Construction Contracts and the Aftermath of the MCO

9 June 2020MS CHRISTINE TOH

Partner, MahWengKwai & Associates

About MahWengKwai & Associates

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● Established in 1985 by Dato’ Mah Weng Kwai, now a consultant with the firm.

● Medium-sized law firm with 22 lawyers and 19 staff.

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Talk Points

● Force Majeure - What is it and can it help?

● Extension of Time (EOT) - Will I get an EOT?

● Loss and Expenses - Can I claim?

● Frustration of Contract - Does it apply?

● References to Forms of Contracts - PAM, JKR, FIDIC, IEM

● Construction Adjudication under CIPAA 2012

Force Majeure

Force Majeure: Definition?

● No legal definition, it is a creature of the contract

● “Force Majeure clauses are clauses generally intended to include risks beyond the reasonable contract of a party. In essence, it frees both parties from liability or obligation when an event such as war, riot or an act of God takes place” - RHB Capital Bhd v Carta Bintang [2012] 10 MLJ 469

● In order to rely on force majeure, there must be a force majeure clause in the construction contract.

Force Majeure: PAM 2006/2018

● Article 7 (ad)

● “Any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics or natural disasters”

Force Majeure: PWD 203A (Rev 1/2010)

● Clause 58.2:

○ War (whether declared or not), hostilities, invasion, act of foreign enemies;

○ Insurrection, revolution, rebellion, military or usurped power, civil war, terrorism;

○ Natural catastrophe including but not limited to earthquakes, floods, subterranean spontaneous combustion or any operation of the forces of nature against which an experienced contractor could not reasonably have been expected to take precautions;

Force Majeure: PWD 203A (Rev 1/2010)

● Clause 58.2 (cont’d):

○ Nuclear explosion, radioactive or chemical contamination or radiation (unless caused by the negligent act, omission or default of the Contractor, its agents or personnel);

○ Pressure waves caused by aircraft or other aerial devices travelling at supersonic speeds; and

○ Riot, commotion or disorder, unless solely restricted to employees of the Contractor or its personnel, servants or agents.

○ Epidemics NOT included

Exceptional Event: FIDIC (Red Book)

● No “force majeure” clause

● “Exceptional Event” as defined under Clause 18

○ Is beyond a party’s control;

○ The Party could not reasonably have provided against before entering into the Contract;

○ Having arisen, such Party could not reasonably have avoided or overcome; and

○ Is not substantially attributable to the other Party.

Exceptional Event: FIDIC (Red Book)

● Examples are:

○ War, hostilities (whether war be declared or not), invasion, act of foreign enemies;

○ Rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war;

○ Riot, commotion or disorder by persons other than the Contractor’s Personnel and other employees;

○ Strike or lockout not solely involving the Contractor’s Personnel and other employees;

Exceptional Event: FIDIC (Red Book)

● Examples are (cont’d):

○ Encountering munitions of war, explosive materials, ionising radiation or contamination by radioactivity, except as may be attributable to the Contractor’s use of such materials;

○ Natural catastrophes such as earthquake, tsunami, volcanic activity, hurricane or typhoon.

● Epidemics NOT included

Exceptional Event: FIDIC (Red Book)

● If a party is prevented from performing its obligations due to an Exceptional Event, it shall give notice to the other party of that effect and event.

● Notice must be given within 14 days of the party becoming aware, or should have been aware, of the Exceptional Event event.

● Clause 18.4: If Contractor affected by an Exceptional Event event, he shall be entitled to an EOT under Clause 20.1.

“Force Majeure”: IEM Contracts

● No “force majeure” clause

● Clause 20.4: Employer’s risk

○ War (irrespective if the war is declared or not) or hostilities, invasion, and act of foreign enemies;

○ Acts of Terrorism;

○ Riots (other than that caused by the Contractor’s own employees and those of his sub-contractors), commotion, disorder or civil war; and

○ Any operation or the forces of nature which an experienced contractor could not have reasonably foreseen or priced for.

“Force Majeure”: IEM Contracts

● Epidemics NOT included as an Employer’s Risk

● Employer:

○ The person, firm, corporation identified in the Articles of Agreement who has accepted the Tender.

