CIPAA 2012, Contract Law and You
CIPAA 2012, Contract Law and You
CIPAA 2012, Contract Law and You
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Litigation is the civil action initiated in courts and the outcome is decided by the Judge. It
is typically complicated and involves high value matters and are brought before a Judge
who draws on the depths of available legal knowledge and precedents, with the
assistance of opposing lawyers, to make a decision within the rigid legal procedural
structure. It is therefore easy to see why litigation is costly and of considerable length.
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dealing with a lorry load of payment claims arriving at the doors of its various ministries
and agencies once the Construction Industry Payment & Adjudication Act 2012 ("CIPAA
2012") comes into effect. It is envisaged that the exemption card may be played by the
Government, albeit selectively initially, to minimize the claims arising from payment
disputes of the construction projects - ongoing or completed, pursuant to s. 40 of CIPAA
2012.
The potential "stop work" or "go slow" as a consequence of adjudication decisions being
enforced by unpaid parties for ongoing Government initiated projects weighs in heavily.
The impact of such actions maybe too crippling for the Government to deal with unless it
already has in placed legal personnel trained to deal with the appeal process to avoid
enforcement. Or else the Government must ready bags full of funds to fork out to deal
with unfavorable adjudication decisions to avoid enforcement.
With so much on the Government's plate, is it any wonder why no one seems to know
when CIPAA 2012 will come into effect?
Posted by Jonathan Rozario at 8:25 PM
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provided in the manner that it should have been, the foundations of a building could crack
and subside, the air-conditioning units fail or the roof leak. However, in considering
'defects' as a matter of principle, work may be defective even if it has been carried out
with all due skill and care but it fails to meet a particular specification.
For example, brickwork may be erected correctly but the wrong type or colour of brick
could have been used in breach of planning permission.
Potentially difficult arguments can arise where work has been carried out incorrectly by
the contractor but the architect or engineer's design is also at fault. In these situations,
the contractor may deny liability on the basis that even though the work was carried out
defectively, it did not cause the damage complained of. An employer will not be as
concerned as the contractor and architect to get to the bottom of exactly who is at fault
for that as long as it can claim against one or both of the parties and both still exist.
It is often important to distinguish between patent and latent defects. A patent defect is
one that is detectable either at or before apparent practical completion or during
the defects liability period. In the past, the courts have held that patent defects must be
apparent on inspection but need not necessarily have been seen by the people carrying
out that inspection. By contract, a latent defect is one which has been concealed in the
works and may not become apparent for many years.
Typical contractual provisions
The standard form construction contracts contain provisions dealing with the treatment of
defective work during the course of construction, at completion and during the defects
liability or rectification period. By way of illustration, the contract form may provide that the
employer may issue instructions requiring the opening up for inspection of any work
covered up or tests of materials or goods or executed work. The cost of opening up or
testing is added to the contract sum, unless the inspection shows that the materials,
goods, or work are not in accordance with the contract - the contractor then bears those
costs.
The question of defects often arises in the context of practical completion (PC), and
whether or not completion can be said to have occurred even though minor defects exist.
In the absence of any definition, guidelines have been developed from case law which
broadly state that:
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'rectification period', 'maintenance period' and 'defects correction period'. The nature and
scope of such periods depend on the mechanism adopted in the particular contract, and
they are typically seen as applying to the whole of the works, the relevant part or section.
The length of the period will be negotiated by the parties and the nature of the works to be
undertaken.
In circumstances where defective work is present, several legal remedies may exist.
Starting with remedies in contract, where defective work is present as a consequence of
a breach of contract then a claiming party is entitled to be put into the position it would
have been if the work had been correctly carried out. This is achieved by a monetary
award. The claiming party's losses may be assessed on the basis of:
In strict legal terms the date for assessment of the loss is when the defect is noticed, but
when considering the cost of repair the date of assessment is usually taken as when it is
reasonable in the circumstances to undertake the relevant works. A party seeking to bring
an action for breach of contract in relation to defective works has six years to do so if the
contract is executed under hand (signed by a single, authorised representative) or 12
years if the contract is executed by deed. Those periods run from the date of the breach
of contract. In the case of patent defects this should be obvious, as it is the date when the
defective work is carried out, but for latent defects the date of cause in action is usually
taken as being the date on which PC is certified or given. Similar considerations would
arise in relation to allegations of defective design.
