In Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd  SGHC 72, a clause in the contract provided that one of the consequences of termination was that “[n]o further payment shall be made to the Sub-Contractor until the whole of the Main Contract Works has been completed”. The High Court agreed with both counsels and the adjudicator that such a provision was in effect a “pay when paid” clause. It made the liability to pay money contingent on the completion of the main contract works which the sub-contractor had no control of. It thus made liability to pay money owing “contingent or conditional on the operation of any other contract or agreement”, which is prohibited under Section 9(b) of the Building and Construction Industry Security of Payment Act (SOP Act).
However, this clause only applied if the contract was terminated. It sought to suspend payment to the sub-contractor until the main contract works had been completed. For terminated contracts, Section 4(3)(c) of the SOP Act provided that the SOP Act “shall not apply” to “any terminated contract to the extent that (i) the terminated contract contains provisions relating to termination that permit the respondent to suspend progress payments to the claimant until a date or occurrence of an event specified in the contract; and (ii) that date has not passed or that event has not occurred”.
As the main contractor had already terminated the contract with the sub-contractor, the main contractor therefore argued that based on Section 4(3(c), the SOP Act did not apply. Accordingly, the sub-contractor could not have applied successfully for any adjudication determination against the main contractor.
The High Court disagreed. It held that since the clause amounted to a “pay when paid” clause, it therefore had no effect in the first place. Section 9 therefore trumped Section 4(3)(c) of the SOP Act. Termination and suspension of payment provisions in the contract are to be given effect to only if they do not fall foul of Section 9 of the SOP Act. The sub-contractor was therefore permitted to file an adjudication application under the SOP Act and enforce the determination that it had obtained thereunder.
This decision may need to be re-visited on a subsequent occasion.
Section 4(3)(c) was introduced to avoid the application of the SOP Act if the contract had been terminated and there was a contractual clause providing for suspension of payment. Any such suspension of payment would have to be until the occurrence of an event. Practically, that event would usually be until the completion of the terminated works by other contractors. The purpose of the suspension of payment clause, after all, would be to defer the liability of the employer/main contractor to make payment until the work has been completed and the total costs are known. This would then allow for a reckoning of the final amount due to the contractor whose contract had been terminated, after deducting the cost required for carrying out the works from the time of the termination until completion of the works.
Such an event would therefore in practice invariably be “contingent or conditional on the operation of any other contract” – whether it be the contract for the new contractor to complete the works, or the contract between the certifier and the employer to ascertain the cost of completion.
For example, in the Public Section form (2020) of contract, Clause 31.2 provides for the suspension to be until the Defects Liability Period had expired and the Superintending Officer (SO) had certified the employer’s cost of completion of the works. The Defects Liability Period can only start and expire after a new contractor has taken over the works and completed them. That new contractor’s contract would be “any other contract” under Section 9 of the SOP Act. In the SIA 9th Edition, Clause 32(8)(a) provides for the suspension to be until the Architect issues the Cost of Termination Certificate. The dependence on the SO and the Architect in both these standard forms would mean that payment is dependent on the SO and Architect’s performance of their own contract with the employer – which would qualify as an “other contract” and fall afoul of the “pay when paid” provision at Section 9 of the SOP Act.
Applying Frontbuild Engineering & Construction Pte Ltd v JHJ Construction Pte Ltd may mean that the provisions for suspension of payment in termination clauses in the current standard forms will all need to be re-looked at.