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. 

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. 

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. 

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You can sign up by sending an e-mail to khenghoe@khenghoe.com. Only select candidates will be invited to attend the interview session.

Three approaches to deal with concurrent delays in construction disputes

If a contractor delays, then he may be subject to pay LAD. If an employer is in default, on the other hand, then the contractor would be entitled to an extension of time, or otherwise time would be made at large.

But what happens when both employers and contractors have some part to play in the delay? For example, the contractor may be slow in its progress of works, but at the same time the employer may have also delayed in handing over the site. Such concurrent delays may lead to construction disputes.

The major issue when there are concurrent delays is to establish how much extension of time the contractor is entitled to. To resolve this problem, there can be a number of approaches.

One approach is called the “Dominant Cause Approach”. For this approach, one must determine what is the dominant cause of the delay, and grant extension of time according to the dominant cause. This “Dominant Cause Approach” was accepted by the Court in Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd.

However, this approach has not been accepted all the time. The Court in H Fairweather & Co Ltd v London Borough of Wandsworth rejected it.

A second approach to deal with concurrent delays is the “but for” approach. In other words, “but for” the delay by the contractor, would an extension of time nevertheless be required? This was the preferred approach in Quinn v Burch Bros (Builders) Ltd.

A third approach is to use the apportionment approach, to apportion the extension of time required between the employer and the contractor based on their responsibility for the delay. This was the preferred approach in Tennant Radian Heat v Warrington Development Corporation.

It would seem therefore that there is no uniform approach. At the end of the day, the construction court is merely seeking, using the best of their ability, to ascertain how much extension of time would be fair based on the factual matrix of the case.

And in construction cases, it is not what are the real facts on site that would ultimately count, but what has been properly documented. Herein lies the biggest challenge for construction companies across the board.

Kheng Hoe Advocates

Building contract and construction contract dispute lawyers
PS: If you have any building contract and construction contract related issues, I invite you to take advantage of my free one-to-one consultation to explore your next steps. There is totally no obligation on your part, and regardless whether you engage me or not, I guarantee that you will walk away with a clear idea as to where your case stands and how to take your case forward. To schedule an appointment, e-mail me with a brief description of your issue at khenghoe@khenghoe.com.

Our performance 2015

Happy New Year!

It’s been a tough year! We have had some major fights. But we have gone through our records, perused our statistics, and we are proud to announce that for 2015, our case performance has exceeded our expectations, although we fell slightly short on our revenue goals. Specifically, we have achieved:

  • 88% of our revenue goals
  • 63% of our cases were won
  • 26% of our cases were settled
  • 11% of our cases were lost

Of course, whether a case is won or lost is not entirely due to us. We do our best for every case, but a lot also depends on the facts, the quality of documentation, etc. However, we always aspire to ensure that 80% of our cases are either won or settled.

Anyway, what’s past is past, and now is the time to look forward to 2016. We will continue to aspire to serve you well, especially in the areas that we know best, namely building contract and construction contract disputes.

Here’s to a fantastic 2016!

Cheers!

Kheng Hoe Advocates

Building contract and construction contract dispute lawyers

PS: If you have any building contract and construction contract related issues, I invite you to take advantage of my free one-to-one consultation to explore your next steps. There is totally no obligation on your part, and regardless whether you engage me or not, I guarantee that you will walk away with a clear idea as to where your case stands and how to take your case forward. To schedule an appointment, e-mail me with a brief description of your issue at khenghoe@khenghoe.com.