SUSPENSION OF WORKS AS REMEDY FOR NON-PAYMENT

LEE CHIA KUANG

UNIVERSITI TEKNOLOGI MALAYSIA

SUSPENSION OF WORKS AS REMEDY FOR NON-PAYMENT

LEE CHIA KUANG

A project report submitted in partial fulfillment of the requirements for the

award of the degree of

Master of Science in Construction Contract Management

Faculty of Built Environment

Universiti Teknologi Malaysia

JULY 2009

iii

DEDICATION

Specially dedicated to:

My beloved Father, Lee Kee Chin

My beloved Mother, Tan Chun Thoo

My cute little baby sister, Lee Jo Ying

Thanks for all the love and encouragement ~

iv

ACKNOWLEDGEMENT

As a result of the completion of this research, I wish to thank everyone who

has helped and encouraged me. Many thanks to the supervisor for this research,

Encik Jamaludin Yaakob. His guidance has motivated and helped me throughout the

completion of this research. I am so thankful for his commitment and his guidance in

contributing towards my understandings and thoughts.

Nevertheless, I would like to express my gratitude towards my beloved

family who has contributed to the completion of this research. I am grateful for their

sincere support, love, encouragement and motivation. Their love and continued

support had made this project report successfully researched and completed.

v

ABSTRACT

Construction industry is vital for the nation’s growth and will only continue

to function with the basis of payment by the employer. However this industry has

been plagued by the non-payment scenario, and directly affecting contractor’s

cashflow. In properly securing payment and remedying non-payment by the

employer, contractor nevertheless can choose to suspend works. This right is a self-

help remedy that can be an effective means of securing payment without the need to

instigate other formal procedures and remedies which are time and money consuming.

In Malaysia, this right has been introduced in CIDB 2000, and later in PAM 2006 for

building works; while the other countries such as UK, New Zealand, Australia, Isle

of Man, and Singapore has incorporated this right in their building acts since a very

long time. Despite of this convenience, studies have shown many contractors in

Malaysia do not favour this right in remedying non-payment, and similiarly there is

almost no case law (except one case in New Zealand) that illustrate contractor

exercising this right. This research therefore has been done to explore what are the

possible problems that the contractor may encounter and to what extent it may arise

when exercise this right in relation to PAM 2006 and CIDB 2000. The result shows

that the contractor’s right in suspension of work can be challenged by the employer

for several grounds such as the validity of notice to suspend works, validity of

interim certificates and the right to set-off as grounds for non-payment. Secondly,

without proper fulfillment such as mitigation of loss, prevention of delay, and

submitting notices, contractor can be held to have lost his rights in these claims.

Thirdly, contractor may face problems in suspending works downstream as there is

lack of back-to back provisions in sub-contracts. This research will shed a light of

what are the possible problems that the contractors may encounter under PAM 2006

and CIDB and forms a guideline for the contractors to suspend work optimistically.

vi

ABSTRAK

Industri pembinaan adalah penting kepada pembangunan negara, dan

kesinambungannya hanya akan berterusan berasakan pembayaran daripada majikan

yang mapan. Akan tetapi, industri ini telah dibelenggu dengan masalah

ketidakbayaran dan menganggu status kewangan pihak kontraktor. Penangguhan

kerja dapat dipilih dan dilihat sebagai satu cara yang efektif dan alternatif kepada

cara-cara yang lain yang hanya memakan masa dan wang dalam menangani

ketidakbayaran. Di Malaysia, penangguhan kerja telah diperkenalkan di borang

setara CIDB 2000, dan seterusnya di PAM 2006 untuk kerja–kerja bangunan.

Negara-negara lain seperti UK, New Zealand, Australia, Isle of Man, and Singapore

telah memperuntukkan penangguhan kerja sebagai satu hak untuk kontraktor dalam

akta pembinaan.Walaupun demikan, kajian telah menunjukkan banyak kontraktor di

Malaysia tidak memilih alternatif ini. Malah, sehingga hari ini hampir tidak ada satu

kes mahkamah (kecuali satu kes di New Zealand sahaja) yang mampu memberi

ilustrasi di mana kontraktor telah menggunakan alternatif ini terhadap ketidakbayaran

majikan. Dengan itu, kajian telah dilakukan di sini untuk mencari potensi masalah-

masalah yang akan dihadapi kontraktor apabila menggunakan hak penangguhan kerja

di bawah borang setara PAM 2006 dan CIDB 2000. Daripada kajian ini, potensi

masalah yang dihadapi meliputi cabaran daripada majikan dalam notis, sijil interim

dan hak “set-off” sebagai satu alasan untuk ketidakbayaran. Malah, hak kontraktor

dalam menuntut kerugian dan pemanjangan masa akan dipertikaikan sekiranya

kontraktor tidak memitigasikan kerugian dan mengurangkan kelewatan dan memberi

notis. Akhir sekali, kontraktor akan mengalami masalah untuk melaksanakan

penangguhan kerja terhadap pihak bawahan disebabkan ketiadaaan klausa di borang

sub-kontrak. Kajian ini akan memberi petunjuk yang berguna kepada kontraktor

supaya optimis untuk menangguh kerja di bawah PAM 2006 dan CIDB 2000.

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TABLE OF CONTENTS

CHAPTER TITLE PAGE

DECLARATION ii

DEDICATION iii

ACKNOWLEDGEMENT iv

ABSTRACT v

ABSTRAK vi

TABLE OF CONTENTS vii

LIST OF ABBREVIATIONS xiii

LIST OF CASES xiv

LIST OF FIGURES xvi

1 INTRODUCTION 1

1.1 Introduction 1

1.2 Problem Statements/ Research Issues 4

1.3 Research Objective 7

1.4 Scope of Research 8

1.5 Significance of the Research 8

1.6 Research Methodology 8

1.6.1 Research Stage One: Literature Review 11

1.6.2 Research Stage Two: Collection of Data 11

1.6.3 Research Stage Three: Data Analysis 12

1.6.4 Research Stage Four: Summary Formation 12

and Report Writing

viii

2 NON-PAYMENT IN THE CONSTRUCTION INDUSTRY 13

2.1 Introduction 13

2.2 Contractor’s Right to Payment 15

2.2.1 Contractors Right to Payment under Express

Terms of Contract 15

2.2.2 Contractor’s Right to Payment under Common Law

Principles (Quantum Meruit) 16

2.2.3 Contractor’s Right to Payment under Implication

of Statutory Provisions 18

2.3 Employer’s Consequences of Non-Payment 19

2.4 Contractor’s Actions against the Employer for 21

Non-Payment

2.4.1 Determination of Employment 22

2.4.2 Application for Summary Judgment 22

2.4.3 Application for Winding up Petition 23

2.4.4 Terminate the Contract under Common Law 24

2.4.5 Claim for Interest 26

2.4.6 Suspension of Works 27

2.5 Proposing Suspension of Works as the Best Remedy

for Non-Payment 28

2.6 Conclusion 30

3 CONTRACTOR’S RIGHT IN SUSPENSION OF WORKS 32

3.1 Introduction 32

3.2 Contractor’s Dilemma in Suspension of Works 33

3.3 Development of Suspension of Works Clause 35

3.4 Contractor’s Right to Suspend Works for

Non-Payment under Express Provisions of Contracts 37

3.4.1 Contractor’s Right to Suspend Works

for Non-Payment under PAM 2006 37

ix

3.4.1.1 Contractor’s Entitlements After

Suspending Works for

Non-Payment under PAM 2006 39

3.4.1.2 Contractor’s duties

Following Suspension under

PAM 2006 40

3.4.2 Contractor’s Right to Suspend Works for

Non-Payment under Standard Form of

CIDB 2000 40

3.4.2.1 Contractor’s Entitlements after

Suspending Works for

Non-Payment under CIDB 2000 42

3.4.2.2 Contractor’s Duties Following Suspension

under CIDB 2000 43

3.4.3 Technical Definition of Suspension of Works

under PAM Contract 2006 and CIDB 2000 43

3.4.4 Back-to-back Provisions in Sub-Contracts 45

3.4.4.1 Back-to- back Provisions in PAM

Sub-Contract 2006 (Nominated) 46

3.4.4.2 Back-to-back Provisions in CIDB

Standard Form of Sub-Contract for

Nominated Sub-contractor

[Form CIDB.B (NSC)/2002] 47

3.4.4.3 Back-to-back Provisions of PAM 2006

and CIDB 2000 in Domestic

Sub-Contracts 48

3.4.5 Contractor’s Right to Suspend Works for

Non-payment under other Contracts – FIDIC 49

3.5 Contractor’s Right Under Statutory Provisions to

Suspend Works for Non-Payment 51

3.5.1 Suspension of Works for Non-payment

under Housing Grants, Construction and

Regeneration Act (HGCRA) 1996 (UK) 52

x

3.5.2 Suspension of Works for Non-Payment

under Building and Construction Industry

Security of Payment Act 1999 amended in 2002,

New South Wales, Australia (NSW Act) 54

3.5.3 Suspension of Works for Non-Payment

under Construction Contracts Act 2002

(New Zealand act) 55

3.5.4 Suspension of Works for Non-Payment

under Construction Contracts Act 2004 Isle

of Man (IoM act) 57

3.5.5 Suspension of Works for Non-Payment

under Building and Construction Industry

Security of Payment act 2004 (Singapore Act) 58

3.5.6 Case Study: Contractor Exercise

Suspension of Works under Construction

Contracts Act 2002- Marsden Villas Limited

vs Wooding Construction Limited 60

3.6 Conclusion 62

4 ANALYSIS OF CASE LAW: IDENTIFYING POSSIBLE

PROBLEMS THAT CONTRACTOR MAY FACE WHEN

SUSPENDING WORKS AS REMEDY FOR NON-PAYMENT 65

4.1 Introduction 65

4.2 Possible Problem 1: Challenges to Contractor’s

Right in Suspension of Works by the Employer 66

4.2.1 Notice to Suspend Works Has Been Given

Unreasonably or Vexatiously 67

4.2.2 Employers Challenges the Validity of

Interim Certificates as a Basis for Non-Payment 71

4.2.2.1 Interim Certificate is Not Validly

Issued by Registered Professional 71

4.2.2.2 Architect/ S.O Has Been Acting

Impartially, Fraudulent in issuing

xi

Interim Certificate 73

4.2.2.3 Interim Certificate was

Fundamentally Inaccurate in Content

and Computation 76

4.2.3 Reasons for Non-Payment is Due to Set-Off 77

4.2.3.1 Common Law Right in Set-Off 78

4.2.3.2 No Presumption on a General Rule

that Exclude the right to Set-Off in interim

Certificates 78

4.2.3.3 Situations That Allow Employer to

Set-Off 80

4.2.3.4 Set-Off in PAM 2006 82

4.2.3.5 Set-Off in CIDB 2000 86

4.3 Possible Problem 2: Challenges to Contractor’s

Entitlements in Suspension of Works 87

4.3.1 Contractor Does Not Mitigate Losses 87

4.3.2 Contractor Does Not Prevent Delay 91

4.3.2.1 Contractor Do Not Use His Best

Endeavour to Prevent or Reduce Delay

under PAM 2006 91

4.3.2.2 Contractor Does Not Take Reasonable

Steps to Avoid or Reduce Delay Under

CIDB 2000 93

4.3.3 Contractor‘s Right in Extension of Time and Loss

and Expense is Deprived For Not Submitting

notices of claims 94

4.4 Possible Problem 3: Problems of Back-to-Back

Provisions in Sub-Contracts 97

4.4.1 Back-to-back Provisions in PAM

Sub-Contract 2006 (Nominated Sub-Contract) 99

4.4.2 Back-to-back Provisions in CIDB Standard

Form of Sub-Contract for Nominated

Sub-Contractor [Form CIDB.B (NSC)/2002] 100

xii

4.4.3 Back-to-back Provisions in Domestic Sub-

Contracts 100

4.5 Conclusion 101

5 CONCLUSIONS AND RECOMMENDATIONS 103

5.1 Introduction 103

5.2 Summary of Research Findings 104

5.3 Recommendation: Guidelines for Contractor 107

Exercising Suspension of Works

5.4 Conclusion 109

5.5 Limitation of Research 109

5.6 Suggestion for Further Research 110

REFERENCES

xiii

LIST OF ABBREVIATIONS

All ER All England Law Reports

BCL Building and Construction Law

BLR Building Law Report

CLD Construction Law Digest

CLJ Supp Current Law Journal Supplement

Con LR Construction Law Report

FSR Fleet Street Reports

K.B King’s Bench

MLJ Malayan Law Journal

NTSC NT Supreme Court

NZLR New Zealand Law Reports

SLR Singapore Law Reports

TCC Technology and Construction Court

xiv

LIST OF CASES

Ayer Itam Tin Dredging Malaysia Berhad vs YC Chin Enterprise Sdn Bhd [1994] 2

MLJ 754

Ban Hong Joo Mines Ltd vs Chen & Yap Ltd [1969] 2 MLJ 83

BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd [2001] 1 MLJ 356

Brani Readymixed Pte Ltd vs Yee Hong Pte Ltd [1995] 1 SLR 205,CA

Canterbury Pipe lines Ltd vs The Christchurch Drainage Board [1979]16 BLR 76

Channel Tunnel Group Ltd vs Belfour Beatty Construction Ltd & others [1992] 2

ALL ER 609

Chandler Bros Ltd vs Boswell [1936] 3 ALL ER 179

C.M Pillings & Co Ltd vs Kent Investments Ltd [1986] 4 Con LR 1

Dawnays Ltd vs F.G. Minter Ltd [1971] 1 BLR 16

DR Bradley (Cable Jointing) Ltd vs Jefco Mechanical Services [1989] 6 CLD , 7-19

Gaymark Investments Pty vs Walter Construction [1999] NTSC 143

Gilbert-Ash (Northern) Ltd vs Modern Engineering (Bristol) Ltd [1973] 1 BLR 73

Gunung Bayu Sdn Bhd vs Syarikat Pembinaan Perlis Sdn Bhd [1987] 2 MLJ 332

Hoenig vs Isaacs [1952] 2 All ER 176

IBM UK Ltd vs Rockware Glass Ltd [1980] FSR 335

Jia Min Building Construction Pte Ltd vs Ann Lee Pte Ltd [2004] 3 SLR 288

J.M Hill and Sons Ltd vs London Borough of Camden [1980] 18 BLR 31

John Jarvis vs Rockdale Housing Association Ltd [1987] 36 BLR 48

xv

Kah Seng Construction Sdn Bhd vs Selsin Development Sdn Bhd [1997]1 CLJ Supp

448

Kabatasan Timber Extraction Co vs Chong Fah Shing [1969] 2 M.L.J .6

Kemayan Construction Sdn Bhd vs Prestara Sdn Bhd [1997] 5 MLJ 608

Lazarus Estates Ltd vs Beasley [1956] 1 All ER 341

Ling Heng Toh Co vs Borneo Development Corporation Sdn Bhd[1973] 1 MLJ 23

Mahkota Technologies Sdn Bhd (Formerly known as the General Electric Co (M)

Sdn Bhd vs BS Civil Engineering Sdn Bhd [2000] 6 MLJ 505

Malaysian Rubber Development Corp Bhd vs Glove Seal Sdn Bhd [1994] 3 M.L.J

569

Marsden Villas Limited vs Wooding Construction Limited [2007] 1 NZLR 807

Mondel v Steel [1835-1842] All ER Rep 511

Parkinson vs Commissioners of Works [1949] K.B.632

Pembenaan Leow Tuck Chui & Sons Sdn Bhd vs Dr Leela’s Medical Centre Sdn

Bhd [1995] 2 MLJ 57

Reinwood Ltd v Brown & Sons Ltd [2006] TCC 9 November 2006

Token Construction Co Ltd v Charlton Estates Ltd [1973] 1 Build LR 48

The Jardine Engineering Corporation Limited v Shimizu Limited [1992] 63 BLR 96

Turner Corporation vs Austotel Pty Limited (1994) [1994] 13 BCL 378

Woo Kam Seng vs Vong Tak Kong [1968] 2 MLJ 244

Yong Mok Hin vs United Malay States Sugar Industries Ltd [1966] 2 MLJ 286

xvi

LIST OF FIGURES

FIGURE NO TITLE PAGE

1.1 Stages of Research 10

CHAPTER 1

INTRODUCTION

1.1 Introduction

Construction industry is vital for the nation’s growth, and works as an

important cog in the wheel propelling the Malaysian economy. Nevertheless, it will

only continue to function with the basis that the people and the professionals such as

the architects, engineers, surveyors, and labourers are paid for work and services that

have been properly executed1.

However, over the years, cash flows problems due to non-payment culture of

the employer have worried key players in the industry2. As the saying goes, “cash

flow is the life blood of the construction industry”3, payment has been one of the

criteria and essence for a successful construction project4. Payment was identified as

one of the ten priority areas in the Malaysian construction industry during a

1 Lim Chong Fong.(2005).The Malaysian Construction Industry – The Present Dilemmas of the Unpaid Contractors. Masters Builders Journal (4th Quarter), pg 80-82 2 CIDB. (2007). Construction Industry Master Plan Malaysia 2006-2015. Malaysia: CIDB, pg 135 3 Lord Denning in Dawnays Ltd vs F.G. Minter Ltd [1971] 1 BLR 16 4 Sr Noushad Ali Naseem Ameer Ali. (2006). A “ Construction Industry Payment and Adjudication Act”: Reducing Payment Default and Increasing Dispute Resolution Efficiency in Construction. From http://www.mbam.org.my/mbam/images/MBJ3Q06(pdf)/CsNaseem(ACTpt1).pdf

2

construction industry roundtable in June 2003. A recent survey carried out by CIDB

in collaboration with University Malaya, even showed that delayed and non-payment

in the Malaysian construction industry chronically affecting the entire delivery

chain 5 . It is really an irony to see the construction industry facilitated by

professionalism creates such an intricate situation for the contractors.

It has been customary for employer to make periodic payments to contractor,

due to the fact that large capital expenditure and the extended period of construction,

it would be difficult for even the most fiscally strong contractor to finance the entire

project until completion6. Eventually, when the project moves towards completion,

the contractor loses leverage, while the employer gains leverage. Some employers

misuse this leverage, by delaying the payment, and eventually lead to non-payment7.

Basically, the contractor would be left with the option of progressing with the work

concurrent with suing for payment with interest, or if the non-payment by the

employer is so serious to constitute a repudiatory breach, the contractor can choose

to terminate the contract8. Indeed, termination as the way to remedy non-payment is

expressly stated out in some standard form of contracts, however as a matter of

practice, many unpaid contractors are reluctant to go on the route of termination9.

As proposed by some of the professionals, suspension of works might do the

trick as one of the avenues in solving the unpaid problems. Suspension of works

represents a contingency that can be made available to the contractor to the contract

in certain defined situation whereby the progress of the work can be temporarily

halted, waiting the employer to remedy the non-payment default10. Encouraged to be

one of the avenues in solving problems of non payments by the employer,

5 Ibid 6 Jervis, B.M, and Levin, Paul. (1988).Construction law Principles and Practice. U.S: McGraw-Hill Book Company, pg 153. 7 Howrey,LLP. (2005). Managing Payment Delays on International Construction Projects, from http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/Nov_21_2005/mana.html 8 Ban Hong Joo Mines Ltd vs Chen & Yap Ltd [1969] 2 MLJ 83. 9 Lim Chong Fong.(2005).The Malaysian Construction Industry – The Present Dilemmas of the Unpaid Contractors. Masters Builders Journal (4

th Quarter), pg 80-82

10 Harbans Singh. (2004). Suspension of Work: An Overview. From http://www.bem.org.my/publication/septnov04/E&L(Suspension)(24-35).pdf

3

mechanism of suspension of works has been strongly recommended to be included in

the proposed Construction Industry Payment and Adjudication Act by the

Construction Industry Working Group on Payment (WG 10) during the construction

industry round table in June 2004 chaired by the Honorable Minister of Works, and

is envisaged in the second strategic thrust in the Construction Industry Master Plan

2006-201511.

Countries such as Australia, New Zealand, UK, Isle of Man, and Singapore

have envisaged suspension of works as a statutory right. It is believed such right

would enable the contractor who is aggrieved for non-payment to suspend

construction works until he is fully paid. Recently there is one case law in New

Zealand (Marsden Villas Limited vs Wooding Construction Limited) has

demonstrated the successfulness of the Construction Contracts Act ( New Zealand

Act) working properly in empowering the right of suspension for non-payment to the

contractor.

However, there is no common law right for contractor to suspend works for

non-payment, as suspension for non-payment is only available to contractor if there

is express clause in contract, and by implication of statutory provisions. In Malaysia,

it appears that without specific statutory provisions, the contractors have no

opportunity to exercise this option. Prior to year 2000, no Malaysian Standard form

of contract for building works provides this express right. However, when CIDB

2000 standard form of contract was first introduced, suspension of work was an

express right for the contractors, and six years after that, this right was entrenched in

PAM 2006 as well. Enshrined both in CIDB 2000 and PAM 2006 for building works,

eventually it gives a new dimension for the contractors rather than terminating the

contract and other avenues which put their interest at stake and consumes times and

money.

