construing contract clause: the literal rule
TRANSCRIPT
CONSTRUING CONTRACT CLAUSE: THE LITERAL RULE
CHAI SIAW HIONG
UNIVERSITI TEKNOLOGI MALAYSIA
PSZ 19:16 (Pind. 1/07)
DECLARATION OF THESIS / POSTGRADUATE PROJECT PAPER AND COPYRIGHT
Author’s full name : ________________________________________________
Date of birth : ________________________________________________
Title : ________________________________________________
________________________________________________
Academic Session : ________________________________________________
I declare that this thesis is classified as :
I acknowledged that Universiti Teknologi Malaysia reserves the right as follows:
1. The thesis is the property of Universiti Teknologi Malaysia.
2. The Library of Universiti Teknologi Malaysia has the right to make copies for the purpose
of research only.
3. The Library has the right to make copies of the thesis for academic exchange.
Certified by :
SIGNATURE SIGNATURE OF SUPERVISOR
880531-13-5632 ASSOC. PROF. DR. MAIZON HASHIM
(NEW IC NO. /PASSPORT NO.) NAME OF SUPERVISOR
Date : Date :
NOTES : * If the thesis is CONFIDENTAL or RESTRICTED, please attach with the letter from
the organization with period and reasons for confidentiality or restriction.
UNIVERSITI TEKNOLOGI MALAYSIA
CONFIDENTIAL (Contains confidential information under the Official Secret
Act 1972)*
RESTRICTED (Contains restricted information as specified by the
organization where research was done)*
OPEN ACCESS I agree that my thesis to be published as online open access
(full text)
CHAI SIAW HIONG
31 MAY 1988
CONSTRUING CONTRACT CLAUSE:
THE LITERAL RULE
2011/2012
SUPERVISOR’S DECLARATION
“I/we*hereby declare that I/we* have read this project report and in my/our*
opinion this thesis is sufficient in terms of scope and quality for the
award of the degree of Master of Construction Contract Management”
Signature : …………………………………………………...
Name of Supervisor : ………………………….………………………..
Date : …………………………………………………...
*Delete as necessary
ASSOC. PROF. DR. MAIZON HASHIM
CONSTRUING CONTRACT CLAUSE: THE LITERAL RULE
CHAI SIAW HIONG
A master‟s project report submitted in fulfillment of the
requirements for the award of the degree of
Master of Construction Contract Management.
Faculty of Built Environment
Universiti Teknologi Malaysia
SEPTEMBER 2012
ii
DECLARATION
I declare that this thesis entitled “Construing Contract Clause: The Literal Rule” is
the result of my own research except as cited in the references. The thesis has not
been accepted for any degree and is not concurrently submitted in candidature of any
other degree.
Signature : ....................................................
Name : ....................................................
Date : ....................................................
CHAI SIAW HIONG
iii
ACKNOWLEDGEMENT
I would like to take this opportunity to record my sincere appreciation to those
who has been helping me throughout this research. This research would not have been
successful without the support, sacrifice and generous contributions from various
parties.
First of all, I would like to thank my research supervisor, Dr. Maizon Hashim,
and my second reader supervisor En Jamaludin Yaakob. They had guided me and
gave me a lot of impressive ideas regarding my research. Their advices and supports
help me to complete this research. I am also very thankful to my coursemate Grace
Poh, who helped me to correct my grammar for this research. Thanks for their
patience and kind advice.
Besides, I would like to thank my parents and family members for their
supports and encouragement throughout this research. Lastly, I would like to thank all
my friends for giving their support and dedication in helping me to complete this
research. Thank you very much.
iv
ABSTRACT
In drafting a contract, contracting parties will negotiate terms of their contract
and subsequently translate them in writing. It is very important to ensure the words
used effectively reflect their true intentions. This is because the law cases relating to
ambiguous terms in contracts would allow the courts to construe the word base on
their opinion. The disagreements and differing opinions by the parties as to the true
construction of particular terms frequently happened in construction industry. There
are many approaches that judge use to construing construction contract clauses, such
as Literal Rule, Golden Rule, Mischief Rule, Purposive Rule, Contra Proferentem
Rule and etc. The courts use those rules to the ambiguous express terms to resolve the
ambiguity or inconsistency or discrepancy. Literal Rule is the oldest of the rules of
construction and is still used today. As there is always the danger that a particular
interpretation may be the equivalent of making law, some judges prefer to adhere to
the law's literal wording. However, there some criticism against the use of Literal
Rule which the rule rests on the erroneous assumption that words has a fixed
meaning. In fact, words are imprecise, leading judges to impose their own prejudices
to determine the meaning of a statute. The objective of this study is to identity
suitability of using Literal Rule in interpretation approach in construction industry.
The law cases that been analyzed was under “Pay When Paid”, “Performance Bond”
and “Termination” clauses. The finding of this study stated that, not all the
construction clauses are suitable to be construed using Literal Rule approach.
v
ABSTRAK
Dalam merangkai kontrak, pihak berkontrak akan berunding terma kontrak
mereka dan seterusnya menterjemahkan dalam bentuk tulisan. Ia adalah sangat
penting untuk memastikan perkataan yang digunakan dalam kontrak dapat
menunjukkan tujuan sebenar mereka. Ini adalah kerana kes undang-undang yang
berhubungan dengan salah tafsiran dalam kontrak akan membenarkan mahkamah
untuk mentafsirkan perkataan asas dengan pendapat mereka. Percanggahan pendapat
dengan pendapat yang berbeza oleh pihak berkontrak sering berlaku dalam industri
pembinaan. Terdapat banyak kaedah yang boleh diguanakan oleh hakim dalam
mentafsirkan fasal kontrak pembinaan, seperti “Literal Rule”, “Golden Rule”,
“Mischief Rule”, “Purposive Rule”, “Contra Proferentem Rule” dan sebagainya
Mahkamah menggunakan kaedah tersebut untuk menyelesaikan masaah tafsiran and
percanggahan. “Literal Rule” adalah kaedah yang paling lama digunakan dan masih
digunakan hari ini. Oleh kerana sentiasa terdapat bahaya bahawa tafsiran tertentu
mungkin dianggap sebagai merangka undang-undang, jadi hakim lebih suka
berpegang kepada “Literal Rule”. Walau bagaimanapun, terdapat beberapa kritikan
terhadap penggunaan “Literal Rule” bahawa peraturan tersebut bergantung kepada
andaian salah di mana perkataan mempunyai makna yang tetap. Malah, sesuatu
perkataan jika tidak mempunyai makna yang tepat, hakim akan mentafsirkan
perkataan mengikut prasangka mereka sendiri untuk menentukan makna statut.
Objektif kajian ini adalah untuk mengenal pasti kesesuaian menggunakan “Literal
Rule” sebagai pendekatan tafsiran dalam industri pembinaan. Kes yang telah
dianalisis adalah berkaitan dengan terma dalam fasal “Pay When Paid”,
“Performance Bond” and “Termination”. Kajian ini mendapati bahawa, tidak semua
fasal sesuai ditafsirkan dengan “Literal Rule”.
vi
TABLE OF CONTENTS
CHAPTER TITLE PAGE
THESIS DECLARATION
SUPERVISOR’S DECLARATION
TITLE PAGE i
DECLARATION ii
ACKNOWLEDGEMENT iii
ABSTRACT iv
ABSTRAK v
TABLE OF CONTENTS vi
LIST OF TABLES x
LIST OF FIGURES xi
LIST OF CASES xii
1 INTRODUCTION
1.1 Background of the study 1
1.2 Problem Statement 5
1.3 Objectives of the Research 8
1.4 Scope of the Research 8
1.5 Research Methodology 9
1.6 Organization of Chapter 12
vii
2 METHOD OF INTERPRETATION
2.1 Introduction 14
2.2 Interpretation Statutory Provisions 16
2.3 Interpretation of Statutes 17
2.3.1 Literal Rule 17
2.3.2 Golden Rule 18
2.3.3 Mischief Rule 21
2.3.4 Purposive Rule 24
2.3.5 Contra Proferentem Rule 27
2.4 Interpretation of Contracts 29
2.4.1 Interpretation Rules in United States 28
2.4.2 Interpretation Rules under English Law 32
2.3.1 Interpretation Rules by Lord Hoffmann 34
2.5 Conclusion 37
3 CRITICISM ON LITRAL RULE
3.1 Introduction 38
3.2 Criticism on literal rule 39
3.2.1 Distinction between Ordinary and Technical
Words In a Statute
40
3.2.2 Distinction between Literal Meaning and
Drafter‟s Intention
41
3.2.3 Fails To Recognize The Complexities And
Limitations Of English Language
44
3.2.4 Creates Loopholes In The Law 45
3.3 Conclusion 46
viii
4 ANALYSIS OF CASE
4.1 Introduction 47
4.2 Case Analyzed On The Suitability Of Using Literal
Rule Interpretation In Construing Contract Clause
48
4.2.1 Literal Rule Approach In Construing “Pay
When Paid” Clause
49
4.2.2 Literal Rule Approach In Construing
“Performance Bond” Clause
64
4.2.3 Literal Rule Approach In Construing
“Termination” Clause
69
4.3 Analysis of Law Cases 74
4.3.1 Analysis On Cases That Applied Literal
Rule Approach In Construing Contract
Clause
74
4.3.2 Analysis On Cases That Applied Literal
Rule Approach In Construing “Pay When
Paid” Clause
75
4.3.3 Analysis On Cases That Applied Literal
Rule Approach In Construing “Performance
Bond” Clause
80
4.3.4 Analysis On Cases That Applied Literal
Rule Approach In Construing
“Termination” Clause
81
4.4 Conclusion 83
5 CONCLUSION AND RECOMMENDATION
5.1 Introduction 84
5.2 Summary of Research Findings 85
5.3 Problem Encountered During Research 89
5.4 Conclusion and Recommendation 89
ix
REFERENCES 92
x
LIST OF TABLES
TABLE
NO
TABLE TITLE PAGE
4.1 Particulars of the Analyzed Cases 48
4.2 Analysis of Cases on Literal Rule Construction and Non
Literal Rule Construction
74
5.1 Analysis of Literal Rule Approach on “Pay When Paid”
Clause
85
5.2 Cases of Performance That Using Literal Rule Approach 87
5.3 Analysis of Literal Rule Approach on “Termination” Clause 88
xi
LIST OF FIGURES
FIGURE
NO
FIGURE TITLE
PAGE
1.1 Research Methodology
11
4.1 Analysis of Cases on Literal Rule Construction and Non
Literal Rule Construction
75
xii
LIST OF CASES
CASES
Adler v George[1964] 2 QB 7
Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd [2010] 3 MLJ 7
BBR Construction Systems (M) Sdn Bhd v. Maxdouble Construction (M) Sdn Bhd
[2002] MLJU 104
Brightside Mechanical & Electrical Services Group Ltd. & Anor v Hyundai
Engineering & Construction Co. Ltd. [1988] 1 MLJ.500
Central Provident Fund Board v Ho Bock Kee [1981] 2 MLJ 162
Corkery v Carpenter [1951] 1 KB 102
Cutter v Eagle Star Insurance Co. Ltd [1998] 4 All ER 417 at 426
DMCD Museum Associates Sdn Bhd v Shademaker (M) Sdn Bhd (No 2) [1999] 4 MLJ
243
DPP v Bull [1995] QB 88
Durabella Ltd v J Jarvis & Sons Ltd [2001] All ER (D) 102
xii
East Ham Corporation v. Sunley [1965] 1 WLR 30
Elliot v Grey[1960] 1 QB 367
Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd [1998] 6 MLJ 80
Fisher v Bell [1961] 1 QB 394
Goodwin & Sons v Fawcett[1945] EG 186
Heydon [1584] 76 ER 637
Hong Kong Teakwood Works Ltd v. Shui On Construction Co Ltd[1984] HKLR 235
Horne Coupar v. Velletta& Company [2010] BCSC 483
Iezzi Construction Pty Ltd v. Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd. R. 350
Inland Revenue Commissioners v Hinchy [1960] AC 748
Interpo Engineering Pte. Ltd. v Sin Heng Construction Co. Pte. Ltd. [1998] 1 SLR 694
Investors Compensation Scheme Ltd v West Bromwich Building Society[1997] UKHL
28
Kejuruteraan Bintai Kidenko Sdn Bhd v Nam Fatt Construction Sdn Bhd And Anor -
[2010] MLJU 1869
Lloyd v. Lloyd [1837] 2 My & Cr 192
London & North Eastern Railways Co. v Berriman [1946] AC 278
Lotteworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor [1998]
7 MLJ 105
Magor and St. Mellons Rural District Council v Newport Corporation [1950] 2 All ER
1226 at 1236
xiii
Partridge v Crittenden[1968] 2 All ER 421
Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd [2007] 4 MLJ 113
Pernas Otis Elevator Co. Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd
[2003] MLJU 394
Pickstonev Freemans plc[1988] ICR 697, HL
R v Allen [1872] LR 1 CCR 367
R v Cheeseman [1836]7 C. & P. 445
R v City of London Court [1892] 1 QB 273
R v Goodwin[2005] EWCA Crim 3184; [2006] 1 W.L.R. 546(1)
R v Harris[1836] 7 C & P 446
R v Register General ex Part Smith [1991] 2 All ER 88
Re Sussex Peerage [1844] 11 Cl&Fin 85
Rich v CGU Insurance Ltd [2005] 79 ALJR 856
Royal College of Nursing v DHSS [1981] 2 WLR 279
Royden (M) sdn bhd v Syarikat Pembenaan Yeoh Tiong Lay sdn bhd [1992] 1 MLJ 33
Schindler Lifts (Hong Kong) Ltd v. Shui On Construction Co Ltd[1985] HKLR 118
Simpson v. Foxon [1907] P 54
Smith & Smith Glass Ltd v. Winstone Architectural Cladding Systems Ltd [1992] 2
NZLR 473
Smith v Hughes[1960] 1 WLR 830
xiv
Teknik Cekap Sdn Bhd v Public Bank Bhd [1995] 3 MLJ 449
Thomas J Dyer Co v. Bishop International Engineering[1962] Co 303 F2d 655
Wallis v. Smith [1882] 21 Ch D 243
Ward v. Eltherington [1982] Qd. R. 561 (SC, Qld)
CHAPTER 1
INTRODUCTION
1.1 Background of the Study
The contract‟s clarity is important; it could help contract drafters and professional
to review and clarify the contract easily. The clear terms and conditions in the contract
make it easy for the parties to understand the contract.1The contractual obligation of
contracting parties in any contract or agreement will be questionable if the terms and
condition of the contracts are not fully appreciated.2 It is very important for contract to be
drafted in clear and unambiguous term that clearly set out the intention of the parties.
Unclear term will lead misunderstanding and disputes.
1Chong, H.Y and RosliMohamadZin (2008).A case study into the language structure of construction
standard form in Malaysia. International Journal of Project Management 28 (2010) 601-608 2Mohamad Ibrahim Mohamad1 And ZulkifliMadon, Understanding Contract Documentation, Proceedings
Of The 6th Asia-Pacific Structural Engineering And Construction Conference (APSEC 2006), 5 – 6
September 2006, Kuala Lumpur, Malaysia.
2
There are many disputes in construction industry. One of the reasons is poor
understanding of contract terms. Poor understanding of contracts is caused by ambiguous
term or unclear term. When terms are ambiguous, the courts use various methods of
interpretation to construe the meaning of words. However when the term are clear and
unambiguous, court will used literal meaning or plain English meaning.3
According to the Free Online dictionary, ambiguity defined as unclearness by
virtue of having more than one meaning. If there is an ambiguity, and the original writer
cannot effectively explain it, then the ambiguity will be decided in the light most
favorable to the other party.4A contract is said to be ambiguous when it is uncertain what
the intent of the drafter and the contract is capable of more than one reasonable
interpretation. Courts will interpret against the ambiguous contract words. The court
may also imply a term if it‟s necessary to give a contract a construction or meaning that is
reasonable. However, a term will not be implied in a contract when the court concludes
that the parties intended for the contract to be silent on a particular point.5
For the ambiguous clauses, the court will interpret the meaning of the term and
provision. This construing exercise is particularly important when the meaning of a
contractual term is ambiguous or uncertain or contradictory. When a judge construes a
provision of a statute or a term in a contract, he will normally applies certain established
“rules of construction”. “Construction” can be define as the form of a building or
combine together the parts of anything, structure and arrangement. In the other hand,
“Construction” also refers to the arrangement and connections of words in a sentence,
3 Helen Scott. Contract II Outline. Spring 1995
4 Farlex, “Ambiguity”, The free Dictionary. Retrieved on 14 August 2012 and available at http://legal-
dictionary.thefreedictionary.com/ambiguity 5 US Legal. Interpretation of Ambiguous contracts, 2010. Retrieved on 14 August 2012 and available at
http://contracts.uslegal.com/interpretation-of-contracts/interpretation-of-ambiguous-contracts/
3
syntactical arrangement in construing, interpreting, or explaining a declaration or facts,
an attributed sense or meaning, understanding, explanation and etc.6
There are many type of interpretation method in construing statutory provision
and contract document. For example literal rule which the words are to be taken prima
facie in their ordinary, literal or grammatical meaning; golden rule, which the
grammatical and ordinary sense of the words is to be adhered to and purposive rule,
which give effect to the true purpose of legislation and are prepared to look at much
extraneous material that bears on the background against which the legislation was
enacted. There is also mischief rule which the courts may consider the pre-existing
problem and the intention of the parliament as regards the remedy for it and by reading
the contract as a whole.7
In the case of Simpson v. Foxon 8, the court had held that the meaning of a
document must be sought in the document itself. In the case of the Lloyd v. Lloyd9, the
clauses in the sale and purchase agreement are complete and unambiguous in their terms
that there can be no other construction possible then the one which was held by the
learned judge. Lord Cottenham LC stated that “If the provisions are clearly expressed,
and there is nothing to enable the court to put upon them a construction different from
that which the words import, no doubt the words must prevail”. It was intention may
prevail over the words used.
