28^th November 2018

Issues

Often times it is said that a subcontractor cannot make a direct claim against the employer of the project for payment / work done as there is no privity of contract between them. In the scheme of things, the contracts are between the employer & the main contractor (“Main Contract”) and between the main contractor & the subcontractor (“Subcontract”). Together, they form a chain of contracts but are independent of each other.

The general rule is that the employer and the subcontractor are strangers to each other, as far as contractual relationship is concerned, and the subcontractor will have to claim against the main contractor for work done, instead of claiming against the employer.

But what if the main contractor is wound up and is not in a position to pay for the work done by the subcontractor? Does the subcontract have any avenue to claim against the employer directly? If so, under what circumstances can such a claim be made?

These issues arose in the case of Mega Mayang M&E Sdn Bhd v Utama Lodge Sdn Bhd and Anor Appeal [2018] MYCA 329, which was decided by the Court of Appeal on 04.10.2018.

The brief facts of the case are as follows:-

(a) The Respondent was the developer of a condominium project and the employer of Sara-Timur, who is the Main Contractor for the project. MEG was the Respondent’s mechanical & electrical engineer (“M&E Engineer”), while DES was the architect (“Architect”) and FPS was the quantity surveyor (“QS”);

(b) The Appellant was awarded 2 sub-contracts dated 15.07.2011 for cold water and sanitary plumbing services (“1^st Subcontract”) and 22.12.2011 for air-conditioning and mechanical ventilation (“2^nd Subcontract”) respectively;

(c) Both subcontracts were entered into between Sara-Timur, as the Main Contractor, and the Appellant. The Appellant was identified as domestic sub-contractor in these subcontracts;

(d) During the project, the Appellant submitted its claims for work to Sara-Timur. These claims were copied to the Respondent, the M&E Engineer and the Architect;

(e) The Respondent paid against these claims by cheques issued to the Appellant and these cheques were delivered to the Appellant through Sara-Timur. The Appellant claimed that its works were never assessed by Sara-Timur. Instead, Sara-Timur only received profit on attendance;

(f) Sara-Timur was wound up on 03.05.2016. The Appellant submitted to the Respondent its Final Claim (No. 38) for the total sum of RM1,805,203.46 for original and additional works under the 1^stSubcontract. A separate claim was made for the works under the 2^ndSubcontract;

(g) The Respondent rejected the claim and the Appellant sued for payment under section 71 of the Contracts Act 1950, with alternative claims based on quantum meruit and unjust enrichment;

(h) The Respondent’s primary defence is lack of privity of contract, i.e. there was no contract between the Appellant and Respondent and that the payment method under the subcontracts (see below) does not create any contract between parties or impose any contractual obligation for the Respondent to pay the Appellant;

(i) The Respondent also alleged that the Appellant did not complete the works and that 3^rd party had to be appointed to complete the works and remedy defects. As a result, the Respondent contended that there are unpaid sums due from Sara-Timur and proceeded to set off these unpaid sums from Sara-Timur.

Decision of the High Court

The High Court dismissed the Appellant’s claims. In relation thereto, the Court of Appeal noted that:-

“[13] …The learned Judge was of the view that in any construction contract, the respondent as the developer and/or employer would ultimately benefit from the work done by all sub-contractors including the appellant. But that did not equate to saying that the subcontractors had directly conferred a benefit to the respondent as the developer and/or employer. Contractually, the appellant, as the sub-contractor, conferred the benefit to Sara-Timur, the main contractor.

[14] For the same reasons, the High Court concluded that the respondent “cannot be said to have received unjust enrichment” since it had paid for the work done. The payment was made to Sara-Timur and not, to the appellant.”

Issues before the Court of Appeal

On the outset, Justice Mary Lim noted the following:-

“[15] This appeal deals with the interpretation and application of section 71 of the Contracts Act 1950…

[16] Section 71 reads as follows:

Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect thereof, or to restore, the thing so done or delivered.