Betterment
Where repair works result in a better or newer building, a deduction in damages will not
usually be made if the claiming party had no reasonable choice but to undertake the
works in that way. However, if a party chooses to rebuild to a higher standard than was
strictly necessary it may only be entitled to recover the cost of those works less a credit
for the betterment element of it. While each case will turn on its own facts, if works are
said to be unnecessarily expensive the test to be applied is whether the claiming party
acted reasonably in proceeding in that way. If not, it may struggle to recover the additional
costs.
Pure Economic Loss
Defects in buildings can also pose significant problems for subsequent owners who take
on responsibility for a building without having procured the relevant work. This is because
there would be no claim in contract, unless separate rights or a warranty had been
conferred on that new owner. If this situation arises and the subsequent owner has no
remedy in contract it raises the question over whether the owner can recover its costs
and losses in any other way, for example in tort. The general rule is that damage to a
building which is attributable to a defect in the structure of that building is not recoverable
such damage is known as 'pure economic loss' as the only loss sustained is the fact
that the new owner has paid too much for the property.
In 2011 the Court of Appeal clarified that, ordinarily, contractors will not owe duties not to
cause pure economic loss. Therefore they will not owe such duties to subsequent
owners.
Limited exceptions may apply if the new owner is able to show that the contractor had
assumed responsibility for that loss through the provision of skilled advice or services or
at least some design responsibility, and that the owner had relied on that advice or
services or design. Such situations have been held to arise, for example, where a
specialist subcontractor provides services to the contractor who employed it and where a
civil engineer provided design services. However, such situations are complicated and
the preferable route would always be to ensure that any new owner had the appropriate
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the measure of abatement can never exceed the sum which would
otherwise be due to the contractor as payment;
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Turning to the execution phase of the contract, the practical issues tend to focus around
evidence and notices. Defects are most likely to be picked up on site if there is regular
monitoring and testing. It will be a commercial judgement for employers and contractors
as to how much they wish to spend monitoring and testing the works, but what is crucially
important is that if defects are identified that are likely to have implications for the project
then comprehensive records will need to be taken. Similarly, if it is intended to reduce a
payment or advance a claim as a result of a defect, then consideration should very rapidly
be given to the basis of the claim. It is also not uncommon for issues to arise as to
whether an employer waived or agreed to allow a defect to remain. Again, evidence of
agreement or waiver should be obtained.
Post completion, if a defect occurs within a defects liability period under a contract then in
all probability the employer will be entitled to require the contractor to correct the defect. In
some forms this is the case even if it is not clear that the defect is the contractor's
responsibility, although the contractor will be entitled to payment if it is proved the defect
is not one for which is it responsible.
Clearly, early consideration should be given to the contractual procedures and relevant
notices. Even if the defects liability period has ended the contractor will in the vast
majority of cases remain liable in damages.
If you are an end user who did not employ the contractor or design team then you will
want to consider whether you have the benefit of any assignment of the relevant building
contract or professional appointments, or alternatively whether you have collateral
warranties or third party rights.
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and the plaintiff, after giving notice to the sureties, entered and completed
and sued the sureties. Held, that the measure of damage was what it cost the
plaintiff to complete the house substantially as it was originally intended, and
in a reasonable manner, less any amount that would have been due and
payable to B by the plaintiff had B completed the house at the time agreed by
the terms of his contract".
That is an American case but the principle enunciated was approved by the Court of
Appeal in Mertens v. Home Freeholds Co [1921] 2 KB 526 at p. 535 where Lord
Sterndale said:
It is true that that is an American case. Though I cannot put my finger on them
for the moment I feel satisfied that there are English cases which fix the same
measure of damages. At any rate for the purpose of this case it is sufficient
to say we all consider that the proper measures of damages for the breach of
a building contract such as this".
