A REPUDIATORY BREACH IN THE CONSTRUCTION INDUSTRY NON-PAYMENT LEE SHIH YIN UNIVERSITI TEKNOLOGI MALAYSIA

A REPUDIATORY BREACH IN THE CONSTRUCTION INDUSTRY NON-PAYMENT LEE SHIH YIN UNIVERSITI TEKNOLOGI MALAYSIA

To my beloved dad, mom, Kah Wei, Yong Sin and Jiih Kui iii

iv ACKNOWLEDGEMENTS A debt of gratitude is owed to many individuals who have given me the benefit of their unconditional help, tolerance and knowledge in writing and completing this master project. First of all, I would like to express my highest gratitude to my supervisor, Encik Norazam Othman for his guidance, advice and support in order to complete this master project. Next, my special thanks are due to all the lecturers for the course of Master of Science (Construction Contract Management), for their patient and kind advice during the process of completing the master project. Not forgetting my dearest parents, brother and sister, a token of appreciation goes to them for giving full support. Lastly, I would like to express my special thanks to my fellow classmates, who have in their own way helped me a great deal throughout the preparation and production stages of this master project.

v ABSTRACT Many complaints have been voiced about non-payments and it is causing severe cash flow problems to contractors. The reaction of many contractors when faced with non-payment is to consider stopping work on site. Whilst this is understandable in many instances, it may amount to a repudiatory breach by the contractor. The contractors are only entitled to terminate the contract when nonpayment is a repudiation of contract. But is the act of non-payment goes to the root of the contract? Whether failure to pay amounts to repudiation will depend on the circumstances of the case. Therefore, this study is to identify circumstances where non-payment by an employer constitutes a repudiatory breach of contract. Findings of this study will assist the contractor to understand his position before he takes action when the employer fails to make payment. The approach adopted in this research is case law based; only cases specifically centered on issue of non-payment will be discussed in this study. The selection of sample court cases involved a depth study rather than a random sample. A total number of 11 cases were studied, where 7 of them were involving construction contracts and 4 were contracts of sales of goods. It is found that there are 2 circumstances in which non-payment constitutes to repudiatory breach and 9 circumstances in which non-payment does not amount to repudiation of the contract. As a conclusion, the result of the analysis seems to suggest that, in most of the circumstances, non-payment is not a repudiatory breach of contract by the employer. The contractors are not advised to stop work at the site when the employer refused to make payments, or he himself would be guilty of a breach of contract in failing to maintain regular and diligent progress. But, an employer may be held to be in repudiatory breach of contract in failing to make payment if his action shows an intention no longer to be bound by the contract and his default goes to the root of the contract.

vi ABSTRAK Terdapat banyak kontraktor yang tidak dibayar dan mereka menghadapi masalah kewangan yang serius. Apabila kontraktor tidak dibayar, mereka akan memikir untuk meninggalkan kerja di tapak pembinaan. Walaupun ini dapat difahami, ia mungkin merupakan pecah kontrak oleh kontraktor. Kontraktor hanya boleh menamatkan kontrak apabila tindakan tidak bayar merupakan pecah kontrak oleh majikan. Adakah tindakan tidak bayar merupakan repudiasi? Sama ada tindakan tidak bayar merupakan repudiasi adalah bergantung kepada keadaan. Maka, kajian ini adalah untuk mengenalpasti keadaan di mana tindakan tidak bayar merupakan repudiasi pihak majikan. Hasil kajian akan membantu kontraktor memahami haknya sebelum ia mengambil tindakan apabila majikan tidak membayar. Pendekatan yang diguna dalam kajian ini adalah berdasarkan kes mahkamah, hanya kes yang berpusat pada isu tidak bayar akan dibincang dalam kajian ini. Pemilihan kes adalah secara mendalam, bukannya secara rawak. Sebanyak 11 kes dikaji, di mana 7 melibatkan kontrak pembinaan dan 4 melibatkan kontrak jual beli. Didapati, hanya 2 daripada 11 kes menunjukkan keadaan di mana tidak bayar merupakan repudiasi majikan, dan 9 menunjukkan keadaan di mana tidak bayar tidak merupakan repudiasi majikan. Sebagai kesimpulan, hasil kajian mencadangkan tidak bayar tidak merupakan repudiasi oleh majikan dalam kebanyakan keadaan. Kontraktor adalah tidak dicadangkan untuk meninggalkan kerja di tapak pembinaan apabila majikan tidak bayar, supaya dia tidak didakwa pecah kontrak atas alasan gagal untuk melaksanakan kerja dengan tekun. Tetapi, seseorang majikan akan didakwa repudiasi kerana gagal membayar jika tindakannya menunjukkan dia tidak ingin diikat oleh kontrak, dan tindakannya memecah asas kontrak.

