Payment Claims - EnƟ tlements and LimitaƟ ons A brief summary of the decision by the Court of Appeal on a case relaƟ ng to the Building and ConstrucƟ on Industry Security of Payment Act, and key takeway points, are provided

PAYMENT CLAIMS ͳ ENTITLEMENTS AND LIMITATIONS

by Jimmy Yap, Accredited Adjudicator (Partner) and Daphne Tan (Associate), CNPLaw LLP, Singapore In 2019, the Court of Appeal considered whether a contractor had the right to apply for adjudicaƟ on under the Building and ConstrucƟ on Industry Security of Payment Act (“SOP Act”). The construcƟ on contract in that case incorporated, with some modifi caƟ ons, the standard terms of the Singapore InsƟ tute of Architects’ ArƟ cles and CondiƟ ons of Building Contract (Measurement Contract) (“SIA Form Contract”), and the claimant-contractor served the relevant payment claims on the respondentdeveloper aŌ er the architect had already issued a fi nal cerƟfi cate in accordance with the terms of the construcƟ on contract. The respondent-developer argued that these payment claims were invalid as they were not accompanied by an architect’s cerƟfi cate, as required under the SIA Form Contract. The Court of Appeal ruled in favour of the respondent-developer. This arƟ cle provides a brief summary of the decision and key takeaway points for those in the construcƟ on industry.

The case before the High Court In Yau Lee ConstrucƟ on (Singapore) Pte Ltd v Far East Square Pte Ltd [2018] SGHC 261 (“Yau Lee”), the developer argued that the adjudicaƟ on determinaƟ on ought to be set aside on the basis that the adjudicator had no jurisdicƟ on to determine the adjudicaƟ on applicaƟ on [1]. The developer argued this to be the case as the payment claims submiƩ ed by the contractor and which formed the basis of the claimant’s adjudicaƟ on applicaƟ on were submiƩ ed aŌ er the architect had already issued a fi nal cerƟfi cate. The developer argued that as a consequence of having been submiƩ ed aŌ er the architect’s issuance of the fi nal cerƟfi cate, the payment claims fell outside the scope of the SOP Act [2]. The High Court ruled in favour of the contractor on the basis of the duty to speak espoused in Audi ConstrucƟ on Pte Ltd v Kian Hiap ConstrucƟ on Pte Ltd [2018] 1 SLR 317 (“Audi ConstrucƟ on”) [3]. The High Court accepted the contractor’s argument that the developer was estopped from objecƟ ng to the validity of the payment claim in quesƟ on as the developer failed to serve a payment response in relaƟ on thereto [4].

The case before the Court of Appeal The developer appealed, and in the case of Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] 2 SLR 189 (“Far East”), the Court of Appeal considered whether the developer had a duty to speak in respect of the payment claims in question. The Court of Appeal answered this question in the negative. The Court of Appeal interpreted the relevant clauses of the SIA Form Contract and held that the SIA Form Contract imposed as a condition precedent to

a contractor’s right to payment, an architect’s certification of the value of the works that have been done [5]. Having held that the said condition precedent had not been and, indeed, could not have been fulfilled in relation to the payment claims in question, the Court of Appeal held that the duty to speak referred to in Audi Construction was not engaged. The Court of Appeal held that the said duty to speak arose, in respect of objections to the jurisdiction of an adjudicator in an adjudication under the SOP Act, only in relation to payment claims which fell within the scope of the SOP Act, and that the payment claims in question did not.

The raƟ onale underscoring the Court of Appeal’s decision The SIA Form Contract does not expressly state that the issuance of an architect’s cerƟfi cate is a condiƟ on precedent to a contractor’s enƟ tlement to payment and/or to apply for adjudicaƟ on under the SOP Act. However, the Court of Appeal’s fi nding was well-reasoned on the following bases: • Whilst secƟ on 5 of the SOP Act provides that any person that has carried out any construcƟ on work under a contract is enƟ tled to a progress payment, secƟ on 6(a) provides that the quantum of the said enƟ tlement “shall” be calculated “in accordance with the terms of the contract”. In other words, secƟ on 5 sƟ pulates the circumstances in which a contractor is enƟ tled to a progress payment (namely, when the contractor has carried out any construcƟ on work or has supplied any goods or services under a contract), whilst secƟ on 6 prescribes that the said enƟ tlement must be quanƟ -

