Articles

21 October 2022

1. Introduction

1. Non-payment is a common cause of disputes in construction projects. In turn, contractors may consider themselves justified in resorting to termination as a response to prolonged refusal by an upstream party, whether a main contractor or employer, to make payment. The question then is when, and in what situations, such termination is defensible.
2. The recent decision of LBE Engineering Pte Ltd v Double S Construction Pte Ltd,¹ rendered by Justice Lee Seiu Kin in the Singapore High Court, addressed some of these issues. In that case, the plaintiff sub-contractor alleged that as the defendant main contractor had failed to certify payment to the plaintiff, it was unable to continue work and therefore stopped work on 18 June 2018. The plaintiff thereafter commenced the suit against the defendant claiming an outstanding amount of $90,845.35, while the defendant filed a counterclaim for damages suffered as a result of alleged wrongful termination.
3. The District Court held that the plaintiff was entitled to terminate the sub-contract and recover the unpaid amounts. The defendant appealed to the High Court, which allowed the appeal and the defendant’s counterclaim.²
4. On the issue of whether the plaintiff was entitled to treat the defendant’s non-payment on the progress claims as a repudiation of the contract, such that the plaintiff was entitled to stop work, the High Court, referring to several previous Singapore court decisions, held that as a matter of law, a sub-contractor has no right to suspend work for non-payment unless this is expressly provided for in the relevant contract.³ The High Court opined that if a dispute arose over non-payment, the proper course was for a sub-contractor to pursue recourse under the Building and Construction Industry Security of Payment Act 2004 ("SOP Act”), rather than unilaterally suspending work. Otherwise, a right to unilaterally suspend work for non-payment would allow sub-contractors to hold main contractors to ransom.⁴
5. Accordingly, the High Court held that the plaintiff did not have the right to stop work, and therefore had wrongfully terminated the contract. Correspondingly, the High Court allowed the defendant’s counterclaim for damages. In reaching his decision, Justice Lee referred to amongst others the words of V K Rajah JC (as he then was) in Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd:⁵

“It appears to be settled law that a contractor/sub-contractor has no general right at common law to suspend work unless this is expressly agreed upon. This is so even if payment is wrongly withheld. […]”⁶

6. Justice Lee noted that Rajah JC’s words had been cited with approval by the Court of Appeal in Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd,⁷ where the Court of Appeal reiterated that “There may be instances in which a persistent course of payment delays, or a protracted delay in the payment of a very substantial sum amounts to a repudiation of the contract […] However, not every instance of non-payment by a contracting party will suffice to constitute repudiation.”
7. Taken together, it is clear from these authorities that a downstream contractor will not be justified in terminating a contract in every situation where it has failed to receive payment from the upstream party.
8. What then does this mean for contractors? At the outset, it would be prudent for a contractor, who considers it has been wronged by an upstream party who has failed to make payment, to exercise restraint and caution. Rather than jumping hastily to termination, a contractor may wish to carefully examine whether there is a good basis for it to terminate the contract. In this regard, the contractor may wish to obtain legal advice on whether it has grounds for terminating the contract, whether under the terms of the contract or at common law.⁸ Otherwise, the contractor risks exposing itself to counterclaims for wrongful termination.
9. If the contractor considers that its grounds for terminating the contract may be less than clear, the contractor may wish to avoid the risk of being caught on the backfoot and being accused of wrongful termination. Instead, it may be useful to bring proceedings against the upstream party to claim for non-payment, which could also serve to put commercial pressure on the non-paying party. As Justice Lee suggested in LBE Engineering Pte Ltd v Double S Construction Pte Ltd, the SOP Act provides a potential mode of recourse for contractors in a situation of non-payment.
10. In a similar vein, Mr. Chow Kok Fong, whilst noting that persistent non-payment may evince an intention on the employer’s party not to be bound by the contract and thereby amount to a repudiatory breach, also writes:⁹

“The enactment of the Building and Construction Industry Security of Payment Act (“the Act”) has significantly changed the position of a claimant contractor who has been denied payment either by reason of a certifier’s wilful refusal to issue a certificate or an owner’s attempts to delay or avoid payment. […] This recourse to the resolution of payment disputes invites a re-examination of the context against which payment defaults may be construed as a premise to allege repudiation on the part of the owner. A contractor, who alleges that an owner’s persistence [sic] defaults of payment constitutes repudiatory conduct, may be expected to explain before an arbitrator or the court why recourse was not attempted to alleviate his difficulties through the relatively cost effective reliefs (albeit reliefs which are only temporarily binding until final resolution of the dispute) available under the Act.”

