28^th July 2019

Issues

Construction contracts usually contain a clause imposing liquidated ascertained damages (“LAD”) if the contractor fails to complete its works within the agreed contract period. In other words, LAD will be imposed for the contractor’s delays beyond the agreed completion date.

Parallel to the LAD clause, construction contracts will usually also contain a mechanism / clause for extension of time (“EOT”).

Under the “prevention principle”, a party cannot benefit from its own breach. If the employer had caused delay to the completion of works, the employer would not be entitled to LAD for the delay that it caused.

• What if both the employer and the contractor caused the delay?
• And what if the contractor failed to apply for EOT even when the contract provides such mechanism?
• To compound matters, what if the employer is also “unable to pinpoint the specific number of days of delay due solely to the contractor”?
• Can LAD still be imposed under such circumstances?
• If so, can the Courts apportion the LAD?

These issues arose in the recently decided Court of Appeal case of MS Elevators Engineering Sdn Bhd v Jasmurni Construction Sdn Bhd [W-02(C)(W)-627-03/2018].

Brief Facts

The brief facts of the case, as reported in the Court of Appeal’s and High Court’s Grounds of Judgment, are as follows-

(1) The Defendant appointed the Plaintiff as its nominated subcontractors for the supply, installation and commissioning of 22 lifts for the project (“Subcontract”). There are 2 parts to the Subcontract works, i.e. (1) 10 lifts for Blocks A, B and C and (2) 12 lifts for the shop lots for a mixed development (“Subcontract Works”). These 2 parts of the Subcontract Works becomes relevant on the issue of LAD;

(2) The Defendant was the main contractor appointed by Kensington Vision Sdn Bhd (“Employer”). The date of commencement is 17.12.2012 and the completion date is 16.12.2014 (“Main Contract”);

(3) Vide a Letter of Acceptance (“LOA”), the Plaintiff entered into the Subcontract based on the PAM Form of Agreement and Schedule of Conditions of Building Contract 2006, (without quantities) (“Subcontract”). The LAD clause and completion date in the Subcontract are based on those in the Main Contract;

(4) The Defendant could not complete the project within the contractually agreed period, i.e. by 16.12.2014. The completion date was extended to 30.04.2015 and was further extended thereafter;

(5) The Plaintiff submitted a revised lift installation work schedule (“3^rd Work Program”) to the Defendant vide the Plaintiff’s letter dated 25.3.2015. The Plaintiff was supposed to complete the 3^rd Work Program works by 30.05.2015;

(6) The dispute between the Plaintiff and Defendant is centered on the 3^rd Work Program. The Plaintiff complained that it was not given a workable site possession to enable it to commence work. This was recorded in several complaint letters from the Plaintiff to the Defendant;

(7) Notwithstanding the same, following the issuance of Certificate of Non-Completion (“CNC”) under the Main Contract, the Defendant had correspondingly issued CNC dated 30.06.2015 to 7 subcontractors, including the Plaintiff;

(8) The correspondences complaining of lack of site possession “tapered off after July 2015”;

(9) The Plaintiff obtained PMA (Permit untuk Mesin dan Angkutan) certification for part of the works on 31.10.2015 and certification for the other part on 16.02.2016;

(10) On 04.12.2015, the Plaintiff submitted its final claim amounting to RM1,058,644.00 to the Defendant. The amount was revised after the Plaintiff received the Statement of Final Account dated 24.02.2017;

(11) Vide Certificate of Practical Completion dated 15.03.2016 (“CPC”), the Architect certified practical completion being achieved on 29.02.2016;

(12) As there was no payment made, the Plaintiff initiated the Suit to claim for work done and the Defendant counterclaimed the sum of RM3,910,000.00 as LAD paid by the Defendant to the Employer, which amount the Defendant said was solely attributed to the Plaintiff’s delay. This is notwithstanding the fact that the Defendant was unable to “pinpoint the specific number of days of delay due solely to the Plaintiff” but had claimed for 292 days, calculated from 30.04.2015 to 16.02.2016

(13) After full trial, the High Court allowed the Plaintiff’s amended claim for work done (revised based on Final Account issued after the Suit) amounting to RM1,235,670.74 together with interest and also allowed part of the Defendant’s counterclaim, awarding RM977,500.00 out of the total LAD counterclaim of RM3,910,000.00.