ILLUSTRATIONS

(a) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He is bound to pay for them.

(b) A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously.”

The Court of Appeal also took the opportunity to restate the test for section 71 of the Contracts Act 1950:-

[17] In the leading case of Siow Wong Fatt v Susur Rotan Mining Ltd & Anor [1967] 1 MLRA 53, the Privy Council held that before a claim under section 71 may succeed, it must be shown that the doing of the act or the delivery of the thing:

i. must be lawful;

ii. must be done for another person;

iii. must not be intended to be done gratuitously; and

iv. must be such that the other person enjoys the benefit of the act or the delivery.

[18] All four requirements must be met before a claim can succeed on the principle of quantum meruit.”

As for the High Court’s judgment, the Court of Appeal also noted the following:-

“[29] In our instant appeal, the learned Judge had dismissed the claim on the basis:

i. that the respondent had paid Sara-Timur for the work done, that this was reflected in the Statement of Final Account dated 25^thJuly 2016- see paragraph 19 of the grounds of judgment;

ii. that the appellant was aware that it was the subcontractor to the project while Sara-Timur was the main contractor- see paragraph 20; and

iii. that in any construction contract, the ultimate beneficiary of work done by all subcontractors would be the developer or employer, which in the appeal was the respondent; but “that does not equate to saying that the sub-contractors have directly conferred a benefit to the defendant as the developer or employer. Contractually, it is the plaintiff the sub­contractor which conferred the benefit to Sara-Timur the main contractor”- see paragraphs 21 and 22.

Decision of the Court of Appeal

The Court of Appeal agreed with the Learned High Court Judge that the first 3 conditions under section 71 of the Contracts Act were satisfied. However, the Court of Appeal respectfully disagreed with the High Court Judge’s finding that the 4^th condition was not satisfied:-

“[30] It would appear that the learned Judge had dismissed the claim on the basis that the fourth condition under section 71 of the Contracts Act was not met and that the appellant knew at all times, that it was the subcontractor, contracting with Sara-Timur and not, the respondent. We deduce from the lack of deliberations on the other three conditions that those other conditions were fulfilled on the facts. In this respect, we agree with the learned Judge that the first three conditions were in fact, satisfied. The act or works carried out by the appellant are lawful; done not for itself but for another; and, the act or works were never done gratuitously. The appellant always required payment for any of its work done pursuant to the two subcontracts.”

 [31] As for the fourth requirement, we must, with respect, disagree with the learned Judge. We are of the unanimous view that even this fourth requirement is met. Contrary to the learned Judge’s view, we find the factual background and arrangements between all the parties in the present appeal highly suited to a claim under quantum meruit.”

[Emphasis added]

Factual Background and Arrangements “Highly Suited” for a Quantum Meruit Claim

Following from the above, the Court of Appeal allowed the appeals and entered judgment in favour of the Appellant premised on the following factual background and arrangements, which the Court of Appeal finds to be “highly suited to a claim under quantum meruit”:-

(a) There is no contractual relationship between the Appellant and the Respondent. Instead, the contractual relationship is between Appellant and Sara-Timur or Sara-Timur with the Respondent;

(b) The claim is not made based on any contract between the Appellant and Respondent or premised on the payment clause in the contract between the Appellant and Sara-Timur (Clause 20), which read as follows:-

“It is agreed that the Employer shall issue all payment cheques to the Sub-Contractor company name and made payable to the Sub-Contractor via Main Contractor.”

(c) Instead, the Appellant’s claim was premised on quantum meruit and the Appellant led evidence during Trial to show that:-

“…throughout the progress of the project, it submitted its claims for work done to Sara-Timur with the respondent amongst the parties copied in on the claims. The claims were assessed and approved by the respondent who then paid the appellant vide cheques issued in the appellant’s name. The appellant was never paid by Sara-Timur.”

