“PAY WHEN PAID” PROVISIONS AND TERMINATION OF CONSTRUCTION CONTRACT
In Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd [2021] SGHC 72, the Singapore High Court considered what happens when a term in the construction contract purports to suspend payments upon termination of the contract, and renders the liability to pay any further sum contingent or conditional upon the operation of some other contract or agreement.
The facts. The facts in Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd [2021] SGHC 72 (“Frontbuild v JHJ”) are summarised below.
Frontbuild Engineering & Construction Pte Ltd (the “plaintiff”) was the main contractor. The plaintiff appointed JHJ Construction Pte Ltd (the “subcontractor”) as its subcontractor pursuant to a Letter of Award dated 27 March 2019 ([6] Frontbuild v JHJ).
Clause 9. On 4 March 2020, the plaintiff issued a written notice pursuant to clause 9(a) of the Sub-Contract demanding the defendant to resume works ([8] Frontbuild v JHJ). Clause 9 provides as follows ([9] Frontbuild v JHJ):
“9. Termination of Sub-Contract
The Main Contractor, without prejudice to any other rights or remedies including his right to treat this Sub-Contract as repudiated may terminate the Sub-Contract on any of the following grounds.
a. If the Sub-Contractor has wholly or partly suspended work without justification or is failing to proceed with diligence and due expedition, and following expiry of 7 days written notice from the Main Contractor to that effect, has failed to take effective steps to re-commence work or is continuing to proceed without due diligence or expedition, as the case may be.
b. If the Sub-Contractor has previously received a written notice under paragraph (a) thereof with which he has complied at the time but at any time thereafter has again suspended work or failed to proceed with diligence and due expedition.
c. If the Sub-Contractor commits an act of bankruptcy or becomes insolvent or compounds with or makes any assignment for the benefit of his creditors and under such circumstances the employment of the Sub-Contract is automatically terminated.
In any of the above cases the following shall apply, namely:
… b. No further payment shall be made to the Sub-Contractor until the whole of the Main Contract Works has been completed and the Sub-Contractor shall indemnify the Main Contractor for the additional cost necessary to complete the remaining Sub-Contract Works and any loss or damage suffered as a result of the termination.
[emphasis added]”
(emphasis in original)
On 12 March 2020, the plaintiff issued the defendant a notice of termination of the Sub-Contract ([11] Frontbuild v JHJ).
On 31 March 2020, the defendant served on the plaintiff Payment Claim No. PC9 (the “Payment Claim”). There was no payment response. In due course, an Adjudication Determination was rendered on 27 March 2020, determining that the plaintiff had to pay $204,210.67 ([11] Frontbuild v JHJ).
The defendant obtained leave to enforce the Adjudication Determination as a judgment from the State Courts on 24 July 2020 ([11] Frontbuild v JHJ), and the plaintiff sought to set aside the Adjudication Determination and the leave obtained by the defendant via an originating summons filed on 9 November 2020 ([13] Frontbuild v JHJ).
Preliminary Issue. There was a preliminary issue on whether the plaintiff’s setting aside application had breached O 95 r 2(4) of the Rules of Court as it was made more than 14 days after when the order granting leave to enforce the Adjudication Determination was served on 29 July 2014 ([13] Frontbuild v JHJ).
In this regard, while the order granting leave to enforce the Adjudication Determination as a judgment of the court did not contain the notice required under O 95 rr 2(4) – 2(5) of the Rules of Court, the High Court accepted that it was an irregularity that fell within O 2 r 2(1) of the Rules of Court and allowed the irregularity to be cured under O 2 r 2(2) of the Rules of Court ([25] – [27] Frontbuild v JHJ).
On the facts of the case, the High Court also exercised its discretion to grant the plaintiff an extension of time for the filing of the setting aside application ([29] Frontbuild v JHJ).
Substantive Issue. The substantive issue in dispute was whether the Adjudication Determination should be set aside on the basis of the Adjudicator having failed to take into account the effect of the termination of the Sub-Contract and the application of s 4(2)(c) SOPA ([22] Frontbuild v JHJ).
Validity of termination. The High Court found that the finding by the Adjudicator that the termination by the plaintiff on 12 March 2020 was valid was a finding that went to the merits of the Adjudication Determination and could not be revisited by the court in a setting aside application ([33] Frontbuild v JHJ).
Hence, the High Court dismissed the defendant’s arguments in the setting aside application on how the Sub-Contract was not terminated under Clause 9 ([17] – [18] read with [33] Frontbuild v JHJ).