vii TABLE OF CONTENTS CHAPTER TITLE PAGE DECLARATION ii DEDICATION iii ACKNOWLEDGEMENTS iv ABSTRACT v ABSTRAK vi TABLE OF CONTENTS vii LIST OF TABLES xi LIST OF ABBREVIATIONS xii LIST OF CASES xiv 1.0 INTRODUCTION 1.1 Background Studies 1 1.2 Problem Statement 3 1.3 Objective of the Research 8 1.4 Scope of the Research 8 1.5 Importance of the Research 8 1.6 Research Methodology 9

viii 2.0 PAYMENTS IN THE CONSTRUCTION INDUSTRY 2.1 Introduction 10 2.2 The Right to Payment 11 2.2.1 Lump Sum Contract 12 2.2.1.1 Entire Contracts 13 2.2.1.2 Substantial Performance 15 2.2.1.3 Non-Completion 15 2.2.2 Contract other than for a Lump Sum Contract 16 2.2.3 Quantum Meruit 17 2.3 Arrangements for Interim Payment 18 2.4 Mode of Payment 19 2.4.1 Payment in Cash 19 2.4.2 Payment in Bills 19 2.4.3 Payment in Debentures or Shares 20 2.4.4 Payment in Land 20 2.5 Conclusion 21 3.0 REPUDIATORY BREACH IN CONSTRUCTION CONTRACT 3.1 Introduction 22 3.2 Common Law Termination 24 3.2.1 Discharged by Performance 25 3.2.2 Discharged by Agreement 26 3.2.3 Discharged by Frustration 27 3.2.4 Discharged by Repudiation 28 3.3 Contractual Termination 29 3.4 Repudiatory Breach 30 3.4.1 Repudiation 31 3.4.1.1 Intention to Repudiate 32 3.4.1.2 Misapprehension of Contract Obligations 33 3.4.2 Fundamental Breach 35 3.4.2.1 General Principles 35 3.4.2.2 Rule of Construction 37 3.4.2.3 Onus of Proof 39

ix 3.4.3 Breach of Fundamental Terms 39 3.4.3.1 By Statutory Implication 41 3.4.3.2 Because the Parties have explicitly made it so 41 3.4.3.3 Because the Court so Construes it 41 3.4.4 Non-Fundamental Breaches after Notice 42 3.4.5 Erroneous Expression of View 43 3.4.6 Arbitration Agreements 44 3.5 Recourse for Repudiation and Fundamental Breach 44 3.5.1 Innocent Party Elects to Terminate the Contract 45 3.5.2 Innocent Party Elects to Treat the Contract as Continuing 47 3.6 Grounds of Termination by the Contractor 47 3.6.1 Employer s Refusal to be bound 48 3.6.2 Preventing Execution of Works 49 3.6.3 Failure to Give Possession of the Site 50 3.6.4 Failure to Pay 51 3.6.5 Under-Certification of Payments 53 3.6.6 No General Right to Suspend Work 54 3.6.7 Interference or Influence of Certifier 55 3.6.8 Other Breaches 55 3.7 Conclusion 56 4.0 CIRCUMSTANCES WHERE NON-PAYMENT IS / IS NOT A REPUDIATORY BREACH BY THE EMPLOYER 4.1 Introduction 58 4.2 Circumstances Where Non-Payment by an Employer Constituted a Repudiatory Breach of Contract 60 4.2.1 Circumstance 1 61 4.2.2 Circumstance 2 64 4.3 Circumstances Where Non-Payment by an Employer Did not Constitute a Repudiatory Breach of Contract 67 4.3.1 Circumstance 1 68