Application for Extension of Time

EOT: PAM 2006 /2018

● Clause 23: Contractor may apply for EOT if he thinks that works will be delayed beyond the completion date because of any of the relevant events mentioned in Clause 23.8

● Clause 23.8 listed 24 Relevant Events [25 Relevant Events in PAM 2018]

● Relevant provisions (similar in both 2006 and 2018 forms):

○ Clause 23.8 (a);

○ Clause 23.8 (p);

○ Clause 23.8 (w).

EOT: Clause 23.8 PAM 2006/2018

● Clause 23.8(a): Force Majeure - Refer to Article 7 (ad)

● Clause 23.8(p):

○ “Compliance with any changes to any law, regulations, by-laws or terms and conditions of any Appropriate Authority and Service Provider”.

● Clause 23.8(w):

○ “Suspension of the whole or part of the Works by order of an Appropriate Authority provided the same is not due to negligence, omission, default and/or breach of contract by the Contractor and/or Nominated Sub-Contractors”.

EOT: Clause 23.1 under PAM 2006 & 2018

● A contractor may apply for EOT by:

○ Giving written notice of his intention to do so to the Architect within 28 days from the commencement of the MCO - this is a condition precedent;

○ Submitting a final claim for EOT within 28 days after the cause of delay, supported with all the relevant particulars for the Architect’s assessment;

● If contractor fails to submit such particulars, it will be deemed that the MCO did not delay the completion of the works.

● EOT is NOT an automatic entitlement!

EOT: Notice Requirement

● Ipoh Tower Sdn Bhd v Taki Engineering Sdn Bhd and Another Appeal [2016] MLJU 1509 by Mary Lim J (Now JCA):

○ “...non-compliance of the notice requirement rendered the matter unavailable for consideration by the Architect”.

● Failure to adhere to the notice requirement is FATAL.

EOT : PWD 203A (Rev 1/2010)

● Clause 43.1 listed 10 events

● “Epidemic” is not included under the definition of Force Majeure in PWD/JKR Contracts.

● Clause 43.1(i)

○ Delay in completion is due to the Contractor’s inability for reason beyond his control and for which he could not have reasonably foreseen.

EOT: FIDIC (Red Book)

● Effect of an Exceptional Event - Clause 18.4 - the Contractor shall be entitled to EOT

● Procedures laid down in Clause 20.2

● Clause 20.2.1:

○ If the contractor considers himself entitled to an EOT, he shall give notice to that effect to the engineer no later than 28 days after the contractor became aware, or should have been aware, of the relevant event or circumstance.

EOT: FIDIC (Red Book)

● Clause 20.2.4:

○ Within 84 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the Claim; or

○ such other period (if any) as may be proposed by the claiming

Party and agreed by the Engineer

the claiming Party shall submit to the Engineer a fully detailed

Claim.

EOT: IEM Contracts

● Clause 44: An Engineer may certify extension to the Date of Completion by fixing an extended date if there is a delay in the completion of the Works caused by a Relevant Event listed in 44.1(1).

● Clause 44.1(c) - EOT can be grated at the occurrence of an Employer’s Risk or a combination of the Employer’s Risk as listed in Clause 20.4.

● Clause 44.2: If the Contractor considers that there will be or has been a delay based on 44.1, he must serve a notice to the Engineer. The notice must include the estimated extended Date for Completion.

EOT: IEM Contracts

● Clause 44.2(3): The Contractor must act within reasonable despatch in serving the notice required in Clause 44.2(1).

Loss and Expenses: How to Claim?

Loss and Expenses: Can I Claim?

● This again depends on the terms of the contract.

● An entitlement for EOT does not automatically mean that you are entitled to a claim for Loss and Expenses.

● The issue of time, and costs are separate.

● Loss and Expenses are governed by an entirely separate contractual provision

● Based on contractual right, no common law remedy.

Loss and Expenses: Can I Claim?

● Examples:

○ Demobilisation and remobilisation costs;

○ Site Staff salaries, accomodations;

○ Utilities;

○ Rental for equipment;

○ Scaffolding;

○ Costs of extended insurance coverage.

L&E: PAM 2006/2018

● Clause 24 allows a Contractor to claim for Loss and Expenses.

● Similar provisions in both PAM 2006 and 2018.

● Clause 24.3 listed 14 matters which may lead to a claim for Loss and Expenses.

● The relevant provisions for consideration is:

○ Clause 24.3(n) - Suspension of the whole or part of the Works by order of an Appropriate Authority provided always that the same is due to negligence or omission on the part of the Employer, Architect or Consultant.

