Adjudication Case Update: Shimizu Corporation v Stargood Construction Pte Ltd (CA)(2020)

Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 3

​

Introduction

This is a Court of Appeal decision rendered in 2020 concerning an application to set aside two adjudication determinations relating to the submission of payment claims following the termination of a sub-contract.
 
This decision touches on the “dual railroad track system” for making payment claims which has been accepted and understood by the industry as a norm since the Singapore High Court’s decision in Tienrui Design & Construction Pte Ltd v G & Y Trading and Manufacturing Pte Ltd [2015] 5 SLR 852 (“Tienrui”) in 2015.
 
After this decision, do parties have separate rights under contract and statute to make payment claims? What impact will this have on contract negotiations for main and subcontractors alike? This decision by the apex court will clarify matters and provide clearer guidance for construction contracts.
​

 
Facts
The appellant, Shimizu Corporation (“Shimizu”), engaged Stargood Construction Pte Ltd (“Stargood”) as one of their subcontractors for a project which incorporated (with amendments) the Real Estate Developers’ Association of Singapore Design and Build Conditions of Contract (3rd Ed, 2013) (the “Subcontract”).
 
In brief, parties’ payment claim mechanism under the subcontract was as follows:

1. Shimizu would appoint a project director (the “Project Director”);
2. Stargood would submit payment claims to the Project Director, who would in turn issue a payment response;
3. The amount reflected in the payment response was the amount due from Shimizu to Stargood.

 
Sometime before March 2019, Shimizu alleged breaches by Stargood and issued a Notice of Default, subsequently terminating the Subcontract with Stargood on 22 March 2019. On 30 April 2019, Stargood served Payment Claim No. 12 (“PC12”) on Shimizu for works done prior to termination and proceeded to lodge an Adjudication Application on 4 June 2019 (“AA203”) following a lack of payment response.
 
Stargood appeared to be cognisant that their case in AA203 could be deterred by the issue of improper service, and elected to serve Payment Claim No. 13 (“PC13”) on 31 May 2019. The content of the claims in PC13 was essentially identical to PC12. Stargood also proceeded to file an adjudication application on PC13 (“AA245”) on 5 July 2019.
 
AA203 was dismissed due to improper service of PC12, and more importantly, the adjudicator found that PC12 was served after Shimizu had already terminated the Subcontract, rendering the Project Director functus officio as regards his function of certifying payment claims under the payment claim mechanism.
 
AA245 was also dismissed by the adjudicator as he determined that parties were bound by the adjudication determination in AA203.
 
Stargood subsequently filed OS 1099 of 2019 to set aside the adjudication determinations. The High Court found that Shimizu had only terminated Stargood’s employment rather than the entire Subcontract. This finding in effect determined that the payment claim mechanism survived the termination. Further, the High Court found that the Building and Construction Industry Security of Payment Act (Cap 30B, Rev ed 2006) (“SOPA”) provided Stargood with the “independent right to progress payments, even if the entire Subcontract had been terminated”.
 
The High Court thus set aside both adjudication determinations and granted a declaration that Stargood was entitled to serve further payment claims for work done prior to the termination of the Subcontract.
 
The appellant in the present case applied to set aside the orders made by the Judge below.
​

Decision
The Court of Appeal agreed with the appellant and set aside the orders of the High Court. The Court determined that Stargood was not entitled to serve PC12 and PC13. According to the reasons for their decision (explained below), this also meant that Stargood would also not be entitled to serve any further payment claims.
 
The Court accorded primacy to the provisions of the underlying contract, and explicitly stated that the SOPA does not provide any independent right to progress claims that overrode terms of the contract.
 
In its decision, the Court addressed the following:

1. Whether the SOPA created a separate statutory entitlement to progress payments?
2. Whether the SOPA created a statutory right to serve a payment claim?
3. The effect of certain 2018 Amendments to the SOPA.

 
Statutory entitlement to Progress Payments
The Court clarified that the SOPA was merely a framework to expedite the payment process in lieu of arbitral or legal proceedings. There must first be a basis to make a claim for progress payments.
 
Steven Chong JA, in examining the provisions of SOPA, explained that provisions of the underlying contract would always come first. The SOPA would only modify or act as a “gap-filler” in specific situations. For example, these situations were:

1. Section 6 – Amount entitled in progress payment to be calculated “in accordance with the terms of the contract”;
2. Section 7 – Construction work to be valued “in accordance with the terms of the contract”; or if the contract does not contain such provision, are to be valued having regard to “the contract price”, “any other rate or price specified in the contract”, and “any variation agreed to by the parties to the contract”.
3. Section 9 – “pay when paid provisions” are unenforceable.

 
Since the right to be paid was premised on the basis of claiming such payment, thus where there is no such basis, there is no gap to be filled by the SOPA, and there is nothing to be adjudicated.
Thus, the Court has explicitly denied that the “dual railroad track system” exists. Such a system would create “intolerable uncertainties” rendering claimants, respondents, and adjudicators unable to make decisions with any sense of finality.
 
Statutory right to serve Payment Claims
Similarly, since SOPA only acts as a supplement to contractual terms, there is no separate entitlement to serve payment claims where the underlying contract provides a mechanism. Where a mechanism is provided and the mechanism can no longer operate, then the party is no longer entitled to serve a payment claim.
 
In the appeal, the Court examined the Subcontract in detail. The Subcontract provided for the following situations and outcomes:

a) Where termination of the Subcontract was due to the fault of Stargood, damages would be due to Shimizu;

b) Where Shimizu’s main contract was terminated:

1. If it was due to the fault of Stargood, payment for work done due to Stargood would be offset by damages due to Shimizu;
2. If it was not due to the fault of Stargood, Stargood would be entitled to claim payment for work done.

 
The Court pointed to the envisioning of a singular situation where Stargood would be entitled to claim for work done to show that in all other situations, the payment mechanism would cease to exist, and Stargood would be disentitled from serving any further payment claims. On this basis, PC12 and PC13 were declared invalid by the Court.
 
Effect of 2018 Amendments
Parties also focused on amendments to SOPA in 2018 wherein the reference to a contract was amended to read:
 
“contract” means a construction contract or a supply contract, and includes a construction contract or supply contract that has been terminated.
 
Chong JA made clear that this merely answered the question of whether parties can apply for adjudication in principle, if the contract itself contains provisions relating to the amount and valuation as well as payment certification. If it did, then SOPA did not need to step in to fill any gaps. In any case, the provisions of SOPA would not override terms if the contract provided a contrary provision.
 
Termination of Employment, Entire Subcontract, and functus officio
Chong JA also acknowledged that a distinction between termination of employment alone and termination of the entire subcontract and its terms existed in construction contracts. However, it did not mean that a payment mechanism necessarily survived if only employment was determined. This would still depend on the terms of the contract. Accordingly, whether a payment certifier was functus officio was dependent on those same terms.
 

Comments
Where does this leave parties? In the absence of a surviving payment mechanism, this case explains that parties can only avail themselves to arbitration or other legal proceedings as long as the contract dictates that these are the options. As of this judgment, parties can no longer depend on a “dual railroad track system”.
 
As warned by Chong JA, parties will need to pay more attention to the terms of a subcontract dealing with consequences of termination. Main contractors should be careful to draft terms which prevent parties from submitting payment claims long after completion/termination. Subcontractors need to negotiate so as not to lose the option to submit payment claims for work done prior to completion/termination, as other remedies may incur additional cost and time delay. ​

​
Tan Joo Seng
E: js.tan@tytolaw.com

Chan Chan Leong
E: Chan.Leong@tytolaw.com