Singapore case restricts construction sub-contractor payment withholding

The Court dismissed an appeal from the main sub-contractor on two construction projects in Singapore, Civil Tech, in relation to a dispute over a payment claim raised by Hu Rong Engineering, a sub-contractor from which it had sourced labour.

Hu Rong Engineering raised a claim for payment of more than SIN$600,000 ($456,000) with Civil Tech in late 2016 in relation to work under one of the two construction contracts in which it was engaged. However, Civil Tech counterclaimed that the sub-contractor owed it more than SIN$1.5 million ($1.14m) because it alleged that payment claims that Hu Rong Engineering had raised previously under the second contract between them were fraudulent.

However, the Court of Appeal in Singapore ruled that the Building and Construction Industry Security of Payment Act did not permit Civil Tech to rely on the overall financial position between the two companies to withhold payment under the first contract.

In security of payment adjudications, businesses subject to payment claims are not permitted to withhold payment on the basis of cross claims or set offs which do not arise from the contract on which the payment claim is based, the Court of Appeal ruled.

The court's decision was based on its interpretation of the Building and Construction Industry Security of Payment Act in Singapore, which it said applied to the supply of contracts between Civil Tech and Hu Rong Engineering.

"The purpose of the Act is to ensure that downstream parties are timeously paid for work done or materials supplied," the Court of Appeal said in its ruling. "The Act promotes cash flow by facilitating prompt payments down the chain of contractors involved in any given construction project. In our judgment, it is this conception of cash flow – the flow of monies from upstream parties to downstream parties, that is, cash flow in a literal sense – which is reflected in the Act, not the notion of giving effect to the net financial position between the parties."

The case raised by Civil Tech before the Court of Appeal had been ruled on previously by first an adjudicator in Singapore and Singapore's High Court, both of which had ruled against the position Civil Tech had argued.

Yong Neng Chan, a specialist in dispute resolution based in the Singapore offices of Pinsent Masons, the law firm behind Out-Law.com, said: "This restrictive finding has significant consequences on cross-project accounting. Industry players will now have to recognise that where adjudication proceedings are commenced, the adjudication process will be limited to determination of the financial position between the parties vis-à-vis the project concerned, as opposed to the net financial position between parties as a whole."