Why employers should NOT make direct payments to sub-con

It is quite a common occurrence for employers to make direct payments to sub-contractors, circumventing the main contractor. This practice creates a lot of issues for the main contractor concerned, for example, how would the main contractor hold the sub-contractor liable for defects if the sub-contractor has been fully paid. And yet, the employer who made the direct payments would have no qualms about holding the main contractor liable for defects occasioned by the sub-contractor.

Oftentimes, the employer thinks that making direct payments is a way to ensure that the sub-contractors get paid, and consequently, the works will proceed as usual.

But is it true that employers have no risk in doing so? Think again.

In Desa Samudra Sdn Bhd v Bandar Teknik Sdn Bhd, the Appellant was the owner of Wisma E&C in Damansara Heights. The appellant appointed Autoways Constructions Sdn Bhd (“Autoways”) as the main contractor under the PAM form to erect the office building. Autoways got into financial trouble and applied for a scheme of arrangement under the previous s176 of the Companies Act 1965. In light of Autoways’ financial trouble, the Appellant issued a notice of termination of the contract. Autoways vacated the site, but allowed its sub-contractor (the Respondent) to re-enter the site and remove equipment and goods. In the process, the building was damaged.

The Appellant sued for trespass and conversion. The Respondent counter-claimed for direct payments based on an alleged oral contract and due to past practice of direct payments. The High Court favoured the Appellant and dismissed the counter-claim. The Court of Appeal reversed the High Court’s decision. Following that, the Appellant appealed to the Federal Court.

The bulk of the Federal Court decision focused on whether a scheme of arrangement would result in the automatic termination of the PAM Form contract. This article won’t focus on that discussion, but the short answer is No.

What is more disturbing is that the Federal Court took the view that certain minutes of meeting and the past conduct of making direct payments evidenced an oral agreement between the Appellant (as employer) and the Respondent (as sub-contractor) for direct payments to be made.

The Federal Court concluded that such minutes of meeting and past conduct of making direct payments created a legal relationship between the employer and the sub-contractor. As a result, the employer ended up being liable for all payments due to the sub-contractor.

Bear in mind that in the factual matrix of this case, Autoways as the main contractor had already fallen into bad times. Therefore, if there was no legal relationship between the sub-contractor and the employer, the sub-contractor would most likely end up not being paid.

So, should employers make direct payments to sub-contractors? Think carefully before doing so, because you may end up biting off more than you intended to chew.

M/s Kheng Hoe is a firm of construction lawyers in Malaysia focused on handling construction disputes. If you have any query, e-mail khenghoe@khenghoe.com.

Utilising retention fund for liquidated damages

Can an employer utilise moneys in the retention fund to set-off liquidated damages for delay?

In Thamesa Designs Sdn Bhd & Ors v Kuching Hotels Sdn Bhd, which was an appeal that came before the Supreme Court previously, the Appellants were the nominated sub-contractor for extension works to the Kuching Holiday Inn hotel. When they were not paid by the main contractor, they sued and obtained a judgement.

The Appellant then sought to garnish moneys held by the employer in its retention fund to settle the judgement it had obtained.

In reply, the Respondent said that the retention monies had already been utilised, firstly for payment of defects rectification, and secondly to set-off liquidated damages due to delay in completion of the project.

In the High Court, the High Court judge agreed with the Respondent and held that the retention monies cannot be garnished because it was no longer available.

The Appellants appealed.

The Appellant’s contention in appeal is that the retention monies ought not to have been utilised to set-off liquidated damages for delay because due to a late handover of the site by the Respondent to the main contractor, time was “at large” and no liquidated damages can be imposed.

The Supreme Court looked into the terms of the contract and discovered that there was no provision in the contract for any extension of time. Therefore, when the employer failed to hand over site on time, the employer is said to have breached the contract and was no longer entitled to liquidated damages for delays to the work.

In light of that finding, the Supreme Court set aside the certificate of final payment which included liquidated damages for delay. The sum set-off for liquidated damages was required to be paid back into the retention fund, and to be garnished by the Appellant.

