Can an adjudicator consider liquidated damages under the new SOP regime?

Singapore
This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

In Range Construction Pte Ltd v Goldbell Engineering Pte Ltd [2021] SGCA 34, the Court of Appeal declined to set aside part of an adjudication determination made under the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (“SOP Act”) pertaining to an employer’s set-off for liquidated damages.

This article considers the implication of this decision together with the recent amendments to the SOP Act (“SOP Amendments”). Notwithstanding that adjudicators are now required to disregard items of damage, loss or expense not supported by the requisite agreement or certification, respondents’ set-offs for liquidated damages remain live issues in adjudication proceedings.

Background

Goldbell Engineering Pte Ltd (“Goldbell”) appointed Range Construction Pte Ltd (“Range”) as its contractor for a project (“Project”). The contract incorporated the Real Estate Developers’ Association of Singapore Design and Build Conditions of Main Contract (3rd Ed, July 2013) (the “Conditions”).

Clause 19.1 of the Conditions stated that if Range failed to complete the Project by the completion date (which was 7 September 2018), liquidated damages of $12,000.00 would be payable by Range to Goldbell for each day that elapsed between the contractual date of completion and the date of issuance of the handing over certificate.

Range served its payment claim for the sum of $2,445,225.58 on 2 December 2019, before the SOP Amendments took effect on 15 December 2019. It subsequently commenced adjudication proceedings against Goldbell. In the adjudication determination (“AD”), the adjudicator awarded Range $205,647.42, which was arrived at after deducting $852,000.00 in liquidated damages which he found payable by Range to Goldbell.

In quantifying the liquidated damages payable, the adjudicator relied on a 17 November 2018 email from Range’s managing director, who stated that “L3, L5 and Roof are ongoing and will be completed next week”. The adjudicator understood this email to mean that Range had not completed the Project as of 17 November 2018 and hence imposed liquidated damages from 8 September 2018 to 17 November 2018.

Range unsuccessfully applied to set aside the part of the AD in the High Court, alleging, inter alia, that adjudicator had acted in excess of jurisdiction in finding that Goldbell was entitled to set off liquidated damages. Range reiterated similar arguments before the Court of Appeal.

Holding

The Court of Appeal held that the adjudicator was entitled to consider Goldbell’s set-off for liquidated damages, and such jurisdiction was based on Section 15(3)(a) and 17(3) of the SOP Act (pre-amendment).

Section 15(3)(a) of the SOP Act (pre-amendment) expressly allowed the adjudicator to consider “any reason for withholding any amount, including but not limited to any cross-claim, counterclaim and set-off”, as long as that reason was included in the relevant payment response. Had Parliament intended to exclude liquidated damages as a valid form of set-off, this would have been expressly reflected in the SOP Act. In the absence of an express provision, there was no room to interpret Section 15(3) of the SOP Act to exclude liquidated damages as a valid form of set-off.

Similarly, Section 17(3) of the SOP Act provided that an adjudicator ought to have regard to, inter alia, the payment response. Goldbell had indeed imposed liquidated damages in its payment response to Range.

The Court of Appeal also found that the adjudicator was entitled to find that the Project remained incomplete as at 17 November 2018 (and hence did not exceed his jurisdiction or breach the fair hearing rule):

  • In finding that the Project remained incomplete as of 17 November 2018, the adjudicator did not designate 17 November 2018 as the completion date. He simply found that, at the minimum, the Project was still incomplete as at 17 November 2018.

  • The fact that the adjudicator was not required to identify the exact date of completion did not mean ipso facto that he was precluded from awarding liquidated damages.

  • The adjudicator was hence entitled to decide that liquidated damages were only payable up till 17 November 2018.

Effect of Section 17(2A)

While the SOP Amendments were inapplicable to Range’s case, Range nevertheless cited the following ministerial statement by Minister of State Zaqy Mohamad at the second reading of the Building and Construction Industry Security of Payment (Amendment) Bill (Singapore Parliamentary Debates, Official Report 2 Oct 2018 vol 94 (the “Ministerial Statement”):

Another issue that this Bill will address is the lengthening of the adjudication process due to submission of complex claims. We have observed that some claimants have started to include complicated prolongation costs, damages, losses or expenses when applying for adjudication.