6 Accurate & Reliable Dictionary, “Construction”, A free English online dictionary. Retrieved on 14
August 2012, and available at http://ardictionary.com/Construction/11089 7 Wikipedia, the free encyclopedia
8 [1907] P 54
9 [1837] 2 My & Cr 192
4
In construing the words, the words are to be taken in their literal meaning. It can
be showed in the case of Wallis v. Smith,10
in determining whether a clause can be
considered as liquidated damages, the court held that a clause provided that a sum of
money will be payable to contractor for any substantial breach committed by defendant,
and the court of appeal construed it as being a liquidated damages clause.
When construing a contract, a contract is to be construed as a whole. It was shown
at the case of East Ham Corporation v. Sunley11
. It was a case which the plaintiff is
seeking damages for the defective performance of a building contract which was a
contract for labour and materials. The normal measure of his damages was the cost of
carrying out remedial work. Reasonableness was a part of the primary assessment of
damages as well as of mitigation of damage.
When the main issue related to the ambiguity of a term in a contract, the court
will use a suitable method of interpretation in order to find out the exact intention of the
parties. The courts have developed a range of rules of interpretation to assist them. One
of the rule that commonly been used is Literal Rule, when the literal rule is applied the
words in a statute are given their ordinary and natural meaning, in an effort to respect the
will of Parliament.12
10
[1882] 21 Ch D 243 11
[1965] 1 WLR 30 12
Pearson, Catalogue, Chapter 3 Statutory Interpretation. Retrieved on 19 August 2012 and available at
http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/ELS_C%20and%20
M_Chap%203.pdf
5
1.2 Problem Statement
Literal rule is one of the important methods of interpretation. Literal rule is not
only being used in interpretation clause in contract, but also in interpretation statutory
provision. Literal rule is mainly used when the words in clause are clear and
unambiguous. For example in the case of Teknik Cekap Sdn Bhd v Public Bank Bhd13
, the
court held that the wording of the performance bond itself, it was clear and unequivocal.
Therefore giving the words in the performance bond its literal plain meaning, it was a
conditional bond.
The literal approach is dominant in the English legal system, although it is not
without critics, and devices do exist for circumventing it when it is seen as too restrictive.
This view of judicial interpretation holds that the judge should look primarily to the
words of the legislation in order to construe its meaning and, except in the very limited
circumstances considered below, should not look outside of, or behind, the legislation in
an attempt to find its meaning.14
Under the literal rule the judge considers what the clause actually says, rather than
what it might mean. In order to achieve this, the judge will give the words in the literal
meaning. Sometimes, the effect of plain meaning is to produce what might be considered
as an otherwise unjust or undesirable outcome. The literal rule says that the intention of
contract parties is best found in the ordinary and natural meaning of the words used. If
the judges are permitted to give an obvious or non-literal meaning to the words of
contract law, then the meaning of contract can be contradict.15
13
[1995] 3 MLJ 449 14
Fundamentals Level – Skills Module, The literal Approach. Paper F4 (ENG) Corporate and Business
Law (English) December 2009 Answers. 15
LabSpace, open educational resources. Judge and the Law: Part E The rules of statutory interpretation
The literal rule. Retrieved on 19 August 2012 and available at
http://labspace.open.ac.uk/mod/resource/view.php?id=415849
6
Literal meaning is a simple exercise. All that the judge does is to give the words
in the clauses their literal or plain English meaning. For example in the case of Brightside
Mechanical & Electrical Services Group Ltd. & Anor v Hyundai Engineering &
Construction Co. Ltd.16
The relevant payment provision reads as “Within five days of the
receipt by the contractor by the sum included in any certificates of the architect, the
contractor shall notify and pay to the sub contractor……”. In construing the wordings of
this provision, Judge Thean said the clauses were clear and unambiguous and effect must
be given to them.
However, the literal meaning may not be in compliable with the intentions of the
contract. For example “Pay When Paid” clause, it may not be correct to assumed that the
subcontractor will not be paid at all so long as the employer has not paid the main
contractor for what else the reasons is. If the reason for not payment to the main
contractor is the default of the main contractor, thus it is cannot that the subcontractor
will not be paid at all. For example in the case of Durabella Ltd v. J Jarvis & Sons Ltd17
,
the court held that a contractor cannot rely on a “Pay When Paid” clause if the reason for
non-payment is its own breach of contract or default. It is trite law that one cannot take
advantage from one‟s breach of contract.
The literal rule may also not be suitable when the interpretation gives a different
meaning. It was showed in the “Termination” clause for the ways of serving termination
notice. In the case of Goodwin & Sons v Fawcett18
which decided that the provisions for
giving of the notice of determination by registered post was not mandatory and that such
a notice given by recorded delivery was valid. However in the case of Fajar Menyensing
Sdn Bhd v Angsana Sdn Bhd19
, the cpurt held that clause of the contract clearly required
16
[1988] 1 MLJ.500 17
[2001] All ER (D) 102 18
[1945] EG 186 19
[1998] 6 MLJ 80 (HC)
7
the notices to be given by registered post or recorded delivery. The notices of
determination delivered by hand were hence invalid.
The literal rule fails to recognize that the English language itself is ambiguous and
that words may have different meanings in different contexts. The use of this rule can
sometimes lead to absurdities and loopholes which can be exploited by an unmeritorious
litigant. Judges have tended to over-emphasize the literal meaning of statutory provisions
without giving due weight to their meaning in a wider context. Placing emphasis on the
literal meaning of words assumes an unobtainable perfection in draftsmanship. Finally, it
ignores the limitations of language.20
The used of literal rule also can lead to harsh outcomes. It was showed in the case
of London & North Eastern Railways Co. v Berriman21
, were a rail worker was killed
when doing maintenance work. When his widow tried to claim compensation she was
told she would not receive anything due to the work of maintaining the line. This was
because the word maintaining was not “Relaying” or “Repairing” as said in the Fatal
Accidents Act. It showed that there had been a minor technicality with the words
maintaining and repairing as they had been seen as being completely different words
when taking the meaning of them literally. 22
After the Berriman case, Professor Micheal
Zander decided that the literal rule was mechanical is divorced from the realities of the
language which was in use.
20
Ibid, no.15 21
[1946] AC 278 22
Amy Cross. Using cases to illustrate, explain how and why the courts make used of the doctrine of
judicial precedent and statutory interpretation to resolve points of law. November 2008
8
The literal rule has been widely used in interpretation of contract clauses;
however it is not always suitable for construing of all contract clauses. Literal rule gives
meaning to words without the consideration of different situations. It will lead to the
unfair judgment and obscure outcomes.
1.3 Objective of the Research
The objective of the study is to identify the suitability of using literal rule in
construing contract clause.
1.4 Scope of the Research
The approach adopted in this research is case law based. The cases specifically
related to the issue of literal rule have been discussed in this study. The relevant court
cases are taken from the Malayan Law Journal and other sources. Furthermore, this study
has been conducted based on the relevant provisions in Standard Forms of Construction
Contract used in Malaysia such as PAM contract 2006, PWD Form 203A 2010, CIDB
2000 and other provisions under Common Law.
9
1.5 Research Methodology
The methodology of this study is by documentary analysis. To achieve the
objective of this study, a systematic process has been planned. The process of the study
divides into five stages as followings:
a) Identify the issue of study
b) Literature review
c) Data collection
d) Data analysis
e) Conclusion and recommendation
1.5.1 Stage 1: Identify the Issue of Study
Before identify an issue, it involved general reading on various type of material
such as journals, articles, newspaper, magazine, online database, previous research report
and cases in the Malayan Law Journal. After confirming an interesting topic or issue, it
involved extensive reading and of the concept involved to collect more data to make sure
the issue was strong enough.
10
1.5.2 Stage 2: Literature Review
After identifying the issue, the next stage is literature review which explained and
discussed about the research topic. The data and information are gathered from the
journals, books, articles and magazines. Besides that, it also refers to the court cases from
different sources such as Malayan Law Journal, Malaysian Bar and etc. This phase is to
increase the understanding and support for the research before proceeding to another
stage. Apart from that, the clause in various type of standard form will be referred such as
PAM form of contract 2006, PWD Standard Form of Contract 2010 and CIDB 2000
standard form of contract.
1.5.3 Stage 3: Data Collection
Data collection is a process of obtaining the data and information related to the
study. In order to meet the goals and objectives, the cases that are relevant to plain
English in the Malayan Law Journal (MLJ) cases will be focused. It carries out by using
the online database via university library. Besides that, other source such as articles,
journal and related website are also been studied and referred.
11
1.5.4 Stage 4: Data Analysis
Data analysis is done after the data collection stage. The relevant court cases that
related to the research objective will be reviewed with the facts, issue and court held by
each different cases. After the discussions have been made from the analysis, there will
be the recommendation and conclusion chapter to accommodate those researches
findings.
1.5.5 Stage 5 Conclusion and Recommendation
The final step of study is conclusion and suggestion of the study. The findings of
the research are concluded and some suitable recommendations for further study are
made.
12
Figure 1.1 Research Methodology
1.6 Organization of Chapter
Organization of chapter is a summary of the content for the Research Project Report. The
report consists of four chapters:
Stage 5 conclusion and Recommendations
Conclude the findings from research
Stage 4 – Data Analysis
Documentary analysis, Analysis of cases relevant to Literal Rule
Stage 3 – Data Collection
Relevant Malayan Law Journal (MLJ) cases from online database via university library
Stage 2 - Literature Review
Data and information gathered from the journals, books, articles, magazines and etc.
Stage 1 - Identify the Issue of Study
General reading on various type of material to identify objective of study, issue and scope of study.
13
a) Chapter 1 : Introduction
This chapter covers the background of the study, statement of problem, research
objective and scope of study. This chapter also includes the research methodology
for this study.
b) Chapter 2 : Method of Interpretation
This chapter is literature review for the study. It explains the data and information
obtain from secondary resources. It‟s including the introduction of statutory
provision interpretation and contract document interpretation.
c) Chapter 3: Literal Rule
This chapter also is literature review for the study. It was a further explains for the
chapter 2 date information. It‟s more focused on the Literal rule interpretation
approach and the criticism of the literal rule.
d) Chapter 4 : Case Analysis
This chapter presents the findings achieved from documentary analysis of the law
cases. The law cases are analyzed and discussed.
e) Chapter 5 : Conclusion and Recommendation
This chapter concludes the findings of the study and some recommendations are
suggested.
CHAPTER 2
METHOD OF INTERPRETATION
2.1 Introduction
According to the World English Dictionary, interpretation is the act or process of
interpreting or explaining. It is a particular view of an artistic work especially as
expressed by stylistic individuality in its performance. Interpretation is the
ascertainment of the meaning of the words used by the contracting parties. It is applying
appropriate standards to determine the meaning of the words. “Construction” involves
the court determining, as a matter of law, the legal meaning of the entire contract. In
short, interpretation involves ascertaining the meaning of the contractual words, while
construction involves determining their legal effect. Accordingly, interpretation is a
question of fact, while construction is a question of law.23
23
Jackson Walker L.L.P. Boilerplate Terms, Rules Of Interpretation, And Developments In Drafting
ContractsPresented at the Continuing Legal Education Seminar “Corporate Counsel Update”
MAY 29, 2003 (HOUSTON, TEXAS).
15
Under English law, “interpretation” is a narrower concept and has traditionally
been an exercise of determining the literal meaning of the words used. The object of
contract interpretation under English law is to ascertain objectively the mutual intention
of the parties as to the legal obligations each assumed by the contractual words in which
they required to express them.24
In interpreting, the grammatical and ordinary sense of the words is to be adhered
to, unless that would lead to some absurdity or some repugnance or inconsistency with
the rest of the instrument, in which case the grammatical and ordinary sense of the word
may be modified so as to avoid that absurdity and inconsistency but no further.25
The
dictionary meaning of the words applies, unless there are some special reasons to do
such as term of art or definition, statutory definition or trade usage. Particularly in
respect of commercial agreement, the document as a whole may be considered to give
guidance in the meaning of words and provision.26
Inconsistencies of the words and provisions in the document often arise from the
common practices of forming documents through copying from previous documents or
extracting from old agreements or clauses provided by helpful friend or colleagues. The
drafter has the ultimate responsibility for making sure that the documents reads properly
as whole by ensuring consistency of the words and expressions throughout as well as the
consistency of the rights, duties or obligations.27
24
HenrikWærstedBjornstad, Entire Agreement Clauses. Magister Juris (University Of Oxford) 2007 25
Per Lord Wensleydale in Grey v Pearson [1957] 6 HL Cas 61 at 106 26
Edward W. Daigneault. Pocket Guide. Drafting International Agreement in legal
English.ManzcheVerlages- und Univeristitatsbuchhanlung GmbH. Wien 2005 27
Ibid.
16
2.2 Interpretation Statutory Provisions
Statutory interpretation is used when the cases that come before the courts have
disputes over the exact meaning of some words in the acts of parliament. The courts
make it their job in deciding the exact meaning of a particular word. The main reasons
on why a phrase or word may be unclear could be that there is a board term were the
word could be designed to cover several different possibilities which was seen in the
case Dangerous Dogs Act (1991) where there was confusion with what was actually
meant with the word „type‟ and does that word mean the same meaning of „breed‟.28
.
Another reason on why a word may be unclear would be to do with ambiguity
was a word may have two meanings and that it is not clear in the act which meaning is
referred. Over the years in the English legal system, there have been developing many
different rules of interpretation to discover the meaning of particular rule.29
a) Interpretation Act
This Act may be cited as the Interpretation Act 2005 and comes into operation on
1 January 2006.In the interpretation Act 2005, it is an act respecting the
interpretation and application of acts and of statutory instruments made under
acts and providing for the repeal of certain enactments relating to those matters.
28
Ibid, no. 22 29
Ibid, no. 22
17
b) Contract Act 1950
In the section 30 of the Contract Act, it showed that a contract will be void when
the words are ambiguous. It showed as follow
“Section 30 Agreements void for uncertainty
Agreements, the meaning of which is not certain or capable of being made
certain are void.”
2.3 Interpretation of Statutes
2.3.1 Literal Rule
Under this rule, the judge needs to consider what the legislation words actually
says rather than considering what it might mean.30
Words must be given their plain,
ordinary and literal meaning in literal rule. If the words are clear, they must be complied
with even though the intention of the drafter may be different from the implied meaning
on the words. The rule for construction of Acts or contracts is that they should be
construed according to the intent of the contracting parties. If the words of the
agreements are precise and unambiguous, then no more can be necessary than to
expound those words in that natural and ordinary sense. The words themselves alone do,
in such a case, best declare the intention of the contract drafter.31
30
Ibi, no. 14 31
MEMcLaughlin.Statutory Interpretation - Rules of Construction.Quizlet. March 2011retrieved on 22
August 2012 and available at http://quizlet.com/4935216/statutory-interpretation-rules-of-construction-
flash-cards/
18
The literal rule is the primary rule which is commonly used by the courts in
interpretation. Words and phrases need to be construed by the court in their ordinary
sense and the ordinary rules of grammar and punctuation should be applied. When
applying the literal rule, the court will interpret a clear meaning and the contracting
parties need to comply with it. The courts will not inquire what the clause and intention
of the drafter. 32
In the early 1900‟s, this rule was commonly used and still been used
today to help courts to decide what the actual words mean. It is used as the starting point
for interpreting any legislation.33
With all the rules, there are advantages and disadvantages when using them
which are important when solving points of law. The advantages of literal rule are that,
this rule has to literally follow the rods of drafter and which words they have used in the
past. In the English legal system, parliament is the law drafting body and it is right that
judges should apply the law exactly as it is drafted. With the literal rule interprets
exactly as it is drafted, it makes people easier to understand the law and how judges
apply it.34
2.3.2 Golden Rule
The golden rule is an adaptation of the literal rule. Golden rule provides that
words should be given their ordinary meaning as far as possible, but only to the extent
that they do not produce an absurd or totally obnoxious result.35
This rule is applied in
32
Law Student.A journey into a law degree. The Literal Rule. 2012. Retrieved on 22 August 2012 and
available at http://oulawstudent.blogspot.com/2010/12/literal-rule.html 33
Ibid, no. 22 34
Ibid, no. 22 35
Ibid, no 31
19
situation where the used of the literal rule is looks absurd so then the golden rule can try
to help distinguish what the phrase or words means.