11 Sr Noushad Ali Naseem Ameer Ali. (2006). A “ Construction Industry Payment and Adjudication Act”: Reducing Payment Default and Increasing Dispute Resolution Efficiency in Construction. From http://www.mbam.org.my/mbam/images/MBJ3Q06(pdf)/CsNaseem(ACTpt1).pdf

4

1.2 Problem Statement/ Research Issues

Failure of the employer to pay for work properly executed is one of the

contractor’s worst fears, as the amount of money owed may be substantial and this

can drive the contractor and his or her sub contractor out of business12. Lately there

are signs that deteriorating economic conditions begun to hurt the construction

industry despite the government’s injection of an additional allocation of RM 7

billion into the economy13. This scenario greatly affects the key players especially

the contractors in their cash flow. This circumstance has indeed worsened the

adversarial nature of the construction industry, due to the fact that construction

industry is complex and easily bound to raise financing issues and disputes relating

to non-payment 14 . However, non-payment related dispute remedied through

litigation if affordable but it takes too long; while arbitration is faster but expensive15.

Suspension of works nevertheless can be regarded as a self –help remedy to

the contractor who has not received payment, and if used properly it can be as

effective means of securing overdue payment without the need to instigate other

more formal procedures such as adjudication, arbitration or litigation16. However,

there is no common law for contractor to suspend works for non-payment, and

contractor can only suspend works based on express provisions in contracts and

statutes.

Under statutes, suspension of work has already been created under a statutory

right in section 112 of the HGCRA 1996 to remedy the non-payment of the employer

12 Kwakye,A.A. (1997). Construction Project Administration in Practice. England: Addison Wesley Longman, pg 241. 13 The Star. (2008). Proposed act To protect contractors. The star. From http://star-space.com/news/story.asp?file=/2008/12/9/pnews/2735045&sec=pnews 14 Ibid 15 Lim Chong Fong. (2005). The Malaysian Construction Industry – The Present Dilemmas of the Unpaid Contractors. Masters Builders Journal (4

th Quarter), pg 80-82

16 Pettigrew, R.(2005). Payment Under Construction Contracts Legislation. London : Thomas Telford, pg 120

5

in the UK 17. Besides that, countries like Singapore, and New Zealand, Australia and

Isle of Man had similar acts which had incorporated the right of suspension of work

since a very long time ago.

However in Malaysia, the Construction Industry Payment and Adjudication

Act is still awaiting submission to the cabinet for approval and directive so that a

formal Bill can be presented to parliament18. The construction industry had been

pushing for the act that provides for inter alia the suspension of work since 2004 and

yet, there has been little progress until now19. Hence, the only way for the contractor

to suspend works is to rely upon the express provisions if any set out in construction

contracts. So far, suspension of works for non-payment was incorporated in FIDIC

since a long time ago and in Malaysia this right was introduced in CIDB 2000, and

later in PAM 2006 for building works.

Despite of the importance of suspension of work as a remedy for non-

payment in Malaysia being promoted by the key players, yet a recent survey study

carried out by University Malaya has shown that contractors are less willing to

exercise out the right to suspend works and their responds towards this right is

unfavorable compared to the other avenues20. Hence, first impression comes to mind

is that the right to suspend works enshrined in what we have now in standard form of

contracts such as PAM 2006 and CIDB might posses certain difficulties which

impede contractor’s interest in exercising this right against non-payment by the

employer. Is there really a problem by exercising this provision? Unfortunately there

are no study made and no writings can provide this information.

17 Murdoch, John. and Hughes, Will. (2008). Construction Contracts Law and Management Fourth

Edition. London: Taylor and Francis Group,pg 331 18 The Star. (2008). Proposed act To protect contractors. The star. From http://star-space.com/news/story.asp?file=/2008/12/9/pnews/2735045&sec=pnews 19 Bernama. (2009). Government Urged to help local construction industry. From http://www.bernama.com/bernama/v3/news_lite.php?id=390130 20 M.S. Mohd Danuri, M.E. Che Munaaim, H. Abdul Rahman, M.Hanid. (2006). Late and Non-Payment Issues In The Malaysian Construction Industry - Contractors' Perspective. Joint International Conference on Construction Culture, Innovation, and Management (CCIM), Dubai. (Non-ISI/Non-SCOPUS Cited Publication. From http://www.irbdirekt.de/daten/iconda/CIB4392.pdf

6

Similarly in Malaysia, CIDB 2000 and PAM 2006 have been launched 9 and

3 years ago respectively, and yet there is no single case law that illustrate contractors

exercising out suspension of work. Despite of the convenience of this right under

statutes in UK, Australia, New Zealand, and Isle of Man there is almost no case law

which illustrate contractors exercising the right to suspend works except one case

law in New Zealand - Marsden Villas Limited vs Wooding Construction Limited21.

In this case, the employer had challenged the contractor’s right in suspension of

work. The employer had argued that the contractor was not entitled for suspension

when he had served the contractor payment schedule, however the court held that the

only way to lift the suspension was to pay the full amount to the contractor.

Following the New Zealand case, however in practice there are still various

possibilities under which a contractor’s action in suspension of work which may be

challenged by the employer. This can pose a big problem to the contractor when they

suspend works. Eventually, there are various possible grounds that the employer may

be able do that. A quick search through the law cases indicates that there are several

issues that employer can choose as possible grounds to challenge suspension of

works by the contractor. The employer may argued the validity of the interim

certificate, the validity of notices of suspension and the right to set-off as possible

grounds for non-payment, thus challenging contractor’s right in suspension.

Followed by that, contractor may encounter a hard time enjoying his

entitlements when suspending works. Stipulated in PAM 2006 and CIDB 2000, the

contractor is entitled for claiming loss and expense and extension of time when

suspending works. These claims require the contractor to follow certain procedures

and conditions which may prove some difficulties in his fulfillment. Besides that,

contractor’s entitlements in claiming these can be challenged based on other grounds

as well. Nevertheless, as suspension of work relates to other parties especially sub-

contractor, contractor may have problems exercising this right which is directly

affecting the sub-contractors as well.

21 [2007] 1 NZLR 807

7

However to what extent these problems stated notionally will arise when

contractor exercises out his right of suspension based on PAM 2006 and CIDB 2000

remains unanswered unless research and study has been done. There is less

information and almost no law cases that can show the contractor has attempted his

right in suspension of work for non-payment. Lackluster of this information may

cause the contractors to less acknowledged about what are do’s and don’ts in

exercising out their right in suspending works for non-payment. As the saying goes:

“if you don’t keep the score, you are only practicing it”22, eventually there is a need

to have a research that can shed a light to the contractors in having a clear awareness

of the possible problems when exercising out suspension of work under and

strengthen their understanding in the mechanism of suspension of work as a remedy

for non-payment.

1.3 Research Objective

Suspension of work has been greatly emphasized as one of the remedies to

allow unpaid contractors to remedy payment problems. Due to lack of information

and nearly no law cases can enlighten the contractors about the possible problems

that have arise when exercising out the right to suspend work in Malaysia, hence,

the objective of this research is to identify:

a) The possible problems that the contractor may encounter when he exercises

his right in suspending works as remedy for non-payment based on PAM

2006 and CIDB 2000 standard form of contract for building works.

22 Kunju Ahmad, R. and Gibb, A. (2004). Towards Effective Safety Performance Measurement-

Evaluation of Existing Techniques and Proposals for the Future. In Rowlinson, S. (Ed.). Construction Safety Management Systems. (425-442). London: Spon Press.

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1.4 Scope of Research

The study will be focused on the contractor in Malaysia, and conducted on

relevant clauses in Standard Forms of Contract for Building Works used in Malaysia

such as PAM 2006, CIDB 2000 and law cases which explain the possible problems

that the contractor may face when suspends works as remedy for non-payment.

1.5 Significance of the Research

Studies have even shown many contractors do not really take suspension of

work as an alternative to remedy non-payment problems in Malaysia. In addition to

that almost no law cases available and no study being made regarding to the issues

that have arise due to suspension of work by the contractor. Hence, this research

would clarify the possible problems that the contractors may face when suspend

works and provide useful guidelines for the contractors about the do’s and don’ts

when suspending works as remedy for non-payment.

1.6 Research Methodology

This research has been carried out based on a legal research, and unlike

empirical research, this study was not done based on statistical study. The primary

data for this research are clauses in the construction contracts such as PAM 2006 and

CIDB 2000 which explain and stipulate the right of suspension by the contractor for

non-payment. Nevertheless, law cases forms an important source of the primary data

which can be searched by using Lexis Nexis Engine. Although there are no direct

9

law cases regarding to contractor exercising the right of suspension of work,

however other law cases which relate to issues of payment, certificates, etc will be

sought and analyzed as these cases answers and dictate what are the possible

problems that may arise when the contractor suspends works.

On the other hand, secondary data will be obtained from analysis, and

researches done by people such as books, journals, articles, conferences, newspaper

articles, and internet articles regarding to payment, remedies for non-payment. These

secondary data materials will be sought and referred as well to aid in the literature

review write up.

Eventually, all primary data and secondary data will be analyzed carefully.

Documentary analysis will be made on these data as to provide an answer for the

objective of this research, and all relevant information and findings will be written

and made ready for summarized and published. In a nut shell, the stages for doing

this research have been shown in figure 1.1 below:

10

Figure 1.1 Stages of Research

Stage 1: Literature Review

� Ascertain Topic of Research � Obtaining sources of Literature

Review

Stage 2: Collection of Data

� Primary Data- Through Legal Cases and Clauses of Standard Form of Contract

� Secondary Data- Through journals articles, newspapers, books, websites, conference articles, magazines and

handouts modules, etc

Stage3: Data

Analysis

� Documentary Observation and

analysis

Stage 4: Summary Formation

and Report Writing

� All relevant information and

findings will be written

� Reports will be written in format

and sent for binding

11

1.6.1 Research Stage One: Literature Review

Through conversations with supervisor, an early perspective towards the

research can be obtained. Relevant issues regarding with the research can be seen

clearly, and the topic and scope of research are ascertained after getting some advice

and consultations from the supervisor. Besides that, research issues are obtained as

well after simultaneous reading from the sources and constant discussions with

supervisor. Sources of the literature review will consist of articles in journals,

magazines, published conference articles, books, websites, and handouts of

published modules, and legal cases obtained from Lexis Nexis search engine.

1.6.2 Research Stage Two: Collection of Data

Collection of data can be divided into two categories, namely collection of

primary data and collection of secondary data. To collect primary data, court

decisions and standard form of contract analysis are vital in the collection of primary

data. Standard form of contracts in Malaysia such as PAM 2006 and CIDB 2000, and

legal cases obtained through Lexis Nexis Search Engine which provides important

facts and data about suspension of work and contractor’s rights and duties in

suspension of work shall be analyzed carefully and critically. Analysis of these

documents and cases shall be able to answer the objective of this research.

On the other hand, secondary data will be obtained from analysis, and

researches done by people such as books, journals, articles, conferences, newspaper

articles, and internet articles. Information about legal cases regarding to suspension

of work, and even standard form of contracts available locally and internationally

shall be referred to aid in the literature review write-up.

12

1.6.3 Research Stage Three: Data Analysis

All the data such as clauses from the standard form of contracts and court

decision shall be analyzed qualitatively. By taking a deep look and review on the

available forms of contract as well as court decisions, writing up will be made to

answer the objective of the research.

1.6.4 Research Stage Four: Summary Formation and Report Writing

The summary of the study will be formed according to the analysis made

before. The objective of research will be achieved based on the analysis. All relevant

details will be prepared systematically in accordance with the format required. The

produced report writing will then be sent for documentation and binding.

CHAPTER 2

NON-PAYMENT IN THE CONSTRUCTION INDUSTRY

2.1 Introduction

Payment by the employer has been one of the most important criteria in the

construction projects, as ultimately construction works are made possible with the

basis that every workers and professionals in the projects are paid adequately and

properly. Construction works are often complex and involve transactions that

account huge sums in thousands and millions of ringgits. However, it is irony to see

the industry that is construed based on coordination, cooperation and teamwork

being troubled with the scenario of payment issues, triggered mostly by non-payment

problems by the employers.

Much have been said about non payment, however what is the definition of

non payment by the employer in the context of construction industry? With a

glimpse of each word, “non- payment” means an act act of failing to meet a financial

obligation; or deliberate act of failing to pay money23.However, in the context of the

construction industry, “non-payment” means to cover circumstances where there is

23 Farlex .(2009). The Free Dictionary. From http://www.thefreedictionary.com/nonpayment

14

lack of correct or timely payment, or refusal of total payment from the employer or

upper tier contractor during the progress of the works24. Hence non-payment by the

employer contextually can be clearly defined as default in payment by the employer

which is lack of timely payment or refusal of total payment that is supposedly to be

paid for progress of construction works.

It has been a common fact that a contractor requires adequate funding for the

commencement of construction work on site. With the fact that construction

activities are often subject to a high level of risks and tender prices are inserted with

a lot of uncertainties based on technical and financial assumption, contractors are on

the verge of non stability as they are paid in arrears and capital funding for the works

of overdrafts, trade credits and other interim means as the work is almost

unavoidable25. Non payment by the employer scenario has plagued the industry with

a lot of negative consequences such as cash flow problems, unnecessary tensions and

financial hardships to the contractor26, provoking more and more disputes between

the employer and contractor as nevertheless lack of proper payment has been

identified as one of the factors of construction disputes27. As the saying goes, “cash

flow is the life blood of the construction industry”, non payment by the employer

will only burden the contractor in terms of financial flow and chronically affecting

the entire delivery chain.

24 Gary Soo., Kumaraswamy, M., and Wu, J. (2008). Contractor’s Right to Stop Work on Non-

Payment: A Comparitive Perspective from Hong Kong. From http://www.bear2008.org/post/54.pdf 25 Ibid

26 M.S. Mohd Danuri, M.E. Che Munaaim, H. Abdul Rahman, M.Hanid, (2006), Late and Non-Payment Issues In The Malaysian Construction Industry - Contractors' Perspective. Joint International Conference on Construction Culture, Innovation, and Management (CCIM), Dubai. (Non-ISI/Non-SCOPUS Cited Publication. From http://www.irbdirekt.de/daten/iconda/CIB4392.pdf 27 Ashworth,A and Hogg,K. (2002). Willis’s Practice and Procedure for the Quantity Surveyor

Eleventh Edition. Oxford: Blackwell Science, pg 303

15

2.2 Contractor’s Right to Payment

Indeed, payment in the line of construction has never been easy and is often

complicated. The primary obligation upon the employer is to pay the contractor the

sum of money which forms the consideration for the contract, and the contractor

must be paid promptly and fully unless there are specific reasons for withholding it28.

When the contractor agrees to carry out the works, the employer’s side of the bargain

is payment of money29 . Generally contractors have the right to be paid for the

construction works done, and it arises by virtue of express terms of the construction

contracts, and by necessary implication under common law principles and even

statutory provisions.

2.2.1 Contractor’s Right to Payment under Express Terms of Contract

Starting off with express terms in construction contracts, most of the standard

form of construction contracts entitle the contractor to be paid by the employer

within the stipulation period upon receipt of the amount due as stated in the

certificate issued by the architect/engineer/S.O/ 30 . Stipulation in construction

contracts such as clause 42 CIDB standard form of contract for building works 2000

edition31; or clause 28 P.W.D form 203 A (rev 2007)32 for example entitles the

contractor to payment with the virtue of interim certificates within the period of

honouring certificates stating in the Appendix.

28 Murdoch and Hughes. (2008). Construction Contracts Law and Management Fourth Edition. London :Taylor and Francis Group, pg 207 29 Uff, J. (1981). Construction law-An outline of law and practice relating to the construction industry third edition. London: Sweet & Maxwell, pg 95 30 Entrusty group. (2008). Is Late Payment A Ground for Determination or Termination? Master

builders (3rd Quarter), pg 92-95

31 CIDB Standard Form of Contract for Building Works 2000 Edition 32 P.W.D Form 203 A ( Rev.2007)

16

Interim certificates, is a term found in most standard forms referring to the

periodic certification of money due to the contractor”33.The essence of the interim

certificate nevertheless is meant for periodic payments, and made during the progress

of the contract34. Provisions for interim certificates are inserted in building contracts

for the benefit for the contractor, and to enable him to obtain payments on account

during the progress of the works35. The virtue and mechanism of interim certificates

in fact is merely confirming that an installment of the contract sum that is due to the

contractor. However, interim certificate is not conclusive about anything, as it says

nothing about the quality of materials or workmanship, and it obliged the employer

to pay the contractor within the stated time36.

2.2.2 Contractor’s Right to Payment under Common Law Principles

(Quantum Meruit)

Nevertheless, the contractor has the right to be paid by the necessary

implications of common law principles. In the context of construction works,

quantum meruit basis is a common law principle that entitles the contractor payment

for construction works they have done based on a reasonable basis. As defined by

“Oxford dictionary of Law” 37 , quantum meruit is defined as “as much as he

deserves”, which has the implication that the contractor has the right to be paid for

the amount of work that he has done for the employer. There are several

circumstances which trigger quantum meruit principles that entitle the contractor to

33 Chappel,D., Marshall,D., Powell Smith,V., and Cavender,S. (2001). Building Contract Dictionary. UK: Blackwell Science, pg 226 34 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 288 35 Wallace, D. (1970). Hudson’s Building and Engineering Contracts. London: Sweet and Maxwell, pg 492 36 Murdoch and Hugh. (2008). Construction Contracts Law and Management Fourth Edition. London: Taylor and Francis Group, pg 209 37 Martin, E.A and Law, J. (2006). Oxford Dictionary of Law. New York: Oxford university Press inc, pg 432

17

be paid for a reasonable sum; however 3 main circumstances will be discussed here

for a better elaboration of the principles of quantum meruit.

Firstly, a claim on a quantum meruit is appropriate where there is an express

agreement to pay a reasonable sum, or where such an agreement is to be implied38.

Eventually the contractor is entitled to a reasonable sum under the virtue of such

express terms for service rendered and construction work done.

Secondly, the contractor is entitled to a quantum meruit claim and entitled to

payment where an apparent contract under which work is done is in fact void39. In

other words, the contractor is entitled to payment under quantum meruit when the

contractor carries his work on the mistaken basis that there is an enforceable contract,

but there is no contract (void). In a Malaysian case, Ayer Itam Tin Dredging

Malaysia Berhad vs YC Chin Enterprise Sdn Bhd 40, the learned judge held that the

contractor was awarded a claim based on quantum meruit subjected to a maximum

limit of RM300,000 for the commencement of preliminary works carried out on site

even though there was no a binding contract at law.

Thirdly, when the contract is silent on how work done is to be paid, for

instance when the extra work is ordered which falls outside the scope of a variation

clause, and there are no contract terms and clauses that described how the extra

works should be remunerated, the contractor eventually is entitled to be paid for the

extra work under quantum meruit principles. In the case of Parkinson vs

Commissioners of Works41 , the contractor was entitled $5 million of work

constructed; however there was an instruction of work which totaled up to $6.6

million, exceeding the contract value, and the extra work was outside the scope of

the variation clause. The Court of Appeal held that even though the additional work

38 Uff,J. (1981). Construction law-An outline of law and practice relating to the construction industry third edition. London: Sweet & Maxwell, pg 97 39 Murdoch and Hughes. (2008). Construction Contracts Law and Management Fourth Edition. London: Taylor and Francis Group, pg 314 40 [1994] 2 MLJ 754 41[1949] K.B.632

18

was outside the scope of the contract, the contractor was entitled to be paid for the

extra work which was beyond the total fixed profit under the contract on the basis of

quantum meruit.

Undeniably, the contractor is entitled for payment under the common law

principle; however contractor should always bear in mind that these common law

principle will not apply if the contractor do not complete construction work which is

condition precedence to payment42. As been held in the case of Hoenig vs Isaacs43,

the contractor could not make claim for the work done under quantum meruit

principle unless he has completed the construction work substantially.

2.2.3 Contractor’s Right to Payment under Implication of Statutory

Provisions

Under implication of statutory provisions, the contractor can take full

advantage of the beauty of statutory provisions to be paid for construction works

done. In Singapore for an example, contractors are entitled to progress payment

under section 5 of the Building and Construction Industry Security of Payment Act

200444, whereby any person who has carried out any construction work, or supplied

any goods or services, under a contract is entitled to a progress payment. Besides that,

another example would be the Housing Grants, Construction and Regeneration Act

199645, whereby section 109 entitles the parties to the construction payment via

installments, stage payments, periodic payments, except in certain limited situations.

The essence of this section is that the parties are free to agree what are the

42 Uff,J. (1981).Construction law-An outline of law and practice relating to the construction industry third edition. London, Sweet & Maxwell, pg 97 43 [1952] 2 All ER 176 44 From http://www.bca.gov.sg/Publications/SecurityofPayment/sop_act.html#5, accessed on 25th May 2009 45 From http://www.opsi.gov.uk/acts/acts1996/ukpga_19960053_en_8#pt2-pb3-l1g109, accessed on 25th May 2009

19

circumstances and how the payment be made, however if they fail to agree then the

“Scheme for Construction Contracts” will apply.

In Malaysia on the other hand, although Construction Industry Payment and

Adjudication Act is still a proposal and awaits to be enacted, however the contractors

still can find a certain relieve when Malaysian Contracts Act 1950 provide a

breathing space for the contractor to be paid for construction works done via section

71 , which states that:

“Where a person lawfully does anything for another person, or delivery

anything to him , not intending to do so gratuitously, and such person enjoys the

benefit thereof, the latter is bound to make compensation to the former in respect of,

or to restore , the thing so done or delivered”. The contractor may seek the help of

this section to be reasonably paid and reimbursed for the construction work done,

applicable for any governance of construction contract.

Implication of these statutory acts indeed entitle the contractor a statutory

right to a progress payment for construction works done , and does no more than to

enshrine what is already practiced in the construction contracts. Although many

construction contracts nowadays include the right to payment, however statutory

implication has a prominent role in aiding and safeguarding the contractor to be paid

for construction works done, especially when the construction contract is silent about

the right of payment.

