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Errant rail contractors: Can LTA do more?

Thursday, November 14, 2013 - 06:00

[SINGAPORE] The plight of small and medium enterprises (SMEs) left in the lurch by a defaulting rail project sub-contractor has put the scrutiny on whether the Land Transport Authority (LTA), as the owner of the Downtown Line 3 Project, could have done more.

This comes after a group of small contractors here were left with some $2 million in bounced cheques after Korean company Samdaiyang Development went bust. The company was the sub-contractor for Hyundai Engineering & Construction Co, which, in turn, was awarded the $188 million Contract 931 for the construction of MacPherson station to link Downtown Line 3 to the Circle Line.

The SMEs said when they turned to the main contractor, Hyundai Engineering and Construction, for help, they were told to file their claim submissions at the Seoul Central District Court, as Samdaiyang Development had filed for insolvency.

According to an LTA spokesman, only the main contractors' financial positions are taken into account during tender evaluation.

"To minimise the impact of the main contractors' default, LTA closely monitors the progress of its contracts and have in place financial safeguards, such as safety deposits and retention sums, which could be used to offset the cost, if any, arising from the default," said the spokesman.

Observers said the issue is not a straightforward one, given that the SMEs were contracted with Samdaiyang Development, which, in turn, was the sub-contractor for Hyundai Engineering & Construction. Therefore, there is no direct contract or commercial relationship between LTA and the affected parties.

On the other hand, there are grounds to argue that LTA does have an interest in what goes on beyond the main contractor level, said Paul Wong, partner at Rodyk & Davidson.

It isn't uncommon for such projects to have a clause requiring LTA's consent before any sub-contractor is engaged, though it is unknown if this was the case for this project.

"LTA can require financial details of the sub-contractor before consent is granted. Such provisions can enable LTA to ensure that financially viable sub-contractors are engaged.

"But, if LTA did so, it would be to protect its own interest, that is, it does not want any sub-contractor's insolvency to affect the project. LTA would not be doing this to help the sub-sub-contractors," said Mr Wong.

Industry players told BT it is customary practice to conduct background checks on sub-contractors. This includes detailed checks into their job history and safety records.

"You don't want your sub-con to (throw a spanner) in your work, so generally all builders will have a system to make sure their sub-cons are sound" and if they are new, there has to be a period to adjust, because they may be unfamiliar with your procedures, said a main contractor.

Details of a company can also be obtained from ACRA, which will show what the paid-up capital is, who the directors and shareholders are, and also whether there are any charges against the company's assets. Searches can also be done to ascertain if a company is facing law suits, noted Mr Wong.

There are avenues for recourse. The provisions of the Building and Construction Industry Security of Payment Act allows for firms to claim payment by way of adjudication, gives them the right to stop work if payment is not made after an adjudication award is obtained, and also allows the main contractor to pay them directly to avoid work stoppage.

Given that Samdaiyang Development has filed for insolvency, the only recourse in Singapore for the affected SMEs is to apply to the courts to wind up the company.

Mr Wong said: "This will help to make sure that any of the company's assets in Singapore are ring-fenced to pay the Singapore creditors. A similar process is now being carried out in relation to the Alpine insolvency."

Austrian construction firm Alpine Bau GmbH filed for insolvency in June this year. It had won the contract for the design and construction of three stations and tunnels along Downtown Line Stage 2, valued at $670.74 million, in 2009.