payment claims may be submitted for adjudication under the SOPA after the contract is terminated. This approach facilitates the ‘roughshod’ justice intended by the SOPA to enable downstream contractors to obtain payment for work done or materials supplied under the contract. In other words, ‘pay now, argue later’! In 2020, Shimizu and Far East’s case (2019) drastically overturned the prior state of the law that had allowed such claims. This article seeks to evaluate the two cases and suggests a practical way forward until the Court of Appeal has the opportunity to review the position.

Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37

Introduction

The Court of Appeal decision in Shimizu Corporation (‘Shimizu’) v Stargood Construction Pte Ltd 2019 (‘Stargood’) is a startling departure from a string of Court decisions prior and up to the 2018. It ignored the new definition of “contracts” as including “terminated contracts” and rendered redundant the new Section 4(2)(b) (c) introduced by the 2018 Amendments to the Building and Construction Security of Payment Act, cap 30B, 2006 Rev Ed (‘SOPA’). Although the facts are simple, it raises a very important question for contractors seeking to recover progress payments by the fast-track adjudication system under SOPA.

The question was whether a claimant can submit payment claims under SOPA after notice of termination had been served. But first, let us look at the facts in Shimizu’s case.

Stargood was Shimizu’s subcontractors. Their contract incorporated the Real Estate Developers Association of Singapore Design and Build Conditions of Contract (‘REDAS’), 3rd Ed, 2013. Following alleged breaches of the sub-contract by Stargood, Shimizu issued a notice of default on 4 March 2019 under clause 33.2 of the sub-contract. A notice of termination was issued on 22 March 2019.

Thereafter, Stargood, on 30 April 2019, served a payment claim No 12 (‘PC12’) on Shimizu for $2,599,359.44 in respect of work done up till April 2019. Shimizu did not respond to it. 

Stargood applied for adjudication on 4 June 2019 (‘AA203’). In its adjudication response, Shimizu argued that: (a) PC12 had not been properly served, and (b) PC12 was outside the purview of SOPA. AA203 was dismissed by the adjudicator on 27 June 2019 on grounds that PC12 had not been properly served on Shimizu; and secondly, that the Project Director was functus officio since the sub-contract had been terminated, and there was no post-termination payment certification regime under the sub-contract.

Meanwhile, Stargood served payment claim 13 (“PC13”) and applied for adjudication on 5 July 2019 (‘AA245’). This was dismissed by the adjudicator on the ground that Stargood was bound by the determination in AA203. Stargood filed Originating Summons 1099 to set aside the determinations in AA203 and AA245.

At the High Court, both parties did not dispute that Stargood’s employment had been terminated by the notice of termination. The High Court found in favour of Stargood, and the case found its way to the Court of Appeal.

In this article, the joint authors propose to discuss the following areas:

• the purpose, intent and nature of the rights under SOPA;
• the difficulty raised by Shimizu’s case and another case Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] SGCA 36 (‘Far East’);
• Whether the difficulty has been addressed by Act No: 47 of 2018 (“2018 Amendments”) which came into effect on 15 December 2019.

(A) The purpose, intent and nature of the rights under SOPA

SOPA was enacted in 2006 to remedy payment problems prevalent in the construction industry to ensure that contractors, sub-contractors and suppliers would be paid timeously for work done and materials supplied. The Act established two basic principles:

(i) any person who has carried out construction works under a contract is entitled to progress payment; and

(ii) he may seek to recover these progress payments through a statutory adjudication system by  making payment claims in accordance with the Act

The New South Wales (‘NSW’) courts have pithily described the adjudication process as ‘pay now, argue later’ and taken a robust approach to their Act. ⁱ But while these are the similarities between our Act and the NSW Act, there are also important differences. We will take a short detour to the NSW Act.