2.3 Employer’s Consequences of Non-Payment

Having the obligation to pay the contractors, the employer has the duty to

honour the interim certificates issued by the architects and S.O, and as the pay

20

master he do not have the right to obstruct or interfere with the issuance of certificate

which entitles payment to the contractor. Followed by that, the employer has to bear

some consequences for non-payment which have burdened and caused hardships to

the contractor.

It has been held that a mere non-payment does not constitute to repudiation.

In the case of Yong Mok Hin vs United Malay States Sugar Industries Ltd46, Raja

Azlan Shah held that the building contractor was not entitled to treat the contract as

repudiated for mere non- payment of the installment, in fact it is the building

contractor who had repudiated the contractor for abandoning it. This indicates that a

mere non-payment in one payment due or simply late by few days may not constitute

repudiatory breach, and may not sufficient for the contractor to rescind the contract.

However, if the non-payment is so serious and goes to the root of the contract

and constitute a fundamental breach, as the innocent party, the innocent contractor

can accept such repudiation and treat his future under the contract as at an end47. The

effect of bringing the contract to an end following a fundamental breach is to

discharge both the defaulting party and the innocent party of their duties of

performance and their rights to demand48. As decided in Ban Hong Joo Mines Ltd

vs Chen & Yap Ltd49, the court held that the employer had repudiated the contract by

refusing to pay what was already due by methods of paying fortnightly to the

contractor, and the contractor was entitled to treat the contract as at an end. In

addition to that, in other case Brani Readymixed Pte Ltd vs Yee Hong Pte Ltd50, the

court held that mere failure or delay in making payment per se was not a repudiatory

breach, however if a party was not merely stalling time but with an intention not to

pay at all, is equivalent an intention not to perform the contract will amount to a

repudiation.

46 [1966] 2 MLJ 286. 47 Chappel,D., Marshall,D., Powell Smith,V., and Cavender,S. (2001). Building Contract Dictionary. UK: Blackwell Science, pg 176 48 Chow, Kok Fong, (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia, pg 168 49 [1969] 2 MLJ 83 50 [1995] 1 SLR 205,CA.

21

From the cases above, deduction be made whereby a mere non-payment of

the employer will not amount to a repudiatory breach, however if the employer

continues not to pay and shows his intention not to be bound by the contract, the

employer has repudiated the contract and the contractor can terminate the contract

under common law and sue for damages. Even if a non-payment does not amount to

a repudiatory breach, a non payment is considered a breach of contract and the

contractor can take actions on the employers. As the rights of the contractors to be

paid and the obligation of the employer to pay is spelt out in most of the construction

contracts, breach of contract by the employer regarding to non-payment entitles the

contractor to exercise their rights, and remedies in the relevant contract provisions ,

or even with the virtue of statutory provisions against the employer.

2.4 Contractor’s Actions against the Employer for Non-Payment

There are several actions can be taken by the contractor for non-payment of

the employer other than the traditional way of dispute resolution and litigation.

Generally, in Malaysia, contractors can seek remedies and rights such as determine

his own employment, apply summary judgment, apply for a winding up petition,

terminate the contract, claim for interests, and suspend construction works against

the employer for non-payment.

22

2.4.1 Determination of Employment

“Determination of employment” is a decision in bringing an end of the

employment, and mostly it refers to the ending of the contractor’s employment51. In

determination, it is the contractor’s responsibility to carry out the works under the

contract that is terminated and not the contract, and the contractual rights of the

parties remained intact and are not invalidated due to determination52.

As stipulated out in construction contracts such as CIDB 2000 and PAM

2006, the contractor can determine his own employment against non-payment by the

employer. As expressly stated out in clause 45.1 CIDB 2000 as well as clause 26.1

PAM 2006, the contractor is entitled to determine his own employment if the

employer fails to pay the contractor the amount due on any certificate within the

period of Honouring Certificate stated in the appendix. The contractor is required to

give a default notice to the employer specifying the default of non-payment.

However, if the employer still continue with non-payment for 14 days after the

acceptance of such notice, the contractor can then within 10 days after the expiry of

the said 14 days with further notice to the employer provided that the notice shall not

be given unreasonably and vexatiously.

2.4.2 Application for Summary Judgment

A contractor nevertheless can apply for summary judgment for his claims

against non-payment by the employer. Summary judgment is a procedure which the

court may decide a particular claim or issue without a trial, and the court may give

51 Chow Kok Fong. (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia, pg 129 52 Entrusty Group. (2008). Is Determination of Employment and Termination of Contract the Same in Meaning and Implications? Masters Builders( 2

nd Quarter), pg 96.

23

summary judgment against a claimant or defendant on the whole of a claim or on a

particular issue if it considers that the claimant has no real prospect of succeeding on

the claim or issue, and there is no other compelling reason why the claim or issue

should be disposed at a trial53.

Standard forms of contracts do not have provisions for actions through

summary of judgment, and therefore contractors who apply for summary judgment

must strictly comply with Order 14, Order 81, Order 73 and etc54. As in the case of

Pembenaan Leow Tuck Chui & Sons Sdn Bhd vs Dr Leela’s Meidcal Centre Sdn

Bhd 55, the contractor had agreed to construct a private hospital to be named ‘Dr

Leela Medical Centre’ for the defendant, Dr Leela’s Medical Centre Sdn Bhd (‘the

employer’). Eventually, the appellant (contractor) applied and sought summary

judgment under Order 14 alleging that there is an obligation imposed upon the

employer to pay at once the sum of RM433,288.97 appearing in the penultimate

progress payment certificate issued on 3 August 1992 by the architect (‘the

penultimate progress payment certificate). The court held that summary judgment in

this case had been obtained for clear-cut unpaid certificate claims, and allowing the

appeal.

2.4.3 Application for Winding up Petition

“Winding up”, is termed as a procedure by which a company can be

dissolved, and it may be instigated by members or creditors of the company, or by

order of the court56. Either of the process involves the appointment of liquidators to

53 Martin, E.A and Law, J.(2006). Oxford Dictionary of Law. New York: Oxford university Press inc, pg 520 54 Ravindran Nekoo.(2002). Practical Guide to Civil Procedure Malaysia. Petaling Jaya: International Law Book Services , pg 58 55 [1995] 2 MLJ 57 56 Martin, E.A and Law, J. (2006). Oxford Dictionary of Law. New York: Oxford University Press Inc, pg 576

24

collect assets, pay depts., and distributes any surplus to company members in

accordance with their rights57.

The contractor can take action against non-payment of the employer by filing

a petition as laid down in section 217(1) (b) of the Companies Act 196558, which

states that a petition to wound up a company can be made by the company’s creditor.

In addition to that, section 218 (1) (e) states that the court may order the winding up

if the company is unable to pay its debts.

Hence, these two sections of the Companies Act 1965 forms the basis of an

action that can be taken by the contractor against non payment by the employer. As

been held in the case of BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd59,

The petitioner filed a winding-up petition to wind-up the respondent company on the

ground that the respondent was unable to pay its debts .The respondent was indeed

indebted to the petitioner for four progress payments in the sum of RM173, 096. Due

to fact that that he hardly had any material to show that he was still solvent and has

the ability to pay its debts, hence in pursuance of section 218 of Companies Act 1965,

the court ordered the respondent to be wound up.

2.4.4 Terminate the Contract under Common Law

Termination of contract under common law occurs when a valid and

enforceable contract is brought to an end either by becoming impossible to perform

due to unforeseeable circumstances at the time contract was formed or by the actions

57 Ibid 58 Companies Act 1965, incorporating all amendments up to 1st January 2006, from http://www.scribd.com/doc/3333802/Companies-Act-1965-revised-1-January-2006 59 [2001] 1 MLJ 356 Company Winding-Up No 28-87 Of 199874

25

of one or both parties60 . Nevertheless, if the contractor wishes to terminate the

contract due to non-payment by the employer, the breach of employer in this

circumstance must be so serious that it goes to the root of the contract and in a

repudiatory breach that shows he no longer intends to fulfill his contractual

obligations61.

Generally, when the employer’s non-payment constitute to a repudiatory

breach, the contractor is not bound to accept the repudiation and rescind the contract,

in fact the contractor can choose to continue with the contract if he wishes. However,

if the contractor accepts the repudiation and rescinds the contract, he can do so by

taking proceedings to have the contract set aside by the court or by giving notice to

the employer of his intention to treat the contract as an end62.

Termination of contract is enshrined in section 40 in Contracts act 1950,

whereby the contractor is entitled to terminate the contract if the employer has

refused to perform, or disabled himself from performing and his promise in its

entirely. As been discussed before, a mere non-payment by the employer is not a

repudiatory breach, however if the employer continue not to pay and showed his

intention not to be bound by the contract, the contractor can rescind the contract and

entitled to compensation for any damage he has sustained through the non-

fulfillment of the contract, as laid out in section 76 of the Contracts Act 195063.

60 Entrusty group. (2008). Is Late Payment A Ground for Determination or Termination? Master

builders (3rd Quarter), pg 92-95 61 Chappel,D., Marshall,D., Powell Smith,V., and Cavender,S. (2001). Building Contract Dictionary. UK: Blackwell Science, pg 352. 62 Chappel,D., Marshall,D., Powell Smith,V., and Cavender,S. (2001). Building Contract Dictionary. UK: Blackwell Science,pg 352. 63

ILBS. (2008).Contracts Act 1950 (Act 136), Contracts (Amendment) Act 1976 (A 329) &

Government Contracts Act 1949 (Act 120).Selangor: Golden Books Centre Sdn Bhd

26

2.4.5 Claim for Interest

Unnecessary payment delays could turn a profitable contract into a

significant loss-maker, and financing of outstanding amounts, together with the

attendant recovery costs can cause significant difficulties for many companies. Since

non-payment of debt can have a profound effect on the profitability of construction

companies especially the contractor, the recovery of interest on non-payment can

often be vital for contractors in business64.

Under the provisions of construction contracts such as PAM 2006 and CIDB

2000, the contractor can claim for interest against the employer for non-payment. As

stated clearly in clause 30.17 PAM 200665,

“If the employer fails to pay the Contractor the amount due on any certificate

(less any Liquidated Damages and set off which the employer is expressly entitled to

make under the contract) after the Period of Honouring Certificates, or the

Contractor owes a debt or fails to pay any sum due and owing to the Employer

within twenty-one (21) days after receipt of written notification by the Employer of

such debt or amount owing, a simple interest based on the Maybank Base Lending

Rate plus one (1) percent shall be payable by the defaulting party on such

outstanding amount until the date payment is made.”

Nevertheless, clause 42.9 (b) CIDB 2000 stipulates that:

“In the event that the Employer fails to make the whole or any part of the

payment due to the Contractor within the Period of Honouring Certificate, the

Employer shall pay to the Contractor in addition to the amount certified, simple

64 Pettigrew, R.(2005). Payment Under Construction Contracts Legislation. London:Thomas Telford, pg 153 65 PAM Contracts 2006 ( With Quantities)

27

interest at the rate stated in the Appendix in respect of any sum unpaid from the date

by which the same should have been paid until the payment of such sum”

The significance and the purpose of these two clauses is that the contractor is

to “punish” the contractor in case of any single event of non-payment, ultimately

adopted the prevention principle forcing the employer to bear the consequences by

over paying the original amount due to the contractor.

2.4.6 Suspension of Works

Suspension of works is generally termed as cessation of construction activity

by a contractor in a construction contract before the works are completed66. By

suspending the works under the contract, the parties merely stop or cease all work

related activities on a temporary basis, and the contract inclusive all of rights and

obligations there under, however subsist67.

The contractor is entitled for suspension of works against non-payment

clearly stated in construction contracts such as clause 30.7 PAM 2006, and clause

42.10 CIDB 2000. In PAM 2006, Clause 30.7 68 for example states that:

“Without prejudice the Contractor’s right to determine his own employment

under Clause 26.0, if the Employer fails or neglects to pay the contractor the amount

due as shown in the payment certificate (less any Liquidated Damages and set-off

which the Employer is expressly entitled to make under the contract) and continue

66 Chow, Kok Fong. (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia, pg 371 67 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 5 68 PAM Contracts 2006 ( With Quantities)

28

such default for fourteen (14) days from the receipt of a written notice delivered by

hand or by registered post from the Contractor stating that if payment is not made

within the fourteen (14) Days, the Contractor may by a further written notice

delivered by hand or by registered post, forthwith suspend the execution of the works

until such time payment is made. Provided always that such notice shall not be given

unreasonably or vexatiously”.

From this clause for an instance, the contractor is also allowed to suspend

works for the event of non-payment. However the contractor must follow strict

procedures laid down in the express terms in the construction contract, and for this

case giving notice has been made condition precedence for suspension of work.

2.5 Proposing Suspension of Works as the Best Remedy for Non-Payment

Non-payment scenario in the industry had placed the contractors in dilemma,

and indeed the contractor is easily burdened with disputes relating to non-payment.

Remedies such as litigation for example are lengthy and may costly as well.

Alternate dispute resolution such as arbitration or mediation, however may

sometimes be expensive and time consuming. In addition to that, it is common for

cross claims and payment disputed is postponed until the resolution of the dispute69.

As for the remedies mentioned earlier, there are disadvantages which may not

be helpful when cash is acquired at the shortest time from the employer. For

determination of employment and termination of contract for example, as a matter of

practice most contractors are reluctant to go for this route considering their self

69 Lim Chong Fong. (2005). The Malaysian Construction Industry – The Present Dilemmas of the Unpaid Contractors. Masters Builders Journal 4th Quarter, pg 80-82

29

interest for business70. Moreover, when the project moves towards completion, the

contractor loses leverage, while the employer gains leverage, making the contractor

even more reluctant to determine his own employment and terminate the contract.

Nevertheless, remedies such as summary judgment is not suitable for non-

payment disputes, as sometimes claims are not clear-cut involving uncertified work

done and disputed variation orders, and complicated even more with cross claims

and set off. 71Winding up on the other hand, requires extra effort by the contractor as

he has to establish the true financial position of the employer’s company and will be

quite useless if he fail to do so72. Next, claim of interest is a reactive measure and

does not help the contractor significantly during unpaid moments.

Actions such as litigation, dispute resolution, summary judgment, winding up

petition, claim of interest, do not solve non-payment problems in the quickest time,

not to mention that the contractors still have to proceed his obligation and work

“regularly and diligently’ while waiting for the outcome of the remedies taken. No

cash flow can be inward coming when non-payment disputes cannot be resolved

within the quickest time. Thus, the contractor is left with the option of own money to

keep the works alive and rely heavily on bank financing, which may not favour the

contractors in the best way. In addition to that, the contractor may be easily exposed

to more and more risk in being delay, easily to be deducted for liquidated damages

and further extra costs.

Hence, suspension of work can be seen as a magnificent way to deal with

non-payment issues. Suspension of work represents a contingency that can be made

available to the contractor to the contract in certain defined situation whereby the

progress of the work can be temporarily halted, waiting the employer to remedy the

70 Ibid 71 Lim Chong Fong. (2005). The Malaysian Construction Industry – The Present Dilemmas of the Unpaid Contractors. Masters Builders Journal 4th Quarter, pg 80-82 72 BMC Construction Sdn Bhd v Dataran Rentas Sdn Bhd [2001] 1 MLJ 356

30

non-payment default73. The purpose of suspension work nevertheless is to freeze the

contract, maintaining the rights and obligation of the contractor to be held in

postponement for the period of suspension, helping the contractor to stop work

temporarily without affecting his cash flow for the time being. Strongly

recommended to be one of the contents of the proposed Malaysian Construction

Industry Payment and Adjudication Act, contractors generally can nevertheless take

advantage of this avenue against non –payment by the employer which has plagued

the industry.

2.6 Conclusion

The importance of progress payment to the contractor has been stressed in

most of the construction contracts which entitle the contractors to be paid promptly

on time by the employer. Interim certificates are issued and to be honoured so that

the contractor can expend his money on construction works, and eventually is very

hard for the contractor to proceed with work unless he is paid for what he has done.

However the construction industry has been plagued with non payment scenario,

directly affecting contractors causing them to endure with financial hardships,

eventually provoking more and more disputes among the key players in the industry.

This circumstance has forced the contractor to take few actions such as

dispute resolution, summary judgment, winding up petition, claim of interest, or even

go through the route of termination and determination which are not at his best

interest, and these actions do not solve non-payment problems in the quickest time.

However, the contractor nevertheless can exercise suspension of work as self help

remedy against non-payment. Strongly recommended in the proposed Construction

Industry Payment and Adjudication Act in Malaysia, suspension of work is believed

73 Harbans Singh.(2004).Suspension of Work: An Overview.From http://www.bem.org.my/publication/septnov04/E&L(Suspension)(24-35).pdf

31

to be able to remedy non-payment at the swiftest time. Eventually this self-help

remedy will enable the contractor to force the employer for payment, without going

through the other route of remedies which consume time and money.

CHAPTER 3

CONTRACTOR’S RIGHT IN SUSPENSION OF WORKS

3.1 Introduction

Practically in the context of construction, both contractor and the employer

should be able to exercise the power of suspension, if and when necessary 74 .

Nowadays, in the engineering and construction industry, employers, main

contractors, sub-contractors are vested with the power to suspend construction works

suppliers and the like. Grounds for suspending works basically may be invoked due

to payment problems, and even weather problems. Over the years, little emphasis

had been on envisaging the right of suspending works on the contractors, whereby

such power is only bestowed on the employer. However, with more and more

importance made on the significance of suspension of work clause, “bespoke”

standard form of contracts nowadays had envisaged the contractors such right for

non-payment problems.

74 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 4

33

3.2 Contractor’s Dilemma in Suspension of Works

There is generally no common law for the contractor to suspend works,

unless there are express provisions and terms implied in statutory provisions.

Contractors who suspend works unreasonably and without any right expressed

contractually or, if he shows his evincing intention not to be bound by the contract,

might breach the contract instead and lead to a repudiatory breach.

In the case of Kah Seng Construction Sdn Bhd vs Selsin Development Sdn

Bhd75, Low Hop Bing J succinctly held that:

“In my judgment, it is trite law that a contractor can only terminate his

contract with his employer (at common law, as opposed to the exercise of an express

termination clause) if he shows, inter alia, a repudiatory breach by the employer in

the sense that the employer has evinced an absolute refusal not to perform his side of

the contract. There is no intermediate right in a building contract to suspend works.

If the contractor insists on the continued performance of the contract, i.e. he affirms

the contract; he must himself continue to perform his primary obligations under the

contract, i.e. to continue performing the contract works. This is why suspension of

the works by the contractor, i.e. not continuing with his primary obligations,

becomes itself a repudiatory breach by the contractor. Even if the plaintiff can

establish that the defendant is in repudiatory breach of contract, the plaintiff would

have no right to suspend works, but instead would have had to elect to either

terminate the contract or insist on due performance. By suspending works without

valid legal cause, the plaintiff has in fact repudiated its contractual obligations.”

Eventually from this Kah Seng case, the contractor can only terminate the

contract when the contract expressly provides this route. Even though the employer

have shown his intention not to pay , the contractor do not have the right to suspend

75 [1997]1 CLJ Supp 448

34

works, as eventually suspension of works without any express right will cause a

repudiatory breach by the contractor.

In another New Zealand Case in Canterbury Pipe lines Ltd vs The

Christchurch Drainage Board76 the engineer withheld certificates for progress

payments and the contractor suspended works temporarily. Mr. Justice Cooke stated

that there is no common law right for the contractor to suspend works, and

eventually held that:

“This case does not call for a decision on whether New Zealand Law

recognizes a general right in the contractor to suspend work by reason of substantial

default by the employer in paying a certified progress payment or a progress

payment that has fallen due under a contract not requiring certificates …..It seems to

us as well to leave that question open, whatever the answer to it, we are against

recognizing such a right when the architect or engineer has declined to issue his

certificate stipulated for by the contract as a condition precedent to the employer’s

duty to pay. It would disrupt the scheme of these contracts. It could encourage

contractors to take the law into their hands. They might stop work which in the

public interest needs to be done promptly. In such cases, if the contractor cannot or

does not wish to rescind and cannot prove impossibility or its equivalent, he will be

left with whatever remedies regarding to the recovery of progress payments may be

available to him under the contract…We do not exclude the view that a case of

impossibility or his equivalent might be made out by proving that for want of money

the contractor could not carry on or could not reasonably be expected to do so.”

The importance of having express terms of suspension of work clause was

stressed in Channel Tunnel Group Ltd vs Belfour Beatty Construction Ltd &

others77, whereby the contractor cannot suspend work under the contract if he so

desires in the absence of an express provision permitting him to do so.

76 [1979]16 BLR 76 77 [1992] 2 ALL ER 609

35

In addition to that, in DR Bradley (Cable Jointing) Ltd vs Jefco Mechanical

Services78, the court held that in the absence of express provisions permitting the

contractor to suspend works , the only option the contractor has in responding

payment default by the employer is to determine the contract. The significance of

having suspension work clause is furthered echoed in the case of Jia Min Building

Construction Pte Ltd vs Ann Lee Pte Ltd79, VK Rajah JC stated that:

“It appears to be settled law that a contractor/sub-contractor has no general

right at common law to suspend work unless this is expressly agreed upon”.

From all the cases discussed above, the contractor is indeed having a

dilemma in suspending construction works in responding employer’s non-payment.

Suspension of work is a breach of condition that may lead to a repudiatory breach as

there is no common law that entitles the contractor to suspend works. Without

express terms and clauses of suspension of works, the contractor cannot suspend

works if otherwise the contractor can be held to have breached the contract.