Under golden rule, the court is not to ignore, or replace, legislative provisions
simply on the basis that it considers them absurd. The court must find genuine
difficulties before it declines to use the literal rule in favor of the golden one. For
examples, there may be two apparently contradictory meanings to a particular word used
in the statute, or the provision may simply be ambiguous in its effect. In such situations,
the golden rule operates to ensure that preference is given to the meaning that does not
result in the provision being an absurdity.36
There have been some cases used the golden rule. In Adler v George37
, the
defendant was found guilty, under the Official Secrets Act 1920, with obstruction „in the
vicinity‟ of a prohibited area, although she had actually carried out the obstruction
„inside‟ the area.38
There was another case that also used golden rule. In R v Allen39
, the
defendant claimed that he was not legally married, the court decided that the word marry
means go through a ceremony of marriage. So the defendant was seen guilty because he
had gone through a marriage ceremony, as the word marry can mean two different things
which is the actual legal binding or the marriage ceremony.
When the courts adjudicate disputes about the meaning of an ambiguous
provision, they generally apply the golden rule. Golden rule requires the court to take the
following steps:
a) Determine the ordinary and natural meaning of the words used in the provision
36
Ibid, no.14 37
[1964] 2 QB 7 38
Ibid, no.14 39
[1872] LR 1 CCR 367
20
b) Consider the context of the contract, which includes matters such as the purpose
of the contract, any 'recitals' or 'background' clauses, and any other relevant
provisions of the contract
c) If the ordinary and natural meaning is inconsistent with the context of the
contract, or if it gives rise to any absurdities, modify the meaning as appropriate.
The meaning derived by this method, in the vast majority of cases, will be
adopted by the courts. 40
The advantage of Golden rule is that it is an alternative way
besides using the literal rule. Golden rule respects every word that parliament has said
apart from some limited situations. The golden rule allows the judges to choose the most
suitable and correct meaning for a word in which they feel better with the case. It also
can be used to prevent the situations becoming repugnant and make sure sensible
decision is made.41
The advantages of golden rule are showed as follow:
a) Errors in drafting can be corrected immediately
b) Decisions are generally more in line with Parliament's intention
c) Closes loopholes
d) Often gives a more just result
e) Brings common sense to the law
40
Scott Alden , Alex Ottaway& Jennifer Tetstall.Drafting Contracts: Guidance On Managing Ambiguity.
Construction Update (Australia) 1 Feb 2012. RtrievedOn 22 August And Available At
Http://Www.Dlapiper.Com/Australia/Publications/Detail.Aspx?Pub=6719 41
Ibid, no. 22
21
The disadvantages that can be occurred in the golden rule is that it has a very limited
use, so usually the golden rule being used in very rare occasions. People can never
predict when the golden rule can be used.42
Judges are able to add or change the meaning
of statutes and thereby become law makers infringing the separation of powers. Besides
that, judges have no power to intervene for pure injustice where there is no absurdity.43
2.3.3 Mischief Rule
The mischief rule of statutory interpretation is the oldest rules. This rule allowed
the court to go behind the actual wording of a statute in order to consider the problem
that the statute is supposed to remedy. In its traditional expression, it is limited by being
restricted to use previous common law rules in order to decide the operation of
contemporary legislation. Thus in Heydon‟s44
case,it was stated that in making use of the
mischief rule, the court should consider what the mischief in the law was which the
common law did not adequately deal with and which statute law had intervened to
remedy.
The mischief rule Heydon's Case has stated that for the true interpretation of all
statutes, four things are to be considered:
a) What was the common law before the making of the Act.
b) What was the mischief and defect for which the common law did not provide.
42
Ibid, no. 22 43
E-lawresources.co.uk. Providing resources for studying law. The Golden Rule.Retrieved on 22 August
2012 and available at http://www.e-lawresources.co.uk/Golden-rule.php 44
[1584] 76 ER 637
22
c) What remedy Parliament resolved and appointed to cure the disease.
d) The true reason of the remedy; and then the function of the judge is to make such
construction as shall suppress the mischief and advance the remedy.
The mischief rule was the product of a time when statutes were a minor source of
law by comparison with the common law, when drafting was by no means as exact a
process as it is today and before the supremacy of Parliament was established. The
mischief could often be discerned from the lengthy preamble normally included. The
mischief rule was regarded by the Law Commission, which reported on statutory
interpretation in 1969, as a "rather more satisfactory approach" than the other two
established rules.45
The use of the mischief rule may be seen in Corkery v Carpenter46
. A man was
found guilty of being drunk in charge of a carriage although he was in fact only in
charge of a bicycle.47
In Re Sussex Peerage48
, it was held that the mischief rule should
only be applied where there is ambiguity in the statute. Under the mischief rule, the
court's role is to suppress the mischief the Act is aimed at and advance the remedy.49
The advantage of using mischief rule isallowing the law to develop and adapt to
changing needs e.g. Royal College of Nursing v DHSS50
. Offences Against the Person
Act 1861 makes it an offence for any person to carry out an abortion. The Abortion Act
1967 provided that it would be an absolute defence for a medically registered
45
Smith &Baile on the Modern English Legal System. Third edition 1996, p351-403; cases in Jacqueline
Martin, The English Legal System, chapter 3 46
[1951] 1 KB 102 47
Ibid, no.14 48
[1844] 11 Cl&Fin 85 49
E-lawresources.co.uk. Providing resources for studying law. The Mischief Rule. Retrieved on 22
August 2012 and available at http://www.e-lawresources.co.uk/Mischief-rule.php 50
[1981] 2 WLR 279
23
practitioner to carry out abortions provided certain conditions were satisfied. Advances
in medical science meant surgical abortions were largely replaced with hormonal
abortions and it was common for these to be administered by nurses.
The court held that it was legal for nurses to carry out such abortions. The Act
was aimed at doing away with back street abortions where no medical care was
available. The actions of the nurses were therefore outside the mischief of the Act of
1861 and within the contemplate defence in the 1967 Act.
The disadvantage of mischief rule is showed in Smith v Hughes51
. The
defendants were prostitutes who had been charged under the Street Offences Act 1959
which made it an offence to solicit in a public place. The prostitutes were soliciting from
private premises in windows or on balconies so could be seen by the public. The court
applied the mischief rule holding that the activities of the defendants were within the
mischief, the Act was aimed at even though under a literal interpretation they would be
in a private place. It creates a crime after the event of Smith cases.
The other case is Elliot v Grey52
. The defendant's car was parked on the road. It
was jacked up and had its battery removed. He was charged with an offence under the
Road Traffic Act 1930 of using an uninsured vehicle on the road. The defendant argued
he was not 'using' the car on the road as clearly it was not drivable. The court applied the
mischief rule and held that the car was being used on the road as it represented a hazard
and therefore insurance would be required in the event of an incident. The statute was
aimed at ensuring people were compensated when injured due to the hazards created by
others.
51
[1960] 1 WLR 830 52
[1960] 1 QB 367
24
Besides that, the disadvantages of this rule also includes that judges are givena
law making role infringing the separation of powers. Judges can bring their own views,
sense of morality and prejudices to a case of Smith and DPP v Bull53
. A man was
charged with an offence under section 1(1) of the Street Offences Act 1959 which makes
it an offence for a 'common prostitute to loiter or solicit in a public street or public place
for the purposes of prostitution'. The magistrates found him not guilty on the grounds
that 'common prostitute' only related to females and not males. The prosecution appealed
by way of case stated.
The court held that the Act did only apply to females. The word prostitute was
ambiguous and they applied the mischief rule. The Street Offences Act was introduced
as a result of the work of the Wolfenden Report into homosexuality and prostitution. The
Report only referred to female prostitution and did not mention male prostitutes. The
QBD therefore held the mischief the Act was aimed at was controlling the behaviour of
only female prostitutes.
2.3.4 Purposive Rule
The purposive approach is a more modern style of interpreting statutes. The
purposive approach rejects the limitation of the judges‟ search for meaning to a literal
construction of the words of legislation itself. This rule is interpretative role of the judge
to look beyond the words of statute in pursuit of the reason for its enactment. That
meaning should be construed in the light of that purpose and so as to give it effect.54
53
[1995] QB 88 Divisional Court of the Queen's Bench Division 54
Ibid, no.14
25
This approach has been influenced by the European Union because it is widely
used in European law. However, the principle is not confined to EU law and judges
frequently adopt a purposive approach when considering all types of statute. EU
legislation is drafted in a very different way from English statutes. It follows the civil
law tradition, which favors simplicity of drafting and a high degree of abstraction, rather
than the exhaustive approach adopted in the UK. This means that a purposive approach
is vital when interpreting legislation, so that questions of wide economic or social aims
are often considered by the courts.55
Lord Denning in the Court of Appeal stated in Magor and St. Mellons Rural
District Council v Newport Corporation56
that „we sit here to find out the intention of
Parliament and of ministers and carry it out, and we do this better by filling in the gaps
and making sense of the enactment by opening it up to destructive analysis‟. This
attitude was criticized on appeal by the House of Lords. Lord Simmons called this
approach as „a naked usurpation of the legislative function under the thin disguise of
interpretation‟. He went on to say that „if a gap is disclosed, the remedy lies in an
amending Act‟.
In Pickstone v Freemans plc57
, the House of Lords held that it was permissible,
and indeed necessary, for the court to read words into inadequate domestic legislation in
order to give effect to Community law in relation to provisions relating to equal pay for
work of equal value. However, it has to recognize that the purposive rule is not
particularly modern and has its precursor in a long established rule of statutory
interpretation, namely the mischief rule.58
55
Ibid, no.31 56
[1950] 2 All ER 1226 at 1236 57
[1988] ICR 697, HL 58
Ibid, no.14
26
The advantage of using this rule is that it allowed more situations to be covered
which overall can lead to justice in individual cases. It also leads to the gaps in the law
being filled with judges deciding on what is best with this Act of law. Purposive
approach also allowed the changes of technology which make old law out dated as there
is new technology used.
The disadvantage of purposive rule is that it can lead to law uncertainty and
made it difficult for lawyer to advise their client. This rule also can make law less certain
because it allows many unelected judges make laws as they decide what they feel the
law should be. Rather than using the words that parliament decided and it makes many
people feel unfair.59
It is showed in the case of R v Register General ex Part Smith60
, it
concerned section 51 of the Adoption Act 1976 which enables a person to obtain details
of his birth certificate when reaching 18 years of age. There were certain conditions to
be undertaken, but the applicant had undertaken all of these. On a literal view of the law,
the Registrar-General had to comply and supply the information. However, in doing so
he would put at risk the life of the applicants‟ natural mother because the applicant was
in Broadmoor Mental Hospital having murdered twice. The Court despite the plain
language of the Act and applied a purposive approach saying held that Parliament could
not have intended to promote serious crime.
59
Ibid, no. 22 60
[1991] 2 All ER 88
27
2.3.5 Contra Proferentem Rule
“Contra Proferentem” is a rule which courts use when interpreting contracts. In
plain English, it means that if there is an ambiguous clause in a contract it will be
interpreted against the party responsible for drafting the clause.61
Under this rule, the
ambiguous contract term may be interpreted by the Courts against the proffered,
applying an interpretation of the contract term which is most favorable to the other
party.62
The rule is also applied by the Courts to exclusion, indemnity and other similar
clauses i.e. liquidated damages clauses. Such provisions are strictly construed against the
person relying on them. This is not dealt with further or in any detail in this article. In
construction contracts, this rule is more likely to apply to one party‟s unilateral terms.
These often seek to give a distinct advantage to the proffered over the other
party.63
However it is doubtful that this rule would be applied to un-amended industry
recognized standard forms of Contract. Whilst selected for use by the Employer, these
are not unilateral, being negotiated by representatives from all sides of the industry.64
In the case of Horne Coupar v. Velletta& Company65
, it involved a dispute
between two Victoria law firms. In coming to this decision, the Court used the Contra
Proferentem doctrine. Specifically the Court reasoned as follows:
61
BC Injury Law and ICBC Claims Blog.Contra Proferentem Rule Applied To Court Order Interpretation
.Copyright © 2008 The MacIsaac Group of Law Firms. 62
Alway Associates.Ambiguities in Contracts – The Contra Proferentem Rule.2012 Alway Associates
(London) Ltd All rights reserved .2006. Retrieved on 22 August 2012 and available at http://www.alway-
associates.co.uk/legal-update/article.asp?id=128 63
ibid 64
Ibid, no 62 65
[2010] BCSC 483
28
“Contra proferentem is a rule of contractual interpretation which provides that an
ambiguous term will be construed against the party responsible for its inclusion in the
contract. This interpretation will therefore favour the party who did not draft the term
presumably because that party is not responsible for the ambiguity therein and should
not be made to suffer for it. This rule endeavours to encourage the drafter to be as clear
as possible when crafting an agreement upon which the parties will rely. This rule also
encourages a party drafting a contract to turn their mind to foreseeable contingencies as
failure to do so will result in terms being construed against them. That there is
ambiguity in the contract is a requisite of the application of this rule, however, once
ambiguity is established, the rule is fairly straightforward in application.”
In a minority of cases, however, the courts will consider that the ambiguity is so
great that it cannot be resolved by the above method. In these cases, the courts may
resort to the so called 'contra proferentem rule'. This rule states that the ambiguity
should be interpreted against:
a) The party who prepared the contract (e.g. for standard form contracts, which are
usually offered on a 'take it or leave it' basis); or
b) The party who seeks to rely on the ambiguous provision (e.g. the beneficiary of a
guarantee, indemnity, limitation or exclusion provision). 66
66
Ibid, no.40
29
2.4 Interpretation of Contracts
2.4.1 Interpretation Rules in United States
In interpreting the contract document, some guiding principles emerge at least
from the perspective of common law court, which are also practice by civil law court. In
United States America, the interpretation rule was divided into primary and secondary
rule of contract interpretation. Below are the main principles of contract interpretation:
a) Primary Rules of Contract Interpretation
i. The Main Purpose Doctrine
The Main Purpose Doctrine provides that when interpreting the meaning of an
agreement, the primary intent and purpose of the parties must prevail and the court may
not re-write the agreement. With the primary intent and purpose in mind, plain words
will be given their plain meaning, while technical terms or words of art will be given
their technical meaning.67
ii. The Four Corners Rule
67
Ibid, no.23
30
A contract will be read as a whole and every part must be interpreted with
reference to the whole document and in such a way as to give effect to the main purpose
of the agreement. Furthermore, when interpreting the meaning of the contract, the court
should not look beyond the four corners of the contract in order to interpret the meaning.
When the contract contains preprinted, typed and handwritten words which are arguably
conflicting or ambiguous; preference should be given in handwritten, typed, and then
pre-printed words.68
b) Secondary Rules of Contract Interpretation
i. Ejusdem Generis
The rule of interpretation ejusdem generis means that where there is a listing of
specific things followed by more general words relating to the same subject matter, the
more general words will be interpreted as meaning the same class of things in the more
specific listing.69
When a list of specific items, which belong to the same class, is
followed by the general words, the general words are treated as confined to other items
of the same class. Example: „cats, dogs, and other animals‟.70
ii. Expressio Unius Est Exclusio Alterius
The term expression unius est exclusion alterius is a maxim of interpretation that
the expression of one thing is to the exclusion of another.71
When a list of specific items
68
Ibid, no.23 69
Ibid, no.23 70
Mathew Just, Esq, Workshop on contract Drafting and Patent Licensing 8 March 2008 71
Ibid, no.23
31
is not followed by general words, it is taken as exhaustive. The rule becomes particularly
relevant when a document lists specific matters but omits others that might be thought to
be relevant. The rule presumes that the omission was deliberate.72
iii. Noscitur a Sociis Doctrine
The doctrine of noscitur a sociis means that “words are known from their
associates.” In other words, the context and subject matter of a contract may indicate
that the ordinary and plain meaning of a word was not intended by the parties.
Accordingly, application of this doctrine may determine that a word of otherwise clear
meaning has been incorrectly used by the parties in the agreement.73
If the meaning of a
phrase in a contract is unclear by itself, its meaning should be gathered from the words
and phrases associated with it.74
iv. Lawful, Effective and Reasonable Interpretations Are Preferred.
Consistent with the doctrines providing that all parts of a contract should be
given effect where possible, an interpretation which renders the contract lawful,
effective, and reasonable is preferred over interpretations which render the contract
unlawful, invalid, or impossible to perform. 75
v. Interpretation Should Take Into Account Circumstances Existing At
Contract Formation.
72
Ibid, no.70 73
Ibid, no.23 74
Ibid, no.70 75
Ibid, no.23
32
In order to interpret the main purpose and primary intent of the parties, a court
should take into account the circumstance existing at the time and place of its execution.
