LTA's possible actions after rail sub-contractor default

The Business Times reported that 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 law firm, Rodyk & Davidson.

"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.

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. "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," added Mr. Wong.