Is a quotation sufficient to claim for remedial / defective works? Or do you need to ACTUALLY incur the cost of repair?
By KELVIN NG CY (fMIArb) (fSIArb) (MCIArb)
Imagine this scenario: You are an employer. You engaged a contractor to carry out building works. There is defect on his work. He fails or refuses to rectify it. Left with no alternative, you intend to engage another to carry it out. This new contractor gives you a quote for the remedial work. It will cost you some money. Can you file an action in court to claim for the cost prior to carrying out the remedial work? Or must you expand that cost first?
The case of Ang Ban Giap
In Ang Ban Giap v Worldwide Holdings Bhd & Anor  8 MLJ 669, the plaintiff entered into a sale and purchase agreement with the 1st defendant for the purchase of a new bungalow. The 2nd defendant was the vendor’s solicitors. They were holding some of the purchase money as stakeholders’ sum under the SPA.
Clause 25 of the SPA is in relation to defect liability period. It says that any defects shall be made repaired and made good by the 1st defendant within 30 days from them receiving a written notice from the Purchaser within the DLP. Clause 25 further provides that if the 1st defendant fails to remedy the defects:
“… the Purchaser shall be entitled to carry out the works to repair and make good the said defect, shrinkage or other faults himself and ‘to recover’ from the Vendor the costs of repairing and making good the same and the Purchaser may deduct such cost from any sum which has been held by the Vendor’s solicitors as stakeholders for the Vendor under item 5 of the Third Schedule provided that the Purchaser shall, at any time after the expiry of the said period of thirty (30) days, notify the Vendor of the costs of repairing and making good the said defect, shrinkage or other faults before the commencement of the works and shall give the Vendor an opportunity to carry out the works himself within fourteen (14) days from the date the Purchaser has notified the Vendor of his intention to carry out the said works and provided further that the Purchaser shall carry out and commence the said works as soon as practicable after the Vendor’s failure to carry out the said works within the said fourteen (14) days. …”
The plaintiff discovered defects in his bungalow. He wrote to the 1st defendant giving him notice to remedy the defects. When the 1st defendant failed to do so, the plaintiff engaged a 3rd party contractor to estimate the cost of the remedial works. The plaintiff only proceeded with some of the works. He did not proceed with the rest because of the high costs involved. The plaintiff commenced a suit for among others, the balance of the rectification costs. He also claims against the 2nd defendant to release to him the stakeholder’s sum under clause 25.
The High Court dismissed the plaintiff’s claim. The reason by the Court is that the plaintiff can only make a claim if he fulfils his contractual obligation to carry out and complete the rectification works. The court emphasised that merely submitting a quotation for the cost of rectification does not qualify under clause 25.
The Court drew the meaning of the word ‘recover’ which is ‘to get back something lost or spent’. His Lordship took a strict and literal interpretation of clause 25 in that “that the key words ‘recover’ and ‘deduct’ in the cl 25(2) are sufficiently clear in their meaning that the plaintiff needs to complete the rectification works first, before he is entitled to recover and deduct the cost of repairing and making good the defects, shrinkages or other faults from the sum held by D2 as stakeholder for D1” .
Yet the decision in Ang Giap is not consistent with past precedents which allowed a claimant to claim for remedial works which have yet to be carried out:
In Komala Devi a/p M Perumal v Bandar Eco-Setia Sdn Bhd & Anor  MLJU 719, Lim Chong Fong JC (as his Lordship was formerly known) allowed the plaintiff’s claim for rectification of defective works based on a quotation. Like in Ang Giap, these remedial works have yet to be carried out. This case also concerns a contract with a defect liability clause that uses the word “recover”:
- Defect Liability Period
(1) Any defect, shrinkage or other faults in the said Building which shall become apparent within a period of (18) calendar months after the date the Purchaser takes vacant possession of the Building to which water and electricity supply are ready for connection to the said Building, and which are due to defective workmanship or the material or the said Building not having been constructed in accordance with the plans and descriptions as specified in the Second and Fourth Schedule as approved or amended by the Appropriate Authority, shall be repaired and made good by the Vendor at its own cost and expense within (30) days of it having received written notice thereof from the Purchaser and if the said defect, shrinkage or other faults in the said Building have not been made good by the Vendor, the Purchaser shall be entitled to recover from the Vendor the costs of repairing and making good the same and the Purchaser may deduct such costs from any sum which has been held by the Vendor’s solicitors as stakeholder for the Vendor...”