76
vi. Contra Proferentem
The party drafting the contract should always include a provision that the general
rule of construction, which stated that any uncertainty in a contract will be construed
against the drafter, will not apply to the subject contract.77
In the case of Rich v CGU
Insurance Ltd78
, Judge Kirby stated that if an ambiguity in a contract cannot be resolved
in any other way, then it must be interpreted against the interests of the party which
suggested it. For example, an ambiguous provision in an insurance contract will be
construed against the drafter insurer and in favour of the insured. This is a rule of last
resort and is only occasionally used.79
2.4.2 Interpretation Rules under English Law
Under English Law, It considers the legal rules and key principles of
interpretation. It including the general approach to construing express terms, the extent
to which terms can be implied into a contract, evidential matters and some of the tools of
76
Ibid, no.23 77
Ibid, no.23 78
[2005] 79 ALJR 856 79
Ibid, no.70
33
construction that the courts have at their disposal to assist then in reaching a judge
outcome between the parties.80
a) Express Term
When a court needs to construe a contract in a dispute, the judge will look at the
express terms. English law takes a purposive and commercial approach to the
construction of contracts as per the approach set down in the leading authority on
contractual interpretation. Ordinary words are to be interpreted according to their
ordinary meaning. Trade terms and technical terms are to be interpreted according to
their trade or technical meaning. „Software‟ when referring to a computer, does not
mean something that is soft, but it means the actual program.81
b) Implied Term
In particular kinds of contract, certain standards terms are implied by legislation
or common law. In appropriate cases the court will recognise standard practice in
particular industry and is willing to imply terms into an agreement to reflect the practice,
provided the wording of the contract is not inconsistent with the implication.
Furthermore, the court will also accept other implications if it is satisfied that the
implication sought reflect the presumed intention of the parties. The court will look at
the particular context of the contract and its language and the relationship between the
parties to ascertain if the implication sought can be inferred. 82
80
Ashurst. Quick Guides. Interpretation of Contracts under English Law. London: Ashurst LLP 2012 81
US Legal. Interpretation of contracts. 2012 retrieved on 26 August 2012 and available at
http://contracts.uslegal.com/interpretation-of-contracts/ 82
ibid
34
2.4.3 Interpretation Rules by Lord Hoffmann
In the case of Investors Compensation Scheme Ltd v West Bromwich Building
Society83
, were an investors were given negligent advice by their financial advisers,
building societies and solicitors and had claims for breach of statutory duty.
The Securities and Investments Board (now under the Financial Services Authority)
started a compensation scheme.
Investors contracted with the Investors Compensation Scheme to assign their
claims to get compensation. ICS would then sue on the investors' behalf. The claims
were assigned, excluding "Any claim (whether sounding in rescission for undue
influence or otherwise)" against a building society which would abate sums otherwise
owed to that society. The question was whether ICS, and not the investors, had a right to
claim damages and rescission against the building societies. This case had laid down that
a contextual approach must be taken to interpretation of contracts. Lord Hoffmann set
out five principles for interpreting contracts as follows:
a) The Intention of the Parties Is Objective
Generally the law is not concerned with the subjective expectations of a party.
The understanding of the agreement by the courts will be in an objective sense. The
objective intention of the parties is to be ascertained from the document itself and the
admissible background knowledge. This approach to ascertaining the objective intention
of the parties means that a particular clause might be said to have a plain meaning. The
context, the commercial objective of the contract and its contractual matrix, however,
may point away from that meaning. If examination of the objective contractual context
83
[1997] UKHL 28
35
indicates that the intention of the parties is other than the plain meaning of the agreement
the court will give effect to that intention even if this involves departing from or
qualifying particular words used.84
b) The „Matrix of Facts‟
Under this principal, it is to ascertain the intention of the parties by considering
the disputed contractual term in its contextual dimension. Thus, undue emphasis should
not be placed upon a particular word, phrase, sentence or clause of a contract. The terms
of a contract should be considered within the context of the contract as a whole.
Secondly, even where the words of the contract are capable of literal application there is
no obstacle to a party adducing evidence to show that, construed in the light of the
factual background to the making of the contract, the words bear a different meaning to
a reasonable person. Indeed, it would appear that there is an onus on the court to
consider the words within the context of the surrounding circumstances. 85
c) The Exclusions From the „Matrix of Facts‟
The principle excludes from the admissible background, such as the previous
negotiations of the parties and, their declarations of subjective intent. It is clear that to
ascertain the intention of the parties the court does not inquire into the parties‟ subjective
states of mind but makes an objective judgment based on the background materials
identified. 86
84
Vincent Nelson QC. The Interpretation Of Contracts: The Rules Re-Written For Modern Time. at 39
Essex Street Wednesday 31st March 2004 85
Ibid, no.84 86
Ibid, no.84
36
d) The Words of a Contract Do Not Necessarily Mean What They Say
Lord Hoffman‟s Fourth Principle requires the court to look beyond merely the
words used in the contract. The task of the court is to construe the contract in the light of
all the background which could reasonably have been expected to have been available to
the parties in order to ascertain what would have objectively have been understood to be
their intention. The fact that the words are capable of literal application is no obstacle to
evidence which demonstrates what a reasonable person with knowledge of the
background would have understood the parties to mean. The judge stated that “in this
area, we no longer confuse the meaning of words with the question of what meaning the
use of words was intended to convey.‟ 87
e) Something Must Have Gone Wrong With the Language
If the conclusion from the background evidence is that something must have
gone wrong with the language, the law does not require the courts to attribute to the
parties an intention they did not have. Even the document on its face does not indicate
that the parties have made a linguistic mistake, but it is open to either of them to contend
that the „matrix of facts‟ indicate that there has been an error which the contract does not
truly represent the intention of the parties. Under this principal, a party will not be
entitled to benefit from a mistake which was not part of the benefit for which he had
bargained. It also gives effect to the true intentions of the party. 88
87
Ibid, no.84 88
Ibid, no.84
37
2.5 Conclusion
There are many types of interpretation rule that had been used in construction
industry. Each of the interpretation approach has its merits and demerits according to
different cases. The rule of interpretation is a guidance tools and the particular facts and
circumstances of the case determine how they are applied. In practice it is upon to
judges to select from those approaches at their discretion in order to make the contract
work, give effect to the contract parties‟ intentions and try to achieve reasonable justice
between them.
Statutory interpretations are very important within legal system to make sure that
the courts are able to solve the disputes arise. The courts enforced the parties‟ agreement
through the interpretation of contract clause. The courts give effect to the terms of a
contract once the parties find themselves in a dispute, which is important not only to
counsel representing the parties in a contract dispute, but also to counsel drafting a
contract in the first place. A drafter with knowledge of the rules of contract
interpretation and construction can draft the contract to avoid disputes or at least put the
client in a better position if a dispute arises.
CHAPTER 3
CRITICISM ON LITERAL RULE
3.1 Introduction
For many years the literal rule was the dominant approach to statutory
interpretation. It is very simple, as the wording in a statute is clear. It can be applied
literally. Judges may use the extrinsic aid of a dictionary to give word in their ordinary
meaning. Although there has been a general move away from the literal approach in
recent year, some judges prefer to start with this method and apply the ordinary meaning
of the word wherever possible.89
A useful illustration of the literal rule in practice is provided by Cutter v Eagle
Star Insurance Co. Ltd90
. The legislation under security in this case was the Road Traffic
Act 1988. Mr. Cutter was sitting in a car waiting for his friend and the car was parked at a
multi storey car park. Gas from a can of lighter fuel in the car leaked, and Mr. Cutter‟s
89
Andrew Mitchell &MinelDadhania.As Law Level. Cavendish Publishing Limited, The Glass House,
Wharton Street London , United Kingdom 2003. 90
[1998] 4 All ER 417 at 426
39
friend arrived and he lit a cigarette which resulted in a fire causing injury to Mr. Cutter.
The question of interpretation was significance since his friend‟s insurance company
would have to pay compensation if a „road‟ under the Act included a „car park‟. The
court held that using the literal rule approach to interpretation, the „car park‟ was not a
„road‟ and therefore the insurance company is not liable to Mr. Cutter. However, the
literal rule has also been subjected to severe criticism as stated as below.91
3.2 Criticism on Literal Rule
Professor Michael Zander who is the expert on the English legal system (London
School of Economics and Political Science), has criticized that literal approach is a lazy
approach. It reduces the rule of Judges to a mechanical task. With the use of a dictionary,
it provides the easy option of interpreting difficult problems. If judges use the literal
approach in relation to old statues, they have very limited discretion to adapt to changing
times. Since social and technological developments may have changed the legislation.92
The literal rule is often called the „dictionary rule‟. The court applied the literal
rule approach by using the 'dictionary meaning' of the words. However, dictionaries
normally contain a number of alternative meanings for one word. The plain-meaning
approach cannot be used for general words, which are obviously capable of bearing
several meanings. It also restricts judicial creativity and holds back development of the
law in keeping with changing social conditions.
91
Ibid, no.89. 92
Ibid, no.89
40
The plain-meaning theory may be acceptable outside the courtroom, since it could
be true that a high proportion of statutory materials and other legal documents can in fact
be interpreted without recourse to any mischief or golden rule. But in the court room, the
words meaning will be interpret by two different parties, usually represented by counsel,
arguing over the meaning of the relevant passage. It makes little sense to dispose of the
issue between them by reference to the plain meaning when there are two meanings in
issue.93
With the literal rule- it must be remembered that in extreme cases the statute may
be carelessly drafted where certain words in isolation can have several meanings. The
Law Commission 1969 was very critical of the literal rule as it assumed that Acts of
Parliament were perfectly worded. The Law Commission in an instructive and
provocative report on the subject of statutory interpretation said of this rule that „to
place undue emphasis on the literal meaning of the words of a provision is to assume
an unattainable perfection in draftsmanship‟. The rule, when in operation, does not
always achieve the obvious object and purpose of the statue.
3.2.1 Distinction between Ordinary and Technical Words In a Statute
The distinction between ordinary and technical words in a statute involves the
exercise of discretion by the judge. Technical words are not always obviously technical
upon their words. In the case of Fisher v Bell94
, the defendant had a flick knife displayed
in his shop window with a price tag on it. Statute made it a criminal offence to 'offer' such
93
Atom. Literal Rule of Construction: Criticism. 2010. Retrieved on 24 August 2012 and available at
http://lawaids.blogspot.com/2010/06/literal-rule-of-construction-criticism.html 94
[1961] 1 QB 394
41
flick knives for sale. His conviction was quashed as goods on display in shops are not
'offers' in the technical sense but an invitation to treat. The court applied the literal rule of
statutory interpretation.
Section 1(1) of the Restriction of Offensive Weapons Act 1959 made it a criminal
offence „to offer for sale‟ a flick knife. „Offer for sale‟ may appear to be plain language.
However the defendant was found not guilty because the court said the phrase „offer for
sale‟ had to be construed in its technical sense under the English law of contract. Under
this, placing goods in shop windows was an invitation to treat and not an offer to sell
which would come at a later stage in the transaction when the shopkeeper named a price
to a prospective purchaser.95
These problems of the literal rule show its inherent contradiction. A literal
meaning is always an interpretative meaning. A selection or choice has be made whether
consciously or unconsciously to prefer one of several possible literal meaning in the
context of the phrase or statutory rule to be interpreted.96
3.2.2 Distinction between Literal Meaning and Drafter’s Intention
The literal rule is strongly criticized by many lawyers. It has been said to be a rule
using intelligence in understanding language. Anyone who always interprets the words
literally with the meaning being different to what the speaker or writer meant would be
95
Fiona Cownie, Anthony Bradney& Mandy Burton. English Legal System in Context.Fourth Edition.
Oxford University Press, 2007 96
P. Goodrich. Reading the Law (1986) Basil Blackwell, Oxford.P 109.
42
regarded as a pedant, a mischief-maker or an idiot. Such criticism, it is submitted, is
misguided. 97
Under the literal rule, the court interpreted the words in single, isolated words.
Instead they have to give meaning to the phrase, sentences or a section in a statute,
isolated words may have comparatively clear meaning, that ascertainable from a
dictionary. However, when the words put gather into sentences of context each other and
into a context of disputes, we have to call on principles of grammar to assist in gaining
the meaning. Calling on these aids will rarely show how to interpret particular words or
phrase. Rather they give a range of alternative interpretations.98
For example, in the Hotel Proprietors Act 1956, it provides that in certain
circumstances a hotel proprietor is liable for loss of or damage to guests‟ property, but
this liability does not usually extend to guests‟ motor vehicles or property left „therein‟.
The question arises is that the hotel proprietor liable for property left on, rather than in a
vehicle. On a literal meaning, the hotel proprietor is liable. This is because if Parliament
had intended to exclude property left on a vehicle, the Act would have said „therein or
thereon‟. 99
However, the „common-sense‟ school would say that it is absurd to make a
distinction between property left in or on a vehicle. That may be so in the admittedly
trivial example given, but if this line of argument is accepted, it means that the courts
would have power to rewrite Acts of Parliament, which many people would consider to
be highly dangerous, particularly where it takes the form of assuming that Parliament
97
Law Student.A journey into a Law degree.The Literal rule. 2010. Retrieved on 24 August 2012 and
available at http://oulawstudent.blogspot.com/2010/12/literal-rule.html 98
Ibid, no.95 99
Ibid, no.97
43
„intended‟ something, when in truth it is more than likely that Parliament never gave that
matter a moments‟ thought.100
Under the literal rule, the difficulties of assigning a fixed and unchallengeable
meaning to any word are recalled. A consideration of cases reveals examples where the
literal rule has been used as a justification for what otherwise might appear as a partial
judgments on the part of the court concerned in the case. Inland Revenue Commissioners
v Hinchy101
concerned s 25(3) of the Income Tax Act 1952, which stated that any taxpayer
who did not complete their tax return was subject to a fixed penalty of £20 plus treble the
tax which will ought to be charged under the Act.102
The question that has to be decided was whether the additional element of the
penalty should be based on the total amount that should have been paid, or merely the
unpaid portion of the total. The house of Lord adopted a literal interpretation of the
statute and held that any taxpayer in default should have pay triple their original tax
bill.103
In R v Goodwin104
the driver of a jet-ski in the sea off Weymouth, crash into
another jet-ski and had caused serious injuries to the driver of another machine. The
defendant was prosecuted under section 58 of the Merchant Shipping Act 1995, which
makes it an offence for „ the master of ……a United Kingdom ship‟ negligently to do any
act which causes or is likely to cause serious injury to any person. Section 313 of the Act
defines a ship including every description of vessel „used on navigation‟. At first instance
100
Ibid, no.97 101
[1960] AC 748 102
Gary Slapper & David Kelly.The English legal system. Twelfth Edition 2011-2012. Tayler& Francis e-
library, 2011. 103
Ibid. 104
[2005] EWCA Crim 3184; [2006] 1 W.L.R. 546(1)
44
it was decided that a jet-ski was a ship for the purpose of the Merchant Shipping Act
1995 and as a result the defendant pleaded guilty.105
On the appeal, the court of Appeal quashed his conviction, deciding that a jet-ski
is not used in navigation for the purpose of travel from one place to another and as
section 58 only applies to sea-going ships and the jet-ski was used only within the port of
Weymouth, it could not really described as „sea going‟.106
3.2.3 Fails to Recognize the Complexities and Limitations of English Language
The other problem that arisen from the literal rule approach is the meaning of
words in dictionary. This is because the courts recognize that the meaning of words may
change with the passing of time. Once the meaning of the particular word has been
ascertained at the time the Act was passed, the court will then need to consider how this
meaning relates to present day usage and circumstances.
This was so in the case of R v Cheeseman107
. It involved acts of indecency in
some public toilets which is an offence under the Town Police Clauses Act 1847. The
court had to determine the meaning of the words „street‟ and „passenger‟. It found that
the meaning of „passenger' did not extend to include police officers who, acting upon
complaint, were waiting for the defendant at the scene, and were therefore not passengers
in the sense of persons using the toilets. Whilst this may be the case some would argue
105
Ibid, no.102. 106
Ibid, no.102 107
[1836]7 C. & P. 445
45
that such a literal and narrow approach fails to look at the wider picture and purpose for
the legislation.108
3.2.4 Creates Loopholes in the Law
The literal rule involves applying the „plain, ordinary literal meaning‟ of words –
even if this could lead to a manifest absurdity. In the case of Lord Esher in R v City of
London Court109
, Lord Esher said that "If the words of an Act are clear then you must
follow them even if they lead to a manifest absurdity. The court has nothing to do with
the question whether the legislature has committed an absurdity." The judge will be
assisted by references to a dictionary as it will give the plain ordinary meaning of
words. It is likely that reference will be made to a dictionary in common use such as the
Oxford English Dictionary.
The use of literal rule can lead to absurdities and loopholes which can be
exploited by an unmeritorious litigant. Judges have tended to over-emphasize the literal
meaning of statutory provisions without giving due weight to their meaning in a wider
context. Placing emphasis on the literal meaning of words assumes an unobtainable
perfection in draftsmanship.110
In the case of R v Harris111
, the defendant bit off his
victim's nose. The statute made it an offence 'to stab cut or wound' the court held that
under the literal rule the act of biting did not come within the meaning of stab cut or
wound as these words implied an instrument had to be used. Therefore the defendant's
conviction was quashed.
108
Lawmentor.The literal rule. @2012 lawmentor.co.uk. retrieved on 24 August 2012 and available at
http://www.lawmentor.co.uk/glossary/t/the-literal-rule/ 109
[1892] 1 QB 273 110
Ibid, no15 111
[1836] 7 C & P 446
46
Furthermore in the case of Partridge v Crittenden112
, the defendant placed an
advert in a classified section of a magazine offering some bramble finches for sale. S.6 of
the Protection of Birds Act 1954 made it an offence to offer such birds for sale. He was
charged and convicted of the offence and appealed against his conviction. The court held
that the defendant's conviction was quashed. The advert was an invitation to treat not an
offer.
