In 2005, the government introduced the Security of Payment Act (SOPA), in a bid to improve cash flow in the construction industry and provide an efficient and low-cost dispute resolution mechanism for payment disputes. This has had significant impacts on construction companies, particularly small and medium-sized companies that need to maintain their cash flow, but may face obstacles in initiating lawsuits to enforce their legal right to payment. The adjudication mechanism provided by SOPA offers a quicker route for companies to claim payment for work done. This article is solely intended for the purposes of providing general information about SOPA and is not to be taken or relied on as any form of professional legal advice.
What is a progress payment?
A progress payment is payment for the carrying out of construction work or the supply of goods and services in relation to construction. Significantly, progress payments can be claimed once the work or service has been done, even if the project as a whole is not yet complete. Thus, one can see progress payments as interim payments made at certain intervals during the project timeline claiming for work done up till that time.
This is in contrast to the clause previously employed in construction contracts known as the “pay when paid” clause. This clause stipulated that payment could be made by X to Y only when X had been paid by a third party. In other words, payment to Y depended on payment to X having been made. This made things difficult for Y because it was unable to claim payment unless X had been paid, an event which was often beyond Y’s control. Under SOPA, such clauses are unenforceable – even if they are included in the contract as they are inconsistent with the SOPA regime.
Who does SOPA apply to?
SOPA includes a detailed definition of its scope of application. In brief, however, there are two main conditions that must be fulfilled for SOPA to apply.
First, the payment must be for a certain type of work, good, or service. Essentially, the work, good or service must be related to construction. In this respect, there are three possible categories that the work, good or service can fall into:
- Construction work: This means any work done on buildings, structures or works that form or will form part of the land. This includes construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling.
- Goods: This refers to goods that are used in relation to construction work as defined above. This includes materials or components that form part of the building, structure or works, or any plant or materials used in connection with the construction work.
- Services: This refers to any services rendered in relation to construction work. For example, the conduct of feasibility studies, site supervision services, professional engineering services, or the provision of labour to carry out construction work.
Second, the contract under which the payment is claimed must meet three conditions:
- It must be made in writing;
- it must be concluded after 1 October 2005; and
- it must relate to construction work carried out within Singapore.
Notably, the requirement that the contract be in writing is more flexible than it sounds. This requirement is fulfilled as long as:
- The contract is in writing but not signed;
- the contract is made by an exchange of communications which were in writing (e.g. emails);
- the contract was not in writing but it was recorded by one of the parties to the contract; or
- the contract was not in writing but the parties agreed by reference to terms which were in writing.
How much can I claim under SOPA?
As mentioned above, SOPA gives one the right to claim progress payments. At this juncture, it is useful to note that full payment outstanding at the end of a project can be claimed under SOPA too. The amount of the payment, however, can be calculated in two ways.
The default method is to calculate the amount based on what the contract stipulates. Where the contract does not contain such stipulation, the next method is to calculate the amount based on the value of the construction work or the goods or services supplied. This, in turn, is determined based on several factors, including:
- The terms of the contract, including the contract price, any other rate or price specified in the contract, and any variation agreed to by the parties regarding these
- The prevailing market rate or price at the time the construction work was carried out or the goods or services supplied
- Whether the construction work, goods or services are defective, and how much it costs to rectify the defect
How do I make a claim under SOPA?
This article will aim to provide a brief outline of how to make under SOPA. There are 6 important steps in this process.
#1 Claimant serves payment claim
First, the Claimant must serve a payment claim once the payment becomes due. The time by which the payment claim must be served depends on whether the contract stipulates such a time. If not, the payment claim must be made by the end of each month starting from the when the contract was entered into. (For eg: if the contract is made on 27 August 2018, then the Payment claim must be served by 26 of January 2017, assuming the project continues till then).
There are several prescribed requirements that the payment claim should adhere to. Specifically, it must:
- Be in writing
- Identify the contract to which the progress payment relates
- State the reference period to which the progress payment relates
- Contain the relevant details of the claimed amount, including a breakdown of the items constituting the amount, a description of these items, the quantity of each item, and the calculations that show how the claimed amount is derived.
#2 Respondent has not made a payment response, or has challenged the amount claimed
Second, the time by which the Respondent has to respond to the payment claim depends on (i) the type of contract and (ii) whether the contract has provided for the date of payment response.
| Situation | When payment response becomes due |
|---|---|
| Construction contract provides for due date for payment response | The date stipulated in the contract, or 21 days after the payment claim is served, whichever is earlier |
| Construction contract does not provide for due date for payment response | 7 days after the payment claim is served |
| Supply contract provides for due date for payment response | The date stipulated in the contract OR 60 days after the relevant payment claim is served, whichever is earlier |
| Supply contract does not provide for due date for payment response | 30 days after the relevant payment claim is served |
There are also several prescribed requirements which a payment response should adhere to. Specifically, it should:
- Be in writing
- Be addressed to the Claimant
- Identify the payment claim to which it relates
- State the payment amount (if any), or state “nil” if the Respondent does not propose to pay any part of the claimed amount and the reasons why
- Where the Respondent intends to pay less than the claimed amount, state the amount proposed to be paid instead, as well as the calculations and reason for this amount
It must be noted that a payment response must have a level of particularity sufficient to describe to the parties of the real issues in the dispute. It is not enough to provide a bare assertion of disagreement with a claim. It is thus important for the Respondent to state a response amount, even if it is unable to arrive at a very precise amount, to preserve its rights to assert their reasons for deducting or withholding any payment in relation to the payment claim. The Respondent cannot decide not to respond to the payment claim even if it verily believes that the payment claim is invalid.