3.3 Development of Suspension of Works Clause

Since there is no common law for suspension of work, without an express

entitlement of suspension of work, even in the face of non-payment by the employer

which is serious that amounts to a repudiatory breach, the contractor is only left with

the option to determine his own employment, arbitration/litigation, and any options

left in the contract. Hence, the contractors who wishes to suspend construction works

due to non-payment by the employer has to make sure that there is an express

provisions in the contract and there is a statutory right that entitles the contractor to

suspend works.

78 [1989] 6 CLD , 7-19 79 [2004] 3 SLR 288

36

The significance importance of suspension of work clause in helping

contractor to remedy non-payment can be traced back in FIDIC contracts80, whereby

FIDIC contracts have for many years contained provisions entitling the contractor to

suspend works or to reduce the rate of progress in the event of the employer’s failure

to pay. Prior enacted to be a statutory provision in the Housing Grants, Construction

and Regeneration Act 1996, suspension of work clause was commonly in UK

especially in sub-contracts but however the main contracts do not81.

Sir Michael Latham in his report “Constructing the team Final Report”

suggested that suspension of work should be available if the “adjudicator has been

involved and has issued a decision, which the employer has then failed to honour

with immediate effect”82.However, in his report and recommendation , Sir Michael

Latham continued to say that suspension of work should not merely confined to

cases where the employer is unable or refuses to pay , but there should include

situations where the architect or engineer fails to issue a payment certificate as well.

Seeing this clause still to be very important to be enacted as a statutory right,

the proposal for statutory right of suspension originated during deliberations of the

Working Group of the Construction Industry Board and formed part of the proposals

for legislation considered for adoption by the UK government 83 . Slowly, these

recommendations to statutorily entrench a right on the unpaid claimant to suspend

works were eventually accepted and implemented as section 112 of Housing Grants,

Construction and Regeneration Act (HGCRA) 1996. However, the HGCRA 1996 is

different from the Latham’s recommendation regarding to the right of suspension of

work. Under the UK act, the right to suspend work does not arise from the

adjudicator’s determination and decision.

80 Brewer, G. (2003). Suspension of work. From http://www.brewerconsulting.co.uk/cases/CJ0322RR.htm 81 Ibid. 82 Sir Michael Latham. (1994). Constructing the Team, Final Report July 1994, HMSO at pg 96. Reviewed by Chow Kok Fong, (2005), Security of Payments and Construction Adjudication. Singapore: Lexis Nexis, pg 450 83 Pettigrew, R.(2005). Payment Under Construction Contracts Legislation. London:Thomas Telford , pg 153

37

Seeing HGCRA 1996 had backup the contractors the right to suspend works

against any payment default, this right was soon followed by other countries and

found its way into other countries such as Australia -NSW Act, Singapore- Building

and Construction Industry Security of Payment Act 2004, and New Zealand-

Construction Contracts Act 2002, and Isle of Man- Construction Contracts Act

2004. Great care has been envisaged in these countries in making this right as a legal

statutory right so that this suspension mechanism can form as a self-help remedy for

the contractors to use in parallel with other procedures to remedy against non-

payment.

3.4 Contractor’s Right to Suspend Works for Non-Payment under Express

Provisions of Contracts

By looking at the scenario in Malaysia, since Construction Industry Payment

and Adjudication Act in Malaysia still awaits to be passed through the parliament,

the contractor cannot suspend works for non-payment with any virtue of statutory act.

However two Malaysian Standard forms of contracts for building works namely

PAM 2006 and CIDB 2000 provides that route for the contractor to suspend works

for non-payment, and the contractor can nevertheless take a careful in-depth study on

these two standard form of contracts for building works.

3.4.1 Contractor’s Right to Suspend Works for Non-Payment under

PAM 2006

Starting off fresh with PAM 2006, the right to suspend works is enshrined in

clause 30.7, which states that:

38

“Without prejudice to the contractor’s right to determine his own

employment under the clause 26.0, if the employer fails or neglects to pay the

contractor the amount due as shown in the payment certificate (less any Liquidated

Damages and set-off which the employer is expressly entitled to make under the

contract) and continue such default for fourteen days from the receipt of a written

notice delivered by hand or by registered post, from the contractor stating that if

payment is not made within the fourteen (14) days, the contractor may be a further

written notice delivered by hand or by registered post, forthwith suspend the

execution of the works until such time payment is made. Provided such notice shall

not be given unreasonably or vexatiously”

From here, the contractor is always allowed to take the route of determination

under clause 26.0. Suspension of work is never condition precedence, or any barrier

to determine his own employment if there is a default of payment by the employer.

The right of suspension is without prejudice to the right to determination under

clause 26.0 in PAM 2006.

If the employer is default in payment and do not pay the sum in the certificate

(which has deducted liquidated damages and any set-off which is allowed in the

contract), the contractor is only allowed to suspend works after fulfilling certain

procedure requirements as laid out in the express clause in clause 26.0. The period of

honouring certificate as stated in the appendix is 21 days (if none is stated) from the

date of the Interim Certificate issued. If the employer fails or neglects to pay the

contractor the amount due as shown in the certificate within 21 days, the contractor

can further a written notice delivered by hand or by post demanding the employer to

make payment within 14 days from the issuance of the notice. However, if the

employer still continues such default within 14 days, the contractor can then further a

written notice delivered by hand or by registered post forthwith suspend the

construction works until payment is made, provided such notice is not “unreasonably

and vexatiously” given.

39

3.4.1.1 Contractor’s Entitlements after Suspending Works for Non-Payment

under PAM 2006

The applicable formula governing the contractor’s entitlement to various

additional costs and time entitlement consequences to the suspension are usually

stipulated in the respective conditions of contract 84 . Generally, contractors

suspending works due to non-payment are entitled to extension of time, and loss and

expense as well.

As stipulated out in clause 23.8 (v) PAM 2006, if the contractor eventually

suspend his works due to non-payment, he is entitled for an extension of time. As

stated out in clause 23.1(a), if the contractor is in the opinion that exercising

suspension of work would delay the completion of works beyond the completion

date, then he shall give written notice to the architect his intention to claim for such

extension of time together with an initial estimate of the extension of time he may

require supported with all causes of delay, and such notice must be given within 28

days from the date of the commencement of the relevant event ( suspension of work) ,

whichever is earlier. The giving of such written notice shall be condition precedent

to an entitlement of extension of time.

Nevertheless, when the contractor is exercising out suspension of works for

non-payment, he is entitled to claim loss and expense as well. As stated out in clause

24.3(m), if suspension of works against non-payment by the employer which

materially affected the regular progress of the works or any section of the works, and

the contractor has incurred or likely to incur loss and expense which could not be

reimbursed by payment made any under any provision in the contract, the contractor

may make claim for such loss and expense. The contractor shall give written notice

to the architect of his intention to claim for loss and expense together with an initial

estimate of the loss and expense he may require supported with all causes of delay,

84 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 36

40

and such notice must be given within 28 days from the date of the commencement of

the relevant event (suspension of work), whichever is earlier. The giving of such

written notice shall be condition precedent to an entitlement to loss and expense that

the contractor may have under the contract or common law.

3.4.1.2 Contractor’s Duties Following Suspension under PAM 2006

As expressly stated out in clause 30.9, if the contractor suspends works

against non-payment by the employer, he shall secure and protect the works during

the period of suspension and ensure that there is a separate cessation insurance cover

for all the risks specified in clause 19.0 ( Insurance against injury to person and

loss/or damage of property), clause 20. A (Insurance of new building works by the

contractor), or clause 20. B (Insurance of New Building works-by the employer), or

clause 20.C (Insurance of existing Building or extension –by the employer).

3.4.2 Contractor’s Right to Suspend Works for Non-Payment under Standard

Form of CIDB 2000

Nevertheless, contractor can exercise the right to suspend works under the

virtue of clause 42.10 CIDB 2000, which states that:

“If the employer fails or neglects to make payment of any amount due to the

contractor within the Period of Honouring Certificate (unless and to the extent that

under the terms of the contract the said Interim Certificate has been corrected or

modified by a later Interim Certificate which has been issued pursuant to clause 42.4

or the employer may be empowered by the provisions of the contract either not to

41

pay, or to make deductions from, the sums shown as due in the certificate) and such

failure or neglect shall continue for 14 days from the date by which the same should

have been paid, then the contractor may give notice of his intention to suspend the

execution of works. If the employer shall continue such default for 14 days after the

receipt of such notice, then the contractor may suspend wholly or partly the

execution of the works or reduce the rate of execution of the works”.

Eventually if the employer default in payment and do not pay any amount

due to the contractor within the period of honouring certificate, which is 21 days as

stipulated in the appendix, (unless under the terms of the contract the said interim

certificate has been corrected or modified by a later interim certificate which has

been issued due to correction of certificates in clause 42.4, or the employer may be

empowered by the provisions of the contract either not to pay, or to make deductions

from the sums shown in the certificate) , and such failure shall continue for a further

14 days from the date such amount is due for payment, then the contractor shall give

notice of his intention to suspend work. If the employer shall continue to default in

payment 14 days after the receipt of the notice, the contractor may suspend wholly or

partly the further execution of the works, or reduce the rate of the works.

It is also important to note that contractor’s right in suspending works against

non-payment is without prejudice to his right of determination nor a condition of

precedence under clause 45 CIDB 2000. As stated out in clause 42.10(b),

Contractor’s suspension of work shall lapse when the employer eventually pays the

amount due including interest to the contractor. The contractor shall resume normal

working as soon as is reasonably possible.

42

3.4.2.1 Contractor’s Entitlements after Suspending Works for Non-Payment

under CIDB 2000

Similarly with PAM 2006, contractor who suspends works under clause

42.10 CIDB 2000 is entitled for extension of time and loss and expense as well.

Stated clearly in clause 42.10 (c) ii, the contractor is entitle for extension of

time as the time for completion shall be deemed to be extended by the period of such

suspension, including reasonable period for resumption of normal working. However

it is important to note that clause 24.2 stipulates that the contractor still is required to

submit particulars of delays such as the appropriate contract references, the estimated

length of the delay and of the extension of time required and details of the effect of

the event of delay on the works programme. Such notification is essential for the S.O

to make sufficient information and assessment for granting extension of time. If the

contractor does not submit particulars, yet the S.O still has the discretion to grant a

fair reasonable and necessary extension of time notwithstanding that the contractor

has failed to comply with the provisions of clause 24.

On the other hand, the contractor has the entitlement to loss and expense

under clause 42.10(c) (iii), whereby if the contractor incurs loss and expense arising

from suspension and resumption that incurred, then the amount of such loss and

expense nevertheless shall be ascertained by the Superintending Officer and added to

the contract Sum. It is important for the contractor who wishes to claim loss and

expense arising from suspension of work to submit notice of claim in pursuant to

clause 32.1 (b) , as the giving of such notice shall be a condition of precedent to any

entitlement that the contractor may have under the contract.

43

3.4.2.2 Contractor’s Duties Following Suspension under CIDB 2000

Contractor who suspends works must not withdraw his entire workforce from

the site, as he is obliged under clause 42.10 (c) (i) to protect and secure the works

during the period of suspension.

3.4.3 Technical Definition of Suspension of Works under PAM Contract 2006

and CIDB 2000

Questions often arise regarding to the exact definition of suspension of work.

The word “suspend” as defined in Oxford English Dictionary85is halt temporarily;

while Farley Free dictionary 86define suspension as: “The act of suspending or the

condition of being suspended, especially, a temporary abrogation or cessation, as of

a law or rule; or a postponement, as of a judgment, opinion, or decision”. In the

context of construction, by suspending the works under the contract, the parties

merely stop or cease all work related activities on a temporary basis. The contract is

not suspended, where all rights and obligations there under still subsists during the

period of suspension87.

What can the contractor do when suspend works is not always expressly

listed out in full in the contract conditions, and the contractual provisions are never

complete and exhaustive but are in most situations intended to be implied from the

85 Soanes, C. (2002). Compact Oxford English Dictionary. New York: Oxford University Press, pg 1159 86 Farlex .(2009). The Free Dictionary. From http://www.thefreedictionary.com/suspension 87 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 5

44

construction of the relevant provisions88. Hence the technical term of “suspension of

work” actually entails that the contractor is:

a) Expected to discontinue work relating to the affected part of the works on the

date specified in the suspension order89. In other words, the contractor is

halting all construction, erection, installation of related activity90.

b) Secondly, the contractor is expected to ensure that no further purchase orders

for materials and equipment or subcontracts are placed in respect of the

suspension portion of the works91. The contractor can suspend the ordering

fabrication off-site, delivery to the site, etc of all material, plant and

equipment; retract the placement of orders or subcontracts where these have

not been acted on upon on by the suppliers and the sub-contractors.

c) Thirdly, the contractor can make every effort to; in turn suspend reasonable

terms those purchase orders, subcontracts and equipment hire agreements

which relate to the part of the works affected by the suspension order92.

d) Nevertheless, in tandem with the cessation of the activities related both to the

site work and off-site disciplines, the contractor is allowed to demobilize the

resource for the anticipated duration of suspension, whereby human resource,

plant, equipment can be reassigned if possible to mitigate the full rigors of

the suspension93.

Despite of these actions mentioned above fulfill the technical term for the

word” suspension of works” for the contractor, however there is a limitation to the

technical term of suspension of work. As laid down in both PAM 2006 and CIDB

88 Chow Kok Fong. (1988). An outline of the Law and Practice of Construction Claims. Singapore: Longman Singapore Publishers Pte Ltd, pg 186 89 Ibid 90 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 5 91 Chow Kok Fong, op.cit, pg 186 92 Ibid 93 Harbans Singh, op.cit, pg 5

45

2000, it can be seen that the contractor must not withdraw the workers completely

and he cannot leave the site as he has the responsibility and obligation under this

clauses to secure and protect the works. In assigning this responsibility, the

consequence risks during the suspension period are accordingly passed to him, and

he then remains primarily liable for the security of the works, protection against the

elements and deterioration from foreseeable causes.

Another important criteria in suspension of works is that since suspension of

works by the contractor relates to subcontractors, workman, it is nevertheless

important for the contractor to accordingly initiate the commensurate suspension

downstream94. The contractor should expect that when he suspends works due to

non-payment in the main contracts, he can temporarily suspend the sub-contractor’s

works as well, and tie their subcontractors on a “back-to-back basis” in the sub-

contracts agreement.

3.4.4 Back-to-back Provisions in Sub-Contracts

Back to back provisions nevertheless play an important role governing the

relationship between the contractor and the nominated and domestic subcontractor.

Back to back provisions act like a link to transfer wholly or partly the contractual

terms and conditions from a main or subcontract to subcontract or sub-sub contract95.

It is important to have back-to-back provisions, because when the contractor

suspends works, he may want to demobilize his works and retreat his work force,

and order the sub-contractor to cease works as well. However without an express

clause in the sub-contract will prove difficulties to the contractor to do so.

94 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 5 95 Ho Chi Yi, Ludwig. (2009). "Back-to-Back" Provisions in Hong Kong's Building Contracts - Points to Note from Some Recent Hong Kong Court Cases. From http://www.hkis.org.hk/hkis/general/st/200901/2009st018_pra.pdf

46

In the case of the The Jardine Engineering Corporation Limited v Shimizu

Limited96 , the plaintiff entered into Sub-Contracts with the Defendant, for the

provision of the complete medical gas service, for the completion of the steam

services installation, the complete air-conditioning system, the complete electrical

system and the fire services system. In this case, Justice Kaplan stated that if a true

"back-to-back" contractual relationship is to be formed; all clauses from main

contracts should be incorporated into sub-contracts without any ambiguities. Hence,

sub-contract must incorporate suspension of work clause from the main contract so

that the contractor can suspend the performance of sub-contractors as well when the

contractor himself is suspending his works.

3.4.4.1 Back-to-back Provisions in PAM Sub-Contract 2006 (Nominated)

Nominated sub-contractor is sub-contractor that is nominated by the architect

to enter into a contract with the contractor. Stated expressly in clause 27.2 PAM

contract 2006, nominated subcontractor enters into the contract with the contractor

based upon the terms and conditions of PAM Sub-Contract 200697. Hence, it will be

worthwhile to explore how does the suspension of work clause by the contractor

under the main contracts PAM 2006 has been incorporated in the subcontracts.

Starting off with PAM Sub-Contract 2006, back-to-back provisions have been

incorporated in sub-clause 26.16 (suspension of main Contract Works), which

stipulates that:

“Where under the Main Contract, the contractor exercises his right to

suspend performance of his obligations, the Contractor shall so notify the sub-

contractor in writing and may direct the Sub-contractor to suspend performance of

the Sub-contract works. The Sub-contractor shall be entitled to an appropriate

extension of time under clause 21.0 and loss/or expense under clause 22.0”

96 [1992] 63 BLR 96 97 PAM Sub Contract 2006

47

Hence, the contractor is able to call-off the subcontractor, while suspend

works under the main contract, the contractor can suspend performance and

commensurate downstream by suspending reasonable terms regarding of those

purchase orders, retract the placement orders and equipment hire agreements to the

part of the works related to the nominated sub-contractor, with the condition that the

contractor shall notify the sub-contractor in writing and direct him to suspend the

performance. This “back to back clause” of PAM Sub-Contract 2006 has incorporate

well what the main contract has stipulate about suspension of work, and eventually

when the nominated sub-contractor received notification of writing by the contractor

to suspend works, he is entitled for loss and expense and extension of time .

3.4.4.2 Back-to-back Provisions in CIDB Standard Form of Sub-Contract for

Nominated Sub-contractor [ Form CIDB.B (NSC)/2002]

CIDB Standard Form of Sub-Contract for Nominated Sub-contractor 98or

known as Form CIDB.B (NSC) /2002 nevertheless has been designed and published

for use in conjunction with the CIDB standard for of contract for building works.

Nominated sub-contractors enters into contract with the main contractor on the basis

under clause 6.1 of CIDB.B (NSC) /2002, which states that the nominated sub-

contractor shall design, execute and complete the sub-contract works so as to enable

the contractor to discharge his obligations under the main contract in so far they

relate and apply to the sub-contract works.

So far, the CIDB Nominated Sub-contract is not straight forward compared to

PAM Sub-Contract 2006 regarding to suspension of work. Nevertheless, contractors

can always issue all instructions to the nominated subcontractors on matters relating

to Sub-contract as laid out in clause 4.2. In addition to that, clause 5.1 of the sub-

98 CIDB Standard Form of Sub-Contract for Nominated Sub-contractor (Form CIDB.B (NSC) /2002)

48

contract stipulates that the Nominated Sub-Contractor shall observe, perform and

comply with all provisions of the main contract on the part of the contractor to

observe, perform and comply with in so far as they relate and apply to the sub-

contract works or any part of the sub-contract works which are not repugnant to or

inconsistent with the provisions of the sub-contract. Back-to-back provisions relating

to the contractor’s right to suspend sub-contractor’s works is somehow vague in

CIDB.B (NSC) /2002.

3.4.4.3 Back-to-back Provisions of PAM 2006 and CIDB 2000 in Domestic Sub-

Contracts

Domestic sub-contractor on the other hand is sub-contractor chosen by the

contractor themselves to enter into contract with. The contractor eventually sublet

their portion of work to the domestic sub-contractor other than the nominated sub-

contractor. In Malaysia, despite of many standard forms of contracts published for

main contracts and the corresponding nominated subcontracts, there are still no

published standard terms of contracts for “ domestic” subcontract work in Malaysia ,

and hence many sub-contractors are let out based on various in-house contracts

drafted by main contractors99.

Since there are no back-to back provisions in any standard form of Domestic

Subcontracts, hence “Model terms of Construction Contract between Contractor and

Subcontractor for Subcontract work” published by CIDB Malaysia has been referred.

However, a clear back-to back provision of contractor suspending works is not

stipulated in the model contract either. So far as concerned, only “termination

clause” is clearly stated out in this model sub-contract.

99 CICC. (2006). Model terms of Construction Contract between Contractor and Subcontractor for

Subcontract work. Malaysia: CIDB, pg 3

49

Whatever the case is, if the contractor wishes to draft out the domestic sub-

contracts incorporating back-to back provisions from the main contract, the

contractor should bound the suspension clause which enables him to suspend the

domestic workers as well in the sub-contract. Lack of provisions with a lot of

ambiguities will surely create more and more disputes.

3.4.5 Contractor’s Right to Suspend Works for Non-Payment under Other

Contracts - FIDIC

Contractor who enters the contract with the employer based on FIDIC 1999

(Conditions of Contractor for Construction for Building and Engineering Works

Designed by The employer) 100 , is entitled for suspension of work against non-

payment as well. Since FIDIC has been mentioning suspension of work for many

years, it will be worthwhile to briefly discuss this right against non-payment.

Generally, under clause 16.1, if the engineer defaults in certifying interim

certificates and issuing interim certificates, or the employer fails to comply with

clause 2.4 which requires the employer to make financial arrangements , or fail to

comply with clause 14.7 which requires the employer to pay the amount certified in

the interim certificate within the stipulated time, then the contractor can forward give

a notice for the employer stating his intention to suspend work unless he has received

the payment certificate, reasonable evidence or payment.

Contractor’s action in suspension of work is somehow without prejudice his

rights to financing charges, whereby he shall be entitled to receive financing charges

compounded monthly on the amount unpaid during the period of delay. In addition

100 FIDIC 1999 (Conditions of Contractor for Construction for Building and Engineering Works Designed by The employer)

50

to that, his act in suspension is without prejudice to his entitlement to terminate the

contract under clause 16.2. However, the contractor’s suspension of work shall lapse

upon receiving Payment Certificates, and evidence or payment before giving a notice

of determination. Contractor is expected to resume normal working as soon as

possible.

