Singapore Court of Appeal: Claims from Other Contracts Cannot Be Set Off in an Adjudication

March 08, 2018

Singapore’s Court of Appeal recently ruled that claims and set-offs from other contracts between the two parties in an adjudication are not consistent with the purpose of the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (the Act). Contracting parties are therefore advised that even though claims and set-offs from one construction contract may well be valid, they may not be used to withhold payment on a claim in adjudication under another construction contract.

The nature of the construction industry is such that sometimes parties enter into multiple concurrent contracts in relation to different projects, or different aspects of the same project. Such parties should be aware that claims from other contracts between the same parties cannot be set off against a claim in adjudication under one of those contracts. The recent Court of Appeal case of Civil Tech Pte Ltd v Hua Rong Engineering Pte Ltd [2018] SGCA 12 illustrates this when the Court of Appeal declined to allow the withholding of payment, based on a claim or asserted set-off which arises from a separate construction contract (Cross-Construction Contract Claim).

Background: Civil Tech v Hua Rong

Civil Tech was engaged as the main subcontractor for two construction projects by the Land Transport Authority, the T211 project for the construction of the Bright Hill MRT station and the C933 project for the construction of the Jalan Besar MRT station. In two separate contracts (the T211 Contract and the C933 Contract), Civil Tech engaged Hua Rong as its subcontractor to supply labour for these projects.

Hua Rong submitted a payment claim (the Payment Claim) in the sum of $601,873.40 to Civil Tech for work under the T211 Contract. Civil Tech issued a payment certificate certifying a negative sum of $1,571,055.66. According to Civil Tech, Hua Rong had made fraudulent payment claims under the C933 Contract, which claims Civil Tech had satisfied and which it contended it was entitled to recover. Civil Tech sought to raise a set-off to the Payment Claim on this basis. Hua Rong subsequently filed an adjudication application in relation to the Payment Claim. In its adjudication response, Civil Tech again claimed that it had satisfied fraudulent payment claims made by Hua Rong under the C933 Contract, and was entitled to withhold payment of the Payment Claim on this basis. The Adjudicator in his Adjudication Determination held that the Act did not permit the respondent in an adjudication application to set-off claims arising under another contract against monies due to a claimant under the contract to which the adjudication relates. Civil Tech applied to court to set aside the Adjudication Determination.

High Court: Application Dismissed

After hearing Civil Tech’s application, the High Court dismissed the application, holding that in an adjudication under the Act, a respondent to a payment claim may only rely on reasons for withholding payment arising out of the Payment Claim Contract.

Court Of Appeal: No Entitlement to Withhold Payment Based on Cross-Construction Contract Claim

The Court of Appeal held that the relevant provisions of the Act, along with its purpose and scheme, demonstrated that Cross-Construction Contract Claims are not valid withholding reasons under the Act. The Court of Appeal held that an adjudicator is appointed to determine a single payment dispute arising out of a payment claim contract and appointment for this limited purpose is not consistent with the adjudicator having to review potentially extensive documentary material on claims arising under other contracts. If an adjudicator were required to consider such material, this would add to the length of adjudication proceedings, and hamper the operation of the adjudication regime as a swift procedure for resolving payment disputes.

Takeaway: Do Not Rely on Claims or Set-Offs in Separate Construction Contracts

A party in Civil Tech’s position would be well advised to

  • take stock of the respective claims and set-offs under each of their respective contracts separately;
  • examine whether the provisions of one contract may expressly allow claims and set-offs under another contract to be raised in adjudication; and
  • consider other avenues for interim recovery on such claims and set-offs, such as by a demand on a performance security.

Indeed, the Court of Appeal’s analysis suggests that an adjudicator may only consider one contract, which would form the basis of the payment claim that is disputed and referred to adjudication. This may cast doubt on provisions in construction contracts which expressly allow claims and set-offs under other contracts to be raised in adjudication. Should there be a performance security or retention fund to call upon, there may well be no need to rely on claims and set offs under one contract to withhold payment under another contract.

The Court of Appeal was of the view that the only issue before it in this appeal was whether Cross-Construction Contract Claims are valid withholding reasons under the Act. It did not consider it necessary to decide whether the High Court’s view, that the only valid withholding reasons under the Act are those arising from the payment claim’s contract, was correct. With these remarks, the Court of Appeal left the question of whether other withholding reasons (such as claims for consequential damage, loss of profits, and additional expense) are valid under the Act, for another day.