Kum Leng General Contractor v Hytech Builders Pte Ltd

• Jurisdiction: Singapore
• Judge: S Rajendran J
• Judgment Date: 29 February 1996
• Neutral Citation: [1996] SGHC 33
• Date: 29 February 1996
• Subject Matter: Delay in completion of building works by sub-contractor causing loss to main contractor,Defendant purporting to exercise right of set-off against progress payments due to plaintiffs,Whether main contractor had a right of set-off at law or under the sub-contract,Set-off and abatement,Construction of contract,Building and Construction Law
• Docket Number: Suit No 80 of 1995 (Registrar's Appeal No 102 of 1995)
• Published date: 19 September 2003
• Defendant Counsel: Daniel Koh (Allen & Gledhill)
• Court: High Court (Singapore)
• Plaintiff Counsel: Raymond Lam (Lee Lam & Pnrs)

The plaintiffs had applied for O 14 judgment of their claim against the defendants. The assistant registrar dismissed their application and the matter came up before me on appeal. I reversed the assistant registrar`s order and granted the plaintiffs` application. I now give my grounds.

The plaintiffs were sub-contractors in a building project in which the defendants were the main contractors. On 28 October 1994 the defendants wrote to the plaintiffs in which they referred to cl 22 of the main contract and cl 9 of the sub-contract and informed the plaintiffs that the architect had by letter dated 25 October 1994 certified that the works ought reasonably to be completed by the revised completion date of 9 August 1994. By this letter the defendants put the plaintiffs on notice that should the employer deduct liquidated damages of $5,000 per day (as provided in the main contract) the defendants reserved the right to recover from the plaintiffs an apportioned amount of such damages.

By letter dated 31 October 1994 the defendants informed the plaintiffs that the apportioned amount of the damages that they would recover from the plaintiffs for the period 10 August to 30 September 1994 was $130,000 and that this amount would be deducted from the progress payment due to the plaintiffs. Subsequently, by letter dated 2 December 1994, the defendants informed the plaintiffs that the apportioned amount of damages they would recover from the plaintiffs for the period 1 to 31 October 1994 was $75,000 making a cumulative total of $205,000. The plaintiffs disputed the defendants` rights to make such deductions but the plaintiffs proceeded to do so. From the amounts due to the plaintiffs under interim certificates dated 1 September 1994, 30 September 1994 and 31 October 1994 the defendants withheld a total of $224,560.16. The plaintiffs commenced proceedings for the recovery of this sum of $224,560.16 and, as indicated above, applied for summary judgment.

The defendants alleged that the employer had deducted, from moneys due to the defendants, the sum of $680,000 as liquidated damages for delay in the completion of the main contract works from 10 August to 23 December 1994. They point out that cl 3 of the sub-contract obliged the sub-contractor to observe the terms of the main contract in so far as it relates to the sub-contract work and to indemnify and save harmless the contractor against and from any loss to the contractor arising out of non-performance or breach of the sub-contract. The defendants alleged that the delay in completing the contract works was due to the plaintiffs` delay in completing the sub-contract work and that they had a right both in common law and by the terms of cl 14 of the sub-contract to set off from the amounts payable to the plaintiffs that part of the claim attributable to delay by the plaintiffs. In support of their case, the defendants relied on a certificate issued by the architect dated 1 April 1995 [which counsel informed the court was issued pursuant to cl 9(a) of the sub-contract] wherein the architect opined that the sub-contract work of the plaintiffs ought reasonably have been completed by 23 September 1994. I shall refer to this letter in greater detail later.

The contractual provisions of the main contract and sub-contract in this case were somewhat similar to the contractual provisions in Dawnays Ltd v FG Minter and Trollope & Colls Ltd [1976] 1 BLR 16. In Dawnays ` case, the issue was also whether the contractor could, from payments certified as due to the sub-contract under interim certificates issued by the architect, deduct amounts to cover claims for damages caused to the contractor by reason of delays in the sub-contract work. This depended on the construction of cll 11(b) [which corresponds to our cl 12(b)] and 13 of the sub-contract [which corresponds to our cl 14]. The Court of Appeal in that case regarded cl 11(b) as a specific provision requiring the main contractor to make payment within 14 days of the issue of the certificate, less only the sums specified. In rejecting the argument that the contractor`s cross-claim for delay can under cl 13 be deducted, Denning MR said:

