Impacts on the Building and Construction Industry

Construction industry in Malaysia can be considered as a big business in their country. Construction has important role in our country’s development and prosperity as economics of the country depend very much on the trends of the construction. Although it accounts for less than 5 percent of GDP, construction industry is a very strong growth push because of its extensive linkages with the rest of the industries such as manufacturing.

It is clear than anything that impacts on the building and construction industry has potential to affect the whole economic. Construction industry is a unique and complex compared to other types of industries. The complex construction can often result in complex dispute, which are predominantly arose from the complexity and magnitude of work, multiple prime contracting parties, poorly prepared and/or executed contract documents, inadequate planning, financial issues, and communication problems.

Construction disputes may occur from the inception stage until the completion of project and seems unable to be eliminated in the construction industry, as the nature of construction is full of risk. The occurrences of construction disputes may leave negative impact towards the construction parties. Work progress may slow down and lead to slow down of client’s cash flow. Unsatisfactory end users may create troubles, for instance logging reports on building quality.

Many of construction works involves things that are hidden under the ground and those hidden things may not actually be as had been anticipated. The plans may not work as well as expected when they are applied to the actual site, traffic, maze of utilities, rainy weather, delays, poor planning and management. When variations occur, there is a potential of disagreements and these disagreements can be regarded as disputes when small conflict is not solved directly when it occurred. There are lots of problems exist in construction industry which is related to poor quality, poor workmanship, poor safety and health environment, project failures, manpower, productivity, disputes and many more that are always reported by the newspaper.

One of these examples that will be discussed is the case TEKNIK CEKAP SDN BHD V. VILLA GENTING DEVELOPMENT SDN BHD. The plaintiff averred that the defendant had failed and refused to make payment of the sum specified in the certificates and applied for an order that the defendant deposit the first moiety of the retention sum into a separate bank account until the conclusion of the trial. The defendant contested the plaintiff procured the contract by fraud and the contract has become void; and plaintiff did not plead breach of trust in the statement of claim and thus not entitled to the remedies sought by them.

2.0 FACT OF THE CASE

It was happened back in year 1995. Villa Genting Development Sdn Bhd, the client (hereinafter referred to as “the defendant”), appointed Teknik Cekap Sdn Bhd as the main contractor (hereinafter referred to as “the plaintiff”), by a contract dated April 1994 in respect of the construction of the defendant’s resort apartment on Lot PT 11386, HS(D)10563 Genting Highland, Pahang Darul Makmur. The construction comprised of 688 units inclusive of two levels of commercial podiums, three levels of car parks and other external works (hereinafter referred to as “the said works”). The defendant also appointed Messrs Gerak Reka Akitek Sdn Bhd as the architect for the said works. The contract between the parties followed closely the standard PAM Conditions of Contract (hereinafter referred to as the “PAM contract”.) The salient features of the contract were compendiously stated in these words:

the architect would issue monthly certificates of payments stating the amount due to the plaintiff from the defendant and the plaintiff would be entitled to the payment stated therein within twenty one (21) days from the date wherein the respective certificates were presented to the defendant;

the amount stated as due under the monthly certificates of payments would be the value of the work done and 75% of the materials and goods delivered by the plaintiff less 5% thereof which may be retained by the defendant as the retention fund;

Upon practical completion of the said works, the architect would issue a certificate of practical completion together with a certificate for the release of one moiety of the retention fund and the plaintiff would then be entitled to the payment of the moiety within 21 days from the preservation of the certificate of practical completion to the defendant.

The plaintiff had completed the said works in accordance with the terms of the contract. It was averred that in the course of the said works, the defendant had retained the sum of RM 3,412,003 as the retention fund. In due course, the architect had, on the following dates, issued payment certificates certifying that the following sums were payable to the plaintiff by the defendant:

Certificate Number

Dates

Sums Payable

(RM)

