Appointment of expert by Adjudicator

Section 25(d) CIPAA allows an adjudicator to appoint independent experts to inquire and report on certain matters with the consent of the parties. It would seem therefore, that, consent of both parties are required before an adjudicator appoints an independent expert.

Even with the consent of parties, an adjudicator must be careful to ensure that he complies with natural justice when he relies on the expert’s report. Hence, if an expert were to decide on a particular issue, and that issue will influence the adjudicator’s decision, it would seem to be appropriate that the expert report must be provided to the parties for their comment beforehand. Otherwise, the adjudicator will be deciding on a point of importance not referred to parties, which would be a breach of natural justice.

This happened in RSL (South West) Ltd v Stansell Ltd, where an initial report was submitted to parties for their comments. RSL was unhappy with the initial report and submitted their comments, whereas Stansell which was happy with the initial report did not make any comment. The expert subsequently considered RSL’s comments and issued a final report (which was different from the initial report). This final report was not submitted to parties for their comments.

The court refused to enforce the adjudication decision on the basis that there has been a breach of natural justice. This was despite parties having consented to the appointment of the expert in the first place.

In short, adjudicators should always be very wary about ensuring all parties have the reasonable opportunity to comment on important points raised that would affect the adjudication decision. That is a task that sounds easy on paper, but sometimes not so simple in practice when issues get overly complicated.

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

Can CIPAA apply when the contract is subject to foreign law?

If a construction contract is subject to foreign law, and parties have submitted to the jurisdiction of a foreign court, can CIPAA apply?

YES. CIPAA is a statute, and will apply to payment disputes arising from written construction contracts whereby the works are wholly or partly carried out in Malaysia. There is simply no contracting out of CIPAA.

Even when parties submit to the jurisdiction of a foreign Court, it does not oust CIPAA, or the jurisdiction of the High Court to enforce CIPAA decisions.

In Comsite Projects Ltd v Andritz AG, the contract states that all disputes are subject to the exclusive jurisdiction of the Austrian Courts, and that Austrian law shall apply. Notwithstanding such a clause, the UK Court enforced the adjudication decision. However, any further and final dispute arising between the parties would then have to be resolved by the Austrian Court applying Austrian law.

In that sense, entering into a contract that is subject to foreign law and submitting to a foreign jurisdiction would only mean that the final dispute would have to be resolved following the clause. CIPAA which provides temporary finality continues to apply between the parties in the meantime.

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

Is breach of natural justice a defence to enforcement of Adjudication Decision?

S.15 CIPAA provides that breach of natural justice or excess of jurisdiction are among grounds to set aside an Adjudication Decision. However, if a party fails to apply to set aside the decision, can he still rely on these grounds to resist the enforcement of an Adjudication Decision?

In Inai Kiara Sdn Bhd v Puteri Nusantara Sdn Bhd, the Court of Appeal considered precisely this question. In that said case, Inai Kiara received a favourable Adjudication Decision which it sought to enforce in the High Court. Puteri Nusantara did not apply to set aside the Decision, but argued that the Adjudicator had nevertheless acted in excess of his jurisdiction. Excess of jurisdiction is a ground to set aside the decision under s.15(d).

The learned Judge agreed that the Adjudicator had acted in excess of his jurisdiction, and therefore refused to enforce the decision. Dis-satisfied, Inai Kiara appealed. The issue to be decided by the Court of Appeal was whether a party can rely on excess of jurisdiction (under s15(d) CIPAA) when it did NOT apply to set aside the decision under s.15.

The Court of Appeal disagreed with the High Court Judge. The learned Mary Lim JCA said that a party cannot “invoke any of the grounds set out in s.15(a) to (d) in opposition to an application under s.28 (for enforcement) without at the same time, filing an application under s.15 itself to set aside the adjudication decision on any of those grounds”.

With due respect, this decision may be introducing an unnecessary technicality to CIPAA.

For example, s.15(a) CIPAA says that a decision can be set aside if it was procured through fraud and bribery. Does that mean that if a party can show evidence of fraud and bribery, the decision must still be enforced if for any reason whatsoever, his lawyer failed to apply to set aside the decision under s.15(a) CIPAA? Surely the enforcement of any decision that was procured through fraud and bribery would be patently against public policy.

The general principle of law is that the courts would not assist any party who had participated in unlawful/illegal acts. Surely the Courts should not impose a technical requirement for the party to make the formal application before taking cognisance of such acts (if indeed proven).