See also Quah Ban Poh v Dragon Garden Pte Ltd  2 MLJ 159, Portland Arena Sdn Bhd v Sime Darby Property Bhd  10 MLJ 1 which allowed claims for rectification works based on quotation although the exact clauses are not mentioned in these two cases.
PAM 2006 Conditions of Contract
Clause 15.4 of the PAM 2006 Conditions of Contract uses a different, albeit similar, phrase than that in clause 25 of Ang Giap:
“… If the Contractor fails to attend to the Defects, the Employer may, without prejudice to any other rights and remedies which he may possess under the Contract, employ and pay other Person to rectify the Defects and all costs incurred shall be set-off by the Employer under Clause 30.4. …”
The expression in the PWD 203 form also uses the phrase “the costs incurred …shall be deducted from any money due or to become due”.
It can be suggested that the operation is PAM and PWD is only limited to instances where the employer intends to use the cost for purposes of set off alone under the respective clause.
It is suggested that one has to look at the exact and precise terms of their respective contract to decide if they can claim for remedial works based on a quotation.
Is LAD conclusive? Does an employer have to proof he /she suffered actual losses? Can a party challenge it?
By KELVIN NG CY (fMIArb) (fSIArb) (MCIArb)
Almost every construction contract comes with a LAD clause: i.e. where a party fails to complete the works by an agreed date, the other party is entitled to impose a sum payable by the defaulting party. It is calculated in the following formula: [RM …. / day ] x [no. of days until the completion is achieved]
Is this amount or rate conclusive? Can the employer rely on the rate in the contract or must he still proof his actual loss?
The law in Selva Kumar
Prior to Cubic Electronics Sdn Bhd (in Liquidation) v Mars Telecommunications Sdn Bhd  2 CLJ 723, the law was this: an innocent party in a contract that has been breached, cannot recover simpliciter the sum fixed in a damages clause whether as penalty or liquidated damages. He must prove the actual damage he has suffered unless his case falls under the limited situation where it is difficult to assess actual damage or loss.
This was the principle laid down in Selva Kumar Murugiah v Thiagarajah Retnasamy  1 MLJ 817.
The facts of Cubic Electronics
Cubic Electronics (“Cubic”) owned a plant and machineries which were put up for sale by way of an open tender. Mars Telco (“Mars”) made an offer to purchase the property and machineries at RM80million and RM 10 million respectively. The terms of the tender state that all offers must be accompanied by an earnest deposit of 2% and 10% of the offer price for the property and machineries respectively. It also contained a term that the sale and purchase agreement must be executed within 30 days failing which the earnest deposits will be forfeited as agreed liquidated damages and not by way of penalty.
Mars did not execute the SPA within time and sought for extension. Cubic allowed for extension of time on condition that Mars pay a further earnest deposit of RM500,000.00. Cubic cautioned Mars that in the event Mars failed to comply with the deadline, the earnest deposit would be forfeited as agreed liquidated damages.
There were another 2 more extensions granted by Cubic on condition of further earnest deposits to be paid. By then Mars had paid RM 3 million as earnest deposit and RM 40,000.00 as interest.
When Mars failed to pay the balance purchase sum by the extended date, Cubic terminated the sale and forfeited the whole RM 3.04 million.