18

09.02.1995

2,568,800.00

19

20.03.1995

1,464,000.00

20

28.04.1995

1,052,700.00

21

01.06.1995

1,666,600.00

TOTAL

6,752,100.00

Indeed the architect was empowered to certify that the said works have been practically or substantially completed. These payment certificates numbering 18, 19, 20 and 21 were presented by the plaintiff to the defendant and accordingly the sums stated therein became due and owing. It was averred that the defendant had paid the plaintiff the sum of RM 2,500,000 under payment certificate number 18 but the defendant was obstinate and failed and / or refused to make payment of any other sums specified in payment certificate numbers 18, 19, 20 and 21 thereof. Hence, the sum of RM 4,252,100 remained due and owing under payment certificate numbers 18 to 21. On May 5, 1995, the architect issued the certificate of practical completion and the plaintiff presented that certificate to the defendant on or about the same day. In the premises, it was said that one moiety of the retention sum equivalent to RM 1,706,001.50 became due and payable by the defendant. Unfortunately, the defendant refused to pay the sum of RM 1,706,001.50 which sum was due and payable under the certificate of practical completion.

The defence and the counterclaim of the defendant raised interesting issues. The defendant emphasised that under the PAM contract, the interim certificate of payment and the certificate of practical completion shall not by themselves be conclusive evidence that any works, materials or goods to which it relates were in accordance with the contract specifications. The defendant also emphasised that all workmanships, materials and components throughout the said works shall comply with the Malaysian standards and / or Codes of Practice or as the case may be, the British standards and / or Codes of Practice or other standards or codes as are stipulated in the specifications. It was the defendant’s stand that the plaintiff did not complete the said works in accordance with the contract.

Under the PAM contract, it was the duty of the plaintiff to carry out and complete the said works. It imposed an obligation on the part of the plaintiff to do everything which was necessary to be done in order to complete the said works. It was said that the plaintiff had failed to comply with the specifications and had produced defective works. It seemed that the architect in issuing the certificates had failed to take into account the poor quality of the plaintiff’s workmanship especially the defective works. It was said that the architect issued the interim certificates on the understanding that the plaintiff would subsequently rectify the defective works. On this premise, the defendant disputed the correctness of the certificates.

Even though the defendant admitted paying the plaintiff the sum of RM 2,500,000, yet the defendant challenged the interim certificate number 21 by stating that the architect had failed to take into account the various omissions to the variation orders. Later, on or about September 28, 1995, the architect issued interim certificate No 22 wherein he authorised the deduction of RM 1,310,000 for substantial major defective works, outstanding works and works that were not done in accordance with specifications. The defendant emphasised that due consideration and effect must be given to interim certificate number 22 and when so taken, it was said that the defendant was entitled to set-off the authorised deduction against the plaintiff’s claim.

The defendant contended that the certificate of practical completion was null and void, and of no effect. It was also contended that the certificate of practical completion did not bind the defendant in that it was invalid and ought to be disregarded because:

it was not issued independently;

it was issued with the collusion of the plaintiff;

it failed to take into account matters which should have been considered, like for instance:

that the plaintiff had not completed nor handed over a substantial portion of the works;

that there was failure on the part of the plaintiff in not completing the mechanical and electrical works within the meaning of the contract; it was said that under the contract, completion shall be deemed to include testing and commissioning of all plants, equipment controls and distribution networks;

that the plaintiff failed to hand over the two levels of commercial podiums to the defendant.

It was for these varied reasons that the defendant said that it was not obliged to release the first moiety of the retention sum of RM1,706,001.50 to the plaintiff. In regard to the set-off, the defendant averred that various items of losses and damages should be subtracted and these items were said to incorporate the following features:

Estimated cost of rectification

RM 2,500,000.00

Liquidated and ascertained damages

RM 4,925,000.00

Works that were supposed to be carried out by the plaintiff but instead it was completed and done by the defendant

RM 1,149,519.95

Purchasers’ claims for late delivery

RM 5,013,797.04

Due to the plaintiff’s delay, together with the use of substandard materials and the subsequent change in market, the sales of the defendant’s condominiums in Phase 2 has suffered tremendous loss of profits for Phase 2 and it could not be quantified