x 4.3.2 Circumstance 2 77 4.3.3 Circumstance 3 83 4.3.4 Circumstance 4 86 4.3.5 Circumstance 5 89 4.3.6 Circumstance 6 92 4.4 Conclusion 95 5.0 CONCLUSIONS AND RECOMMENDATIONS 5.1 Introduction 97 5.2 Summary of Research Findings 97 5.3 Problems Encountered during Research 103 5.4 Further Studies 104 REFERENCE 105 BIBLIOGRAPHY 107

xi LIST OF TABLES TABLE NO TITLE PAGE 5.1 Circumstances where non-payment constituted a repudiation of contract by the employer 98 5.2 Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser 99

xii LIST OF ABBREVIATIONS AC All ER ALJ ALR ALJR App Cas B B & S Build LR CA CB Ch Ch App Ch D CIDB CLD DC Const LJ Const LR CP CPD DLR Exch Eq EWHC Law Reports Appeal Case All England Law Reports Australian Law Journal Australian Law Reports Australian Law Journal Reports Appeal Cases Beavan Best and Smith s Reports Building Law Reports Court of Appeal Common Bench Reports Chancery Chancery Appeal The Law Reports, Chancery Division Construction Industry Development Board Construction Law Digest Divisional Court, England Construction Law Journal Construction Law Reports Law Reports, Common Pleas Law Reports, Common Pleas Division Dominion Law Reports Exchequer Reports Equity Case High Court of England and Wales Decisions

xiii FC F & F H & N HL HKC HKLR IR JKR KB LGR LJKB (QB) Lloyd s Rep LR LT JP MLJ NZLR PAM PWD PD QB TCC SLR WLR WR Federal Court Foster & Finlayson s Reports Hurlstone & Norman s Exchequer Reports House of Lords Hong Kong Cases Hong Kong Law Reports Irish Reports Jabatan Kerja Raya King Bench Local Government Reports Law Journal Reports, King s (Queen s) Bench Lloyd s List Reports Law Reports Law Times Reports Justice of the Peace / Justice of the Peace Reports Malayan Law Journal New Zealand Law Reports Pertubuhan Arkitek Malaysia Public Work Department Probate, Divorce and Admiralty Division of High Court Queen Bench Technology and Construction Court Singapore Law Reports Weekly Law Reports Weekly Reports

xiv LIST OF CASES CASES PAGE AA Valibhoy & Sons Pte Ltd v. Banque Nationale de Paris [1983] 2 MLJ 26 (CA) 39 Acrow (Automation) Ltd. v. Rex Chainbelt Inc. (1971) 1 WLR 1676 50 Afovos Shipping v. Pagnan [1983] 1 WLR195 31 Appleby v. Myers (1867) LR2CP 651 12, 13, 16 Architectural Installation Services v. James Gibbons (1989) 16 ConLR 68 30 Associated Pan Malaysian Cement Sdn Bhd v. Syarikat Teknikal & Kejuruteraan Sdn Bhd (1990) 3 MLJ 287 82 Ban Hong Joo Mines Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83 61, 67, 95, 98 Bickerton (T.A.) & Sons Ltd v. N.W. Regional Hospital Board [1970] 1 WLR 607 56 Bolton v. Mahadeva [1972] 1 WLR 1009 16 Bradley v. Newson [1919] AC 16 32 Brani Readymixed Pte Ltd v. Yee Hong Pte Ltd [1994] 2 SLR 552 68, 74, 95, 99 Bremer Vulkan v. South India Shipping Corporation [1981] AC 909 44 British Steel Corporation v. Cleveland Bridge and Engineering [1984] 1 All ER 504 17 Bunge Corporation v. Tradax [1981] 1 WLR 711 40, 41 C J Elvin Building Services Ltd v. Noble and Another [2003] EWHC 837 (TCC) 5, 64, 95, 98 Canterbury Pipe Lines v. Christchurch Drainage (1979) 16 BLR 76 43, 54, 59, 89, 95, 102 Carr v. A. J. Berriman (1953) 27 A.LJR 273 43, 51

