Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37: No longer a “Dual Track” Railroad but a Single Lane with Statutory Gap-Filling?

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Introduction

In our earlier article “Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] SGCA 36: Inroad into Dual-Track Regime for Construction Claims?”, we noted how the Singapore Court of Appeal (SGCA)’s comments had appeared to query the “dual-track” approach under the Building and Construction Industry Security of Payment Act (CAP 30B, 2005 Rev. Ed.) (SOPA). For convenience and ease of reference, this article will adopt the terms and definitions adopted in the previous article. In a subsequent decision rendered by the Court of Appeal following from their earlier decision in Far East v Yau Lee, the Court of Appeal in in Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37 (“Shimizu v Stargood”) categorically rejected the “dual-track” approach under SPOA.

The SGCA also clarified that the legal position on whether a contractor is entitled to submit a payment claim after the underlying construction contract has been terminated is dependent on the contractual terms, and what is terminated – employment of the contractor or the construction contract?

Background facts

The facts of Shimizu v Stargood are fairly straightforward. Shimizu Corporation (Shimizu) was the main contractor for a project. Stargood Construction Pte Ltd (Stargood) was one of Shimizu’s sub-contractors, and parties adopted the third edition (2013) of the Real Estate Developers’ Association of Singapore Design and Build Conditions with amendments (the Subcontract).

Under clause 6 of the Subcontract, Shimizu appointed a Project Director to act on its behalf in respect of matters relating to the Subcontract, including certification of progress payments. Following certain alleged breaches of the Subcontract, Shimizu issued a notice of default on 4 March 2019. Under clause 33.2 of the Subcontract, the Project Director may terminate the Subcontract following the issuance of a notice of default unless the default is rectified within 7 days. As the default was allegedly unrectified, Shimizu terminated the Subcontract on 22 March 2019.

After termination of the Subcontract, Stargood served Payment Claim No. 12 (PC 12) on Shimizu for the sum of SGD 2,599,359.44 as payment for works done up till April 2019. Shimizu did not serve a payment response to PC 12. Stargood then proceeded to lodge Adjudication Determination No. SOP/AA203/2019 (AA 203) on 4 June 2019 based on PC 12. In its adjudication response, Shimizu took the position, amongst other things, that PC 12 had not been properly served.

On 31 May 2019, prior to the determination of AA 203, Stargood served another Payment claim No. 13 (PC 13) on Shimizu. PC 13 was identical to PC 12, save that the claimed sum was stated to be for works done up till May 2014. Shimizu’s payment response to PC 13 was simply “nil”. Stargood later lodged Adjudication Determination No. SOP/AA245/2019 (AA 245) on 5 July 2019 based on PC 13.

On 27 June 2019, the adjudicator dismissed AA 203 on two distinct grounds, namely: (i) PC 12 had not been properly served on Shimizu and (ii) PC 12 cannot be served after the termination of the Subcontract as there was no post-termination certification regime provided for under the Subcontract allowing the Project Director to certify any further payment claim. Thereafter, AA 245 was dismissed by the adjudicator on 6 August 2019 as he found that Stargood was bound by the determination in AA 203. Following this, Stargood took out a court application to set aside the adjudication determinations in AA 203 and AA 245.

Decision of the Court of Appeal

The SGCA’s decision can be broadly categorised into 3 sections: (i) Description of SOPA framework generally, (ii) addressing the issue of whether payment claims can still be submitted post-termination of contract and (iii) further comments on several provisions under the SOPA.

SOPA Framework – the “Gap-Filling” and not “Dual-Track” Regime

First the SGCA reiterated (at [21] of the Shimizu v Stargood) its comments in Far East v Yau Lee that the SOPA is merely a legislative framework to expedite the process by which a contractor may receive payment – done through the payment certification and adjudication process – in lieu of commencing arbitral or legal proceedings. It does not, in and of itself, grant the contractor a right to be paid. Insofar as previous High Court decisions which appear to suggest that the SOPA creates a “dual railroad track system” where a party possesses a statutory entitlement to a progress payment which is separate and distinct from a party’s contractual entitlement – that would be erroneous ([26] of the Shimizu v Stargood). Their conclusion was drawn from a holistic consideration of Part II of the SOPA ([31] of Judgment) and further reinforced by the “gap-filling” functions of sections 6 and 7 of the SOPA. Sections 6 and 7 of the SOPA apply in situations where the contract is silent as to the amount of a progress payment which a party is entitled to, or does not provide any mechanism for valuation of construction work carried out or goods or services supplied ([29] of Judgment).

In this regard, the Court of Appeal noted that having two payment regimes co-existing side-by-side creates intolerable uncertainties. Contractors may be confused as to which regime applies, or even whether they have to make a (revocable or irrevocable) election between them ([31] of Judgment).

Whether Payment Claims can be submitted Post-Termination depends on whether the Contract provides for it

Following the above, it follows that there is no separate statutory entitlement to serve a payment claim under section 10 of the SOPA where the underlying contract has provided a mechanism for service of payment claims ([20] and [32] of Judgment). In a situation where the contractual terms on payment certification can no longer operate, a party is no longer entitled to serve a payment claim ([32] of Judgment).

