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. 

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.