Security of Payments in the Construction Industry: When is the Claim Triggered?
There has been some confusion over the construction of the Building and Construction Industry Security of Payments Act 2004. In the present article, the authors suggest that on a purposive construction of the Act, the statutory intent is that the statutory process is triggered the moment a payment claim is served pursuant to the Act.
Two interesting points on the Building and Construction Industry Security of
Payment Act 2004 (‘Act’) were raised recently in an article (‘the article’)
published in
The Singapore Law Gazette.1
Firstly, it was suggested that the operation of the Act in relation to the terms
for interim payment certification found in most standard forms of building
contract necessarily means that ‘a builder can serve a payment claim [under the
Act] only when an interim certificate of payment is issued under the provisions
of existing standard forms of building contract, that is, when he becomes
entitled to payment’. The second point relates to the question of whether the
adjudicator would be circumscribed by any payment certificate issued by the
certifier in any determination of the progress payment due to the builder. As
the first issue lies at the core of the entire Act, it would be useful to begin
with an examination of the writer’s case for its assertion.
The statement made by the learned writer of the article was set out in the following terms:
The scheme of [the Act] requires a claimant to submit a payment claim as prescribed in order to start the process of adjudication. By s 10(1), ‘a claimant may serve one payment claim in respect of a progress payment’ and by s 2, progress payment is defined as a payment to which a person is entitled. Therefore, it would appear that a builder can serve a payment claim only when an interim certificate of payment is issued under the provisions of the existing standard forms of building contract, that is, when he becomes entitled to payment.2
While it is clear that most construction contracts provide for the issue of an interim payment certificate as a condition for payment, with respect, it is difficult to understand how this could be construed to suggest that the payment certificate also serves as a condition precedent which has to be satisfied before a contractor can submit a payment claim, whether under the Act or otherwise. This construction is all the more difficult to sustain when it is borne in mind that certain standard forms of contract, for example the Public Sector Standard Conditions of Contract, expressly provides for the Contractor to submit a monthly statement which claims ‘the amounts to which the Contractor considers himself to be entitled’3 and, notwithstanding the absence of any express provision requiring a progress payment claim to be made, a progress payment claim is inevitably made as a matter of practice to assist the Architect or Engineer in the payment certification process. It would seem therefore that the learned writer has in this instance mistaken the accrual of the right to make a claim from the accrual of an entitlement to be paid for the sum certified.
This would have been sufficient, in our view, to show that the anxiety canvassed in the article is unnecessary. Nevertheless, it is useful to take this opportunity to consider whether the statutory right to make a claim under the Act could be subordinated to an express contractual requirement of a payment certificate. The analysis must begin with the appreciation that the security of payment regime was introduced to improve the cash-flow position of the parties who undertake construction work (or who supply goods and services in relation to construction work). This underpins what is now accepted by the courts as the purposive approach to statutory construction in order ‘to give effect to the true purpose of legislation’.4 Thus in RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd (2002),5 when commenting on the thrust of the English Housing Grants, Construction and Regeneration Act 1996 (the equivalent of our Act), Ward LJ in the English Court of Appeal considered the policy objectives of the legislature and then described the thrust of the regime as ‘pay now, argue later’. Similarly, this approach was adopted by the New South Wales Supreme Court in determining the province of the New South Wales Building and Construction Industry Security of Payment Act in relation to interim payments: see, for example, Parist Holdings Pty Ltd v WT Partnership Australia Pty Ltd (2003)6 and Paynter Dixon Constructions Pty Ltd v JF & CG Tilston Pty Ltd (2003).7
One
particular mischief which had to be cured by the present legislation concerns
the ease with which a web of conditions precedent to the right to payments could
be randomly drafted into a construction contract. Thus it is common to find in
sub-contracts — and these do not have to be necessarily nominated sub-contracts
— an express term which predicates the amount which the sub-contractor is to be
paid on the amount which has been included for the sub-contractor’s work in the
payment certificate issued to the main contractor under the terms of the main
contract. As most practitioners will readily attest, a main contractor’s
progress claim may be resisted on grounds which have nothing to do with the
sub-contractor’s delivery or satisfactory performance of his part of the works.