3.3 Conclusion
Despite such criticisms the literal rule has been in use since the nineteenth century
and has been the most commonly applied rule up until recent times when more modern
approaches such as the purposive approach have been found to be more appropriate.
Literal rule had been applied in many types of cases as an interpretation approach
including construction industry cases until today.
From the criticism above, it showed that the application of literal rule is not
suitable for all cases. Furthermore, most construction contracts use in construction
industry was very complex. The standard form provision and other special or bespoke
agreement will increase the difficulties of courts in construing the clauses. Under literal
rule, court does not usually entitle to „go behind‟ the contract to determine the contract
parties‟ intentions. 113
112
[1968] 2 All ER 421 113
Dr. ChandanaJayalath..Limitations and Hypothesis Underlying the Use of Interpretation Rules in
Construction Contracts Revisited. Articlebase. 2009. Retrieved on 24 August and available at
http://www.articlesbase.com/construction-articles/limitations-and-hypothesis-underlying-the-use-of-
interpretation-rules-in-construction-contracts-revisited-998499.html
CHAPTER 4
ANALYSIS OF CASE
4.1 Introduction
This chapter analyses the cases relevant to the objective of the research. The
objective of this study is to identity the suitability of using the literal rule of interpretation
in construing contract clauses. The method used to achieve the objective is by analyzing
the relevant law cases reported in the law report. The relevant law reports including
reported and unreported case law in Malayan Law Journal. Those law cases are available
at the of university‟s library online database. The cases analyzed including Malaysia
cases and others country cases. The other countries cases that the Malaysian court
referred are such as British, New Zealand, Hong Kong and Singapore. The cases are
retrieved from the Lexis Malaysia online database.
48
4.2 Case Analyzed On the Suitability of Using Literal Rule Interpretation in
Construing Contract Clause
Table 4.1 below show the cases that had been analyzed for this study. The cases
that been analyzed had showed some cases that interpreted the contract clauses with
literal rule effectively. However, there also have some contracts clauses and
circumstances that are not suitable to use the literal rule for interpreting the contract
clause. The cases analyzed been categories in “Pay When Paid” clause, “Performance
Bond” clause and “Termination” clause.
Table 4.1: Particulars of the Analyzed Cases
No Case Name And Citation
“Pay When Paid”
1 BBR Construction Systems (M) Sdn Bhd v. Maxdouble Construction (M) Sdn
Bhd [2002] MLJU 104 (HC)
2 Pernas Otis Elevator Co. Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn
Bhd [2003] MLJU 394 (HC)
3 Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd [2010] 3 MLJ 7 (CA)
4 Thomas J Dyer Co v. Bishop International Engineering[1962] Co 303 F2d 655
(CA)
5 Ward v. Eltherington [1982] Qd. R. 561 (SC, Qld)
6 Smith & Smith Glass Ltd v. Winstone Architectural Cladding Systems Ltd
[1992] 2 NZLR 473 (HC)
7 Royden (M) sdn bhd v Syarikat Pembenaan Yeoh Tiong Lay sdn bhd [1992] 1
MLJ 33 (HC)
8 Iezzi Construction Pty Ltd v. Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd. R. 350
(SC)
9 Durabella Ltd v J Jarvis & Sons Ltd [2001] All ER (D) 102
49
Performance Bond
10 Teknik Cekap Sdn Bhd v Public Bank Bhd[1995] 3 MLJ 449
11 Lotteworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Anor
[1998] 7 MLJ 105
12 Kejuruteraan Bintai Kidenko Sdn Bhd v Nam Fatt Construction Sdn Bhd And
Anor - [2010] MLJU 1869
Termination Of Contract
13 Central Provident Fund Board v Ho Bock Kee [1981] 2 MLJ 162 (CA)
14 Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd [1998] 6 MLJ 80 (HC)
15 Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd [2007] 4 MLJ 113 (CA)
16 DMCD Museum Associates Sdn Bhd v Shademaker (M) Sdn Bhd (No 2) [1999]
4 MLJ 243 (HC)
4.2.1 Literal Rule Approach in Construing “Pay When Paid” Clause
Payment issues always arise in the sub-contract which the subcontractor does not
received payment from main contractor for the work completed. The main contractor in
order to maintain their cash flow; they will incorporates a “Pay When Paid” provision in
sub-contract.114
In Malaysia, the literal rule had been applied in the case of BBR
Construction Systems (M) Sdn Bhd v. Maxdouble Construction (M) Sdn Bhd.115
114
Oon Kee Kheng, “Pay when paid” clause in subcontracts. International Forum on Construction
Industry Payment Act and Adjudication jointly organized by CIDB Malaysia and The Institutions of
Surveyors, Malaysia on 13-14 September 2005 at Kuala Lumpur Convention Center. 115
[2002] MLJU 104 (HC)
50
In this case the Main Contractor was awarded by Eternal Resources Sdn. Bhd.
(the Employer) a contract for the construction of one Block with 8 storeys „Pusat
Perdagangan Dan Pelancongan‟at Kawasan Persiaran Pantai, Sungai Nibong, Pulau
Pinang. The main contractor then awarded the said whole works to the sub-contractor and
the defendant in this case. In turn the defendant awarded the „Post-tensioning Works‟ to
BBR Construction Systems (M) Sdn. Bhd, the nominated sub-contractor and the plaintiff
in this.
Towards this end an agreement was entered between the plaintiff and the
Defendant dated 15th
July 1996 with a contract sum amounting to RM2,260,000.00.
Under Clause 9 of the said Agreement it was stipulated that payment for progress works
done shall be made upon receipt of payment by the defendant from the main contractor.
Clause 9 reads:-
"9. Progress payment, payment of authorized variations and claims after taking into
account the computation as per Clause 7, 8 and 9 and quantities duly checked and
certified by the Main Contractor's Representative, shall be made to the Nominated Sub-
Contractor at monthly intervals and within 7 days upon receipt of payment by the Sub-
Contractor from the Main Contractor."
The court held that it was not disputed that in accordance with Clause 9 payment
by the defendant to the plaintiff would be made upon receipt by the defendant payment
from the main contractor. According to the plain meaning of the clause, if the main
contractor did not make any payments to the defendant, the defendant in turn would not
be obliged to pay the plaintiff. It was explained by the defendant that it could not make
further payment to the plaintiff because the main contractor, Dubon Bhd, had failed to
make payments to the defendant in respect of the works claimed by the plaintiff.
51
The court dismissed the plaintiff's claims with costs and held that it was a valid
defense to the defendant for not making further payments to the plaintiff if the defendant
did not receive any more payments from the main contractor. The court had referred to
the decision of the Singapore case of Brightside Mechanical & Electrical Services Group
Ltd. & Anor v Hyundai Engineering & Construction Co. Ltd.116
In this case, the relevant
payment provision reads as follows:
“Within five days of the receipt by the contractor by the sum included in any certificates
of the architect, the contractor shall notify and pay to the sub contractor……”
In construing the wordings of this provision, Thean J. said the clauses were clear
and unambiguous and effect must be given to them. He concluded that the words
“contemplate actual receipt by the main contractor of the sum included in the certificate.
So construed, the effect of [the clause] is that until the defendants receive the sum
claimed by the plaintiffs, the defendants are not obliged to pay it to the plaintiffs.” It did
not seem to matter that the main contractor in this case did not receive actual payment
because the employer was exercising its right of set-off against the main contractor for its
delay as liquidated damages. The subcontractor appealed.
The court of Appeal dismissed the appeal and held that “prima facie, clause 11(b)
contemplated the actual receipt by the main contractor of the sum included in the
certificate and that until the Defendants received from the owner the sum claimed by the
Plaintiffs they were not obliged to pay it to the Plaintiffs. In this case, there was no actual
receipt by the Defendants of the amount certified by the architect."
116
[1988] 1 MLJ.500
52
In another payment decision for subcontract works, the High Court in Malaysia
made the same decision when interpreting a “Pay When Paid” clause. It was showed in
the case of Pernas Otis Elevator Co. Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn
Bhd117
. The Defendants were the Main Contractors in a joint venture project involving
the construction of a proposed hotel known as Hotel Istana. The plaintiff was a
subcontractor to the defendants by virtue of a written subcontract dated 15.6.1990 for the
supply, delivery, commissioning and maintenance during defects liability period of lifts
and escalators including all accessories and incident works. The employer of the Project
was Pernas One. The employer employed Juruukur Bahan Malaysia (JUBM) as the
consultant quantity surveyors.
Ranhill Bersekutu as the mechanical and electrical consultant for the project
appointed by the employer, complained that the lifts installed by the plaintiff has caused
excessive harmonic distortions which has affected the electric flow system in the project.
On that ground, Ranhill Bersekutu instructed the consultant quantity surveyors not to
release the last 2 1/2% of the retention sum amounting RM300,000.00 to the plaintiff.
Consequently, the architect had deducted the said sum of RM300,000.00 from the
amount to be paid to the plaintiff.
The plaintiff denied the allegation made by Ranhill Bersekutu about the problem
of excessive harmonic distortion. In any event, according to the plaintiff, the problem can
be solved by the employer involving costs of RM167,500.00 only. Therefore, the plaintiff
is claiming for the said sum of RM300,000.00 or in the alternative, the sum of
RM132,500.00 (being the balance sum after deducting RM167,500.00); plus interest at
the rate of 8% p.a. from the date of filing of this action until full satisfaction.
117
[2003] MLJU 394
53
In the issue of whether the defendants were liable to the plaintiff in respect of the
sum claimed, which sum was a deduction certified by the architect, Daya Bina Architect.
The court had referred to a Hong Kong case of Interpo Engineering Pte. Ltd. v Sin Heng
Construction Co. Pte. Ltd.118
in determined was whether Clause 7 of the subcontract was
a "Pay When Paid" clause and the effect of the clause. The clause 7 provided as:
"(1) As and when a progress payment for Main Contractor work is received by (the
Defendants) from (Tavica), (the Defendants) shall promptly cause it to be banked into
(the Defendant's) bank account and shall immediately upon its clearance issue a cheque
in (the Plaintiff's) behalf thereof (hereinafter called the 'net sum');
(ii) (The Plaintiff's) entitlement to payment of the net sum each time shall arise
progressively as and when a progress payment or NSC sum including the retention sum,
is received from Tavica by the (Defendants) and (the Plaintiffs) shall issue an official
receipt to (the Defendants) for each and every payment received."
The learned judge in that case was of the view that clause 7(ii) was reasonably
straight forward and unambiguous. The plain meaning was that the plaintiffs were not
entitled to any progress payments unless such payments were received by the defendants
from Tavica (the Employer).
The courts had given the words "receipt of payment" their literal normal meaning.
In other words, they refer to "receipt of actual payment, receipt of money." As a result the
main contractor incurs no liability to pay the subcontractor until he had actually receives
payment in the physical sense from the employer. In this case, the effect of clause 2.3 of
the subcontract was the same. Clause 2.3 was clear and unambiguous, in that the
defendant is only liable to pay the plaintiff when the defendant had received the said
payment or sum from the employer and the payment to the plaintiff must be made within
118
[1998] 1 SLR 694
54
7 days after the receipt of the said sum by the defendant. The court dismissed the
plaintiffs‟ claim.
The other case that had applied literal rule in interpreting the “Pay When Paid”
clause was Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd119
. The plaintiff was the
nominated subcontractor to build, a swimming pool for a 161-unit condominium in
Seremban. The defendant had earlier entered into a main contract with the developer ('the
employer') to build the condominium. The plaintiff completed the swimming pool but
had not been fully paid by the defendant, as the employer had not paid the defendant.
Pursuant to the main contract, the defendant had commenced an action against the
employer to recover the agreed sum.
Under the subcontract, the plaintiff commenced the present action against the
defendant to recover the unpaid sum. The Sessions Court had allowed the plaintiff's claim
with costs. On appeal to the High Court, the defendant's appeal was allowed with costs.
Aggrieved by the decision of the High Court, the plaintiff now appealed to the court of
Appeal. The plaintiff submitted that pursuant to the subcontract, the final payment
claimed by the plaintiff was outside the “Pay When Paid” provision expressed in clause
13.01 of the subcontract, as it referred to 'progress payment/interim payment' only.
Clause 13.01 about progress payment was stated as:
“ Notwithstanding the provision of Clause 27 pertaining to nominated sub-contractor
and the payment for works executed, it is hereby agreed that in the event of any interim
certificate which includes, for nominated sub-contract works, the payment in respect of
any work, 75% material or goods comprised in the sub-contract shall be made to the sub-
contractor within 14 days after receipt by the Main Contractor of payment certified as
due in the Interim Certificate from the Client ie Messrs Ng Chee Yee Sdn. Bhd.”
119
[2010] 3 MLJ 7
55
The defendant however, contended that the final payment claimed by the plaintiff
was only due and payable upon receipt of such payment by the defendant from the
employer, because the expression 'progress payment' in clause 13.01 covered final
payment. The central issue before the court was on the true construction of clause 13.01,
particularly the expression 'progress payment' and whether the final payment claimed by
the plaintiff fell within the ambit of 'progress payment'.
In order to construe the “Pay When Paid” clauses, the court had referred to some
previous cases from other countries. Firstly, the case of Hong Kong Court of Appeal‟s in
Schindler Lifts (Hong Kong) Ltd v. Shui On Construction Co Ltd120
, the sub-contractor
(Schindler) was claiming judgment for sums of money which were alleged to be owing
upon two certificates issued under a building contract. The main contractor (Shui On)
relied on a clause which provided that payment was to be made by the main contractor to
the sub-contractor upon Shui On having received the payment from the developer of the
project. The developer had earlier exercised its right of set off for liquidated damages
under the main contract between the developer and Shui On.
In setting aside the High Court‟s decision allowing an application by Schindler for
summary judgment, the Court of Appeal effectively recognized the validity of the “Pay
When Paid” provision in the sub-contract with another Hong Kong High Court‟s case of
Hong Kong Teakwood Works Ltd v. Shui On Construction Co Ltd121
. The payment
provision in Hong Kong Teakwood reads as follows:
“Within 14 days of the receipt by the main contractor of payment from the employer
against any certificate from the architect, the main contractor shall notify and pay to the
sub-contractor ...”
120
[1985] HKLR 118 (CA) 121
[1984] HKLR 235 (HC)
56
The High Court in Hong Kong Teakwood held that the word “receipt” here must
be construed as actual receipt by the main contractor of the sum certified in the certificate
and Hunter J stated that “the prima facie meaning of receipt of payment is receipt of
money”. The contractor only liable to pay sub contractor when he had received the
money from employer.
In present Asiapools case , the Judge Ramly Ali J (now JCA), after referring to
the above article, and the judgments of the Hong Kong and Singapore courts, held that
the defendants' liability or obligation to pay the plaintiff arose only upon the defendant
having received the payment from the employer. The court had dismissed the appeal with
cost. Abdul Malik Ishak JCA stated that the effect of a 'pay-when-paid' clause will be
entirely a matter of construction, requiring clear and unambiguous words, and requiring
careful consideration of whether, on a true construction, the clause affects the right to
payment or only the time for payment. The words generally are to be understood in their
plain and literal meaning.
This is subject to admissible evidence being adduced to show that the words are to
be understood in some technical or special senses. The court held that words generally
are to be understood in their plain and literal meaning. This does not mean that one must
refer to the dictionary in order to obtain the dictionary sense of the word. Rather the
words must generally be understood to mean one thing and not another.122
So there was no necessity to adduce any evidence to interpret clause 13.01
because the words appearing in the clause are rather plain and they clearly preclude the
defendant from paying immediately to the plaintiff unless the defendant receives payment
from the employer.
122
Robertson and Thomson v French (1803) 102 ER East, 1-6 at pp 779781
57
Although there are many court cases in Hong Kong, Singapore and Malaysia that
applied literal meaning in interpreting the “Pay When Paid” clause, but the validity of
using literal approach for “Pay When Paid” clause is still questionable. In an American
Court of Appeal case of Thomas J Dyer Co v. Bishop International Engineering123
, the
interpretation against the “Pay When Paid” clause was distinguished from the cases
analyzed above. Thomas J is an Ohio corporation engaged in the plumbing contracting
business. The engineering company is a partnership engaged in the general contracting
business. The engineering company entered into a written contract with The Kentucky
Jockey Club, Inc. by the terms of which it agreed to provide labor and materials.
That portion of the project was described as “phase one”. On April 27th 1959,
Dyer entered into a written subcontract with the Engineering Company, by the provisions
of which it agreed to provide materials and to install certain plumbing and utilities
required in connection with the completion of the construction work to be performed by
the engineering company. The engineering company had provided all of the labor and
material and has done all things necessary for the completion of the work required under
the contract, and has received payment, specified by the contract as the consideration to
be paid to it for the work to be performed by it.
From time to time following the execution of the contract of August 19th, 1958,
the engineering company was called upon by the Jockey Club to provide labor, services
and materials for the completion of various items. The engineering company has received
compensation for certain portions of such additional labor, services and materials
provided by it at the requests of the Jockey Club but has not yet received payment for all
of them.
