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Can you submit a payment claim under SOPA to recover monies paid out under a performance bond?

In China Railway No 5 Engineering Group Co Ltd Singapore Branch v Zhao Yang Geotechnic Pte Ltd [2019] SGHC 130, the HC dealt with one key issue of whether adjudication under the SOPA is the proper forum to canvass construction disputes that arise purely in relation to performance bond proceeds.

The plaintiff main contractor engaged the defendant sub-contractor to carry out certain construction works. An on-demand performance bond was “procured by the sub-contractor to serve as “a deposit or security for the due performance and observance by the Sub-Contractor of all stipulations, terms and conditions contained in the Sub-Contract””. On 20 December 2018, the plaintiff called on the performance bond for the sum of $281,441.95.

On 25 December 2018, the defendant served Payment Claim 36 (“PC 36”) on the plaintiff for a sum that is the value of the performance bond which had been called, plus 7% GST. In its payment response, the plaintiff disputed the validity of PC 36 by arguing that it was a repeat claim with no claim for any new works, and that it was not even a claim for construction work under the SOPA. The matter was then referred to adjudication. During adjudication, the adjudicator found that he had the jurisdiction to adjudicate on PC 36 which “relatedly solely to the proceeds of the performance bond”, and determined that the plaintiff was to pay the defendant the sum of $281,441.95, excluding GST (the “AD”). Dissatisfied with the AD, the plaintiff applied for it to be set aside.

In setting aside the AD in its entirety, the HC first found that s 10(1) SOPA, which prescribes the scope of a valid payment claim, is a mandatory provision. The HC then went on to consider whether PC 36, being a claim for performance bond proceeds only, is a valid payment claim within the scope of s 10(1) SOPA. In this regard, the HC held that:

“While the performance bond relates to the construction works, a call on the performance bond resulting in the main contractor receiving the bond proceeds cannot be considered as works done by the sub-contractor … On the contrary, the performance bond is usually called as a result of some alleged breach of the contract … It is therefore an allegation on the main contractor’s part that construction works have not been done satisfactorily, or that goods or services have not been supplied in accordance with the contract. Allowing the subcontractor to issue a payment claim for such negative work thus verges on the nonsensical.”

The HC further held that deeming PC 36 as valid would negate the efficacy of the performance bond, thereby defeating the bargain struck between the parties and contravening s 36(4) SOPA. This was in view of the fact that under the contract, it is clear that the performance bond was issued as a deposit or security, and “does not have to be used to offset any liquidated damages, back-charges or other sums owed by the sub-contractor to the main contractor”.

This case clarifies that a payment claim cannot be made to recover under SOPA monies paid out under a performance bond.

Disclaimer: This update is provided to you for general information and should not be relied upon as legal advice.