In short, there is primacy of the construction contract as modified or gap-filled by the SOPA.

Importantly, the Court of Appeal rejected the argument raised by Stargood – that the 2018 amendments to SOPA allowed payment claims to be served after termination of contract since definition of “contract” under SOPA has been amended to include a construction contract that has been terminated. The Court of Appeal’s reasoning is simply that the 2018 amendments seeks to only clarify that the SOPA may apply to progress payments after termination; but whether it can actually do so depends on whether the contractual terms so provide for it ([35] and [36] of Judgment).

The Court of Appeal’s also disagreed with the lower court’s concern that such a position may place subcontractors and suppliers “at the mercy of the main contractor or employer, who can resist or delay payment by terminating the underlying contract on tenuous grounds”. The Court of Appeal was instead of the view that termination must necessarily be prima facie valid, and that contractors (who are economic actors in their own right) are unlikely to exercise termination rights capriciously in order to resist or delay payment ([37] of Judgment).

On the facts, since the Subcontract did not provide for service of payment claims following termination under clause 33.2, both PC 12 and PC 13 were not valid payment claims under the SOPA and were incapable of supporting adjudication applications ([38] of Judgment).

The Court of Appeal noted that its judgment did not leave Stargood without any remedy. Stargood would still be able to commence proceedings to sue for work done or subsequently raise these claims as a set-off against damages due to Shimizu (for alleged breaches by Stargood). If Stargood’s case is that the termination was made without basis, Stargood may also sue Shimizu for wrongful termination and to add the value of any work done which remains outstanding ([47] of Judgment).

Other Pertinent Observations

First, the Court of Appeal clarified that section 5 of the SOPA does not provide any statutory entitlement to a progress payment. The section serves to premise the right to be paid on the performance of a construction contract. Therefore, if there was a breach of performance, the right to be paid does not crystallise. Ultimately, the contractor making a claim for progress payments under SOPA must show that there is a basis for claiming such payment under the contractual terms. Where the contract does not provide any basis to bring such a claim, there is simply nothing to be adjudicated under the SOPA ([28] of the Judgment).

Second, the Court of Appeal reiterated the distinction between termination of a contractor’s employment on the one hand and termination of a construction contract on the other. However, its effects would depend heavily on the contractual terms agreed between the parties. Where the employment of a contractor is terminated pursuant to an express clause in the contract, the parties will remain bound by any terms which are expressed to survive such termination (of employment) and the issue will be determined by a consideration of the terms of the relevant construction contract ([43] of Judgment).

Significance of the Judgment

The Judgment now provides further conceptual clarity on the SOPA framework. As we had pointed out in our earlier article, the Court of Appeal’s comments in Far East v Yau Lee at [30] and [31] had created some ambiguity (in terms of a contractor’s ability to submit payment claims) when the underlying construction contract is subsequently terminated, rescinded or avoided. It is now clear that a well-crafted provision in a construction contract may be able to completely deprive the contractor of his entitlement to progress payments under the SOPA. This decision will have significant impact for all contractors in the construction industry.

The decision of the Court of Appeal is significant in the sense that it has clarified that there is no “dual-track” regime under the SOPA. As mentioned in the previous article, a dual track regime is one whereby a claimant can make separate claims under a construction contract between the parties and under the SOPA, or make a claim that has both contractual and statutory force. This is best expressed by the reproduction of a table extracted from Chow Kok Fong, Security of Payments and Construction Adjudication (LexisNexis, 2nd Ed, 2013) at paragraph 5.12:-

Graph

The dual track approach finds its genesis from the Building and Construction Industry Security of payment Act 1999 enacted by the state of New South Wales in Australia (the NSW SOP Act) which was later amended by the Building and Construction Industry Security of Payment Amendments Act 2002 (NSW) and the relevant authorities from the New South Wales. As cited by the learned author in Chow Kok Fong, Security of Payments and Construction Adjudication (LexisNexis, 2nd Ed, 2013), “many of the features of the [SOPA], including its general framework, were either developed from or else drew liberally from the [NSW SOP Act]. Furthermore, New South Wales has the longest experience amongst the Australian states with this subject and, as a consequence, there is now a significant body of case law which affords a rich vein of precedents demonstrating the operation of key features of the Act.” Whilst the framework of the NSW SOP Act and the SOPA have material differences, s 8 of the NSW SOP Act (which reads very similar to s 5 of the SOPA), reads as follows:-

“8. Right to progress payments

A person who, under a construction contract, has undertaken to carry out construction work to or to supply related goods and services is entitled to receive a progress payment.”

The framework of the NSW SOP Act and the mischief that the NSW SOP Act intended to avoid may be gleaned from the classic decision of the New South Wales Supreme Court in Walter Construction Group Ltd v CPL (Surry Hills) Pty Ltd [2003] NSWSC 266 (“Walter Construction”) at [52].