Prior to the latest amendments to the NSW SOPA (also in 2018), the Australian courts struggled to find a ‘reference date’ ⁱⁱ when a contract had been terminated. This struggle arose because Section 8 of NSW SOPA stated that :

‘on and from each reference date under the construction contract, a person who has undertaken works …, is entitled to progress payment.’ (emphasis added)

This was the nub of the problem in NSW. The very section which created the right to progress payment also shackled that right by linking it to reference dates under the contract. This presumed the continuation of the contract. Once the contract was terminated, no more reference date could arise under the contract! Many cases, notably the latest Trinco (NSW) Pty Ltd v Alpha A Group Pty Ltd ⁱⁱⁱ rejected claims which could not be matched with a ‘reference date’.

In 2018, amendments to the NSW Act have done away with the ‘reference dates’ altogether. In NSW, Section 8 now states that “Any person who, under a construction contract, has undertaken to carry out construction work … is entitled to receive progress payment” (emphasis added). With this amendment, NSW has unshackled the right to progress payment. It enabled claims to be brought even after a contract is terminated. This is evident from their new Section 13(1C) which states that “in the case of a construction contract that has been terminated, a payment claim may be served on and from the date of termination”.

With this understanding, we turn to our own Act. Section 5 of our SOPA states that “Anyone who has carried out construction work … under a contract, is entitled to progress payment.”

Hence, section 5 enshrines the right to progress payment. It does not shackle that right to any date under the contract.  As long as work is carried out under a contract, the right to claim progress payment springs into existence.

This right was recognised in WY Steel Construction Pte Ltd v Osko Pte Ltd ^iv where the Court of Appeal stated at [18] that:

“First, it establishes that parties who have done work … are entitled to payment as of right: see s 5 of the Act.” (emphasis added)

In Lee Wee Lick’s case ^V, another Court of Appeal case at [3] reiterated that “… any person who has carried out construction work … under a construction contract … has a statutory entitlement to payment”.

 At [88], the Court of Appeal further held that SOPA section 10(2) (read with regulation 5(1) thereof) governed the date for service of payment claims and did not operate as a limitation period. By analogous reasoning, section 10(2)(b) is not intended to shorten the limitation period.

This understanding is consistent with Admin Construction Pte Ltd v Vivaldi (S) Pte Ltd ^vi which re-stated the law as follows :

“The aims of the Act are … set out in … Terence Lee, … The Act established the principle that such parties are entitled to progress payments as of right …at [41]

 “… the authoritative construction placed on section 10(1), 10(4) and Regulation 5(1) by the Court of Appeal in Terence Lee has the effect of allowing a claimant to make a payment claim, sit on it until some two years later … and only then spring an adjudication application.” at [45]

“… there is an entitlement to payment for work done … and this entitlement continues to exist until it is extinguished by payment or by operation of the Limitation Act ….” at [46]

This was the state of the law from 2012 (Lee Wee Lick’s case) to the 2018 Amendment Act (“Prior state of the Law”).

1.  Difficulty arising from Shimizu and Far East

A departure from the Prior state of the Law?

The Prior state of the Law was shaken six years later by the Court of Appeal in Far East Square Pte Ltd v Yau Lee Construction (S) Pte Ltd.^vii  The Court of Appeal emphasised that:

“… SOPA does not … grant the contractor a right to be paid. The right…. to be paid ultimately stems from the construction contract …. Indeed a ‘progress payment’ is defined in section 2 of the SOPA as a payment to which a person is entitled for the carrying out of construction work … under a contract”.  [30]

 “SOPA was not meant to … give rise to a payment regime independent of the contract… to claim for progress payment …it is imperative … to first establish that he is entitled to such payments under the contract.  It follows that in order to determine a contractor’s entitlement to submit payment claims under the SOPA, the court must necessarily have regard to…. the underlying contract”. [31]

The said [30] and [31] contradicted the words ‘as of right’ in WY Steel and ‘statutory entitlement’ in Lee Wee Lick. The Judgment did not explain why a mere contractual provision ^viii could be allowed to cut short the six year limitation period for claims allowed by section 10(4) (as worded prior to the 2018 Amendment), without being rendered void under section 36 of the Act. The explanation came in the more recent decision in Shimizu’s case. 

