Building and Construction Industry Security of Payment (Amendment) Bill

Order for Second Reading read.

4.25 pm

The Minister of State for National Development (Mr Zaqy Mohamad) (for the Minister for National Development): Mr Deputy Speaker, on behalf of the Minister for National Development, I beg to move, “That the Bill be now read a Second time.”

The Building and Construction Industry Security of Payment Act, or SOP Act in short, was introduced in 2005 to facilitate cash flow in the construction industry. The SOP Act introduced a fast and low-cost adjudication mechanism to deal with payment disputes.

For a typical construction project, the developer pays the main contractor, who in turn pays its sub-contractors or suppliers. As a construction project can take several years to complete, progress payments are made periodically throughout the project duration. Parties along the value chain often fund their own work first, and collect payment thereafter. So, it is critical that parties are paid in a timely manner for work done or goods supplied.

The Act has served the industry well. When the Act was first introduced, the industry was unfamiliar with how the adjudication process could assist them. Over the years, industry players are now more aware that adjudication is an effective mechanism to resolve payment disputes quickly, as compared to arbitration or litigation which can be lengthy and expensive.

In the initial years of administering the Act, there were less than 100 applications per year. This has now increased to more than 400 applications per year since 2014. We are happy to see that the industry is increasingly using the Act to resolve their payment issues. As of mid-2018, the adjudication process has facilitated payments of over $940 million.

However, from time to time, there have been calls by stakeholder groups to amend the SOP Act to enhance the effectiveness of the Act in facilitating cash flow. So, we initiated a review of the SOP Act and have consulted stakeholders extensively over the last five years.

In all, BCA conducted four rounds of industry consultations and six focus group discussions with stakeholders including developers, architects, engineers, main contractors, sub-contractors, suppliers, adjudicators, and the Singapore Mediation Centre which administers the adjudication process.

However, different stakeholders may have different views and perspectives. For example, the Singapore Academy of Law (SAL) Law Reform Committee published a list of proposed amendments to the SOP Act in September 2015. The Committee raised concerns that the current approach of allowing a limitation period of six years for claimants to submit a claim for work done was too long. In this regard, it suggested reducing the limitation period from six years to one year so that respondents would not have to manage claims for an unreasonably long period after works have been completed.

But the feedback from the industry was that one year would be too short as settlement of final payments for the projects tended to take much longer. Finally, we landed on a limitation period of 2.5 years or 30 months. This is a reasonable period taking into account the time to settle final payment claims and the defects liability period, which typically ranges from 12 to 18 months.

This illustrates the approach that we have taken in coming up with the amendments that are before the House today. We have considered and incorporated feedback from stakeholders into our amendments where possible. In doing so, we have tried to strike a balance between the interests of the varied stakeholders while ensuring that the amendments enhance the effectiveness of the adjudication mechanism as a low-cost and speedy dispute resolution mechanism for the construction industry.

Broadly speaking, the amendments focus on three areas: first, expanding and clarifying the scope of the application of the Act. Second, handling of payment claims and responses. And third, enhancing the adjudication processes. Sir, let me go through some of the key features of the Bill.

First, we are proposing amendments that will expand the scope for more contracts to be applicable under the Act. Singapore has been making a big push to raise productivity and quality in the built environment. The Construction Industry Transformation Map (ITM) launched in October last year set out the strategies to help our construction industry move up the value chain and capture growth opportunities in Singapore and abroad. The scope of the SOP Act will be amended to support the Construction ITM.

Clause 3 will allow prefabrication works done overseas for local projects to be covered by the SOP Act. This is an important inclusion as our ITM envisages that by 2020, up to 40% of Singapore projects would incorporate productive construction technologies, and some of these may be sourced from overseas by Singapore builders.

Internationalisation is also a key thrust of our construction ITM. Given our small domestic market, firms will need to venture overseas in order to grow in size. So, clause 3 will also cover prefabrication works that are carried out locally for projects overseas. The coverage for local prefabrication works for export will only be applicable when both contract parties are locally registered entities. This will facilitate the enforcement of the adjudication determination in Singapore.