However, the cost of completion means the cost of completing the contract work, but
not different work. Thus in Milwaukee City v. Shailer [1898] 84 Fed Rep 106 another
American case, Shailer contracted to construct a tunnel for the city. The contract
provided that in case of default, the city should be entitled to complete the work at
Shailer's expense. On Shailer's default the city constructed a tunnel which was
essentially different in plan and cost of construction from that contemplated by the
contract. It was held that the city was not entitled to recover damages from Shailer.
Mr McDonald, a quantity surveyor, testified that a total sum of $377,221.92 would be
the cost of remedying defective work and completing the project from where the
plaintiff had left it. He based his valuation on the current and appropriate building
rates for this quality of work pertaining to this part of Malaysia. It must be borne in
mind that the original contract price was $187,500, and the figure quoted by DW6
would therefore include the cost for the variation and remedying defective work. The
cost of putting right defective work, he stated, was $21,095.75. Therefore,
arithmetically, $168,720 would be the cost of the extra work. In this connection the
cost of extra work must be considered in the light of all the surrounding
circumstances. Thus an employer may have deliberately chosen a small-time
contractor with limited resources of capital, plant and labour to do the work in the
hope of getting a cheaper job. The plaintiff is a class 'E' PWD contractor with a
ceiling of $50,000. As no fixed amount was agreed upon in respect of extra work,
and considering that work was to be done by a contractor of the same class as the
plaintiff, and in view of the principle enunciated in Milwaukee City v. Shailer, supra, I
would consider a sum of $126,540 (750f $168,720) as reasonable. In the
circumstances, the amount that would cost the defendant company to complete the
work and remedy defects would be $335,135.75.
As against that amount must be deducted the contract price as varied that would
represent the costs which the plaintiff would have expended on the whole project as
varied. I assess that figure in the following manner:
Original contract price $187,500
Extra work 74,000
;$261,500.00 ($74,000 is made up of $24,000, the cost of alteration from
zinc walls to 9" brick walls; $40,000 for a third store; and $10,000 for labour
and miscellaneous expenses). From the amount of $261,500 must be
deducted the sum of $36,000 as representing the fifth progress payment.
Therefore the amount which would be due to the plaintiff would be $225,500.
The measure of damages would be the difference between the reasonable costs of
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completing the work as varied and the amount that would have been due to the
plaintiff had he completed the work as varied, and that is $109,635.75.
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adjudication decision which has to be delivered within 45 days of either the Adjudication
Response or Adjudication Reply, whichever is the later.
A Two-Tier Involvement
A two-tier involvement can be anticipated for lawyers in payment disputes brought for
adjudication in CIPAA 2012, i.e. - pre-adjudication decision and post-adjudication
decision.
Pre-Adjudication Decision.
CIPAA 2012 does not impose any specific format on parties for filing of various
documents to bring or to defend a claim to be adjudicated by an adjudicator certified by
Kuala Lumpur Regional Centre For Arbitration ("KLRCA") at this moment. This is quite
unlike an action in the Courts whereby the format and filing of cause papers is determined
by various statutes and therefore requires the services of a lawyer if one is to avoid the
pitfalls of Do-It-Yourself litigation.
The scope of involvement of lawyers at initial stages of the Payment Claim and Payment
Response may not be required by parties, especially where the disputed amount is not
substantial, and the payment dispute does not involve complicated facts and issues. The
preparation of documents required for "Payment Claim" by the unpaid party and
"Payment Response" by the non-paying party, and subsequently the "Adjudication Claim"
and "Adjudication Response" can very well be handled by non-lawyers. It can be ably be
dealt with by persons within the company with sufficient legal exposure, but with detailed
personal knowledge as to the details of the dispute at hand. The key contribution a lawyer
can provide at this stage is to provide compilation expertise to prepare relevant
submissions in what may turn out to be invaluable when the adjudication decision is
disputed in Court or arbitration.
If a lawyer is involved in the preparation of all documents and communications between
parties and the appointed adjudicator prior to the adjudication decision, he / she will be
able to provide valuable input in such preparation, including being able to keep an eye
open to look out for issues which may result in improperly procured adjudication decision,
such as denial of natural justice and bias, fraud, bribery, etc which can then be used to
contest the adjudication decision and get it set aside by the Courts.