xv CASES PAGE Cehave N.V. v. Bremer m.b.h. [1976] 1 QB 44 42 Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1992] 2 All ER 609 5 Chilean Nitrate Sales v. Marine Transportation [1982] 1 Lloyd s Rep. 570 31 Compagnie General Maritime v. Diakan Spirit [1982] 2 Lloyd s Rep 574 40 Coombe v. Greene (1843) 11 M&W 480 55 Cornwall v. Henson [1900] 2 Ch 298 70, 86, 95, 101 Cort v. Ambergate Railway (1851) 17 QB 127 49 Cory Ltd v. City of London Corp [1951] 2 KB 476 (CA) 49 Croudace v. London Borough of Lambeth (1986) 33 BLR 20 (CA) 50 Ctr. Jones v. Cannock (1852) 3 HLC 700 55 Cutter v. Powell (1795) 6 TR 320 13, 15 Dakin v. Lee [1916] 1 KB 566 15 Davidson v. Gioyne (1810) 12 East 381 36 Davis Contractors Ltd. v. Fareham Urban Council (1956) [1956] AC 696 27 De Waal v. Adler (1886) 12 App. Cas. 141 20 Décor-Wall International SA v. Practitioners in Marketing Ltd [1971] 2 All ER 216 36, 37, 59, 68, 70, 95, 99 Duncan v. Blundell (1820) 3 Stark 13 Earth & General Contractors Ltd v. Manchester Corp. (1958) 108 LJ 665 50 Ellis v. Hamlen (1810) 3 Taunt. 52 15 Farnsworth v. Garrard (1807) 1 Camp 38 15 Federal Commerce v. Molena Alpha [1979] AC 757 31, 34, 42 Felton v. Wharrie (1906) HBC (4 th ed.), Vol. 2, P.398 (CA) 50 Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190 15 Frederick Leyland & Co. v. Panamena Europea Navigacion Cia (1943) 76 Lloyd L.R. 113 54 Freeth v Burr (1873-74) 9 CP 208 62, 77, 78, 95, 100 Gaze Ltd. v. Port Talbot Corp. (1929) 93 JP 89 55 General Billposting Co. Ltd v. Atkinson [1909] AC118 31, 60 Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA) 17

