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    06:33 PM Tan Jia Wei, Justin, Senior Associate (Eversheds Harry Elias LLP)

    Finally, A Fast and Low-Cost Adjudication for the Building and Construction Industry – Recent Developments on the SOP Act

        

    Introduction

    The Building and Construction Industry Security of Payment Act (Cap. 30B) (the “SOP Act”) was enacted to ease cash flow to contractors and sub-contractors downstream in the building and construction industry. This was done by establishing a low-cost adjudication system to resolve payment disputes. Adjudication under the SOP Act was also expected to be fast, taking only three weeks from application to determination.

    However, adjudications have increasingly been neither fast nor low-cost. As evident from the increasing grounds of decisions issued by the Singapore Courts between 2014 and 2017, more and more parties apply to set aside adjudication determinations in court, increasing the time spent and costs in reviewing an adjudication determination’s validity.

    It is against this backdrop that the Court of Appeal’s recent decisions in Audi Construction Pte Ltd v Kian Hiap Construction Pte Ltd [2018] 1 SLR 317; [2018] SGCA 4 (“Audi Construction”) and Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979; [2018] SGCA 19 (“Comfort ‘Management”) become significant. These decisions have clarified the adjudication process, set the scope of the adjudicator’s powers and duties, and set the minimum requirements to support a claim, all of which further the aims of the fast and low-cost dispute resolution envisaged under the SOP Act.

    Background to Audi Construction

    In Audi Construction, the appellant was a sub-contractor engaged by the respondent, a main contractor, to carry out structural works for a project. Under the contract, the sub-contractor was required to serve its payment claim on the main contractor on the 20th of each month. However, 20 November 2016 fell on a Sunday, and the main contractor’s office was closed that day. The sub-contractor decided to serve the payment claim 2 days earlier, whilst post-dating the payment claim to 20 November 2016, intending for the main contractor to receive it timeously and to be clear about the effective date of service ([6]-[7] of Audi Construction).

    The main contractor did not provide a payment response, and the sub-contractor applied for adjudication under the SOP Act, taking 20 November 2016 as the payment claim’s effective date. At the adjudication, the main contractor argued for the first time that the sub-contractor’s payment claim was invalid as it was served 2 days early and in breach of the contract. This argument was rejected by the adjudicator, who made a determination in the sub-contractor’s favour ([8] of Audi Construction).

    The main contractor applied to the High Court to set aside the determination, relying on the same argument above, amongst others. As the High Court accepted the main contractor’s arguments and set aside the adjudication determination, the sub-contractor appealed to the Court of Appeal ([8] of Audi Construction).

    On appeal, the sub-contractor argued that it had validly served the payment claim, and further argued that the High Court should have taken a “purposive interpretation” of the service clause, where a payment claim would be valid even if it was served earlier, since the main contractor would not need to deal with it until the contractual date, unless the main contractor chose to ([15] of Audi Construction).

    Alternatively, the sub-contractor argued that the main contractor had waived its right to object to the payment claim’s validity, since the main contractor did not object to this alleged breach at the earliest opportunity (i.e. by the deadline to serve the payment response), as set out in the Court of Appeal’s earlier decision at [64]-[68] of Grouteam Pte Ltd v UES Holdings Pte Ltd [2016] 5 SLR 1011; [2016] SGCA 59.

    On the contrary, the main contractor maintained its argument that the payment claim was invalidly served, and argued further that waiver did not apply, given the numerous High Court decisions in its favour ([17]-[18] of Audi Construction).

    The Court of Appeal’s Decision in Audi Construction

    At the appeal, the Court of Appeal found for the appellant sub-contractor. The Court held that the payment claim was validly served after considering the facts of the case. In addition, the Court found that the main contractor had waived its right to object to the payment claim’s validity, since it had not stated its objections in a validly served payment response. In a departure from its previous decision, the Court further held that an adjudicator would have the right to rule on his own jurisdiction. 

