Security of Payment (SOP) Act which aims at improving cash flow of construction industry provides statutory right to claimants to receive payment and have access to swift resolution of payment disputes via the adjudication regime. Any respondent (or payer) who receives payment claim and decides to withhold payment must provide its reasons for doing so. In this regard, this legislation may be viewed as a statutory tool to mainly assist the claimant rather than the respondent. However, the SOP Act is not designed in a one sided manner because there are also avenues within this legislation that balances the interest of the respondent too. This article examines the SOP Act from the respondent’s perspective particularly how respondents could better appreciate and utilise this legislation in order to avail themselves with any statutory remedies. 

As the SOP regime can be fairly time sensitive, the respondent should ensure that any response it serves is clear and self explanatory. Whilst much have been written about the need for serving a payment response and to do so in a timely manner, there is fairly limited coverage on how to enhance clarity and reduce subjectivity of each payment response particularly when the responded amount is less than amount claimed. To this end, there are certain best practices that can be considered in administration of interim progress payments. Although payment responses are structured in a table or schedule that mirrors payment claims, there are ways to increase its clarity within the format constraints.

Under the SOP regime, there are several opportunities for the respondent to serve a payment response if it had not done so in an earlier time frame or to vary its original payment response if necessary. The respondent ought to be familiar with these frameworks without appearing to flip flop or to inexplicably change its position that could compromise its own credibility. Finally, the SOP Act is intended to deal with straightforward payment related claims that are associated with work done as opposed to complex damages claims that are not suitable to be adjudicated within a short timeframe. In view of this, how should the respondent position itself in case there are genuine cases of cross claims or set off? The above mentioned respondent centric issues will be explored further in the subsequent sections of this article.  

Transition From Accepted Tender Sum To Contract Sum – Clarity of Payment Response

Clarity in payment response can be enhanced when there is an agreement on payment entitlement especially for disbursement of both direct and indirect costs of construction works. Payment entitlements for overhead expenses and preliminaries could be subjective because these represent indirect cost of construction works. During the formation of contract, the selected tenderer’s offer is accepted and the tender sum becomes contract sum. During this transition, both parties should make the effort to agree on how the contract sum ought to be distributed across the pricing schedule which will in turn influence project cashflow. The contract sum breakdown may not necessarily mirror the accepted tender sum breakdown for various reasons. Firstly, the Employer and its consultant may be concerned over the practice of ‘front loading’ where disproportionate amount may be paid in the beginning of the project in respect of preliminaries or general overhead expenses. Likewise the contractor may want to ensure that its main contract cashflow is in tandem with its subcontract cashflow including other domestic commitments. These issues of contract sum distribution are not usually negotiated prior to award of contract. However these becomes relevant post contract formation as it affects the claimant’s payment entitlements over construction period, thus the associated payment response. By way of example, suppose the contractor allocates $100,000 under its preliminaries costs for all tower cranes deployed for the construction period. Under the SOP Act, the principal focus is cash flow. In this regard, the issue is how should such $100,000 be paid progressively over the construction period, i.e. project cash flow. During the negotiation on distribution of contract sum in pricing schedule, both parties should agree on the lump sum that will be paid upon mobilisation of such cranes. Thereafter, a comparable amount shall be set aside for its demobilisation cost. The balance shall be paid progressively and in equal tranches over the construction period. These payment distributions agreements are important for clarity in payment response particularly when response amount is lower than claimed amount. An adjudicator should ideally be able to appreciate the respondent’s position without elaborate written submission. 

The other critical issue that is not often discussed is the administration of discounts offered by the tenderer (or awarded contractor) during procurement period. Discounts are not uncommon as part of negotiation but the nature of such discount are rarely negotiated at length. Discounts can generally be administered as a lump sum discount or percentage discount. As regards lump sum discount, it can be administered either by distributing the lump sum across various sections of the pricing schedule evenly or it could be applied per agreed tranches to various progress payments (e.g. a $10,000 discount can be applied by way of $1,000 across ten progress payments). As regards percentage discounts, it can be applied as a percentage to the amount due and payable every month or be distributed into the unit rates of agreed scope of works. When percentage discount is incorporated into unit rates, its effect continues to be applicable when valuing addition or omission in affected scope of works. Whilst these issues appear administrative, it can significantly reduce dispute over payments withheld due to lack of upfront discussion. 

Payment entitlement for direct construction works is arguably less contentious than indirect construction works. The general principle is that payment is made based on work done and such payment entitlements are fairly self evident. Direct construction works usually include physical evidence by way of progress reports which is supported by photographic records. Any claim for payment beyond actual completion of works on site is usually contradicted by contemporaneous programmes which documents actual progress of works. If progress of direct construction works is behind schedule, it will also be glaring when cross comparison is made against the initial S-curve submitted by the contractor which depicts the projected cash flow. These supporting evidence can be included in payment response if and when there are disputes over payment entitlements for direct construction works. Cost of direct construction works require relatively less upfront agreement between the parties as compared to cost of indirect construction works.