fi ed in accordance with the terms of the contract, and if the contract is silent in relaƟ on thereto, secƟ on 6(b) provides that the said enƟ tlement is to be quanƟfi ed on the basis of the value of the work done or goods or services supplied. • Clause 31(2)(a) of the SIA Form Contract states that the basis of a contractor’s payment claim shall comply with the valuaƟ on rules set out in sub-clause (4), which subclause goes on to prescribe the method with which the architect is to value the works. Simply put, this clause consƟ tutes the “terms of the contract” referred to in secƟ on 6 of the SOP Act. • Clause 31(2)(a) of the SIA Form Contract also requires the contractor to serve a copy of its payment claim on the architect. The Court of Appeal highlighted that the wording of clause 31(2)(a) enƟ tled a contractor to serve a payment claim on the developer, but required (by using the word “shall”) the contractor to forward a copy of the same to the architect. • Clause 31(3) of the SIA Form Contract requires the architect to issue an interim cerƟfi cate within 14 days aŌ er the architect’s receipt of the payment claim. Put another way and read with clause 31(2)(a), the mandatory wordings in the SIA Form Contract in relaƟ on to a contractor’s forwarding of a copy of its payment claim to the architect, together with the architect’s issuance of an interim cerƟfi cate within 14 days of its receipt thereof, rendered the issuance of an architect’s cerƟfi cate in relaƟ on to a payment claim a condiƟ on precedent to the claimant’s enƟ tlement to the said payment claim. In Far East, it was no longer possible for the architect to issue such a cerƟfi cate. This was because the architect had, in accordance with the SIA Form Contract, issued a fi nal cerƟfi cate and therefore lost the ability to issue any further cerƟfi cates thereaŌ er. As such, in Far East, the requirement prescribed by clause 31(2) (a) of the SIA Form Contract was no longer capable of being fulfi lled, with the consequence that the contractor’s enƟ tlement to progress payments under secƟ on 5 of the SOP Act could no longer be quanƟfi ed, as mandatorily required by secƟ on 6 of the SOP Act, in accordance with the “terms of the contract”. As a result, since the contractor could not establish an enƟ tlement to payment, the Court of Appeal held that the contractor was not enƟ tled to apply for adjudicaƟ on under the SOP Act and that the respondent was accordingly not under the duty to speak specifi cally referred to in Audi ConstrucƟ on.

Takeaways from the Court of Appeal’s decision for construcƟ on contracts incorporaƟ ng the SIA Form Contract Contractors should note that a construcƟ on contract that incorporates the terms of the SIA Form Contract has the eff ect of precluding them from being enƟ tled to payment under a payment claim unless and unƟ l the project architect has issued an interim cerƟfi cate in relaƟ on to the said payment claim. As a contractor, you can go on to accept the architect’s cerƟfi caƟ on and interim cerƟfi cate or choose to dispute the same (by, for example, fi ling for adjudicaƟ on under the SOP Act). Further, you should also note that under the SIA Form Contract, the architect’s fi nal cerƟfi cate is just that - fi nal - and that the architect cannot cerƟ fy any payment claims you issue thereaŌ er because the SIA Form Contract does not allow the architect to do so. Any such cerƟfi caƟ on will no doubt be challenged by your employer, and in the light of the Court of Appeal’s decision in Far East, such a cerƟfi cate is likely to be meaningless in any event. You may therefore wish to negoƟ ate for an amendment to your construcƟ on contract for more fl exibility, by, for example, expressly providing for an alternaƟ ve mechanism under which you can claim payment even aŌ er a fi nal cerƟfi cate has been issued, if you are of the view that such an alternaƟ ve mechanism is necessary for your scope of work. Alternatively, if you have already entered into a construction contract which incorporates the SIA Form Contract and which does not provide for such an alternative mechanism, you may wish to explore whether it is viable for you to bring your claim against your employer before the courts or, if there is an arbitration agreement (as is the case in the SIA Form Contract), commencing arbitration with your employer on other bases, eg a common-law entitlement to recover a reasonable sum for work done (also known as quantum meruit).

Key takeaways from the Court of Appeal’s decision for other construcƟ on contracts The factual matrix of the case in Far East precluded the contractor in that case from having recourse to adjudication under the SOP Act. The outcome of the case is a lesson learnt on the part of the contractor. Simply put, a contractor that is not entitled to receive payment under their construction contract is similarly not entitled to apply for an adjudication of its payment claim under the SOP Act. As a contractor, you must take note of the terms of your entitlement to payment under the construction contract and act in accordance therewith in order to establish a right to be paid for the work you have done. If, as a contractor, you have taken the posiƟ on that an outstanding amount is due to you for work done under a construcƟ on contract which incorporates the terms of the SIA Form Contract aŌ er the project architect has issued a fi nal cerƟfi cate, you will not be able to apply for adjudicaƟ on under the SOP Act and will have to commence arbitraƟ on instead. In other words, where, as a contractor, your construcƟ on contract imposes upon you addiƟ onal requirements or condiƟ ons precedent to your enƟ tlement to payment, ensure that you comply with these strictly. If you are unable to do so for reasons out of your control, try negoƟ aƟ ng with your employer for a waiver of your compliance with that requirement or condiƟ on immediately in wriƟ ng.