xvi CASES PAGE H Dakin & Co. Ltd v. Lee [1916] 1 KB 566 14 Heyman v. Darwins [1942] AC 356 30, 37 Hiap Hong & Co. Pte. Ltd. v. Hong Huat Development Co. (Pte) Ltd. [2001] 2 S.LR 458 (CA) 54 Hoare v. Rennie (1859) 5 H & N 19; 29 LJ Ex 73; 1 LT 104; 8 WR 80; 157 ER 1083; 39 Digest 572, 1766 77 Hochster v. De La Tour (1853) 2 E&B 678 31, 45, 48 Hoenig v. Issacs [1952] 2 All ER 176 5, 13, 14, 15 Holland Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80 17 Hong Kong Fir Shipping v. Kawasaki Kison Kaisha [1962] 2 QB 26 (CA) 37, 40, 42 Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1 31, 60 Hunt and Winterbotham Ltd v. BRS (Parcels) Ltd [1983] 2 MLJ 26 (CA) 39 Hunt v. Bishop (1853) 8 Ex. 675 55 Hunter Engineering Inc v. Syncrude Canada Ltd (1989) 57 DLR (4d) 321 38 Hutchinson v. Harris (1978) 10 BLR 19 15 Hyundai Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129 (HL) 46 James Shaffer Ltd. v. Findlay, Durham & Brodie [1953] 1 WLR106 (CA) 43 Jonassohn v. Young (1863) 4 B & S 296; 2 New Rep 390; 32 LJQB 385; 10 Jur NS 43; 11 WR 962; 122 ER 470; 39 Digest 652, 2459 79 Joseph Thorley Ltd v. Orchis Steamship Co [1907] 1 KB 660 36 Kah Seng Construction Sdn Bhd v. Selsin Development Sdn Bhd Suit No 22-309 of 1992 77, 79, 95, 100 Karsales (Harrow) Ltd. v. Wallis [1956] 2 All E.R. 866 35 Keys v. Harwood (1846) 2 CB 905 21 King v. Allen & Sons Billposting Ltd. [1916] 2 AC 54 31 Kingdom v. Cox (1848) 5 CB 522 49 Lee Poh Choo v. Sea Housing Corporation Sdn Bhd [1982] 1 MLJ 324 92, 96, 102 Lilley v. Doubleday [1907] 1 KB 669 36 Lim Sew Lan v. Pembangunan Hysham Sdn Bhd [1995] 5 MLJ 670 37 Lombard v. Butterworth [1987] QB527 41 Low Kon Fatt v. Port Klang Golf Resort (M) Sdn Bhd [1998] 6 MLJ 448 37 Lubenham Fidelities & Investment Co. v. South Pembrokeshire District Council and Wigley Fox Partnership (1986) 33 BLR 39 (CA) 4, 53, 54

xvii CASES PAGE Macintosh v. Midland Counties Railway (1845) 14 LJ Ex. 338 55 Marshall v. Mackintosh (1898) 78 LT 750 5 Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434 5, 31, 32, 43, 48, 52, 60, 63, 83, 95, 101, 103 Modern Engineering (Bristol) v. Gilbert-Ash [1974] AC 689 30 Munro v. Butt (1858) 8 EB 739 13 Levison v. Patent Steam Carpet Cleaning Co. Ltd [1983] 2 MLJ 26 (CA) 39 Needler v. Guest (1647) Aleyn 9 11 Newfoundland Government v. Newfoundland Ry. (1888) 13 App. Cas. 199 (PC) 16 Panamena, etc. v. Frederick Leyland & Co. Ltd [1947] AC 428 53 Parker Distributors (Singapore) Pte Ltd v. Svenborg [1959] AC 576; [1959] 3 All ER 182 (PC) 39 Percy Bilton v. Greater London Council [1982] 1 WLR 794 56 Perini Corporation v. Commonwealth of Australia (1969) 12 BLR 82 53, 54 Peter Dumenil v. James Ruddin [1953] 1 WLR 815 (CA) 43 Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827 38, 45, 46 Portman v. Middleton (1858) 4 CB (NS) 13 Re Aldborough Hotel Co., Simpson s Case (1869) 4 Ch. App. 184 20 Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405 19 Rees v. Lines (1837) 8 C&P 126 51 Roberts v. Bury Commissioners (1870) LR4CP 755 50, 51 Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co. [1940] 3 All ER 60 31, 33, 43, 60 Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC 694 41 Schuler (L.) A.G. v. Wickman Machine Tool Sales [1974] AC 235 (HL) 42 Simpson v Crippin (1872-73) 8 QBD 14 62 Sinclair v. Bowles (1829) 9 B&C 92 13, 15 Smyth v. Bailey [1940] 2 All ER 60 32 Southern Foundaries v. Shirlaw [1940] AC 701 49 Spettabile v. Northumberland Shipbuilding Co. (1919) 121 LT 628 49 State Trading Corporation of India v. Golodetz [1989] 2 Lloyds s Rep. 277 (CA) 41

