Anda di halaman 1dari 7

A rticles

CONSTRUCTION CONTRACT & MANAGEMENT ISSUES

The following are the sub-headings to the contents of


this article;

• Introduction

• Distinction between Determination and Termination

• Common Law Termination

• Contractual Determination / Termination

• Termination for Convenience

• Can Determination or Termination occur when the


Works is substantially completed ?

• Conclusion

In this third quarter issue of Master Builders Journal for • References / Bibliography
2010, BK Burns & Ong Sdn Bhd, a subsidiary of BK Asia
Pacific, a regional group providing project, commercial We shall first explain the distinction or difference
and contractual management services joins with Entrusty between the terms “Determination” and “Termination”
Group, a multi-disciplinary group, collectively named in construction contracts, then examine and review the
as BK Entrusty, presents a new series of contract and common routes of termination existing in the laws of
management articles in construction related areas of Malaysia, followed by the pertinent contractual clauses on
project, commercial, contracts, risks, quality and value, determination and/or termination in the standard forms
on “Can the Contractor’s employment be determined or of construction contract commonly used in Malaysia.
its contract terminated upon substantial completion of
the Works ?” Distinction between Determination and Termination

Introduction One of the common problems in the construction industry


which often has serious implication on the project and the
The construction industry is a complex industry with parties concerned is the determination of the Contractor’s
many parties involved in its process and operations, often employment under the contract or termination of the
brought together to work for a particular project. Due to construction contract. The Contractor’s employment
its multi- faceted nature and involvement of numerous can be determined or a construction contract can be
parties, disputes are often inevitable. One common dispute terminated by an express term in the contract such as
in the construction industry is the issue of ‘determination’ determination/termination clauses, or termination at
of the Contractor’s employment or termination of the common law.
contract by the Employer or the Contractor itself.
Termination is not the same as Determination. It is the
In this article, BK Entrusty aims to provide readers with Contractor’s employment which is determined, not
an overview and understanding of this pertinent issue terminated, whereas a contract can be terminated, but not
as to whether the employment of a Contractor (or even determined. When the employment of the Contractor has
Sub-Contractor) can be determined or its contract (or been determined, the procedures, mechanisms and forms
Sub-Contract, as the case may be) terminated when of recovery and remedies are as provided in accordance
the progress and/or stage of the Works is substantially with the provisions of the contract. On the other hand,
completed. when a contract has been terminated, then such recovery

Master Builders Vol 3 | 2010


64
A rticles

and/remedies are to be dealt with outside the contract From the foregoing two judicial decisions, it can be noted
i.e. at law, when there is no express provision under the that not every breach gives rise to an entitlement to
contract. terminate the contract. Only repudiatory breach that
goes to the root of the contract will entitle the innocent
party to terminate the said contract, if the innocent party
accepts such repudiation by rescinding the contract.
Further reading on the distinction
between Determination and Termination In Malaysia, a contract can be terminated in law under
Section 40 of the Contracts Act 1950, which reads:
can be found in the past MBAM Journal
article by Entrusty on “Is Determination “When a party to a contract has refused to perform,
Of Employment And Termination Of or disabled himself from performing, his promise in its
Contract The Same In Meaning And entirety, the promisee may put an end to the contract,
unless he has signified by words or conduct, his
Implications” published by MBAM. acquiescence in its continuance.”

