Disputes Can Have Serious Implication in Construction Project

ABSTRACT

Dispute in construction industry always occur and can be attested by many court cases reported in court proceedings, various law journals and law reports. Construction disputes can have serious implication in construction project. The project may suffer cost and time overrun, the owner may suffer significant loss and profit and worst still the project may be abandoned or failed. This is because construction is a complex process involving of many activities, myriads of individual, different company or firms, different size, part of country with different skills and capabilities and always subject to the changing environment. The issues are which elements is actually the common subject matter of the dispute? What is the nature of the disputes? Who are the parties involved? What type of the project? When do the dispute occur? And what kind of a standard form of the project? Therefore, the objectives of this study is to develop profile of construction disputes feature or characteristic of the dispute where consists of the nature of the disputes, the parties involved, type of project, time of the disputes occurred, and standard form of contract for the project. Limitation of this study will be on the construction disputes reported by ‘ The Malayan Law Journal ’,cases in Malaysia and related to ‘ Building Contract ’ only while the methodology of this study will be based on the secondary analysis. Research finding identified that the common nature of construction disputes is Clauses 10, 12 and 22 of the JKR 203/203a. The most party involved in construction disputes are between employer and the main contractor and also the main contractor and sub contractor.

1 Introduction

Every young engineer goes out into the world after completing his formal academic training with lofty intentions of putting his newly acquired knowledge into practice. In the initial stages of his working life, he may invariably pick up many shortcuts from his superiors, colleagues and others involved in the trade. Without proper education every young enginner would be devastating their knowledge by their activity. The aim of study is to understand the cases and justify based on the JKR203a clauses.

Background

Disputes have occurred in construction industry from the ancient era through the years until now. It may happen due to time, financial, and workmanship matters as well as the relationship between parties involved in the construction industry. The dispute may become serious and may involve court judgments or civil litigation but it will cost each party a lot of money as well as time.

Disputes are almost inevitable in construction environment. It may not be incorrect to suggest that it is not very uncommon to have dispute free construction. This is mainly attributed the fragmented and complex nature of construction. Construction relationships in the construction industry all over the world have become more increasingly strained as years goes on and on. Working relationships, communications, and contractual commitments are often not carried in good faith. This has led to most developed countries to search for better alternatives on how to manage disputes in the construction industry. Though it has been seen that disputes in the industry is like an un-incurable disease, means are done to fight the problem.

In the United Kingdom, for example the standard form of contract that is internationally used to new engineering contracts has been subject to change; whereas, in the United States of America the Disputes Review Boards ( DRB’s) which comprises of three board members to manage disputes in construction sites was introduced. All this exercises undertaken have proved to be successful. Developing countries are still facing this problem and the research on this topic will be on what to do either to improve or avoid and manage disputes in our local construction industry. Alternative dispute resolution is therefore essential for the industry in order to improve its performance.

In Malaysia also a developing country which the construction industry employs over 500,000 people and represent 9.5 percent of the work force in the country in the year 2002. The total contract value of construction in 2002 was exceeded 41.5 billion RM which represents 3.2 percent of the gross domestic product (GDP).

Although it accounts for less than 5 per cent of GDP, the industry is strong growth push because of its extensive linkages with the rest of the economy. In particular, the industry has extensive linkages with construction related manufacturing industries such as basic metal products and electrical machinery. (Source: Market Watch Malaysia 2004-Construction and Building Material Industry). Clear then, anything that impacts on the building and construction industry has potential to affect the whole economic. The construction industry is a unique and complex compare to other industries as it involves many participants in all trends .Due to this, conflict and disputes can be easily occurred, for example; changes in plans, quantities, or details of construction which are inherent in the nature of construction. That is because much of construction works involves things that are hidden beneath the ground and those hidden things may not actually be as had been anticipated. Also, even with the best of intentions, the plans may not work as well as expected when they are applied to the actual site, traffic, maze of utilities, inclement weather, delays of material delivery, delays of payment, poor planning and management etc.

Over the past two decades the construction industry has made tremendous progress in developing more efficient methods of dispute prevention and resolution. In fact, experts frequently refer to the construction industry as being on the innovative edge regarding dispute resolution (ENR 2000, Hinchey and Schor 2002). Despite the progress, there remains much room for improvement. The Malaysian construction industry is also pervaded with disputes. This can be attested by hundreds of cases reported in the various law reports and journal such as Building Law Report, Construction Law Report and Malayan Law journal, therefore dispute’s effects in construction industry should be studied and examined thoroughly in order to prevent them from occurring, or managing them in an effective way. Disputes may bring about serious cost and time overrun; both owners and the contractors may incur significant loss of profit or worst still ,they may be forced out of business; and most horrific of all, the project may fail or totally abandoned. The loss or suffering is not only confined to the owner and the contractor, but also to the consultants, workers, the public and the country. Therefore, it is the responsibility of the project manager or construction manager to ensure that project under his/her charge is completed on time, within the cost and to an acceptable quality.

