A.I.s post-CNC and post-CPC?

The Architect has a wide ambit in giving instructions during the subsistence of a construction contract.

Condition 2.1 of the PAM Form 2006 requires the Contractor to comply (mandatorily) to instructions issued by the Architect. Failure to do so (provided the Architect’s instruction is within the ambit of the contract) would subject the Contractor to severe penalties including set-off of all costs paid to third parties to comply with the Architect’s instructions, as well as potential termination of the contract.

But whilst the Architect may do much, he nevertheless does not have carte blanche to do as he wishes. As mentioned, the scope of the Architect’s instruction must first and foremost be within the ambit of the contract.

Besides the scope, the Architect also has to be mindful of the timing in which he issues his instructions.

During the contract period, if an Architect issues his instructions but these instructions are not made on a timely basis, it could lead to a successful application for an extension of time by the Contractor. A late instruction may also lead to a loss and expense claim (for example, where works have to be re-constructed in order to comply with the Architect’s requirements).

Once a CNC is issued, any instruction by the Architect would almost inevitably lead to an extension of time. This is because once post-CNC, every task would be deemed critical as the Contractor is on extended time and would also be incurring liquidated damages on a daily basis.

What about after CPC?

Whilst the PAM Form does not stipulate that Architect’s instructions are only to be given during the currency of the contract, nevertheless it would seem logical that Architects are not entitled to issue instructions once CPC has been obtained. After all, the very definition of CPC is that the Works are practically completed save for minor defects. Therefore, how would it be justifiable for the Architect to continue issuing instructions when the Architect himself has acknowledged that the works have been practically completed?

As for the issue of ongoing defects rectification, by right such rectification works should not require an instruction from the Architect. After all, the obligation to carry out such rectification works are already stipulated in the contract itself, and there is no need for a further instruction to compel parties to do what they have already contracted to do in the first place.

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Pricing LADs for sub-contracts

How to determine the LAD to be imposed for delays in sub-contracts?

This is a tricky question, because:

a. On the one hand, any delays by the sub-contractor may potentially cause a delay in the main contract (or to other sub-contractors). Delays in the main contract may be subject to very substantial LADs up to RM50,000.00 per day or even beyond;

b. But the sub-contract sum may be much less, as the sub-contract may be for one particular aspect of the work only. If the entire sub-contract is worth a mere RM500,000.00 or RM1,000,000.00, then the profit margin of the sub-contractor may well be only in the range of RM50,000.00 to RM100,000.00 (assuming a 10% margin). That means imposing a RM50,000.00 LAD charge per day of delay would totally wipe out the entire profit of the sub-contractor in 1 single day!

Surely a sub-contractor would never agree to accept a sub-contract of this nature. And if indeed the sub-contractor is minded to accept such a sub-contract, he would price the sub-contract at a premium to allocate for the LAD risk. This would increase the price of the sub-contract (and the cost for the main contractor) rather substantially.

It has been generally accepted that the Federal Court decision in Selva Kumar requires for actual damage and loss to be proven notwithstanding any LAD clause. Actually, the decision in Selva Kumar and the subsequent decision of Johor Coastal is somewhat more nuanced than this general principle, but this general principle seems to have been accepted as canon.

This means that even if the main contractor imposes RM50,000.00 per day LAD for delays, the main contractor cannot in fact levy such a sum without suffering actual damage and loss on its part. In other words, the generally accepted reading of Selva Kumar has effectively rendered liquidated damages to be equivalent to unliquidated damages, yet subject to the maximum of the amount specified.

Because of that unique position in Malaysian law, I would suggest that it is better for main contractors to be silent on the LAD to be imposed on sub-contractors in the event of delay. Perhaps a general clause to the effect that if the sub-contractor delays, then the sub-contractor will be liable for all losses, damage and expense suffered by the main contractor by reason of the delay would suffice.

In this way, there will not be a very substantial figure reflected in the sub-contract which would compel the sub-contractor to increase its price (or refuse the sub-contract), yet at the same time the main contractor may still reserve its rights to claim for any actual loss, damage and expense suffered by reason of delays.

It would of course be recommended that the provisions of the main contract including the LAD clause be highlighted to the sub-contractor from the onset, so that the sub-contractor cannot argue that the substantial LAD imposed by the employer on the main contractor is unreasonable and/or otherwise beyond the contemplation of parties at the time of entry into the sub-contract.

Kheng Hoe Advocates advices clients on CIPAA, mediation, litigation and arbitration of construction disputes in Malaysia. We can be contacted at khenghoe@khenghoe.com. 

Can LAD be more than the subcontract value?

The imposition of LAD in construction contracts is commonplace. The PAM Form stipulates that such LAD is a genuine pre-estimate of loss, and therefore arguably it may fall within the exception of Selva Kumar and Johor Coastal requiring strict proof of damages. Admittedly, that point has not been successfully canvassed as yet.

However, when LAD is translated at the sub-contract level, it may lead to a situation where the LAD imposed is totally out of proportion to the sub-contract value. A main contract, for instance, may be valued anywhere from RM20 million to RM100 million. LAD imposed on the main contract could perhaps run to the sum of RM100,000 to RM150,000 per day.

One of the sub-contractors appointed by the main-contractor may have a sub-contract value of say RM1 million. Can the main contractor impose LAD of RM100,000 to RM150,000 per day on this particular sub-contractor whose contract value is only RM1 million?

Theoretically, why not? After all, a delay by this relatively minor sub-contractor may still lead to a delay in the main contract which would in fact cost the main contractor RM100,000 to RM150,000 per day. All the more if the sub-contract makes reference to the main contract, and therefore the sub-contractor is deemed to have taken cognisance of the terms of the main contract. In other words, the sub-contractor cannot argue unreasonableness, being damages out of the contemplation of parties, as required by Hadley v Baxendale.

So what then is the solution? Is it for the sub-contractor not to agree to an LAD clause? That too would not be helpful for the sub-contractor. This is because an LAD clause in fact seeks to put a cap on the amount of LAD claimed. If there is no LAD clause, the main contractor can claim all reasonably foreseeable damages suffered, and surely a sub-contractor can reasonably foresee that the main contractor would be subject to LAD by the Employer should there be delays in the project. Without an LAD clause, the damage on the sub-contractor may even be far worse.

So, an LAD clause is not only to protect the rights of the main contractor, but it also serves to cap the liability of the sub-contractor. It would be up to the sub-contractor to insist that a reasonable sum of LAD be imposed, failing which the sub-contractor may be well-served to walk away from the sub-contract.

Kheng Hoe Advocates helps clients in CIPAA (adjudication), mediation, litigation and arbitration of construction disputes. We can be reached at khenghoe@khenghoe.com.