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    01:09 AM Kaden Goh Hua Zhou (Associate, Loo & Partners LLP)

    Haste Makes Waste – The Effect of a Premature Adjudication Application under the Building and Construction Industry Security of Payment Act

        

    Introduction

    In Newcon Builders Pte Ltd v Sino New Steel Pte Ltd [2015] SGHC 226 (“Newcon”), Quentin Loh J overturned the decision of the court below and held that a premature application for adjudication under the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (“SOPA”) is invalid, and that the court will set aside the resulting adjudication determination. This judgment has significant implications for those in the construction industry, given the widespread usage of the adjudication scheme for disputes over payment claims.

    Facts

    A main contractor (“the Contractor”) for demolition works and construction of a property and swimming pool (“the Project”) entered into a sub-contract (“the Sub-Contract”) with a sub-contractor (“the Sub-Contractor”) for some structural and architectural steel works for the Project. Notably, the Sub-Contract provides that the works were to be executed in accordance with the main contract between the Contractor and its employer (“the Main Contract”), and that the conditions of the Sub-Contract shall comply fully with all the terms and conditions in the Main Contract.

    The sub-contracted works were substantially completed, and the Sub-Contractor served a payment claim on the Contractor. The Contractor sought clarification of the payment claim but the Sub-Contractor did not reply. Instead, the Sub-Contractor served a notice of intention to apply for adjudication pursuant to the regime provided under the SOPA. The Contractor submitted a document titled “Statement of Final Account”, which it claims to be its payment response. The Defendant subsequently filed an adjudication application (“the Adjudication Application”) and served it on the Contractor.

    The adjudicator decided in favour of the Sub-Contractor, and the Contractor unsuccessfully applied to set aside the adjudication determination (“the Setting-Aside Application”). The Contractor now appeals against the first instance decision on the ground that the adjudication determination should be set aside as the Adjudication Application was premature, viz, that it was made before the end of the dispute settlement period mandated under the SOPA.

    First Instance Decision – Newcon Builders Pte ltd v Sino New Steel Pte Ltd [2015] SGHCR 13

    Before the Assistant Registrar (“the AR”), the Contractor proffered two grounds in support of his application to set aside the adjudication determination. The first was that the Adjudication Application was premature and the second is that the adjudicator had acted beyond his powers in allowing the Sub-Contractor to lower its claim during the adjudication. The Contractor’s application failed on both grounds, but its appeal was only on the first ground.  This commentary will therefore only focus on the issue of the premature Adjudication Application.

    Dismissing the argument that the Setting-Aside Application should be allowed because the Adjudication Application was premature

    The AR opined that s 13(3)(a) of the SOPA merely sets the latest date by which an adjudication application must be made and says nothing of when the application shall not be made. Hence, the provision which was breached in this case is s 12(2) of the SOPA.

    Applying the test set down by the Court of Appeal in Lee Wick Lick Terence (alias Li Weili Terence) v Chua Say Eng (formerly trading as Weng Fatt Construction Engineering) and another appeal [2013] 1 SLR 401 (“Chua Say Eng”), the AR considered whether s 12(2) of the SOPA is so important that it is the legislative purpose that an act done in breach of the provision should be invalid. It was held that a breach of s 12(2) did not satisfy the test.

    First, the AR noted that s 12(2) of the SOPA states that a claimant is entitled to lodge an adjudication application after the dispute settlement period, and held that the usage of the phrase “is entitled” is permissory and not mandatory. The AR considered the absence of mandatory language as a significant factor in determining the legislative purpose, and hence whether a breach of the provision should result in the determination being set aside.

    Second, the AR opined that the raison d’etre of the regime under the Act is to provide for a swift and low cost system to resolve payment disputes. Accordingly, while a mandatory deadline by which an adjudication application must be submitted would further this objective, this is not the case for providing a timeline before which an adjudication application ought not to be submitted. The AR further acknowledged that s 12(2) of the SOPA balances two competing interests, that of establishing a fast adjudication system and allowing sufficient time for parties to attempt to amicably resolve the dispute privately. However, the AR relegated the latter interest to a secondary position.

    The AR therefore concluded that it is not the legislative purpose for a premature application made in breach of s 12(2) to be ipso facto invalid, for deciding otherwise would run counter to the legislative purpose of creating an expedited adjudication process.