Contractual Determination / Termination


Common Law Termination
Most construction contracts whether in bespoke forms or
standard forms of contract, would normally incorporate
The termination of contract at common law occurs
an express provision and/or clause, setting out the parties’
when a valid and enforceable contract is brought to an
rights and remedies in the event of determination of the
end either by it becoming impossible to perform due to
Contractor’s employment or termination of the contract.
unforeseeable circumstances at the time the contract was
formed or by the actions of one or both parties.
Clauses 25 and 26 of PAM 2006 Standard Form of Building
Contract provide for the determination of the Contractor’s
In Teh Wan Sang & Sons Sdn Bhd v See Teow Chuan
employment by the Employer and the determination of
[1984], the High Court held that:
its own employment by the Contractor, respectively.
“A repudiation in advance by one party to a contract,
Similarly, Clauses 44 and 45 of CIDB 2000 Standard Form
that he will not perform it before the arrival of the time
of Contract for Building Works provide for determination
for the performance by the repudiating party, does not,
by the Employer and determination by the Contractor,
by itself, amount to a breach of contract, though it may
respectively.
optionally be, of course, regarded as such a breach by
the other party in treating it as at an end.”
In PWD Form 203 (Rev.2007), Clauses 51, 52 and 53
respectively provide for termination by the Employer, as
In Ching Yik Development Sdn Bhd v Setapak
follows;
Development Sdn Bhd [1996], the High Court held
that:
• based upon events and consequences of default by
the Contractor;
“… where the term that has been flouted is fundamental
to the contract, the innocent party is entitled to treat • on national interest; and
himself as being discharged from further obligations
under it. But where the obligation that has been breached • on corruption, respectively.
is only subsidiary or minor in nature, the innocent party
may not treat himself as being free of his obligations It is to be noted that although PWD Forms only provide
under the contract, although he may sue and recover for termination of contract, they envisage the procedures,
damages for the non-performance of the subsidiary mechanisms and forms of recovery and remedies to be
term … A party who terminates a contract or treats it as within the contract, and not outside the contract. There
having come to an end in reliance upon the breach of a is no express provision for termination by the Contractor,
non-fundamental term is himself guilty of a breach of a hence any termination by the Contractor can only be
contract.”

65 Master Builders Vol 3 | 2010


A rticles

done at law, unless the disputing parties agree to a mutual 28 days after the later of the dates on which the
termination. Contractor receives this notice or the Employer
returns the Performance Security. The Employer
Termination for Convenience shall not terminate the Contract under this Sub-
Clause in order to execute the Works himself or to
Termination for Convenience clauses are predominantly arrange for the Works to be executed by another
used by Employers to unilaterally terminate a contract Contractor.”
without having to prove default of the Contractor. Such
clauses have been held by courts to be enforceable, As can be seen from the aforementioned clauses, the
provided that the termination is done in good faith and Employer has been given a unilateral power to terminate
is not fraudulent. the contract without the necessity to cite reason/s in
support for the termination.
The following standard forms of construction contracts
In the case of Bains Harding (Malaysia) Sdn Bhd v
used locally and internationally have express provisions
Arab-Malaysian Merchant Bank Bhd & Others [1996],
for Termination for Convenience by the Employer;
the Court had discussed at length the issue of good faith
in the exercising of such termination of convenience
Clause 46.1 of CIDB 2000, which reads, as follows;
provided under the contract.
“Clause 46.1 Right of the Employer to Terminate
Can Determination or Termination occur when the
Works is substantially completed?
The Employer may at any time, give to the
Contractor 30-Day notice of termination of
From the foregoing discussion, it is clear that determination
the Contract. Upon the expiry of 30 Days from
and/or termination can be effected through provisions in
the receipt of such notice the Contract shall be
the contract based upon specific and/or relevant events
terminated.”
of default by the Contractor such as Clause 25 and 26
of PAM 2006 and Clause 51, 52 and 53 of PWD 2007,
Clause 52.1 of PWD Form 203A (Rev. 2007) and Clause 62.1
respectively. However, the position can be ambiguous
of PWD Form DB (Rev. 2007), which reads, as follows;
under the standard forms of conditions of contract as to
whether the Contractor’s employment can be determined
“Termination and/or its contract terminated when the Works has been
substantially completed by the Contractor.
a) Notwithstanding any provision of this
Contract, the Government may terminate In order to answer the aforesaid question, the issue that
this Contract by giving not less than thirty needs to be first identified would be whether the contract
(30) days written notice to that effect to the and/or agreement between the parties were a divisible
Contract (without any obligation to give any or entire contract. Chitty on Contracts (23rd Edition)
reason thereof) of the Government considers Volume 1 states in paragraph 1147, as follows:
that such termination is necessary for national
interest, national policy or national security.”
“In an entire contract, complete performance by a
party is a condition precedent to the liability of the
In a reputable and common international construction other; in such a contract the consideration is usually
contract, FIDIC, Clause 15.5 of FIDIC 1999 Conditions of a lump sum which is payable only upon complete
Contract for Construction of Building and Engineering performance by the other party. The opposite of
Works designed by the Employer, provides that; an entire contract is a divisible contract, which
is separable into parts, so that different parts of
“Clause 15.5 Employer’s Entitlement to Termination the consideration may be assigned to severable
parts of the performance, e.g., an agreement for
The Employer shall be entitled to terminate payment pro rata. It is a question of construction
the Contract, at any time for the Employer’s of the contract whether it is entire or divisible, but
convenience, by giving notice of such termination in the reported cases (none of which is of recent
to the Contractor. The termination shall take effect date) the courts have tended to the view that in