Contractor’s entitlement nevertheless is almost the same with CIDB 2000 and

PAM 2006. As continue to stipulate in clause 16.1, if the contractor suffers delay or

incur cost as a result of suspending work or reducing the rate of work, the contractor

is entitled for extension of time and payment of any cost plus reasonable profit which

shall be included in the contract price. However contractor should take note that he

should submit notice to the engineer as soon as practicable, and not later than 28

days, as the notice is a condition precedent to the entitlement for extension of time

and claiming additional payment.

FIDIC however is silence about the duties of contractor following suspension

of work. Although not expressly stated out in the contract, however the contractor

should understand that during suspension of work and the definition of “suspension”

itself, the works continue to reside with the with the contractor, and the contractor is

merely freezing and halting his works until payment default is remedied by the

employer. Eventually securing and protecting own works is definitely an implied

necessity for the contractor to maintain the works in question for the said period101.

101 Harbans Singh K.S. (2003). Engineering and Construction Contracts Management Post

Commencement Practice. Malaysia: Malayan Law Journal Sdn Bhd, pg 25

51

3.5 Contractor’s Right Under Statutory Provisions to Suspend Works for

Non-Payment

Since there is no common law for contractors to suspend works for non-

payment, contractors generally can only seek express provisions in their bespoke

standard form of contracts which allow them to exercise the right of suspension.

Since the Latham’s Recommendation had strongly recommended suspension of work

as a self-help remedy against non-payment, slowly this right has been entrenched in

the Housing Grants, Construction and Regeneration Act (HGCRA) 1996 and

followed by other countries such as New Zealand, Australia, Isle of Man, and

Singapore. Generally, there are 9 Acts now available which envisage suspension of

work against non-payment as a statutory right, namely:

� Housing Grants, Construction and Regeneration Act 1996, United Kingdom,

(UK Act)

� Building and Construction Industry Security of Payment Act 1999 amended

in 2002, New South Wales, Australia (NSW Act)

� Building and Construction Industry Security of Payment Act 2002, amended

in 2006, Victoria, Australia (Vic Act)

� Construction Contracts Act 2002, New Zealand Act

� Building and Construction Industry Payments Act 2004, Queensland,

Australia (Qld Act)

� Construction Contracts Act 2004 Western Australia

� Construction Contracts Act 2004 Isle of Man (IoM Act)

� Construction Contracts ( Security of Payment) Act 2004 Northern Territory,

Australia (NT Act)

� Building and Construction Industry Security of Payment Act 2004 (Singapore

Act)

From these acts, it can be seen clearly that so far there are 5 countries

inserted suspension of work as a statutory right, namely Australia, UK, Isle of Man,

New Zealand, and Singapore Act. By taking a look at Australia alone, there are

52

already five acts in New South Wales, Queensland, Victoria, Western Australia, and

Northern Territory. However suspension of work was first introduced in Building

and Construction Industry Security of Payment Act 1999 in New South Wales.

Hence, this chapter will briefly mention five acts from each country for discussions,

namely:

a) Housing Grants, Construction and Regeneration Act 1996, United Kingdom,

(UK Act)

b) Building and Construction Industry Security of Payment Act 1999 New

South Wales, Australia (NSW Act)

c) Construction Contracts Act 2002 (New Zealand Act)

d) Construction Contracts Act 2004 Isle of Man (IoM Act)

e) Building and Construction Industry Security of Payment act 2004 (Singapore

Act)

3.5.1 Suspension of Works for Non-Payment under Housing Grants,

Construction and Regeneration Act (HGCRA) 1996 (UK)

Contractor can find relieve by suspending works against non-payment under

the virtue of section 112 (1) of the Act102, which stipulates that when there is a sum

due under the contract, and the sum has not been paid in full by the end of the period

for the payment, and an effective notice of withholding has not been issued, then the

contractor can suspend his performance of his obligations under the contract to the

employer who has defaulted in his payment. This right of suspension nevertheless is

without any prejudice to the other rights and remedies that they may have, whether

by contract or by law. The contractor may be entitled to seek both suspension and

adjudication and depends on their contractual rights they may even able to arbitrate

102Obtained from http://www.opsi.gov.uk/acts/acts1996/ukpga_19960053_en_1

53

or seek to recover interest on late payment, as this right of suspension do not bar the

contractor form using other remedies, as so called” without prejudice”.

However, the contractor must comply with section 112 (2), whereby he has to

first give at least seven days’ notice of intention to suspend performance, stating the

ground on which it is intended to suspend performance. Section 112(3) continue to

states that the only way to cease the suspension is to make full payment of the

outstanding amount, eventually once this happens then the parties must be resume

their obligation in the contract which includes matters off site works and other

matters103.

Controversially, this act is silent about the contractor’s entitlement in

claiming loss and expense arising from suspension of work. However, section 112(4)

only stipulates contractor’s right in extension of time for the period of suspension. In

addition to that, other parties whose work directly or indirectly has been affected by

the suspension of work is entitled for extension of time as well. Contractors should

take note that no period of grace is given for remobilization, which means that

extension of time will not include any further time for remobilization following the

end of the suspension period104.

103 Pettigrew, R.(2005). Payment Under Construction Contracts Legislation. London:Thomas Telford, pg 128 104 Ibid

54

3.5.2 Suspension of Works for Non-Payment under Building and Construction

Industry Security of Payment Act 1999 amended in 2002, New South

Wales, Australia (NSW Act)

In New South Wales, Australia, the contractor can suspend works if the

employer fails to make payment. As laid out in section 27 in this act 105 , the

contractor can suspend works based on three circumstances:

a) If the employer does not provide a payment schedule to the contractor within

the time required by the relevant construction contract, or within 10 business

days after the payment claim is served by the con\tractor, whichever time

expires earlier.

b) If the employer do not pay the whole or any part of the scheduled amount to

the claimant on or before the due date for the progress payment to which the

payment claim relates.

c) If the employer fails to pay the whole or any part of the adjudicated amount

which has determined by the adjudicator. Eventually the employer must pay

that amount to the contractor on or before the relevant date to the contractor.

The relevant date is the date occurring 5 business days after the date on

which the adjudicator’s determination is served on the employer concerned.

However, the contractor nevertheless must issue at least 2 business day’s

notice of intention to the employer to suspend works. When the contractor suspend

works, he must take note that eventually he has to cease his suspension and continue

work immediately after 3 days following the date which the contractor receives full

payment from the employer.

105 Obtained from http://www.austlii.edu.au/au/legis/nsw/consol_act/bacisopa1999606/

55

Unlike the HGCRA (UK), section 27(2A) of NSW Act stipulates that if the

contractor exercises the right to suspend the construction work (Construction and

supply of related goods and services) and incurs loss or expense as a result of the

removal by the employer from the contract nor any part of the work or supply, the

employer is liable to pay the contractor for such amount of any such loss or expenses.

And controversially, the NSW Act is silent about extension of time due to delay

arising from the suspension of work.

Further mentioned in section 27 (3), the contractor who suspend works is not

liable for any loss or damage suffered by the employer or any person claiming

through the respondent as the consequences of the contractor not carrying out the

work during the period of suspension.

3.5.3 Suspension of Works for Non-Payment under Construction Contracts

Act 2002 (New Zealand Act)

In New Zealand, Construction Contracts Act 2002 empowers the contractor

to suspend works under the virtue of section 72 (1)106. The contractor has the right to

suspend works if any of these following circumstances occur:

a) The employer does not pay full by the due date for his payment and no

payment schedule has been provided by the employer.

b) The employer does not pay full by the due date for its payment even though a

payment schedule was given by the employer to the contractor

106 Obtained from http://www.legislation.govt.nz/act/public/2002/0046/latest/DLM163472.html#DLM163472

56

c) The employer has not complied with an adjudicator’s decision and

determination that employer must pay an amount to the contractor by a

particular date.

Prior to suspend works, the contractor is obliged to serve a 5 days’ notice to

the employer to suspend works. After the 5 days has been expired, the contractor

may then suspend works.

Section 72 (2) of this Act continue to elaborate that the contractor can claim

extension of time to complete the contract, and at the same time is not entitled solely

by reason of this Act to recover any costs incurred as a consequence of the extension

of time. Suspension of work at the same time does not affect and bar the contractor’s

right to terminate the contract. This section of the act also stipulate that the

contractor can anytime lift the suspension as he wills, even though the amount has

not yet being paid or the determination has not been complied with.

Once again, section 72(4) reminds the contractor that suspension of work is

not prejudice and does not affect any rights that would have available to the

contractor under the Contractual Remedies Act 1979. At the same time, when the

contractor exercises the right of suspension does not affect any right that would

otherwise have been available to the contractor under the Contractual Remedies Act

1979.

Finally, section 72 (5) emphasize that the right to suspend work under a

construction contract ceases when the employer pays the amount in full or complies

with the adjudicator’s determination. The suspension period shall lapse upon

payment and the contractor shall continue to commence with his works.

57

3.5.4 Suspension of Works for Non-Payment under Construction Contracts

Act 2004 Isle of Man (IoM Act)

Section 9(1) of the Construction Contracts Act 2004 Isle of Man 107or known

as (IoM Act) also empowers the contractors to exercise suspension against non-

payment. This act is direct and straight to the point to this statutory right. Carefully

laid out and implied in section 9(1), if there is a sum under a construction contract is

not paid by the employer in full by the final date for payment and no effective notice

to withhold payment has been given by the employer, the contractor has the right,

without prejudice to the other remedies, suspend performance of his obligations

under the contract.

However, the contractor must first serve notice prior suspending the works.

As stated in section 9(2), submission of notice is condition precedence for

suspension of work. This section states that the right may not be exercised without

first giving to the party in default (employer) at least 7 days’ notice of intention to

suspend performance. In the notice, the contractor must state his ground for his

intention to suspend performance. Next, Section 9(3) implied that the right to

suspend performance shall lapse when the employer makes payment in full of the

amount due.

The wording and the essence of this section 9 is actually exactly the same

with the section 112 of the HGCRA 1996 (UK). Controversially, this IoM Act is

silent about the contractor’s entitlement in claiming loss and expense arising from

suspension of work. However, section 9(4) only stipulates contractor’s right in

extension of time for the period of suspension. Nevertheless, other party whose work

directly or indirectly has been affected by the suspension of work is entitled for

extension of time as well. Contractors should take note that they are in the situation

where no period of grace is given for remobilization, which means that extension of

107 Obtained from http://www.gov.im/lib/docs/infocentre/acts//ca2004.pdf

58

time will not include any further time for remobilization following the end of the

suspension period.

3.5.5 Suspension of Work for Non-Payment under Building and Construction

Industry Security of Payment act 2004 (Singapore Act)

The mechanism of exercising suspension of work under the Building and

Construction Industry Security of Payment (BCISP) act 2004 Singapore Act is quite

different from the other types of act. BCISP Act 2004 cherished Sir Michael

Latham’s Recommendation that the “right of suspension should only be invoked

after an adjudicator has been involved and has issued a decision108”. Under the

BCISP Act2004, as stated out in section 26 (1) (d), the right to suspend the carrying

out of construction work or supply of goods or services can only arise after the

adjudicator has determined the adjudicated amount.

However, it is also a requirement under clause 26 (1) (b) for the contractor to

serve 7 days’ notice in writing to the employer of his intention to suspend carrying

out construction work or supplying goods or services under the contract. Eventually

when the 7 days has elapsed since the notice is served on the employer, the

contractor is entitled for suspension of works. This indicates that if the employer

pays the adjudicated amount to the contractor before the expiry of the seven days, the

contractor is not entitled to suspend works.

Section 26 (2) generally stipulates that notwithstanding the contractual terms

between the contractor and the employer, the contractor is not liable for any loss or

108 Chow Kok Fong. (2005). Security of Payments and Construction Adjudication. Singapore: Lexis Nexis, pg 451

59

damage suffered by the employer as a consequences of the suspension under this act.

This however does not negate the employer’s right to liquidated damages, which

could still be imposed by the employer on the contractor.

Followed by that, section 26 (3) continue to imply that when the contractor in

exercising out his right to suspend works, and suffer loss or expenses as a result of

employer’s act in removing respondent from the contract of any part of the work or

supply, the contractor can recover such loss and expense as a debt from the employer.

Eventually, as implied in section 26 (4), the suspension period shall lapse when the

adjudicated amount is paid fully. The contractor shall resume works and supply

within 3 days after being paid the adjudicated amount.

The contractor should also take note that under section 26(5), if the employer

is a licensed housing developer with a Project Account opened under section 9 of the

Housing Developers (Control and Licensing) Act (Cap.130), and the employer

somehow has not defaulted previously on any payment to the contractor, the

contractor must resume work or supply within 3 days after being served notice of

payment by the employer under section 24(2) (a) of this act. Eventually, even though

payment has not been received, the contractor must continue works. Nevertheless,

under section 26 (6), when the contractor is in default of resuming works upon being

paid fully the adjudicated amount, the contractor must indemnify the employer for

any loss or damage suffered.

Finally, section 26 (7) and 26 (8), entails contractor’s right in extension of

time for the period of suspension. Nevertheless, other party whose work directly or

indirectly has been affected by the suspension of work is entitled for extension of

time as well.

60

3.5.6 Case Study: Contractor Exercise Suspension of Works under

Construction Contracts Act 2002- Marsden Villas Limited vs Wooding

Construction Limited

So far, there is only one case which illustrate contractor exercising his

statutory right and had emphasize on the beauty of section 72 (5) of the Construction

Contracts Act 2002 (New Zealand Act).

In the case of Marsden Villas Limited vs Wooding Construction Limited109,

there is a big issue on whether Wooding Construction Limited was entitled to

suspend works. Marsden Villas entered into a construction contract whereby they

commissioned Wooding Construction to build 30 apartments in Paihia. The contract

documents included the New Zealand standard form of contract for 1998, the

General Conditions of Contract NZS 3910:1998. The Construction Contracts Act

2002 was also included in the list of agreed contract documents.

Eventually, the contract took longer than was anticipated to complete, and

significant disputes arose between the parties. Wooding Construction had gone over

time in terms of completion of the contract; however it had submitted various

extensions of time claims to Marsden Villas. These claims were disputed by Marsden

Villas and have become subject to the adjudication process. In 27 February 2006,

Wooding Construction made a progress claim namely “Progress Claim 29” for over

$2.9m. A payment schedule was served by Marsden Villas on 15 March 2006.

On 30 March 2006 Wooding Construction gave Marsden Villas notice of its

intention to suspend work, relying upon the Construction Contracts Act 2002 on the

basis that Payment Claim 29 had not been paid and indicated that work would stop in

5 working days if payment was not made. Then, on 7 April 2006 Wooding

109 [2007] 1 NZLR 807

61

Construction gave notice that it had suspended construction work from that date, and

all work ceased. Wooding Construction also gave an alternative basis for suspension

of works being non-payment of Payment Claim 26 amount for $1.65million.

There are 3 issues to be resolved by the Court, namely:

a) Whether Wooding Construction had served a valid payment claim in terms

of the Act

b) Whether Marsden Villas served its responding payment schedule within

time

c) Whether Wooding was entitled to suspend works

Regarding to (a), Marsden Villas argued that the payment claim was not valid

for two reasons. Firstly, it was argued that the payment claim covered a period of

work of less than one month and therefore breached the specific contractual term to

the effect that progress claims would not cover a period of less than a month. The

Court eventually held that the clause in the contract only indicates that progress

claims ought to be made on a monthly basis rather than a weekly or bi-weekly basis.

So the payment claim was valid.

Secondly, it was also argued by Marsden Villas that Progress Claim 29 was

invalid as a payment claim because Progress Claim 29 included within it previously

unclaimed Progress Claims 26. However the Court held that this did not make a

payment claim invalid.

For the issue (b), Marsden argued that the Payment Schedule was served

upon Wooding within the relevant time period prescribed by the Act namely 20

working days. However the actual contract only specified 10 working days. The

court held that the 10 working day period was applied since the fact that there had

been an unequivocal adoption by the parties of the provisions of clause 12 in the

contract as to the sending and response to the payment claim. Hence, this indicates

62

that a valid payment claim had been served and not responded by Marsden Villas

within time.

For issue (c), Marsden Villas contended that even if they failed to serve their

Payment Schedule within the prescribed period, so long as it was served prior to

expiration of the Notice of Intention to Suspend Works being 5 working days, then

works could not validly be suspended by the contractor. However the Court held that

once Notice of Intention to suspend works had been served, the way to lift the

suspension is to pay the contractor amount in full. The suspension of work was valid

and can only be lifted when Progress Claim 29 has been paid in it’s entirely.

This case has given a light of the problems that may arise when the contractor

suspend works. From this case, the employer has challenged the contractor’s right

based on the validity of payment claim and challenged the validity of suspension of

work by giving reasons of lifting the suspension. In practice, contractor’s right to

suspend works is always related to the validity of interim certificates, and

nevertheless the employer can challenge the interim certificates and this can be one

of the problems that the contractor may encounter. However simply with this case is

not adequate, as in practice there are still many potential problems that the

contractors may face and yet need to be researched.

3.6 Conclusion

To put it in a nutshell, there is no common law for the contractor to suspend

works even in the face of employer’s non-payment. However, contractor

nevertheless can seek this right in express provisions in bespoke construction

contracts, as well exercising out their rights if there is a statutory right in their

countries. Since Sir Michael Latham’s recommendations regarding to payment

63

demands should be backed up by a right to suspend works, countries such as

Australia, New Zealand, Isle of Man, UK, and Singapore have implied suspension of

work clause as a statutory right. Each Acts in these countries as before mentioned

has their own prerequisite condition to be fulfilled before contractors can be fully

entitled to suspend works. Nevertheless, contractors have their own duties and rights

as well detailed out in the Acts discussed above, although each acts have slight

difference, however the purpose of these acts is to provide the self-help remedy for

the contractor in case of non-payment by the employer.

By taking a look at Malaysia, contractors faced by non-payment in the

industry cannot depend on any statutory right to suspend works as the Construction

Industry Payment and Adjudication Act still has not yet passed by the Parliament.

What can the contractor depends on so far is the express provisions laid out in

bespoke construction contracts, and so far two Malaysian Construction Contracts

namely PAM 2006 and CIDB 2000 have introduced the right of suspension for non-

payment.

However, over the years, there has been less knowledge about what are the

legal problems that have arise from exercising out this right. Cases that have brought

to court regarding to payment in Malaysia, none of them are related to suspension of

works. Yet, in other countries, although countries such as UK or Singapore have the

statutory right, yet almost no cases can illustrate contractors have suspended their

works in the face of non-payment. Until today, there is only one New Zealand case

which has shown the Construction Contract Act 2002 was working in practice, and

yet not adequate enough to enlighten the contractors regarding to the legal problems

arise from exercising the right of suspension. Hence, undeniably, there is a need to

carry out a research, by looking at the scenario in Malaysia, and focus on what the

contractors have so far mainly focusing on PAM 2006 and CIDB 2000. Studies have

shown that in Malaysia contractors are less favour in exercising this right, what are

the reasons we may not know, but however by laying down what are the possible

legal problems that may arise can nevertheless enlighten the contractors are the do’s

64

and don’ts and directly taking away their ignorance regarding to the right of

suspension of work.

CHAPTER 4

ANALYSIS OF CASE LAW:

IDENTIFYING POSSIBLE PROBLEMS THAT CONTRACTOR MAY FACE

WHEN SUSPENDING WORKS AS REMEDY FOR NON-PAYMENT

4.1 Introduction

Disputes have been a common nature in the profile of Malaysian construction

industry, and from a recent research done on the profile of disputes in Malaysia from

the year 1997 until 2007, 51% of the disputes related to construction are payment

problems, and 13.5% of the payment disputes are disputes for nonpayment for

certified sums110. However, the remedies mentioned in these disputes none of them

are related to the exercising of suspension of works by the contractor. In Malaysia,

there is no single case law that illustrates the legal problems and issues regarding to

suspension work by the contractor.

Indeed, there is almost no legal cases nowadays can be found which mention

about contractor suspending works. Even though statutory provisions such as the

Housing Grant, Construction and Regeneration Act 1996 (UK) and Building and

110

Asniah Bt. Abidin. (2007). The Profile Of Construction Disputes. Master of Science, UTM, Skudai

66

Construction Industry Security of Payment Act 2004 (Singapore) and other countries

for example contains the right of suspension of work, however there are almost no

cases that illustrate the legal issues arise due to exercising suspension of work under

these acts against nonpayment by the contractors. Until recently, there is only one

New Zealand case Marsden Villas Limited vs Wooding Construction Limited

111which only discusses about how the Construction Act 2002 functioned and worked

properly when the contractor suspended his works.

Hence, this chapter intends to illustrate the possible problems that contractor

may face when he exercises his right in suspension of works as remedy for non-

payment in Malaysia. Since there are no direct cases that deal with the proposition,

hence the discussion of the issues is by way of indirect cases which have

demonstrated issues in interim certificates, validity of notices, or disputes between

contractors and sub-contractors which are largely related to the possible problems

that may arise when contractor suspends works. Similarly, there are no statutory

provisions that allow the contractor to suspend works due to non-payment in

Malaysia; hence discussions and illustrations will be based on PAM 2006 as well as

CIDB 2000 main contracts for building works.

4.2 Possible Problem 1: Challenges to Contractor’s Right in Suspension of

Works by the Employer

The contractor’s right to exercise suspension of works under both PAM 2006

and CIDB 2000 nevertheless is subject to certain fulfillment of certain condition as

set out in the clauses. Defaulting employer whose contractor has suspended works

under the express provisions may challenge such action on the ground that the

111 [2007] 1 NZLR 807

67

suspension of work is invalid or wrongful for a variety reasons. The possible reasons

are:

4.2.1 Notice to Suspend Works Has Been Given Unreasonably or Vexatiously

According to clause 30.7 in PAM 2006, if the employer do not pay within 14

days after receiving a suspension notice by the contractor, the contractor must further

issue a written notice delivered by hand or by registered post to effect his suspension

of work and provided that such notice shall not be given “unreasonably or

vexatiously”.