Similarly in the case of a main contract where, as noted earlier, it is common
for standard forms of contract to premise the contractor’s entitlement to be
paid on the issue of the payment certificate, the mischief which had to be
addressed by legislation arises from situations where architects and other
certifiers have been known to deliberately hold up certifications or certify
sums which are so low that they must invite serious questions as to the bona
fide character of the underlying valuations. On this point, Duncan Wallace,
unappreciated supporter of the contractors’ lifeline that in order ‘to reinforce
confidence in certification-based systems’, institutions like the SIA would ‘be
well advised to lend their full official support to proceedings for misconduct
against any of their members who can be thought ... to have given way to
improper client pressures or interference’.8
The statutory entitlement to progress payment as found in s 5 of the Act was clearly formulated to redress this imbalance. The section reads:
Any person who has carried out any construction work, or supplied any goods or services, under a contract is entitled to a progress payment.
This provision contemplates only two basic requirements on which the entitlement to make a payment claim under the Act crystallises. The first is that the claimant must have carried out the construction work (or supplied the goods or services) to which the claim relates. Secondly, the carrying out of the construction work or supply of goods or services must arise from a contract as defined in the Act. There is no other qualification. The Act contains other prescriptions relating to the procedure by which a claim may be brought and adjudicated but these have no effect on the basic entitlement to make a claim.
Admittedly, the statutory right to make a payment claim co-exists to some extent with the contractual provisions for progress payment in the underlying contract. However, this notion of co-existence should not be taken too far. It will follow from the purposive construction of the Act that the statutory right to payment and the intent of the Act overrides any contrary provision in the underlying contract which seeks to deny or diminish this right. This intent is articulated in s 36(1) which stipulates that ‘the provisions of this Act shall have effect notwithstanding any provision to the contrary in any contract or agreement’. Sub-section (2)(a) reinforces this position by providing that any provision in the underlying contract which seeks to either ‘exclude, modify, restrict or prejudice the operation of this Act’ is void. The result of both sections 5 and 36 therefore is that the statutory right conferred under the Act is intended to override or negate any contractual restraint which seeks to either negate or diminish the right to progress payment.
Section 5 of the Act was cast in basically similar terms to s 8(1) of the amended New South Wales Building and Construction Industry Security of Payment Act 1999 (‘NSW Act’) in so far as both confer on a claimant who has undertaken construction work or supply related goods and services an unqualified entitlement to progress payment.9 Significantly, the anti-avoidance provisions in s 36(1) and s (2) of the Act and sections 34(1) and (2) of the NSW Act are formulated in almost identical language. Bearing in mind that there are differences elsewhere in the respective legislation, the New South Wales authorities are nonetheless instructive in assisting with the construction of these provisions and, in particular, the issue which is being considered in this comment.
The position which emerges from the New South Wales authorities may be simply stated. A payment certificate under a conventional building contract operates as a condition precedent to a claimant’s entitlement to be paid and this will continue to be relevant in relation to the parties’ rights in the underlying contract. However, its effect on the statutory process introduced by the Security of Payment legislation is subject to the requirement that the certification process like any term in the contract must not be inconsistent with the slated objectives and provisions of the NSW Act. Thus if a contractor makes a claim under the NSW Act it is no answer to say that he is not entitled to make a claim because the architect has not issued an interim certificate. This issue lies at the core of the classic case in Walter Construction Group Ltd v CPL (Surry Hills) Pty Ltd (2003).10 In that case the claimant served a payment claim on 20 December 2002 but the Superintendent (the counterpart of the Architect under the SIA Contract) did not issue a payment certificate in response to the claim until 23 January 2003, some 20 days after the date prescribed under the NSW Act for the issue of the payment schedule (the equivalent of the payment response under the Singapore Act).
Accordingly, it was rejected by the New South Wales Supreme Court as a payment schedule (the equivalent of our payment response) for the purpose of the statutory regime. The court held that the contractor was entitled to proceed on the basis that no payment schedule (response) was in fact issued. In Consolidated Constructions Pty Ltd v Ettamogah Pub (Rouse Hill) Pty Ltd (2004),11 McDougall J of the New South Wales Supreme Court summarised the position of a claim under a security of payment regime when he said that a claimant’s ‘ability to serve a valid payment claim depends on either actual or claimed entitlement’. Hence, notwithstanding that a claimant may not be ‘entitled’ to a progress payment as a matter of law (statute or contract), he may still serve a payment claim and this should be sufficient to trigger the adjudication process provided for under the NSW Act.12
It is necessary now to return to the matter of s 10(2) of the Act which may have led some to construe that the timing of the payment claim may be subject to any condition precedent such as the issue of a payment certificate. If this sub-section is read in the context of what has just been chronicled, it will be clear that the matter regulated here is the timing of the submission of the claim. In essence, the sub-section states that if the underlying contract provides a date by which the payment claim is to be served, then this stipulation shall apply and s 10(2)(b) continues to state that if nothing is specified then the period within which the claim may be made is that as prescribed in the Regulations. There is, however, nothing in this sub-section to suggest that the entitlement to make a payment claim under the Act is to be subject to any provision in the underlying contract. Furthermore, it does not countenance the insertion of an intermediate event upon which a claim can be made. It is one thing to suggest that a payment claim may be made any time within say, seven days, from the end of a calendar month or within seven days from the completion of the first floor of the building. It is another to require that the payment claim can only be made if the architect or superintending officer certifies that the work to which the claim relates has been completed. Such a condition operates to fetter the position of the claimant under the Act and will be clearly prejudicial to the claimant if the architect or engineer is reluctant or unwilling to make the certification. Similarly, any suggestion that the entitlement to make a payment claim only arises upon the issue of a payment certificate must be understood to offend the fundamental position of s 5 of the Act that any person who has undertaken construction work or supply goods or services is entitled to make a progress payment.