And if the Courts were to take cognisance of s.15(a) without an application to set aside, then clearly the factors set out in s.15(b) to (d) ought also be taken into account.

Nevertheless, the above is just my view on the matter. The Court of Appeal has clearly taken a different view of the same. Such being the case, one now must necessarily apply to set aside a decision if any of the factors of s.15(a) to (d) come into play, otherwise they would not be considered as legitimate defences against an enforcement application under s.28.

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

Are oral amendments of written contracts covered by CIPAA?

Section 2 CIPAA provides that it applies to “every construction contract made in writing“. The AIAC had issued a Circular No 03 to define what it understands to be a contract made in writing, namely:

“1. There is a contract in writing:

a) If the contract is made in writing (whether or not it is signed by the parties);

b) if the contract is made by exchange of communications in writing; or

c) if the contract is evidenced in writing.

2. Where parties agree otherwise than in writing by reference to terms which are in writing, they make a contract in writing.

3. A contract is evidenced in writing if a contract made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the contract.”

If a contract is not made in writing, then CIPAA would not apply and parties would have to resort to litigation to resolve their disputes. However, what if a construction contract was first made in writing, but subsequently amended orally? Would this oral amendment to the construction contract then fall under CIPAA, considering that the initial contract was in writing?

This question arose in Carillion Construction v Devonport Royal Dockyard. In that case, there was a written contract under which Carillion would be reimbursed its costs and earn a fee based on a gain-share/pain-share arrangement. A gain-share/pain-share arrangement is one where any underspend compared to the target budget would be shared by the parties jointly, conversely any over-spend would be contributed by the parties jointly. However, Carillion alleges that this written contract was subsequently amended orally and pursuant to the amendment, the gain-share/pain-share arrangement was abandoned. Devonport refused to pay pursuant to the “amended” arrangement and the matter was then referred to adjudication.

The adjudicator found in favour of Carillion and decided that there was a binding amendment to the written contract. Dis-satisfied, the employer took the matter to Court.

The learned judge held that the UK Construction Act (then) did not provide for adjudication in respect of oral contracts. Therefore, an oral variation to a written contract would be excluded. (Note: Subsequently, the Local Democracy, Economic Development and Construction Act repealed the need for contracts to be in writing in order to be subject to adjudication. However, Malaysia still requires a written contract).

Taking the cue from Carillion, it would seem that once a written contract is amended orally, then the entire contract would fall outside the purview of CIPAA. Of course, as CIPAA relates only to payment disputes, the amendment would logically have to affect the terms of payment, whilst an oral amendment of other terms of the contract may nevertheless not lead to its exclusion from CIPAA.

Kheng Hoe Advocates advises clients on arbitration, litigation, adjudication (CIPAA) and mediation of building and construction contract disputes. We also publish the Construction Law Malaysia Youtube Channel. We can be reached at khenghoe@khenghoe.com. 

Scope of partial enforcement of adjudicator’s awards

Section 28(2) CIPAA makes it clear that the High Court can enforce an adjudication decision “either wholly or partly”. The question is, to what extent can the High Court enforce an adjudication decision “partly”?

Keating on Construction Contracts say that if there is a breach of natural justice, “the whole decision is unenforceable and it is not possible to sever the good from the bad”. With due respect, an adjudication decision may involve several different heads of claims (eg. certified sums, uncertified sums, retention monies, backcharges, interest element, etc). To adopt the view that a breach of natural justice in respect of, say the interest payable, would render the entire decision to be unenforceable would seem overly harsh, especially since breaches of natural justice would be errors on the part of the Adjudicator primarily and not errors of the claimant itself.

Hence, in Cantillon v Urvasco, the learned judge opined that if there was more than one dispute referred to adjudication, then where there has been a breach of natural justice in one dispute, that particular dispute can be severed from the other one.

That seems to make sense, in that where there are different heads of claim, and the High Court takes the view that there has been an error or breach of natural justice for one of the heads of claim, that particular head of claim can be severed and the rest of the decision enforced accordingly.

However, the question is whether the High Court can enforce partially one particular head of claim, for instance for uncertified sums?

If an adjudicator were to allow say RM1 million for uncertified sums, can the High Court turn around and say that exercising its powers in section 28(2) CIPAA, it only allows enforcement of RM800,000?