Conclusion To conclude, Far East makes clear that a claimant must fi rst address the issue that was presented to the Court of Appeal in that case - namely, that it is contractually enƟ - tled to payment - in order to establish that its payment claim falls within the ambit of the SOP Act and that it is enƟ tled to commence adjudicaƟ on. Then, and only then, can a putaƟ ve respondent be said to be under the duty to speak espoused in Audi ConstrucƟ on such that it is estopped from advancing any objecƟ ons not stated in its payment response. Accordingly, contractors should not take for granted their enƟ tlement to commence adjudicaƟ on by virtue of their employer’s silence and failure to provide a payment response. As a contractor, review your construcƟ on contracts thoroughly and ascertain comprehensively the terms that you have to comply with and the condiƟ ons that must be fulfi lled in order for you to be contractually enƟ tled to payment. This will help you ensure that your adjudicaƟ on applicaƟ ons are not defeated on the jurisdicƟ onal basis that was successfully presented by the respondents in Far East. Employers should do likewise to avoid incurring, unnecessarily, the costs of defending against invalid adjudicaƟ on applicaƟ ons on the substanƟ ve merits. References [1] Yau Lee at [11]. [2] Yau Lee at [12]. [3] In Audi ConstrucƟ on, the Court of Appeal held that the SOP Act’s prescripƟ on of a mandatory requirement that an employer fi le a payment response in response to a payment claim fi led by the contractor imposed upon the employer an affi rmaƟ ve duty to speak as to any objecƟ ons the employer might have to the contractor’s payment claim. Audi ConstrucƟ on stands for the proposiƟ on that an employer that neglects to do so is estopped from raising any objecƟ on not contained in its payment response. A more detailed analysis of Audi ConstrucƟ on is provided in Subramanian Pillai, Daphne Tan, and Leonard Chua: “An Overview of the Recent Amendments to the Building and ConstrucƟ on Industry Security of Payment Act”, CNPUpdate, 19 June 2019. hƩ ps://www.cnplaw.com/an-overview-of-therecent-amendments-to-the-building-and-construcƟ on-industrysecurity-of-payment-act/. [4] Yau Lee at [28] and [34] to [39]. [5] Far East at [35] and [39]. Disclaimer: This arƟ cle is provided as general informaƟ on and should not be relied upon as legal advice. (More informaƟ on relaƟ ng to this arƟ cle and the subject maƩ er discussed may be obtained by emailing jyap@cnplaw.com or dtan@cnplaw.com)

Value of UK construcƟ on disputes falls below global average

The average value of construcƟ on disputes in the UK fell by a massive 47% in 2018, according to Arcadis. The value of disputes averaged just USD 17.9 million in 2018, which was well below the global average of USD 33 million, marking a signifi cant decrease over the last six years. The fi ndings were revealed in the ‘Arcadis Global ConstrucƟ on Disputes Report 2019: Laying the FoundaƟ on for Success’. The report provides insight into the causes, duraƟ on and value of construcƟ on disputes, while highlighƟ ng the best ways to avoid, miƟ gate and resolve them. According to the report, the UK also remained the jurisdicƟ on with the shortest average length of Ɵ me to solve a dispute -12.8 months. However, this was up approximately 28% on the previous year and was consistent with the global trend which shows disputes are taking longer on average to resolve. The research highlights that failing to administer the contract correctly or human factors can oŌ en be the primary cause of disputes. As mega-projects conƟ nue to expand around the globe, inevitably the procurement, contracts and construcƟ on of the projects themselves become more complex. Projects are ulƟ mately at risk of failing when uncertainty and expectaƟ ons are inadequately managed. However, as the industry seeks to beƩ er understand and address the impact of human factors in disputes, it is hoped that early dispute resoluƟ on techniques - such as dispute avoidance - will become increasingly common. Currently in the UK, most disputes are resolved aŌ er they have crystallised, rather than parƟ es seeking to avoid or miƟ - gate potenƟ al dispute situaƟ ons as they arise. While it is encouraging that negoƟ aƟ on remains the preferred method of resoluƟ on, research respondents said that the number one factor which could have the biggest impact in avoiding disputes at all would be ‘a willingness to compromise in the dispute’. “In some cases, it could be argued construcƟ on contracts are simply too complex for administrators to understand, and beƩ er training for everyone involved would go some way towards avoiding disputes as they arise. However, our results show the UK to be a world leader in eff ecƟ ve avoidance and miƟ gaƟ on strategies, and as we conƟ nue to transiƟ on towards greater use of digital technologies like BIM and 4-, 5- or 6D modelling, we are likely to see an improvement in risk allocaƟ on much earlier on in the process. This could help all par Ɵ es to collaboraƟ vely resolve any diffi culƟ es before cost and Ɵ me pressures start to escalate”, said Gary KiƩ , Head of UK Contract SoluƟ ons at Arcadis.