In Shimizu, the Court of Appeal followed Far East and reiterated that :

“… the phrase ‘under the contract’ in section 5 of the SOPA ‘serves to premise the right to be paid on the performance of a contact so that if there is a breach of performance, the right to be paid does not crystallise”. [28]

“A holistic consideration of…..Part II of..SOPA leads to the conclusion that there is no separate statutory entitlement to a progress payment where a contract already makes provisions for such payments….” [31]

“… Thus, in a situation where under the terms of the contract the payment certification mechanism can no longer operate, a party is no longer entitled to serve a payment claim. In this regard, we would note that the SOPA fulfills a similar “gap-filling” role here as it does in relation to the amount and valuation of progress payments under ss 6 and 7 of the SOPA”. [32]

On the face of it, these paragraphs establish that the contractual provisions take precedence over s5 SOPA. Shimizu appears to contradict the earlier two Court of Appeal’s cases which identified the ‘right’ (WY Steel) and ‘statutory entitlement’ (Lee Wee Lick) under section 5. Curiously, these two Court of Appeal decisions were not cited in Far East and Shimizu, This raises the question whether the Prior State of the Law has been overturned by Far East and Shimizu or whether they can be reconciled. For eg. it is not clear whether paragraphs 28, 31 and 32 in Shimizu applied only to Terminated Contracts ^ix while the Prior state of the Law may still be good law for cases where the contract is still afoot. The problem of trying to reconcile the Prior State of the Law with Shimizu is that :

(a) there is nothing stated in Shimizu that shows that paragraphs 28, 31, 32 thereof applied only to Terminated Contracts; and

(b) Lee Wee Lick arose from a claim served after the contract was terminated – there the Court of Appeal appeared to have assumed that the statutory entitlement stated therein was a right that continued after the contract was terminated.

Is SOPA merely ‘Gap-filling’?

(a) Modification of contract

SOPA sections 8, and 11 allow the contract to specify respectively, the due date for payment and the date or time period for service of payment response. However in both these sections, SOPA imposes a maximum time limit. Shimizu at [30] described this limit in s8 as a limit on freedom of contract.

Further, SOPA section 10 (as worded prior to our 2018 Amendments) allows the contract to specify the date for service of payment claims. However, it also states that a payment claim may be served within six years after the work is done.

(b)  SOPA cannot be excluded by terms of the contract

More pertinent is that section 36(1) expressly provides that the SOPA shall have effect notwithstanding any provision to the contrary in any contract or agreement. Sub-section (2) lists the following provisions in any contract or agreement (whether in writing or not) to be void:

(a) “a provision under which the operation of this Act … is purported to be, excluded, modified, restricted or in any way prejudiced …;”

(b) “a provision that may reasonably be construed as an attempt to deter a person from taking action under this Act.”

Section 36 is a powerful indication of the primacy of the Act.  Against this background, it is difficult to follow the rationale stated in Shimizu that s 5 SOPA is a mere ‘gap-filling’ provision.

Having said that, the question is this -- how should the Prior State of the Law be interpreted (or reinterpreted) after the 2018 Amendment was passed by Parliament? The 2018 amendments have, ex abundanti cautela, confirmed that SOPA applies to “terminated contracts”.  Let us turn to the 2018 Amendments.

(C) The Building and Construction Industry Security of Payment (Amendment) Act 2018 (No. 47 of 2018) (‘2018 amendments’)

Prior to 2018, cases such as Lee Wee Lick Terence v Chua Say Eng (formerly t/a Weng Fatt Construction Engineering), CHL Construction Pte Ltd v Yangguang Group Pte Ltd ^xi and Choi Peg Kum & Anor v Tan Poh Eng Construction Pte Ltd ^X had all dealt with terminated contracts and the court had assumed that a payment claim under SOPA would survive the termination of the contract.

The Building and Construction Industry Security of Payment (Amendment) Act 2018 (No. 47 of 2018) amended the definition of “contract” to include “a construction contract … that has been terminated” (“2018 Amendments” and “Terminated Contract Amendment” respectively).

