In DSL Integrated Solution Pte Ltd v Triumph Electrical System Engineering Pte Ltd [2022] SGHC 221 (“DSL v Triumph”), the High Court addressed “back-to-back” contracts and found that a sub-sub-contractor was justified in stopping works as the sub-contractor had committed a repudiatory breach by failing to make payment.

Background. In DSL Integrated Solution Pte Ltd v Triumph Electrical System Engineering Pte Ltd [2022] SGHC 221 (“DSL v Triumph”), the plaintiff, DSL Integrated Solutions Pte Ltd (“DSL”), was engaged by the main contractor, Qianjian International (South Pacific) Group Development Co Pte Ltd (“CNQC”), to design, supply and install electrical works. The contract between DSL and CNQC shall be referred to as the “Main Contract”.

DSL claimed that it, in turn, sub-contracted out part of its works to the defendant, Triumph Electrical System Engineering Pte Ltd (“Triumph”).

DSL claimed that Triumph had wrongfully repudiated the agreement between DSL and Triumph by unjustifiably stopping work, and that Triumph had also breached the agreement by failing to perform several obligations under the Main Contract.

“Back to back contract”. In this regard, on 17 September 2020, Triumph had issued a quotation to DSL for the provision of electrical installation works.

And on 22 September 2020, DSL sent an email enclosing a revised version of Triumph's quotation (the “Revised Quotation”).

In the email, DSL stated, among others, that “… this shall be an [sic] back to back contract with commercial having certain acceptation.”

The Revised Quotation also contained the words “This quotation approved in principle and pending official main contractor's contract.”

However, as of 22 September 2020, the Main Contract had not been sent to Triumph.

In fact, the Main Contract was only sent to Triumph on 23 December 2020.

Inchoate counteroffer. Given the above, Triumph argued that the Revised Quotation was an inchoate counteroffer that was incapable of being accepted in law.

As summarised in [18(b)] DSL v Triumph, Triumph's argument was, in essence, that at the time of the Revised Quotation, it was not possible for the contract to have formed since the terms of the agreement were unknown.

No “back-to-back” as contended by DSL. Kwek J held that since the Main Contract was only sent to Triumph on 23 December 2020, the parties could not have, as DSL had contended, intended for a “back-to-back” contract where all the terms of the Main Contract were incorporated ([20]; [22] DSL v Triumph).

Kwek J also found that, on the facts, there was no evidence that Triumph had agreed to all the terms of the Main Contract ([64] DSL v Triumph) and that the plaintiff's own conduct suggests that not all the terms of the Main Contract should be incorporated ([65] – [66] DSL v Triumph).

Nonetheless, Kwek J disagreed with Triumph's argument that the Revised Quotation was an inchoate counteroffer.

Kwek J held at [25] – [56] that based on the facts, Triumph had accepted DSL's counteroffer as set out in the 22 September 2020 email and the Revised Quotation, which had contained “… the essential terms such as the name of the parties, scope of work, contract period and price”.

Only terms within general appreciation and knowledge. Referring to [48] and [50] of GIB Automation Pte Ltd v Deluge Fire Protection (SEA) Pte Ltd [2007] 2 SLR(R) 918 (“GIB Automation”), Kwek J held that “… terms of the Main Contract that were within the general appreciation and knowledge of the Parties could be incorporated by the back-to-back clause” in 22 September 2020 email ([23] DSL v Triumph).

We set out [48] and [50] GIB Automation below:

“48 The weight to be attached to the fact that a party has not seen the main contract must be considered in the light of the factual matrix as a whole. It may not be decisive if the circumstances are such that the terms said to be affected by the back-to-back provision are matters that would fall within the general appreciation and knowledge of the parties to the subcontract. On the other hand, if the terms are highly technical and particular, it may be more important. Further, consideration should be given to the sub-contractor's ability to ask for a copy of the main contract. It may also be overcome with sufficiently explicit language making it clear that the head contract was being incorporated and that the sub-contractor was deemed to have acquainted itself with its terms.

…

50 Just what is incorporated will depend in each case upon such things (among others) as what was objectively known to the parties at the time they entered into the contract, what specific references were made to the main contract document, and whether the terms of the main contract relevant to the back-to-back provision were of such a nature that they should have been and were specifically brought home to the sub-contractor or whether they were sufficiently general that they would fall within the general appreciation and knowledge of the parties. By way of example, it may be generally known to a sub-contractor that the main contractor would in due course make an application for payment to the employer in respect of works done by the sub-contractor. On the other hand, it may not be generally known to the sub-contractor that requests have to be in a very particular format.”

On the facts of the case, Kwek J found that:

  1. Terms such as the contract price, the work scope of the Main Contract, and that Triumph would be paid 92% of the contract price as set out in the Main Contract would be incorporated (see [24] and [67] DSL v Triumph);
  2. Terms such as the requirement for the submission of drawings in BIM format, the provision of full-time supervision by an experienced engineer/supervisor were not incorporated (see [117] and [119] DSL v Triumph).