Court of Appeal

In relation to the issue of LAD, the Plaintiff submitted as follows:-

“[9] …It was submitted that the learned judge failed to appreciate that the defendant had caused delay and did not give possession of the lift related areas to the plaintiff for it to carry out its works which resulted in the plaintiff being unable to adhere to the 3rd work program which was not its fault.

[10] It was submitted that the defendant had the burden but failed to prove any such subsequent date wherein possession as per contract was granted to the plaintiff and the learned judge ought to have dismissed the defendant’s claim. It submitted that the defendant failed to prove that the actual loss suffered was attributable to the plaintiff.”

(Emphasis added)

On the other hand, the Defendant submitted as follows:-

“[13] The defendant submitted that it was a prerequisite for the plaintiff to obtain an extension of time pursuant to clause 21.5 of the PAM Sub Contract for any delay to complete its work program as stipulated otherwise LAD would apply. The defendant contended that the plaintiff did not obtain the necessary extension and therefore was entitled to the LAD. It submitted that once the delay ended, the plaintiff was required to issue a notice under Clause 21.5(b) to claim the final extension of time but did not do so.

[14] The defendant submitted that it claimed a delay of 292 days for LAD of RM3,910,000.00. The defendant submitted that the learned judge took the simplistic view that the delay on part of the plaintiff was counted from the day the plaintiff’s letters of complaint ceased on 23.9.2015 until the date the PMA license was obtained on 16.2.2016. It submitted that the learned judge had erred in arriving at 146 days of delay only and erred in awarding only RM977,500.00 to the defendant.”

(Emphasis added)

After hearing submissions from both the Plaintiff and Defendant, the Court of Appeal dismissed both the Appeals and upheld the Learned High Court Judge’s decision.

The Court of Appeal noted that the “plaintiff did not apply for any extension of time”. However, the Court of Appeal also noted that the delays to completion was not due solely to the Plaintiff and that the Defendant was unable to quantify the number of days of delay due solely to the Plaintiff:-

“[29] Based on the letter dated 23.9.2015 by the consulting engineer, the M&E works had been completed save for the lift works for the shops and the learned High Court Judge found that the CNC dated 30.6.2015 was issued by the defendant to 7 other subcontractors including the plaintiff. The delays were not due solely to the plaintiff. The defendant and the other subcontractors were also responsible for the delays. The defendant was unable to pinpoint the specific number of days of delay due solely to the plaintiff. However the defendant claimed for 292 days calculated from 30.4.2015 to 16.2.2016.”

(Emphasis added)

In the circumstances, the Court of Appeal found that the Learned High Court Judge had adopted a common sense approach in assessing the LAD and quantifying it at RM977,500.00 on the basis of proportionality and the Learned High Court Judge was not plainly wrong to do so:-

“[30]  The learned High Court Judge was entitled to adopt a common sense approach in assessing the damages. On the evidence before him, the learned High Court Judge assessed the LAD at RM977,500.00 and had given his reasons for his assessment. This was based on proportionality. On the facts and circumstances, he was not plainly wrong.”

(Emphasis added)

High Court (WA-22C-57-09/2016)

To better appreciate the Court of Appeal’s decision, it is instructive to refer to the Learned High Court Judge’s “reasons for his assessment” as per the High Court’s Grounds of Judgment.

In relation to the issue of LAD, 2 principle issues arose at the High Court, i.e.:-

1. Whether part of the delay in completing the Works were caused by the Defendant so as to disentitle the Defendant to that part of the LAD claimed in the Counterclaim; and

2. Whether the Defendant has proved its Counterclaim in the LAD on the balance of probabilities.

1. Whether part of the delay in completing the Works were caused by the Defendant so as to disentitle the Defendant to part of the LAD claimed in the Counterclaim

Following full trial, the Learned High Court Judge took into consideration that the Plaintiff had issued several letters dated 05.02.2015, 05.03.2015, 18.03.2015 and 27.04.2015 to the Defendant, complaining that the site is not ready for work to start. This continued until the Architect issued a CNC under the Main Contract, certifying that the Defendant failed to complete the works by 30.04.2015.