Mr. Zaqy Mohamed, at the second reading of the 2018 Amendments, stated that the Terminated Contract Amendment was intended to resolve “any ambiguity … as to whether claimants can apply for adjudication upon the contract termination”.

In Shimizu, the High Court interpreted Mr Zachy’s statement as follows :

“Although the SOP (Amendment) Bill of 2018 has not come into force, the Parliamentary Debates makes it clear that the SOP (Amendment) Bill of 2018 does not change the current position. It seeks only to “address any ambiguity”. Hence, it must be correct that, even at present …”

The Court of Appeal did not comment on the High Court’s reasoning that the Terminated Contract  Amendment was a statutory confirmation of an interpretation of SOPA prior to the said Amendment. The Court of Appeal appeared to have tacitly agreed with that reasoning when it addressed the Terminated Contract Amendment as if it applied to the facts. Instead, the Court of Appeal disagreed only with the conclusion that the right to serve a claim survived the termination of the contract. The Court of Appeal at [36] emphasised that Mr. Zaqy’s statement “must be seen in the context of … the ‘gap-filling’ role which the legislation fulfils …”

To understand Mr. Zaqy's statement, we need to look at the transitional provisions for the 2018 Amendments. The 2018 Amendments came into force on 15 December 2019. As there were pending claims, the question might arise as to how the 2018 Amendments would apply to them. To address this, transitional provisions in Section 25 preserved various sections of the old SOPA so that they continue to apply respectively to various specified events, viz when the contract was made or the claim served before 15 December 2019.   

In contrast, there is no transitional provision for the Terminated Contract Amendment. This suggests that Parliament did not intend to preserve the old definition of ‘contract’ by reference to any of the specified events. This may mean that s5 and s10(2) SOPA must now be viewed as applying to terminated contracts. Even the definition of “progress payment” in s2 must include progress payment under a terminated contract. And this may be so for contracts and clams both before as well as after 15 December 2019.

However, there is another amendment which did not have any transitional provision. That is the amendment which brings us the new Section 4(2)(c) (“New s4(2)(c)”). The New s4(2)(c) clearly represents a change in the law which reverses the impact of the High Court decision in Choi Kum Peng. As there is no transitional provision for the New s4(2)(c), is it intended to apply the same way as the Terminated Contract Amendment, ie. to apply to any construction claim regardless of when the contract was signed or when the claim was served? If so, did the New s4(2)(c) apply to Shimizu’s case?

The significance of the New s4(2)(c) is that it carves out a category of clauses in terminated contracts that the SOPA does not apply to. These are clauses that suspend the right to progress payment pending a date or event that has not yet passed or occurred. If the New s4(2)(c) is the exception carved out of a general rule, the converse must be the general rule, i.e. that SOPA applies to a terminated contract except for the category carved out. On the other hand, if s5 and s10 SOPA fulfill a mere ‘gap-filling’ role, a clause that suspends the right to payment will always take primacy and there is no need for the New s4(2)(c). In other words, the decision in Shimizu renders the New s4(2)(c) redundant.

To be fair, the New s4(2)(c) was not cited to the Court of Appeal in Shimizu. It is not clear whether the Court of Appeal would have interpreted s5 SOPA as a “gap-filling” provision and rendered the New s4(2)(c) redundant if its attention had been drawn to the New s4(2)(c).

Conclusion

Shimizu and Far East raise several difficult questions relating to SOPA’s “gap-filling” role. Does this role apply to Part II and sections 5 and 10 only? Is that role confined to Terminated Contracts? Does it overturn previous Court of Appeal decisions such as  WY Steel and Lee Wee Lick? Does it render the New s4(2)(c) redundant? It is hoped that the Court of Appeal will have a chance soon to clarify this area of the law, and in particular, how the 2018 Amendments (in particular the New s4(2)(c)) should be applied.

Contributed by:

Eric Ng Yuen and Tan Lay Hong