xviii CASES PAGE Stegmann v. O Connor (1899) 81 LT 627 (CA) 15 Stevens v. Taylor (1860) 2 F&F 419 55 Stirling v. Maitland (1864) 5 B&S 840, 852 49 Sumpter v. Hedges (1898) 1 QB 673 14 Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361 31, 37, 40, 44, 47, 60 Supamarl v. Federated Homes (1981) 9 ComLR 25 54 Sutcliffe v. Chippendale & Edmondson (1971) 18 BLR 149 30 Sutcliffe v. Thackrah [1974] AC 727 53 Sweatfield Ltd. v. Hathaway Roofing Ltd. [1997] CILL 1235 49 Sweet & Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 QB699 (CA) 43 Sze Hai Tong Bank v. Rambler Cycle Co [1959] AC 576; [1959] 3 All ER 182 (PC) 38 Terry v. Duntze (1795) 2 Hy. Bl. 389 11 The Mihalis Angelos [1971] 1 QB 164 (CA) 31 Toepfer v. Cremer [1975] 2 Lloyd s Rep.118 (CA) 43 Tramways Advertising Pty Ltd. v. Luna Park (NSW) Ltd. (1938) 38 S.R. (NSW) 632 36 Trollope & Colls v. Singer (1913) HBC (4 th ed.) 55 Turriff v. Richards & Wallington (1981) 18 BLR 19 44 UGS Finance v. National Mortgage Bank of Greece [1964] 1 Lloyd s Rep. 446 38 Valpy v. Oakeley (1851) 16 QB 941 19 Vigers v. Cook [1919] 2 KB 475 (CA) 13, 15 Wates Ltd. v. Greater London Council (1983) 28 Wells v. Army & Navy Co-op Society (1902) 86 LT 764 55 Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA) 15 Withers v. Reynolds (1831) 109 ER 1370 52, 79 Wong Poh Oi v. Guok Gertrude & Anor [1965-1968] 1 SLR 455 68, 95, 99 Woodar v. Wimpey [1980] 1 WLR 277 31, 32, 33, 43, 60

CHAPTER 1 INTRODUCTION 1.1 Background Studies The practice of efficient and timely payment in construction projects is a major factor leading to a project s success. Payment has been referred to as the lifeblood of the construction industry due to latter s inherent nature that takes relatively long durations and large amounts of money to complete. 1 The primary obligation upon the employer is to give the contractor the sum of money which forms the consideration for the contract. 2 Furthermore, the contractor has a right to be paid on time. 3 The contractor s right to payment depends upon the wording of the contract. Within the limits of legality parties can make what arrangements they please. 4 1 2 3 4 Construction Industry Development Board, A Report of a Questionnaire Survey on Late and Non-Payment Issues in the Malaysian Construction Industry. (Kuala Lumpur: CIDB, 2006), p.i. John Murdoch and Will Hughes, Construction Contracts: Law and Management. Third Edition. (London: Spon Press, 2000), p.197. Sundra Rajoo, The Malaysian Standard Form of Building Contract (The PAM 1998 Form). Second Edition. (Kuala Lumpur: Malayan Law Journal, 1999), p.295. Stephen Furst and Vivian Ramsey, Keating on Building Contracts. Fifth Edition. (London: Sweet & Maxwell, 1991), p.69.