123
[1962] Co 303 F2d 655 (CA)
58
The subcontractor on the project brought an action against the appellant to recover
the sum of US$134,684.53 for materials and labor furnished by it in the construction of
the project. The General Insurance Company of America of the appellant, was also made
a defendant as surety on the “Owner‟s Protective Bond”, executed by Engineering
Company as principle. The engineering company stated that according to the provisions
of paragraph 3 of its subcontract with the Thomas J, no payment was due to the Thomas J
until five days after the Jockey Club had made payment to the engineering company.
When the engineering company did not receive any further payment from the Jockey
Club, then being reorganized in bankruptcy, it had no obligation to make further payment
to the Thomas J.
The court held that conditions on payment are enforceable, so long as such
conditions are clearly expressed. In construing the clause that "no part [of payment] shall
be due until five days after the owner shall have paid the contractor", the court decided
that the clause was sufficiently ambiguous to require examination of the parties' intent. In
examining the parties' intent, the court noted that general contractors normally bear the
risk of nonpayment due to insolvency. The court held that this normal relationship could
be varied only with clear and unequivocal language. Accordingly, the court held that the
“Pay When Paid” clause was only effective to delay payment "for a reasonable period of
time after the work was completed, during which the general contractor would be
afforded the opportunity of procuring from the owner the funds necessary to pay the
subcontractor."
The literal rule of construction approach also was not used in the case of Ward v.
Eltherington 124
. An association wished to build a clubhouse and entered an agreement
with a firm of engineers for the firm to produce the necessary drawings and plans. The
subcontractor was not paid by the firm of engineers, and sued for its fees. The McPherson
J held that:
124
[1982] Qd. R. 561 (SC, Qld)
59
“The plaintiff firm had completed their work … the plaintiffs should be paid for their
work. This means that they were to be paid a reasonable sum for their services … The
time for payment for the work, as distinct from the right to charge for it all, having been
postponed to an event which has not happened, and a reasonable time having elapsed,
the plaintiffs are entitled now to recover the agreed sum for their services. The condition
precedent to performance by payment … having been discharged by impossibility of
performance, that condition is discharged, leaving the plaintiffs‟ right to a fee
unconditional and unimpaired.”
Another case in New Zealand declined to follow the literal meaning approach
although the court had referred to those Schindler, Hong Kong Teakwood and Brightside
cases. The case is Smith & Smith Glass Ltd v. Winstone Architectural Cladding Systems
Ltd 125
. Smith & Smith were glass sub-sub-contractors to Winstone, a curtain wall
subcontractor in a building in Auckland. Before the works were completed, the main
contractor went into receivership. Smith & Smith claimed payment due under three
payment certificates. Winstone raised the defence that it was only liable to pay Smith &
Smith when it itself had been paid. The “Pay When Paid” clause in the subcontract
provided as follows:
“Payment will be made in accordance with the contract documents. Before any progress
payment is made the necessary public liability insurance cover note 6 shall be delivered
to the office of Angus Construction Ltd. Payments will be made within five working days
of receipt of the client's cheque.”
Master Towle referred to cases in Singapore (Brightside) and in Hong Kong
(Hong Kong Teakwood). His Honour concluded that the clause merely governed the
125
[1992] 2 NZLR 473 (HC)
60
timing of payment and did not impose a condition precedent before the liability to pay
arose. Master Towle also stated:
“While I accept that in certain cases it may be possible for persons contracting with each
other in relation to a major building contract to include in their agreement clear and
unambiguous conditions which have to be fulfilled before a subcontractor has the right to
be paid, any such agreement would have to make it clear beyond doubt that the
arrangement was to be conditional and not to be merely governing the time for payment.
I believe that the contra proferentum principle would apply to such clauses and that he
who seeks to rely upon such a clause to show that there was a condition precedent before
liability to pay arose at all should show that the clauses relied upon contain no
ambiguity.”
The judge had drew a distinction between clauses that make receipt of payment a
condition precedent before liability to pay arises ('if' clauses) and clauses with regard to
the time for payment ('when' clauses). In this case, Master Towle found support from the
submission that the clause in question should be construed not to mean 'if' Winstone was
paid but 'when' Winstone was paid.
There was a Malaysian court case that also set aside the literal rule approach in
construing the “Pay When Paid” clauses. In the case of Royden (M) sdn bhd v Syarikat
Pembenaan Yeoh Tiong Lay sdn bhd126
, the defendant was employed by the employer as
the main contractor for the construction of a project, Raintree Terrace. The defendant and
the plaintiff entered into two subcontracts to supply air-conditioning and ventilation
systems. Clause 2 required the plaintiff to observe all the provisions of the main contract
only so far as they are related and applicable to the subcontract works and were not
repugnant to or inconsistent with the express provisions of the subcontract. The plaintiff
alleged that the defendant had failed or refused to pay the plaintiff certain progress
126
[1992] 1 MLJ 33 (HC)
61
payments notwithstanding that such payment were duly certified by the authorized
architect of the project.
The plaintiff instituted the action against the defendant. The learned registrar
entered summary judgment against the defendant under O 14 of the Rules of the High
Court 1980. On appeal to judge in chambers, the defendant argued that the defendant was
not indebted to the plaintiff on the grounds, inter alia, that clause 27(a)(vii) of the main
contract specially provided that payment would be made only within 14 days after the
receipt by the defendant from the employer of the amounts stated in the architect's
certificate.
In this case, the court was asked to construe a payment clause in the main contract
(i.e. Clause 27(a) (vii) which read:
“That payment in respect of any work, materials, or goods comprised in the sub-
contract shall be made within 14 days after the receipt by the Contractor from the
employer of the amounts stated in any architect‟s certificate under Cl 30 of these
conditions which includes an amount due to the nominated sub-contractor under the
sub-contract.”
The learned judge did not even attempt to construe the said clause as he held that
Cl. 27(a) (vii) had not been properly incorporated into and therefore did not form part of
the subcontract. He further held that since the sub-contractor was not a party to the main
contract, under the doctrine of privity of contract, its provisions (and especially Cl. 27(c)
(vii)) could not bind him and therefore would not affect his entitlement to payment. 127
127
Harbans Singh K.S, Construction of Contingent Payment Clauses: An Overview. Ingenenier, The
Lembaga Jurutera Malaysia. KDN PP11720/1/2006 ISSN 0128-4347 VOL.28 DEC 2005 - FEB 2006
62
Plaintiff in the case of Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd128
had
rendered this case in his argument. However, the court held that this case was irrelevant
because the wordings that used in the clause were different. The court stress that the
reliance by the main contractor on the main contract, in particular clause 27(a)(vii), in
Ryoden, did not help the main contractor in Asiapools. This is because the “Pay When
Paid” provision contained in clause 27(a)(vii) was held not to be part of the subcontract.
A Queensland, Australian Supreme Court of in Iezzi Construction Pty Ltd v.
Watkins Pacific (Qld) Pty Ltd,129
also did not interpret the “Pay When Paid” clause using
literal rule. The employer had gone into liquidation and had not been able to pay the main
contractor the interim payment. In this case the subcontractor sued the main contractor
for payment under the subcontract. The main contractor‟s defense was relying on clause
10(d) as follows:
“(10) (c) The Builder shall make progress payments to the Subcontractor within fourteen
(14) days after the Builder has received payment from the Proprietor in respect of the
Work, the subject of the Subcontractor‟s claim.
(10) (d) It is expressly agreed that the Subcontractor‟s right to receive payment is
entirely dependent upon the Builder having already received from the Proprietor
payment in respect of the work, subject of the Subcontractor‟s claim, and that the
Subcontractor shall have no other right to payment.”
The clause showed that sub contractor will only be paid by the main contractor
when his received the payment from employer. However, the main contractor‟s appeal to
the Court of Appeal was dismissed. The court held that the “Pay When Paid” clause did
not bar a claim in restitution.
128
[2010] 3 MLJ 7 (CA) 129
[1995] 2 Qd. R. 350 (SC)
63
The first English authority has analyzed detail in “Pay When Paid” clause in the
case of Durabella Ltd v J Jarvis & Sons Ltd130
. Durabella, was a sub-contractor to the
Jarvis for provision in hard wood flooring of a flat for Grilliard Homes Ltd. Durabella has
claims interim payment under the sub contract. However Jarvis refuse to pay Durabella
relying on the “Pay When Paid” clause. The facts of this case showed that reason for
employees refuses to pay main contractor was defective work by main contract himself.
In the “Pay When Paid” issue, the court held that:
“A contractor cannot rely on a „pay when paid‟ clause if the reason for non-payment is
its own breach of contract or default. It is trite law that one cannot take advantage from
one‟s breach of contract. So if the employment of a contractor under a JCT form had
been lawfully terminated for default to which a sub-contractor had not contributed then
the contractor could not take advantage of the provisions by which the normal
contractual code for payment is replaced by the new code under which no payment may
be made until completion. The contractor has either deprived the sub-contractor of the
opportunity to complete the subcontract works, or, if they have been completed, of the
opportunity to be paid upon application, statement, or certificate.”
The court further held that the “Pay When Paid” clause can only be effective if
the machinery of payment is capable of being operated. It was an implied condition for
the clause. If the machinery breaks down, e.g. certificates are not or cannot be issued as
they should be, then the contractor, although it may not in any way be responsible, is
nevertheless best placed to remedy the situation. If the “Pay When Paid” clause is to be
effective then the contractor should undertakes that it will pursue all means available to
obtain payment, or it will not be able to rely on the provision to defeat the sub-
contractor‟s claim.
130
[2001] All ER (D) 102
64
The court found that Jarvis could not rely on the “Pay When Paid” clause. Firstly,
because once its employment had been terminated because of its supposed default, it lost
the right to interim payments if, as was thought, the JCT conditions applied, or, as there
was no such contract since it had lost the opportunity for payments on account since its
own conduct had brought its employment to an end. Second, because it failed to pursue
its remedies promptly and effectually.
The cases on “Pay When Paid” clause, was show that many of Malaysian,
Singapore and Hong Kong cases had using literal rule in construing “Pay When Paid”
clauses. They concluded that the literal meaning for the pay when paid clause was clearly
stated out the subcontractor can only be pay when the main contractors receipt payment
from employer. However, in the other countries cases such as New Zealand, American,
Australia and British, the court had found that is not fair for subcontractor. They should
be pay for their services, and it was the main contractor implied liability to obtain
payment from employer.
4.2.2 Literal Rule Approach in Construing “Performance Bond” Clause
Literal rule is also being used in construing the clause of “Performance Bond”
such as in the case of Teknik Cekap Sdn Bhd v Public Bank Bhd131
.The appellant was the
main contractor for Wisma Goldhill, Jalan Raja Chulan, Kuala Lumpur and had engaged
a company called Lightweight Concrete Sdn Bhd as its sub-contractor for the design,
manufacture, supply and delivery of concrete panels. Subcontractor obtained a
performance bond for RM422,000 from Public Bank Bhd in favour of Teknik to
guarantee the proper performance of the sub-contract works.
131
[1995] 3 MLJ 449
65
Appellant had issued two letters purportedly calling for payment of the bond from
PBB, to make a claim for the full amount of performance bond. PBB immediately paid
appellant the RM422,000 and then uplifted a fixed deposit of RM42,000 given by
subcontractor as security for the performance bond and demanded payment of the
difference. However, subcontractor contended that PBB had no claim against it and
demanded that PBB reinstate the fixed deposit account as the call on the bond was
invalid, not being an 'on demand bond' but a 'conditional bond'.
The subcontractor issued a writ against PBB seeking, inter alia, a declaration that
the call on the bond was invalid and an order for reinstatement of the RM42, 000 with
interest. PBB then issued a third party notice and statement of claim against appellant for
a declaration that the call on the bond was invalid and an order that the sum of
RM422,000 be repaid by appellant to PBB.
The trial judge held that appellant notices of demand were bad in law as they did
not state that Lightweight Concrete Sdn Bhd had breached or failed to execute the sub-
contract, and granted both Lightweight's Concrete Sdn Bhd and PBB's applications.
Appellant appealed vis-ê-vis PBB. The issue for determination in this appeal was whether
the performance bond was an 'on demand' bond or a 'conditional bond'. The court had
dismissed the appeal.
In determine whether the performance bond was an 'on demand' bond or a
'conditional bond', the court held that the wording of the performance bond itself, it was
clear and unequivocal that what would trigger off the guarantee was Lightweight's breach
or failure to execute the contract. Only then would PBB's liability arise. Therefore giving
the words in the performance bond its literal plain meaning, it was a conditional bond.
66
“Performance Bond” clause began with the words ' If the sub-contractor (unless
relieved from the performance of any clause of the contract or by statute or by the ……to
any partial demand having been made as aforesaid.” Wording of the bond itself it is
clear and unequivocal that what would trigger off the guarantee is the sub-contractor's
failure to execute the contract or commit any breach thereof. Then the liabilities of the
guarantor arise. Therefore giving the words in the bond their plain meaning, it cannot by
any stretch of imagination be said that the bond in the circumstances of this case is an
unconditional bond.
In the case of Lotteworld Engineering & Construction Sdn Bhd v Castle Inn Sdn
Bhd & Anor132
, is another example of used of literal meaning approach. Plaintiff
(contractor) and the first defendant (principal) had entered in to a formal construction
contract. The letter of acceptance contained terms and conditions precedent reserved by
the first defendant which required plaintiff to deposit with the first defendant a
performance bond. Second defendant (guarantor) was to pay the first defendant the sum
under the performance bond.
Upon breach of the contract, the first defendant sent a letter of demand to the
second defendant for the sum under the performance bond. Subsequently, the plaintiff
obtained an ex parte order from the court restraining the first defendant from further
calling or receiving the sum demanded until the hearing and disposal of this application.
At the hearing of the application, counsel for the plaintiff submitted that the performance
bond was void as at the time the performance bond was obtained, there was no contract
and that the demand letter was not a proper and/or valid demand.
The court had dismissed the application and set aside the ex parte injunction. The
court found that “the words of the performance bond were clear in the context and
132
[1998] 7 MLJ 105
67
consistent with an immediate undertaking to pay on written demand without any protest
by the plaintiff. The beneficiary is entitled to forfeit the cash deposit, if such had been
obtained or in the case of a bond, an advantage to immediate payment before the
underlying dispute is determined either by trial or arbitration. The court will not attribute
an intention contrary to the plain meaning of the words used to attach liability towards
payment upon demand.”
Kejuruteraan Bintai Kidenko Sdn Bhd v Nam Fatt Construction Sdn Bhd And
Anor133
, was an case of application for an interlocutory injunction to restrain the first
defendant from receiving the proceeds from two Performance Guarantees upon which
two calls had been made by the first defendant. The second defendant is the Guarantor
Bank. The plaintiff was a sub-contractor to the first defendant, the main contractor for a
project for the construction of the Integrated Customs, Immigration and Quarantine
Complex in Johor Bahru. The employer was a company called Gerbang Perdana Sdn Bhd
(GPSB), with JKR as the project owner. The plaintiff was one of several sub-contractors
for the project for two components, namely the electrical and mechanical works which
had a total contract value of RM100 million made up of RM54 million (for the
mechanical portion) and RM46 million (for the electrical portion).
The revised contract sum for the entire project was RM577,582,886.44. This
appeared from Exhibit LKC - 8 to the Affidavit in Reply filed by the first defendant
(Enclosure 20), i.e. the contractor's certificate of payment dated 31.12.2009. By that
certificate, a sum of RM1,251,964.49 was certified as now due to the contractor. The sum
certified as due had taken into account numerous deductions for non-compliance and
failure to perform obligations under the contract, including deductions for non-
compliance and damages due to non-completion attributed to the plaintiff for the
mechanical and engineering portions of the works.
133
[2010] MLJU 1869
68
Significant delays have occurred in the completion of the project which should
have been completed by 13.9.2005, but according to the Plaintiff the works have been
completed and a Certificate of Practical Completion (CPC) has been issued by JKR on
8.9.2007 and backdated to be effective from 31.5.2007. A Bank Guarantee (or
Performance Bond) is a distinct document from the building contract. The Bank
Guarantee is an agreement between the beneficiary and the provider of the Bond. The
building contract therefore forms no part of the Bank Guarantee nor incorporated into
it.134
Where the Bank Guarantee is an unconditional or an "on demand" guarantee, the
beneficiary is entitled to immediate payment before the underlying dispute is determined
either by trial or arbitration, and the court will not attribute an intention contrary to the
plain meaning of the words.135
The court found that the final draft account prepared by the employer (Gerbang
Perdana) showed that the Plaintiff is owed monies regarding to the Performance
Guarantee in relation to the electrical works component. So, it will be unconscionable to
make a call on the Performance Guarantee on this. The court had dismissed Enclosure 3
which is the Plaintiff's Summons in Chambers for an interlocutory injunction, and by
consensus of the parties, Enclosure 1 (namely the main claim) as well since dismissal of
Enclosure 3 practically decides the entire dispute between the parties in relation to the
motion to restrain the call on the Performance Guarantees.