Quantum not listed

Variation orders that were overcharged

RM 1,700,000.00

Materials incorporated into works

RM 508,900.00

The defendant also alleged by way of an alternative that the plaintiff procured the contract illegally or by way of a fraud. The particulars of fraud were itemised and set out in this fashion:

the plaintiff had paid the defendant’s general manager by the name of Ler Cheng Koy and the site manager by the name of Chen Woon Hin secret bribes to the tune of RM550,000 in order to procure the contract. This sum was paid through a person by the name of Lim Hwa Keng who happens to be the brother-in-law of Ler Cheng Koy and, at the material time, was said to be a student.

the plaintiff had by way of a letter dated April 24, 1993 allegedly appointed Lim Hwa Keng Consultant for a fee of RM550,000 in order to “obtain tender document, assistance in pricing, negotiating and finalising of tender” and at the same time to “provide administrative services following award of contract.” It was, however, a term of the said letter that Lim Hwa Keng Consultant would not be paid its remuneration in the event the plaintiff was not successful in its tender exercise.

by a letter dated May 24, 1993, the plaintiff’s sub-contractor by the name of Natamas Sdn Bhd allegedly appointed Lim Hwa Keng Consultant for a fee of RM100,000 in accordance with the terms of the plaintiff’s letter dated April 24, 1993.

ironically, Lim Hwa Keng, who was purportedly said to be the project consultant of the plaintiff and who was paid a substantial amount of money was not and had never been mentioned in any correspondence nor attended any meeting whatsoever.

It was further averred that both Ler Cheng Koy and Chen Woon Hin acquiesced in a number of things. They did not object to the false claims for the said works that were not completed, neither did they object to the substitution of materials and equipments which were of lower quality or value to that specified nor did they object to the serious defects in the plaintiff s works. They too did not bring to the attention of the architect, the serious defects in the plaintiffs works.

So the stand of the defendant was quite simple. By bribing Ler Cheng Koy and Chen Woon Hin, the plaintiff was able to conceal deficiencies in the said works because both these two personalities conveniently and purposely failed to inform the architect of the existence of those inherent deficiencies. For these reasons, the defendant averred that the contract was void and unenforceable and so it was submitted that the plaintiff was disabled from enforcing the certificates that were issued thereto. That being the case, the defendant held onto the notion that damages for fraud was due to them and the particulars of fraud were listed as:

additional contract sum paid as a result of fraud;

cost of repairing and replacing concealed defects and omissions; and

variations that were fraudulently made.

3.0 PLAINTIFF’S CLAIMS AGAINST DEFENDANT

the sum of RM4,252,100 which was due and owing under payment certificate numbers 18 to 21;

the sum of RM1,706,001.50 which was due and owing under the certificate of practical completion;

interest on the above sums at the rate of 8% per annum calculated from such date as the court deems fit;

costs; and

such further or other relief as the court thinks fit.

The plaintiff sought to rationalise the application and advanced three interesting reasons:

to purely preserve the status quo of the case until the disposal of the substantive action and the final conclusion of the trial proper;

the profound fear of the plaintiff that the defendant may not have the necessary funds at a future date and may not be able to comply with any order of this court particularly in regard to the return of the first moiety, and it was to overcome this fear that the plaintiff had applied for the first moiety to be deposited in a separate bank account.

it was said that the defendant held the first moiety as a fiduciary trustee for the benefit of the plaintiff and that being the case it was only right, so the submission went, that the first moiety should be deposited into a separate bank account to enable it to earn interest.

The plaintiff was even magnanimous and was prepared to suggest two attractive options:

that the first moiety be placed in a fixed deposit account in the joint name of both the plaintiff and the defendant solicitors’ firms; or

that the first moiety be deposited into court until the conclusion of the trial.

4.0 DEFENDANT’S COUNTERCLAIMS AGAINST PLAINTIFF

losses and damages;

interest;

costs; and

further and other relief.

5.0 RELEVANT CLAUSES IN STANDARD FORM OF CONTRACT

5.1 RETENTION FUND/PERFORMANCE BOND/PERFORMANCE GUARANTEE SUM

According to the case, the contract followed closely by PAM contract. In PAM contract 2006 (With Quantities), retention fund is written in Clause 30.5 as following:

“The employer may retain the percentage of the total value of the work, materials and goods referred to in clause 30.2, which is stated in the Appendix as Percentage of Certified Value Retained. When the sum of the amounts so retained equals the amount stated in the Appendix as Limit of Retention Fund or that amount as reduced under Clauses 16.1(d) and 16.1(f) and/or Clause 27.7, as the case may be, then no further amounts shall be retained by virtue of this clause.”

