China Railway No 5 Engineering Group Co Ltd Singapore Branch v Zhao Yang Geotechnic Pte Ltd

• Jurisdiction: Singapore
• Judge: Chan Seng Onn J
• Judgment Date: 22 May 2019
• Neutral Citation: [2019] SGHC 130
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 443 of 2019
• Published date: 25 May 2019
• Year: 2019
• Hearing Date: 13 May 2019,07 May 2019
• Plaintiff Counsel: Tan Jin Yong (Lee & Lee)
• Defendant Counsel: Choa Sn-Yien Brendon and Zachariah Chow Jie Rui (ACIES Law Corporation)
• Subject Matter: Building and Construction Law,Statutes and regulations,Building and Construction Industry Security of Payment Act,Payment claim,Performance bond proceeds
• Citation: [2019] SGHC 130

Chan Seng Onn J: Introduction

The present originating summons involves one key issue, namely, whether adjudication under the Building and Construction Security of Payments Act (Cap 30B, 2006 Rev Ed) (“SOPA”) is the appropriate forum to canvass construction disputes that arise purely in relation to performance bond proceeds.

At first blush, the issue appears to have been conclusively decided by Tan Siong Thye J (“Tan J”) in the earlier decision of SH Design & Build Pte Ltd v BD Cranetech Pte Ltd [2018] SGHC 133 (“SH Design”). There, Tan J held that the adjudicator “had jurisdiction to account for the Bond Proceeds because these were included in the Payment Response” (SH Design at [57]).

On closer inspection, however, it will be seen that the decision in SH Design does not have such a wide ranging impact, and the facts of that case are distinguishable from the present case. For reasons to be elaborated on below, I therefore allow the application to set aside the adjudication determination (“AD”) issued by the adjudicator.

Facts

The plaintiff, China Railway No 5 Engineering Group Co Ltd Singapore Branch (“the main contractor”) engaged the defendant, Zhao Yang Geotechnic Pte Ltd (“the sub-contractor”) to carry out works in relation to the “design and construction of Lentor station and construction of tunnels for Thomson line”.¹

The first adjudication

On 25 September 2018, the sub-contractor issued Payment Claim 35 (“PC35”), claiming from the main contractor a total sum of $848,584.93 (inclusive of Goods and Services Tax (“GST”)).² The total sum related to works completed from 20 October 2015 to 25 September 2015.³ Following a dispute in relation to PC35, the parties referred the matter to adjudication.

By his AD dated 13 December 2018, the adjudicator determined that $692,051.21 (inclusive of GST) was payable by the main contractor to the sub-contractor (“1AD”).⁴ It is not disputed that the adjudicated sum was paid in full by the main contractor to the sub-contractor.⁵

The second adjudication

Not long after 1AD was issued, on 20 December 2018, the main contractor called on an on-demand performance bond issued by the United Overseas Bank Ltd (“UOB”) in favour of the main contractor for the sum of $281,441.95.⁶ The performance bond had been procured by the sub-contractor to serve as “a deposit or security for the due performance and observance by the Sub-Contractor of all stipulations, terms and conditions contained in the Sub-Contract.”⁷

As a result of the call on the performance bond, on 25 December 2018, the sub-contractor served Payment Claim 36 (“PC36”) on the main contractor for the sum of $301,142.89, being the value of the performance bond which had been called and 7% GST.⁸

In response to PC36, the main contractor issued its payment response, disputing the validity of PC36 as there was “no claim for any new works under PC 36 which is a repeat claim”.⁹ Further, the main contractor explained that PC36 was “not even a claim for construction work under the [SOPA] but rather an attempt by [the sub-contractor] to recover the sum of $281,441.95 paid to [the main contractor] under the unconditional performance bond”.¹⁰

Given the dispute between the parties, the matter was referred to adjudication. At the adjudication, the adjudicator held that he had the jurisdiction to adjudicate on PC36 which relatedly solely to the proceeds of the performance bond. In summary, as Tan J had held in SH Design that the adjudicator therein did not exceed his jurisdiction by accounting for the bond proceeds in that case,¹¹ and given that performance bonds are “an integral part of a construction contract”,¹² the adjudicator determined that the adjudication application under SOPA was “a proper forum to address the issue of performance bond proceeds and hence, the adjudicator ha[d] the jurisdiction to adjudicate on this”.¹³

Having found that he had jurisdiction to determine the matter, the adjudicator determined that the main contractor was to pay the sum of $281,441.95 (excluding GST) to the sub-contractor (“2AD”).¹⁴ By mirroring the sum called under the performance bond, 2AD reversed the call on the performance bond entirely.

