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. 

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