The Singapore High Court Clarifies The Valuation Mechanism Under The SOP Act.

Legal News & Analysis - Asia Pacific - Singapore - Dispute Resolution - Construction & Real Estate

1 June, 2019

 

Introduction

 

The Singapore High Court decision of Chuang Long Engineering Pte Ltd v Nan Huat Aluminium & Glass Pte Ltd [2019] SGHC 55 recently considered the question of whether S7(2)(c) of the Building and Construction Industry Security of Payment Act (Cap 30B, 2006 Rev Ed) (SOPA) entitles a claimant to include in its payment claim the value of materials fabricated under the contract but which remained undelivered and uninstalled. [NoteSelvam LLC represented Nan Huat in both the adjudication determination and subsequent setting aside application.]

 

This decision highlights the importance of proper drafting of construction contracts and the significance of including a proper valuation mechanism to avoid any uncertainties in the event of a dispute. Ideally, the valuation mechanism should provide for periodic payments for the off-site fabrication of materials and subsequent delivery and installation. Parties should also clarify in the contract if payment should be contingent on delivery and whether the contracting parties have any post-termination right to seek payment for materials that remain undelivered and uninstalled.

 

Background

 

The case concerns a construction contract between the main contractor, Chuang Long, and the subcontractor, Nan Huat, for Nan Huat to fabricate, deliver and install certain aluminium fins and cladding for a new two-storey detached house. The contract was silent on the valuation mechanism or methodology to adopt for certifying payment claims. 

 

Nan Huat’s contract was subsequently terminated by Chuang Long after it alleged that Nan Huat had breached completion deadlines and schedule of works, which eventually led to the commencement of adjudication proceedings. In the adjudication application, relying on S7(2)(c) SOPA, Nan Huat claimed for the value of undelivered and uninstalled materials, which had been specifically fabricated for the project. The adjudicator allowed Nan Huat’s claim on the basis that he was entitled under S7(2)(c) SOPA to include, for the purposes of the valuation exercise, the value of “materials or components that are to form part of any building, structure or works arising from the construction work… that… on payment, will become the property of the party for whom the construction work is being carried out”. Dissatisfied with the adjudicator’s decision, Chuang Long brought this action to set aside the adjudication determination. The Singapore High Court thus had to decide whether S7(2)(c) SOPA entitles a subcontractor to include the value of undelivered and uninstalled materials in its payment claim.

 

Position Under Singaporean and Australian Law

 

As a preliminary point, both parties agreed that there is very little case law regarding this issue in both Singapore and Australia. Additionally, the SOP Acts in both jurisdictions contain substantially the same provision. In this respect, S7(2)(c) of the Singapore SOPA mirrors S10(2) of the New South Wales SOPA.

 

Judgment

 

After analysing S7(2)(c) SOPA, Justice Chan Seng Onn agreed with the adjudicator and held that S7(2)(c) SOPA extends beyond affixed or incorporated materials, notwithstanding that property in the materials has not passed, and the sole question to ask in this situation is whether the materials were fabricated to form part of the building/structure in the construction contract. In so doing, Justice Chan emphasised Parliament’s intention to facilitate cash flow and preserve the right to payment for work done by construction parties, especially downstream sub-contractors.

 

Practical Considerations

 

This decision thus highlights two crucial points. First, construction parties should, where possible, always include a valuation mechanism for work done under the construction contract. Where the contract is silent, S7(2) SOPA provides a statutory mechanism for the valuation of work, but it leaves the question of valuation at the sole discretion of the adjudicator. This may have important consequences, as seen in this case. While the adjudicator decided in favour of Nan Huat, the awarded sum was reduced from the claimed sum of $237,421.35 to $165,683.91 (a 30 percent discount). Additionally, a valuation clause would have benefitted Chuang Long because it would then have been able to dictate the amount payable (if at all) if the materials were fabricated but remained undelivered or unfixed.

 

Secondly, the decision also provides assurance for downstream subcontractors who have entered into similar construction contracts without a valuation mechanism. Given the clarification in the law, main contractors would not be able to hold such subcontractors at their mercy by threatening to terminate a construction contract without a valuation clause. To mitigate this scenario and in line with the legislative intent, S7(2)(c) SOPA allows the subcontractor to claim for the value of materials fabricated under the contract that have yet to be delivered or installed.

 

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For further information, please contact:

 

Satinder Pal Singh, Duane Morris & Selvam LLP

spsingh@selvam.com.sg