11. In this regard, it is pertinent that section 26 of the SOP Act provides that a successful claimant in an adjudication has a right to suspend work if the adjudicated amount in the adjudication has not been paid to the claimant.¹⁰ During the period of suspension, the claimant is not liable to the respondent, the respondent’s principal or the owner of the project for any loss or damage as a result of the suspension. However, the respondent’s principal and the owner may recover liquidated damages from, or exercise any other remedy available with respect to, the respondent.¹¹ In other words, if a contractor who has not been paid successfully obtains an adjudication determination in its favour, and if the upstream parties still fail to make payment of the adjudicated amount, this may give rise to a statutory right on the contractor’s part to suspend work.  
12. That said, contractors also need to bear in mind that the application of statutory adjudication may be qualified where a contract has been terminated. In Orion-One Residential Pte Ltd v Dong Cheng Construction Pte Ltd and another appeal,¹² the contract had been terminated around 2 years and 5 months before the service of the payment claim in question, and there were also ongoing arbitration proceedings in relation to the same issues as the payment claim. The Court of Appeal held that where a contract provides that a contractor may not serve a payment claim on an employer after termination of the contract until all costs incurred by the employer as a result of the termination are ascertained, the contractor is prevented from serving a payment claim and commencing adjudication until after the said costs are ascertained.¹³
13. Similarly, in Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd,¹⁴ the Court of Appeal recognized that where a construction project has come to an end or a contract has been terminated, this may be an exception justifying stay of enforcement of an adjudication decision, particularly where there are other dispute resolution proceedings underway that would finally resolve the disputes between parties (as opposed to an adjudication determination that only has temporary finality). The Court of Appeal stated:

14. Hence, while the Building and Construction Industry Security of Payment Act 2004 can be a useful means for contractors to obtain recourse in the short-term, contractors need to be mindful that pursuing a final resolution of a dispute (for example, through arbitration or court proceedings) may be, in the longer term, a more cost-efficient and constructive avenue of pursuing relief, as opposed to hastily commencing adjudication proceedings to claim for non-payment.
15. The foregoing demonstrates that there may not be an easy solution where a contractor fails to receive payment. A contractor who finds himself in that situation may wish to carefully consider its options before taking retaliatory action through terminating (or purporting to terminate) the contract. Singapore law affords various means for a contractor to seek recourse, whether through statutory adjudication or some other mode of dispute resolution, and it is open to contractors to explore such options if they consider that they have been wronged by non-payment.

Contributed by:

Matthew Koh - Partner, Rajah & Tann Singapore LLP

[1] LBE Engineering Pte Ltd v Double S Construction Pte Ltd [2022] SGHC 92.

[2] LBE Engineering Pte Ltd v Double S Construction Pte Ltd [2022] SGHC 92, [10].

[3] LBE Engineering Pte Ltd v Double S Construction Pte Ltd [2022] SGHC 92, [21]. 

[4] LBE Engineering Pte Ltd v Double S Construction Pte Ltd [2022] SGHC 92, [21].

[5]  Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288.

[6] Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288, [55] and [57].

[7Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2021] 2 SLR 510

[8] See the four situations that Andrew Phang JA outlined in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR(R) 413.

[9] Chow Kok Fong, Law and Practice of Construction Contracts, Fifth Edition – Volume 1 (Thomson Reuters, 2018: Singapore), [13.071].

[10] This is subject to service of the requisite notice under section 23(1)(b) read with section 26(1) of the SOP Act.

[11] See section 26(2) of the SOP Act.

[12] Orion-One Residential Pte Ltd v Dong Cheng Construction Pte Ltd and another appeal [2021] 1 SLR 791.

[13] Orion-One Residential Pte Ltd v Dong Cheng Construction Pte Ltd and another appeal [2021] 1 SLR 791, [32] to [37].

[14] Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2021] 2 SLR 510.

[15] Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Co Pte Ltd [2021] 2 SLR 510, [82].