In CIDB 2000 however, the procedure of giving notice is different from PAM

2006. As stipulated in clause 42.10 CIDB 2000, if the employer fails or neglects to

honour the interim certificate within the period of honouring the certificate, and

continues for 14 days from the due date of honouring certificate, the contractor may

give notice of his intention to suspend works. And if the employer continues to

default in payment for 14 days after the notice, the contractor can directly suspend

the works. From here, under CIDB 2000 the contractor is required only to issue one

notice, unlike PAM 2006 which requires the contractor to issue first notice of

intention and second notice to initiate suspension. However in CIDB, the wordings

of “unreasonably or vexatiously” is silent regarding to notice of suspension.

The word “reasonable” literally means “a fair and proper view or assessment

of a matter in a particular set of circumstances, and the impression that a particular

68

view or assessment is not extreme but was made on the principles of fair play and

natural justice112.

In the case of J.M Hill and Sons Ltd vs London Borough of Camden113, the

contractor had sent a notice of determination in accordance to clause 26(1) (a) of the

contract which allow for determination. Clause 26(1) of the contract stipulates that:

"if the Employer does not pay to the Contractor the amount due on any

certificate... within 14 days from the issue of that certificate and continues such

default for seven days after receipt by registered post or recorded delivery of a

notice from the Contractor stating that notice of determination under this Condition

will be served if payment is not made within seven days from receipt thereof... then

the Contractor may thereupon by notice by registered post or recorded delivery to

the Employer or Architect forthwith determine the employment of the Contractor

under this Contract; provided that such notice shall not be given unreasonably or

vexatiously."

Eventually the employer argued that the notice and the contractor’s action

were unreasonable. Ormrod LJ had commented on the definition of “unreasonable”,

whereby he held that:

"But what the word "unreasonably" means in this context, one does not know.

I imagine that it is meant to protect an employee who is a day out of time in payment,

or whose cheque is in the post, or perhaps because the bank has closed, or there has

been a delay in clearing the cheque, or something -- something accidental or purely

incidental so that the Court could see that the contractor was taking advantage of

the other side in circumstances in which, from a business point of view, it would be

totally unfair and almost smacking of sharp practice."

112 Chow, Kok Fong. (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia, pg 320. 113 [1980] 18 BLR 31

69

“Vexatiously” on the other hand is literally defined as “causing annoyance or

worry”, denotes an action or the bringer of an action that is brought without

sufficient grounds for winning, purely to cause annoyance to the defendant114.

In the case of John Jarvis vs Rockdale Housing Association Ltd115 , the

defendants engaged the claimants to construct 50 flats for the elderly. When the

nominated sub-contractors started late, produced defective works, and wrongfully

withdraw from site, the architect eventually instructed the claimant to stop work.

Eventually after the suspension had lasted for more than one month, and the claimant

eventually gave notice to terminate his employment. However, such notice of

termination was argued to be “vexatious”. Bingham LJ in this case explained and

defined the definition of “vexatious”, which means “an ulterior motive to oppress,

harass, or annoy”, and eventually such notice by the claimant was not vexatious and

was entitled to terminate the contract.

In the another case of Reinwood Ltd v Brown & Sons Ltd116, Reinwood had

employed Brown based on JCT standard form for the construction of 59 residential

apartments in Manchester. In July 2006, Brown issued a notice to determine its

employment under the contract for the repeat of the specified default by Reinwood,

whereby Reinwood had failed to pay on 28 June the sum of £39,981 due under

interim certificate 34 by that date, being the final date for payment of that sum

contract. The contract makes it clear that the second notice, the notice of

determination, must not be given unreasonably and vexatiously. One of the claims by

Reinwood was that such notice of determination by Brown has been given

“unreasonably and vexatiously”.

Judge Gilliland explains the definition of “unreasonably and vexatiously” and

held that:

114 Soanes, C. (2002). Compact Oxford English Dictionary. New York: Oxford University Press, pg 1236 115 [1987] 36 BLR 48 116 [2006] TCC 9 November 2006

70

a) It is for the employer to show on the balance of probabilities that the

contractor has determined the contract unreasonably or vexatiously.

b) “Vexatiously” means that the contractor determined the contract with the

ulterior motive or purpose of oppressing, harassing or annoying the employer.

c) The test of what is an unreasonable determination is ascertained by how a

reasonable contactor would have acted in all the circumstances.

d) It isn’t for the court to substitute its own view of what is reasonable for the

contractor’s view if that is one which a reasonable contractor might have

taken in the circumstances.

e) Although the contractor’s motive in exercising the right of determination is

relevant, the test of what is unreasonable conduct is objective and the fact

that the individual contractor may have thought that his conduct was

reasonable is not conclusive.

f) The effect of the determination on the employer is a relevant factor and it

might be unreasonable if it disproportionately disadvantages the employer.

From the cases mentioned above, “unreasonable” is hard to defined, however,

from a business point of view, a notice of determination is called “unreasonable” if

the contractor is disproportionately taking advantage of the other side (employer)

which is unfair and almost smacking of sharp practice. What is reasonable in one

case may not necessarily consider unreasonable in another. In the context of building

contracts, the question whether something is or is not reasonable is probably best

answered, by considering what the average architect, engineer, project manager, and

builder or the like would consider reasonable having regard to the particular facts

and circumstances under which the parties found themselves in the specific case in

point117.“Vexatiously” on the other hand refers to an individual with the ulterior

motive or purpose of oppressing, harassing or annoying the employer.

Hence, contractor who exercises suspension of works under PAM 2006 must

be aware and cautious. As held in Reinwood case, it is for the employer to show on

117 Chappel,D., Marshall,D., Powell Smith,V., and Cavender,S. (2001). Building Contract Dictionary. UK: Blackwell Science, pg 344

71

the balance of probabilities that the contractor has determined the contract

unreasonably or vexatiously. Hence, the contractor’s notice to initiate suspension of

work must not be given “vexatiously” and “unreasonably”, and the employer can

always challenge the contactor by using this ground. Even though CIDB 2000 is

silent about the notice being “vexatious and unreasonable”, eventually contractor still

may face a big problem exercising out his right of suspension when employer still

can argue that actions in suspend works has been carried out unreasonably and

vexatiously and content that the notice to suspend works given by the contractor is

“unreasonably”, which have brought a disproportionately disadvantage to himself,

and may even contend that the notice to be “vexatiously” given, which have the

ulterior motive or purpose of oppressing, harassing or annoying.

4.2.2 Employers Challenges the Validity of Interim Certificates as a Basis for

Non-Payment

The biggest fear for the contractor in the line of construction business is that

the employer has adequate reason for non-payment. One of the reasons is that the

employer challenges the validity of the interim certificate, and refuses to honour the

certificate based on the ground of bona fide. The contractor’s right to suspend work

nevertheless must in relation to the validly issued certificates. There are several case

law to demonstrate interim certificates can be challenged by the employer for several

reasons as such:

4.2.2.1 Interim Certificate is Not Validly Issued by Registered Professional

As stipulated in clause 30.1 PAM 2006, after receiving contractor’s details

and particulars and received payment valuation from the Quantity Surveyor, the

architect shall within 21 days issue an interim certificate to the employer with a copy

72

to the contractor, and the employer shall thereafter pay the amount certified to the

contractor within period of honouring certificates. Similarly in CIDB 2000, clause

42.2 (a) stipulates that within 21 days of receiving statement of work done, the

superintending officer shall issue an interim certificate to the employer stating the

amounts which the contractor is in his opinion entitled in respect of the amounts.

However, who is architect? And who is superintending officer? As explained

in Article 7 in PAM 2006, architect means the person named in article 3 and shall be

a professional architect or any other form of practice registered under the Architects

Act 1967 and approved by the Boards of Architect. Section 10(1) of Architects act

1967 continues to state that any person who holds the qualification recognized by the

Board shall be entitled on application to be registered as a registered Architect.

Similarly, superintending officer in CIDB 2000 shall be the person named in Article

4 shall be an individual, or the principle of a sole proprietorship or a partner of a

partnership, or a director of a corporation, and provided such individual, principle;

partner or director is a full member of a professional body connected to the

construction industry. The concept here still applies, whereby the person named as

“S.O” here must be registered and hold the qualification by the professional body.

Employer has the ground for non-payment when he feels that the interim

certificate is not issued by authorized, registered person. In the case of Gunung

Bayu Sdn Bhd vs Syarikat Pembinaan Perlis Sdn Bhd118, the appellants had entered

into a building contract with the respondents, a firm of building contractors for the

construction of a housing scheme. The contract provided for progress payments to be

made based on interim certificates to be issued by the appellant's architect who was

Hijjas Kasturi Associates Sdn. Bhd. The contract also contained the usual arbitration

clause. The work proceeded and interim certificates were issued for work done.

However, the interim certificate signed by a graduate architect who had not been

registered. The appellants claimed the interim certificate is not valid and refused to

honour the certificates. The respondents terminated the contract and filed a writ

118 [1987] 2 MLJ 332

73

against the appellants. The appellants applied to have the writ struck out on the

ground that under the agreement the parties have agreed to go to arbitration in the

event of "any dispute or difference." The appeal eventually was allowed by the court.

Indeed, contractors will face a problem in exercising suspension of work

when the validity of interim certificate is not validly issued by architect or S.O.

Eventually showed from this case, the employer can claim that the interim certificate

was not valid, not issued by the authorized person, and hence lead to arbitration

when this circumstances has provide a ground for the employer to challenge the

certificates.

4.2.2.2 Architect/ S.O Has Been Acting Impartially, Fraudulent in Issuing

Interim Certificates

Nevertheless, employer may from time to time argue that the interim

certificate has been issued by the architect who has acted impartially, under the

influence by the contractor.

In one case of Ling Heng Toh Co vs Borneo Development Corporation Sdn

Bhd119 , the appellants had entered into a contract with the respondents for the

construction of a wharf and river wall in Sarawak. It was agreed that payment for the

work actually carried out would be made monthly against the certificate of the

engineer. During the progress of the work, three interim certificates had been issued

by the engineers and paid by the respondents. However, when the appellants had

asked the engineers for a fourth interim certificate for $ 35,415.89 but the engineers

issued a certificate for the sum of $ 18,161.61 only. The appellants after some

119 [1973] 1 MLJ 23

74

correspondence brought an action against the defendants for the balance of

$ 17,254.27, alleged inter alia in the statement of claim that the engineers had not

acted impartially and independently between the parties and had wrongly certified

that only $ 18,161.61 was due. The learned trial judge dismissed the action and the

appellants appealed. However, trial judge had found that there was no fraud or

collusion between the respondents and the engineers and that the respondents had not

interfered with or obstructed the engineers in issuing the certificate nor had they

given instructions which impeded the engineers in the issue of the certificate, the

appellants had failed to show that they could proceed in the action without a

certificate.

Although from this case apparently it was shown that the contractor argued

and contended the certifier was acted impartially and under influenced by the

employer. However in practice, the same ground can be used by the employer for

non-payment when he allegedly claims that the architect/ S.O has been acting

impartially and under the influence by the contractor.

The same circumstances also occur in another case of Lazarus Estates Ltd vs

Beasley120, issues regarding to fraud or collision between certifier and the relevant

parties. Landlords of a flat served on the statutory tenant a notice of a repairs

increase of rent under the Housing Repairs and Rents Act, 1954, s 25(1). The notice

was accompanied by a declaration that the conditions justifying an increase were

fulfilled and that within four years of the service of the notice works of repair had

been carried out on the block of flats or solely for the benefit of the flat or of the

block of flats to the necessary value, £ 324. The repairs specified in the schedule to

the declaration as having been done were decorative repairs £ 226 and other repairs

for the benefit of the flats £ 300. The tenant however did not apply to the county

court within the twenty-eight days allowed by para 4(1) of Sch 2 to the Act to

determine whether the work of repair had been carried out. In an action by the

landlords for the recovery of the increase of rent, the tenant alleged that the

120 [1956] 1 All ER 341

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declaration was false and fraudulent in that the repairs for the benefit of the flats of

£ 300 to the knowledge of the landlords had never been carried out, and she also

objected to the validity of the notice of increase on the ground that it was not

addressed to the tenant. The landlords contended that the tenant could not raise the

defense of fraud as she had not applied within the twenty-eight days allowed to her

and, by para 5 of Sch 2 to the Act of 1954 [a], service of the declaration was to be

treated in such circumstances as satisfactory evidence that the work of repair had

been carried out.

The court however held that the tenant was entitled to raise the defense that

the declaration was fraudulent; and, if she succeeded, the declaration would be void

and the increase of rent to which it related would not be recoverable. Lord Denning

stated:

“No court in this land will allow a person to keep an advantage which he

obtained by fraud. No judgment of a court, no order of a minister can be allowed to

stand if it has been obtained by fraud…fraud unravels everything.”

Similarly shown in this case, the employer can use the ground of “fraud or

collusion”, by the architect/S.O, challenging the validity of the interim certificate by

alleging that the interim certificate was issued due to fraudulent acts by the

architect/S.O. Nevertheless, if the employer can succeed in raising the defense

showing the issuance of interim certificate was issued in act of fraud by the architect,

the interim certificate can be proved to be void and the contractor can have the

ground for non-payment.

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4.2.2.3 Interim Certificate Was Fundamentally Inaccurate in Content and

Computation

Interim certificate in typically issued at intervals prescribed under the terms

of the contract, and the amount certified for payment represents only the approximate

value of work done and is not conclusive or binding on the paying party. Eventually

the amounts certified by way of interim certificates and paid by the employer are

adjusted at the end of the contract when the final amount due from one party to the

other is stated in the final certificate121. Nevertheless, the amount in the certificate

can be challenged by raising a bona fide arguable contention about the accuracy of

the interim certificate.

In the case of C.M Pillings & Co Ltd vs Kent Investments Ltd122 , the

defendants let a contract to the plaintiffs under the JCT Fixed Fee Form of Prime

Cost Contract for the extension of a large house, the provision of an indoor

swimming pool and the addition of a new master bedroom suite. On 5 October 1984,

the architects issued an interim certificate for $ 110,000, and subsequently revised to

$ 101,529. The defendant (employer) disputed the sum certified and wished to

challenge the accuracy of the certificate. They refused to honour the certificate, and

when the plaintiffs issued a writ and sought summary judgment for $ 101,529, the

defendants asked for an order that the action should be stayed under section 4 of the

arbitration Act 1950 and referred to arbitration. The court eventually held that there

was just sufficient evidence to entitle the employers to raise a bona fide arguable

contention about the accuracy of the interim certificate. There is a right to rise cross

claims in any action for payment under a certificate unless the terms of the contract

expressly exclude that right. The court eventually ordered a stay of the application

for summary judgment for the sum certified so that the matter would be referred to

arbitration.

121 Chow, Kok Fong. (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia, pg 209 122 [1986] 4 Con LR 1

77

From this case, the employer can challenge the validity of the interim

certificate by raise a bona fide arguable contention with the amount and the accuracy

of the certificate issued by his own architect, and claims he is right for not honouring

the interim certificate. Eventually, when contractor suspend works due to non-

payment by the employer, the employer may raise the bona fide arguments

challenging the accuracy of interim certificates as the basis for non-payment.

4.2.3 Reasons for Non-Payment is Due to Set-Off

Another reason for non-payment is the argument to set-off the amount in the

certificate by the employer.

Set-off123, defined in “Oxford Dictionary Law”, is a monetary cross claim

that is also a defense to the claim made in the action by the claimant, or “deductions

of the money to be made”. Over the years, contractors rely on interim certificates as

condition precedence for their payment. Such interim certificates usually are issued

by the S.O and architects. In some situations, when the contractor suspends works

for non-payment, the employers may argue that he is entitle to set off, and refuse to

pay the contractors as the amount due as shown in the payment certificates.

The issue of whether there is a right of set-off against interim certificates

issued has caused hardships the contractors. The contractor has financial obligations

towards its suppliers, sub-contractors and employees and these financial obligations,

during the course of construction, are normally met from payments via approved

interim certificates. Persistent attempts by employers to rely on the rights of set-off

123 Martin, E.A and Law, J. (2006). Oxford Dictionary of Law. New York: Oxford University Press Inc, pg 490

78

had nevertheless cause undue financial stress on the contractors124. Employer who

set-off nevertheless has attempted to rely on common law right as well contractual

right in set-off.

4.2.3.1 Common Law Right in Set-Off

The fact is, employers do have common law right in set-off. The essence of

set-off is in defense rather than a cross-action. The common law right of set-off was

derived from the case of Mondel v Steel125. This principle eventually indicates that

when the defendant (buyer of the goods or the employer), is sued by the plaintiff

seller or contractor for the price, the defendant, in the absence of a contrary provision

in the contract, is allowed to defend himself by setting-off against the amount

claimed, any damage which he has sustained as a result of the plaintiff's breach of

the contract under which the goods were sold and delivered or the work and labour

done and thus showing the diminution of value of the subject matter126.

4.2.3.2 No Presumption on a General Rule that Exclude the Right to Set-Off in

Interim Certificates

Contractors nevertheless should take note that there is no general rule that

excludes common law right to set-off in interim certificates. In the case of Gilbert-

Ash (Northern) Ltd vs Modern Engineering (Bristol) Ltd127 , the employer had

engaged the main contractor using the standard RIBA form (1967 issue) and the

main contractor in turn entered into a sub-contract with the sub-contractor. The

124 Eugene Tan. (1995).The Common Law Right of Set-off in Construction Contracts. Lexis Nexis The Malayan Law Journal Article 125 [1835-1842] All ER Rep 511 126 Eugene Tan, loccit 127 [1973] 1 BLR 73

79

architect issued interim certificates certifying a certain amount to be paid by the main

contractor to the sub-contractor. The main contractor however set-off the amount and

paid a reduced amount to the sub-contractor alleging delay and defective work on the

part of the sub-contractor. The main contractor set-off the amount based on the set-

off clause which states that:

“If the sub-contractor fails to comply with any of the conditions of this sub-

contract, the contractor reserves the right to suspend or withhold payment of any

moneys due to or becoming due to the sub-contractor. The contractor also reserves

the right to deduct from any payments certified as due to the sub-contractor and/or

otherwise to recover the amount of any bona fide contra accounts and/or other

claims which he, the contractor may have against the sub-contractor in connection

with this or any other contract”

Eventually the court held that the contractor was entitled to set-off since the

sub-contract was so clear. The importance of 'cash flow' is not unique to the building

industry. Each case depends on the terms of the contract. There is no presumption of

a general rule which excludes the common law right of set-off in regard to interim

certificates.

The right to set-off amounts in the interim certificate was further illustrated in

another case Token Construction Co Ltd v Charlton Estates Ltd128 .In this case, the

contractors entered into a contract with the building owners on a modified prime cost

contract for the erection of four blocks of flats in Regents's Park Road. However, the

contractor was in delay and the employer deducted liquidates damages, and refuse to

pay the interim certificate issued by the architect which amounts to £ 16,347.

Eventually the employer contended that the liquidated damage was larger than the

amount in the interim certificate. Eventually, Lawson J held that:

128 [1973] 1 Build LR 48

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'If there is a provision in the contract which on its proper construction

entitles a building owner to deduct damages for delay from amounts shown to be due

on certificates, there is nothing in the authorities which would preclude such a

deduction being made from an interim certificate'. Court held that deductions can be

made from Interim Certificates if the contract expressly gives that right.

4.2.3.3 Situations That Allow Employer to Set-Off

In Malaysia, some case law has demonstrated that employers can set-off

amount in the interim certificate. In the case of Woo Kam Seng vs Vong Tak

Kong129 , The plaintiff a contractor sued the defendant on a building contract

for$ 5,876.62 being the sum of $ 7,000 stated in the architect's certificate less

$ 1,563.38 for mosaic and wall tiles supplied (as admitted) and for $ 440 being

certain other works carried out which were additional to the agreement. The

defendant counterclaimed the right to set-off for building materials supplied and

$ 878.08 for window grilles and gates and damages for breach of the agreement. The

court held that the defendant is allowed to set-off the claim by the contractor, as the

contractor was proved to fail to deliver the house according to the specification

required by the employer, and damages for breach of the agreement.

In another case of Mahkota Technologies Sdn Bhd (Formerly known as the

General Electric Co (M) Sdn Bhd vs BS Civil Engineering Sdn Bhd130 , The

plaintiffs entered into a sub-contract with the defendants to supply and to install four

units of lifts and 22 units of escalators at a premise known as Plaza Putra, Alor Setar.

Whilst the plaintiffs claimed that they were entitled to payment as they had fulfilled

their contractual obligations to the satisfaction of the architect, the defendants

contended otherwise. They alleged, amongst other things, that the plaintiffs' work

129 [1968] 2 MLJ 244 130 [2000] 6 MLJ 505

81

was shoddy and that the plaintiffs failed to complete the contract work within time.

Towards the recovery of their loss, the defendants filed a counterclaim wherein the

amount sought was in excess of the plaintiffs' claim. They were, thus, entitled to

withhold payment. The court eventually held that the employer’s right to set - off

payment was clearly preserved in the contract. There was in fact various defective of

works by the contractor was found by the employer and the employer’s counterclaim

was far in excess of the plaintiff’s claim which entitled the employer to withhold

payment.