Another amendment, also at clause 3, will make clear that claims for work done or goods supplied before contract termination are valid. This is to address any ambiguity on the point as to whether claimants can apply for adjudication upon contract termination.

That said, we understand that it is common industry practice for contract terms to suspend payment until a later date if a contractor has defaulted, leading to the termination of the contract. When this happens, the SOP Act will pay heed to terms pre-agreed by parties. As such, clause 3 will require adjudicators to respect the contract clauses on suspension of payment for terminated contracts. This means that claimants that have defaulted on the contract will need to abide by contract terms, and they will be able to submit a payment claim under the SOP Act only after the conditions in the contract have been met.

Another issue that this Bill will address is the lengthening of the adjudication process due to submission of complex claims. We have observed that some claimants have started to include complicated prolongation costs, damages, losses or expenses when applying for adjudication.

This goes beyond the original scope of the SOP Act, which is intended to cover claims for work done or goods and services supplied. For example, one adjudication case took 129 days as the adjudicator needed more time to go through the claims for prolongation costs, which made up 70% of the total claimed amount. In contrast, a typical adjudication case takes only about 21 to 28 days from application to payment.

So, clauses 11 and 14 will make clear that adjudicators are to consider claims on damages, losses, and expenses only when the claim is supported by documents showing the parties' agreement on the quantum of the claim, or a certificate or document that is required to be issued under the contract. Parties that wish to dispute on complex claims should consider other avenues, such as arbitration or litigation.

The second set of amendments will deal with the handling of payment claims and responses.

Currently, the Act requires claimants to serve payment claims according to the contract terms. Typically, a contract will stipulate a specific date or fixed period for payment claims to be served so that employers can better manage payment claims from multiple sub-contractors. However, there have been past cases where claimants unintentionally serve their claims on the wrong date.

This technically invalidates the payment claim during adjudication. Such issues have also been raised before the Courts, leading to payment delays. To address this, clause 5 will provide that the payment claim will be valid even if it is served before the date or the period specified in the contract.

In such cases, the payment claim will be deemed as served on the contract specified date or on the last day of the fixed period. To illustrate, if a contract specifies that the payment claim must be made on the 29th of the month, the payment claim will still be valid if the claimant serves it before the 29th of the month. However, the respondent's deadline for payment response will only start running from the 29th of the month. If the claimant serves a payment claim on the 30th of the month instead of 29th, his claim will be treated as being served in the next month.

We have also heard feedback from the industry stakeholders on the need for the Act to clarify the status of repeat payment claims. Clause 5 will clarify that claimants are allowed to repeat a payment claim even without additional work done or goods or services supplied. This will preserve claimants' entitlement to seek payment through adjudication so long as the payment claim is served within the limitation period, is unpaid, and has not been adjudicated upon its merits.

The third set of amendments deals with changes to the adjudication process. Currently, the SOP Act only allows for respondents to apply for adjudication review if they disagree with the adjudication determination and wish to have it reconsidered. The Singapore Academy of Law committee had proposed that claimants should also be eligible for adjudication review. This ensures parity between claimants and respondents.

So, clauses 12, 15 and 16 will allow claimants to also apply for adjudication review. With the amendment, it is possible to have a scenario where both the respondent and the claimant are entitled to adjudication review. If both parties submit a review application arising from the same determination, only one adjudication review will be conducted. Regardless of the party that initiated the review, the appointed review adjudicators will consider submissions from both parties in arriving at an assessment.

We are also updating the SOP Act to align it with Court decisions that were based on provisions in the Act. For example, there have been cases where claimants have made administrative errors in their adjudication applications, such as failing to provide an extract of the contract which was relevant to the payment claim when applying for adjudication.

However, the Court noted that the failure to submit such an extract did not prejudice the respondent, and should not invalidate the application. So, clause 10 will empower adjudicators to accept an adjudication application that lacks certain information or documents prescribed in regulations, if the adjudicator is satisfied that the respondent is not materially prejudiced.

I will share another example where we have taken in the judgements from the Courts in our amendments. The SOP Act is meant to facilitate timely payment to claimants. At the same time, the Act gives respondents the opportunity to raise objections to justify non-payment to claimants.

