Singapore: Cross Claims, Counterclaims And Set-Offs From Another Construction Contract - Permissible In An Adjudication?

Executive Summary

It is commonplace in our local building and construction market for the same parties to enter into multiple contracts for different projects. However, what happens if a main contractor has valid backcharges under Project A and wants to apply these to reduce payment for certified work done on Project B? Will the backcharges be considered valid set-offs for the purposes of adjudication under the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (the SOP Act)?

Recently, the Singapore High Court (the Court) in Hua Rong Engineering Pte Ltd v Civil Tech Pte Ltd, [2017] SGHC 179 decided that one cannot do so.

The Court was of the view that permitting parties to introduce any contracts they wanted to in an adjudication determination under the SOP Act would open the floodgates to unchecked expansion of the scope of materials which must be dealt with. More crucially, this may even lead to unmanageable complexity, which will render the SOP Act no longer capable of providing a simple, low-cost, efficient, and quick resolution of payment claims.

Hence, the Court decided that the simplest and quickest procedure, as stipulated by the SOP Act, is to confine the issues of payment claims to those arising in relation to a single construction contract.

Furthermore, the Court pointed out that the adjudication determination only provides temporary finality, and not the final determination of the parties' rights. Hence, this should address any concerns of injustice.

Brief Facts

Civil Tech Pte Ltd (CTP) and Hua Rong Engineering Pte Ltd (HRE) were parties involved in two MRT construction projects. The two projects related to the construction of two MRT stations on different MRT lines. CTP was a sub-contractor of the main contractor and HRE was a sub-contractor engaged by CTP to supply labour for construction for both projects. CTP and HRE entered into contracts for the two projects (referred to hereafter as the "T211 contract" and the "C933 contract", respectively).

On 6 December 2016, HRE submitted a claim of $601,873.40 to CTP for work done in respect of the T211 contract. While CTP accepted HRE's claim, CTP's Payment Certificate reflected that nothing was due to HRE. CTP justified its action by alleging that HRE had made false and fraudulent payment claims under the C933 contract, and that it had therefore overpaid HRE in respect of the C933 contract. Consequently, CTP sought to withhold a sum of $1,468,276.32 from HRE.

As it turned out, HRE filed an adjudication application as regards its claim under the T211 contract. In its adjudication response, CTP contended that it was entitled to set off $1,468,276.32 from the payment claim of $601,873.40 under the T211 contract as a result of the fraud and overpayment in respect of the C933 contract.

When the dispute was referred to the Adjudicator, he ruled that CTP was not entitled to set off a counterclaim based on another contract. In particular, the Adjudicator held that the SOP Act only permitted him to take into consideration cross-claims, counterclaims and set-offs arising under the same construction contract. Accordingly, CTP was ordered by the Adjudicator to pay an amount of $601,873.40 to HRE.

This issue came before the Court when CTP applied to set aside the adjudication determination.

Issues

The main issue is whether an adjudicator is entitled to consider cross-claims, counterclaims and set-offs which do not arise from the same contract which forms the basis for a payment claim in an adjudication under the SOP Act. In other words, the main issue before the court was whether the Adjudicator was correct in confining his deliberation to matters concerning only the T211 contract (and not the C933 contract).

There were two other less significant issues: one, whether the Adjudicator breached s.17(3) of the SOP Act; and two, whether CTP's allegations of fraud and unjust enrichment were made out.

Findings of the Court

Issue 1: Whether s. 15(3) of the SOP Act allows cross-contract cross-claims, counterclaims or set-offs, or whether it is restricted to withholding reasons arising under the same contract

Before dealing with this issue, the Court revisited the object and purpose of the SOP Act, all of which are well known. The Court also cited Sundaresh Menon CJ's observations in the Singapore Court of Appeal case of W Y Steel Construction Pte Ltd v Osko Pte Ltd, [2013] SGCA 32, [2013] 3 SLR 380 (W Y Steel) that arguments raised by parties regarding cross-claims, counterclaims and set-offs may prove to be specious at the end of lengthy and expensive proceedings, such that they can only be resolved through long and tedious deliberation.

The Court noted that sections 2, 5, 10 and 12 of the SOP Act (in addition to sections 15 and 17) were relevant because the language used in those provisions shed light on whether the adjudication process could possibly entertain matters relating to multiple contracts. In this connection, The Court referred to the recent Singapore High Court case of Rong Shun Engineering & Construction Pte Ltd v C.P. Ong Construction Pte Ltd, [2017] SGHC 34 (Rong Shun), where Vinodh Coomaraswamy J dealt with the issue of whether a payment claim (and an adjudication application based thereon) can arise out of more than one contract, or whether a rule of "one payment claim, one contract" applied. In Coomaraswamy J's view, the "one payment claim, one contract" rule did apply because Parliament consistently used the phrase "a contract" in the SOP Act, and variations thereon similarly adopted the singular form. Therefore, this suggested that payment claims and adjudications under the SOP Act should be confined to a single contract. Be that as it may, the Court noted that the issue he had to deal with was whether a respondent may rely on withholding reasons arising in relation to multiple contracts, and not whether a claimant may base his claim on multiple contracts (which was the issue before the court in Rong Shun).

In the Court's view, the language used by Parliament clearly indicated that the same position which applies to payment claims applies as well to withholding reasons which can be considered in an adjudication under the SOP Act. Furthermore, beyond a purely textual analysis, the Court held that there is also a policy justification which militates toward adopting the single-contract interpretation. In essence, bringing in multiple contracts as the basis for cross-claims, counterclaims or set-offs will unduly prolong and complicate adjudications, and this runs contrary to Parliament's intention of ensuring that there is a simple, quick and fair process for the resolution of payment disputes.

In rejecting CTP's interpretation of the law, the Court observed that accepting CTP's position would imply that there is no limit to the scope of matters which an adjudicator is required to consider as potentially valid withholding reasons in an adjudication determination. This is unrealistic due to the practical limitations of adjudication under the SOP Act.

Ultimately, the Court held that both the language of the SOP Act and the SOP Regulations, and their underlying object and purpose, support the interpretation that Parliament intended to limit the adjudication procedure to a single construction contract. Accordingly, the Court agreed with the Adjudicator's decision on this point.

Issue 2: Whether the Adjudicator breached s.17(3) of the SOP Act

The Court held that the Adjudicator did not breach s.17(3) of the SOP Act in finding that the cross-contract set-off should be disregarded. This was because the Adjudicator's reasoning in the adjudication determination suggested that he had properly considered the contents of the payment response and adjudication response. Therefore, the Court was of the view that the Adjudicator's rejection of the withholding reasons raised therein was a product of that proper consideration.

Issue 3: Whether the allegations of fraud and unjust enrichment are made out

The Court was of the view that it was not necessary for him to make any findings or observations because the alleged fraud and unjust enrichment regarding the C933 contract are immaterial following his holding that the Adjudicator was right to confine his deliberation to the T211 contract. Nevertheless, CTP would be perfectly entitled to pursue these allegations further in a separate action.

Implications for Contractors

Dentons Rodyk believes that this is the first reported High Court authority on the issue of whether an adjudicator is entitled to consider cross-claims, counterclaims, and set-offs which do not arise from the same contract which forms the basis of the payment claim.

This decision thus clarifies that any cross-claims, counterclaims, and set-offs claimed in an adjudication under the SOP Act must arise from the same contract in question. All contractors and employers should be mindful of this when they prepare their payment certificates and payment responses.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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