Construction Law Case Update: Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd [2021] SGHC 72

Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd [2021] SGHC 72

Decision date: 31 March 2021.

Introduction 
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The amendments to the SOP Act (“The Act”) in December 2019 introduced a new section 4 (2)(c), which provided that the Act will not apply to any terminated construction contract which has a clause suspending payment obligations upon termination until after the occurrence of a specified date or event (“Termination Suspension of Payment Clause” or “TSP Clause”).  

By virtue of s 4 (2)(c), once the TSP Clause takes effect, a contractor will not be entitled to make an adjudication application under the Act.  The contractor’s entitlement is reinstated only after the occurrence of the date or trigger event mentioned in TSP Clause. One example of a TSP Clause is clause 32 (8)(a) of the Singapore Institutes of Architects’ Articles and Conditions of Building Contract, 9th Ed, Lump Sum which stipulates that the contractors’ entitlement to payment are held in abeyance until the issuance a Cost of Termination Certificate by the architect.

Section 9 of the Act prohibits pay-when-paid clauses in construction contracts. Pay-when-paid clauses include clauses that makes the liability of the payee contingent or conditional on the operation of any other contract or agreement.  

A TSP Clause can fall within the definition of a pay-when-paid clause under s 9 of the Act if the specified date or event is to be determined by reference to a separate contract.
Under such circumstances, should the “pay when paid” TSP Clause be enforceable and would s 4 (2) (c) of the Act still apply?

This was the novel issue before the Court in the case of Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd [2021] SGHC 72.
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It is an important issue for parties who are involved in construction contracts as it would set a framework for understanding their post-termination rights and provide valuable guidance in the drafting of TSP Clauses. 

Brief Facts 
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Frontbuild Engineering & Construction Pte Ltd (“P”) was the main contractor in a project. JHJ Construction Pte Ltd (“D”) was its was sub-contractor for the supply of labour to carry out reinforcement works.

Clause 9 of the sub-contract between P and D provided amongst others that if the sub-contract was terminated, no further payment would be made to D “until the whole of the Main Contract Works has been completed” and that D would “indemnify [P] for the additional cost necessary to complete the remaining Sub-Contract Works and any loss or damage suffered as a result of the termination”.

On 12 March 2020, P terminated the sub-contract.

On 31 March 2020, D issued payment claim no 9 (“PC9”) to claim for payment for work done up to 31 March 2020.

P did not issue any payment response. Subsequently, D obtained an adjudication determination (“AD”) in its favour in the sum of $204,210.67.
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P applied to set aside the AD on the ground that the adjudicator had breached his duty under s 17 (3)(a) of the Act by failing to take into account s 4 (2) (c) of the Act. 

The Decision
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P’s position was that since clause 9 suspended D’s entitlement to payment until after the main contract works, s 4 (2) of the SOP Act applied to disentitle D from making an adjudication application under the Act.
D submitted that clause 9 was:

1) a pay-when-paid clause and rendered unenforceable by s 9 of the Act. 
2) effectively sought to exclude the operation of the Act and was void by reason of s 36 of the Act.

If clause 9 was invalid or unenforceable, it could not be considered as a TSP Clause and s 4 (2) (c) of the Act would not apply to restrict D from making an adjudication application on PC9.

In the Court’s view the answer depended on whether parliament intended s 4 (2) (c) to take primacy over s 9 of the Act.

There were two possible interpretations.

“s 4(2)(c) of the Act should be interpreted on its own and takes primacy over s 9 of the Act such that “pay when paid provisions” in terminated construction contracts remained enforceable as the Act would not apply at all to the terminated contract until the conditions in s 4(2)(c) of the Act had been met.”

And.

“The second possible interpretation, …, was that s 4(2)(c) of the Act was to be interpreted in light of s 9 of the Act such that “pay when paid provisions” in construction contracts, including a terminated contract, were strictly unenforceable”

After considering the parliamentary debates, the Court felt that the overarching intention of parliament was to preserve the rights to payment for construction companies. In this context the Court held that the latter interpretation of the Act would promote the intention of parliament and bring about a harmonious construction of s 4 (2) (c) and s 9 of the Act.  It gave effect to the raison d’être of the statutory framework, which was to ensure that sub-contractors are not left at the mercy of main contractors: (a) withholding payments for reasons unrelated to the subcontractors’ performance; and (b) making such payments contingent on performance of some other contract.

Therefore, when s 4(2)(c) of the Act is construed to determine if the Act applies to a particular terminated construction contract, any TSP Clauses in that contract are to be given effect only if they do not fall foul of s 9 of the Act.

In this case Clause 9 was clearly a pay-when-paid clause as the event triggering D’s entitlement to payment was an event that could only occur in a separate contract i.e., P’s main contract with the project owners. As such Clause 9 was not enforceable and s 4 (2) (c) of the Act did not apply.

​The Court further held that the adjudicator had not breached his duties under the Act as he had considered the interplay between s 4 (2) (c) and s 9 of the Act before he issued the AD.
P’s application was therefore dismissed by the Court.

Comments

TSP Clauses must be carefully drafted so that they will not fall under the definition of a pay-when-paid clause under s 9 of the Act. The date or event giving rise to the downstream contractor’s right to payment after termination should not be a date or event that can only arise under a separate contract.

Further, the qualifying dates or events in TSP Clauses must not be too onerous as this may lead to the TSP Clauses being voided for failing afoul of the anti-avoidance provisions in s 36 of the Act.   

Tan Joo Seng
6 Sept 2021