#3 Claimant makes adjudication application
A Claimant may make an adjudication application:
- Where the Respondent fails to provide a payment response in time;
- Where the Claimant disputes the payment response; or
- Where the Respondent fails to make payment by the due date even though the Respondent had accepted in the payment response that the Claimant was entitled to a certain amount
Notably, with regard to construction contracts, the Claimant is only allowed to make an adjudication application 7 days after the date the payment response is required to be provided by the Respondent. This is known as the “dispute settlement period”, which gives the parties an opportunity to settle the dispute amicably and expeditiously. The dispute settlement period allows the Respondent to seek clarification from the Claimant on the matters relating to the payment claim or where it has failed to provide a payment response earlier, to do so before the expiry of the dispute resolution period.
After the expiry of the dispute resolution period, the Claimant should serve on the Respondent the notice of intention to commence Adjudication. This notice must be served before commencing the adjudication application.
There are several prescribed requirements for the adjudication application. Specifically, the application must:
- Be made in writing
- Contain any information or be accompanied by the relevant prescribed documents
- Be accompanied by the relevant application fee
- Contain or be accompanied by other information or documents (e.g. expert reports, photographs, correspondences and submissions) that are relevant to the application.
The adjudication application must be lodged with the Singapore Mediation Center within 7 days after the expiry of the dispute settlement period.
Following the lodgment of the adjudication application, the Singapore Mediation Center will serve the adjudication application on the Respondent, and other interested parties.
Upon receipt of the adjudication application, the Respondent must lodge an adjudication response with SMC within 7 days. This is essentially a response to the adjudication application, and must contain, inter alia, the following:-
- contain details of the response amount;
- where the Respondent intends to supplement the relevant payment response, contain the additional computations and justifications.
#4 Adjudicator decides the dispute
After 7 days from the Respondent’s receipt of the notice, the adjudication will commence. The Adjudicator has extensive powers in the conduct of the adjudication to make sure that it is both efficient and fair. The Adjudicator is required to make a decision within 2 weeks after the commencement of the adjudication, or any other time that both the Claimant and Respondent have agreed to. If the Respondent fails to submit a payment response and lodge an adjudication response, the adjudicator shall determine the adjudication application within seven (7) days. Specifically, the Adjudicator will determine:
- The amount (if any) to be paid by the Respondent to the Claimant;
- The date on which the amount becomes payable;
- The interest payable on the amount; and
- The proportion of the costs of adjudication payable by each party to the adjudication
#5 Review of Adjudicator’s decision
If the Respondent is aggrieved by the Adjudication determination, it may lodge an application for a review of the Adjudicator’s decision. This only applies where the amount decided by the Adjudicator exceeds the response amount by $100,000 or more. Moreover, the Respondent may not lodge an application for review unless he has paid the amount to the Claimant.
The review will be heard by a Review Adjudicator or by a panel of Review Adjudicators as confirmed by the BCA. The review will be determined within 14 days after the commencement of the review, or any longer period requested by the Review Adjudicator if both the Claimant and Respondent agree.
It is important to note that any determination made upon review is binding on both the Claimant and Respondent, unless:
- The court does not grant leave to enforce the adjudication (see below);
- The dispute is finally determined by a court or tribunal or at any other dispute resolution proceeding; or
- The dispute is settled by agreement of the parties.
#6 Enforcement of Adjudicator’s decision
Finally, once the decision is made, and the Respondent does not comply, the Claimant may adopt the following enforcement measures:
- Apply for the court’s leave to enforce the adjudication as though it were a judgment debt
- Seek direct payment from the principal of the Respondent
- Impose a lien on the goods supplied by the Claimant to the Respondent which are unfixed and which have not been paid for
- Suspend the carrying out of construction work or supply of goods or services under the contract.
General points to note in respect of SOPA:
- Timelines are strict. This is of benefit to the Claimant. Once a payment claim is served on the Respondent, the Respondent has to respond within the prescribed time, or else, the Respondent would have jeopardized its rights to assert its claims or counterclaims or reasons for withholding or deducting payments at the Adjudication response stage. This is unlike a letter of demand where if the other party fails to provide a response, the Claimant would have to commence a suit and the other party (now the Defendant) is not precluded from raising a defence or counterclaim.
- The process is quick. The Claimant, if successful, need not wait for too long before it obtains payment. A court action would take longer to resolve and would ordinarily be costlier.
- For very large and very complex construction claims, SOPA’s tight timelines would not be desirable as there may be a need to go into an extensive study of the issues and the claims. Court action or arbitration is preferred.
- Due to the tight timelines and the consequences for failing to adhere to these timelines, the Adjudication under the SOPA may seem harsh for the Respondent. However, the adjudication only has “temporary finality”, ie, finality until the dispute is “reopened at a later time and ventilated in another more thorough and deliberate forum” such as the Courts or at Arbitration.
Have a question about SOPA?
If you have any questions regarding SOPA, you can get a Quick Consult with Srijit Jeshua or with other lawyers. With Quick Consult, from a transparent, flat fee from S$49, the lawyers will call you back on the phone within 1-2 days to answer your questions and give you legal advice.
This article is written by Srijit Jeshua from Netto & Magin LLC and edited by Rishika Pundrik of Asia Law Network.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.