Second Reading Speech by MOS Zaqy Mohamad on the Building and Construction Industry Security of Payment (Amendment) Bill

Tuesday, 2 October 2018

Mr Speaker, on behalf of the Minister for National Development, I beg to move, “That the Bill be now read a Second time.”

Overview

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 6 years for claimants to submit a claim for work done was too long. In this regard, it suggested reducing the limitation period from 6 years to just 1 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 1 year would be too short as settlement of payments for the projects tended to take 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.

Expanding and clarifying the scope for application of the Act

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 suppliers 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 contracting 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 the 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.

Handling of payment claims and responses

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 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 that 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 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. 

Revisions to adjudication processes

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 the 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 claimant be 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 the 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.

Other changes

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 do’s 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. 

Conclusion

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 Speaker, I beg to move.