Should payment be made for materials off-site?

Usually, progress payments would provide for works carried out and materials on-site. But what if the materials are already manufactured but have not been transported on-site? Should payments be made for such materials?

For the supplier, they sometimes face a problem with site constraints. The site may not have a proper and secure storage location to justify the transport of the materials on-site. Yet at the same time, these materials are already manufactured and are sitting in the supplier’s warehouse, so shouldn’t the supplier be paid for them?

From the contractor’s view however, there are risks when these materials are stored off-site. For one, unless these are unique or custom-made materials, they can be used for other projects and other contractors, so why should the contractor pay for items that potentially could be shipped to others?

Secondly, if the supplier enters into liquidation or receivership, what then happens to these materials? It would involve unnecessary costs, expense, time and effort to recover these materials from the liquidator or receiver.

Thirdly, what if these materials are damaged whilst stored at the supplier’s warehouse? For instance by reason of flooding of the warehouse. How would the contractor be compensated for the loss or damage of materials which it has already paid for?

One possible compromise is to provide that:

a. The materials must be insured, and if it is stored at the supplier’s warehouse, then the insurance ought to be taken out by the supplier (equivalent to a bailment contract);

b. The materials must be specifically identified, preferably attached to a contract note, and legal ownership of the materials must pass to the contractor upon payment to avoid any claims by liquidators or receivers;

c. The materials must be properly tagged as belonging to the contractor;

d. Preferably the supplier must furnish a bond to the contractor to secure for the cost of the materials in the event that the materials are lost, damaged or subject to a claim by a third party.

The use of the bond would allow the contractor to immediately recover the monies paid for the materials, and the contractor can then source for alternative supply. This would be preferable than for the contractor to engage in protracted arbitration or litigation proceedings to claim for materials which it has already paid for, and in the meantime still have to pay for alternative supply due to the needs of its ongoing project.

As for the supplier, it should merely factor the cost of the bond into the price of the supplies, as the early payment by the contractor of the materials even before they are transported on-site would in fact be an advantage to the supplier in terms of its cash flow.

Kheng Hoe Advocates advices on CIPAA, construction litigation and arbitration cases. We can be reached at khenghoe@khenghoe.com. 

What in the world is “consequential loss”?

Oftentimes, one would come across the term “consequential loss” in contracts. What in the world is that? For example:

a. A main contractor has entered into an agreement to lease a tower crane. The tower crane company failed to provide the tower crane, as a result the main contractor had to lease from another company at a much higher price. Is the higher price of leasing the tower crane a “consequential loss”?

b. What if there were delays in procuring a substitute tower crane leading to delays in the work, as a result of which LAD was imposed on the main contractor. Would the LAD be “consequential loss”?

A case that would illustrate the term “consequential loss” is the case of Hotel Services Ltd v Hilton International Hotels. In this case, the dispute involved the supply of Robobars (i.e. minibars in rooms that automatically records all items removed from the bar, and automatically debits the account of the guest with the said item). The Robobars supplied did not work. The claimant sued for overpaid rental of the Robobars, cost of removal and storage, and loss of profits, all of which were allowed.

At appeal, it was argued that the loss of profits would have been “consequential loss”, and the contract expressly states that there shall be no claim for any indirect or consequential losses. The Court of Appeal disagreed. In doing so, the Court of Appeal distinguished between normal losses and consequential losses. According to the Court of Appeal:

a. Normal losses would be the type which every claimant in the same situation would suffer; and

b. Consequential losses would be losses which are peculiar to the particular claimant in his particular situation, and therefore not foreseeable.

Loss of profits, therefore, would be a normal loss and not a “consequential loss” since it would be clearly foreseeable and not peculiar to the particular claimant in his particular situation.

Kheng Hoe Advocates advices developers and contractors on CIPAA, arbitration and litigation of construction disputes. For queries, contact us at khenghoe@khenghoe.com. 

Can claims consultants be liable for deficient legal advice?

The world of construction disputes is not only occupied by arbitrators, adjudicators and lawyers, but also encompass claims consultants. Claims consultants come with a myriad of backgrounds and experience. Some claims consultants would be legally qualified, others emanate from QS or engineering backgrounds, and yet others may have previously been trainers or may not even have any prior construction or legal experience.

However, like it or not, once a claims consultant sets up shop, he/she will be giving legal advice. This is because he/she will be advising companies on their rights and entitlement to claims, perhaps even represent the said companies in CIPAA and arbitration proceedings.

What happens when these claims consultants render deficient legal advice? Can they be held liable? Or would the Courts consider the fact that these consultants are not in fact lawyers, and hence companies who choose to take legal advice from claims consultants have only themselves to blame, in other words, caveat emptor?

In Cambridgeshire Construction Ltd v Nottingham Consultants, the plaintiff retained a firm of claims consultants to advice them on their contract. The final certificate was issued to the plaintiff, and by the terms of the contract, any dispute on the final certificate had to be raised within 30 days, otherwise the certificate is deemed final and conclusive. The claims consultants advised the plaintiff of the need to serve a notice of arbitration on the very last day, and consequently, the plaintiff ran out of time to serve its notice of arbitration.

The Court held that a company which engages a claims consultant is well entitled to rely on the claims consultant’s expertise, and therefore, the standard duty to exercise reasonable skill and care is applicable to the claims consultant.

It seems to be a decision that is only fair. After all, claims consultants do in fact give legal advice, and hence, they ought to be held responsible for the advice given. Of course, whether the fact that they give legal advice is in breach of the Malaysian Legal Profession Act would be a topic for another day and another time.

Kheng Hoe Advocates is a construction law firm in Malaysia. We advice clients on CIPAA, arbitration, litigation and mediation of construction disputes. We can be reached at khenghoe@khenghoe.com.