2 In the construction industry contractors and subcontractors have become accustomed to regular monthly payments. It is this facility which has enabled many businesses to commence with a low capital base. Monthly payment does not result from a basic legal entitlement. The opposite is the case in that, at common law, payment is due following completion of the work. The entitlement to monthly payment comes about from the express provisions in the contract. 5 One of the main purposes of this is to reduce the need for the contractor to fund the development of the project. This is because the total value of each contract forms a large proportion of a contractor s annual turnover. Payment by instalments should eliminate the need for the contractor to borrow money pending final payment. 6 The amount of money due in each instalment is recorded by the contract administrator in an interim certificate. The issue of such a certificate by the contract administrator imposes upon the employer a strict obligation to make payment. 7 In the local scene, many complaints have been voiced about the events of late and non-payments but the information has been mainly in the form of hearsays. A research conducted by the Master Builders Association of Malaysia (MBAM) has demonstrated that the issue of late and non-payment has persisted in the Malaysian construction industry for quite some time now, but have yet to be fully resolved. 8 According to the Works Minister Datuk Seri S. Samy Vellu 9 : More than 18,000 contractors and sub-contractors were either paid late or have yet to receive payment for completed work totaling RM23.7billion since 2000. This is a very huge sum, about 14% of the allocation for development projects under the 9th Malaysia Plan. The Construction Industry Development Board (CIDB) had carried out a 5 6 7 8 9 Rodney Martin, 52 Contractual Issues Relevant to Malaysia and Their Resolution. (Kuala Lumpur: James R Knowles Sdn Bhd, 2005), p.19. Supra note 2. Supra note 2. Supra note 1. The Star, 18,000 Contractors and Sub-Contractors Paid Late. (Kuala Lumpur: The Star, 22 August 2006).

3 six-month survey on 330 contractors, in which 273 cases of payment problems involving RM877.8mil were reported. This shows that Malaysian construction industry now is prone to late and non-payment culture. Such a problem is felt not only in a fast developing economy, as in the case of Malaysia, but also in developed countries, such as the United Kingdom and Singapore. Late and/or non-payment will cause severe cash flow problems especially to contractors, and this would have a devastating knock-on effect down the contractual payment chain. 10 Malaysia has set its vision to be a fully developed nation by 2020. The construction industry has set its own vision to be among the best in the world by 2015. One cannot have a world class construction industry if even mundane things like payment is not being honoured whether in a timely manner or at all! Malaysia too must not under-estimate the potential disastrous consequences of persistent payment default across the industry and the economy. 11 1.2 Problem Statement There is a chronic problem of delayed and non-payment in the Malaysian construction industry affecting the entire delivery chain. 12 Contractors faced with an employer who simply does not pay are in serious difficulties. This can be a very 10 11 12 Supra note 1. Noushad Ali Naseem Ameer Ali, A Construction Industry Payment and Adjudication Act : Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction. (Kuala Lumpur: Master Builder, 2006), p.1. Ibid.

4 serious matter for the contractor who may not be able to fund continuation of the project in the face of the employer s breach. 13 The reaction of many contractors when faced with non-payment is to consider stopping work on site. 14 Some contractors who were complaining of late payment retaliated by withdrawing their labour and most of their plant from the site and thus slowed down progress considerably. 15 Whilst this is understandable in many instances such action could prove fatal. 16 A contractor who suspended work on the ground of not having been paid would be guilty of a breach of contract in failing to maintain regular and diligent progress. 17 The contractor has no right at common law to stop work just because he has not been paid what he considers to be the correct amount. 18 Whether or not such a right exists is generally a complex matter and contractors are well advised to be extremely cautious and to examine all the potential pitfalls. A contractor may himself be in breach if the correct procedures as may be stipulated in the contract are not followed when attempting suspension / termination. 19 It sometimes happens that one contracting party ( A ) is in breach of contract and the other party ( B ) treats this as a repudiatory breach, but it is later held that A s breach was not sufficiently serious to justify this. The question which then arises is whether this mistake means that B, who clearly intended no longer to be bound by the contract, is now guilty of a repudiatory breach, so that A is entitled to terminate the contract! 20 But, can the employer gain profit by his own wrong? The 13 14 15 16 17 18 19 20 David Chappell and Vincent Powell-Smith, The JCT Design and Build Contract. Second Edition. (London: Blackwell, 1999), p.154. Lim Chong Fong, The Malaysian PWD Form of Construction Contract. (Kuala Lumpur: Sweet & Maxwell Asia, 2004), p.108. Supra note 2, p.328. Supra note 5. Supra note 2, p.328. Lubenham Fidelities & Investment Co. v. South Pembrokeshire District Council and Wigley Fox Partnership (1986) 33 BLR 39 (CA). Supra note 14. Supra note 2, p.323.

