Nov 15, 2013

    Errant rail contractors: Can LTA do more?

    The Business Times

    THE plight of small and medium-sized enterprises (SMEs) left in the lurch by a defaulting rail-project sub-contractor has placed 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, 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 that when they turned to the main contractor, Hyundai Engineering & Construction, for help, they were told to file their claim submissions at the Seoul Central District Court, as Samdaiyang Development had filed for insolvency.

    An LTA spokesman said only the main contractors' financial positions are taken into account during tender evaluation.

    "To minimise the impact of the main contractors' default, LTA monitors the progress of its contracts closely and has 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 Mr 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 only financially viable sub-contractors are engaged," said Mr Wong.

    "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."