Master Builders Vol 3 | 2010


66
A rticles

every lump-sum contract there is an implied term From the foregoing judicial decisions, it is evident that a
that no part of the price is to be recovered without lump sum contract is construed to be an entire contract
complete performance. In most modern contracts where the complete performance by one party is a
of any size, however, payments by instalments are condition precedent to the right to call for the fulfilment
specified, so that the law on entire contracts is of the contractual obligations of the other party under the
not often relevant to contracts nowadays.” contract. However, a lump sum contract with an express
provision for interim progress payment, does not require
In the case of Hoenig v Isaacs [1952], the court held the Contractor to entirely complete his performance of
that: the Contract before being paid by the Employer. Such
contracts are divisible contracts as opposed to an entire
“… first question is whether, on the true or a lump sum contract.
construction of the contract, entire performance
was a condition precedent to payment. It was a A Contractor would not be entitled to any payment, even
lump sum contract, but that does not mean that partially, if construction contracts are entire contracts,
entire performance was a condition precedent to if the works are not fully completed. Therefore, the
payment. When a contract provides for a specific strict application of the rule of complete and/or entire
sum to be paid on completion of specified work, performance may result in injustice to the Contractor,
the Courts lean against a construction of the particularly when he had substantially performed the
contract which would deprive the contractor of contract but has not completed or reached the stage of
any payment at all simply because there are some full performance yet, such as minor or inconsequential
defects or omissions. The promise to complete defects or omissions.
the work is therefore construed as a term of the
contract, but not as a condition. It is not every As a result of the legal difficulties in the rule of entire
breach of that term which absolves the employer contracts, the doctrine of substantial performance
from his promise to pay the price, but only a breach had evolved to allow the Contractor to recover the
which goes to the root of the contract, such as contract price but subject to it being adjusted to allow
an abandonment of the work when it is only half for deductions of any cross claims for defective works
done. Unless the breach does go to the root of the and the value of the portion of the works that had not
matter, the employer cannot resist payment of been performed.
the price. He must pay it and bring a cross-claim
for the defects and omissions, or alternatively set What is called “substantial completion” or commonly
them up in diminution of the price. The measure known as “practical completion” in the construction
is the amount which the work is worth less by industry usually occurs when the Superintending Officer
reason of the defects and omissions, and is usually (hereinafter referred to as “SO”) is of the opinion that the
calculated by the cost of making them good.” works had been substantially completed and so certifies
to that effect. This will trigger the start of the defects
In the High Court’s decision of Ming & Co v Leong Ping liability period and the Contractor can secure the release
Ching [1964], it was held that: of the first half of the retention money.

“… an entire contract is one in which the entire The term ‘substantial completion’ is however not explicitly
completion of the work by the contractor is a stated in most forms of standard construction contract,
condition precedent to payment. A contract in including PAM 2006 or in PWD Forms. Consequently, one
respect of which progress payments are made will need to look to common law for its definition.
from time to time … is not an entire or lump sum
contract …” In Hoenig v Isaacs [1952], Lord Justice Denning (as he
then was) said that,
Further, the Federal Court in Tan Hock Chan v Kho
Tech Seng [1980], held that: “…under the doctrine of substantial performance,
a promisor who has substantially performed his
“… contract is clearly not a lump sum contract, in side of the contract may sue on the contract
view of the provision for progress payments: Ming for the agreed sum, although he remains liable
& Co v Leong Ping Ching [1964] …”