The growth and penetration of CIPAA 2012 will largely depend on KLRCA, as the
adjudication authority, who can be expected to introduce rules, policies and guidelines to
regulate adjudication claims, including standardization of the format of cause papers and
its administration. As this evolves, the level of expertise required to adhere to such rules
will follow naturally and resulting in it becoming a specialized area for claim consultants
which is likely to consist mostly of lawyers, or at the very least those who are legally
trained.
Post-Adjudication Decision
Both the winning and the aggrieved party can be expected to turn to the Courts., either to
enforce the adjudication decision or to set aside and/or stay the execution of the same.
So then, it follows that both parties will have to engage services of their lawyer as such
applications are highly technical in nature with specific formats and procedures to adhere
to.
The options available to the aggrieved party includes:
1. apply to the High Court to set aside the adjudication decision on grounds that it was
improperly procured through :
a. fraud or bribery;
b. there has been a denial of natural justice;
c. the adjudicator has not acted independently or impartiality; or
d. the adjudicator has acted in access of his jurisdiction.
2. apply to the High Court for a stay of the adjudication decision.
If a lawyer had been involved during the pre-adjudication decision, then he / she would
have been able to identify the grounds on which the adjudication decision may be set
aside.
One thing is certain. The way documents are filed and kept will be of utmost importance
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in enabling the payment dispute to progress smoothly. Whether lawyers are involved or
not, the success or failure in such payment disputes will rest on parties' ability to compile
its documents quickly, given the short time frames accorded to the parties for filing of
relevant cause papers under CIPAA 2012.
Posted by Jonathan Rozario at 4:00 PM
1 comment:
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level above the said Respondent and in many cases may turn out to be the Main
Contractor or even a sub-contractor as the construction industry in Malaysia tends to
have a long chain in the construction process consisting of a chain of sub contractors,
manpower providers, tools and machinery providers, outsourced maintenance
contractors and services providers, consultancy services, hardware and building material
suppliers, etc.
It is anticipated after CIPAA 2012 comes into force, many principal / employers consisting
owners, developers, main contractors and possibly large sub-contractors in the
construction industry in Malaysia will be surprised to one day receive a notice demanding
payment for the adjudicated amount for work done or goods supplied by a sub-contractor
or supplier 2 levels below the principal. Are you ready Malaysia?
Posted by Jonathan Rozario at 3:52 AM
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work order to put off paying for work done or goods/materials, equipment or workers
supplied to delay making payment in Malaysia anymore. The impact of CIPAA 2012, I
believe, will be felt most within this scenario, which is likely to see suppliers or sub-sub
contractors bringing payment disputes to the adjudicator upon after the invoice becoming
due and unpaid.
However, work done outside the scope of the contract, i.e quantum meruit, is not
expected to be covered by this Act, unless a variation order in writing can be proved.
So ready or not Malaysia, this Act will come into force upon execution by the Minister of
Works.
Posted by Jonathan Rozario at 6:11 AM
1 comment:
Can The Main Contractor Impose Liquidated Damages Fixed Under The
Main Contract On A Subcontractor Who Finishes Late?
Presumption : Subcontractor has contractual obligation to finish within a timescale and is
in breach of the obligation if he completes late.
Where a subcontractor is in breach he will have a liability to pay damages to the main
contractor.
The injured party is entitled to recover any loss likely to arise in the usual course of things
from the breach, plus such other loss as was in the contemplation of the parties at the
time the contract was made and which is likely to result from the breach.
The main contractor, as injured party, is entitled to levy a claim for damages against a
subcontractor who completes late. These damages will include any liability the main
contractor has to pay liquidated damages to the employer which result from the delay.
This will apply irrespective of the value of the subcontract work.
It is open to the subcontractor to argue, if the main contract liquidated damages are
extremely high, that the sum involved was outside his contemplation at the time the
contract was entered into. To forestall this type of argument main contractors, usually
with the tender enquiry documents will set out details of the main contract (including the
sum included for liquidated damages).
Where the subcontractor is nominated and the main contract provides for an extension of
time where work is delayed by the subcontractor no claim from the employer for
liquidated damages will arise provided that the contractor has properly claimed the
extension of time.