L&E: PAM 2006/2018 (Cont’d)

● The Covid-19 MCO and CMCO are not “due to negligence or omission on the part of the Employer, Architect or Consultant”.

● It is a neutral event, with no fault attributable to any of the parties.

L&E: PWD 203A (Rev 1/2010)

● Clause 44.1

○ If during the progress of the Works or any part thereof there has been a delay under clause 43.1(c), (d), (e), (f), (h) and the Contractor has suffered direct loss and/or expense beyond reasonably contemplated and for which the Contractor would not be reimbursed under the Contract, the Contractor shall within 30 days of such an event give notice to the S.O. of his intention to claim for loss and expense, with an estimated figure.

L&E: PWD 203A (Rev 1/2010)(Cont’d)

● Clause 43.1(c) - Clause Suspension of Works under Clause 50;

● Clause 43.1(d) - Directions given by S.O, consequential upon disputes with neighbouring owners provided the same is due to any act, negligence or default of the Contractor or any sub-contractor, nominated or otherwise;

● Clause 43.1(e) Instructions issued by S.O provided that such instructions are not issued due to any act, negligence, default or breach of this Contract by the Contractor or any sub-contractor, nominated or otherwise;

L&E: PWD 203A (Rev 1/2010)(Cont’d)

● Clause 43.1(f) - The Contractor not having received in due time instructions in regard to the nomination of sub-contractors and/or suppliers provided in this Contract, necessary instructions, drawings or levels for the execution of the Works from the S.O. due to any negligence or default of the S.O. PROVIDED THAT the Contractor shall have specifically applied in writing on a date which having regard to the Date for Completion stated in Appendix or to any extension of time then fixed under this clause, was neither unreasonably distant from nor unreasonably close to the date on which it was necessary for him to receive the same;

L&E: PWD 203A (Rev 1/2010)(Cont’d)

● Clause 43.1(h) - Delay in giving possession of the Site as provided under Clause 38.4 hereof other than claim in effecting insurance and Performance Bond.

● BUT Clause 43.1 (i) not included [Delay in completion is due to the Contractor’s inability for reason beyond his control and for which he could not have reasonably foreseen.]

L&E: PWD 203A (Rev 1/2010)(Cont’d)

● Note: Clause 77 obligation

○ The Contractor shall maintain the Site in clean and sanitary condition and shall comply with all requirements of the Government Health and Sanitary Authorities. In the event of any outbreak of illness of an epidemic nature, the Contractor shall comply with and carry out such regulations, orders and requirements as may be made by the Government or the local medical or health authorities for the purpose of dealing with and overcoming the same.

L&E: FIDIC Contracts

● Effect of an Exceptional Event -Clause 18.4(b)

○ If the Exceptional Event is of the kind described in sub-paragraphs (a) to (e) of Sub-Clause 18.1, and in case of sub-paragraphs (b) to (e) of that Sub-Clause, occurs in the Country, payment of such costs.

● Silent as to what happened if it is NOT within sub-clause 18.1

● However, Exceptional Event is not confined to just sub-clause 18.1

● Clause 20.2 - “If either Party considers that he/she is entitled to any additional payment by the other Party .. and/or EOT ...under any Clause of these Conditions or otherwise in connection with the Contract, the following Claim procedure shall apply…”

L&E: IEM Contracts

● Clause 20.3(1):

○ If the damage or loss is caused by an Employer’s Risk or a combination of such risks, the Contractor must make good such damage or loss to the extent instructed by the Engineer. The additional costs for the making good of such risks are to be certified by the Engineer under Clause 53.

● Clause 20.4(1)(d):

○ “Operation of nature which an experienced Contractor could not have reasonably foreseen or priced for”.

Notice Requirement

● Perbadanan Pembangunan Pulau Pinang v Trikkon Construction Sdn Bhd [2012] 2 MLJ 28, Court of Appeal:

○ Contractor did not make any application for direct Loss and Expenses in accordance with the terms of the contract.

○ What the contractor did was reserve his right to make such a claim each time he was served with a variation:

“These Architect’s Instructions and Site Instruction have affected our site programme and revised construction period. We will submit expenses, losses and other claims incurred as a result of the said instructions in due course”

Notice Requirement (cont’d)

● The Court of Appeal held that”...under Clause 11(6) of the contract, the lodging of the claim by way of application to the architect for the project is a prerequisite to the pursuit to the pursuit of a claim under the clause. The respondent’s act of merely reserving its right to make such a claim at such time as it unilaterally deemed fit clearly does not meet this prerequisite.”

