A TALE OF TWO SOP ADS – A FINALE
In the recent decision of Harmonious Coretrades Pte Ltd v United Integrated Services Pte Ltd [2019] SGCA 77, the Court of Appeal clarified the effect of a subsequent adjudication determination on the enforcement of a prior adjudication determination.
Background. United Integrated Services Pte Ltd (“UIS”) was the main-contractor, Civil Tech Pte Ltd (“CTPL”) was the sub-contractor, and Harmonious Coretrades Pte Ltd (“HCPL”) was the sub-sub-contractor.
HCPL obtained an Adjudication Determination (“HC-AD”) against CTPL and enforced the HC-AD by garnishing the debts due from UIS to CTPL. Shortly before the show cause hearing, CTPL obtained an Adjudication Determination (“1AD”) in their favour against UIS. Thus, UIS did not object to HCPL’s garnishee application at the show cause hearing, and the garnishee order was made final (the “final garnishee order”).
However, CTPL had subsequently proceeded with another adjudication application against UIS. This resulted in the second adjudication determination, 2AD, which determined that no amount was payable by UIS to CTPL.
UIS successfully applied to stay the enforcement of 1AD. In summary, the High Court held in United Integrated Services Pte Ltd v Civil Tech Pte Ltd [2019] SGHC 32 that 1AD could not be enforced independently of 2AD, as the adjudication determinations were cumulative.
High Court set aside the final garnishee order. Consequently, UIS applied to set aside the final garnishee order on the basis that no debt was due to CTPL by UIS since the enforcement of 1AD was stayed.
The High Court granted UIS’s application pursuant to its inherent power to prevent injustice, holding that it was plainly unjust to order UIS to pay for a debt which is no longer enforceable and which it may not even owe.
Further, since CTPL was insolvent, the High Court stated that HCPL would be favoured at the expense of UIS should CTPL be wound up later: CTPL may not be able to pay UIS’s counterclaim later on, whereas HCPL would not need to compete with unsecured creditors if UIS paid HCPL pursuant to the garnishee order.
HCPL appealed against the High Court’s decision to set aside the final garnishee order.
Court of Appeal restored the final garnishee order. Although the Court of Appeal agreed that the High Court has the power to set aside a final garnishee order under its inherent power to prevent injustice, the Court of Appeal held that the power should not be exercised in this case, and restored the final garnishee order.
Subsequent AD does not supersede prior AD. The Court of Appeal held that 2AD did not have the effect of superseding 1AD. Instead, until an AD is set aside, each AD was enforceable independently and in their own right. The Court of Appeal identified 2 reasons on why 2AD could not have the effect of impugning or superseding 1AD:
The first reason. “The first reason is that it would run counter to the legislative purpose behind the SOPA to hold that parties could seek to rely on subsequent adjudication determinations to impugn, set-off, or otherwise diminish the enforceability of an earlier adjudication determination. …” ([48] HCPL v UIS). As regards the legislative purpose of the SOP Act, the Court of Appeal said “… The scheme of the SOPA is that even if the upstream party has valid counter-claims against a downstream party, its obligation is to pay up on an adjudication determination and pursue those counter-claims later. In this way, the temporary finality of every adjudication determination will be respected and the life-sustaining cash flow of the downstream party will be preserved.” ([52] HCPL v UIS).
The second reason. “The second reason we could not accept that AD2 had the effect of impugning AD1 was that AD2 did not, in itself, create a debt owing from CTPL to UIS. Although the adjudicator in AD2 found, taking into account the sums owed by CTPL to UIS under AD1, that it was UIS that had a net claim against CTPL for $1,176,050.67, that did not have the effect in law of giving UIS a claim against CTPL for $1,176,050.67. Instead, all that was decided under AD2 was that UIS did not have to pay CTPL on that Payment Claim.” ([53] HCPL v UIS). As such, “[t]he net effect of both adjudication determinations in AD1 and AD2 is that the sums owing under AD1 still stand. AD1 was not impugned by the reasoning or findings of the adjudicator in AD2” ([55] HCPL v UIS).
Therefore, the Final Garnishee order was restored as “UIS did and continued to owe a debt to CTPL under AD1” ([56] HCPL v UIS).
CTPL’s insolvency did not render final garnishee order unjust. The Court of Appeal also did not see injustice arising out of CTPL’s insolvency in the present case. HCPL had acted diligently in enforcing its claim against CTPL, and UIS had made no objections at the show cause hearing ([61] HCPL v UIS).
The Court of Appeal also made clear that the Court is not expressing a view as to whether the final garnishee order would constitute a preferential discharge of HCPL’s claim, and left it for CTPL’s liquidator to consider ([62] HCPL v UIS).
Significance. The most important takeaway from this case is the Court’s holding that each AD is independently enforceable.
It is therefore absolutely critical that respondents deal with payment claims diligently and ensure that all reasons and objections are raised in the payment response.
Once the claimant obtains an adjudication determination in its favour, even on technical grounds, the respondent will be indebted to the claimant until the determination is set aside, or the dispute is finally resolved or settled.
Tags: Building and Construction Industry Security of Payment Act; Enforcement of Adjudication Determinations
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