It was clearly stated in the Appendix of PAM contract 2006 that the Certified Value Retained shall be 10% of the value of work executed and materials on site included in the certificate subject to the limit of retention fund if none stated. The total retention sum shall be equivalent to 5% of the contract sum if none stated throughout the contractual period.

Under Clause 30.6(c)&(d), the architect shall within fourteen (14) days upon the issuance of the Certificate of Practical Completion, issue a certificate for release of one half of the retention fund and upon issuance of the Certificate of Making Good Defects, issue a certificate for the residue of the amount then so retained within fourteen (14) days. Thereof, the contractor shall be entitled to payment within the Period of Honouring Certificates.

In this case, the plaintiff was only concerned on the first moiety of the retention fund. The certificate of practical completion that was issued on May 5, 1995 and it carried the architect’s certification to the following effect:

“I / We declare that one moiety of the retention moneys deducted under previous certificates in respect of the said works or sections thereof are to be released.”

However, the defendant refused to pay the first moiety of retention fund due to the defective works from plaintiff. From here, we can see that it was the breach of contract by the defendant because he did not release the amount of money stated to the plaintiff within fourteen (14) days after the issuance of the Certificate of Practical Completion.

Oppositely, if we look into the standard PWD 203A (2007) Form of Contract (hereinafter referred to as the “PWD Contract”), it does not have the retention fund terms, instead it used the term Performance Bond/Performance Guarantee Sum to secure the due performance of the obligations of the contractor. It is written in Clause 13.1(a) & (b) and 13.2 as the following:

“The Contractor shall, on the date of the possession of Site, provide a Performance Bond or Performance Guarantee Sum as the case may be substantially in the form as in Appendix issued by an approved licensed bank or financial institution incorporated in Malaysia in favour of the Government for a sum equivalent to five percent (5%) of the total Contract Sum as specified in Appendix to secure the due performance of the obligations under this Contract by the Contractor. The Performance Bond shall remain valid and effective until twelve (12) months after the expiry of the Defect Liability Period or the issuance of the Certificate of Completion of Making Good Defects, whichever is the later.”

“If the Contractor fails to submit the said Performance Bond as specified in sub-clause (a) above on the date of possession of the site, then the Contractor shall be deemed to have opted for Performance Bond in the form of Performance Guarantee Sum as provided for clause 13.2 hereof.”

“The Contractor may opt for a Performance Bond in the form of Performance Guarantee Sum in lieu of the Bank, Insurance or Finance Company Guarantee as specified in clause 13.1 hereof whereby deductions of ten percent (10%) shall be made from the first interim payments and subsequent interim payment until the total amount deducted aggregate to a sum equivalent to five (5) percent of the Contract Sum. The amount deducted shall be retained by the Government up to twelve (12) months after the expiry of the Defect Liability Period or the issuance of the Certificate of Completion of Making Good Defects, whichever is the later.”

According to Clause 13.5 of PWD Contract, the sum of money that is retained by the client (Government) as the Performance Bond can only be released or refunded to the contractor on the completion of making good of all defects, shrinkages or other faults which may appear during the Defect Liability Period and upon the giving of the Certificate of Completion of Making Good Defects for the whole of the works under Clause 48 – Defects After Completion. It is different from PAM Contract which divides the portion of money retained into half and refund back to contractor one during the issuance of certificate of Practical Completion and the other one during the issuance of certificate of Making Good Defects. Thus, under PWD Contract, the defendant was not pleaded guilty for not paying the retained fund upon issuance of Certificate of Practical Completion to plaintiff.