Currently, the Act only states that the respondents cannot raise objections for withholding payment in the adjudication stage if these objections were not flagged earlier in the payment response stage. However, we are concerned that payment to claimants would be delayed in the event that respondents raise objections late in the adjudication process.

To that end, clauses 9, 11, 14 and 17 will make clear that any belated objections by respondents will be disregarded by adjudicators or the Courts, unless respondents can prove that their objections could not have been made known earlier. This is in line with comments made by the Courts in recent decisions, and will also advance the intent of the Act to facilitate speedy dispute resolution.

Respondents that are affected by this amendment can still seek recourse through other channels like arbitration or litigation after paying the adjudicated amount.

We will also be making changes to improve the operation of the Act. Currently, the interest rate for late payment is often based on the interest rate stipulated in the contract. We have received feedback that interest rates set out in contracts can be as low as 1%, as sub-contractors may have less bargaining power in setting the rates.

Such a low interest rate is ineffective in deterring late payments. So, clause 4 will set a minimum interest rate based on the rate specified under the Supreme Court of Judicature Act, which currently stands at 5.33%. A higher interest rate will be used if it is stipulated in the parties' contract terms. This amendment will encourage respondents to pay claimants on time. This amendment will also bring our SOP regime in line with practices in other jurisdictions such as New South Wales and Queensland.

Finally, we want to set out clearly the grounds under which an adjudication determination may be set aside by the Courts. This will allow parties to be more mindful about the dos and don'ts when preparing payment claims, adjudication applications and the relevant responses. In this regard, clause 17 will specify a non-exhaustive list of grounds on which parties can commence proceedings to set aside the adjudication determination.

These grounds are consistent with those that have been developed by the Courts over time. For example, if a claimant repeats a claim that is subsequently found to have already been adjudicated on its merits, the determination for the repeated claim may be set aside. The intention is to stipulate a non-exhaustive list, so the Act will not bar the development of case law.

Sir, when the SOP Act was first introduced, the intent was to preserve the rights to payment for construction companies. This remains the principle that underpins the amendments we are introducing today. With these amendments, we believe that the Act will continue to ensure prompt payment practices in our construction industry, and also put our firms in a better position to thrive in both domestic and overseas markets. Mr Deputy Speaker, I beg to move.

Question proposed.

4.38 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, I stand in support of this Bill, which refines the framework for efficient and low-cost adjudication of payment disputes in the construction industry.

I would first like to commend BCA on the public consultation that it conducted in June 2018 on the proposed amendments. Following the consultation, BCA provided responses to key feedback received and refined some proposed amendments after hearing the public's suggestions. I am heartened by BCA's engagement with the public in crafting this Bill and believe that the process has resulted in a stronger piece of legislation.

I have just three clarifications on the proposed amendments.

Firstly, the new sections 19(1A) and (1B) clarify that the adjudication review starts anew if all new review adjudicators are replaced.

During the public consultation, it was suggested that the adjudication review start afresh when majority of the panel of review adjudicators is replaced. BCA responded that if the replacement adjudicators need more time to bring themselves up to speed, the review adjudicators can seek an extension of time subject to the consent of both the claimant and the respondent. If parties can consent to extending time to allow review adjudicators to be brought up to speed, why not also allow parties to consent to having the review start afresh?

Next, the new section 19(5A) clarifies that adjudicators can only consider damage, loss or expense items which are supported by documents showing agreement between parties on the amount or a certificate certifying the claim issued under the contract.

BCA had stated that this keeps adjudication speedy and low cost by removing the need for adjudicators to consider complex loss and expenses claims. The Small Claims Tribunal has jurisdiction to hear a tort for damage caused to property, which includes claims for losses or expenses incurred by owners of property as a result of careless, reckless or improper acts by others. There is no requirement that the claims for losses or expenses be support by written agreement on the amount. It is also able to hear claims arising from oral agreements.

The SCT is similarly intended to provide an efficient and inexpensive channel to resolve consumer-supplier disputes. The power of the SCT to consider losses or expenses claims in the absence of clear documentation does not seem to impede the expediency of the tribunal. As such, can Ministry of Finance clarify why loss and expenses claim should be beyond the power of adjudicators to assess?