134
Karya Legenda Sdn Bhd v Kejuruteraan Bintai Kindenko Sdn Bhd & Another [2007] 6 MLJ 72; Cygal
Berhad v Bandar Subang Sdn Bhd [2004] 3 CLJ 67 135
. Lotterworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd & Another [1998]
7 MLJ.
69
4.2.3 Literal Rule Approach In Construing “Termination” Clause
When a party breaches a condition of a contract, the innocent party may continue
or terminate the contract. The termination is not automatic; the innocent party must notify
the party in breach his option to terminate the contract. The clauses of serving notices for
termination are found in PWD Form 203A (rev 1/2010) (clause 52.0 and 53.0), PAM
Contract 2006 (clause 25.0 and 26.0) and CIDB Standard Form of contract Edition
2000(clause 44.0 and 45.0). There had been some issues arisen in determining the ways
of deliver the notice.
In the case of Central Provident Fund Board v Ho Bock Kee136
, the High Court
had applied the literal rule in construing the clause but the decision had been reversed in
Court of Appeal. By a contract in writing dated June 4, 1971 Ho Bock Kee agreed to
erect a large building for the Central Provident Fund Board at Robinson Road, Singapore
On October 25, 1974, the Superintending Officer served by hand notice of default to Ho
Bock Kee under clause 34(a) that in his opinion Ho Bock Kee failed to proceed with
reasonable diligence with the works. On November 2, 1974 the Chairman of the Board
served termination notice terminate the contract with effect from the date of notice. Both
Notices of October 25, 1974 and November 2, 1974 bore the words "A.R. Registered" but
were sent by hand.
The issue of the case was whether the notices of October 25, 1974 and November
2, 1974 which were served by hand were valid or not. Rajah J of High Court had
construed the clause using literal rule and held that the mode of communication only
became vital if the offeror clearly insists on acceptance in a particular mode or manner. In
this case the words used were very clear and explicit that the parties intended that only
notice by registered post and no other, should operate to determine. The notice that
136
[1981] 2 MLJ 162 (CA)
70
served by hand was considred as invalid, the notice should be delivered by the post
according the clause provision.
Furthermore, Wee Chong Sin CJ at Court of Appeal had reaffirmed the decision in
High Court. The court held that:
“The requirement of registered post is for the protection of the contractor in that he
is duly warned that the determination procedure has been operated and must take
immediate steps to rectify the specified defaults within the time limit prescribed in the
clause; the provision of this method of service no doubt was also intended for the
purpose of avoiding subsidiary disputes between the parties to the contract as to whether
the notice was given or received as it provides for a mode of service and receipt of the
required notice which can be corroborated from an independent and official source.”
Malaysia cases of determining the validity of delivered notice by hand showed in
Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd137
, it also referred to the decision of Ho
Bock Kee case as above. The contractor and employer had entered into a standard
building contract for the construction of a housing scheme. The employer architect by
way of a letter dated 19 July 1988 gave notice that in the architect's opinion, the
contractor had failed to proceed regularly and diligently in execution of the works. The
notice delivered by hand to the contractor.
By a subsequent letter dated 11 August 1988, a fresh notice was issued to the
contractor requesting him proceed regularly and diligently with the works. This notice
was also delivered by hand. Finally, by a letter dated 30 August 1988, which was
delivered by hand and received by the contractor, the employer gave notice of
termination of the contract. The issues were whether the notices of determination by both
137
[1998] 6 MLJ 80 (HC)
71
the employer and its architect were valid or not because they were delivered by hand
rather than in accordance with the provisions of clause 25(1) of the contract (which
provided for notices of determination to be given by registered post or recorded delivery).
The court had referred to the Ho Bock kee case, and held that clause 25(1) of the
contract clearly required the architect's notices to be given by registered post or recorded
delivery. The notices of determination received by hand contravened the express
provision of cl 25(1) and were hence invalid. The mode of service as provided by clause
25(1) was a mandatory provision which must be strictly observed. The contract was a
standard form of contract which the parties had chosen to use and they were thus bound
by its provisions.
Another Malaysia case in the issue of delivery of termination notice was showed
in Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd138
. On 15 February 1997, SK
appointed LCL as the main contractor to construct an office and a factory. The parties
entered into a formal agreement on 8 April 1998. That agreement was in the PAM form
as prescribed by the Architects Association of Malaysia. On 24 April 1998, SK wrote to
the LCL raising three matters based on which it said that it was entitled to stop work
temporarily. Work at the site was then suspended. On the very next day, the architect,
acting under cl 25 of the contract issued a default notice to the LCL. The court held that
the LCL in breach of contract and warned that if work was not re-commenced, another
contractor would be appointed.
Clause 25 in their contract required such a notice to be served by registered post
or recorded delivery. Instead, the notice was sent by fax on 25 April and then delivered
by hand two days later, on 27 April 1998. LCL did not re-commence work, and, after 26
days had passed, the respondent by its solicitors‟ letter of 21 May 1998 terminated the
138
[2007] 4 MLJ 113 (CA)
72
contract. So they bring the termination to Arbitration and the contractor claimed that the
termination was invalid. Following Fajar case, Arbitrator refused to accept the argument
and ruled that the employer‟s default notice delivered by hand was invalid.
Then the employer applied to the High Court to set aside the award on argument
of error on the face of the award. The Judge of High Court found that the notice was
validly issued as he held that:
“The arbitrator made observations indicating that he agreed with the main argument
made by the respondent that the default notice of 25 April 1998 was defective because it
was not sent by registered post as required by cl 25 notwithstanding the fact that the
notice was delivered by hand. In so finding, the arbitrator misdirected himself in law. The
arbitrator‟s reasoning was irrational and perverse. If he had applied the correct law as
stated in Hill v London Borough of Camden [1980] 18 BLR 35, the arbitrator would have
found the default notice to be validly issued.”
The contractor further appeal to Court of Appeal. The court had allowed the
Appeal and found that termination notice delivery by hand were illegal. Thus, the court
held that:
“It had been strenuously argued that the award disclosed an error of law on its face
because the arbitrator did not adopt the business common sense approach when
interpreting the service provision housed in cl 25. It simply did not matter because of the
facts of the present case. Here, the arbitrator not only struck down the termination notice
on procedural grounds, he also found the termination to be illegal at common law”
Although under the literal rule, the termination notice must be served by
registered post, however there are some cases that allowed the notice delivered by othe
73
rmethod. It was proved in the case of DMCD Museum Associates Sdn Bhd v Shademaker
(M) Sdn Bhd (No 2)139
. The plaintiff appointed the defendant as sub-contractor for the
proposed construction and completion of the Petrosains, Levels 4 and 5 Petronas Twin
Towers, KLCC, Kuala Lumpur. A notice of default dated 23 May 1997 was issued to the
defendant by the plaintiff requesting the defendant to remedy all defaults stated therein
within 14 days from the date of receipt of the notice of default. The plaintiff later issued a
notice of termination dated 10 June 1997 which was sent 'by hand'. The issue was
whether the termination of the sub-contract by the plaintiff was unlawful in view of the
termination notice dated 10 June which was sent to the defendant by hand instead of by
registered post.
The court had made a decision that differs from the case Fajar above. The court
held that clause 32 of the sub-contract allowed for the notice which must be in writing to
be 'served upon' the sub-contractor at the address given. It was only when no such
address was given or if there was a change of address of the sub-contractor and he failed
to give notice of such change, the court will deem that it had been properly sent to the
sub-contractor when it is addressed by registered post to the latter's last known address.
In addition to that, the sub-contractor had received the letter dated 10 June 1997
which was despatched by hand, and indeed as he had in fact immediately replied on the
same day. So in refusing to accept the plaintiff's termination of the sub-contract it is too
late for the defendant to take up this issue even assuming the defendant is right to take up
this argument at all. The subcontractor could not argued that it object the notice delivered
by hand
139
[1999] 4 MLJ 243 (HC)
74
4.3 Analysis Of Law Cases
4.3.1 Analysis On Cases That Applied Literal Rule Approach In Constructing
Contract Clause
Table 4.2 and figure 4.1 are the summary for the cases that had been analyzed
based on the literal rule approach in constructing the contract clause. The author found
that there are three main issues that usually applied the literal rule for the court in
constructing the construction contract clause. The main clauses that used literal rule in
interpretation are “Pay When Paid”, “Performance Bond” and “Termination” clause.
Besides that, it can be shown in the table below, it can be categories as cases using literal
rule and cases not using literal rule in the similar issue.
Table 4.2: Analysis of Cases on Literal Rule Construction and Non Literal Rule
Construction
Analysis of Cases On Literal Rule Construction
Clauses Literal Rule Construction Non Literal Rule Construction
Pay When Paid 3 6
Performance Bond 3 0
Termination 3 1
75
Figure 4.1: Analysis of Cases on Literal Rule Construction and Non Literal Rule
Construction
4.3.2 Analysis On Cases That Applied Literal Rule Approach In Construing “Pay
When Paid” Clause
The pay-when-paid clause often used in contracts agreement between main
contractors and sub-contractors or between housing developers and main contractors.
“Pay when paid” or also known as “back to back” method of payment is relevant
especially in the case of domestic subcontractor.140
140
Noor Zarina Binti Mohd Nazir, Late Payment Problems Among Contractors In Malaysia, Master of
Science (Construction Management) thesis, UTM 2006.
3 3 3
6
0
1
0
1
2
3
4
5
6
7
pay when paid termination
Analysis of Cases on Literal Rule
Construction
literal rule
construction
non literal rule
construction
76
In construting the wordings in “Pay When Paid” provision, if the clause is clear
and unambigious, the contracting parties must accept and comply with it. This opinion is
well surportted by the Malaysian Judge in the following cases:
a) BBR Construction Systems (M) Sdn Bhd v. Maxdouble Construction (M)
Sdn Bhd141
b) Pernas Otis Elevator Co. Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay
Sdn Bhd142
c) Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd143
In a refreshing approach and one that rejects the strict literal construction
approach of the Malaysian, Hong Kong and Singapore cases above, some jugements of
the American, Australia, New Zealand and United Kongdom had construe the “Pay When
Paid” cases differently. The Malaysian, Hong Kong and Singapore courts all applied the
literal rule, however United States, Australian, New Zealand and United Kingdom , the
court are attemped to move away from the rule by creating certain principle.
Firstly, is the implications of a “Pay When Paid” clause being a condition
precedent. This condition precedent must be distinguished from that which renders a
contract a conditional contract, one which will only come into existence and be a binding
contract upon the fulfillment of the condition. Condition precedent refers to one which
suspends the performance of an obligation comprised within the binding contract until the
fulfillment of that condition.
When the “Pay When Paid” clause is a condition precedent, it cannot be construed
literally as payment made to the subcontractor when main contractor had receipt payment
141
[2002] MLJU 104 (HC) 142
[2003] MLJU 394 (HC) 143
[2010] 3 MLJ 7 (CA)
77
from employer. This is because the requirement for the fulfillment the condition
precedent within reasonable time. In this regard, it is respectfully submitted that the
reasoning and conclusion in Schindler, Hong Kong Teakwood and Brightside, as well as
Interpro Engineering, Pernas Otis, BBR and Asiapools cases cannot be supported.
There cannot be an indefinite time for which a main contractor suspends his
payment obligation to the subcontractor. The payment must still be made within a
reasonable time even if the main contractor has still not received payment from the
developer. It been showed in the case as follows:
a) Ward v. Eltherington144
b) Smith & Smith Glass Ltd v. Winstone Architectural Cladding Systems
Ltd145
c) Durabella Ltd v J Jarvis & Sons Ltd146
In the case of Ward v. Eltherington147
, the court held that the condition precedent
to performance by payment from employer in the case had been discharged by
impossibility of performance. So the condition is considered been discharged, the sub
contractor have a right to a fee unconditional and unimpaired to claim. The times for
payment had been postponed to an event which was impossible to happen. After the
reasonable time had been elapsed, then the sub contractor was entitled to recover the sum
for their work done.
144
[1982] Qd. R. 561 (SC, Qld) 145
[1992] 2 NZLR 473 (HC) 146
[2001] All ER (D) 102 147
[1982] Qd. R. 561 (SC, Qld)
78
The court in the case of Smith & Smith Glass Ltd v. Winstone Architectural
Cladding Systems Ltd148
held that the contra proferentem principle would apply to such
“Pay When Paid” clause and there was a condition precedent before liability to pay arose
at all should showed that the clauses relied upon contain no ambiguity. The condition
precedent need to be contained in the contract with clear and precise terms that accepted
by both parties.
In the case of Durabella Ltd v J Jarvis & Sons Ltd149
, the court held that “Pay
When Paid” clause only be effective if the cash flow in the payment is capable of being
operated. It is an implied condition for the operation of condition precedent in “Pay
When Paid” clause. When the main contractor does not receive the payment from
employer, the main contractor is responsible to remedy the situation.
In the other criticism of the literal rule adopt in “Pay When Paid” clause was
showed in the case of Thomas J Dyer Co v. Bishop International Engineering150
.
According to the court judgment, “Pay When Paid” clause was not used to delay the
subcontractor payment until main contractor himself been paid. The clause was used to
postpone the payment within a reasonable period to enable the main contractor to procure
the necessary payment to the sub contractor.
Mc Pherson J in the case of Ward v. Eltherington151
also stated that the literal
construction approach cannot used to support the “Pay When Paid” clause. According to
the literal rule, when the main contractor does not received funds from the employer, the
sub contractor never been paid no matter they had completed their work or not. But in
148
[1992] 2 NZLR 473 (HC) 149
[2001] All ER (D) 102 150
[1962] Co 303 F2d 655 (CA) 151
[1982] Qd. R. 561 (SC, Qld)
79
this case, the court insists that a reasonable sum must be paid for a service. When the
subcontractor had completed their works, they must be paid for their work done.
In order to for a “Pay When Paid” clause to be effective, it must be stated clearly
in the sub contract itself and not by merely referring to another document such as the
provisions in the main contract. In a Malaysia case of Royden (M) sdn bhd v Syarikat
Pembenaan Yeoh Tiong Lay sdn bhd152
, the court held that the main contract between
main contractor and employer did not bind the sub contractor. Although there was a
provision in the sub contract stated that subcontractor shall been deemed to have noticed
of all provisions of the main contractor.
The literal rule was stated to be unsuitable to construing the “Pay When Paid”
clause showed in the case of Durabella Ltd v J Jarvis & Sons Ltd153
. Termination of
contract between main contractor and employer should not affect the payment for
subcontractor when the termination is due to the main contractor own‟s default. Main
contractor cannot rely on “Pay When Paid” clause for non-payment which the
subcontractor did not contributed for the breach of contract. Contractor could not take
advantage of the provisions by which the normal contractor‟s code for payment replaced
by new code under which no payment may be made until completion.
From the case above, the “Pay When Paid” clauses are not suitable to use literal
rule approach in interpretation. According to the literal rule, it is unfair for the
subcontractor to insist that they had done their work. They should be pay for the services
that they provided. The “Pay When Paid” clause is to postpone the time for main
contractor to get the funds to pay the subcontractor. Furthermore, the subcontractor
152
[1992] 1 MLJ 33 (HC) 153
[2001] All ER (D) 102
80
should not be suffering from the termination between main contractor and the employer
which he did not contributed any default.
4.3.3 Analysis On Cases That Applied Literal Rule Approach In Construing
“Performance Bond” Clause
“Performance Bond” means the bond required to be provided by the contractor as
a security for the due performance of the contract under clause 37.1 in PAM contract
2006. In the PWD Form 203A (Rev. 1/2010), Performance Bond/ Performance Guarantee
Sum is in clause 13.0. Performance Bond in CIDB Standard From of contract (2000) also
called as Performance Security Deposit. It was a security deposit to be provided by the
contractor to the Employer in accordance with the provision of option Module F.
The literal rule is a method that usually been used by court in interpreting the
“Performance Bond” clause. From every wording of the “Performance Bond” clause
itself which is very clear, unequivocal, unambigious and consistant with an immediate
undertaking to pay on the written sum. The court will not attribute an intention contrary
to the plain meaning of the words. Most of the literal rule was used to determine
conditional and unconditional bond. The court can applied the literal rule for the
wordings in “Performance Bond” clause, and take the effect of plain meaning of the
words. It was showed in the case belows:
a) Teknik Cekap Sdn Bhd v Public Bank Bhd154
154
[1995] 3 MLJ 449
81
b) Lotteworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd &
Anor 155
c) Kejuruteraan Bintai Kidenko Sdn Bhd v Nam Fatt Construction Sdn Bhd
And Anor 156
From all the above cases, the literal rule is suitable to be applied in the
“Performance Bond” clauses. The plain meaning of the “Performance Bond” clause had
claery showed with unambigious, so it bring the advantage for the court in determining
the type of performance bond.
4.3.4 Analysis On Cases That Applied Literal Rule Approach In Construing
“Termination” Clause
Termination of contract is to the release the innocent parties from being bound by
their contractual duties and it bring a contract relationship to an end. In the procedure of
termination, a party that want to terminate the contract will give a written termination
notice to another party. Notice of termination had been stated in clause 25.2 and 26.2 of
PAM contract 2006, clause 51.1 of PWD Form 203A (Rev.1/2010) and clause 44, 45, 46
of CIDB standard form of contract for building works.