To this end, the project manager must ensure harmonious and trusting business and professional relationship between the parties and minimize confusion and misunderstanding which include defining duties and responsibilities of the various contracting parties and to clearly drawing up the terms and conditions of the contract. It has been pointed out that managers in today’s construction organizations must manage the firms strategically. They cannot make decisions based on long standing rules , on the contrary, they must adopt strategic management approach when it comes to dealing with disputes. They must rise above their training and experience in such functional/operational areas such as law, accounting ,marketing or finance and grasp overall picture and look at thing in a holistic manner in order to adopt a pro-active approach by anticipating any future disputes and initiate strategies to minimize them toward achieving the project objectives.

1.2 Statement of Problem

In recent years, carelessness and negligence in construction industry have risen overeater prominence. Political and economic trends are increasing the economic pressure on construction industry; resulting in disputes from careless design and inadequate construction practices. Besides, complex construction can likewise result in complex disputes.

Great concern has been expressed in recent years regarding the dramatic in conflict and disputes in the construction industries of many countries and the attendant high cost both in terms of direct cost (lawyers, claims consultants, management time, delays to project completions) and indirect/ consequential costs (degeneration of working relationships, mistrust between participants, lack of teamwork and resultant poor standard of workmanship).

In construction practice, there are numerous of construction disputes that occur largely through many reasons between the various parties in a design/ construction effort. The construction disputes may occur from the initial stage until the closeout stage of the project. The occurrences of construction disputes can lead negative impact towards client organization. The construction work progress will be slow due to the conflict and disputes between the contractor and client. Subsequently, the cash flow of the client will slow down. The client organization may suffer losses of time, cost and quality which consequently affected the image and background of the company. Unsatisfactory end users may create troubles such as making reports on building quality and irresponsible developer on delivery product. The disputes will be endless and only the developer will be suffer losses and even reputation of the company. Questions were raised: Why disputes have been a nature event in construction industry? What actually causes the disputes occur in construction industry?

Construction claims and other disputes frequently arise during construction projects. This will involve third party on behalf of owners, contractors, design professionals, and construction managers in the early resolution of these disputes through assistance in partnering, negotiation and mediation. When construction disputes cannot be resolved informally, disputes may lead to arbitration. If the construction disputes not able to reach the agreement between two parties or more, it will be litigation case. Construction disputes may end up involvement of high stakes such as multi-million dollar investments, professional reputations and even business survival of the owner.

2.0 LITERATURE REVIEW

2.1 Dispute

Disputes in the construction industry are often lengthy, complex and expensive to resolve. They can also cause long term damage to the commercial relationships between the parties. The word ‘dispute’ should be given its normal meaning. It does not have some special or unusual meaning conferred upon it by lawyers. Despite the simple meaning of the word ‘dispute’, there has been much litigation over the years as to whether or not disputes existed in particular situations. This litigation has not generated any hard-edged legal rules as to what is or not a dispute (Dr Robert, 2006).

However, the accumulating judicial decisions have produced helpful guidance. The mere fact that one party (claimant) notifies the other party (respondent) of a claim does not automatically and immediately give rise to a dispute. It is clear, both as a matter of language and from judicial decisions, that a dispute does not arise unless and until it emerges that the claim is not admitted. The circumstances from which it may emerge that a claim is not admitted are Protean. For example, there may be an express rejection of the claim. There may be discussions between the parties from which objectively it is not to be inferred that the claim is not admitted. The respondent may prevaricate, thus giving rise to the inference that he does not admit the claim. The respondent may simply remain silent for a period of time, thus giving rise to the same inference (Dr Robert, 2006).

The period of time for which a respondent may remain silent before a dispute is to be inferred depends heavily upon the facts of the case and the contractual structure. Where the gist of the claim is well known and it is obviously controversial, a very short period of silence may suffice to give rise to this inference. Where the claim is notified to some agent of the respondent who has a legal duty to consider the claim independently and then give a considered response, a longer period of time may be required before it can be inferred that mere silence gives rise to a dispute. If the claimant imposes upon the respondent a deadline for responding to the claim, that deadline does not have automatic effect of curtailing what would otherwise be a reasonable time for responding. On the other hand, a stated deadline and the reasons for its imposition may be relevant factors when the court comes to consider what a reasonable time for responding is. If the claim as presented by the claimant is so nebulous and ill-defined that the respondent cannot sensibly respond to it, neither silence by the respondent nor event an express non-admission is likely to give rise to a dispute for the purpose of arbitration or adjudication (Dr Robert, 2006).