Under PAM Contract Clause 30.6(a), the amounts retained shall be subject to the following rule:

“The Employer’s interest in any amounts so retained shall be fiduciary as trustee for the Contractor (but without obligation to invest) and the Contractor’s beneficial interest therein shall be subject only to the right of the Employer to have recourse thereto from time to time for payment of any amount which he is entitled under the provisions of this Contract to deduct from any sum due or to become due to the Contractor.”

and using this clause as a leverage, the plaintiff submitted that the defendant was in fact holding the retention monies as a trustee and in a fiduciary capacity. It was further submitted that the retention monies held by the defendant be deposited in a separate bank account until the conclusion and disposal of the trial. Somehow, in PWD Contract, there is no such clause existed and it seems that PWD Contract remain silent in this matter.

The purpose of the provisions for retention under the Clause 30.6 (a) in PAM Contract is to protect both employer and contractor against the risk of insolvency of the other. The employer is protected by his right to retain a proportion of the sum certified as due in respect of work done against the risk that claims in respect of any failure to carry out the architect’s instructions or in respect of delay or other breaches of the contractor’s obligations will, in the event of the contractor’s insolvency, rank as unsecured debts. The contractor is protected by the same clause against the risk that his claim for payment of monies retained by the employer will similarly rank as an unsecured debt, saves only for the lien conferred.

However, this provision creates a clear trust in favour of the contractor and sub-contractors of the retention fund of which the employer is the trustee. The employer would be in breach of his trust if he hazarded the fund by using it in his business and it is his first duty to safeguard the fund in the interests of the beneficiaries. Hence, the court should hold the plaintiff entitled to the protection which they seek. But, both the plaintiff and defendant can seek into mutual agreement to set aside the retention fund in separate identifiable account.

5.2 CONTRACT BY FRAUD

The defendant held opposite views. The defendant said that the contract between the parties, if it was not void or unenforceable, would readily give rise to a trust. However, the defendant rightly emphasised that there were no trust monies to be placed in a separate identifiable account for the following reasons:

since the plaintiff procured the contract by fraud, the contract became void and unenforceable;

since the plaintiff pleaded breach of trust in the statement of claim, the plaintiff was not entitled to the remedies sought by them; and

alternatively, in the event the contract was not void nor unenforceable for fraud, then by virtue of the certificate of practical completion the first moiety of the retention sum was not capable of being placed into a separate account.

Under Section 17 of the Contracts Act 1950, ‘Fraud’ includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

the suggestion, as to a fact, of that which is not true by one who does not believe

it to be true;

the active concealment of a fact by one having knowledge of belief of the fact;

a promise made without any intention of performing it;

any other act fitted to deceive; and

any such act or omission as the law specially declares to be fraudulent.

No matter in PAM Contract or PWD Contract, the contractor is always implied the following:

Perform the works regularly and diligently,

Produce good workmanship throughout the works,

Provide good quality material for the works and,

Complete the works whereby it is fit for purpose.

According to the fact of the case, the plaintiff did not fulfil the above implied obligations on him. By bribing Ler Cheng Koy and Chen Woon Hin, the plaintiff was able to conceal deficiencies in the said works because both these two personalities conveniently and purposely failed to inform the architect of the existence of those inherent deficiencies. Thus, the plaintiff did not perform the said works regularly and diligently. He did not produce good workmanship throughout the said works too. He as well did not provide good quality material for the said works. Therefore, the output of the said work must not fit for the purpose.

The undisputed affidavit evidence of the defendant clearly showed that the plaintiff had admitted to the existence of the fraud. That being the case, the contract on the strength of the affidavit evidence was void and unenforceable for fraud. The court should have held that the plaintiff was not entitled for the remedies sought by them.

5.3 MATERIALS, GOODS AND WORKMANSHIP

Clause 6.1 of PAM Contract stated clearly that:

“All the works, materials, goods and workmanship shall be of the respective quality and standards described in the Contract Documents and required by the Architect in accordance with the provisions of the Contract.

Meanwhile, Clause 35.1 of PWD Contract expressed as following:

“All materials, goods and workmanship shall be of the respective kinds of standards described in the Specification and of good quality and in accordance with the standard of the workmanship in the industry. The Contractor shall upon the request of the S.O. furnish him with the relevant certificates and/or vouchers to prove that the materials and goods comply with the specification.”