    Valid Service of the Payment Claim

    The Court found that there was no basis to argue for a “purposive interpretation” in support of serving the payment claim early, since the contract clearly stated that a payment claim was to be served on a particular date ([24]-[25] of Audi Construction).

    However, because of two good factual reasons, the Court found that the sub-contractor’s payment claim was validly served. Namely, (a) the main contractor’s office was undisputedly closed on Sundays; and (b) there could not be any confusion to the payment claim’s operative date as it was dated in accordance with the contract. Notwithstanding the above, the Court made clear that it was not laying a general principle that parties could effect valid service by serving a claim early and post-dating it, unless they had good reasons for doing so ([26], [29]-[30] of Audi Construction).

    Lastly, the Court also gave guidance to future parties who faced similar situations regarding serving a payment claim on a Sunday or public holiday. The Court noted that a claimant could rely on s 50(c) of the Interpretation Act (Cap. 1) to serve a payment claim on the next day that was not a Sunday or public holiday. In the present case, the sub-contractor’s payment claim would have been validly served if it was served on 21 November 2017, as it was the next day that was not a Sunday ([34]-[35] of Audi Construction).

    Given the above, it is now clear to all parties that they should strictly comply with the contractual terms pertaining to service of payment claims. Moreover, issues regarding serving a payment claim on Sundays or public holidays will now be unlikely with the Court’s guidance on this matter.

    The Importance of a Payment Response

    Importantly, the Court made clear that a party objecting to the validity of a payment claim would have to state these objections in a validly served payment response. Any failure to do so would mean that the responding party would be deemed to have waived the right to raise such objections at the adjudication or in court. Requiring a respondent to raise its objections timeously would support the low-cost and speedy adjudication process envisaged under the SOP Act. Moreover, the early notice would give a claimant a chance to rectify any irregularity at an early stage, before adjudication commenced ([63]-[67] of Audi Construction). 

    Given the above, the Court found that the main contractor was estopped from arguing that the payment claim was invalid as it had failed to state such objections in a validly served payment response ([71] of Audi Construction).  

    Adjudicator’s Right to Rule on his Jurisdiction

    Lastly, and departing from its previous decision, the Court held that an adjudicator would have the right to decide on the validity of his own appointment, as this would facilitate the early resolution of payment disputes ([45] of Audi Construction). The issue of the adjudicator’s powers would be explored more fully in the Court’s subsequent decision in Comfort Management.

    Effect of Audi Construction’s Decision

    The Court’s decision in Audi Construction is significant and wide ranging, as it effectively curtails the practice of respondents failing to provide a payment response and later raising a variety of jurisdictional objections to set aside an adjudication determination. Such jurisdictional objections would involve some contractual irregularity or statutory non-compliance preceding the adjudication application and prevent an adjudicator from having the jurisdiction to hear the application at all. Consequently, parties would have to resolve these jurisdictional objections in court, dragging out adjudications for months, instead of the fast and low-cost adjudication envisaged under the SOP Act.

    By requiring the respondent to put all its substantive and jurisdictional objections in a payment response and giving the adjudicator the power to decide on his own jurisdiction, future adjudications will be more streamlined. Challenges to adjudication determinations will be reduced, since a respondent’s failure to set out jurisdictional objections in a payment response effectively prevents the respondent from making such objections at the adjudication or in court, save for irregularities that appear post-payment response.

    Moreover, time and costs are also saved as claimants can rectify any jurisdictional defect before proceeding with an adjudication, instead of only discovering them after an adjudication has commenced, by which time such irregularities can no longer be remedied, and significant costs have been incurred for the adjudication. Consequently, adjudicators will be able to spend their resources determining the substance of a payment claim, instead of dealing with jurisdictional issues that have little to do with assessing the value of the construction works.

