The Malaysian
Construction Industry Ð
The Present
Dilemmas of the Unpaid Contractors
by
Lim Chong Fong
BSc(Bldg) Hons (NUS), MRICS, MISM, MCIOB, MCIArb,
LLB Hons (Lond), CLP, Barrister at Law
Background
1.
The construction
industry is an important cog in the wheel propelling the Malaysian economy The market size of the industry is RM43
billion based on value of gross output in 2004. The industry then provides work
for many ranging from professionals such as architects, engineers and surveyors
to main contractors, sub contractors, suppliers and ultimately manual labourers
who are employed by these contractors.
2.
The industry works and
will only continue to work on the premise that these people are paid for work
and services properly rendered.
3.
The quantum of payment
for work and services rendered are often huge in the thousands, if not in the
millions of Ringgit.
4.
That notwithstanding,
the construction industry is a dispute prone one. It is therefore common for
the claimant pursuing his claim for work or services rendered to meet with a
cross claim instead for defective work, delayed completion, etc. So, payment is postponed until the
resolution of the dispute.
5.
There can be multitude
of reasons for the dispute ranging from under capitalization of the respondent
to in-competency of the claimant.
6.
As it stands today, the
legal enforcement of the claim and cross claim is unlikely to be summarily
concluded but more likely to involve a protracted trial. In the meanwhile, there is ordinarily
no security for the claim. These are the dilemmas of the unpaid contractor as
its cost flow and profitability are often put in jeopardy.
7.
The common modes of
enforcement of construction claims in Malaysia are presently by way of arbitration
or litigation.
8.
Summary judgment via
litigation may be obtainable for clear cut unpaid certified payment claims.[1]
More often than not, the claims are not clear cut involving uncertified work
done and disputed variation orders.
In addition, there are always cross claims of set offs. The problems are clearly echoed by
Edgar Joseph Jr FCJ in the Pembenaan Leow Tuck Chui case :-
ÒIt is well known to lawyers engaged in the field construction contract law that the question whether a building owner or main contractor is entitled to refuse to make payment of money to a contractor or contractor, as the case may be, allegedly due and payable under an interim certificate issued by an architect or engineer, pursuant to provisions in a RIBA contract and other known forms of building contracts and sub contracts, on the ground that he has cross-claims alleging defective work or over-valuation or damages for delay, is a question of ever-recurring importance, which inevitably throws open for discussion the actual terms of the particular contract or sub-contract in the case and the all too familiar trilogy of cases of Dawnays Ltd v FG Minter Ltd & Anor [1971] 2 All ER 1389; [1971] 1 WLR 1205, Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; [1973] 3 All ER 195; [1973] 3 WLR 421, Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 LloydÕs Rep 197 and their progeny.Ó
9.
Litigation is
affordable but it takes too long. On the other hand, arbitration is faster but
it is expensive.
10.
In any case, both modes
will still take a considerable length of time as the disputes will have to be
determined and disposed in accordance with the law, which must amongst others
require affording the disputant parties natural justice in the presentation of
their respective case.
11.
In United Kingdom, New
Zealand, the states of New South Wales, Victoria and Western Australia and now
Singapore, the principal mode of construction dispute resolution has shifted to
adjudication. This is a swift dispute resolution process that results in a
decision which carries Òtemporary finalityÓ unless reversed in arbitration or
litigation. In the meanwhile the successful claimant is at liberty to enforce
the decision.
12.
There is however no
equivalent process of adjudication in the USA or Canada. The common mode of
enforcement is by way of lien action and arbitration though parties are
increasingly resorting to mediation which has proven to be rather successful.[2]
13.
There are limited
remedies and security pending dispute resolution for the unpaid claimant in
Malaysia. There is no general common law right of suspension of work for non
payment.[3]
In the Kah Seng case, Low
Hop Bing J succinctly held :-
ÒIn
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.Ó
The standard forms of construction contract do not
provide for such a remedy other than the CIDB 2000 form and the PAM-NSC form.
The right of suspension is quite useless if the sub contract is subjected to a
Òpay when paidÓ condition which is rather common unless of course the
contractor has absconded with the money paid by the employer.
14.
The unpaid claimant is
left with the option of
progressing with the work concurrent with suing for payment with
interest or if the non payment is so serious to constitute a repudiatory
breach, then there is the option of terminating the contract.[4]
Some of the standard forms such as the PAM 98 and CIDB 2000 also contain
express provisions for determination. However as a matter of practice, many
unpaid claimants are reluctant to go on the route of termination.
15.
In any case the unpaid
claimantÕs claim is not secured pending the conclusion of the dispute
resolution process. In other words, there is no guarantee that the claimant
will be paid or that there are assets available for execution upon obtaining a successful result after a
lengthy dispute resolution process.
There is the availability of the Mareva injunction procedure in Malaysia
but the applicant has the onerous burden to establish that it has a good
arguable case (especially in the light of a cross claim of set off) and a real
risk of dissipation of assets.[5] If the injunction is granted, there is
some comfort because breaching the injunctive order or even taking wilful steps
to frustrate the application to obtain the order might constitute contempt of
court[6]. It does not still however make
the applicant a secured creditor.