If these claims cannot be resolved by the adjudication process, parties have to resort to arbitration or litigation, as Ministry of Finance has stated. As pointed out by BCA, these matters are slightly more complicated which will incur even greater costs for parties if they have to adjudicate or litigate these claims. These are precisely the cases that require a simpler and cheaper dispute resolution process. It would be more efficient for all heads of claim relating to the same dispute to be heard by a single body.

Lastly, the new section 19(6A) clarifies that a respondent setting aside the adjudication determination can only raise a fresh objection to the payment claim if: one, new circumstances had arisen; two, the objections could not have been made earlier because the respondent could not have known of these reasons; or three there was a patent error.

While the second limb implies that there should be no fault on the part of the respondent in failing to raise the objections earlier because they could not have known of these reasons, the first limb is not clear on the element of the respondent's fault. Can MOF clarify whether section 19(6A)(a) requires that the new circumstances arose out of no fault of the respondent?

Sir, clarifications notwithstanding, I stand in support of the Bill.

4.42 pm

Mr Gan Thiam Poh (Ang Mo Kio): Deputy Speaker, Sir, I welcome the amendments which will help the subcontractors enhance their cash flow and minimise losses. However, many subcontractors had told me that they are likely to continue to suffer in silence and resort to the law only as a last resort as they are afraid to lose jobs from main contractors.

The amendments had taken the uneven balance of negotiating power between main contractors and subcontractors into account. I appeal to the Ministry and relevant Government agencies to consider extending advisory assistance to our subcontractors and guide them with familiarising themselves on their rights and deserved payments. They should and can work with the Government agencies to minimise their losses and avoid worsening their cash flow crunch and falling into financial difficulty.

The construction industry suffers from many problems and disputes. This Bill seeks a fairer allocation of risks to subcontractors and easier settlement of payment disputes. This is because in reality, there are many complex underlying issues which have been unresolved.

Besides unrealistic contract periods and tight manpower resources which have very serious safety implications, both during the process of construction and in the distant future, the parties involved pass the buck in pushing responsibilities for defects and payments.

One common example is the deliberate delay in payment by the owner and main contractor. To make the situation worse, the funds received by the main contractor for specific work done are diverted for other uses instead of paying the subcontractors. Some projects were tendered at a loss due to miscalculations. Others were tendered at unrealistic fees because the main contractors just wanted incoming funds to stay afloat for as long as possible. Occasionally, the owner runs into financial difficulty halfway through the construction.

Hence, I strongly urge the Ministry to further strengthen regulations to ensure that the funds for a specific project are not allowed to be diverted for other uses. I support the Bill.

4.45 pm

Mr Deputy Speaker: Minister of State for National Development.

Mr Zaqy Mohamad: Mr Deputy Speaker, Sir, I thank the Members for their comments and their support for the Bill. Let me address the issues raised.

Mr Louis Ng asked whether it is possible to allow parties to consent to starting the review afresh when a majority of the review adjudicators has been replaced, or in other words, when two out of three adjudicators on the panel have been replaced.

Presently, the Act does not set out the processes following the replacement of adjudicators. The amendments before the House provide clarity in situations where any of the review adjudicators are replaced. The intent is to ensure that the adjudication proceedings are not unduly delayed. In situations where the majority of review adjudicators are replaced, the remaining adjudicator that was involved from the onset can apprise the new adjudicators of the case, and there would be no need to start the adjudication review afresh.

Should a longer period be needed to make a determination, the review adjudicators may seek an extension of time subject to the consent of both the claimant and respondent, as Mr Ng has rightly pointed out. The review adjudicators are best placed to decide on the period of extension required, depending on the needs of the case. This is, in fact, more flexible than starting the review afresh, as the extension could be shorter than 14 days, which is the default period should a review be started afresh. This would avoid unduly delaying payment to the claimant.

I would also like to highlight that the appointment of a panel of review adjudicators is not common. This happens only when the adjudicated amount exceeds the response amount by $1 million or more. As such, we note that there have only been 15 such appointments since the introduction of the SOP Act in 2005. This is less than 1% of all adjudication cases.