Next, in the case of Kemayan Construction Sdn Bhd vs Prestara Sdn Bhd131,

the respondent had entered a contract with a contractor ('the original contractor').

Subsequently, the respondent, the petitioner and the original contractor entered into a

deed of novation whereby, inter alia, the original contractor was released from the

performance of the contract and the petitioner was substituted in its place

accordingly. On 16 November 1995, the architect issued Interim Certificate No 16

for a sum of RM1, 646,782.94. The petitioner failed to remedy the defects and

complete the works. The respondent therefore refused to pay the petitioner. On 19

August 1996, the petitioner filed a petition as well as the statutory notice of demand

pursuant to s 218 of the Companies Act 1965 demanding the total sum of RM 2,

752,882.51 based on Interim Certificate Nos 15 and 16. The respondent disputed the

debt on the basis that the building constructed had been found to have various

defects. In its submission, the petitioner contended that the balance one moiety of the

retention sum was sufficient to cover all the rectification costs and that therefore the

respondent ought to honour the two interim certificates. The court eventually held

that the respondent was entitled to withhold payment, as it was the petitioner’s

failure to rectify the defects at its own cost as per architect’s instruction.

From a few cases stated above, the employer may hold few grounds for set-

off such as contractor’s failure to comply to architect’s instruction, defects in

building, late delivery, and nevertheless depending on provisions under the contract

131 [1997] 5 MLJ 608

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which allows the employer to set-off. From the Kemayan case for example alone, it

has been shown that employers have successfully set-off amount in the certificates

and defeated attempts and contention by contractor to remedy against non-payment

such as winding up petition accordance to s 218 of the Companies Act 1965. Based

on this simple ground, this can pose a problem to contractor’s right in suspension of

work because the employer has the ground for non-payment due to set-off.

4.2.3.4 Set-Off in PAM 2006

The right of set-off nevertheless has been incorporated in PAM 1969, and

continue to be incorporated in PAM 1998, however the right is less highlighted and

is only limited what is expressly stipulated in the contract. PAM 1998 for example,

the right of set-off is stated in clause 30.3(i):

“Unless otherwise expressly provided in these conditions, the Employer shall

not be entitled to withhold or deduct any amount certified as due under any

Architect’s certificates by reason of any claims to set – off or counterclaims or

allegation of defective works, materials, or goods or for any other reasons

whatsoever which he may purport to excuse him from making payments of the

amount stated to be due in an Interim Certificate.” However in PAM 2006, the right

of set-off is made clearer, with certain conditions to comply.

The wordings of set-off in PAM 2006 have been inspired by the case of

Pembenaan Leow Tuck Chui & Sons Sdn Bhd vs Dr Leela’s Medical Centre Sdn

Bhd To see that to what extent the right of set-off can be used as a ground for non-

payment when contractor suspends works under PAM 2006, it is worth looking at

the wording at the clause of set-off in PAM 2006.

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In the famous case of Pembenaan Leow Tuck Chui & Sons Sdn Bhd vs Dr

Leela’s Medical Centre Sdn Bhd132, Clause 30(1) of the contract provided that the

architect would issue an interim progress payment certificate to the builder to be

presented to the employer who would then make the payment within 21 days from

the date of presentation. On 3 August 1992, the architect issued the penultimate

progress payment certificate for a sum of RM433, 288.97. The employer failed to

make the payment and filed a cross-claim for damages against the builder for

defective work and over-valuation The builder sued the employer and sought

summary judgment under O 14 of the Rules of the High Court 1980 ('the RHC')

alleging that the employer was under an obligation to pay at once the sum appearing

in the certificate issued by the architect regardless of pending disputes. The High

Court favoured the employer, however the builder’s appeal eventually was allowed

in the Supreme Court. Edgar Joseph Jr.SCJ held a few critical points in this case:

a) Whether the right of set off or counterclaim, depends upon the wording of the

contract.

b) The court however did not agree with Lord Denning in Dawnays Ltd. v. F.G.

Minter Ltd. & Anor who stated that: “The interim certificate is regarded as

the equivalent of cash. The sub – contractor needs the money so as to get on

with the rest of his work. On principle, and practice, once certificate is issued,

it must be paid, save only for permitted deductions.” There is no special rule

in building contract cases which negatives the ordinary common law.

c) The express enumeration of permitted set-offs in the contract could imply

that the employer was limited to making deductions which fell strictly within

the scope of the permitted set-offs on the basis of the expressio unius

principle. In this case, although there were seven express provisions in the

contract whereby the employer had the right of set-off, none of them were

relevant to the set-off which was contended. Having regard to these

provisions of the contract, and applying the expressio unius principle, the

132 [1995] 2 MLJ 57

84

common law right of set-off had been extinguished, not expressly but by

clear implication.

Hence, from this case it had shed a light whereby regardless of the set-off

right under common law, under the “expressio unius est exclusion alterius”principle,

set-off principle has been extinguished whereby the inclusion of the one is the

exclusion of the other133, the mechanism of set off by the employer is limited to what

is dictated and laid out in the PAM 2006 Contract.

By referring to clause 30.4 PAM 2006, the employer is entitled to set off for

several grounds such as:

a) Failure of Contractor to comply with Architect Instruction ( Clause 2.4)

b) Fees, levies and charges that the contractor should indemnify the employer

arise from contractor’s non-compliances with any laws, regulations, by-laws,

terms and conditions of any appropriate authority and service provider in

respect of the execution of the works and all temporary works. (Clause 4.4)

c) With the consent of contractor, cost of rectifying any errors arising out from

any inaccurate setting out appropriately deducted by set-off by employer

(clause 5.1)

d) Work, materials, goods, or workmanship which is not in accordance with

contract (clause 6.5)

e) False warranty on goods and materials (clause 14.4)

f) Contractor’s failure to comply with the undertaking to attend to the works

and defects of a minor nature. ( clause 15.3 (b), 15.3(c) )

g) Defects in the liability defects liability period instructed to be left by the

architect with the consent of the employer (clause 15.4)

133 Martin, E.A and Law, J. (2006). Oxford Dictionary of Law. New York: Oxford University Press Inc ,pg 213.

85

h) Contractor fails to rectify critical defects during defects liability period which

need urgent rectification required by architect instruction within reasonable

time.(clause 15.5)

i) Contractor makes default in insuring or continues to insure against injury to

person and loss or damage, employee’s social security scheme for local

workmen, compensation insurance for foreign worker. (clause 19.5)

j) Default in insuring new building works ( 20.A.3)

However, the employer is only allowed to set-off provided that the architect

or quantity surveyor submitted their details of their assessment of such set off, and

has given the contractor a written notice delivered by hand or by registered post,

specifying his intention to set off the amount and the grounds on which such set-off

is made. Unless expressly stated elsewhere, such written notice shall be given not

later than twenty eight (28) days before any set-off is deducted from any payment by

the employer.

Good news for the contractor is that the contractor can argue and disagree

with the amount of set-off. Clause 30.4 (b) continue to state that if the contractor

after receipt the written notice from the employer or the architect on his behalf and

wishes to dispute the amount of set-off, shall within 21 days of receipt of such

written notices send to the employer delivered by hand or by registered post a

statement setting out the reasons and particulars of such disagreement. And if the

parties still are unable to agree on the amount of set-off within a further 21 days after

the receipt of the contractor’s response, either party may refer the dispute to

adjudication under clause 34.1. The employer shall not be entitled to exercise any

set-off unless the amount has been agreed by the contractor or the adjudicator has

been issued his decision. Hence, the issue here is clearly seen whereby when the

contractor suspend works due to non-payment by the employer, the employer is hard

to use “set-off” as reasons for non-payment. Even though the employer has the

common law right in set-off, however with the virtue of “expressio unius est

exclusion alterius” as the employer must first follow the procedures set out in PAM

2006 and limited to the conditions that entitles him to set-off.

86

4.2.3.5 Set-Off in CIDB 2000

Contractor’s right in exercising suspension of work under CIDB 2000

nevertheless can be challenged by the employer with the basis that non-payment is

rightful due to set-off. However, in CIDB 2000, there is no direct wording on set-off,

and yet there is no express wording which precludes and negatives the right to set-off.

In clause 42.10 (a) CIDB 2000, it stipulates that:

“If the Employer fails or neglects to make payment of any amount due to the

contractor within the Period Honouring Certificate (unless under the terms of the

contract the said interim certificate has been corrected or modified by a later

interim certificate which has been issued due to correction of certificates in clause

42.4, or the employer may be empowered by the provisions of the contract either

not to pay, or to make deductions from the sums shown in the certificate) , and

such failure shall continue for a further 14 days from the date such amount is due for

payment, then the contractor shall give notice of his intention to suspend work. If the

employer shall continue to default in payment 14 days after the receipt of the notice,

the contractor may suspend wholly or partly the further execution of the works, or

reduce the rate of the works”

From here, this clause indicates that the employer can held the ground of set-

off (make deductions) from the sum shown in certificate as the ground for valid non-

payment, However what are the categories for deductions are not mentioned in CIDB

2000. As been held in both cases of Gilbert-Ash (Northern) Ltd vs Modern

Engineering (Bristol) Ltd and Pembenaan Leow Tuck Chui & Sons Sdn Bhd vs Dr

Leela’s Medical Centre Sdn Bhd, there is no special rule of construction operating

in building which precludes and negatives the ordinary common law right of set-off

in employer. With this principle, employer still can set-off the interim certificate

under CIDB 2000 with the reasons such as contractor’s failure to comply to

architect’s instruction, overpayment, late delivery, and etc.

87

4.3 Possible Problem 2: Challenges to Contractor’s Entitlements in

Suspension of Works

Nevertheless, when the contractor is able to exercise out his rights in

suspension of work due to contractor’s default in making payment, the contractor is

entitled for claiming loss and expense and extension of time as well. As before

mentioned in the chapter 3, clause 24.3 (m) PAM 2006 and clause 42.10 (c) CIDB

2000 entitles the contractor who suspends works for non-payment to claim loss and

expense arising from such suspension. Similarly, clause 23.8(v) of PAM 2006 and

clause 42.10 (ii) CIDB 2000 entitles the contractor extension of time when he

suspends works for non-payment.

However, there are several circumstances that may prove difficulties for the

contractors to enjoy their entitlement in claiming loss and expense after exercising

suspension of work. Those possible circumstances are:

4.3.1 Contractor Does Not Mitigate Losses

As mentioned in chapter 2, contractor is entitled to claim loss and expense

arising from the suspension. Stated clearly in clause 42.10 (c) (iii) CIDB 2000,

contractor can claim loss and expense arising from the suspension, and arising from

resumption of normal working. In clause 24.1(a) PAM 2006, contractors can claim

loss and expense if he has incurred loss and expense arising from suspension.

Although in both contracts they do not expressly state what are the specific

88

components that can be reimbursed, contractors can claim for loss and expense such

as134:

(a) Reasonable costs associated with mobilization and demobilization of

construction plant and workforce.

(b) Compensation for maintaining its organization and equipment committed to

the affected part of the project.

(c) Productivity claims arising from the disruptions and inefficient sequencing of

work brought by the suspension.

(d) Expenses incurred in connection with the action he took to suspend affected

subcontractors and purchase orders, including, inter alia cancellation costs,

storage expenses and compensation for abortive work.

However those claims will be argued based on the basis of the duty to

mitigate, whereby the contractor will be argued for not mitigate employer’s loss. The

duty to mitigate loss is a rule of contract law, and it is linked between people who

has contract. If one breaches the contract, the injured party has to keep any costs that

incurred as a result of the breach are kept to a minimum135. As defined in Oxford

Dictionary of Law, “mitigation “is reduction in the loss or injury resulting from a tort

or a breach of contract. The injured party is under a duty to take all reasonable steps

to mitigate his loss when claiming damages 136 . The duty to mitigate losses is

eventually enshrined in the Section 74 Contracts Act 1950137, which reads as follows:

74 (1) When the contract has been broken, the party who suffers by the breach is

entitled to receive, from the party who has broken the contract, compensation for any

loss or damage caused to him thereby, which naturally arose in the usual course of

134 Chow Kok Fong. (1988). An outline of the Law and Practice of Construction Claims. Singapore: Longman Singapore Publishers Pte Ltd, pg 187 135 Taswa. (2004). The Duty to Mitigate Loss (Keeping Costs to a Minimum). From http://www.taswa.org/downloads/all/3.11_the-duty-to-mitigate-loss.pdf 136 Martin, E.A and Law, J. (2006). Oxford Dictionary of Law. New York: Oxford University Press Inc ,pg 345 137 Lee, Mei Pheng. (2006). General Principles of Malaysian Law.Selangor: Penerbit Fajar Bakti,pg 166

89

things from the breach, or which the parties knew, when they made the contract, to

be likely to result from the breach of it.

74 (2) Such compensation is not to be given for any remote and indirect loss or

damage sustained by reason of the breach.

74 (3) When an obligation resembling those created by contract has been incurred

and has not been discharged, any person injured by the failure to discharge it is

entitled to receive the same compensation from the party in default as if the person

had contracted to discharge it and had broken his contract.

In Malaysia, a few cases have shown the importance of the principle of

mitigation. In Kabatasan Timber Extraction Co vs Chong Fah Shing 138 , the

appellants had contracted to supply timber to the respondent to be delivered at the

site of the saw mill to be erected. The timbers supposedly to be delivered in 3 lots,

however the second lot of 198 logs and 4 of the 22 logs in the third lot were not

delivered to the sawmill but were dumped instead at a distance more than 500 feet

from the sawmill. Eventually, the Federal court recognized the general duty of

mitigation of loss, and allowed only the appropriate damages to be awarded was the

approximate cost of hauling the logs when MacIntrre F.J held that:

“In the instance case, there was no need for the respondent to have gone to

the expense and trouble of buying logs from elsewhere when the logs were lying a

few hundred feet away from the sawmill for mere taking and all that was required

was additional expense for hauling them up to the sawmill”.

In another case of Malaysian Rubber Development Corp Bhd vs Glove Seal

Sdn Bhd139, by a written agreement (‘the said agreement’) dated 1 August 1988

made between the plaintiff and the second defendant as agent for the first defendant,

it was agreed that the plaintiff would supply to the first defendant two million pieces

138 [1969] 2 M.L.J .6 139 [1994] 3 M.L.J 569

90

of rubber gloves per month commencing from November 1988 to October 1989 for a

total purchase price of US$1,848,000. The breach of contract was the failure of the

first defendant to issue an irrevocable letter of credit in favour of the plaintiff 30 days

before the date of the first shipment of the goods which was to have been on or

before 31 October 1988. The Supreme Court eventually laid down the following

legal principles on damages for breach of contract:

a) Generally (in assessing damages in relation to breach under sale of goods),

the value of the goods should be determined at the time of breach, but there is

no available market, the value is likely to be based upon the price at which

the goods are eventually sold.

b) The plaintiff is under a duty to take reasonable steps to mitigate its loss

immediately upon the breach, buy or sell it in the market if there is an

available market or, if there is none, act reasonably to mitigate the loss. The

question of what is reasonable in every case is a question of fact and law.

Hence, from these two cases which applied the principle of mitigation,

contractors who suspend works nevertheless has to take reasonable steps to mitigate

employer’s loss. Indeed, when the contractors exercise the right to suspend works

under PAM 2006 and CIDB 2000, the contractor is required to protect and secure

works, however claims of loss and expense shall not be made on workmen or

machinery for which the contractor can reasonably withdraw, sell, and rent in the

market which he can reasonably mitigate employer’s losses by doing so.

Since contractor’s claim in loss and expense affects employer’s cash flow, in

the employer’s perspective, these claims of loss and expense should not be

exaggerated. Hence, with the basis mentioned above, the employer may challenge

contractor’s entitlement in claiming loss and expenses by claiming that the

contractors are not applying mitigation principle.

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4.3.2 Contractor Does Not Prevent Delay

Nevertheless, contractors are required to prevent delay, and reduce delay

stipulated both in PAM 2006 and CIDB 2000. The decision and assessment of

extension of time nevertheless is in the architects/ S.O discretion. Hence, the

contractor’s entitlements in extension of time nevertheless are impeded by architect’s

discretion and assessment based on several conditions such as:

4.3.2.1 Contractor Do Not Use His Best Endeavour to Prevent or Reduce Delay

under PAM 2006

Eventually the criteria of whether the contractor has prevented delay will

affect architect’s assessment in granting extension of time. As stipulated in clause

23.5 PAM 2006, when the contractor has submitted sufficient particulars for the

architect’s consideration, the architect shall subject to clause 23.5, clause 23.6 ( duty

to prevent delay) and 23.8 consider the contractor’s submission and shall either reject

the contractor’s application or otherwise.

As stipulated in clause 23.6 PAM 2006, “the contractor shall constantly use

his best endeavour to prevent, or reduce delay in the progress of the works, and to

do all that may reasonably be required to the satisfaction of the architect to prevent

and reduce delay or further delay in the completion of the Works beyond the

completion date”.

What does best endeavour means? In the case of IBM UK Ltd vs Rockware

Glass Ltd140, Rockware had agreed to sell IBM some land for development, however

with one condition whereby IBM has to obtain planning permission for the land.

140 [1980] FSR 335

92

IBM was required under a proviso which states that IBM “will make an application

for planning permissions and use its best endeavors to obtain the same”.

Unfortunately, when IBM applied the planning permission from the local authority,

the local authority refused to give such planning permission. However followed by

that, IBM did not appeal against that decision to the Secretary of State. IBM held

with the ground that making an appeal to the secretary of state would cost a

significant amount of money.

Eventually, Rockware contended that IBM had failed to use its best

endeavour to obtain planning permission. When this matter was brought to court, the

court held that when IBM was not appealing, it is actually not using its best

endeavours to obtain planning permission. The test of using “best endeavours” is

“what an owner of the property would take all those steps in their power which are

capable of producing the desired results, namely the obtaining of planning

permission, being steps which a prudent, determined and reasonable, acting in his

own interest and desiring to achieve that result”. In other words, the test of using

"best endeavours" is what an owner of the property in such a case who was anxious

to obtain planning permission should do to achieve that end.

From this case, it can be summarized that when a contract requires the

contractor to use his best endeavours to prevent delay or reduce delay, he is expected

to keep the effect of any matters which would cause delay down to minimum or to

eliminate them if possible by using whatever is in their power. Contractor’s

entitlement and period of extension of time might not be fully enjoyed if the

contractor was held not using best endeavour to reduce delay, for example stalling

employer’s effort in making full payment with the intention to prolong the

suspension period so that extension of time can be prolong as well; or not remobilize

and resume works within reasonable time after suspension period has lapse.

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4.3.2.2 Contractor Does Not Take Reasonable Steps to Avoid or Reduce Delay

under CIDB 2000

As stipulated in clause 24.1 CIDB 2000, the time of completion can be

extended due to suspension of work by the Superintending Officer provided that the

contractor has carried out the works or any section of the works with due diligence

and has taken all reasonable steps to avoid or reduce delay.

What are reasonable steps? There is no direct answer to it, however from

“reasonable” literally means “a fair and proper view or assessment of a matter in a

particular set of circumstances, and the impression that a particular view or

assessment is not extreme but was made on the principles of fair play and natural

justice141”. By taking a look at the antonym “unreasonable”, in previous chapter case

law has defined it as being” disadvantage” to the employer. Hence deduction can be

made here whereby reasonable steps have the essence of fair, not extreme, and not

disadvantage the employer.

Contractor’s entitlement in extension of time when suspending works under

CIDB 2000 stipulated under clause 42.10 (c) states that extension of time shall

granted for the period of suspension including contractor’s time to resume works.

Hence contractor should nevertheless be cautious and take reasonable steps in

reducing delay, and resume works as fast as possible, not to give the impression of

stalling time and prolong the suspension period for remobilization. Failure of doing

so will cause contractor to be accused for not preventing delay and hence affecting

his entitlement for extension of time.

141 Chow, Kok Fong. (2006). Construction Contracts Dictionary. Singapore: Sweet and Maxwell Asia , pg 320.

94

4.3.3 Contractor’s Right in Extension of Time and Loss and Expense is

Deprived For Not Submitting Notices of Claims

Nevertheless, contractor’s entitlement in claiming loss and expense when

suspending works is always subjected to procedures in contracts. In PAM 2006,

clause 24.1(a) states that submission of notice of his intention to claim for loss and

expense to the architect shall be a condition precedent to any entitlement to loss and

expense that the contractor may have under contract and common law. Such notice

shall be given in writing with an initial estimate of his claim duly supported with all

necessary calculations, and must be given within 28 days from the start of

suspension, whichever is earlier.

Similarly in clause 23.1(a) PAM 2006 states that submission of notice of his

intention to claim for extension of time to the architect shall be a condition

precedent to any entitlement to extension of time. Such notice shall be given in

writing with an initial estimate of his claim duly supported with all particulars of the

cause of delay and must be given within 28 days from the start of suspension,

whichever is earlier.

On the other hand, in CIDB 2000, clause 32.1 stipulates that whenever the

contractor intends to claim for loss and expense arise from suspension of work, the

contractor shall submit notice in writing of his intention to do so to the S.O within 30

days after suspension of work has first arisen. The notice shall specify the event and

its consequences, appropriate contract references which are relevant to loss and

expense, estimated value of the loss and expense, and such notice shall be condition

precedence to any entitlement of loss and expense that the contractor may have

under the contract.