Relevant cases:
1. Hadley v. Baxendale (1854)
2. Victoria Laundry (Windsor) Ltd v. Newman Industries (1949)
3. M.J. Gleeson plc v. taylor Woodrow Construction Ltd (1989)
Posted by Jonathan Rozario at 1:55 AM
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(3) reduce the uncertainty surrounding the project and allow the parties to plan for the project and
the future as best as possible.
In Malaysia, the introduction of Construction Industry Payment & Adjudication Act 2012 ("CIPAA
2012") is envisioned to regulate payment disputes which currently afflicts the construction industry.
The scope of CIPAA 2012 is expected to include the oil & gas industry, petrochemical,
telecommunication, utilities, infrastructure supply contracts, project and management, in addition to
typical building construction projects.
Construction work must be carried out wholly or partly in Malaysia, and any payment dispute arising
from a written contract may be referred to an adjudicator registered with the KL Regional Centre for
Arbitration. The approach of such process is "PAY NOW, ARGUE LATER".
Before entering into this type of contract, the owner must have detailed plans and specifications for
the project, and the general contractor must have clear and specific instructions and scope of work.
What is a GMP?
Similar to a cost-plus contract, but with some protection for the owner, utilizing a GMP (guaranteed
maximum price) as a cap for project. The GMP is typically adjusted with each change order, just
as a lump sum contract price is adjusted. This type of contract is amenable to the design build
situation, where the general contractor also serves as a designer. The GMP is arrived at after the
project has been completed to the design development stage.
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contractors, including the general contractor, addenda, building codes and regulations, and
modifications to the plans and specifications after execution of the contract.
It is important for a contractor to review all contract documents incorporated by reference, as the
terms of those documents may be binding on the contractor. For instance, if a prime contract
(between the owner and a general contractor) contains an arbitration provisions, courts will typically
enforce the arbitration requirement against a subcontractor in contract with the general contractor. It
is not necessary, however, that contracts provide for adjudication before payment disputes are
brought for adjudication within CIPAA 2012.
On a smaller scale, a written contract may be referenced within documents used in the supply of goods and/or services,
such as work order, purchase order, invoice, delivery order, etc.
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Natural Justice As The Basis To Set Aside An Adjudication Decision Section 15 (b) Construction Industry Payment & Adjudication Act 2012 of
Malaysia
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Summary of Cases
1. Costain Ltd v. Strathclyde Builders Ltd [2003]
The adjudicator issued a decision that the defender should repay the full amount withheld
as liquidated and ascertained damages. The pursuer now raised proceedings to recover
the sums found due by the adjudicator by means of court proceedings via a motion for
summary decree. The only defence advanced was that the adjudicator's decision is
vitiated by a breach of the principles of natural justice, due to the fact that the
adjudicator had requested for to grant an extension of four days as he wished to "discuss
one point in particular with [his] appointed legal adviser". The result of the discussions
with the legal adviser was not made known to the parties, nor was either party told of the
terms of the discussions that had taken place, or to see their result. Neither party was
invited by the adjudicator to comment or make submissions upon the advice tendered,
and neither party requested any opportunity to do so.
Held :
1. It is important that confidence in the adjudication process should be maintained. For
such confidence to be maintained, it is important that adjudicators should be clearly seen
to give parties a fair opportunity to present their arguments by fulfilling the principle of audi
alteram partem.
2. The mere possibility of injustice is sufficient for a challenge to an adjudicator's decision
for the reasons set out in para 1. above. The parties do not know the content of the legal
advice obtained by the adjudicator. It could have been crucial. Indeed, because the
adjudicator asked for advice on a particular matter, it is reasonable inference that he
thought that it was important. I do not think that the possibility of injustice can be excluded.
3. I conclude that the defender has stated a relevant defence to the pursuer's claim to
enforce the adjudicator's decision. It follows that the pursuer has not satisfied the test for
summary decree, namely that the question of law that arises as to the relevancy of the
defender's averments admits of a clear and obvious answer in the pursuer's favour.
Pursuer's motion for summary decree is refused.
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