This goes beyond the original scope of the SOP Act, which is intended to cover claims for work done or goods and services supplied.

So clauses 11 and 14 will make clear that adjudicators are to consider claims on damages, losses, and expenses only when the claim is supported by documents showing the parties’ agreement on the quantum of the claim…

The Ministerial Statement related to the enactment of a new Section 17(2A) of the SOP Act, which states:

(2A) In determining an adjudication application, an adjudicator must disregard any part of a payment claim or a payment response related to damage, loss or expense that is not supported by -

  1. Any document showing agreement between the claimant and the respondent on the quantum of that part of the payment claim or the payment response; or

  2. Any certificate or other document that is required to be issued under the contract.

Range submitted that based on the Ministerial Statement, Section 17(2A) simply clarified but did not change the legal position under the SOP Act. As such, claims for damage, loss or expenses were prohibited even under the pre-amendment SOP Act.

In rejecting Range’s argument that Section 17(2A) merely clarified and did not change the legal position under the pre-amendment SOP Act, the Court of Appeal found at [33 to 42] that:

  • The Ministerial Statement did not have the force of law. Even if the Ministerial Statement suggested that Section 17(2A) was declaratory of the pre-existing law, it was for the Court to determine if this was correct.

  • The Ministerial Statement was made in the context of payment claims by contractors, and the “original scope” of the SOP Act was intended to cover claims by claimants for work done or goods and services supplied (i.e. not necessarily in the context of claims by respondents, such as liquidated damages).

  • The SOP Amendments were intended to make clear that claims for damage, loss or expense were not permitted because such claims were not clearly precluded under the SOP Act pre-amendment.

  • If Section 17(2A) were merely declaratory of the pre-existing legal position, Section 15(3) would be devoid of any substantive content. In other words, if such claims were already prohibited under the pre-amendment SOP Act, it would have been impossible for an employer to withhold any amount by way of set-off under Section 15(3) of the SOP Act.

Commentary

The Court of Appeal has confirmed at [42] that the enactment of Section 17(2A) has changed rather than merely clarified the law.

In a situation where the SOP Amendments apply, a claimant or respondent (imposing loss & expense or liquidated damages as the case may be) will have to show:

  1. Any document showing agreement between the claimant and the respondent on the quantum of that part of the payment claim or the payment response; or

  2. Any certificate or other document that is required to be issued under the contract.

While Section 17(2A) arguably makes it more difficult for respondents to impose liquidated damages, it does not mean that liquidated damages cannot be considered by adjudicators.

Indeed, the Court of Appeal at [52 to 54] drew a crucial distinction between claims by contractors and respondents:

  • The Court of Appeal agreed with the Ministerial Statement that the SOP Act was not intended to apply to complex claims, in so far as this argument was confined to claims brought by contractors as claimants.

  • It is not apparent from the face of the Ministerial Statement that Parliament’s concerns about the submission of complex claims extended to claims by respondents / employers (i.e. liquidated damages).

  • It is not a foregone conclusion that the rationale for excluding complicated prolongation costs, damages losses or expenses from payment claims necessarily applied to payment responses too.

  • Liquidated damages are typically capable of straightforward computation in most cases (i.e multiplying the number of days and the daily rate).

  • Allowing set-offs for liquidated damages would balance the contractor’s entitlement to progress payments and the respondent / employer’s need for some interim resolution in respect of delays in which it is not culpable.

Hence, while the SOP Act was not intended to apply to complex claims (such as loss & expense claims) brought by contractors as claimants, employers’ claims for liquidated damages are not similarly precluded. The Court of Appeal has left the door open for liquidated damages to be imposed (subject to satisfaction of Section 17(2A)).

Conclusion

The Court of Appeal’s decision attempts to balance a claimant’s entitlement to progress payments and a respondent’s need for some interim resolution in respect of delays for which it is not culpable.

While an agreement or certificate is now required under Section 17(2A) of the SOP Act, parties to the adjudication process should take note that respondents’ set-offs for liquidated damages remain live issues in adjudication proceedings.