In Walter Construction, the claimant had served a payment claim on 20 December 2002. The Superintendent (the equivalent of the Architect or Project Director in the case of Stargood v Shimizu) only provided a payment schedule (the equivalent of our payment response) on 23 January 2003 – a time which fell outside of the statutorily prescribed time for service of a payment schedule (i.e. within 10 business days after service of the payment claim). The claimant applied for summary judgment under the NSW SOP Act. The respondent submitted inter alia that the claimant’s claim was not a valid payment claim within the meaning of the NSW SOP Act because the Superintendent had not issued a payment certificate to the claimant as required under clause 42.1 of the construction contract and therefore, the claimant’s had no entitlement to payment under the NSW SOP Act.

Nicolas J held that the respondent’s submission that “a claimant’s entitlement to the amount claimed must be established under the contract before a person is entitled to make or serve a payment claim under s 13(1) of the Act is unsound.” In doing so, he quoted from Macready, AJ in Beckhaus v Brewarrina Shire Council [2002] NSWSC 960 (“Beckhaus”) from [60] to [65] who considered the framework of the NSW SOP Act:-

“60 The Act obviously endeavours to cover a multitude of different contractual situations. It gives rights to progress payments when the contract is silent and gives remedies for non-payment. One thing the Act does not do is affect the parties’ existing contractual rights. See ss 3(1), 3(4)(a) and 32. The parties cannot contract out of the Act (see s 34) and thus the Act contemplates a dual system. The framework of the Act is to create a statutory system alongside any contractual regime. It does not purport to create a statutory liability by altering the parties’ contractual regime. There is only a limited modification in s 12 of some contractual provisions. Unfortunately, the Act uses language, when creating the statutory liabilities, which comes from the contractual scene. This causes confusion and hence the defendant’s submission that the words “person who is entitled to a progress payment under a construction contract” in s 13(1) refers to a contractual entitlement.

61 The trigger that commences the process that leads to the statutory rights in s 15(2) is the service of the claim under s 13. That can only be done by a person who “is entitled to a progress payment under a construction contract” …

62 … One thus has a series of sections which create a statutory right to a progress payment by fixing entitlement, the date for making claims, amount of claims and due date for payment of claims. The statutory right to claim is for both situations, namely, where a contract provides for such claims and where it does not.

63 Thus s 13 merely continues on the statutory procedure and the opening words must be a reference to the statutory entitlement created in the previous sections not the contractual entitlement submitted by the defendant….

63 As under 42.1 the plaintiff is entitled to progress payments there is no reason why he cannot make the statutory claim at the same time as his contractual claim. This statutory claim must comply with Section 13(2) [the equivalent of s 10(2) of the SOPA]. On its face the document appears to do this and there was no submission to the contrary.”

The rationale behind the NSW court’s reasoning was quite clear: the NSW SOP Act created a statutory entitlement to payment to support the NSW SOP Act’s express object which is to:-

“ensure that any person who carries out construction work (or who supplies related goods and services) under a construction contract is entitled to receive, and is able to recover, specified progress payments in relation to the carrying out of such work and the supply of such goods and services”

Any other construction would defeat its express purpose and object.

Given that the Singapore Court of Appeal has clarified that the dual-track approach in the adjudication regime does not exist and predicated the contractor’s entitlement to payment solely on the terms of the construction contract, the concerns raised in Walter Construction appears to have resurfaced again. This may fundamentally affect the contractor’s entitlement to payment under the SOPA in future cases.

What happens to payment claims where the certifier or the employer regulates the contractor’s entitlement to payment under the construction contract? Under the SIA Form, the Architect’s interim certificate is the agreed to mechanism for certification of claims. Does this mean that the interim certificate can qualify as the payment response and no further language is required? As most stakeholders know, it is common for the SIA Form to be amended such that the interim certificate shall stand as the payment response if there is none from the employer. However, would the Architect when performing its certification function thereby to be regarded as agent of the Employer?

How about clauses in the contract that require payment claims to be submitted with sufficient documentation and supporting evidence to enable the certifier to determine the value of works done under the construction contract or for such drafts to be submitted a stipulated number of days before the due date for payment claims? Will failure to comply with such conditions operate to preclude the claimant from launching an adjudication under the SOPA or would such conditions be deemed inconsistent with the SOPA due to section 36 of the SOPA?

Finally, the Court of Appeal in Stargood v Shimizu had also made some important observations pertaining to the issuance of termination certificate and/or termination of a contractor’s employment under a construction contract. At [37], the Court of Appeal observed that “…any termination must necessarily be prima facie valid. In other words, there must be some facts to support the valid contractual exercise to terminate the contract.” At [43], the Court of Appeal further observed that the Project Director’s certification may only be reopened in adjudication under the SOPA or in arbitral proceedings. Finally, the Court of Appeal noted at [52] that since the adjudicator was entitled to re-open any certificates issued by the Project Director, the termination of the subcontract by the respondent in Stargood v Shimizu and its consequences were not contrary to s 36 of the SOPA. It appears that the Court of Appeal was perhaps suggesting that termination should and can be challenged in adjudication proceedings.

Conclusion

The Court of Appeal’s decision in Stargood v Shimizu is ground-breaking and practitioners may have to relook the previous caselaw. Amidst COVID-19, and the situation that many stakeholders in the building and construction industry are in, it may not be long before the principles in Stargood v Shimizu are revisited again.

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.

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