CAN A SUB-CONTRACTOR CLAIM FOR RECOVERY OF PERFORMANCE BOND PROCEEDS IN AN ADJUDICATION UNDER THE SOP ACT?
In the recent High Court decision of China Railway No 5 Engineering Group Co Ltd Singapore Branch v Zhao Yang Geotechnic Pte Ltd  SGHC 130 (“China Railway v Zhao Yang”), Chan Seng Onn J addressed the issue of whether a sub-contractor can claim for recovery of performance bond proceeds in an adjudication under the Building and Construction Industry Security of Payment Act (“SOP Act”).
Key facts. In brief, the key facts are as follows.
China Railway No 5 Engineering Group Co Ltd Singapore Branch (the “main contractor”) engaged Zhao Yang Geotechnic Pte Ltd (the “sub-contractor”) to carry out certain works.
Sometime in 2018, the sub-contractor commenced an adjudication against the main contractor, and obtained an award in its favour in an adjudication determination dated 13 December 2018. The main contractor paid out the adjudicated amount in full.
On 20 December 2018, the main contractor called on an on-demand performance bond for the sum of $281,441.95 issued in the main contractor’s favour.
As stated in  China Railway v Zhao Yang, this was a typical performance bond procured by the sub-contractor to “… serve as “a deposit for security for the due performance and observance by the Sub-Contractor of all stipulations, terms and conditions contained in the Sub-Contract.””
On 25 December 2018, the sub-contractor then served a Payment Claim No. 36 (“PC36”) on the main contractor, claiming for a sum that is the value of the performance bond plus 7% GST.
In response, the main contractor served a payment response disputing the validity of PC36, stating that it is a repeat claim, and that it is not a claim for construction work under the SOP Act.
When referred to adjudication, the adjudicator found that he had jurisdiction to determine the dispute, and determined that the main contractor was to pay the sum of $281,441.95 (the “AD”).
Dissatisfied, the main contractor applied to set aside the AD.
s. 10(1) SOP Act is a legislatively important provision. The High Court first found that s. 10(1) SOP Act is a mandatory provision. The High Court stated that s. 10(1) SOP Act:
a. Serves to limit the scope of any payment claim to claim for progress payments only ( China Railway v Zhao Yang); and
b. Serves to limit the persons on whom the payment claim may be served ( China Railway v Zhao Yang).
As such, the High Court found at  China Railway v Zhao Yang that “Section 10(1) SOPA therefore ensures that only valid payment claims are made, and claimants who submit frivolous payment claims beyond the scope allowed s 10(1) SOPA ought to have their claims dismissed entirely.”
PC36 is not a valid payment claim. The High Court then held that, distinguishing the earlier decision of SH Design & Build Pte Ltd v BD Cranetech Pte Ltd  SGHC 133, since PC36 is a payment claim purely for the performance bond proceeds, it is not a valid payment claim.
The key reasoning is encapsulated in  China Railway v Zhao Yang, where the High Court found that “… 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 sub-contractor to issue a payment claim for such negative work thus verges on the nonsensical.” (emphasis in original).
The contractual bargain struck, The High Court further held that allowing PC36 would “negate the efficacy of the performance bond entirely, thus defeating the bargain struck between the parties.” ( China Railway v Zhao Yang).
The High Court emphasized that under the contract, the main contractor could require payment of the performance bond proceeds “without any deductions whatsoever…”, and found that it was clear that the “performance bond functions 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” ( –  China Railway v Zhao Yang).
In addition, the High Court at  China Railway v Zhao Yang found that the “… performance bond in this case operates independently from the construction contract between the parties, and serves simply as valuable security or deposit for the main contractor. It is the result of a bargain struck between the parties, and does nothing to exclude, modify, restrict or prejudice the operation of the SOPA regime. …”
Significance. The significance of China Railway v Zhao Yang is that it re-iterates the importance of the performance bond (and in particular, the on-demand performance bond) to the main contractor.
It is not uncommon that a main contractor may accidentally fail to respond to a payment claim as well as it could, with the result that the sub-contractor is able to rely on s. 15(3) SOP Act to obtain an award in its favour, notwithstanding that the main contractor (in fact) has substantial back-charges, set-offs, etc.
China Railway v Zhao Yang is an important reminder to main contractors that if there are genuine disputes between the parties, the main contractor may nevertheless still have recourse to the performance bond even if the sub-contractor has obtained an adjudication determination in its favour, and that the sub-contractor cannot then commence an adjudication to recover the proceeds of the performance bond.
Tags: Building and Construction Industry Security of Payment Act; Adjudication; Setting Aside; s. 10(1); performance bond; construction work
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