Following the Main Contract CNC, the Defendant in turn issued its CNC dated 30.06.2015 to the Plaintiff and its other subcontractors, certifying that they did not complete their work by 30.04.2015. Notwithstanding the same, the Plaintiff continued to encounter problem on site possession as recorded in its letter dated 28.07.2015.  

Relying on the Defendant’s failure to deny / respond to the aforesaid complaint letters, the Learned High Court Judge found that the Defendant was partly responsible for the delay for failing to give possession of a workable site to the Plaintiff:-

“[63]         The silence of the Defendant in the face of the many complaints issued by the Plaintiff is deafening. Surely if there is no truth in it or a gross exaggeration, the Defendant would have replied vigorously…”

After having cited various authorities on prevention principle as well as its correlation with the EOT provision and finding that “a party cannot insist on the performance of a contractual obligation by the other if it is itself the cause of the non-performance”, the Learned High Court Judge finds that the Court is not prevent from finding that the employer had caused the delay even if the contractor did not apply for EOT as per the contract:-

“[72] I would go so far as saying that even if the Architect has not granted any extension of time or as in this case no extension of time was not (sic) applied for, the Court is not prevented from making a finding from the evidence adduced that the Employer here as in the Defendant had caused the delay resulting in the Plaintiff not being able to complete the Works on time.”

2. Whether the Defendant has proved its Counterclaim in the LAD on the balance of probabilities

In as far as this issue is concerned, the following question arose:-

“[73]         The question is whether the delay in the completion of the Works was for the whole period after the CNC has been issued until the date of the PMC license or whether there was a period in which the delay caused by the Defendant has ceased and thereafter after disentangling the fault of the Defendant, the LAD would kick in and apply? “

Having studied the evidence before the Court, the Learned High Court Judge finds that:-

“[74]         …To be fair, the Plaintiff alone cannot be made liable for the LAD bearing in mind that the M&E Works and C&S Works have to be completed before the lift installation, commissioning and testing could be commenced and consequently completed.

[75] The clear evidence as to when the Plaintiff could be made liable is when the Consulting Engineer for the Project stated in their letter dated 23.9.2015 at page 128 DCBOD that the M&E Works had been completed save for the lifts works. With respect to the lift works, it was stated that Block A , B and C have been completed save for the shop lots.”

The Learned High Court Judge proceeded to consider the implication of section 75 of the Contracts Act 1950 as well as the Federal Court case of Selva Kumar a/l Murigiah v Thiagarajah a/l Retnasamy [1995] 2 CLJ 374 and echoed the Federal Court’s decision in that “…in every case the court must determine what is the reasonable compensation… Failure to prove such damages will result in the refusal of the court to award such damages.”

Having so stated, the Learned High Court Judge then examined the evidence before the Court to determine what is “reasonable compensation” due to the Defendant. In relation to this, the Learned High Court Judge finds that the Defendant had paid the sum of RM3,910,000.00 to its Employer for the LAD and that this is the actual loss suffered by the Defendant.

The Learned Judge also noted that this sum “is of course much less than the LAD based on the agreed sum per day of RM68,000.00 per day”. This is as a result of the Defendant’s successful endeavor to procure a sectional Certificate of Completion from the Architect on 23.09.2015 (for Blocks A, B and C after the PMA was issued) and also managed to procure its Employer to reduce the LAD under the Main Contract from RM7,820,000.00 to RM3,910,000.00.

Having made the aforesaid findings, the Learned Judge then proceed to assess which part of the delay can be attributed to the Plaintiff:-

“[85]         … Therefore looking at the period in which the claim was made i.e. from 30.5.2015 to 16.2.2016, it is about 292 days.

[86] The period that can be fairly attributed to the Plaintiff in the sense that whatever was the delay caused or contributed by the Defendant is the period after all the complaints from the Plaintiff had ceased and that would be after 23.9.2015.