● The contractor was not allowed to maintain the claim for loss and expenses.

● FAQ on How Contractors in the Construction Industry Can Manage the Problems Arising from the COVID 19 MCO

Conclusion

PAM 2006/2018

PWD203A (Rev

1/2010)

FIDIC(Red Book)

IEM

Force Majeure

Article 7 Clause 58 Clause 18(“Exceptional

Event)

Clause 20.4 (“Employer’s

Risk”)

EOT Clause 23 Clause 43 Clause 20.2 Clause 44 + 20.4

L&E Clause 24 Clause 44 Clause 20.2 Clause 20.3

Frustration of Contract

Doctrine of Frustration of Contracts

● Section 57(2) of the Contracts Act 1950

○ “A contract to do an act, which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.

○ The word “impossible” is not defined in the Contracts Act 1950.

Does MCO give rise to Frustration of

Contract?● In Guan Aik Moh (KL) Sdn Bhd & Anor v Selangor Properties Bhd

[2007] 4 MLJ 201, Gopal Sri Ram JCA (as he then was) stated that the three elements of the doctrine of frustration:

○ The event causing frustration must have been for which no provision has been made in the contract. If provision has been made then the parties must be taken to have allocated the risk between them.

○ The event relied upon must not be self-induced; and

○ The event which is said to discharge the promise must be such that renders it radically different from that which was undertaken by the contract. The court must find it practically unjust to enforce the original promise.

Does MCO give rise to Frustration of

Contract?● BIG Industrial Gas Sdn Bhd v Pan Wijaya Property Sdn Bhd and

Another Appeal [2018] 3 MLJ 326, Court of Appeal:

○ “The contract has fundamentally changed, which the party did not contemplate at the time of the agreement”.

○ “The doctrine of frustration is to be confined to very narrow circumstances, the reason being, I think, that commercial bargains should not be lightly avoided or brushed aside merely upon a change of circumstances” (Per Abdul Malik Bin Ishak JC in Ooi Yoke In & Anor v Public Finance Bhd [1992] MLJU 25)

Does MCO give rise to Frustration of

Contract?● Depends on facts and circumstances surrounding the construction

contract.

● If the facts and circumstances of the construction contract is such that performance is not radically different or fundamentally changed, MCO will not give rise to frustration of contract.

● Arguably, the performance of contract is harder, but not impossible.

Construction Industry Payment and Adjudication Act 2012

CIPAA 2012

● Construction Industry Payment and Adjudication Act 2012

● This Act came into effect on 15.4.2014

● To facilitate regular and timely payment by providing a mechanism for speedy dispute resolution

● Adjudication is timely, from the service of the 1st “Cause Paper” up to the delivery of the Adjudication Decision will not take more than 105 Working Days

Application of the CIPAA 2012

●

Application of the CIPAA 2012

● CIPAA 2012 applies to:

○ Every construction contract made in relation to construction work carried out wholly or partly within the territory of Malaysia including a construction contract entered into by the Government

● CIPAA 2012 does not apply to:

○ Construction contracts by a natural person for any construction works for a building which is less than 4 storeys high wholly intended for his/her personal occupation.

CIPAA 2012: Essential Characteristics of

CIPAA ●

Provides an interim/temporary solution

Can be both inquisitorial and adversarial

Procedure is summary Informal

Short time frame

A statutory procedure

CIPAA 2012: Advantages

● Speedy

● Can commence CIPAA proceedings while works are still on-going

● Cheaper than litigation and arbitration - recovery of costs of adjudication - AIAC, adjudicator, solicitors costs

○ Standard Fees or AIAC Recommended Fee Schedule

● Direct payment from Principal under Section 30 CIPAA 2012

○ Article: Getting Direct Payment from the Principal under Section 30 of the Construction Industry Payment and Adjudication Act 2012 (CIPAA 2012)

Questions?

M: +6017-2266276

E: christine.toh@mahwengkwai.com

Thank you!

Notice: This presentation does not constitute legal advice and its contents should not

be relied upon as such. The facts and circumstances of each and every case will differ

and therefore will require specific legal advice. Feel free to contact us for

complimentary legal consultation.