Types of Responses Under SOP Regime

The respondent should be aware that under the SOP regime, it has several opportunities to submit a payment response or to vary its previous payment response. Firstly, the respondent has the opportunity to provide its payment response within a maximum of 21 days (usually expressly specified under standard forms of contract) after a payment claim is served, or within 14 days if the contract is silent on the deadline for such payment response. 

Secondly, under Section 12(5)(b) of the SOP Act, the respondent is entitled to provide a payment response during the dispute settlement period, if it had not done so earlier or to vary its previous payment response. Such dispute settlement period refers to the 7-day duration commencing from the due date of payment response where the claimant fails to receive any payment response or disputes the payment response received.

Thirdly, the respondent may submit adjudication response within seven days after being served a copy of claimant’s adjudication application. Although adjudication response is strictly speaking not a payment response, these responses are fairly similar in substance in that these provide reasons for proposing payment less than amount claimed. However the respondent should note that under adjudication response, it may only include objections to amount claimed of any nature only if these were communicated earlier to the claimant. Therefore, the respondent is not at liberty to advance new response amount than what was previously communicated. These rules ensure that disputes or differences between the parties are well crystallised prior to being placed before an adjudicator. If the reasons or objections to claimed amount had already been communicated to the claimant, the adjudication response may include other supplemental documentations that are relevant such as expert reports, photographs, correspondence and submissions. 

Based on the procedural steps set out above, it is clear that the later the respondent decides to include its reasons for withholding payment (i.e. during the stage of adjudication response), the more restrictions are imposed on the respondent. The only exception is that the respondent is able to demonstrate that the new objections only arose after the submission of its earlier payment response or that the new circumstances could not have been reasonably known any earlier. In reality however, the time frames for various responses and associated adjudication applications are fairly short. Therefore the likelihood of making new discovery within a compressed period is relatively low. Even if the respondent fail to include new objections in a particular payment claim, it is at liberty to including the same in the subsequent payment claim or to have the issues properly and finally resolved under arbitration or litigation. In view of this, there is limited utility in expending precious financial resources to legally resisting any decision to exclude new objections. 

Timing of Payment Response In The Absence Of Payment Claim Service Date

It is common for most construction contracts to state the date on which a payment claim must be served. Thereafter the payment response is due 14 days (or maximum of 21 days if otherwise specified) from such date. The payment response deadline is therefore dependent on the payment claim service date. If the contract is silent on the payment claim service date, how does it affect the payment response deadline? By way of illustration, if a contractor decides to serve its payment claim on 5 July 2023 where the contract is silent on payment claim service deadline, is the respondent required to provide its payment response no later than 19 July 2023 (14 days thereafter)? In the case of Hiap Seng Building Construction Pte Ltd v Hock Heng Seng Contractor Pte Ltd [2024] SGHC 50, the court held that in the absence of date of service of payment claim, then any payment claim will be deemed to have been served on the last day of the calendar month in which it was served, regardless of when it was actually served. The court in its deliberation referred to an earlier case of Asia Grand Pte Ltd v A I Associates Pte Ltd [2023] 175 with similar facts where reference was made to amongst others, Sections 10(2)(a)(ii) and 10(3)(b) of the SOP Act as well as Regulations 5(1) and 5(3) of the SOP Regulations. Therefore, if a payment claim that was served on 5 July 2023 would be deemed to have been served on 31 July 2023. Consequently, the payment response is due 14 August 2023, i.e. 14 days after such deemed date.

While the case precedents mentioned above deal with the validity of payment response issued by virtue of timeframe, there are several tangential observations that could be gleaned from these rulings as well. From the respondent’s perspective, there are practical implications arising from the court’s ruling. Apart from removing ambiguity of payment response deadline, this is a helpful feature in the SOP Act that balances the interest of the respondent. This is because not all payment claims are equal in respect of the effort and intensity required to process all issues contained therein. While certain payment claims are more straightforward particularly those served in the beginning of the project, others can be more complex especially if it includes various contentious variation claims that usually arise towards the end of the project. In a hypothetical scenario where a contractor unintentionally delays its claim for such variation items and to only raise these accumulated variation claims under one payment claim, the respondent may be hard pressed to deal with an overwhelming claim within the default 14 days timeframe. If the contract is silent on payment claim service date and such payment claim is served earlier than usual in a calendar month, the payment claim is deemed to be served on the last day of such month thus giving the respondent more time to process such payment claim. It should be noted that under the SOP regime, there are no restrictions in time frame for the claimant to raise it variation claims. Some may choose to raise such variation claims progressively while others with manpower issues may choose to do so at later stage of the project when there are resources available to deal with those claims. Claiming and assessing variation claims can be time consuming since it could involve laborious measurements, collation of substantiating documentations, selection of appropriate valuation methods etc. Therefore the present feature of the SOP Act protects the interest of the respondent in case it receives one contentious payment claim say on 31 January 2025 and the next equally contentious payment claim on 1 February 2025. This is because the latter payment claim is deemed to be served on 28 February 2025 giving the respondent some breathing space. 

Setting Off Adjudicated Amount?

