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.

 

Short, old folks can’t possibly be a threat – on repudiatory breach

When a contracting party breaches the contract, this would usually lead to a claim in damages. However, there is a category of breach that is more serious in nature, known as repudiatory breach. This is the kind of breach deemed to be so serious that it allows the other party to bring the contract to an end, in addition to claiming for damages. By bring the contract to an end, the other party would be released from further obligations under the contract.

Usually, when a repudiatory breach happens, the other party through their lawyers will inform the party in breach that he/she accepts the repudiation and considers that the contract has come to an end. However, there is no need for the exact and precise words to be used.

In the case of Angus Joinery Ltd v James and Valerie McKay, the McKays had ordered for the installation of 6 specially made windows. This was Mr McKay’s wedding anniversary present to his wife. Unfortunately, Angus Joinery Ltd workers were less than competent in the task, and completed the work badly, leaving a big mess and staining a carpet.

The McKays required the workers to rectify their defects. However, the workers refused to do so because they claimed that Mr McKay had made physical threats against them, and that such physical threats amounted to a repudiatory breach.

And what did the Court make of all these?

The Court found that the employees of Angus Joinery could not have been afraid of Mr McKay, on account of his being short in stature and well beyond 60 years of age. Therefore, the Court rejected the claim of repudiatory breach.

The moral of the story?

It may well take more than some threats from a shorter, older gentleman to amount to repudiatory breach to allow a contracting party to avoid its contractual obligations. The circumstances that may amount to a repudiatory breach, however, would be as varied as factual matrixes go.

Kheng Hoe Advocates wishes all our clients and friends a blessed Christmas and a Happy New Year. We can be reached at khenghoe@khenghoe.com. 

What is the meaning of “regularly and diligently”?

An employer may be entitled to terminate a contract if the contractor has failed to proceed with the works “regularly and diligently”. However, what does that phrase mean?

There was an attempt to define the phrase “regularly and diligently” in West Faulkner Associates v The London Borough of Newham. The said case defined the obligation “to proceed regularly and diligently with the works” to mean that the contractor must proceed continuously, industriously and efficiently with appropriate physical resources so as to progress the works steadily towards completion substantially in accordance with the contractual requirements as to time, sequence and quality of work.

The court further held that the failure of the contractor to proceed with the works either regularly or diligently would entitle the employer to terminate.

This test has been applied in Malaysia, firstly by his Lordship Lee Swee Seng, JC (as his Lordship then was) sitting in the Ipoh High Court in the case of Kerajaan Malaysia v Ven-Coal Resources Sdn Bhd. This principle was re-affirmed by his Lordship Lee Swee Seng, J himself sitting in the Kuala Lumpur Construction Court (see for example Hartajaya-Benteng Timur-Amr Jeli JV Sdn Bhd v Kerajaan Malaysia and another appealPoratha Corp Sdn Bhd v Technofit Sdn Bhd, and Daya CMT Sdn Bhd v Yuk Tung Construction Sdn Bhd.)

His Lordship Vazeer Alam, J sitting in the Construction Court in Shah Alam had equally adopted the dicta of West Faulkner Associates in Sunshine Fleet Sdn Bhd v Jabatan Kerja Raya Malaysia & Anor (GM Healthcare Sdn Bhd & Anor, third parties).

The principles that can be gleaned from all these cases, in summary, are:

a. The obligation to proceed with the works “regularly and diligently” refers to a singular obligation.

b. It is the duty of the employer to show that the contractor has failed to proceed “regularly and diligently”, and not for the contractor to justify itself.

c. The way to determine whether a contractor has been proceeding regularly and diligently is by reference to the SKALA or CPM method to determine whether there has been delay to the extent that the works cannot be completed on time.

d. Where extension of time is not granted despite there being legitimate grounds for the same, then it would be unfair for the employer to rely on the original work programme to show that the contractor has failed to proceed with the works “regularly and diligently”.

e. Whether the delay is sufficiently substantial to justify termination would be a matter of fact.

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

Can a QS be liable for over-certification of defective works?

If construction works have been certified by a QS, and it was subsequently found that these works were defective, can the QS be held liable for the over-certification?

A case in point that determined this issue was that of Dhamija v Sunningdale Joineries, Lewandowski Willcox and Mcbains Cooper Ltd. In this case, the owner sued the QS for over-certification, alleging that the works certified by the QS were in fact defective (and therefore ought not to have been certified).

The owner sought to persuade the Court that his appointment of the QS was subject to the implied term that only works that have been properly executed and not obviously defective ought to be certified.

The Court held that in the absence of express terms to the contrary, a QS is only obligated to check the quantities of work, and not its quality. It is the architect who ought to highlight to the QS if there is any apparent defects, in order that the QS may take these defects into account during valuation.

This seems to make sense, considering that it is the architect who would sign off on the interim payment certificates anyway after the works have been valued by the QS.

Kheng Hoe Advocates advises clients on CIPAA, arbitration, litigation and mediation of construction disputes. We can be contacted 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. 

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. 

Claiming for managerial time to prepare a claim

When a claim is mounted, whether in litigation, arbitration or by way of CIPAA proceedings, obviously there would be hard costs involved. These would include costs paid to consultants, lawyers, Court fees, payments to the arbitrator or adjudicator as well as payments to the regulatory bodies like AIAC or PAM.

In addition to these hard costs, there would also be soft costs involved. By these I mean the cost of managerial time required to prepare a claim. Obviously the more complex the claim is, the more managerial time would be incurred.

Query: Can a company claim for managerial time incurred to prepare a claim?

One interesting case on this point would be that of Aerospace Publishing Ltd v Thames Water Utilities Ltd.

Aerospace Publishing is a publisher of aviation and military history. They stored their archives of photographs and reference materials in a basement, which unfortunately was flooded. Thames Water Utilities Ltd was responsible for the flooding of the basement.

Aerospace Publishing sought to claim as damages its staff costs required to prepare its claim. Thames Water Utilities disagreed. After all, such staff costs would be incurred in any event.

The UK Court of Appeal however allowed the claim. However, the Court imposed the condition that in order to succeed in such a claim, there must be evidence that the managers involved in preparing the claim were diverted from their other work, and that if the diversion did not occur, they would have generated revenue to the value that is at least equivalent to their cost of employment.

Hence, whilst managerial seems prima facie to be claimable, however the claim would be subject to somewhat stringent conditions, which most litigants may not readily fulfill.

Kheng Hoe Advocates is a firm of construction lawyers in Malaysia. Presently, a lot of our work revolves around CIPAA claims. We can be contacted at khenghoe@khenghoe.com.