Master Builders Vol 3 | 2010


68
A rticles

in damages for his partial failure to fulfil his “… where a contract has been substantially
contractual obligations.” performed, the test was substantial performance
and not whether the defects were of such a trifling
From the aforesaid doctrine, it is apparent that the nature that they could be disregarded under the de
promise to complete the work is construed as a term minimis rule and in considering whether there had
of the contract as opposed to a condition. Therefore, been substantial performance it was relevant to
if substantial performance of the contract does not take into account both the nature of the defects
contribute to the partial failure to fulfil the Contractor’s and the proportion between the cost of rectifying
contractual obligations that goes to the root of the them and contract price.”
contract, termination of the contract may not be
possible. In addition to the above and as reported in the book of
‘Contract Law in Malaysia’, in Shipton, Anderson & Co v
From the aforesaid judgment, it is clear that the doctrine Weil Brothers & Co [1912] where there was a contract
applies only to cases and/or circumstances where there has for the sale of a cargo of wheat. The contract provided
been part or substantial performance to the contractual for the delivery of not more than 4,590 tons. The plaintiff
obligations under the contract or where only a minor delivered a surplus of 55 pounds, not claiming for the
part of the contract is incomplete or where performance surplus, but the defendant buyer rejected the whole
is defective. It has no application when there has been no cargo. The court held that:
performance at all.
“… the excess was so trifling that it could be
In a Singapore High Court case of Sapiahtoon v Lim ignored.”
SiewHui [1963], Buttrose J held that:
From the foregoing judicial decisions, it is apparent that
“… upon its true construction, the agreement substantial performance had been achieved.
between the parties was an agreement … for a
lump sum … and that under the exact or strict It is also evident from judicial decisions, as described
performance rule, it would be necessary for the hereinafter, that de minimis defective works do not
defendant to show that he had performed his amount to abandonment and/or refusal to perform the
obligations fully and completely … But the rigour contract. It is merely a carelessness and/or negligence
of the exact performance rule is mitigated by insofar as workmanship is concerned.
the doctrine of substantial performance … the
defendant was entitled to the $1,500 withheld In the English Court of Appeal’s case of H Dakin & Co
by the plaintiff subject to the plaintiff’s claim for Limited v Lee [1916], Lord Cozens-Hardy MR dealt with
the cost of completing the building … as well as the case, as follows;
remedial work …”
“… in a contract … for a lump sum, the defect in
The next issue that required to be examined would be some of the items in the specification, or the failure
whether the contract can be terminated if the Contractor to do every item contained in the specification,
had substantially completed its contractual obligations puts an end to the whole contract, and prevents
under the contract, where works or defects of a minor the builders from making any claim upon it; and
nature are still to be executed? therefore, where there is no ground for presuming
any fresh contract, he cannot obtain any payment.
The strict application of the rule of complete performance
The matter has been treated in the argument as
would mean that the party could reject such performance,
though the omission to do every item perfectly
when there are trivial deficiencies. However, it is not the
was an abandonment of the contract. That seems
position of the law as such a circumstance is relieved by
to me, with great respect, to be absolutely and
the legal maxim of de minimis which means that ‘the law
entirely wrong …”
does not concern itself with trifles’.
In another Court of Appeal’s case of Young (t/a All
In the case of Bolton v Mahadeva [1972], the English
Counties Tarmacadam) v Thames Properties Ltd and
Court of Appeal indicated that:
Another [1999], the Court held that:

69 Master Builders Vol 3 | 2010


A rticles

“… as one of negligence and bad workmanship, and In view of the above, Employers must exercise with care
not as a case where there has been an omission and be absolutely sure with respect to determination of
of any one of the items in the specification. The employment or termination of a construction contract
builders … had done all that was intended to be when it reaches the stage of substantial completion,
done in reference to the contract; and I suppose otherwise the Employer determining or terminating can
the defects are due to carelessness on the part of be in repudiatory breach situation and liable for damages
some of the workmen or of the foreman: but the on wrongful termination.
existence of these defects does not amount to a
refusal … to perform part of the contract …” In the next issue of the MBAM journal, BK Entrusty article
will deal with a common contractual issue on “What is
Further, Pickford L J agreed and said in his judgment: Head Office Overheads claim ?”

