Overcoming CP requirements for expense claims

Condition 11.7(a) of the PAM Form (2006) requires the Contractor to give written notice of its intention to claim for additional expenses together with an initial estimate duly supported by calculations within 28 days of any Architect’s instruction. This notice is said to be a “condition precedent to any entitlement to additional expenses that the Contractor may have under the Contract“.

The PAM Form goes on in Condition 11.7(b) to require the Contractor to submit complete particulars of its claim within 28 days of completing any variation works, otherwise “it shall be deemed that the Contractor has waived his rights to any such additional expenses”.

Query: Is this notice requirement to be strictly observed?

Of course, in many instances, the Architect by his conduct may have waived the strict requirements of Condition 11.7, for instance when the Architect proceeded to consider the loss and expense claim notwithstanding the claim being made late.

The situation is more tricky when the Architect did not waive the requirements, i.e. when the Architect required strict compliance and rejected the expense claim solely on the ground that the claim was made late.

One possible argument to overcome this “condition precedent” clause is to make a claim that is not under the Contract, i.e. to mount the claim for expenses as a general claim for damages for breach of contract. Such a claim, arguably, would be one that is not made under the Contract, i.e. one is not relying on the express terms of the Contract for entitlement to claim.

The courts always seek to limit the scope of any exclusion or limitation of liability clause. Hence in Maidenhead Electrical Services, a clause that renders any claims not received within 28 days to be “automatically invalid” was held by the Court to not apply to claims for damages for breach of contract.  Also, in Amec Process & Energy Ltd, a clause which disallowed a claim for price adjustment without meeting strict conditions was held to be not worded sufficiently to remove a claim for damages for breach of contract.

Of course, whilst the above cases may support a contention that a claim may still lie in damages notwithstanding the wording of Condition 11.7(a), yet the contractor would still have to grapple with the wording of Condition 11.7(b), whereby it is said that the Contractor is deemed to have waived its right to additional expenses. Would the argument fly to contend that such waiver is only a waiver of claims “under the Contract“, and similarly would not apply to a waiver of a claim in damages?

That would be an argument for another day.

Kheng Hoe Advocates is a firm of construction lawyers who handle CIPAA, arbitration, litigation and mediation of construction disputes. We can be reached at khenghoe@khenghoe.com. 

When are variations not variations?

A construction contract typically contains a variations clause, allowing for the SO to instruct for variations to the works. These variations can take the form of additions or omissions, and at times may be substantial in nature.

But can a contractor contend that a variation order is in fact NOT a variation, but constitutes an entirely new or replacement contract? A contractor may want to advance such an argument in one of the following circumstances:

Firstly, where the contractor faces a substantial omission variation, resulting in the balance of the contract works to be unprofitable or at the very least unpalatable at the contract rates. In pricing for a contract, it is common practice for contractors to price certain items at better margins, whilst allowing for thin margins or even losses in some items in the quantities. Imagine a situation where the better-margin items are omitted leaving the unprofitable balance of works. A contractor would want to argue for the balance works to be paid at a fair price instead.

Secondly, say that variation works are ordered for entirely new works not envisaged by the original contract (albeit for the same project). For example, an apartment project receives a variation to include an entirely new recreational complex for sporting facilities. Whilst the contractor may be willing to undertake the works, the contractor must nevertheless balance that against the need to complete the works on a timely basis, as well  as to consider whether these new works are acceptable to be carried out under the contract rates.

Thirdly, where the variations are within the scope of the contract works, but there are so many variations ordered to the extent that there is a substantial increase in technical queries, and number of construction drawings to be complied with (in the case of McAlpine Humberoak Ltd v McDermott International, the number of drawings increased from 22 to 161, yet the Court of Appeal dod not agree that the original contract has been replaced). A contractor placed in such a situation may contend that what he originally tendered for has changed so substantially that he cannot possibly be tied down to the original contract rates.

In USA, the trend is to consider cases with overly substantially variations to be an abandonment or cardinal change of the original contract works, beyond the reasonable expectation of parties at the time the contract was entered into. Consequently, such abandonment or cardinal change would allow the contractor to argue for payment on the basis of quantum meruit or fair rates (as opposed to the contract rates which may be relatively depressed). It is important to note that there is no need for the employer to in fact intend to abandon the original contract, because such intention is implied from the conduct of the employer.

Thus far, I am not aware of any such argument being mounted successfully in Malaysia as yet. At most, variation works that did not fall within the scope of the contract would be priced at fair market rates, but there does not seem to be much readiness to re-price the rest of the contract works on the basis of abandonment or cardinal change.

For the appropriate case with the right factual matrix, the USA position would be an interesting proposition to make.