    The effectiveness of Audi Construction in preventing parties from raising jurisdictional objections without first stating the same in a payment response was seen very quickly. In Benlen Pte Ltd v Authentic Builders Pte Ltd [2018] SGHC 61 (“Benlen”), a case decided three months after Audi Construction, the respondent argued that the claimant’s payment claim was invalidly served, as it was contrary to the contractual date of service. However, as the respondent failed to state these objections in its payment response or adjudication response, the High Court held that it had waived its right to object to the validity of the payment claim and was estopped from arguing the same in court ([66] of Benlen).

    The Background in Comfort Management 

    In Comfort Management, the adjudicator issued an adjudication determination in favour of the sub-contractor, OGSP Engineering Pte Ltd. Comfort Management Pte Ltd (referred to as the “main contractor”), applied to set it aside in the High Court and finally before the Court of Appeal.

    Before the Court of Appeal, the main contractor argued that the adjudicator had failed to consider patent errors in the sub-contractor’s payment claim, and that the High Court had erred in holding that the adjudicator was not required to consider all matters under s 17(3) of the SOP Act in coming to his determination ([14] of Comfort Management).

    The Court of Appeal’s Decision in Comfort Management

    In summary, the Court of Appeal agreed with the main contractor that an adjudicator was required to consider all matters listed in s 17(3) of the SOP Act in making his determination. Moreover, the Court held that an adjudicator would have to be satisfied that the claimant established a prima facie case as to the completed works and its value, and that the respondent would still be entitled to raise patent errors in the materials that were properly before the adjudicator, notwithstanding any failure to provide a payment response ([4] & [34] of Comfort Management).

    The Court’s decision in Comfort Management makes clear the standard which a payment claim would have to meet before it would be accepted by the adjudicator. Previously, some adjudicators would take an approach that was either too permissive or overly restrictive. As set out in [47]-[49] of the Law Reform Committee’s Proposals for Amending the Building and Construction Industry Security of Payment Act, some adjudicators took the Court of Appeal’s previous decision in W Y Steel Construction Pte Ltd v Osko Pte Ltd [2013] 3 SLR 380 (“W Y Steel”) to mean that they should confine themselves to determining whether there are any patent errors in a claimant’s payment claim. In the absence of these errors, the full amount claimed was awarded. Alternatively, some read W Y Steel to mean that a claimant was required to prove its case on a balance of probabilities, which was too high a standard for an adjudication.  

    In setting the standard at a prima facie level, the Court recognized in Comfort Management that adjudication was intentionally somewhat roughshod, as adjudications only had temporary finality before being resolved fully and finally in court or at arbitration. Therefore, a claimant was not required to “prove” the payment claim on a certain standard of “proof”, as that exercise could only be done in court or at arbitration ([63] of Comfort Management).

    However, the Court held that the absence of patent errors could not be an applicable standard for an adjudicator to determine a payment claim, since it was not a positive basis for evaluating the completion and value of the work. Furthermore, setting the standard at the absence of patent errors effectively placed the burden on the respondent to show why the payment claim should not be allowed, rather than on the claimant to show why the payment claim should be allowed ([58] of Comfort Management).

    Given the above, it is now clear to all claimants that even if a respondent fails to provide a payment response, an adjudicator will not rubber stamp a payment claim. Claimants should provide documentary support to establish at least a prima facie case before applying for adjudication.

    Disclaimer: The author was counsel for the appellant in Audi Construction Pte Ltd v Kian Hiap Construction Pte Ltd [2018] 1 SLR 317; [2018] SGCA 4. The views expressed in this article are the author’s personal views and do not represent the views of Eversheds Harry Elias LLP.

    * This blog entry may be cited as Tan Jia Wei, Justin, “Finally, A Fast and Low-Cost Adjudication for the Building and Construction Industry – Recent Developments on the SOP Act”  (21 June 2018) (http://www.singaporelawblog.sg/blog/article/213)

    A PDF version of this entry may be downloaded here

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