Given the fact-specific nature of the inquiry, perhaps what is more important are Kwek J's holding at [115] – [116] DSL v Triumph, where Kwek J rejected DSL's arguments that clauses in the Appendix to the Main Contract should be incorporated because “… they are framed in a general nature and set out the scope of the Electrical Works in broad terms…”.

Kwek J held at [116] that “… the mere fact that some clauses in Appendix 2 are phrased in broad terms does not obviate the need to analyze the individual clauses to determine whether they fall within the “general appreciation and knowledge” of the parties.”

Justified in stopping work. The other issue addressed in DSL v Triumph was whether Triumph was justified in ceasing works. Triumph's argument, as summarized in [80] DSL v Triumph, was that it was entitled to terminate the contract as DSL had committed a repudiatory breach of the contract by not paying Triumph for 8 months after Triumph had started.

“80 The Defendant also submits that it is entitled to terminate the contract because the Plaintiff failed to furnish the performance bond to CNQC, which effectively caused CNQC to withhold the equivalent amount in their certification of progress claims, with the material consequence that the Defendant would not be paid for the works carried out. As of 7 May 2021, about eight months after the Defendant had commenced work on the Project, it had not received a single progress payment for the work done on the Project despite CNQC having certified the sum of $161,349 in the value of works carried out (without taking into account the sums withheld for the performance bond). The Defendant argues that the Plaintiff's repeated and prolonged failure to pay amounted to a repudiatory breach which entitled it to treat the Plaintiff as having repudiated the sub-contract.”

Kwek J held that prolonged and substantial failure to make payments can amount to a repudiatory breach (referring to Diamond Glass Enterprise v Zhong Kai Construction CO Pte Ltd [2021] 2 SLR 510) and that the court will “… examine the circumstances surrounding the non-payment in determining whether the non-paying party's conduct demonstrates an intention not to be bound by payment obligations” (at [85]).

On the facts of the case, Kwek J found that Triumph was justified in terminating the agreement with DSL (at [109]). Among others, Kwek J found that:

  1. The present case was not one of underpayment as “… The Defendant did not receive any progress payments for its eight months of work, because the Plaintiff failed to issue the performance bond to CNQC, which resulted in CNQC setting-off the progress payments from the outstanding performance bond sum.” (at 88)).
  2. The correspondence showed that the issue blocking payment to Triumph was “… the performance bond and not the lack of certification by [DSL]” (at [90], even though the responsibility to issue the performance bond was DSL's, and not Triumph's (at [81]).
  3. At the material time, it was not clear that DSL had any resolution to the performance bond issue which affected payments from CNQC (at [104]) nor was there any indication on when payment could be made to Triumph (at [106]);
  4. There was no dispute that Triumph had carried out works from September 2020 to April 2021, and CNQC had certified and agreed to payment “… which was not applied to the deduction for the performance bond, but which inexplicably, was not paid out to [Triumph].” (at [107]); and
  5. At the material time, Triumph had consistently informed DSL that “… it was running out of money. [DSL] in turn agreed that [Triumph] should be paid. But [DSL] never did so, nor did [DSL] give any indication of when such payment would be forthcoming or for what amount…” (at [108] – [109]).

Conclusion. In construction contracts, it is not unusual to come across situations where a contractor was asked to start works, pending finalization of detailed terms and conditions. And sometimes, the contractor would ask its sub-contractor to also begin works, with the intention that the sub-contract would incorporate (by reference) the detailed terms and conditions of the main contract which was (at the pint in time) pending finalization.

DSL v Triumph tells us that in such situations, parties must consider the terms of the sub-contract carefully. Using vague terms such as “back-to-back” may not be effective in incorporating all the terms of the main contract, which can potentially create risks for the main contractor as a court / tribunal may find that (as in DSL v Triumph) only terms that were within the sub-contractor's “general appreciation and knowledge” were incorporated.

One potential way to work around this issue is that once the terms of the main contract are formalized, the contractor should enter into a formal sub-contract agreement with its sub-contractor, where the terms of the main contract are expressly incorporated by reference.

DSL v Triumph is also important as it is an example of a situation where a sub-contractor succeeded in arguing that the main contractor had repudiated the sub-contract due to prolonged and substantial non-payment.

In this regard, we can see that the Court attributed weight to (a) the prolonged delay in non-payment and (b) the reason relied upon by the main contractor to deny payment was not connected to any obligation by the sub-contractor.

We make two observations.

Firstly, DSL v Triumph should not be taken as standing for the proposition that prolonged non-payment per se will always amount to a repudiatory breach. It is a fact-specific question. And if the reason for non-payment involve disputes over counterclaims / set-offs for defective works by the sub-contractor or other breaches of the sub-contract, it may not be so easy for a sub-contractor to succeed in arguing that there has been a repudiatory breach.

Secondly, in general, if there had been prolonged non-payment (or even under-payment), sub-contractors should consider having recourse to statutory adjudication under Building and Construction Industry Security of Payment Act 2004. Adjudications are generally quick and low-cost, and are (in our experience) quite effective in resolving interim payment disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.