Kheng Hoe Advocates advise primarily contractors in CIPAA, litigation and arbitration of construction disputes. We can be reached at khenghoe@khenghoe.com. 

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.

Call us for any queries with regards to CIPAA, arbitration, litigation or mediation of construction disputes. We can be reached at khenghoe@khenghoe.com. 

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.

Pakatan Harapan and force majeure

Since GE14, there has been a flurry of announcements by the new Pakatan Harapan (PH) government, almost on a daily basis. These announcements have ranged from feel-good measures (live World Cup, yay!) to major policies and even outright cancellation of contracts.

Query: Can any of these announcements lead to a plea of force majeure by a contracting party?

Under the PAM Form, force majeure is a relevant event which entitles the contractor to an extension of time. However, it is not an event which allows the contractor to claim for loss and expense. It is also not an event that is expressly stated to be an event permitting any party to determine the contract.

However, common law generally accepts force majeure to be a good defence to any claim for breach of contract, where the force majeure event renders performance of a contract to be impossible, and that event is unforeseen or unavoidable.

Therefore, a sub-contractor may not be able to insist on performance by the main contractor where the entire contract has been cancelled by the PH government. The sub-contractor may even be hard-pressed to claim for losses incurred in, for example, undertaking preparatory works or procuring supplies for the purpose of the sub-contract.

But the factual matrix of each individual case would clearly differ. Hence, if a contract was negotiated by the BN government on the basis of certain exemptions (eg. no GST), what happens now if SST is imposed instead (and at a higher rate) by the new PH government? What if the costing of the entire contract was predicated on the basis of the savings from the GST exemptions, whereby now the savings may not only be entirely eradicated but in fact the higher-rated SST would lead to losses for the contracting party.

Would that be sufficient to establish force majeure?

Or would the Courts instead follow the case of Trandin Aviation Holdings Ltd v Aero Toy Store LLC to hold that changes in economic/market circumstances affecting the profitability of a contract cannot be regarded as a force majeure event?

But surely a change in governmental policy cannot be equated to a change in economic/market circumstance, all the more so when it is the government that caused the change in the economic/market circumstance in the first place?

Perhaps these would be appropriate circumstances for parties to resort to mediation instead.

Kheng Hoe Advocates is a boutique law firm focused on construction disputes. We assist clients in arbitration, litigation, mediation and CIPAA cases. For queries, contact khenghoe@khenghoe.com. 

Can omissions lead to a reduction of the contract period?

Variations are not only limited to additional or varied works, but oftentimes include omissions as well. When variations in the form of omissions are issued, then the contractor would have enjoyed a savings of time required to complete the works.

Question: Can that savings of time be reflected in a reduced contract period?

Under the PAM Form, it is expressly stipulated that in assessing any extensions of time, the Architect may take into account “the effect or extent of any work omitted under the Contract, provided always that the Architect shall not fix a Completion Date earlier than the Completion Date stated in the Appendix”.

Therefore, it seems clear that:

a. the contract period cannot be reduced notwithstanding omissions; BUT

b. the entitlement to extension of time can be reduced by taking into account any previous omissions (in other words, the float time has increased by reason of the omission and therefore, extensions of time may not be as critical).

How about extensions of time that have already been granted? If a contract period cannot be reduced, can a previous extension of time be reviewed and reduced in light of omissions?

Again, the answer would seem to be no. Whilst the PAM Form is silent on interim reviews, however the PAM Form provides for a final review of the Completion Date, but stipulates that “(no) such final review of extension of time shall result in a decrease in any extension of time already granted by the Architect”.

It would seem therefore that once an extension of time is granted, it is already definite and any review can only enhance the extension of time granted, not decrease it.

Kheng Hoe Advocates is a boutique firm handling CIPAA and construction disputes. Whilst based on KL, we have strategic alliances in Penang, Melaka and Johor to service our clients nationwide. A lot of disputes which we handle relate to issues surrounding time. For queries, e-mail us at khenghoe@khenghoe.com. 

Winning the war for EOTs- the critical path analysis

Delays happen in construction projects.

However, an extension of time is not granted for delays unless it affects the ultimate completion of the work, and not just the particular operation. In the words of the learned judge in Royal Brompton Hospital NHS Trust v Frederick Alexander Hammond and Others, “it is desirable to consider what operations, at the time the event with which one is concerned happens are critical to the forward progress of the work as a whole”.

This means that there must be a clear understanding of the sequence of activities from the start of the project to finish, and durations required for each activity, in order to determine the overall project duration.

The best approach would be, of course, to determine on the basis of an as-built critical path analysis. This means that when a delaying event happens, it is compared to the as-built progress of the works to determine whether that particular delaying event is in fact on the critical path towards completion of the project.