The competing interpretations. The High Court then noted that there were two competing interpretations of ss. 4(2)(c) and 9 of the Building and Construction Industry Security of Payment Act (“SOPA“) ([39] Frontbuild v JHJ):
On one interpretation, s. 4(2)(c) SOPA takes primacy over s. 9 SOPA, such that “pay when paid provisions” in terminated construction contracts would remain enforceable, as SOPA would not apply at all to such contracts until the conditions in s. 4(2)(c) SOPA are met.
On another interpretation, s. 4(2)(c) SOPA had to be interpreted in light of s. 9 SOPA, such that “pay when paid provisions” are strictly unenforceable, regardless of whether the contract was terminated or not.
s. 4 SOPA does not take primacy over s. 9 SOPA. The High Court agreed with the defendant that s. 4(2)(c) SOPA had to be construed in context, including s. 9 SOPA ([43] Frontbuild v JHJ).
S. 4(2)(c) SOPA does not take primacy over s. 9 SOPA, such that any provisions of a construction contract on termination and suspension of payment would only be given effect if they do not fall foul of s. 9 SOPA ([47] Frontbuild v JHJ).
It therefore follows that if an adjudicator finds that a provision on suspension of payments following termination of a contract is a “pay when paid” provision under s. 9 SOPA, then the adjudicator is obliged to disregard that provision as “… unenforceable and of no effect “in relation to any payment for construction work carried out … under the contract” [emphasis added]” (emphasis in original) ([48] Frontbuild v JHJ).
Application to the facts. The High Court found that Clause 9(b) Sub-Contract did operate as a “pay when paid” provision as it renders the obligation of plaintiff to make payment contingent and conditional on the operation of another contract or agreement based on the plain wording of the clause ([53] Frontbuild v JHJ).
On the facts of the case, as the Adjudicator had concluded that “termination of the Sub-Contract by the plaintiff was valid and that accordingly, no payment claim may be served by the defendant post-termination under clause 9(b)”, this was a finding that s. 4(2)(c) SOPA might be prima facie applicable ([54] Frontbuild v JHJ).
Since the Adjudicator in the same paragraph went on to consider the impact of s. 9 SOPA on clause 9(b) Sub-Contract and found that it was not valid on account of it being a “pay when paid” provision and thereby concluding that the submission of the Payment Claim was valid, this was a finding by the Adjudicator that the Payment Claim was within the ambit of SOPA ([54] Frontbuild v JHJ).
Hence, the High Court rejected the plaintiff’s submission that the Adjudicator had failed to consider s. 4(2)(c) SOPA or failed to comply with s. 17(3)(a) SOPA ([54] Frontbuild v JHJ).
The High Court also found that as the Sub-Contract “was, apart from clause 9(b), silent on the submission of payment claims post-termination for work done up to the termination of the Sub-Contract. The Sub-Contract also did not contain any terms to the contrary. Thus, [SOPA], including s 10, could be applied to fill the gaps in the Sub-Contract as necessary. The submission of the Payment Claim by the defendant was thus valid and the AD could not be faulted in any way.” ([59] Frontbuild v JHJ)
Significance. As stated by the then Minister of State for National Development, Mr. Zaqy Mohamad, during the Second Reading of the Building and Construction Industry Security of Payment (Amendment) Bill on 2 October 2018, the purpose of s. 4(2)(c) SOPA was to deal with the common industry practice of suspending payment when there has been a default by a contractor leading to termination of the contract:
“That said, we understand that it is common industry practice for contract terms to suspend payment until a later date if a contractor has defaulted, leading to the termination of the contract. When this happens, the SOP Act will pay heed to terms pre-agreed by parties. As such, clause 3 will require adjudicators to respect the contract clauses on suspension of payment for terminated contracts. This means that claimants that have defaulted on the contract will need to abide by contract terms, and they will be able to submit a payment claim under the SOP Act only after the conditions in the contract have been met.”
Frontbuild v JHJ makes clear that the wording of such suspension clauses matters as if they fall foul of the prohibition against “pay when paid” provisions under s. 9 SOPA, such clauses would be struck down, which would prevent you from relying on s. 4(2)(c) SOPA.
Therefore, you should ensure that your contractual clauses which suspend payment upon termination of contract are either based on a fixed date that is not conditional or contingent on the operation of any other contract or agreement or based on an event that is not conditional or contingent on the operation of any other contract or agreement.
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