Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37: A photo of construction site. (Photo credits: EJ Yao / Unsplash)

CASE SUMMARY

A main contractor terminates its contract with its subcontractor. Following the termination, the latter puts up payment claims under Security of Payment Act (“SOPA“) for works carried out prior to the termination. Q: Can a payment claim be served after termination of the contract? That was the issue confronting the CA in Shimizu Corporation v Stargood Construction Pte Ltd [2020] SGCA 37. The CA concluded that the answer lies in the terms of the contract. Where it is clear from its terms that no such right exists, the SOPA cannot be resorted to as conferring an independent right to make such claims. It is only where the contract is silent on the issue that the SOPA can be invoked as a “gap-filler”.

The appellant (“Shimizu”) was the main contractor for a project (“the Project”). It appointed the respondent (“Stargood”) as its subcontractor. Under the terms of their contract (“the Subcontract”), a project director (“the PD”) was tasked with (among other things) the certification of progress payments.

Shimizu took the position that Stargood had breached certain terms of the Subcontract and exercised its right to terminate the Subcontract. Following that, Stargood served payment claims in respect of works it had carried out on the Project prior to the termination. Stargood thereafter commenced adjudication proceedings which ended with the adjudicator dismissing Stargood’s claim on the ground that in light of the termination of the Subcontract, the PD was functus officio as regards his certifying function. In those circumstances, Stargood could no longer serve a valid payment claim.

Stargood applied to the High Court to set aside the adjudicator’s determination and to seek a declaration that it was entitled to serve a payment claim on Shimizu notwithstanding the termination of the Subcontract. The High Court judge allowed Stargood’s application reasoning (among others) that the SOPA, in particular, s 10, provided Stargood with an independent right to progress payments, even if the entire Subcontract had been terminated. Shimizu appealed the decision of the High Court judge.

THE CA’S DECISION

Shimizu argued that the PD was functus officio on the termination of the Subcontract and with that, he is unable to certify further payments. Thus, there can be no question of any payment claims under the SOPA. On the other hand, in seeking to uphold the decision of the High Court judge, Stargood relied on 2 previous High Court decisions which suggested that the SOPA provided for “a dual railroad track system”, one under the terms of the contract and the other being an independent right under the SOPA. Under this system, the party seeking payment has the option to elect between the statutory and contractual entitlement to payment. Thus, a subcontractor can submit a payment claim under the SOPA notwithstanding the fact that such a payment claim would be contrary to the terms of the contract. In short, the SOPA trumps the express terms of the contract.

During the hearing, the CA directed the parties to address the question of the effect of the termination provisions in the Subcontract in relation to the right to submit payment claims post termination.

In its decision, the CA rejected the respondent’s argument of an independent right created under the SOPA to make a payment claim. Its reasoning proceeded as follows.

As a starting point, the CA discussed a contractor’s right to progress payments. It reiterated (at [21]) its decision in Far East Square Pte Ltd v Yau Lee Construction (Singapore) Pte Ltd [2019] 2 SLR 189 that:

“…the SOPA is merely a legislative framework to expedite the process by which a contractor may receive payment through the payment certification and adjudication process in lieu of commencing arbitral or legal proceedings. It does not, in and of itself, grant the contractor a right to be paid. Before a contractor can make a claim for progress payments under the SOPA, it is imperative that he can establish that he is entitled to such payment under the contract.  

Next, the CA observed (at [27]) that “the SOPA plainly points to a preference for the provisions of the contract between the parties in determining rights to payment”.  After a “holistic consideration” of all the relevant provisions, notably, ss 5, 6 and 7 on the right to progress payments, it concluded (at [31]) that:  

…….there is no separate statutory entitlement to a progress payment where a contract already makes provisions for such payments (assuming, of course, that these provisions do not themselves otherwise violate the SOPA). This eminently makes sense as having two payment regimes existing side-by-side would create intolerable uncertainties. Which regime applies or do they both apply? Must a contractor elect between them? Is the election irrevocable?”

In the same paragraph, the CA went on to state that the statutory right to make progress payments can be invoked only if the statutory conditions under the SOPA are satisfied. Notably, one such statutory condition is when the contract does not contain the relevant provision, that it, the contract is silent on the matter. In other words, the SOPA operates as a “gap-filler” in situations where parties have omitted to contractually stipulate for progress payments (at [29]).

Given its conclusion that there is no separate statutory right to progress payments where the contract itself provides for progress payments, it necessarily followed that there can be no question of a corresponding separate statutory entitlement to serve a payment claim in such situations. The CA therefore concluded that the 2 High Court decisions were wrong insofar as they suggest a separate statutory system that co-exists with the system provided under the contract.

In summary, in determining whether a contractor has the right to make payment claims post-termination, the first port of call is the terms of the contract. If on its proper interpretation, the answer is ‘no’, that concludes the matter and the SOPA cannot be invoked to negate that outcome. However, if the contract is silent on whether the right continues to subsist, only then can the SOPA be relied upon to “fill the gap”.

Applying the above principles to the case before it

With the above in mind, the CA focused on the terms of the Subcontract with particular emphasis on the terms governing the parties’ rights post-termination. It noted the following:

  • The Project Director plays an important role in the payment mechanism as his payment response serves as a condition precedent to Stargood’s right to receive progress payments (at [43]).
  • While clause 33.4 provided that upon termination of the Subcontract, Shimizu shall be entitled to damages on the same basis as if Stargood had wrongfully repudiated the Subcontract, there was however no provision made for Stargood to make any payment claim in such a situation (at [45]).
  • Instead, under clause 33.5, Stargood is entitled to serve a payment claim only in the event that the Subcontract is terminated as a consequence of the termination of the Main Contract for some reason that is unconnected to its breach (at [46] – [47]).

The CA thus concluded that the Subcontract made clear that the only circumstance entitling Stargood to serve a payment claim for work done prior to termination is where the termination was in turn caused by the termination of the Main Contract for which Stargood was not responsible. Thus, since the Subcontract was not silent on whether Stargood had the right to make a payment claim post-termination, there was no question of any gap-filling using s 10 SOPA.  

In the circumstances, Stargood was not entitled to make the payment claim and the CA allowed Shimizu’s appeal. The CA noted that this did not mean that Stargood was left without any remedy as it could always commence legal or arbitral proceedings.

The CA was able to reach the above conclusion without considering the parties’ argument as to whether the termination of the Subcontract rendered the PD functus officio. The CA left open the question of the effect of the certifier becoming functus officio on the right to serve a payment claim if the Subcontract provided for the certificate to function as a condition precedent to payment (at [52]).

CONCLUDING REMARKS

The CA’s decision is of signal relevance to all those involved in the construction industry as it makes clear the importance of the terms of the contract between the parties in assessing if there is a right to make payment claims under the SOPA post-termination.

To read the full judgment, click here.