In order to be able to determine such as-built critical path, it is imperative that contractors keep detailed and relevant records. This would include having an updated and revised programme from time to time as and when the original programme needs to be adjusted. It would also include having reasonably particularised daily site reports to determine the actual on-site progress.

At the end of the day, the contractor’s best friend would be its records, records and records. With adequate records, a competent delay analyst can easily work out the critical path, to determine the extension of time required due to delays. Otherwise, it would very much be based on guess-work, in which case, the determination of the critical path would be estimated based on assumptions and parameters determined by the delay analyst.

If that were to happen, then unfortunately, in many instances, it would turn out to be a case of “rubbish in, rubbish out”.

Kheng Hoe Advocates represent main contractors in CIPAA and construction disputes. For queries, e-mail khenghoe@khenghoe.com. 

Is time of the essence in construction contracts?

Lawyers are so used to say that “time is of the essence”, and eventually we grow to believe that time is of the essence in all contracts where time stipulations are found. But what does it mean that “time is of the essence”?

One simple understanding of the phrase is that if time stipulations are not met, then the party not in breach would be entitled to terminate the contract. Hence, if A is supposed to deliver a product to B by X date, then the failure of A to deliver the product can lead to B refusing to accept delivery on a future date.

Once put in these terms, it becomes very apparent that time cannot be of the essence in an ordinary construction contract. A high-rise building that is three-quarters completed cannot simply be demolished. The employer cannot say, “I refuse to accept your works” when the works comprise of bricks and mortar, with foundation properly laid, and built 100m into the sky.

Instead, the construction contract uses other tools like liquidated damages, loss and expense claims and extensions of time as tools to handle the failure to comply with time stipulations. The fact that breaches of time stipulations can be handled by these other measures would be a clear indication that parties never intended for time to be of the essence in the first place (even if that particular phrase appears in the contract due to poor draftsmanship).

But does that time is never the essence in a construction contract?

Of course not. Even when time is not initially of the essence, it can be made of the essence by way of a reasonable notice. Otherwise, a defaulting contractor could take forever and a day to complete its works, and any LAD claims may be futile at the end of the day if that contractor turns out to be insolvent.

Therefore, an inconvenienced party could give clear notice to render time to be of the essence in a construction contract. The inconvenienced party would thereafter be entitled to terminate the contract. After termination, obviously it would be left to the lawyers to determine who would be responsible for what costs.

Kheng Hoe Advocates handle CIPAA claims and construction disputes. For queries, e-mail khenghoe@khenghoe.com.

The dangers of starting work based on letters of intent

Sometimes, works are commenced based entirely on letters of intent. Presumably, this is because the employer wants the work to start immediately, whilst the details of the formal contract are still being worked out. For a contractor, being asked to start work on a letter of intent is oftentimes perceived as being as good as having secured the contract.

So, everything is hunky-dory, right? Well, not quite.

A contractor who starts work on a letter of intent may face difficulty subsequently to claim for its full entitlement should a formal contract fail to be signed. Clearly a contractor would still be able to claim for works actually carried out based on quantum meruit. However, how about the other costs incurred, including preparatory costs, which would oftentimes be provided for by way of preliminaries in a formal contract? How about materials ordered for purposes of the work, but which are not required as yet? Can the contractor claim reimbursement for these materials?

The answer is far from certain, and would very much depend on the wordings of the letter of intent.

Another clear disadvantage for the contractor would be its inability to claim for payment under the Construction Industry Payment and Adjudication Act 2012 (CIPAA) which only allows claims to be made based on a written construction contract. Of course, one may argue that the letter of intent is in fact a written construction contract in essence, but that remains at best an arguable point.

For the employer, it is not entirely without risk as well. If a contractor subsequently refuses to sign on the formal contract, perhaps due to disagreements over certain terms, the employer would be left in a lurch. Appointing a substitute contractor to replace the existing one usually comes at a higher cost. There may also be issues with defects, quality and workmanship of the earlier contractor- how can the employer clearly determine which contractor is at fault? The earlier contractor would also be unlikely to leave the work without raising disputes over payment- how much is in fact due? Is the contractor to be reimbursed only for costs, or for a reasonable and fair valuation of its works? Who is to determine what is reasonable and fair?

All these issues and more ought to encourage parties to sign on to a formal contract where possible before commencing work. This would help all parties clarify their respective rights and obligations, allow the contractor access to CIPAA procedures, and at the same time reduce the potential for future construction disputes.

Kheng Hoe Advocates is a firm of construction lawyers based in Kuala Lumpur, with strategic alliances in Penang, Melaka and Johor Bahru. For queries, contact khenghoe@khenghoe.com.