However, in claiming extension of time due to suspension of work, CIDB

2000 is less harsh on the requirement of condition precedence of notice for claiming

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extension of time. However it is important to note that clause 24.2 stipulates that the

contractor still is required to submit particulars of delays within 30 days of

occurrence of suspension of work such as the appropriate contract references, the

estimated length of the delay and of the extension of time required and details of the

effect of the event of delay on the works programme. Such notification is essential

for the S.O to make sufficient information and assessment for granting extension of

time. If the contractor does not submit particulars, yet the S.O still has the discretion

to grant a fair reasonable and necessary extension of time notwithstanding that the

contractor has failed to comply with the provisions of clause 24.

There is case law to demonstrate that contractor’s right in claiming extension

of time is deprived because of failure to submit notice of claims.

In Turner Corporation vs Austotel Pty Limited (1994)142, there was a

delay caused by the employer and the condition of the contracts eventually required a

written notice delay as condition precedence to an extension of time. Eventually, the

contractor failed to submit the written notice; hence the court held that the contractor

lost the right to an extension of time. Eventually the court held that:

“if the builder having the right to claim an extension of time fails to do so, it

cannot claim that the act of prevention which would have entitled it an extension of

time for Practical Completion resulted in its ability to complete by that time. A party

to a contract cannot rely upon preventing conduct of the other party where it failed

to exercise a contractual right which would have negated that effect of preventing

conduct.”This Australian case has decided that the failure of notice has caused the

contractor to lose the right for extension of time, as the conditions of the contract has

required a written delay notice as a condition precedent as the entitlement to EOT.

142 [1994] 13 BCL 378

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Another case law in Gaymark Investments Pty vs Walter Construction143

,

whereby. Gaymark Investments Pty Ltd (‘Gaymark’) entered into a modified NPWC

3 contract with Walter Construction Group Ltd (‘Walter’) to construct the Darwin

Central Hotel complex. The modified extension of time clause, SC 19.1 provided

that:

“the contractor was “only to be entitled” to an extension of time where (inter

alia) the cause of the delay arose out of “any breach of the provisions of the contract

or other act or omission on the part of the Principal, the Superintendent, or their

agents… and where the Contractor had complied strictly with the notices

required…”. In the contract clause, a written notice from the contractor is a

condition precedent to the entitlement of extension of time

Eventually, the employer was responsible for the a 77 days delay; however

the contractor did not submit the required EOT application and notice within 14 days

of the delay arising, and eventually the contractor lost his entitlement to extension of

time.

From here, these cases have demonstrated that if the contract stipulates the

notice is a condition precedent to the entitlement, contractor’s failure to do so will

be deprived of his entitlement. Hence, since PAM 2006 have stipulated that

submission of notice is a condition precedent for both claiming extension of time and

loss and expense, contractor’s right will be deprived and lost its entitlement if he do

not submit the notice within the stipulated time.

Similarly in CIDB 2000, submission of notice of claim for loss and expense

has been made a condition precedent to the entitlement, and failure of contractor to

submit notice will lost his right in the entitlement as well. However in the case of

extension of time, although submission of notice of claim for extension of time was

143 [1999] NTSC 143

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required, but the clause 24 CIDB 2000 does not stipulates the submission is a

condition precedent, and however clause 24.5 further explains that the S.O has his

absolute discretion to grant a fair, reasonable and necessary extension of time

notwithstanding the contractor has fail to submit notice of extension of time.

However, it is in the discretion of S.O, he may or may not grant the extension of time.

Contractor suspending works under CIDB 2000 and PAM 2006 has really to

aware the clause of “condition precedent”. Eventually non-payment is a breach by

the employer, and the contractor will be justified in suspension of work and enjoy his

entitlement such as claiming loss and expense and extension of time. It will be a

waste if the contractor has deprived and lost his rights in both extension of time and

loss and expense just for mere failure to submit notice of claims.

4.4 Possible Problem 3: Problems of Back-to-Back Provisions in Sub-

Contracts

Contractor should expect that when he suspends works due to non-payment

by the employer in the main contracts, he can temporarily suspend the sub-

contractor’s works as well, commensurate downstream and tie their subcontractors

on a “back-to-back basis” in the sub-contract agreement. Another possible problem

that may arise when contractor exercising suspension of work is that this back-to

back basis are not strong in its attempt to incorporate the main-contract terms

relating to suspension of work into the sub-contracts.

In the case of Chandler Bros Ltd vs Boswell144, The defendant (a contractor),

had contracted to divert a road for a county council, and, as incidental to that purpose

144 [1936] 3 ALL ER 179

98

to make a tunnel. The work of excavating for the tunnel was sub-contracted to a firm

called Chandler Bros. Chandler Bros was later turned into a limited company and a

receiver was appointed by the debenture holders. The receiver elected to complete

the sub-contract, but, hampered by lack of money, he was unable to proceed with the

work at the speed the contract required. The main-contract contained a clause giving

the engineers of the county council, if they were dissatisfied with any sub-contractor,

power to remove the sub contractor. Eventually the employer exercised this clause

and ordered the contractor to remove the sub-contractor.

Under the sub-contract, it contained a recital to the effect that the sub-

contractor agreed out the work in accordance with the terms of the principal contract.

Indeed the sub-contract expressly dealt with many matters in the contract, but the

sub-contract did not deal with contractor’s power to order the removal of the sub-

contractor. Since the sub-contract did not specifically give the main contractor a

power of removing sub-contractor, the main-contractor was placed in a dilemma

where he could commit a breach of sub-contract if he carried out the engineer’s

instruction to remove the particular sub-contractor, and if he did not followed the

employer’s instruction would commit a breach of the main-contract.

However, the contractor eventually chose to carry out instructions by

employer and purported dismissed the sub-contractor. The court of Appeal held that:

a) The main contractor was guilty of a breach of the sub-contract.

b) The recital only meant that the sub-contractor “was to provide work for the

quality and dispatch which was stipulated for in the head contract”. The

removal clause in main contract was not imported into the sub-contract.

Eventually learned from this case, a general stipulation providing that “all the

terms of the main contract are hereby incorporated in the subcontract” may somehow

not always be appropriate, and not enough. Back-to back provisions nevertheless

must be clear, direct, and do not incorporate any disambiguates in the sub-contracts.

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Fundamental issues easy arise between contractors and sub-contractors easily arise

because lack of precision as to the actual terms and conditions. Contractors

suspending works nevertheless ensure that he has the right to order the sub-

contractor to suspend works when he is suspending works. By looking at what we

have in sub-contracts such as PAM Sub-contracts 2006 and CIDB Nominated Sub

Contract 2002, and domestic sub-contract forms, study can be made whether

contractors will have problems exercising suspension of work which is directly

affecting the sub-contractors and domestic sub-contractors.

4.4.1 Back-to-back Provisions in PAM Sub-Contract 2006 (Nominated Sub-

Contract)

In PAM Sub-Contract 2006, back to back provisions have been incorporated

in sub-clause 26.16 (suspension of main Contract Works), which stipulates that:

“Where under the Main Contract, the contractor exercises his right to

suspend performance of his obligations, the Contractor shall so notify the sub-

contractor in writing and may direct the Sub-contractor to suspend performance of

the Sub-contract works. The Sub-contractor shall be entitled to an appropriate

extension of time under clause 21.0 and loss/or expense under clause 22.0”

This “back to back clause” of PAM Sub-Contract 2006 has incorporate well

what the main contract of PAM 2006 main contracts stipulate about suspension of

work, and eventually when the nominated sub contractor received notification of

writing by the contractor to suspend works, he is entitled for loss and expense and

extension of time.

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4.4.2 Back-to-back Provisions in CIDB Standard Form of Sub-Contract for

Nominated Sub-Contractor [Form CIDB.B (NSC)/2002]

CIDB Standard Form of Sub-Contract is not straight forward compared to

PAM Sub-Contract 2006 regarding to suspension of work. Contractors is allowed to

issue all instructions to the nominated subcontractors on matters relating to Sub-

contract as laid out in clause 4.2. In addition to that, clause 5.1 of the sub-contract

stipulates that the Nominated Sub-Contractor shall observe, perform and comply

with all provisions of the main contract on the part of the contractor to observe,

perform and comply with in so far as they relate and apply to the sub-contract works

or any part of the sub-contract works which are not repugnant to or inconsistent with

the provisions of the sub-contract. However, the stipulation of right of the main

contractor to order suspension of work towards sub-contractor is vague and not clear.

This scenario is almost the same with Chandler Bros Ltd vs Boswell145, whereby no

direct empowerment of the contractor to invoke suspension on nominated sub-

contractors, and the contractor may face problems exercising suspension of work the

contractor which is directly related with nominated sub-contract. He may face

problems to call-off the subcontractor to suspend performance regarding of those

purchase orders, retract the placement orders and equipment hire agreements to the

part of the works related to the main contractor’s right in suspension of works for

non-payment.

4.4.3 Back-to-back Provisions in Domestic Sub-Contracts

Since there is no formal draft and standard form of Domestic Sub-Contracts,

a quick study on “Model terms of Construction Contract between Contractor and

Subcontractor for Subcontract work” published by CIDB Malaysia has been made.

145 [1936] 3 ALL ER 179

101

However, a clear back-to-back provision of contractor suspending works is not

stipulated in the model contract. So far as concerned, only “termination clause” is

clearly stated out in this model subcontract. Suspension of work is not stipulated and

incorporated in this model term, nevertheless pose a potential problem for

contractors to commensurate suspension of work downstream towards domestic sub-

contractors.

4.5 Conclusion

This chapter has illustrated the possible problems that may arise when the

contractor suspends works against non-payment based on PAM 2006 and CIDB

2000. As discussed here, the first major problem that may arise when the contractor

suspends works is that his suspension of work is challenged by the employer based

on several grounds. From the cases discussed and analyzed here, when the contractor

suspends works, the employer can claim that the contractor’s notice of suspension of

work has been given “unreasonably and vexatiously”. Contractor governed by PAM

2006 and CIDB 2000 both have the risks being challenged based on this ground.

Next, employer can always challenge the validity of interim certificate as the ground

for non-payment. As suspension of work by the contractor is nevertheless in relation

to the validity of interim certificates, employer can argue that the interim certificates

is not valid for reason such as not properly issued by registered professional, wrong

in computation and amount, and even fraud and issued impartially by architect or

S.O. Nevertheless, employer may even hold that set-off is the reason for non-

payment, and contends that contractor is not entitled for suspension of work.

However in PAM 2006, the good news is employer is hard to set-off and limited to

the strict procedure as well as the expressio unius principle. In CIDB 2000, set-off is

not clearly mentioned however it does not prevent the contractor to set-off under

common law for contractor’s failure to comply to architect’s instruction, building

defects, late delivery, and etc.

102

The second major problem that contractor will face when suspend works is

that his entitlement in suspension work such as loss and expense and extension of

time is challenged for few reasons, such as failure to apply mitigation principle,

failure to use best endeavours or reasonable steps to prevent or reduce delay.

Nevertheless, contractors may even face the problems of losing his entitlement in

these claims when he does not submit claims which have been made condition

precedent in PAM 2006. Although in CIDB 2000 notice of application for loss and

expense is only made a condition precedent, however failure to submit notice for

extension of time will put the contractor at stake because the entitlement is at the

discretion of the S.O.

Finally, as suspension of work relates to sub-contractors as well, contractor

may face problems commensurate suspension of work downstream and tie their

subcontractor on back-to-back basis. Case law has demonstrated that without clear

and incorporation of terms from the main contract to the sub-contract, contractors

will be place at a dilemma and disputes are bound to happen. Eventually contractor

suspends works under PAM 2006 will have a good flow in suspending nominated

sub-contractor’s work as the power to suspend sub contractors has been incorporated

in PAM Sub-Contract 2006. On the other hand, CIDB.B NSC 2002 is vague and do

not expressly contain any wordings of this power, and contractors under CIDB will

face a big problem in suspending nominated sub-contractor. In Malaysia however,

there is still no standard form of domestic sub contracts, except the “Model terms of

Construction Contract between Contractor and Subcontractor for Subcontract work”

published by CIDB. However, this model do not expressly provides the power for

the contractor to suspend the domestic sub-contractors on a back-to-back basis.

With all these findings, eventually this research has reached its objective in

finding the possible problems when the contractor suspend works which have taken

into account the criteria such as employer to contractor basis, entitlements of

suspension of work itself, and contractor-subcontractor basis. These possible

problems can indirectly form a guideline for the contractor about the do’s and don’ts

in exercising suspension of work.

CHAPTER 5

CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter will summarize all the findings regarding to the possible

problems that the contractor will face when exercising his right in suspension of

works as remedy for non-payment based on PAM 2006 and CIDB 2000. Eventually

the extents of the problems that may arise are different based on different

construction contracts. In PAM 2006 and CIDB, to what extent the contractors in

facing every possible problem that may arise due to suspension of work have been

discussed and elaborated in chapter 4. However this chapter will once again

reorganize and illustrate the possible problems that may arise respectively in PAM

2006 and CIDB 2000 when the contractor exercise his rights in suspension of work.

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5.2 Summary of Research Findings

To put it in a nutshell, 3 major possible problems the contractor may face

while exercising suspension of works as remedy for non-payment are as below:

(a) Possible Problem 1: Challenges to contractor’s right in suspension of

works by the employer

� Employer can claim that contractor’s notice to suspend works is

“unreasonably” and “vexatiously” given. Contractor’s suspension of work can be

challenged on the ground that the notice is “unreasonably” given, which means that

the contractor has the intention to disadvantage the employer. Such notice also can

be challenged to be” vexatious”, which means the contractor has the ulterior motive

to harass, annoy, and oppressing.

� Suspension of work nevertheless is in relation to non-payment in the interim

certificates. Employers may challenge the validity of interim certificates as a basis

for non-payment. Case law has demonstrated that interim certificate can be

challenged for grounds such as: not properly issued by registered professional,

wrong in computation and amount, and even fraud and issued impartially by

architect or S.O.

� Employers nevertheless can argue his right to set-off under common law the

amount that ought to be paid to contractor. Case law has illustrated that contractor

can be set-off for reasons such as failure to comply to architect’s instruction, late

delivery, defective works in building.

(b) Possible Problem 2: Challenges to Contractor’s Entitlements in

Suspension of Works

� Nevertheless, contractor will face problems in entitlement in suspension of

work such as loss and expense and extension of time when these claims are

challenged for few reasons, such as failure to apply mitigation principle, failure to

105

use best endeavours or reasonable steps to prevent or reduce delay. In addition to that,

contractor may even face the problems of losing his entitlement in these claims when

he does not submit claims which is a condition precedent to the entitlement.

(c) Possible Problem 3: Problems of Back-to-Back Provisions in Sub-

Contracts

� Finally, as suspension of work relates to sub-contractors as well, contractor

may face problems commensurate suspension of work downstream and tie their

subcontractor without well-incorporate terms of back-to back provisons in the sub-

contracts. Case law has demonstrated that without clear and incorporation of terms

from the main contract to the sub-contract, contractors will be place at a dilemma

and disputes are bound to happen.

The extent to which these possible problems will arise when contractor

suspend works based on PAM 2006 and CIDB 2000 will be summarized here:

Possible Problems PAM 2006 CIDB 2000

(1) Challenges to contractor’s right

in suspension of works by the employer

(a) Notice to suspend is contended by the employer to be vexatious and unreasonable. (b) Interim Certificate is contended to be not valid due to fraud, architect acting not impartial, wrong in computation and amount, issued by unregistered professional. (c) Employer Set-off the amount in the interim certificate and held this reason for non-payment.

May Arise

May Arise

Hard to exercise set-off as the basis for non-payment, common law right of set-off is limited to express conditions in

May Arise

May Arise

May Arise (since the contract is silent about the restriction of set-off, and do not exclude the right to set-off,

106

contract in relation to the principle of

expressio unius

principle

common law right of set off is preserved)

(2) Possible Problem 2: Challenges

to Contractor’s Entitlements in

Suspension of Works

( Entitlements such as loss and expense and extension of time)

(a) Contractor was held for the failure to apply mitigation principle. (b) Contractor was held for the failure to take best endeavour to prevent or reduce delay. (c) Contractor was held for the failure to take reasonable steps to prevent or reduce delay. (d) Contractor was held for the failure to submit notice of application which is condition precedence for the entitlement of loss and expense.

(e) Contractor was held for the failure to submit notice of application which is a condition precedence for the entitlement of extension of time.

May Arise

May Arise -

May Arise

May Arise

May Arise

-

May Arise

May Arise

Depends on the discretion of S.O

(3) Possible Problem 3: Problems in

Back-to-back Provisions

(a) When contractor suspend works, contractor may find a dilemma order the Nominated Sub-contractor to suspend works as well because the sub-contracts do not incorporate the suspension terms from the main contract. (b) When contractor suspend works, contractor may find a dilemma order the Domestic Sub-contractor to suspend works because the sub-contracts do not incorporate the suspension terms from the main contract.

In PAM Sub-Contract 2006, clause 26.1 has express clause empowers the contractor to order the sub-contractor suspend works as well. This is a good example of back-to back provisions. There is no standard form of Domestic Sub-contracts. In the “Model terms of Construction

Problems may arise because no clear express terms that entitles the contractor to suspend the nominated sub-contractors. There is no standard form of Domestic Sub-contracts. In the “Model terms of Construction

107

Contract between Contractor and Subcontractor for Subcontract work” published by CIDB do not have express terms of empowering the contractor’s right to order domestic contractors to suspend works.

Contract between Contractor and Subcontractor for Subcontract work” published by CIDB do not have express terms of empowering the contractor’s right to order domestic contractors to suspend works.

5.3 Recommendation: Guidelines for Contractor Exercising Suspension of

Works

From the discussions made above regarding to possible problems that the

contractor may encounter when suspending works, the contractor can always take

note of the problems that may arise and take the correct moves in exercising this

right against non-payment by the employer. The guideline is illustrated below:

1) Contractor who intends to suspend works against non-payment must ensure

his notice to suspend works is in accordance with the contract. He must not submit

his notice of suspension “unreasonably and vexatiously” with the intention to

disadvantage the employer, or to harass, annoy and oppressing. Hence, the notice

must not be submitted too early before the stipulated time lapse during the employer

is given the time to do payment, and its best for him to include reasons for such

suspension to the employer so that the employer will not holding any grudge with the

contractor.

2) As employer may challenge the validity of interim certificate as not valid,

there is nothing much the contractor can really do except acting partially and do not

influence the architect in any issuance of interim certificates starting the beginning.

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3) Set-off can be held as a ground for non-payment by employer, hence the

contractor must assure his work is clean, free from defective works, had acted in

accordance with SO/architect instructions, etc. Although in PAM 2006 the set-off

procedures are strict and require the consent of contractor before the employer can

set-off, however in CIDB employer do remain the common law of set-off.

4) To fully enjoy his entitlement in suspension of work such as claiming loss

and expense for example, the contractor nevertheless must mitigate employer’s loss

as far as he could. He must realign and rearrange his work force, and retract his

machineries and equipments and properly manage them during suspension of work

so that no additional expense is occurred during such suspension of work. Next,

contractor nevertheless is advised to use his best endeavour (in PAM 2006) and take

reasonable steps (in CIDB 2000) to prevent or reduce any delay that may caused by

suspension of work. Finally, contractor should submit all notice of claims for loss

and expense or extension of time within time so that he will not lose his entitlement

in these claims.

5) As suspension of work directly relates to sub-contractor, contractor who

suspends works nevertheless must ensure there are express provisions in the sub-

contract to empower him to suspend sub-contractor’s work as well as a back-to-back

basis. However, the express term in PAM Sub-Contract 2006 is clear; while on the

other hand CIDB.B NSC 2002 it is vague and not clear. Since there is no standard

form of Domestic Sub-contract form, when drafting of agreement is made contractor

nevertheless must ensure the incorporation of suspension of work terms in the main-

contract is made in the Domestic subcontract as well. Contractor must reminded

again that the “Model terms of Construction Contract between Contractor and

Subcontractor for Subcontract work” a published by CIDB do not provide a back-to

back basis which empowers the contractor to order domestic sub-contractor to

suspend work as well.

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5.4 Conclusion

Suspension of work has been regarded as a self help-remedy that enables the

contractor to take actions against non-payment by the employer without having to go

through routes of remedies that is time consuming and painful for the contractor.

However over the years barely no case law that can demonstrate and provide

information about the problems that the contractor may encounter when suspending

works, this research has shed a light in exposing what are the possible problems that

the contractor may encounter when exercising his right in suspending works against

non-payment based on discussions in PAM 2006 and CIDB 2000.

In nutshell, problems that may arise consist of contention by the employer,

challenges in the entitlements of suspension of work, and the difficulties to

commensurate order downstream (subcontractors) has been discussed in this chapter

and nevertheless the extent of the problem that may arise based on PAM 2006 and

CIDB 2000 has been discussed as well. With confidence, not only the virtue of this

research is capable of answering possible problems arise in exercising this right, at

the same time it is able to shed a light to the contractors in the do’s and don’ts while

exercising suspension of works.

5.5 Limitation of the Research

Discussions regarding to the right of suspension of work for non-payment is

very limited to what we have in Malaysia and can only be done on PAM 2006 and

CIDB 2000 for building works. As mentioned in the discussion, suspension of work

is one of the contents in our Malaysian Proposed Malaysian Construction Industry

Payment and Adjudication Act. However it is almost impossible to widen the

research and discussion of suspension of work which can be further discussed based

110

the Proposed Malaysian Construction Industry Payment and Adjudication Act, as

this proposed act is not available in library, internet, unless obtained from the

drafters.

5.6 Suggestion for Further Research

Since there is no standard form of domestic subcontract in Malaysia and the

“Model terms of Construction Contract between Contractor and Subcontractor for

Subcontract work” as published by CIDB somehow do not have a back-to back

suspension of work, further research can be made study how to incorporate the

suspension of work in domestic subcontracts effectively.

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