Dissatisfied with the adjudicator’s determination, the main contractor applied to set aside 2AD.

The two issues

Two interrelated issues arise for my consideration.

The first issue is whether s 10(1) SOPA, which delineates the scope of a payment claim under SOPA, is a mandatory provision, breach of which would mandate the adjudication determination arising from the underlying payment claim to be set aside.

If s 10(1) SOPA is deemed to be a mandatory provision, the second issue is whether a payment claim for performance bond proceeds only is a valid payment claim for the purposes of s 10(1) SOPA.

The first issue: Whether s 10(1) SOPA is a mandatory provision The court’s role in setting aside applications

As the Court of Appeal cautioned in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd [2018] 1 SLR 979 (“Comfort Management”) at [73], “the role of a court in reviewing an adjudicator’s determination is not to review the merits of the determination, and that any setting aside must be premised on the adjudicator’s acting in excess of his jurisdiction or in breach of the rules of natural justice.”

In determining whether the adjudicator has acted in excess of his jurisdiction, the question is whether the SOPA provision alleged to have been breached is a mandatory provision (Comfort Management at [74]–[76]).

In this case, the main contractor relies on the sub-contractor’s alleged breach of s 10(1) SOPA as its primary basis for setting aside 2AD.

Hence, the preliminary question is whether s 10(1) SOPA is a mandatory provision, breach of which enables the main contractor to succeed in its setting aside application.

Section 10(1) SOPA is a mandatory provision

In determining whether s 10(1) SOPA is a mandatory provision, the query is whether it is “so important that it is the legislative purpose that an act done in breach of that provision should be invalid” (Comfort Management at [75]; see also Australian Timber Products Pte Ltd v A Pacific Construction & Development Pte Ltd [2013] 2 SLR 776 at [75], per Woo Bih Li J).

In this regard, section 10(1) SOPA provides as follows:

Payment claims

10.—(1) A claimant may serve one payment claim in respect of a progress payment on — (a) one or more other persons who, under the contract concerned, is or may be liable to make the payment; or (b) such other person as specified in or identified in accordance with the terms of the contract for this purpose.

[emphasis added]

By stipulating that the payment claim must be “in respect of a progress payment”, s 10(1) SOPA seeks to limit the scope of any payment claim to claims for progress payments only. Hence, s 10(1) SOPA will be breached if, for example, the payment claim is not in respect of a progress payment. Herein, a person is entitled to submit a progress payment if he has “carried out any construction work, or supplied any goods or services, under a contract” (s 5 SOPA), but not otherwise.

Furthermore, s 10(1) SOPA limits the persons on whom the payment claim may be served to (a) persons who may be liable to make the payment under the construction contract, or (b) any other persons identified in the construction contract. Payment claims against any other persons would breach s 10(1) SOPA.

Section 10(1) SOPA therefore ensures that only valid payment claims are made, and claimants who submit frivolous payment claims beyond the scope allowed under s 10(1) SOPA ought to have their claims dismissed entirely. This is consistent with the goal of the SOPA adjudication framework, which “facilitates cash flow by establishing a fast and low cost adjudication system to resolve payment disputes” [emphasis added] (Singapore Parliamentary Debates, Official Report (16 November 2004) vol 78 (“the Debates”) at col 1113 (Cedric Foo Chee Keng, Minister of State for National Development)). By weeding out invalid payment claims which are not premised on work done or goods or services supplied under a contract (see s 5 SOPA), s 10(1) SOPA ensures that the SOPA adjudication framework will not be abused to resolve construction disputes outside the ambit of SOPA.

The importance of ensuring that payment claims remain within the scope of s 10(1) SOPA cannot be understated. As Lee Seiu Kin J highlighted in Sungdo Engineering & Construction (S) Pte Ltd v Italcor Pte Ltd [2010] 3 SLR 459 at [32], the adjudication process is “predicated by a whole chain of events initiated by the service of a Payment Claim by the claimant on the respondent under s 10 of the Act.” Hence, a payment claim is the fundamental trigger for any SOPA adjudication, and ensuring that only validly-made ones are entertained is vital for maintaining a “fast and low cost adjudication system” (the Debates at col 1113). Accordingly, I...