Landmark decision by the Singapore Court of Appeal on the Security of Payment Act Cap 30B

Background

The Court of Appeal in Singapore recently released its judgment in Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37 (“Shimizu CA”).

This article evaluates and summarises the objects and effects of the decision; and entails approximately five minutes’ reading time.

In a landmark decision concerning the jurisprudence and applicability of the Building and Construction industry Security of Payment Act Cap 30B (“SOP Act”, interchangeably the “Act”), the Court of Appeal in Shimizu CA handed down binding new developments that are of high relevance to local developers and builders, as well as to international contractors based in, or are involved in projects seated in Singapore.

These developments may be put in the following ways:

  1. The Court of Appeal clarified the application of its decision in Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] SGCA 36 (“Far East Square”); and
  2. The Court of Appeal also provided guidance on how the underlying contract and the SOP Act should interact.

By way of background, in Far East Square the Court of Appeal held that once a payment certifier’s role under the contract has ended upon completion and discharge (or by way of an event of termination or rescission), there would be no further basis for a contractor to submit any further payment claims.

Equally, the payment certifier would also not be further obligated to certify any claims that were submitted after the contract was brought to an end. Thus, for instance any payment claim submitted by a contractor after an architect issued a final certificate was held to be outside the ambit of the SOP Act.

Essentially, once a contract ends, the right to statutory relief for payment under the SOP Act also ends.

The Court of Appeal in Far East Square also held that the SOP Act was not intended to alter existing contractual rights, nor to give rise to a payment regime independent of the contract. The Court did not then address the cases hitherto resolved below in the High Court which supported a then industry-wide approach which tacitly acknowledged a “dual track” regime between statutory payment relief (under the SOP Act) and claims raised under contract.

In Shimizu CA, the apex Court now had an opportunity to refresh and revisit the issues left post-Far East Square.

The High Court decision below in Stargood Construction Pte Ltd v Shimizu Corp [2019] SGHC 261

The facts of this case are uncomplicated.

Shimizu Corporation (“Shimizu”) was the main contractor of a project and Stargood Construction Pte Ltd (“Stargood”) was one of its subcontractors. Stargood’s employment was terminated on 22 March 2019. Subsequently, Stargood submitted two payment claims and in turn, lodged adjudication applications for these payment claims. Stargood’s applications were dismissed.

The High Court allowed Stargood’s application to set aside both determinations, thus reinstating its right to commence a fresh campaign of adjudication.

Shimizu appealed the High Court’s decision.

The Court of Appeal in Shimizu CA

The Court of Appeal analyzed Sections 5, 6, 7 and 10 of the SOP Act and the cases in the High Court which supported a then industry-wide view of the “dual track” regime mentioned above.

The Court of Appeal concluded that the SOP Act does not give rise to a “dual track” regime that confers on a party, a statutory entitlement to a progress payment which operates on a separate and parallel basis alongside a party’s contractual entitlement.

Instead, the Court opined that between the terms of a contract and the SOP Act, the latter acts as a “gap-filler” to cover a situation where the parties had omitted to stipulate a remedy in writing, or where the contract between them was otherwise silent.

The specific question of whether a subcontractor is entitled to serve a payment claim on the contractor after the sub contract was termination turns on the existence (or not) of a right to do so as a matter of contract.

In this connection, the Court of Appeal affirmed on the facts that the sub contract between Shimizu and Stargood “….was not silent (as to) whether Stargood was entitled to submit a payment claim for work done prior to termination.

In Stargood’s sub contract, termination for convenience was limited to a scenario where the sub contract would have to be terminated because of a “knock-on” consequence occasioned by the prior termination of the overhead main contract (between Shimizu and its principal) – in other words, in a so-called “back-to-back” scenario. Grounds for termination in this context precluded other reasons connected to Stargood’s performance of the sub contract.

Notwithstanding a “back-to-back” termination, the sub contract nevertheless provided that Stargood had the right to serve a payment claim prior to termination, for the value of works done up to the date of termination of the sub contract.

Stargood was not provided any other contractual right to claim payment for works done prior to termination of the sub contract, if the event arose as a result of any other cause other than as stated above. In this regard, albeit applicable only in very narrow circumstances the Court observed that the sub contract was not silent on the subject of claims prior to termination. Accordingly, the Court also thought that “….there is no question of gap-filling by s 10 of the SOPA”.

Any distinction between termination of employment or termination of sub-contract was also thought irrelevant. There was no need to draw any distinction between a case where the payment certifier becomes functus officio as a result of the completion of the contract or the termination of a contract. In both cases, the payment certifier no longer has the ability to certify payments under the contract.

Key outcomes

Following Shimizu CA, the Court of Appeal has now made clear that:

  1. There is no “dual track” regime as the SOP Act does not confer a statutory right to payment independent of the underlying contract.
  2. In determining the validity of payment claims and entitlement to submit claims under the SOP Act, the provisions of the underlying contract will be the first recourse.
  3. It is only when the underlying contract is silent, that the provisions of the SOP Act will then step in to “fill in the gaps” where appropriate.
  4. The terms of the underlying contract would also determine whether a contractor would be entitled to submit a claim for progress payment post termination. Where the contract provides to the contrary, a contractor’s entitlement to submit a progress claim post termination (for works done prior to termination) will not arise.

Conclusion

As a result of the Shimizu CA decision, it is now clear that the underlying contract prevails over the previously widely accepted “dual track” regime for statutory SOP and contractual claims.

With Far East Square now clarified, and Shimizu CA making it clear that the terms of the underlying contract is the dominant basis by which parties’ rights to payment are generally interpreted, and specifically, the basis that would determine a contractor’s entitlement to submit progress claims post termination, it is now all the more critical that developers and contractors need to take care and in all events, to seek appropriate specialised advice in the drafting of their building and engineering contracts.

For more information, please feel free to contact Kevin Kwek (Kevin.Kwek@kennedyslaw.com), Henry Heng (Henry.Heng@kennedyslaw.com), Glenn Cheng (Glenn.Cheng@kennedyslaw.com) and Christopher Yeo (Christopher.Yeo@Kennedyslaw.com) in Kennedys Singapore office.