    Appellate Decision

    In the ensuing Registrar’s Appeal, Quentin Loh J had two issues to consider. The issues are:-

    1. Whether an adjudication application can be made before the expiry of the dispute settlement period, and if not, whether that adjudication determination is liable to be set aside by the court (“the Jurisdictional Issue”); and
    2. If the adjudication determination is liable to be set aside, whether the Adjudication Application is premature in this case, which depends on whether the terms of the Main Contract were incorporated into the Sub-Contract (“the Construction Issue”).

    Despite applying the same test in Chua Say Eng, Loh J overturned the AR’s decision and held that an adjudication determination based on a premature application is liable to be set aside by the court. Given that the terms of the Main Contract were incorporated into the Sub-Contract, the Adjudication Application was premature and the Setting-Aside Application was accordingly allowed.

    The Jurisdictional Issue

    Loh J disagreed with the AR’s decision regarding the Jurisdictional Issue for three different reasons.

    First, while the learned judge agreed that a premature adjudication application will be a breach of the provisions of the SOPA, he differed from the AR who held that s 13(3)(a) of the SOPA had not been breached in this case. Loh J held that s 13(3)(a) not only prescribes a deadline by which an application must be made, but also when time starts to run for the adjudication application period. The latter is determined by when the entitlement to make the application arises pursuant to s 12(2) of the SOPA. Accordingly, a premature adjudication application breaches both ss 12 and 13 of the SOPA and is therefore invalid.

    Second, Loh J disagreed with the AR’s interpretation of s 12(2) of the SOPA, which was a significant factor in the AR’s decision that it is not the legislative purpose for a premature application made in breach of s 12(2) to be ipso facto invalid. Instead, Loh J held that s 12(2) of the SOPA is mandatory in nature.

    Loh J first opined that the word “entitled” does not connote any permissory element. He then interpreted the phrase “is entitled” in the entire context of s 12, the general scheme of the SOPA, and the adjudication process (including the steps provided for). In light of the above-mentioned, the learned judge stated that the dispute settlement period is an important step in the adjudication process as it allows parties to seek clarification from each other and provides the respondent with an opportunity to make a payment response or vary his payment response. Loh J also observed that the 7-day dispute settlement period under the SOPA is unique to Singapore, and was specially introduced to give the respondent more time to prepare a proper payment response to defend an adjudication claim. This will, in turn, ameliorate the possibility of claimants using the adjudication process to “ambush” a respondent.

    Accordingly, the learned judge interpreted s 12(2) as being mandatory in nature. Consequently, the provision effectively states that the claimant shall not make an adjudication application until the entitlement under the SOPA arises.

    Third, the learned judge held that while the AR is right in that the raison d’etre of the SOPA regime lies in providing a fast and low cost adjudication system, the AR erred in relegating the regime’s desire to encourage settlement to a mere secondary objective.

    The court emphasised that a balance between allowing enough time for settlement and moving the adjudication process along has to be struck, and that this balance is inextricably linked to the objective of providing for a fast and low cost adjudication system. Accordingly, the right to settle within the dispute settlement period cannot be taken away.

    The learned judge also considered that a successful claimant to the adjudication usually gets to keep the payment until the dispute is finally decided, and that the contents of the payment response are critical to defending a payment claim. The SOPA therefore provides a respondent with opportunities to provide or vary a payment response, and these opportunities cannot be stripped away by perceived policy reasoning.

    Based on the above-mentioned reasons, the court held that there is no entitlement to make an adjudication application during the dispute settlement period and that such premature application is invalid. In such an event, the court is entitled to set aside the adjudication determination arising from the application. This is regardless of whether there is any prejudice, for the court is concerned with whether the Parliament intended the provisions that are breached to be strictly observed — it is found that the answer is in the affirmative.

    The Construction Issue

    In deciding whether the Adjudication Application was premature, the court had to first decide whether the terms of the Main Contract were incorporated into the Sub-Contract. If the terms were incorporated, the Adjudication Application will only be premature if Clause 2.2 of the Main Contract is a clause stipulating the time period of a payment response. This depends on whether an interim certificate could function as a payment response, as Clause 2.2 of the Main Contract merely provides a time period for the issuance of an interim certificate after the receipt of a payment claim.

    The Sub-Contractor argued that the court should not consider whether the terms of the Main Contract were incorporated into the Sub-Contract as this would involve a review into the merits of the decision made by the adjudicator. Loh J disagreed with the Sub-Contractor and held that the court is merely construing the underlying contract in order to determine whether the Adjudication Application was filed within the statutory time limit. This does not constitute a review into the merits of the adjudicator’s decision. Accordingly, the court could decide on the Construction Issue.