“… I cannot accept the proposition that if a man References/Bibliography


agrees to do a certain amount of work for lump
sum every breach which he makes of that contract
1. Chitty on Contracts (23rd Edition) Volume 1.
by doing his work badly, or by omitting some small
portion of it, is an abandonment of his contract
2. Sir Anthony May, Adrian Williamson & John
…”
Uff, ‘Keating On Building Contracts’ (6 Edition)
1995.
From the foregoing judicial decisions, it is obvious that in
a situation where a Contractor has committed de minimis
3. John Uff, ‘Construction Law’ (Ninth Edition)
defective works when its works reached the stage of
2005.
substantial completion, the Employer may not be able to
terminate the contract in the absence of a contractual
4. Sundra Rajoo, Dato’ WSW Davidson &Ir Harban
provision entitling the Employer to do so.
Singh KS, ‘The PAM 2006 Standard Form of
Building Contract’ 2010.
The remaining question is whether the Employer
can terminate the contract with a “termination for
5. Krishnan Arjunan, Abdul Majid bin NabiBaksh,
convenience” clause when the physical works on site have
‘Contract Law in Malaysia’ (2008).
reached the stage of substantial completion. The answer
may lies in whether the termination was exercised in bad
faith such as when the termination was for the purpose 6. Entrusty Group, ‘Is Determination Of Employment
of avoiding paying for the balance of the profit on the And Termination Of Contract The Same In
remaining works. Such termination will constitute as a Meaning And Implications ?’, Master Builders
breach of contract and wrong at law. Journal (2nd Quarter 2008), MBAM.

Conclusion

Substantial completion of Works for a construction


contract certainly constitutes incomplete fulfilment
of the Contractor’s contractual obligations under the
contract. However, whether it is a ground for termination
or determination is very much dependent on the Entrusty Group is a multidisciplinary group of companies
intention/action of the contracting parties. In common which comprises Entrusty Consultancy Sdn Bhd (formerly
law termination, substantial completion with de minimis known as J.D. Kingsfield (M) Sdn Bhd), BK Burns & Ong
defective works may not be sufficient for the Employer Sdn Bhd (a member of BK Asia Pacific Ltd, Hong Kong),
to rescind or terminate the contract unless the breach Pro-Value Management Sdn Bhd (in association with
is so serious and fundamental that goes to the root of Applied Facilitation & Training, Australia) ,International
the contract, such that the Employer cannot use it for its Master Trainers Sdn Bhd (in association with Master
intended purposes. Trainer of New York), Agensi Pekerjaan Proforce Sdn
Bhd, Alpha-Omega Matrix and Entrusty International

Master Builders Vol 3 | 2010


70
A rticles

Pte Ltd. The Group provides comprehensive consultancy, • One Day or Two Days Intensive Seminar (with
advisory and management services in project, commercial, workshop) on Practical Construction Claims in
contracts, construction, facilities, risks, quality and Malaysia.
value management, cost management, executive
search/personnel recruitment and corporate training/ • 10 Half Day or 5 Full Day Modules on Practical
seminars/workshops to various industries particularly in Construction Contract Administration / Management.
construction, petrochemical, manufacturing and IT, both • One Day or Two Days Intensive Training (with
locally and internationally. For further details, visit www. workshop) on Value Engineering / Management.
entrusty.com.
• International / Accredited Value Management
Programmes.

• ISO 9001:2008 Training.

• One Day Seminar on “Doing The Right Things


Right”.

• Motivation, Train-The-Trainer and NLP programmes.


BK Asia Pacific is group of companies incorporated in the
Asia Pacific Region providing a comprehensive network
of project management, commercial and contract
management services to the international construction
industry, with offices in Cambodia, China (Hong Kong,
Shanghai), Malaysia, Philippines, Singapore, Thailand,
Vietnam, United Kingdom and United Arab Emirates. For
further details, visit www.bkasiapacific.com.

BK Entrusty provides 30 minutes of free consultancy


(with prior appointment) to MBAM members in the areas
of project, commercial, contracts, risks, quality and value
management, For enquiries, please contact HT Ong at BK
Entrusty, 22-1& 2 Jalan 2/109E, Desa Business Park, Taman
Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123
Fax: 6(03)-7982 3122 Email: htong@entrusty.com.my or
htong@bkasiapacific.com

Public Seminars

• Claims Preparation and Management

• Certifications and Payments

• Time and Monetary Claims

• Common Contractual Issues / Problems in


Malaysia

• Pertinent Contractual Provisions in Construction


Contracts

• Recent Construction Contract case law in


Malaysia

Public/In-house Training Programmes

• Effective Project or Contract Administration /


Management.

71 Master Builders Vol 3 | 2010