CAN AN EMPLOYER SET OFF ITS CLAIM FOR LIQUIDATED DAMAGES AGAINST A CONTRACTOR’S PAYMENT CLAIM?
In Range Construction Pte Ltd v Goldbell Engineering Pte Ltd [2021] SGCA 34, the Court of Appeal affirmed the High Court’s and Adjudicator’s decision in allowing the employer’s set-off for liquidated damages under the pre-2019 SOPA regime. In doing so, the Court of Appeal also examined whether the scope of the pre-amendment and current SOPA regime permitted such set-offs, which will be the focus of this blog.
Brief facts. Pursuant to a letter of award (“the Contract”), Range Construction Pte Ltd (“Range”) was appointed as the contractor of Goldbell Engineering Pte Ltd (“Goldbell”) for the design and erection of a six-storey single-user workshop with an ancillary office (“the Project”) (at [5]). The Contract incorporated the Real Estate Developers’ Association of Singapore Design and Build Conditions of Main Contract (3rd Ed, July 2013) (“the Conditions”).
In the event that the Contractor (i.e. Range) failed to complete the Project on time, cl 19 of the Conditions provided for the payment of liquidated damages:
Cl 19.1 (read with Appendix 1) set out the rate at which liquidated damages would be payable; and
Cl 19.2 stipulated that the Employer (i.e. Goldbell) could deduct the amount of liquidated damages payable from any moneys due, or to become due, to the Contractor (i.e. Range) under the Contract.
In the adjudication determination delivered under the Building and Construction Industry Security of Payment Act (“SOPA”), the Adjudicator awarded Range a sum which was arrived at after deducting liquidated damages that he found to be payable by Range to Goldbell (at [7]).
Decision of the High Court. Range applied to set aside the parts of the adjudication determination pertaining to, inter alia, the award of liquidated damages to Goldbell (at [11]).
Range’s application was dismissed by the High Court, and it suffices to say that Range appealed against the High Court’s decision and raised substantially similar arguments on appeal (at [11] and [21]).
Issues. There were three issues before the Court of Appeal (at [23]):
“whether it was within the Adjudicator’s jurisdiction to allow Goldbell to set off liquidated damages against the sums claimed by Range”;
“whether the Adjudicator exceeded his jurisdiction and/or breached the fair hearing rule by identifying 17 November 2018 as the completion date”; and
“whether the Adjudicator breached the rules of natural justice by failing to consider if the grant of [the Temporary Occupation Permit (“TOP”)] was determinative of Range’s entitlement to the [Handing Over Certificate (“HOC”)]”.
As stated above, this blog will only focus on the first issue. Although it was the pre-amendment SOPA which governed the adjudication application and the present appeal, the court also examined whether and how the 2019 amendments to the SOPA were relevant to the interpretation of the pre-amendment SOPA (at [25]).
Pre-amendment SOPA. The Court of Appeal agreed that the Adjudicator had jurisdiction under the SOPA to determine Goldbell’s set-off for liquidated damages, and this jurisdiction stemmed from the SOPA itself (at [26]).
The starting point was that s 15(3)(a) of the pre-amendment SOPA allowed an adjudicator to consider “any reason for withholding any amount, including … any … set-off”, as long as that reason was included in the relevant payment response (at [27]; emphasis in original).
Under the pre-amendment SOPA, the adjudicator shall have regard to the payment response (s 17(3)(d)) and the provisions of the contract to which the adjudication application relates (s 17(3)(b)).
Both were satisfied on the facts: Goldbell’s set-off for liquidated damages was included in PR 1 and cl 19.2 of the Conditions expressly permitted Goldbell to deduct liquidated damages.
Therefore, based on ss 15(3)(a) and 17(3) of the pre-amendment SOPA, the Adjudicator had jurisdiction and was entitled to consider Goldbell’s set-off for liquidated damages.
Further, the Court of Appeal observed that had Parliament intended to exclude liquidated damages as a valid form of set-off, it would have been expressly reflected in the SOPA (see for example s 26(2) of the pre-amendment SOPA) (at [28]).
Enactment of s 17(2A). The bulk of the judgment then turned on the significance and effect of the enactment of s 17(2A) on the Adjudicator’s jurisdiction under s 15(3) (at [29]).
Range argued that parliamentary debates preceding the enactment of s 17(2A) supported the position that an adjudicator’s jurisdiction under s 15(3) was much more limited (at [29]).
S 17(2A) not declaratory. Although s 17(2A) was not applicable to the adjudication, Range submitted that the section was merely declaratory (at [31]) and did not change the legal position under the pre-amendment SOPA. As such, claims for damage, loss or expenses were prohibited even under the pre-amendment SOPA, regardless of whether they were made in payment claims or payment responses (at [32]).
Range relied on a passage in the parliamentary debates for its assertion.
However, the Court of Appeal found Range’s reliance misplaced for two reasons (at [33]):
Firstly, the Court of Appeal found that “although ministerial statements may be useful in shedding light on the parliamentary intent underlying a statutory provision, they do not have the force of law… even if the Minister of State had suggested that s 17(2A) was declaratory of the pre-existing law, that suggestion might not have been accurate and is certainly not conclusive” (at [34]).
Secondly, the statements relied on by Range were made in the context of payment claims by contractors and did not “… incontrovertibly indicate that claims for loss and expense in payment responses were impermissible even under the pre-amendment SOPA” (at [35]; emphasis in original).