A few conclusions seem to be capable to be drawn from this case:

  1. The Supreme Court did not frown upon the utilisation of retention monies for purposes of setting-off liquidated damages for delay (except that there was no liquidated damages due in this case).
  2. The principle that late handover of site dis-entitles the employer to liquidated damages seems to be tied to the fact that there was no extension of time clause in the contract. Presumably, if a late handover of site is coupled with an extension of time to cover for the late hand-over, then liquidated damages would continue to be applicable.

M/s Kheng Hoe is a firm of construction lawyers based in Kuala Lumpur, focused on arbitration and litigation of construction disputes. If you have any queries, e-mail khenghoe@khenghoe.com.

Difference between aggravated, exemplary and punitive damages

There is oftentimes confusion in the use of the terms “aggravated”, “exemplary” and “punitive” damages. Are these different types of damages, or are they one and the same?

It is helpful therefore, that the Court of Appeal in its recent decision of Sambaga Valli a/p KR Ponnusamy v Datuk Bandar Kuala Lumpur & 2 Ors had clarified the use of these different terms, as well as how to quantify the same.

Aggravated Damages
Starting at paragraph 32 of the decision, the Court of Appeal defined aggravated damages to be the “species of compensatory damages, which are awarded as additional compensation where there has been intangible injury to the interest of personality of the plaintiff, and where this injury has been caused or exacerbated by the exceptional conduct of the defendant.”

Hence, aggravated damages are first and foremost compensatory in nature, which means that you cannot get aggravated damages without showing some form of injury.

An easier definition of aggravated damages would be the special and highly exceptional damages awarded when the defendant’s conduct is wrongful (tortious) and the conduct has subjected the plaintiff to humiliating and malicious circumstances.

Exemplary and Punitive Damages
At paragraph 33 of the decision, the Court of Appeal firstly clarified that exemplary and punitive damages are two terms which are used interchangeably.

As opposed to aggravated damages, exemplary damages are not based on the injury to the plaintiff. Instead, it looks to the conduct of the defendant.

In other words, exemplary damages are awarded when the Court wishes to signify its disapproval, condemnation or denunciation of the defendant’s conduct, quite independently of any injury suffered by the plaintiff. The purpose of awarding exemplary damages is to deter future occurrences and punish the wrongdoer.

But how can such damages be quantified?

Quantifying Exemplary Damages
In seeking to quantify exemplary damages, the principles set out by Lord Devlin in the case of Rookies v Barnard are helpful:

  1. Exemplary damages are only recoverable by the victim of the wrongful conduct- no matter how reprehensible the conduct is, exemplary damages cannot be awarded to someone who has not been victimised by it;
  2. It must be assessed with restraint– meaning that the quantum of damages awarded must be moderate and not excessive;
  3. The means of the parties must be taken into consideration;
  4. It is to be awarded “if but only if” compensatory (including aggravated) damages are not sufficiently punitive.

Even in the USA where exemplary damages have been reported to be phenomenal, the US Supreme Court in BMW v Gore had struck down exemplary damages which are excessive for being “unconstitutional”.

In Malaysia, the case of Sin Heap Lee v Marubeni Sdn Bhd provides a guiding principle for the award of exemplary damages- it should be calculated at 25% of the award for compensatory damages.

The Court of Appeal in Sambaga Valli adopted the same standard.

Whilst aggravated damages look at the injury suffered by the plaintiff, exemplary or punitive damages consider the actual conduct of the defendant.

Even then, it would be assessed based on the guiding principles laid down in Sin Heap Lee, to be approximately 25% of the compensatory damages awarded. Hence, any party seeking to claim phenomenal sums in exemplary damages would first and foremost have to succeed in proving their compensatory damages beforehand.

Messrs Kheng Hoe is a firm of construction lawyers focused on construction disputes in Malaysia. If you have any queries, you may e-mail khenghoe@khenghoe.com.