There is little, therefore, by way of either the purposive construction of the provisions Act or a consideration of the authorities on the subject to support the proposition that a claimant’s entitlement to progress payment under the Act is conditioned on any certificate. It may be useful to note too that, this particular point has never been raised as a ground for jurisdictional challenge under either the UK Act or the NSW Act where the basic certification machinery in a construction contract in each case has been practiced for a longer period of time than in Singapore. In our view, this principle lies at the core of the regime and it is likely that our courts here will give the same support to this legislative intent as that provided by the courts in the UK and New South Wales.
Turning now to the second point, the writer of the article has sought to justify his view on the basis that the adjudicator is constrained by s 6(a) of the Act in any determination of the progress payment due. The corollary of this argument is that if the contract provides for the amount of progress claim to be certified by the certifier, the adjudicator would be bound to give effect to the provisions of the contract and in the absence of circumstances suggesting lack of good faith on the part of the certifier, to accept the amount certified by the certifier.
As highlighted in another article by one of the present writers,13 this issue has been considered in a NSW decision Abacus Funds Management Ltd v Davenport (2003).14 In that case, a challenge was mounted on the basis that a certain portion of the adjudicator’s award for on-site costs had been certified by the architect and that the adjudicator was bound by the architect’s certification. McDougall J rejected the challenge on the grounds that while the contractual terms provide for the builder to be entitled to be paid amounts certified as progress payments by the architect, the adjudicator was not bound under the NSW Act by the terms of any progress certificate issued.
The Act has anticipated and has pre-empted challenges of this nature by providing expressly in s 17(4) that an adjudicator shall not be bound by any payment response or any assessment in relation to the progress payment that is provided in the contract to be final or binding on the parties. It is unfortunate that the article appears to have glossed over the effect of s 17(4) thereby leaving readers with the impression that certificates currently issued under the existing standard forms of contract would remain immune from review in any adjudication proceedings under the Act.
Wong Meng Meng, SC and Chow Kok Fong
Wong Partnership and Equitas Law Corporation
E-mail: wmm@wongpartnership.com.sg and k.f.chow@equitascorp.com
Endnotes:
1 Philip Chan ‘Brief Update on Construction Law — the Impact of the Security of Payment Act 2004 on the Builder’ The Singapore Law Gazette, February 2005 at page 29.
2 Ibid.
3 Clause 32.1, Public Sector Standard Conditions of Contract (3rd Ed, 2004).
4 Per Lord Griffifths in Pepper v Hart [1993] AC 593 HL at 617. See also the speech by Lord Diplock in Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 at 879 In Singapore this approach was applied by Tay Yong Kwang J in United Engineers (Singapore) Pte Ltd v Lee Lip Hiong and Ors [2004] SGHC 190.
5 [2002] 1 WLR 2344.
6 [2003] NSWSC 365 at para 19.
7 [2003] NSWSC 869 at para 39. A more detailed discussion on this approach to the construction of the Act appears in chapter 2 of a forthcoming book, Chow Kok Fong, Security of Payments and Construction Adjudication (April 2005, LexisNexis).
8 I N Duncan Wallace ‘Statutory Adjudicator or Contractual Certifier?’ (2004) 16 SAcLJ 480 at 487.
9 There are minor differences in the wording of the two provisions but it is considered that these do not affect the point that is being made here.
10 [2003] NSWSC 266, see also Leighton Contractors Pty Ltd v Campbelltown Catholic Club Ltd [2003] NSWSC 1103
11 [2004] NSWSC 110.
12 [2004] NSWSC 110 at para 61.
13 Chow Kok Fong ‘Cash Flow in the Construction Industry — Case for Statutory Intervention (Part I)’ The Singapore Law Gazette, February 2005 at page 17.
14 [2003] NSWSC 1027.