The Court of Appeal stated that the passage relied upon by Range was equally consistent with the position that s 17(2A) had modified the law by changing the position from one where “SOPA allowed for loss and expense claims if it could be demonstrated that payment for such items were contemplated under the terms of the contract in question” (at [35]; emphasis in original)
Impossible to withhold any amount. Moreover, the Court of Appeal stated that if s 17(2A) were merely declaratory of the pre-existing legal position, then s 15(3) of the pre-amendment SOPA would have been devoid of any substantive content (at [36]).
This is because “if claims for damage, loss or expense were categorically prohibited under the pre-amendment SOPA, it would be simply impossible for an employer to withhold any amount by way of set-off under s 15(3) and s 15(3) would have been legislated in vain” (at [37]; emphasis in original).
Only two exceptions? Range submitted that s 17(2A) was enacted to make clear that claims for damage, loss or expense could not be brought under both the current SOPA and the pre-amendment SOPA, save for the two exceptions provided for in ss 17(2A)(a) and 17(2A)(b) (at [38]).
The Court of Appeal disagreed, stating that the two exceptions stipulated in s 17(2A) were nowhere to be found in the express language of s 15(3) of the pre-amendment SOPA, and primacy should be accorded to the text of the provision in ascertaining its meaning and legislative purpose (at [39]).
Amendments to s 15(3). The Court of Appeal also found another difficulty with Range’s argument, which essentially assumed that s 15(3) of the pre-amendment SOPA and s 17(2A) were to be read harmoniously (at [40]). But the fact that s 15(3) was amended in 2019 to omit any reference to set-offs was fatal to this argument.
The Court of Appeal expressed at follows (at [41]; emphasis in original): “Evidently, s 17(2A), which generally bars claims related to damage, loss or expense, was at odds with the old s 15(3), which permitted set-offs as long as they were reflected in the relevant payment response, thereby necessitating amendments to s 15(3). The very fact that s 15(3) was amended at the same time that s 17(2A) was enacted to omit all references to set-offs militates against Mr Tan’s strained interpretation of s 15(3). In our view, the amendments to s 15(3) further demonstrated that s 17(2A) changed the law and was not merely declaratory. Far from illustrating that set-offs for liquidated damages could not be brought under the pre-amendment SOPA, the 2019 amendments to the SOPA in fact suggested the very opposite.”
Therefore, the Adjudicator had acted within his jurisdiction under ss 15(3) and 17(3) of the pre-amendment SOPA in adjudicating Goldbell’s entitlement to liquidated damages. There was no equivalent provision of s 17(2A) (which has since altered the legal position) in the pre-amendment SOPA that precluded the Adjudicator from determining Goldbell’s set-off for liquidated damages (at [42]).
The case law. Stating that there was no local authority directly addressing the issue at hand (at [43]), the Court of Appeal cited Australian cases that indirectly affirmed an adjudicator’s jurisdiction to consider set-offs for liquidated damages under the New South Wales Act, which the SOPA was based on (at [46]-[51]).
The policy objectives of SOPA. The Minister of State explicitly noted in the Ministerial Statement that “some claimants have started to include complicated prolongation costs, damages, losses or expenses when applying for adjudication …” (at [52]; emphasis added by the Court of Appeal). The Court of Appeal highlighted that it was not apparent that the Parliament’s concerns about the submission of complex claims extended to employers’ claims (for e.g. liquidated damages) in payment responses.
Rejecting the suggestion that the rationale necessarily applied to payment responses as well, the Court of Appeal stated that “It is eminently sensible and logical that payment claims are limited to claims for work done or for goods and services supplied… that can be readily valued… thereby preserving the SOPA as an efficient and low-cost mechanism for the resolution of payment disputes …” (at [53]).
Liquidated damages are typically capable of straightforward computation. The Court of Appeal then stated that “… In the same vein, liquidated damages (unlike unliquidated damages) are typically capable of straightforward computation in most cases …” (at [53]), and said that “… there is nothing incompatible or contradictory about limiting payment claims to claims for construction work done or for goods and services supplied on the one hand, and permitting set-offs by employers for liquidated damages on the other”.
Further, at [54], the Court of Appeal stated “That adjudicators hav[ing] the jurisdiction to determine entitlements to set-offs for liquidated damages is also aligned with the overriding aim of the SOPA … given the frequency with which claims for liquidated damages arise, it would be “too limiting a charter to exclude financial claims associated with contract prolongation” … Allowing set-offs for liquidated damages would balance the contractor’s entitlement to progress payments and the employer’s need for some interim resolution in respect of delays for which it is not culpable…”
Therefore, Range’s argument that the Adjudicator had no jurisdiction to consider liquidated damages in assessing the adjudged sum was dismissed (at [55]).
Conclusion. As the Court of Appeal reiterated, the clarification on the scope of SOPA in relation to set-offs for liquidated damages will be of importance to employers across the construction industry who frequently have to grapple with delays in completion.
With the Court of Appeal’s decision, it is clear that prior to the 2019 amendments, adjudicators had the jurisdiction to consider liquidated damages in assessing the adjudged sum.
The decision also makes clear that the rationale stated in the 2019 amendments for excluding complicated “prolongation costs, damages, losses or expenses from payment claims” do not necessarily apply to payment responses. As the Court of Appeal was at pains to highlight, typically, liquidated damages are not that complicated to deal with, for “the calculation of the liquidated damages payable to Goldbell simply entailed multiplying the number of days for which liquidated damages were payable and the daily rate of liquidated damages payable” (at [53]).
Therefore, this decision will no doubt be welcomed by parties in the position of a respondent under SOPA (whether pre-amendment or post-amendment), as it is a strong statement by the highest court of the land that liquidated damages are claimable and can be considered as a set-off in SOPA adjudications.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.