[Emphasis added]

(d) In light of the same, the Respondent’s argument that it had paid Sara-Timur or that it had paid Sara-Timur for the Appellant’s work is immaterial, especially considering:-

“…the settlement or payment concerns other claims or issues between those contracting parties which have nothing to do with the appellant.”

[contracting parties being the Respondent and Sara-Timur]

(e) The Respondent attempted to set off the monies which the Respondent claimed were due from Sara-Timur to the Respondent and with this set off together with a reduction of the Subcontract works’ value (under the Main Contract), the Respondent contended that it had already paid Sara-Timur. This was rejected by the Court of Appeal:-

“[38] In this respect, we agree with the appellant that the letter of award does not provide for any right to set off in the manner claimed by the respondent in which case, the respondent’s argument cannot stand. Since the set off is due to an exercise of contractual rights and obligations between the respondent and Sara-Timur, the respondent’s set off is erroneous.”

(f) To fortify the rejection of payment to Sara-Timur issue, the Court of Appeal finds that:-

“[39] Further, clause 20 had already provided for the respondent’s direct payments to the appellant. The respondent was never to pay Sara-Timur and then for Sara-Timur to pay the appellant. For this added reason, the respondent’s contention that it had already paid Sara-Timur is once again, irrelevant and immaterial to the appellant’s claim for payment from the respondent.”

(g) Further, the Respondent’s document in support of its contention that it had paid Sara-Timur (i.e. a Proof of Debt against Sara-Timur (“POD”) and related documents) were not admitted in evidence and thus, “remained unreliable and is of no support to the respondent’s claim.”

(h) In any event, the Respondent claim for such monies shown in the POD is not against the Appellant. “These claims, if at all, arise from the whole works undertaken by Sara-Timur whereas the appellant was only the subcontractor for two types of particular works.”

​In conclusion, the Court of Appeal finds that:-

“[44] The unflinching evidence led at trial showed that the respondent was always in direct control and influence over the appellant. Not only did the respondent supervise the appellant’s work, it assessed and paid for the appellant’s work. Although there was no contract between the parties, it is quite evident to us, that the appellant’s work was always to be paid for by the respondent, the party that benefited from the appellant’s work. Not only was there no evidence that the appellant carried out its works with no intention or expectation of being paid for such works, there was not even a suggestion that the appellant ever did its work gratuitously. The appellant’s work involved payment; the only question who was to be the paymaster. In our view, it is clear that it was by the respondent and for the reasons as relied on by the appellant.

[45] It is our firm view that all the conditions under section 71 have been fulfilled. The appellant’s work was lawfully done; it was not done for itself but for another; the work was never intended to be done gratuitously but in every expectation that it would always be paid. The learned Judge was plainly erroneous in dismissing the appellant’s claim.

…

[48] With these conclusions, we are not inclined to deliberate on the issue of unjust enrichment save to say that we agree with the submissions of learned counsel for the appellant on this. Given that the benefit of the appellant’s work is with the respondent, for which the appellant never received payment from the respondent, the respondent may be said to have been unjustly enriched were it not ordered to pay the appellant for the benefit received under both subcontracts.”

[Emphasis added]

Effect of Decision

The decision is not a carte blanche for subcontractors to lodge direct claims against the employer (instead of claiming against the main contractor). Otherwise, provisions such as section 30 of the Construction Industry Payment and Adjudication Act 2012 (Direct Payment from Principal) would be rendered redundant.

However, it does give an additional avenue for the subcontractor to pursue a claim against the employer for quantum meruit, if the requisite conditions are met.

On the flipside, employers should also be very cautious of its involvement in the management of the subcontracts for involvements such as:-

(a) asserting direct control and influence; or

(b) supervising, assessing and making direct payment

may render the employer to be the “paymaster” of the subcontractor and give rise to a claim of quantum meruit by the subcontractor against the employer.

Whilst this case relates to a construction project, the principles enunciated therein is equally applicable to other situations involving claims between a subcontractor against an employer, or a sub-subcontractor against a main contractor, in a chain of contracts.

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