With respect, doing so would mean that the High Court necessarily has to look into the merits of the RM1 million decision, and effectively sit in appeal or re-hearing of the adjudication proceedings. It is well-accepted that a High Court does not do so, and that notwithstanding mistakes by the Adjudicator, the Adjudication Decision should generally be allowed to stand as a temporary finality pending final determination.

Hence, it is submitted that the powers of the High Court to enforce partially an Adjudication Decision under section 28(2) CIPAA ought only to be exercised in order to exclude (entirely) any particular head of claim. It ought not be employed for the purpose of reviewing the Adjudication Decision in order to allow enforcement of part of a particular head of claim, because that would essentially be the High Court sitting in appeal and/or re-hearing of the adjudication process.

We will await a suitable case to advance this proposition for the High Court’s deliberation.

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

Federal Court finally puts Selva Kumar to rest

The case of Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy had been a cause of many an advocate’s nightmare. Once liability has been established, you must still strictly proof damage suffered, even if the contract has an agreed liquidated damages clause. Sometimes, the strict proof of damage is not so simple, and as a result, contractors who are late get off the hook just because damages cannot be proven.

We seem to be on the verge of waking up from this nightmare with the recent Federal Court decision of Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd. Interestingly, the case of Cubic Electronics in fact concerns the claim for refund of earnest deposit paid. However, the Federal Court took the opportunity to delve into a re-look at section 75 Contracts Act, and specifically overturned Selva Kumar.

The facts of Cubic Electronics are simple:

a. Cubic Electronics was the owner of a piece of land in Melaka together with machineries on the land. When it was wound-up, the land and machineries were put up for sale by way of open tender.

b. Mars Telecommunications made an offer to purchase the properties for a total of RM90 million, and offered an initial earnest deposit of RM1 million. The liquidator did not proceed with the open tender and accepted the earnest deposit paid.

c. Having paid the earnest deposit, Mars Telecommunications failed to sign the sale and purchase agreement within the requisite time frame. Instead, they paid a further RM500,000.00 of earnest deposit in exchange for an extension of time.

d. Mars Telecommunications subsequently paid yet a further RM500,000.00 earnest deposit for a second extension of time.

e. They subsequently paid a further RM1,000,000.00 earnest deposit and RM40,000.00 late interest payment for a third and final extension of time.

f. Even then, Mars Telecommunications did not sign the sale and purchase agreement despite the third extension of time, and consequently, the liquidator forfeited the earnest deposits paid totalling RM3,040,000.00. The property was then sold to a third party.

Dissatisfied, Mars Telecommunications sued for a return of at least RM2,040,000.00 (less the initial earnest deposit of RM1,000,000.00). Their suit was duly dismissed by the High Court.

However, on appeal to the Court of Appeal, Mars Telecommunications was successful, in that the Court of Appeal allowed the refund of RM2,040,000.00. The Court of Appeal held that following Selva Kumar and the subsequent case of Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd, there was no evidence to show that Cubic Electronics had in fact suffered damage to the sum of RM3,040,000.00, neither was the same a genuine pre-estimate of loss pursuant to section 75 Contracts Act.

The matter therefore went before the Federal Court. The Federal Court reaffirmed the position of Linggi Plantations to the effect that in the event of a breach of contract, monies paid in advance for performance and as part-payment of the contract price is recoverable, but a deposit paid is not recoverable.

However, the Federal Court goes on to say that a deposit is subject to section 75 Contracts Act (being tantamount to an amount stipulated to be paid in the event of a breach). This is because section 75 does not distinguish between a deposit and other agreed payments or penalties.

The Federal Court then concludes that section 75 allows reasonable compensation to be awarded by the court irrespective of whether actual loss or damage is proven. Therefore, the correct approach in determining any LAD clause would be:

a. The party seeking to enforce a damages clause must adduce evidence that there was a breach of contract and the contract contains a clause specifying a sum to be paid upon breach. Once established, the innocent party is entitled to receive a sum not exceeding the amount stipulated in the contract irrespective of whether actual damage or loss is proven.

b. If there is a dispute as to what constitutes reasonable compensation, the burden of proof falls on the defaulting party to show that the damages clause including the sum stated therein is unreasonable.

In establishing the approach to an LAD clause, the Federal Court has reversed the onus now to lay the burden on the party in breach to show that any LAD clause is unreasonable, instead of the current position where the party seeking to enforce an LAD clause must nevertheless prove its actual damage or loss.

This is a welcome departure and development in the Malaysian position. Where an LAD clause is not patently unreasonable on the face of it, it flies in the face of fairness and good sense to compel the party not in breach to nevertheless jump through the hoop of having to prove its actual loss.