Decision of the Federal Court in Cubic Electronics
Cubic Electronics departed from that the law in Selva Kumar. The Federal Court held that there is no necessity for proof of actual loss or damage in every case where the innocent party seeks to enforce a damages clause.
The Federal Court also reversed the burden of proof. In summary:
- The initial onus lies on the party seeking to enforce a clause under section 75 of the Act to adduce evidence that firstly, there was a breach of contract and that secondly, the contract contains a clause 54 specifying a sum to be paid upon breach.
- Once these two elements have been established, the innocent party is entitled to receive a sum not exceeding the amount stipulated in the contract irrespective of whether actual damage or loss is proven, subject to (c) below
- If the defaulting party disputes the reasonableness of the compensation, the burden of proof falls on him or her to show that the damages clause is unreasonable or to demonstrate from available evidence and under such circumstances what comprises reasonable compensation caused by the breach of contract;
- Failing to discharge that burden, or in the absence of cogent evidence suggesting exorbitance or unconscionability of the agreed damages clause, the compensation stipulated in the contract ought to be upheld.
The decision of Cubic Electronics was published on 21.11.2018.
The Court of Appeal in So Lian Yee
On 4.1.2019, the Court of Appeal heard So Lian Yee (trading in the name and style of Goldwell Trading) v China Railway Engineering Corp (M) Sdn Bhd & Anor  3 MLJ 115 CA
The respondents were JV partners in a railway rehabilitation project in Sabah. They appointed the appellant as the subcontract for the earthworks and drainage works. The appellant claimed from balance of unpaid work including retention sum. The 1st respondent counterclaimed for defective works and LAD arising from delay. On the issue of LAD, the high court ordered the appellant to pay LAD to the 1st respondent. However, the Court of Appeal reversed this decision.
The reason for doing so was because the Court of Appeal held the 1st respondent had failed to prove the LAD under section 75 of the Contracts Act 1950. The Court of Appeal followed the principles in Selva Kumar. The Court did not refer to the Federal Court’s decision in Cubic Electronics.
Where do we go from here?
Despite So Lian Yee being decided after Cubic Electronics, it is the author’s view that the decision in Cubic Electronic is binding. The latter is decided by the apex court of the land. Judicial precedent means that latter cases must follow Cubic Electronics unless and until it is over turned in a subsequent Federal Court decision.
Exploring the contractor’s right to Suspending and/or Slowing down Works for non payment
There is a saying that cashflow is the lifeblood of the construction industry. Though cliché, the significance of that is evident to all in the industry. When there is no payment from the employer to the contractor when due (or contractor to the subcontractor), what recourse does a contractor have? Regardless, if it is because the certifier fails to issue payment certificate or despite there being a certificate, the employer fails to pay according to the same – the consequence to the contractor is the same: he is not getting paid. Short of terminating the contract, can the contractor stop work in the middle of the project until he is fully paid what is due? Or can they slow their progress down? (termination is a drastic recourse. Whilst it has its own advantage and disadvantages, that topic falls outside the ambit of today’s discussion)
To what extent ‘pay when paid’ clause applies to construction contracts?
“The Main Contractor shall make payments to the Sub Contractor within x no. days from the date they receive payment from the Employer”
The example above is an all too familiar clause found in many construction contracts from the main contractor to its subcontractors. It fundamentally provides that the Sub Contractor will get his payment only upon the Main Contractor getting paid from the Employer. In the construction industry, this is known as a “pay when paid” clause.
It makes the Sub Contractor’s right to being paid conditioned upon the Main Contractor receiving the payment from the Employer, usually in respect of the Sub Contractor’s portion. If the Employer does not pay the Main Contractor, then the Sub Contractor’ cannot insist on his right to get paid.
Such clauses put tremendous risk on the Sub Contractor. They have already undertaken the resources to perform the subcontract work. Now they are forced to bear the risk of not getting paid if the Employer fails to pay or delays payment to the Main Contractor, or worse, goes into liquidation.