Respondent usually have access to certain contractual security to ensure the claimant’s performance of its obligations under the contract such as performance bond, retention monies etc. In case of default by the claimant, the respondent may utilise these securities to address the costs of such default. By way of example, the respondent may call on the performance bond if the claimant fails to complete the construction works in accordance with the specified standards by utilising the funds guaranteed therein. 

However the respondent should exercise such rights judiciously in view of the SOP Act especially if there is an adjudicated amount determined in favour of the claimant. This is to ensure that the calling on such bond does not negate or undermine the adjudication determination. This happens when there is an adverse determination rendered by the adjudicator on the very issues that led to the calling of bond. Using the same example, if the adjudicator found that the contractor had carried out the construction works in accordance with the specified standards, the respondent therefore is not justified in withholding the associated payment. In this case, if the respondent calls on performance bond on grounds that the very same works were not done in accordance with the standards in issue, it directly undermines the adjudication determination. The respondent’s conduct is therefore unconscionable and in violation of the SOP Act. To be clear, whilst adjudication determination is binding on the parties, it is an interim outcome where the parties are free to have those adjudicated issues be finally resolved under arbitration or litigation as the case may be. However, parties are not at liberty to negate the effects of the adjudication prior to any final resolution of disputes. Any attempt to do so may amount to contracting out of the SOP Act by setting off the adjudicated amount.

In this regard, there are a few provisions in the SOP Act that are of relevance. Firstly, Section 21(1) states that an adjudication determination is binding on the parties unless and until the dispute is finally resolved under a court or arbitration proceedings, disputes were settled by agreement between the parties or the court refused to enforce the adjudication determination. Further, Section 36(1) states that the SOP Act shall have effect despite any contrary contractual provision. Therefore the parties are not able to contract out from the SOP Act. Consequently the effects of SOP Act may override parties’ agreement on any provision of on-demand bond. 

Whilst the effects of the above mentioned provision is not meant to indiscriminately curtail the respondent’s access to security, the respondent have to exercise caution in the manner it chooses to call on the bond. The respondent may still be able to call on performance bonds where the grounds for such action is clearly distinguished from the issues determined by an adjudicator. Therefore, it is in the respondent’s interest to be clear, narrow and specific in any of its reasons for withholding payment, in case the adjudication determination that ensues is not in its favour. Such determination can then be clearly distinguished from other issues that may have led to the calling of bond.

Set Off And Cross Claims In Payment Response

Apart from withholding payment on the basis that the amount claimed is not supported by actual works done on site, the respondent may have further cross claims against the claimant that could set off any amount that may be due and payable. These cross claims may arise due to liquidated damages, cost of engaging third party contractor to rectify defects and cost of completing remaining works etc. However, Section 17(3) of the SOP Act states that in determining an adjudication determination, the adjudicator must disregard any part of a payment response related to damage, loss or expense that is not supported by (a) any document showing agreement between the parties on the quantum of that part of the payment response or (b) any certificate or other document that is required to be issued under the contract. Therefore, not all types of cross claims may be within the purview of the adjudicator unless it fulfils the qualifications included in the said Section 17(3). The main purpose of this section is to ensure parties exclude complex disputes from SOP adjudication regime in order to facilitate swift resolution of disputes. SOP Act is meant to deal with payment claims for work done rather than damages claim. 

It will not be surprising to see that any respondent that believes it has legitimate cross claim may attempt to fulfil the qualifications set out in Section 17(3) stated above either by identifying any document depicting an agreement on such quantum or any certificate or its equivalent issued under the contract. These attempts no doubt may require certain creativity in relation to the way these cross claims are couched or presented. Some may argue that since liquidated damages indicated as $X/day are expressly stipulated under the contract, it should fulfil the qualifications of an “agreement”. However, quantum of liquidated damages are quite different from the rate of liquidated damages. The complexity usually associated with deriving the quantum of liquidated damages is determining the period or duration in which the contractor (or the claimant) is in culpable delay. This is because it may involve issues such as concurrent delay, compliance with condition precedents, delay analysis etc. Even if such cross claim are legitimate, it may not be suitable to be determined within the time frame set out in the SOP regime. However, if the independent certifier (i.e. an Architect or Superintending Officer as the case may be), have performed its assessment and certified such delay including the corresponding liquidated damages amount, then an adjudicator may be able to deal with such cross claims within the statutory time constraints. Therefore, it appears that the respondent should prioritise any relevant certification over its search for “an agreement” in order to better avail itself to the benefits of exceptions set out in Section 17(3).

Conclusion

While it is important for the respondent to appreciate the mechanism under the SOP Act, it also critical to apply commercial sense in the course of asserting its rights under the statutory regime. It is worth reiterating that any adjudication determination, including the favourable ones are interim by nature. If the disputes are so contentious that claimant had to resort to SOP Act, it is perhaps fair to assume that the very same dispute may be reviewed again for final determination in future litigation or arbitration. Therefore, any resources expended under the SOP adjudication could inadvertently provide the claimant with an opportunity to “preview” the respondent’s case. In other words, the respondent should always balance its short term interest with the longer term objectives.




Koon Tak Hong Consulting Private Limited