RESTRAINING CALLS ON PERFORMANCE BOND POST ADJUDICATION
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Lawyers
The Court of Appeal has recently delivered an important decision on the interaction between the calling of performance bonds and the adjudication regime established under the Building and Construction Industry Security of Payment Act (“SOPA”) in Samsung C&T Group v Soon Li Heng Civil Engineering Pte Ltd [2020] SGCA 79 (“SCT v SLH”). In summary, the Court of Appeal made clear that calls on performance bonds which have the effect of negating the decision of an adjudication determination prior to the circumstances allowed under SOPA would be unconscionable.
Brief Facts. In brief, the appellant, Samsung C&T Corporation (“Samsung”) had engaged a sub-contractor, Soon Li Heng Civil Engineering Pte Ltd (“SLH”), to carry out excavation and disposal works ([2] SCT v SLH).
Disputes arose, and SLH commenced an adjudication against Samsung. The adjudicator directed the Samsung was to pay SLH a certain sum pursuant to an amended adjudication determination (the “1AD”) ([5] SCT v SLH).
Samsung made payment of the adjudicated sum under 1AD on 26 December 2018 ([7] SCT v SLH).
SLH made further payment claims, and commenced another adjudication on 7 March 2019 (the “Second SOP”) ([13] SCT v SLH).
While the Second SOP was ongoing, Samsung called on the performance bond issued under the contract ([14] SCT v SLH).
Key fact. In this regard, the key fact in SCT v SLH is that it was undisputed that the “nub of Samsung’s complaint about overpayment concerned matters that had already been adjudicated under 1AD.” ([15] SCT v SLH).
This fact is significant: the decision of SCT v SLH may be different if Samsung’s call on the performance bond was based on matters that were not, and could not, have been adjudicated in 1AD.
In this regard, the Court of Appeal at [60] SCT v SLH referred to s 17(5) SOPA:
“60 It is arguable that the above view about temporary finality is reinforced by s 17(5) SOPA. Under that provision, a subsequent adjudicator is to give the same value for construction work carried out or goods or services supplied as that previously determined in an AD unless the claimant or respondent satisfies the adjudicator that the value has changed since the previous determination. However, we defer any further discussion on this provision as the parties did not refer to it in arguments.”
Hence, it appears (at the very least arguable) that if the call was based on grounds that were not, and could not, have been raised before the adjudicator in 1AD, such a call would not in fact undermine the 1AD.
The appeal. It suffices to state that SLH commenced proceedings to seek an injunction to restrain Samsung’s call which was granted by the High Court ([14] SCT v SLH).
SLH commenced the present appeal against the High Court’s grant of the injunction ([1] SCT v SLH).
The Court of Appeal’s decision. The Court of Appeal dismissed the appeal ([21] SCT v SLH), and in this regard, the key reasoning by the Court of Appeal was that “it is unconscionable for a party to call on a performance bond in circumstances where the effect of so doing will be to negate an AD prior to any final determination of the dispute between the parties … because of the legislative scheme embodied in SOPA” ([22] SCT v SLH).
The Court of Appeal distinguished various Australian authorities cited by Samung for the proposition that SOPA did not interfere with a party’s contractual right to call on the performance bond (see [28] – [60] SCT v SLH).
In particular, the Court of Appeal highlighted that:
1. At [47] SCT v SLH, it is a consequence of an on-demand bond that a beneficiary who makes a call on the performance bond before an adjudication determination may be in a more advantageous position that one who does so after an adjudication determination.
2. But this simply meant that the counterparty, while not being able to rely on the adjudication determination to show unconscionability, may be able to show rely on another basis.
3. At [48] SCT v SLH, if a beneficiary “were to deliberately avoid making a claim before an adjudicator simply to preserve its right to claim under a performance bond, that might itself be evidence of unconscionability.”
4. At [57] SCT v SLH, the Court of Appeal also opined that had the contract between Samsung and SLH contained a clause similar to clause 5.2(b) in the decision of Duro Felguera Australia Pty Ltd v Samsung C&T Corporation [2016] WASC 119, such a clause may amount to a provision to contract out of SOPA.
Contract does not always trump. The key point made by the Court of Appeal in SCT v SLH is that found in [58] SCT v SLH, namely, that “[t]he contractual rights of parties are circumscribed by SOPA and the scheme under SOPA and not the other way around. Otherwise the “no contracting out” provision in s 36 SOPA would be meaningless.”
As such, the Court of Appeal stated that “We did not agree that, on the one hand, Samsung must pay the adjudicated amount but, on the other hand, it can recover overpayment by making a demand on the PB and rely on reasons which have been rejected by the adjudicator to resist a restraining order. If it could do so, the temporary finality of the AD would be undermined.” ([58] SCT v SLH).
Takeaways. We make the following observations:
1. For sub-contractors. Based on anecdotal feedback, some clients have expressed concerns that if they commence adjudication under SOPA, their main contractors may call on their performance bond.
2. SCT v SLH provides the re-assurance that such calls may not be possible. This is especially in light of [59] SCT v SLH where the Court of Appeal stated that “If Samsung had threatened SLH that it would make a demand on the PB if SLH sought an adjudication or, thereafter, demanded payment under 1AD, it would have been clear that Samsung would have been attempting to circumvent the legislative scheme.”
3. For main contractors. For main contractors, SCT v SLH makes clear that main contractors who choose not to call on the performance bond until after an adjudication determination has been issued run the risk that any further calls may be restrained on the basis that such calls would “undermine” the adjudication determination.
4. Practically, this means that main contractors may need to call on a performance bond early instead of adopting a “wait and see” approach.
5. Main contractors should also review their contractual terms on when a performance bond may be called, to ensure that their terms would not be regarded as terms that seek to contract out of SOPA.
Food for thought. SCT v SLH essentially makes clear that contractual rights are circumscribed by SOPA. This raises the perennial (and interesting) issue of to what extent can parties contract such that they would not fall foul of SOPA.
Per the Court of Appeal in Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] SGCA 36, parties can agree that there is no more right to serve a payment claim after the final certificate is issued under the Singapore Institute of Architects Articles and Conditions of Building Contract (Measurement Contract) (7th Edition, April 2005).
What other manner of contracting would not fall foul of SOPA? We leave this for the reader’s consideration.
Tags: Construction law; Building and Construction Industry Security of Payment Act; SOPA; Performance Bond; Unconscionability; Temporary Finality
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