Mr Knight submits that these two clauses [ie cl 13 of sub-contract and cl 27(b) of the main contract (which is also cl 27(b) of our main contract)] should be read together. I agree that they should be. But, so reading them, I hold that both clauses - cl 13 in the sub-contract and cl 27(b) in the main contract - refer to liquidated and ascertained sums which are established or admitted as being due. The reason is because, taking the various words, it is only such a sum which is capable of being `deducted`: it is only such a sum as to which it can be said that the sub-contractor is `liable to pay`: it is only such a sum of which it can be said that the main contractor is `entitled`. Each of those words show to my mind that the only sums which can be deducted from the certificate are liquidated and ascertained sums established or admitted to be payable. It is not permissible to deduct claims which are unliquidated and are still matters of dispute.

Lord Denning gave another reason for his decision that the main contractor was not permitted to make the said deductions. This third reason was that under cl 8(a) of the sub-contract (similar to our cl 9(a)) no sums are payable in respect of delay unless there has been a proper certificate by the architect certifying that the works ought to have been completed within the specified time or any certified extension of time. The architect in that case had not finally determined what extension should be given. Lord Denning however did not pursue this point and rested his decision on the construction of cll 11(b) and 13.

There was an application to the House of Lords in Dawnays ` case for leave to appeal but this was turned down. The plaintiffs submit that this can only be because the House of Lords was satisfied that, as a matter of construction, the contractual provisions precluded the contractor in Dawnays ` case from setting off his claim for damages from the amounts due to the sub-contract under the interim certificate.

Dawnays ` case attracted considerable criticism. This was not so much in respect of the construction placed on the documents but because having stated that cl 11(b) was a very specific provision requiring payment within 14 days of the sum stated less only the sums specified, Denning MR made the following comment:

The interim certificate is regarded as the equivalent of cash. The sub-contractor needs the money so as to get on with the rest of his work. On principle, and in practice, once a certificate is issued, it must be paid save only for the permitted deductions.

And after dealing with the arguments based on cl 13, Denning MR reiterated those comments when he said:

It must be remembered that a disputed claim cannot be referred at once to arbitration. Unless all agree, the determination of a disputed claim has to wait until the completion of the work. The arbitration clause makes that plain. It follows that, if Mr Knight`s contention is correct, it would mean that his clients could hold this money (which is the sub-contractor`s money) indefinitely. They could hold on to it until the end of the main contract, that is, until the whole work was completed. They could then hold on to it still longer whilst the dispute was referred to arbitration. They would not have to pay it over until the arbitration was concluded, maybe after a case stated to this court. That seems to me to run counter to the very purpose of interim certificates. Every businessman knows the reason why interim certificates are issued and why they have to be honoured. It is so that the sub-contractor can have the money in hand to get on with his work and the further work he has to do. Take this very case. The sub-contractor has had to expend his money on steelwork and labour. He is out of pocket. He probably has an overdraft at the bank. He cannot go on unless he is paid for what he does as he does it. An interim certificate is to be regarded virtually as cash, like a bill of exchange. It must be honoured. Payment must not be withheld on account of cross-claims, whether good or bad - except so far as the contract specifically provides. Otherwise any main contractor could always get out of payment by making all sorts of unfounded cross-claims. All the more so in a case like the present, when the main contractors have actually received the money.

These two passages in the judgment of Lord Denning gave rise to a quick succession of cases in the Court of Appeal in which it was held - following what was called `the rule in Dawnays ` case` - that in the absence of clear words to the contrary, payments of an amount due under an interim certificate could not be held up for disputed cross-claims.

The first of these cases to reach the House of Lords was Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689. The Court of Appeal had in that case held, following the rule in Dawnays ` case, that the defence of set-off was not available to the contractor in relation to payments due under an interim certificate. This the Court of Appeal decided in spite of the clear words in cl 14 of the sub-contract for the contractor to:

... deduct from any payments certified as due ... the amount of any bona fide contra accounts and/or other claims which he, the contractor, may have against the sub-contractor in connection with this or any other contract.

The House of Lords unanimously allowed the appeal and emphatically rejected the principle embodied in the rule in Dawnays ` case. The plaintiffs` submit that the rejection of `the rule in Dawnays ` case` by the House of Lords did not affect the interpretation adopted by the Court of Appeal on the relevant contractual provisions. As the contractual provisions in Dawnays ` case are...