That does not however mean that the party in breach is without remedy.

a. Firstly, the party in breach can still seek to show that the quantum of LAD imposed is unreasonable under the circumstances; and

b. In any event, the Federal Court has not removed the discretion of the judges to determine a reasonable compensation notwithstanding an LAD clause. It is still not claimable per se, although the high bar of proof has been substantially lowered.

It will be interesting to see how this plays out in future CIPAA cases. Currently, in most CIPAA cases, adjudicators have rarely allowed LAD counter-claims to reduce the amount of claim, on the basis of Selva Kumar and the need for the developer to prove actual loss. The scenario may well change quite drastically moving forward.

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

 

Can a payment certificate be revised?

Contractors rely on interim payment certificates to provide the essential cash-flow for their projects. A contract would ordinarily stipulate the interval in which progress claims are made, certificates are issued, and payments made on those certificates.

The PAM Form stipulates that a payment certificate shall be “the total value of the work properly executed and include the percentage of the value of materials and goods stated in the Appendix up to the date of the Contractor’s payment application less any amount which may be retained…The materials and goods must be for incorporation into the permanent works and have been delivered to and properly stored at the Site and be protected against loss, damage or deterioration and be in accordance with the Contract. The certificate shall only include the value of materials and goods which are reasonably, properly and not prematurely brought to the Site”.

The Quantity Surveyor would ordinarily value the works and value of materials on site. It must be borne in mind that the valuation should only take into account works “properly executed”- therefore if works are incomplete or improperly executed, they may be excluded from valuation or a diminished value be allocated for the same.

In a perfect world, the interim valuations would capture perfectly the progress of works and delivery of materials to site. However, the reality is always less than perfect.

Therefore, there may be situations where claims are made for works purportedly done, which are not yet done, but it was valued anyway due to a lack of proper checking. Some works may have been completed but improperly (for example items may be installed which do not meet specifications), and these would be valued as well. Materials at site may not be adequately protected, leading to deterioration subsequently but already valued and paid.

Can these interim certificates therefore be revised?

Yes, and No.

No, an interim certificate cannot be revised save for “clerical, computational or typographical error or errors of a similar nature” In other words, once a decision with regard to the valuation of interim certificates is made, that decision cannot be revised willy-nilly.

However, “the Architect may, by a later certificate, make correction or modification in respect of any valuation errors in any earlier certificate”. Therefore, at any time before the final account is concluded, the Architect can adjust subsequent certificates to correct or modify earlier certificates, including to issue negative certificates if necessary.

The only exception would be the Final Certificate, which would be conclusive once issued in so far as it relates to the final value of the works. However, even the Final Certificate would not be conclusive that works, materials and goods are in accordance with the Contract.

Kheng Hoe Advocates advises clients on CIPAA, arbitration, litigation and mediation of construction disputes. We can be reached at khenghoe@khenghoe.com.

The danger of under-pricing quantities

Sometimes, in an attempt to procure a contract, contractors under-price certain items in the Tender BQ. This could have been done perhaps because the contractor estimated that the said items would be of minimal cost or the cost for the same could be easily absorbed.

A problem arises when there is a variation involving the same items in the BQ which had been under-priced. In the case of Dudley Corporation v Parsons & Morris Ltd, a contractor under-priced the task of excavating rock, whereby he priced the task at £75 per 750 cubic yards. He did so because at the stage of tender, it was not certain that there would be any rock encountered.

A problem arose during the execution of the contract whereby a total of 2,230 cubic yards of rock were encountered and had to be excavated. It was accepted by the contractor that for the first 750 cubic yards, the cost would be £75. However, what about the excess? The quotation by the contractor was a gross under-estimate.

The architect took the view that for the excess rock encountered, the contractor ought to be allowed a reasonable rate of £2 a cube. The employer was not pleased with the architect’s decision and challenged the same.

The Court of Appeal held that the issue was a matter of contractual interpretation, and that “the actual financial result should not affect one’s view of the construction of the words”. In other words, the contractor was bound to honour the quote of £75 per 750 cubic yards even for the excess quantities.

This should serve as a caution to contractors, against the practice of under-quoting for certain items in the BQ in order to lower the overall pricing for purposes of securing the contract. Such under-quoting of certain items may well be a major disadvantage in the event there is any variation which substantially increases the said items.

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

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.