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.
vii
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.
8
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
75
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
80
'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
82
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.
83
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.
91
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
97
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.
99
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.
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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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