    It was held that the Sub-Contract incorporated the terms of the Main Contract as the former evinced a clear intention that the terms of the Main Contract would apply to the Sub-Contract. In coming to this decision, Loh J also considered the context in which the Sub-Contract was entered into (i.e. the building and construction industry). Furthermore, Loh J opined that this interpretation is commercially sensible given the relationship between the parties. Clause 2.2 of the Main Contract is therefore incorporated, and the final hurdle for the Setting Aside Application lies in whether an interim certificate could function as a payment response.

    In this regard, the court noted that interim certificates can and do function as payment responses in the industry, and that there is no objection in principle to an interim certificate functioning as such. Furthermore, the interim certificates in this case provided fairly detailed responses to the amount claimed and would satisfy the statutory requirements for payment responses. It was thus held that an interim certificate here could, and was indeed intended to, function as a payment response.

    In light of the above-mentioned, the Adjudication Application was premature and invalid. The court therefore exercised its supervisory jurisdiction to set aside the Adjudication Determination.

    Commentary

    Newcon is a landmark decision clarifying the law for the benefit of those in the construction industry. The rigorous application of the timelines in the SOPA has always been emphasised by the courts, such as in Citiwall Safety Glass Pte Ltd v Mansource Interior Pte Ltd [2015] SGCA 42, where the Court of Appeal upheld the adjudicator’s disregard of an adjudication response that was out of time by a mere two minutes. That said, Newcon is the first decision where there is detailed reasoning on the effect of a premature adjudication application.

    It is submitted that the overturning of the AR’s decision is a welcome development. The AR’s interpretation of the relevant provisions, while keeping true to the legislative objective of providing a swift and low cost adjudication scheme, would have placed undue commercial pressure on a respondent to decide if it wishes the settle the claim. Furthermore, as noted by Loh J, allowing a premature application could lead to claimants using the adjudication scheme as a form of “ambush”. These concerns are in addition to the prejudice suffered by the claimant in having less time to put in the best payment response for the adjudicator’s consideration. Hence, it appears that the AR’s decision would, in a manner of speaking, tilt the playing field in a claimant’s favour. Loh J’s decision in Newcon therefore balances the scale, for it clarifies that a swift adjudication should not come at the cost of sacrificing the prospect of settlement and the rights of respondents.

    Interestingly, Quentin Loh J is not alone in his interpretation of the relevant SOPA provisions and his rejection of a valid premature application. The need for a balance to be struck between a swift adjudication process and the legislative purpose in providing for a dispute settlement period can also be seen in Tienrui Design & Construction Pte Ltd v G & Y Trading and Manufacturing Pte Ltd [2015] SGHC 243, a High Court decision that was handed down five days before Newcon. There, Lee Seiu Kin J opined that the entitlement to lodge an adjudication application only begins after the expiry of the dispute settlement period, and that the legislative intent to allow parties to crystallise the issues and encourage settlement would be undermined if parties were allowed to jump the gun and make a premature application. The decision is therefore consonant with Loh J’s concerns in Newcon vis-à-vis allowing premature adjudication applications.

    Reading Newcon together with Tienrui Design & Construction Pte Ltd v G & Y Trading and Manufacturing Pte Ltd and Citiwall Safety Glass Pte Ltd v Mansource Interior Pte Ltd, it is clear that the statutory timelines are provided for the benefit of both parties and has to be strictly complied with. It appears that the courts will give any attempt to bypass the timelines short shrift, even if such an attempt does further the objective of having a quick adjudication system per se. For quickness is beside the point, if the resolution process is not also a fair one. Accordingly, parties wishing to avail themselves of the adjudication scheme under SOPA must be sure of the statutory and, where applicable, contractual timelines and strictly adhere to them, for unnecessary costs will be incurred if parties go through the entire process only to have the determination set aside on a technicality, albeit an important one.

    * This blog entry may be cited as Kaden Goh Hua Zhou, “Haste Makes Waste – The Effect of a Premature Adjudication Application under the Building and Construction Industry Security of Payment Act”, Singapore Law Blog (5 November 2015) (http://www.singaporelawblog.sg/blog/article/144)

    ** A PDF version of this entry may be downloaded here

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