The defendant claimed that the plaintiff did not complete the said works with the required quality and standards as written in the contract. Both PAM Contract and PWD Contract have set the provision for the materials, goods and workmanship that the said works done by the contractor shall be of the respective quality and standards described in the contract. Thus, the court should have held that it was the plaintiff’s breach of contract and the defendant is entitled to set-off the authorised deduction against the plaintiff’s claim.

5.4 CONTRACTOR’S OBLIGATIONS

As a supportive point to the previous statement, both PAM Contract and PWD Contract have an expressed term of Contractor’s Obligations, which clearly stated that the contractor shall complete the said works in accordance with the Contract Document. Section 1.0 in PAM Contract has stated clearly all the obligations of the plaintiff as the contractor in the said works. On the other hand, Section 10.1 in the PWD Contract also stated the same as Section 1.0 in PAM Contract.

Let’s take one example clause from each Standard Form of Contract as the evidence to prove that it was the plaintiff’s breach of contract. Clause 1.1 in PAM Contract stated that:

“The Contractor shall upon and subject to these Conditions carry out and complete the Works in accordance with the Contract Documents and in compliance therewith provide materials, goods and standards of workmanship of the quality and standard described in the Contract Documents and/or required by the Architect in accordance with the provisions of the Contract.”

Meanwhile, Clause 10.1(a) in PWD Contract stated that the Contractor shall:

“construct, complete, test and commission the Works in accordance with the Contract;”

The defendant had claimed that the contract was void since it is procured by fraud of the plaintiff and the plaintiff was unable to prove it is wrong. Therefore, the plaintiff was pleaded to breach of contract because he did not obey and fulfil the contractor’s obligations under both PAM Contract and PWD Contract.

5.5 CERTIFICATES AND PAYMENT

Clause 30.1 in PAM Contract and Clause 28.1 to 28.3 in PWD Contract stated that client must issue the interim certificates to contractor upon finish valuation the works done on the site during every Interim Claim Interval. The payment must be made together with the issuance of the Interim Certificates. Only the persons do the valuation of the work done on site and duration of issuance the Interim Certificate differentiate between PAM Contract and PWD Contract.

Clause 30.1 in PAM Contract said that the contractor should values the work done on site and submits the payment application to the architect on behalf of the client on every Interim Claim Interval. Within twenty one (21) days upon receiving the contractor’s application, the architect must issue the Interim Certificate and pay the amount certified to the contractor within the period of honouring certificates.

However, Clause 28.1 to 28.3 in PWD Contract said that the Superintending Officer (S.O.) on behalf of the client should value the work done on site. Within fourteen (14) days from the date of the valuation being made, the S.O. must issue the Interim Certificate and pay the amount certified to the contractor within the period of honouring certificates.

From here, it can be concluded that it was defendant’s fault because the defendant had only paid the plaintiff the sum of RM 2,500,000 under payment certificate number 18 but was obstinate and failed and / or refused to make payment of any other sums specified in payment certificate numbers 18, 19, 20 and 21 thereof.

However, refer to Clause 30.14 in PAM Contract and Clause 32.0 in PWD Contract, the defendant’s counterclaim regarding the interim certificate of payment and the certificate of practical completion shall not by themselves be conclusive evidence that any works, materials or goods to which it relates were in accordance with the contract specifications was right. Thus, the defendant should not be held guilty instead deduct the sum of money of losses and expenses which were caused by the plaintiff.

5.6 SET-OFF/DEDUCTION FROM MONEY DUE TO CONTRACOR

Clause 30.4 in PAM Contract and Clause 33.0 in PWD Contract have given the client’s authority to set-off all cost incurred and loss and expense owing from the contractor from any sum which may become due or is payable by the client to the contractor. Therefore, the defendant was entitled to deduct the losses and expenses caused by the plaintiff due to the defective works.

6.0 CONCLUSION

As a conclusion, the court solved the case by reject the application of the plaintiff because he fail to contradict an allegation amounted to an admission of the fact and he fail to rebut the defendant’s averments of fraud which meant that he had admitted to the fact of procuring the contract by fraud. Besides, there was no obligation to set aside any retention monies in a separate identifiable account. The plaintiff must plead all the relevant facts to show a dishonest breach of trust. The defendant won and was entitled with all his claims.