However, many disputes could be avoided by ensuring that a formalized contract is made, which is drafted clearly and fairly and contains provisions for early dispute resolution and effective contract management. There are four basic precautions which contribute to the minimization of disputes (Dr Robert, 2006).

ensure that the parties enter into finalized contract before works commerce

ensure the scope and quality of the works are clearly defined at the pre-contract stage

ensure the contract terms are fair and clear, and utilize standard forms of contracts whatever possible

Ensure that the contract used contains provisions for the early notification of potential disputes and a well-structured dispute resolution clause which is not limited to arbitration/litigation.

3.0 Research Methodology

3.1 Research Instrument

This research used both the journal and internet Research methodology. These instruments were used to collect both primary and secondary data. We found our cases from the Malian Law Journal.

3.2 Research Procedure

As teamwork, we ran a research about dispute in construction contract. First of all we extracted some general and basic information about the construction contract and dispute could happen in a contract. During the actual study, the cases were read and discussed by group members.

4.0 DISCUSSION

4.1 CASE STUDY ONE:

Konajaya Sdn Bhd v Perbadanan Urus Air Selangor Bhd ([2009] 5 MLJ 263)

In reference to the this case, the Konajaya sdn Bhd (Konajaya) as a plaintiff and Perbadanan Urus Air Selangor Bhd (Perbadanan) as a defendant had entered into a contract for the Perbadanan to carry out certain design and construction works. Konajaya successfully completed the works on 22 February 1999. In accordance to the contract, the Perbadanan provided the Konajaya with a guarantee issued by Maybank Bhd (‘MBB’) for the design of the works (‘the guarantee’). The guarantee was to remain in force for 5 years and 6 months from the date of completion of the works on 22 February 1999. So the guarantee was to expire on August 2004. On June 2003, Konajaya was notified by MBB that the Perbadanan had made a call on the guarantee which Konajaya had not given other party any prior notice of any claim on the guarantee.

Konajaya applied for an injunction to restrain Perbadanan from demanding

and accepting any moneys under the guarantee pending Konajaya’s application for a declaration that the defendant had no right to call on the guarantee. After that, the Perbadanan who was the defendant, failed to make any attempt to preserve the guarantee and it expired. In support of its application, the plaintiff requested the guarantee to be required by the defendant to state the defects or damage to the works when making a demand to MBB. If the defendant had failed to do so in its demand, it will be assumed that the defendant’s demand to MBB for payment under the guarantee was invalid and ineffective. The defendant however countered and said that the guarantee was a performance bond, which did not require anything more that a demand in writing to call on the guarantee.

Fortunately, after several appeals from the plaintiff, the court finds that the defendant’s letter of demand dated 27 June 2003, calling for the bank guarantee, failed to comply with the conditions set out in the bank guarantee, and thus the defendant was not entitled to call on the said bank guarantee. The plaintiff’s originating summons was allowed with costs.

4.1.1 Technical Assessment based on JKR Standard Form:

Based on the JKR203a clause 22.2 the contractor shall provide the design guarantee bond by approved bank or financial institution that shall remain valid for 5 years after the date of practical completion date of work, and If any defect/damage occur at particular works resulted from defect, fault, or inadequacy in the design which then become defective, the approved licensed bank will issuing the Design Guarantee Bond and pay to the Government.

4.2 CASE STUDY TWO:

Raja Lob Sharuddin bin Raja Ahmad Terzali & Ors v Sri Seltra Sendirian Bhd ([2008] 2 MLJ 87)

There were 45 plaintiffs claimed that their houses bought from the defendant were not built according to specifications and had suffered from poor workmanship. Thus, they sued the defendant with the evidence of such defects through an experienced engineer of 25 years standing and registered with the Lembaga Jurutera Malaysia. He had prepared a report detailing the defects consisting of photos that shown the defects were all similar in nature and there were serious structural defects, which would not appear immediately.

While, witnesses for the defense, testified to the effect that the defendant had obtained all the required planning and development approvals from the relevant government agencies and had also engaged professional consultants. It was denied on behalf of the defendant that low quality materials were used, but no explanation was offered with regard to the defects in the houses of the plaintiffs. However, the defendant failed to set out any professional evidence to dispute plaintiff witness’s engineering report. The defendant also claimed that the defects in the plaintiffs’ houses appeared well after the defects liability period and therefore the plaintiffs had no cause of action against the defendant. Thus, the judge ruled that the plaintiffs had failed to prove their case and dismissed their claims with costs

4.2.1 Technical Assessment based on JKR Standard Form

Based on the JKR203a clause 10 part (a), contractor shall construct, complete, commission and test all the works in accordance on the contract and the all detail and specifications of contract. More over based on the part (i) of clause 10 contractor shall supervise and instruct all of staffs and subcontractors during the construction to control the accordance of construction process based on contract details.

On the other hand based on clause 10 part (j) contractor shall make good any defect, imperfection, shrinkage or any other fault whatsoever which may appear during the Defects Liability Period (DLP), and don’t have any responsibility about it after DLP.