Cross claims, counterclaims and set-offs from another construction contract - Permissible in an adjudication?

by Dentons
Contact

Dentons

Executive Summary

It is commonplace in our local building and construction market for the same parties to enter into multiple contracts for different projects. However, what happens if a main contractor has valid backcharges under Project A and wants to apply these to reduce payment for certified work done on Project B? Will the backcharges be considered valid set-offs for the purposes of adjudication under the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (the SOP Act)?

Recently, the Singapore High Court (the Court) in Hua Rong Engineering Pte Ltd v Civil Tech Pte Ltd, [2017] SGHC 179 decided that one cannot do so.

The Court was of the view that permitting parties to introduce any contracts they wanted to in an adjudication determination under the SOP Act would open the floodgates to unchecked expansion of the scope of materials which must be dealt with. More crucially, this may even lead to unmanageable complexity, which will render the SOP Act no longer capable of providing a simple, low-cost, efficient, and quick resolution of payment claims.

Hence, the Court decided that the simplest and quickest procedure, as stipulated by the SOP Act, is to confine the issues of payment claims to those arising in relation to a single construction contract.

Furthermore, the Court pointed out that the adjudication determination only provides temporary finality, and not the final determination of the parties’ rights.  Hence, this should address any concerns of injustice.

Brief Facts

Civil Tech Pte Ltd (CTP) and Hua Rong Engineering Pte Ltd (HRE) were parties involved in two MRT construction projects. The two projects related to the construction of two MRT stations on different MRT lines. CTP was a sub-contractor of the main contractor and HRE was a sub-contractor engaged by CTP to supply labour for construction for both projects. CTP and HRE entered into contracts for the two projects (referred to hereafter as the “T211 contract” and the “C933 contract”, respectively).

On 6 December 2016, HRE submitted a claim of $601,873.40 to CTP for work done in respect of the T211 contract. While CTP accepted HRE’s claim, CTP’s Payment Certificate reflected that nothing was due to HRE. CTP justified its action by alleging that HRE had made false and fraudulent payment claims under the C933 contract, and that it had therefore overpaid HRE in respect of the C933 contract. Consequently, CTP sought to withhold a sum of $1,468,276.32 from HRE.

As it turned out, HRE filed an adjudication application as regards its claim under the T211 contract. In its adjudication response, CTP contended that it was entitled to set off $1,468,276.32 from the payment claim of $601,873.40 under the T211 contract as a result of the fraud and overpayment in respect of the C933 contract.

When the dispute was referred to the Adjudicator, he ruled that CTP was not entitled to set off a counterclaim based on another contract. In particular, the Adjudicator held that the SOP Act only permitted him to take into consideration cross-claims, counterclaims and set-offs arising under the same construction contract. Accordingly, CTP was ordered by the Adjudicator to pay an amount of $601,873.40 to HRE.

This issue came before the Court when CTP applied to set aside the adjudication determination.

Issues

The main issue is whether an adjudicator is entitled to consider cross-claims, counterclaims and set-offs which do not arise from the same contract which forms the basis for a payment claim in an adjudication under the SOP Act. In other words, the main issue before the court was whether the Adjudicator was correct in confining his deliberation to matters concerning only the T211 contract (and not the C933 contract).

There were two other less significant issues: one, whether the Adjudicator breached s.17(3) of the SOP Act; and two, whether CTP’s allegations of fraud and unjust enrichment were made out.

Findings of the Court

Issue 1: Whether s. 15(3) of the SOP Act allows cross-contract cross-claims, counterclaims or set-offs, or whether it is restricted to withholding reasons arising under the same contract

Before dealing with this issue, the Court revisited the object and purpose of the SOP Act, all of which are well known.  The Court also cited Sundaresh Menon CJ’s observations in the Singapore Court of Appeal case of W Y Steel Construction Pte Ltd v Osko Pte Ltd, [2013] SGCA 32, [2013] 3 SLR 380 (W Y Steel) that arguments raised by parties regarding cross-claims, counterclaims and set-offs may prove to be specious at the end of lengthy and expensive proceedings, such that they can only be resolved through long and tedious deliberation.

The Court noted that sections 2, 5, 10 and 12 of the SOP Act (in addition to sections 15 and 17) were relevant because the language used in those provisions shed light on whether the adjudication process could possibly entertain matters relating to multiple contracts. In this connection, The Court referred to the recent Singapore High Court case of Rong Shun Engineering & Construction Pte Ltd v C.P. Ong Construction Pte Ltd, [2017] SGHC 34 (Rong Shun), where Vinodh Coomaraswamy J dealt with the issue of whether a payment claim (and an adjudication application based thereon) can arise out of more than one contract, or whether a rule of “one payment claim, one contract” applied. In Coomaraswamy J’s view, the “one payment claim, one contract” rule did apply because Parliament consistently used the phrase “a contract” in the SOP Act, and variations thereon similarly adopted the singular form. Therefore, this suggested that payment claims and adjudications under the SOP Act should be confined to a single contract. Be that as it may, the Court noted that the issue he had to deal with was whether a respondent may rely on withholding reasons arising in relation to multiple contracts, and not whether a claimant may base his claim on multiple contracts (which was the issue before the court in Rong Shun).

In the Court’s view, the language used by Parliament clearly indicated that the same position which applies to payment claims applies as well to withholding reasons which can be considered in an adjudication under the SOP Act. Furthermore, beyond a purely textual analysis, the Court held that there is also a policy justification which militates toward adopting the single-contract interpretation. In essence, bringing in multiple contracts as the basis for cross-claims, counterclaims or set-offs will unduly prolong and complicate adjudications, and this runs contrary to Parliament’s intention of ensuring that there is a simple, quick and fair process for the resolution of payment disputes.

In rejecting CTP’s interpretation of the law, the Court observed that accepting CTP’s position would imply that there is no limit to the scope of matters which an adjudicator is required to consider as potentially valid withholding reasons in an adjudication determination. This is unrealistic due to the practical limitations of adjudication under the SOP Act.

Ultimately, the Court held that both the language of the SOP Act and the SOP Regulations, and their underlying object and purpose, support the interpretation that Parliament intended to limit the adjudication procedure to a single construction contract. Accordingly, the Court agreed with the Adjudicator’s decision on this point. 

Issue 2: Whether the Adjudicator breached s.17(3) of the SOP Act

The Court held that the Adjudicator did not breach s.17(3) of the SOP Act in finding that the cross-contract set-off should be disregarded. This was because the Adjudicator’s reasoning in the adjudication determination suggested that he had properly considered the contents of the payment response and adjudication response. Therefore, the Court was of the view that the Adjudicator’s rejection of the withholding reasons raised therein was a product of that proper consideration.

Issue 3: Whether the allegations of fraud and unjust enrichment are made out

The Court was of the view that it was not necessary for him to make any findings or observations because the alleged fraud and unjust enrichment regarding the C933 contract are immaterial following his holding that the Adjudicator was right to confine his deliberation to the T211 contract. Nevertheless, CTP would be perfectly entitled to pursue these allegations further in a separate action.

Implications for Contractors

Dentons Rodyk believes that this is the first reported High Court authority on the issue of whether an adjudicator is entitled to consider cross-claims, counterclaims, and set-offs which do not arise from the same contract which forms the basis of the payment claim.

This decision thus clarifies that any cross-claims, counterclaims, and set-offs claimed in an adjudication under the SOP Act must arise from the same contract in question.  All contractors and employers should be mindful of this when they prepare their payment certificates and payment responses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dentons | Attorney Advertising

Written by:

Dentons
Contact
more
less

Dentons on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.