By Luis Duhart
Construction projects are a ripe ground for disputes. When these disputes arise, they often threaten to bring the project itself to a halt if not resolved expeditiously. However, many large-scale construction projects (particularly international ones) provide for their disputes to be referred to arbitration.
In such a case downstream contractors are often disadvantaged as prompt payment of their claims creates the necessary cash flow for them to even continue work. If these claims need to be referred to arbitration, the subcontractor must bear the burden of non-payment until the dispute is resolved some months or years later, and often too late.
In response to this situation, the UK, Australia, and Singapore have implemented a separate dispute-resolution scheme known as adjudication. In Singapore, this scheme exists under the Building and Construction Industry (Security of Payments) Act 2004, (the “SOPA”). While this article will discuss the Singapore SOPA, the key features and motivations behind the regimes are largely similar.
Under the SOPA regime, there is a prescribed form and timing for a subcontractor to bring an upstream claim once a month. If this claim is not satisfied, the SOPA provides for a referral to adjudication. The right to adjudicate is a statutory right and may not be excluded by contract.
Key Features of Adjudication
For ease of reference, we refer to the upstream contractor (or developer) as the “Main Contractor”, and the downstream contractor as the “Subcontractor”.
One of the key features of the SOPA regime is the shortness of its timelines. These are as follows:
|1.||Subcontractor serves payment claim||by the last day of any month (unless otherwise agreed)|
|2.||Main Contractor serves payment response setting out all reasons for refusing Subcontractor’s Claim, including any counterclaim
|14 days after payment claim is served (may be contractually extended to 21 days)||2 weeks|
|3.||Dispute resolution period||7 days after payment response is due||3 weeks|
|4.||Subcontractor may file an Adjudication Application||Within 7 days from end of dispute resolution period||4 weeks|
|5.||Adjudication Response||Within 7 days from service of Adjudication Application||5 weeks|
|6.||Adjudicator Appointed by Singapore Mediation Centre||Within 7 days from filing of Adjudication Application||5 weeks|
|7.||Adjudicator’s Determination||Between 7-14 days after Adjudication Response is due (unless otherwise agreed)||6-7 weeks|
Under the SOPA, a typical dispute should be resolved within 6-7 weeks from the Subcontractor’s request for payment. Parties who are dissatisfied by the Adjudication Determination may usually (subject to the quantum of the claim) also seek a review of the Adjudication Determination, which would typically add another 3 weeks to the process. Thereafter, the parties may still apply to the High Court to set aside any Adjudication Determination (on limited procedural grounds)
Importantly however, the losing party must pay any sums due under an Adjudication Determination in full (to be held by the Court or to the Singapore Mediation Centre) as a condition precedent to adjudication review or setting aside proceedings. This filters out unmeritorious challenges to Adjudication Determinations.
In addition to truncated timelines, the SOPA regime ensures strict compliance. For example, non-compliance with the due date for a payment claim, or for the filing of the Adjudication Application, would render any adjudication improperly commenced, depriving the adjudicator of jurisdiction.
Similarly, a Main Contractor may not raise arguments in its Adjudication Response which it did not raise in its payment claim. As such, failure to issue a payment response on time (or failure to raise all relevant issues in a payment response) can leave a Main Contractor unable to advance a positive case in the ensuing adjudication.
Prima Facie Standard of Proof and Limitation of Claims
Given the limited time available to adjudicators, parties to SOPA proceedings must only prove their respective claims (or counterclaims, if any) to a prima facie standard of proof. That being said, parties would still need to show some evidence to assert that they have completed the work they are claiming for.
To counterbalance the above, the SOPA regime limits the nature of claims which may be adjudicated. Critically, any claims relating to “damage, loss or expense” must be precluded unless the quantum of the claim is agreed between the parties, or where a contract provides for the issuance of a certificate for such works, and such a certificate has been issued.
As such, complex claims for delay, disruption, or breaches of contract (often in the form of backcharges by a Main Contractor) are generally precluded from adjudication proceedings. Instead, the purpose of the SOPA scheme is to ensure prompt payment of work done.
Interim Finality and Enforceability
Given the relatively roughhewn nature of adjudication proceedings, Adjudication Determinations are only given interim finality. This means that all issues addressed in adjudication proceedings may be re-opened during later proceedings (often, after the project has been completed). Adjudication Determinations may also be set aside by the High Court on procedural grounds.
However, unless and until the issues are re-opened in subsequent proceedings, the Adjudication Determination is (with the Court’s leave) enforceable as a judgment or order of court. If an Adjudication Determination is unpaid, the Subcontractor also has a statutory lien over goods supplied, a statutory right to suspend work, and a right to seek direct payment from the project owner.
Capped Fees + Costs
Finally, the costs of SOPA proceedings are far more circumscribed than in arbitration or court proceedings. The costs of the adjudication itself are determined by a scale of fees published by the Singapore Mediation Centre, which provide that an Adjudicator’s fees are to be charged at an hourly rate, and cannot exceed 10% of the claimed amount.
Further, an Adjudicator does not have the power to order legal costs be paid as part of an Adjudication Determination. Unless otherwise agreed, the parties will bear their own legal costs no matter the outcome.
This control of costs ensures that the prospects of invoking adjudication are not overly daunting nor punitive, particularly given the typical disparity in resources between Subcontractors and Main Contractors.
Lessons for Arbitration
The SOPA regime has been extremely successful in addressing the construction industry’s difficulties with dispute resolution. By design, the SOPA was enacted to fill gaps in existing dispute-resolution mechanisms, but not to replace them.
To do so, the SOPA process prioritizes quick, cheap, and simplified proceedings, at the cost of a detailed study and determination of a parties’ claims. However, parties to SOPA proceedings ultimately know that the adjudication is a stopgap, pending a full and final determination of the parties’ claims.
That being said, expedited arbitration provides a useful middle ground between SOPA-like adjudications and full-blown arbitrations. Where parties are looking to resolve discrete issues but want the certainty a Final Award provides, they may consider referring their limited dispute to expedited arbitral proceedings (whether pursuant to institutional rules or ad-hoc). This is particularly of use where the parties seek to continue the project, but have reached a critical impasse.
In considering such proceedings, parties may want to consider:
- Providing for joint- or third party-appointed arbitrators;
- Providing for truncated and strict procedural timelines;
- Providing for limited terms of reference and shortened submission lengths;
- Providing for limited recourse to the expedited award; and/or
- Providing for a cap on the costs which parties can claim.