[87] There was no longer the usual letters of complaint from the Plaintiff to the Defendant on what was preventing the Plaintiff from completing the Works….

[89] Whilst the period from the Completion Date of 30.5.2015 to 23.9.2015 can safely be regarded as the period of delay occasioned by the Defendant themselves for the reasons already alluded to above, the same cannot be said for the period after 23.9.2015 to 16.2.2016, the date the PMA license was obtained…

[91] Therefore that period from 23.9.15 to 16.2.2016 is about 146 days which works to be about 50% of the period claimed which may be attributed to the Plaintiff where delay was concerned. The Plaintiff had not applied for any extension of time.

[92] Realistically and reasonably, the part of which the Plaintiff is responsible with respect to LAD is 50% of RM3.91 million which is RM1,955,000.00.”

Having made the aforesaid assessment, the Learned High Court Judge had further taken into consideration that part of the works, i.e the 10 lifts at Blocks A to C, had been completed prior to the overall completion. In this regard, the Learned High Court Judge then further apportioned the LAD claimed by the Defendant:-

“[93] The Court was inclined to take into consideration that 10 out of the 22 lifts have been completed in Block A, B and C, leaving only 12 lifts to be completed for the shop lots.

[94] Hence in terms of LAD that can be attributed to the Plaintiff, the uncompleted lifts appear to be only half that amount seeing that the LAD should only be chargeable after CNC had been issued on 30.6.2015 and not from the Completion Date of 30.4.2015.”

Having made the aforesaid assessment, the Learned High Court Judge then allowed a portion of the Defendant’s LAD counterclaim amounting to RM977,500.00. In other words, the Learned High Court Judge allowed ¼ of the Defendant’s total counterclaim of RM3,910,000.00 having deducted 50% (RM1,955,000.00) for the delay attributed to the Defendant from 30.5.2015 to 23.9.2015 and a further 25% (RM977,500.00) after taking into account that part of the works (Blocks A, B and C) were completed prior to the overall completion.

It is pertinent to note that this case was decided in the High Court before the latest Federal Court’s decision on the issue of LAD viz section 75 of the Contracts Act 1950 in Cubic Electronics Sdn Bhd (in liquidation) v MARS Telecommunications Sdn Bhd [2019] 1 AMR 737. For our write up on the Cubic case, click [HERE].

Effect of Decision

From the Court of Appeal’s decision, it appears that it would not be plainly wrong for a Trial Judge to apportion the quantum of LAD claimed by Employer where part of the delay is caused by Employer, based on the evidence before the Court, notwithstanding that:-

(a) The Employer themselves are unable to “pinpoint the specific number of days due solely to” the Contractor;

(b) The Contractor did not make any application for EOT although the Contract had provided for time to be extended.

However, it should be noted that the “LAD” claimed in this case is the actual loss suffered by the Defendant, i.e. the actual LAD paid by the Defendant / Main Contractor to its Employer, under the Main Contract.

Would the outcome differ if the claim were purely for contractual LAD calculated based on the sum provided under the contract? Would the failure to make an EOT application in accordance to the contract disentitle the contractor to an apportionment of LAD like this case?

Following the Federal Court case of Cubic, an employer who is seeking to enforce the LAD clause, being a “damage clause under s.75” of the Contracts Act 1950, bears the burden to “adduce evidence that there was a breach and that the contract contained a clause specifying a sum to be paid upon breach.”

If the employer is unable to “pinpoint the specific number of days of delay due solely to” the contractor, would the employer still satisfy the first limb of the test under Cubic in a claim for contractual LAD, i.e. that the contractor had breached the contract by failing to complete within the agreed contractual period?

Following the decision, it should be noted that:-

(a) As a matter of good practice, the contractor should record all the instances of delay caused by its employer and such correspondences should be issued contemporaneously, i.e. at or about the same time as the instances of delay; and

(b) In abundance of caution, if the contract provides for mechanism for EOT, it is imperative that the contractor applies for EOT pursuant to the terms of the contract to avoid any dispute on whether the contractor is entitled to a reduction of LAD for the delays caused by the employer.

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