The issue that arisen in the notice of termination was about the ways of delivered
the notice. Unlike PAM 2006 that stated clearly where it allowed the notice delivered by
hand or by registered post, the contract in those analyzed case is specific that the notice to
155
[1998] 7 MLJ 105 156
[2010] MLJU 1869
82
be delivered by post. In determining the validity of termination notice that delivered by
hand, the court had used literal rule approach. The literal meaning is the notice must be
delivered by post, and no other method would be allowed according to the contract. So in
many cases, the judgment of the court was dismissed when the termination notice had
been delivered by hand. Those cases are as follows:
a) Central Provident Fund Board v Ho Bock Kee157
b) Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd 158
c) Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd 159
In the case of Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd160
, there are
some issue in the High Court, the court had dismissed the decision of Abitrator and stated
that the arbitartor was irrational and perverse, the notice that delivered by hand should be
valid. Although in the court of Appeal, the court had stated the decision of Abitrator was
rights and notice delivered by hand was invalid. But it showed that, the literal rule that
notice must be delivered by hand had been rejected in High Court.
In the case of DMCD Museum Associates Sdn Bhd v Shademaker (M) Sdn Bhd
(No 2) 161
, it showed some circumstances that literal rule was not suitable to be applied.
When no such address was given or if there was a change of address of the sub-contractor
and he failed to give notice of such change, then the notice that delivered by hand would
be deem as valid. Furthermore, when the other party had received and response upon that
notice deliverd by hand, the notice will be considered as valid.
157
[1981] 2 MLJ 162 (CA) 158
[1998] 6 MLJ 80 (HC) 159
[2007] 4 MLJ 113 (CA) 160
[2007] 4 MLJ 113 (CA) 161
[1999] 4 MLJ 243 (HC)
83
From the case that had been analyzed above, the literal rule are not suitable to be
use in the clause of termination notice. The purpose of termination notice is to inform the
other parties to specify the default. No matter what type of the delivered method used, as
long as the party received the notice, it should be deem as valid. Moreover, in the PAM
contract 2006, it stated that the party can give the notice by hand or by registered post. It
showed that, the termination notices that served by hand considered as a valid method of
delivery.
4.4 Conclusion
As a conclusion for the findings, it can be concluded that the suitability of using
literal rule approach is different between clauses. Literal rule approach is suitable and
effective to be use in “Performance Bond” clause. The clear and unambiguous wordings
in “Performance Bond” clause showed the plain meaning of the clause, so the court will
not attribute contrary to the plain meaning of the words itself.
However, from the cases that had been analyzed above, the literal rule are not
suitable to use in interpreting the “Pay When Paid” and “Termination” clause. The
purpose of the “Pay When Paid” and “Termination” clauses was distinguisher from the
plain meaning that interpreted by literal rule. It was showed from some cases that appear
in ignoring to using literal rule interpretation as the judgment in previous cases.
CHAPTER 5
CONCLUSION AND RECOMMENDATION
5.1 Introduction
In this chapter, the conclusion and summary of the findings of this research are
discussed. The conclusion is based on the research objective that is set out on chapter 1.
This chapter attempts to summarize the research‟s finding of literature review, case laws
and analysis done by the author in the previous chapters. Besides, this chapter also
discusses the problems faced when conducting this research.
This chapter will also provide further recommendation for future study and
conclusion. Generally, the objective of this study had been achieved through the
documentary analysis of 16 law cases. The objective of this study is to identify the
suitability of using literal rule interpretation in construction contract clause.
85
5.2 Summary of Research Finding
Table 5.1: Analysis of Literal Rule Approach on “Pay When Paid” Clause
Case Analysis On Literal Rule Construction
Clauses Literal Rule Construction Non Literal Rule Construction
Pay When Paid 3 6
In construing the wording of “Pay When Paid” provision, Table 5.1 shows that
there are 3 Malaysian cases that are using the literal rule approach. According to the
court of Malaysia, they had refered to some Singapore and Hong Kong cases in such
dispute. From the cases quoted, the court found that the “Pay When Paid” clause clearly
stated that subcontractor only will be paid when main contractor received payment from
the employer. The Malaysian cases that uphold the validity of the “Pay When Paid”
clause are as follows:
a) BBR Construction Systems (M) Sdn Bhd v. Maxdouble Construction (M)
Sdn Bhd162
b) Pernas Otis Elevator Co. SdnBhd v Syarikat Pembenaan Yeoh Tiong Lay
Sdn Bhd163
c) Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd164
For the cases that ignore the use of literal rule, they are mostly cases from
foreign countries and only one Malaysian case. The cases that do not use literal rule
interpretation are showed as bellows:
162
[2002] MLJU 104 (HC) 163
[2003] MLJU 394 (HC) 164
[2010] 3 MLJ 7 (CA)
86
a) Thomas J Dyer Co v. Bishop International Engineering165- American
b) Ward v. Eltherington166- Australia
c) Smith & Smith Glass Ltd v. Winstone Architectural Cladding Systems Ltd
167- New Zealand
d) Royden (M) sdnbhd v Syarikat Pembenaan Yeoh Tiong Lay sdn bhd168-
Malaysia
e) Iezzi Construction Pty Ltd v. Watkins Pacific (Qld) Pty Ltd 169Durabella
Ltd v J Jarvis & Sons Ltd170- English authority
In the cases above, it shows that the court does not use literal interpretation in the
“Pay When Paid” clause although there were many previous cases that are using literal
rule. The reasons and circumstances that the court rejected to use literal rule are because
of the implications of a “Pay When Paid” clause is being a condition precedent. Under
this condition precedent, one will only come into existence and become a binding
contract upon the fulfillment of the condition.
The other reason why the literal rule is not suitable to be used in “Pay When
Paid” clause is because the “Pay When Paid” clause should not be used to delay the
subcontractor payment until main contractor himself been paid. The literal rule cannot
be used to support the “Pay When Paid” clause because of unjust enrichment principal.
Unjust enrichment is a legal term denoting a particular type of causative event in which
165
[1962] Co 303 F2d 655 (CA) 166
[1982] Qd. R. 561 (SC, Qld) 167
[1992] 2 NZLR 473 (HC) 168
[1992] 1 MLJ 33 (HC) 169
[1995] 2 Qd. R. 350 (SC) 170
[2001] All ER (D) 102
87
one party is unjustly enriched at the expense of another, and an obligation to make
restitution arises, regardless of liability for wrongdoing. The subcontractor should be
paid for what they had done; main contractor cannot unjustly enrich to get advantages
for non-payment.
The purpose of “Pay When Paid” clause should act as a tool that ensures the
main contractor to get payment from employer within the time. “Pay When Paid” clause
cannot be the reason for main contractor to escape from their payment liability.
Furthermore, the clause cannot be supported by literal rule when the determination of
main contractor with employer does not concern with the subcontractor. The contract
between main contractor and employer should not bind subcontractor except it had
expressly in the contract provision.
Table 5.2: Cases of Performance Bond That Using Literal Rule Approach
Performance bond
Literal rule approach
Teknik Cekap Sdn Bhd v Public Bank Bhd[1995] 3 MLJ 449
Lotteworld Engineering & Construction Sdn Bhd v Castle Inn Sdn Bhd&Anor [1998]
7 MLJ 105
Kejuruteraan Bintai Kidenko Sdn Bhd v Nam Fatt Construction Sdn Bhd And Anor -
[2010] MLJU 1869
From table 5.2, it shows that all cases above are suitable to be interpreted in
literal rule approach interpretation. Every wording of the “Performance Bond” clause is
very clear, unambigious and consistant. The court will not attribute an intention contrary
to the plain meaning of the words. The court can apply the literal rule for the wordings
in “Performance Bond” clause, and take effect of the plain meaning of the words. The
contracting parties need tocomply with the clauses as it is clear enough.
88
Table 5.3: Analysis of Literal Rule Approach on “Termination” Clause
Case Analysis On Literal Rule Construction
Literal Rule Construction Non Literal Rule Construction
3 1
From Table 5.3 above, it shows that 3 cases are using literal rule approach,
however one case refusestouse literal approcah. The cases that use literal approach are:
a) Central Provident Fund Board v Ho Bock Kee171
b) Fajar Menyensing Sdn Bhd v Angsana Sdn Bhd 172
c) Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd173
From the cases above, the court applies the literal rule interpretation. Court found
that the contract clauses had clearly expressed the delivery method of the termination
notice, so given in their literal meaning, they must use register post and no other method
is available. However, there is one case that did not use the literal approach which in
DMCD Museum Associates Sdn Bhd v Shademaker (M) Sdn Bhd (No 2)174
. Under the
purposive approach, the clause will be look into the purpose of clause. No matter what
method is used, as long as the termination notice is received by other parties, it will be
considered valid.
171
[1981] 2 MLJ 162 (CA) 172
[1998] 6 MLJ 80 (HC) 173
[2007] 4 MLJ 113 (CA)
174[1999] 4 MLJ 243 (HC)
89
5.3 Problem Encountered During Research
There are some problems faced when conducting this research. One of the main
problems is the lack of time. The duration given to complete the writing up and to
submit this research is insufficient. Another problem is the lack of comprehensive data.
This problem arises during the case law selection process. The cases related to the literal
rule are mostly from the international cases.
5.4 Conclusion and Recommendation
From this research, it is found that the literal rule approach is widely used in
construction industry. However this research only focuses on three types of clauses that
are related to the literal approach only. Therefore, there are some recommendations for
future researches that could be carried out for further study as below:
a) Widen the scope to all issue arises in relating to the use of literal rule in
construction cases
b) Other than identifying the use of literal rule approach in construing
contract clauses, the further research can be expanded to the suitability of
other types of interpretation approach such as golden rule, mischief rule,
purposive rule etc.
90
The literal rule is words that give in their ordinary and natural meaning. In other
words, the law is to read from word to word and not to divert from its plain meaning. In
many standard forms of contracts, a „definitions' section within a contract is always
included to explicitly define the important terms used throughout the contract. But some
contracts fail to define a particular term. The plain meaning rule attempts to guide that
turns on the meaning of a term not defined by the contract, or on that of a word found
within a definition itself.
If the words are clear, they must be applied even though the intention of the
parties may be different or the result is harsh or undesirable. Because of this, there have
been many criticisms against the use of literal approach in interpretation. In the
construction industry cases, the literal rule has been widely used. However, this
approach is not suitable for all of the clauses.
As a conclusion for this study, it can be concluded that the suitability of using
literal rule approach is different in different types of cases. It depends on different
circumstances. Literal rule approach is suitable and effective to be used in “Performance
Bond” clause. The clear and unambiguous wordings in performance clause shows the
plain meaning of the clause, so the court will not attribute contrary to the plain meaning
of the words itself.
However, from the cases that been analyzed above, the literal rule is not suitable
to use in interpreting the “Pay When Paid” and “Termination” clause. The purpose of the
“Pay When Paid” and “Termination” clauses is distinguished from the plain meaning
that interpreted by literal rule. It is showed by some cases which ignore the use of literal
rule interpretation as the judgment in previous cases.
91
A contract will be interpreted as a whole. The court cannot construe words in a
single plain meaning but need to consider all background knowledge, situation and
circumstances which would appear in the cases. A contract must be understandable and
construing according to the contracting parties‟ intention.
92
REFERENCES
Accurate & Reliable Dictionary, “Construction”, A free English online dictionary.
Retrieved on 14 August 2012, and available at
http://ardictionary.com/Construction/11089
Always Associates. Ambiguities in contracts- the Contra Proferentem Rule. 2012.
Retrieved on 22 August 2012 and available at http://www.alway-
associates.co.uk/legal-update/article.asp?id=128
Amy Cross. Using cases to illustrate, explain how and why the courts make used of the
doctrine of judicial precedent and statutory interpretation to resolve points of
law. November 2008
Andrew Mitchell & Minel Dadhania. As Law Level. Cavendish Publishing Limited, The
Glass House, Wharton Street London , United Kingdom 2003.
Ashurst. Quick Guides. Interpretation of Contracts under English Law. London: Ashurst
LLP 2012
Atom. Literal Rule of Construction: Criticism. 2010. Retrieved on 24 August 2012 and
available at http://lawaids.blogspot.com/2010/06/literal-rule-of-construction-
criticism.html
93
BC Injury Law and ICBC Claims Blog. Contra Proferentem Rule Applied To Court
Order Interpretation . Copyright © 2008 The MacIsaac Group of Law Firms.
Chong, H.Y and RosliMohamadZin (2008).A case study into the language structure of
construction standard form in Malaysia. International Journal of Project
Management 28 (2010) 601-608
Dr. Chandana Jayalath.. Limitations and Hypothesis Underlying the Use of
Interpretation Rules in Construction Contracts Revisited. Articlebase. 2009.
Retrieved on 24 August and available at
http://www.articlesbase.com/construction-articles/limitations-and-hypothesis-
underlying-the-use-of-interpretation-rules-in-construction-contracts-revisited-
998499.html
Edward W. Daigneault. Pocket Guide. Drafting International Agreement in legal
English. Manzche Verlages- und Univeristitatsbuchhanlung GmbH. Wien 2005
E-lawresources.co.uk. Providing resources for studying law. The Golden Rule. Retrieved
on 22 August 2012 and available at http://www.e-lawresources.co.uk/Golden-
rule.php
E-lawresources.co.uk. Providing resources for studying law. The Mischief Rule.
Retrieved on 22 August 2012 and available at http://www.e-
lawresources.co.uk/Mischief-rule.php
Farlex, “Ambiguity”, The free Dictionary. Retrieved on 14 August 2012 and available at
http://legal-dictionary.thefreedictionary.com/ambiguity
Fiona Cownie, Anthony Bradney & Mandy Burton. English Legal System in Context.
Fourth Edition. Oxford University Press, 2007
94
Fundamentals Level – Skills Module, The literal Approach. Paper F4 (ENG) Corporate
and Business Law (English) December 2009 Answers.
Gary Slapper & David Kelly. The English legal system. Twelfth Edition 2011-2012.
Tayler & Francis e-library, 2011.
Harbans Singh K.S, Construction of Contingent Payment Clauses: An Overview.
Ingenenier, The Lembaga Jurutera Malaysia. KDN PP11720/1/2006 ISSN
0128-4347 VOL.28 DEC 2005 - FEB 2006
Helen Scott. Contract II Outline. Spring 1995
Henrik Wærsted Bjornstad, Entire Agreement Clauses. Magister Juris (University Of
Oxford) 2007
Jackson Walker L.L.P. Boilerplate Terms, Rules Of Interpretation, And Developments In
Drafting Contracts Presented at the Continuing Legal Education Seminar
“Corporate Counsel Update”
LabSpace, open educational resources. Judge and the Law: Part E The rules of statutory
interpretation The literal rule. Retrieved on 19 August 2012 and available at
http://labspace.open.ac.uk/mod/resource/view.php?id=415849
Law Student. A journey into a law degree. The Literal Rule. 2012. Retrived on 22
August 2012 and available at http://oulawstudent.blogspot.com/2010/12/literal-
rule.html
Lawmentor. The literal rule. @2012 lawmentor.co.uk. retrieved on 24 August 2012 and
available at http://www.lawmentor.co.uk/glossary/t/the-literal-rule/
95
MEMcLaughlin. Statutory Interpretation - Rules of Construction. Quizlet. March
2011retrieved on 22 August 2012 and available at
http://quizlet.com/4935216/statutory-interpretation-rules-of-construction-flash-
cards/
Mohamad Ibrahim Mohamad1 And ZulkifliMadon, Understanding Contract
Documentation, Proceedings Of The 6th Asia-Pacific Structural Engineering
And Construction Conference (APSEC 2006), 5 – 6 September 2006, Kuala
Lumpur, Malaysia.
Noor Zarina Binti Mohd Nazir, Late Payment Problems Among Contractors In Malaysia,
Master of Science (Construction Management) thesis, UTM 2006.
Oon Kee Kheng, “Pay when paid” clause in subcontracts. International Forum on
Construction Industry Payment Act and Adjudication jointly organized by
CIDB Malaysia and The Institutions of Surveyors, Malaysia on 13-14
September 2005 at Kuala Lumpur Convention Center.
P. Goodrich. Reading the Law (1986) Basil Blackwell, Oxford. P 109.
Pearson, Catalogue, Chapter 3 Statutory Interpretation. Retrieved on 19 August 2012
and available at
http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/sample
chapter/ELS_C%20and%20M_Chap%203.pdf
96
Scott Alden , Alex Ottaway & Jennifer Tetstall. Drafting Contracts: Guidance On
Managing Ambiguity. Construction Update (Australia) 1 Feb 2012. Rtrieved On
22 August And Available At
Http://Www.Dlapiper.Com/Australia/Publications/Detail.Aspx?Pub=6719
Smith & Baile on the Modern English Legal System. Third edition 1996, p351-403;
cases in Jacqueline Martin, The English Legal System, chapter 3
Stephen Hunt, Drafting: Plain English versus Legalsese. Waikato Law Review 1995.
Retrieved on 14 August 2012 and available at
http://www.nzlii.org/nz/journals/WkoLRev/1995/9.html
US Legal. Interpretation of Ambiguous contracts, 2010. Retrieved on 14 August 2012
and available at http://contracts.uslegal.com/interpretation-of-
contracts/interpretation-of-ambiguous-contracts/
Vincent Nelson QC. The Interpretation of Contracts: The Rules Re-Written For Modern
Time at 39 Essex Street Wednesday 31st March 200