16.
The adjudication
process in the United Kingdom does not also make the claimant a secured
creditor after a decision is obtained. The successful claimant must still apply
to court for summary judgment and thereafter execute the judgment in the usual
ways. Nevertheless the principal advantage of adjudication is that the time
taken between the referral of the dispute and the entry of the successful
decision in the form of a judgment is considerably shortened. In this regard,
there is hopefully a better prospect that there are assets available for
execution. It cannot however
address the problems of a secured creditor such as the lending financier taking
first priority and/or the unsuccessful party going insolvent and having earlier
dissipated assets whether in breach of the Òpari-passuÓ principle or not.
17. It has been
suggested[7]
that there are only three effective legal mechanisms to provide security for
payment. i.e. the concept of the lien, trust and bond.
18. The problem of security is to a
considerable extent addressed in USA and Canada by way of mechanic lien
statutes which is absent in Malaysia. In gist, any unpaid claimant who has
expended labour or material to build has the right to apply for a lien to be
attached to the land whereon the building was constructed. After the entry of
the lien, the claimant can then apply to auction the building wherein the
proceeds of sale will then be utilized for payment. The dispute thus always
centers on the unpaid claimantÕs application for lien which is often resolved
via arbitration. The lien security nevertheless usually takes effect from
visible construction of the building long before the conclusion of the
arbitration and this makes the unpaid claimant a secured creditor usually
second only to the lending financier bank taking first priority as an even
earlier secured creditor.
19. The other attraction is that the lien
statutes have resulted in the lending financier taking steps to ensure that the
payments are made to the relevant people who have expended labour and material
to prevent its security from being encumbered by a lien order especially lien
statutes based on the Pennsylvanian model which obliges the employer or
financier to pay the unpaid sub contractor notwithstanding that the main
contractor was already paid.
20. The trust operates on the premise that any party receiving money holds the whole or part of it on trust for others who have expended labour and material to carry out the work. The trust is created at every level of contract. Thus the aggrieved unpaid claimant has the right to trace the money notwithstanding that the recipient party is insolvent and/or has dissipated the money.
21. The trust concept is not alien in Malaysia in respect of retention monies. It is provided in the PAM 1969/1998 form, CIDB 2000 form and the PAM NSC form. The trust is however a conditional one in that it permits the employer or the contractor to set off permissible deductions therefrom. In the absence of set off, the employer or the main contractor may be compelled by way of an injunction to set aside the retention money into a trust account[8]. However, most of the time, the application is defeated by set offs.
22. In the unusual case of R&G Engineering Sdn Bhd v ESPL (M) Sdn Bhd[9], the Malaysian Court of Appeal found that the progress payment under a sub contract was subject to an express trust and the Court ordered that the corpus of the trust i.e. unpaid progress payment money be interlocutorily secured pending trial notwithstanding set offs.
23. The payment bond is a straight forward devise basically requiring a third party such as a bank or an insurance company to guarantee payment in the event of default on the part of the paying party. The provision of bond by the employer is presently uncommon in Malaysia other than for bullet payment contracts[10]. The CIDB 2000 form nevertheless provides for it as an option.
24. It is clear that there are various avenues that are available to improve the payment problem in the industry and some of these options have been incorporated in the construction contract or statutes in the other developed countries.
25. In summary, these
avenues include :-
i) payment of
stipulated interest
ii) suspension
of work or going slow
iii) eradication
of Òpay when paidÓ
iv) adjudication
v) liens
vi) trust
vii) payment
bonds
26. It is basically up to us now to choose the avenue or a combination of avenues which best suits and serves the Malaysian construction industry.
[1] Pembenaan Leow Tuck Chui Sdn Bhd v Dr Leela Medical Centre Sdn Bhd [1995]2 MLJ 57, but see also article by the author entitled Pembenaan Leow Tuck Chui Revisited, MBJ 1st Quarter 2003 @ page 74
[2] Article by author entitled Legal Enforcement of Construction Payment Claim Ð An American Perspective Ð KLRCA Newsletter Ð December 2003
[3] Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1997] 1 CLJ Supp 448
[4] Ban Hong Joo Mines Ltd v Chen & Yap Ltd [1969] 2 MLJ 83
[5] Pacific Centre Sdn Bhd v United Engineers (M) Bhd [1984] 2 CLJ 56
[6] Monatech (M) Sdn Bhd v Jasa Keramat Sdn Bhd [2002] 4 CLJ 401
[7] Contemporary Issues in Construction Law Vol. 1 , Construction Law Press London 1996
[8] Lee Kam Chun v Syarikat Kukuh Maju Sdn Bhd (SPPK Sdn Bhd, Garnishee) [1988] 1 MLJ 444, LEC Contractors (M) Sdn Bhd v Castle Inn Sdn Bhd [2001] 3 CLJ 31
[9] [2004] 4 CLJ 674
[10] Pekeliling Triangle Sdn Bhd & Anor v Chase Perdana Bhd [2003] 1 CLJ 153