Mr Ng also noted that the Small Claims Tribunal has jurisdiction to hear claims on damage, loss and expense that are not supported by written document, and asked why adjudicators must disregard such claims under the SOP Act. As mentioned in my earlier speech, this restriction is to reduce delays in the adjudication process. For example, we have seen delays of up to 129 days due to the inclusion of such claims. Allowing such claims to be heard under the SOP Act clearly goes against the intent of the SOP Act to provide speedy dispute resolution and facilitate cash flow.

There are also several key differences between claims under the Small Claims Tribunal Act and the SOP Act. The quantum and corresponding complexity of the claims under both Acts are quite different. For instance, the claim limit for disputes brought to the Small Claims Tribunal is $10,000, or $20,000 if all parties consent. When the Small Claims Tribunal (Amendment) Act 2018 comes into operation, the claim limit will be $20,000, or $30,000 if all parties consent.

But there is no limit on the claim amount under the SOP Act. It is not uncommon for damage, loss and expense in a construction contract to exceed millions of dollars. Adjudicators under the SOP Act are also required to meet statutory timelines and complete their determinations within set timelines. In this regard, it is reasonable for such complex claims to be dealt with outside the ambit of the SOP Act.

Mr Ng asked to clarify if the objections raised by respondents to a payment claim based on new circumstances must arise out of no fault of the respondents. The policy objective is indeed so.

The purpose of the amendment is to encourage respondents to raise any objections to payment claims at the earliest opportunity to facilitate the fast resolution of payment disputes between the parties. Thus, belated objections from respondents must not be within the respondent’s knowledge or control.

For example, if an adjudicator considers a claim for damage, loss or expense that is not supported by any document showing agreement of the parties, the adjudicator has failed to comply with the provisions of the Act in making the adjudication determination. In such an event, it would be considered a new circumstance beyond the respondent’s control, and he could raise this as a valid objection in a review adjudication or an application to court for setting aside.

Mr Gan Thiam Poh has rightly pointed out that parties further upstream in the construction value chain typically have more bargaining power in negotiating contracts with their sub-contractors. In this regard, the sub-contractors may prefer more amicable settlement of disputes before resorting to adjudication, arbitration or litigation.

While the SOP Act cannot change such dynamics entirely, it has been useful in facilitating cash flow in the industry. By upholding the rights of parties in the industry to seek payment for work done or goods supplied, the Act has helped deter parties from delaying or withholding payment without valid reasons. But in order for this to be effective, claimants need to exercise their rights and apply for adjudication when required.

Mr Gan has also suggested for the Government to extend advisory assistance and to raise awareness amongst sub-contractors on their rights to payment. On this note, BCA will be enhancing the current guide on the SOP Act on its website to make it easier for contractors to understand. BCA will also work closely with industry associations to provide firms with information on how adjudication can be used as an effective means to settle payment disputes. In addition, BCA will also conduct briefings to familiarise the industry with the amendments that are before the House today.

Mr Gan has also suggested to put in place measures to prevent funds meant for a construction project from being diverted for other uses. We have examined this issue as part of the review. One possible approach would have been to require the developer of a project to make payments into a project bank account, which parties can then draw down from for work done or goods supplied to the project.

One example is Queensland. In October last year, Queensland amended its equivalent of the SOP Act to require head contractors to establish project bank accounts for government building projects worth between $1 million and $10 million.

As such a move would affect many industry stakeholders and increase the administrative burden on companies, we will take more time to carefully study this approach, and to monitor the effectiveness of Queensland’s model before deciding on the next steps. We will consult the industry when ready.

Sir, let me conclude by thanking Mr Louis Ng and Mr Gan Thiam Poh again for their thoughtful suggestions, and their support for this Bill. By taking on feedback and views from the industry players, the revised SOP Act should help to create a more conducive operating environment for all parties in the construction industry.

With that, Mr Deputy Speaker, Sir, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Zaqy Mohamad].

Bill considered in Committee; reported without amendment; read a Third time and passed.