5 employer cannot rely upon its own breach to justify a contention that the contractor was itself in repudiatory breach. 21 At common law, one contracting party (A) had no right to suspend performance of contractual obligations on a temporary basis, on the ground that the other party (B) was in breach of contract. 22 Unless B s breach was sufficiently serious to justify A in terminating the contractor altogether, A s only remedy was to claim damages, in the meantime continuing with the contract. The absolute refusal to carry out the work or abandonment of the work before it is practically completed without any lawful excuse is a repudiation by the contractor. 23 Abandonment of the work or refusal to carry on is plainly a breach which goes to the roof of the contract. 24 Therefore, the absolute refusal to carry out the work is a repudiation by the contractor. The issue arises then is, is the contractor still liable for repudiation if the employer failed to make payment at the first place? Clearly, the employer is in breach of contract when they refuse to make payment, but is the act of non-payment goes to the root of the contract? An employer s obligation to pay the contractor is determined by the payment arrangement envisaged in the terms of the underlying contract. 25 This cannot be a repudiation if there is no contractual duty to pay them. Where there is such a duty it is a question in each case whether failure to pay is a repudiation. 26 21 22 23 24 25 26 C J Elvin Building Services Ltd v. Noble and Another [2003] EWHC 837 (TCC). Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1992] 2 All ER 609. Supra note 3, p.251. Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434; Marshall v. Mackintosh (1898) 78 LT 750; Hoenig v. Issacs [1952] 2 All ER 176 (CA). Chow Kok Fong, Law and Practice of Construction Contracts. (Singapore: Sweet & Maxwell Asia, 2004), p.335. Supra note 4.

6 Generally, there is no common law right for any party to treat a contract as repudiated simply because the other party is in breach of his obligation to pay. 27 Failure to pay one instalment out of many due under the terms of the contract is not ordinarily sufficient to amount to a repudiation. 28 In addition, a simple delay of a few days in payment, even if persistently repeated, would probably not amount to repudiation. 29 Under common law, it is probably insufficient to sustain an allegation that the employer has repudiated a contract, unless he has fallen behind in honouring a series of progress payment over a period of time. 30 However, persistent delay in payment can no doubt amount to repudiation, if sufficiently serious. 31 So a clear indication of refusal or inability to pay future instalments will be a repudiation, as also a repeated failure to pay on time in response to warnings, if raising the inference of an intention to pay late habitually so as to derive financial advantage, it is submitted. 32 What does repudiation actually mean? The word repudiation is ambiguous and has several meanings, but it is the most convenient term to describe circumstances where one party so acts or so express himself as to show that he does not mean to accept the obligations of a contract any further. To amount to repudiation a breach must go to the root of the contract. Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations. Repudiation by one party standing alone does not terminate the contract. It takes two to end it, by repudiation on the one side, and acceptance of the repudiation on the other. 33 27 28 29 30 31 32 33 Supra note 13, p.268. Supra note 4. Supra note 3, p. 295. Supra note 25. Supra note 29. Duncan Wallace, Hudson s Building and Engineering Contracts. Eleventh Edition. (London: Sweet & Maxwell, 1995), p.623. Supra note 4.

7 Various acts by the employer can result in a repudiatory breach and thus entitle the contractor to terminate the contract. 34 A party contemplating to terminate a contract following a breach by the other party must necessarily consider the nature and magnitude of the breach. 35 The remedy for non-payment if it constitutes repudiation is to terminate the contract pursuant to express termination provisions in the contract, or rescission at common law for a breach going to the root of the contract, or suing for interim payments or requiring arbitration where that is provided. If the contractor chooses not to rescind or terminate, his own obligations continue and he is bound to go on with the work. 36 In a nutshell, the contractor alleges that his cash flow is seriously disturbed when the employer fails to make payment. As a consequence, he treats this as a repudiatory breach by the employer and chooses to stop his work at the site because he is not able to fund the project without the employer paying for his works. However, it is later held that the employer s breach is not sufficiently serious to justify the contractor in stopping his work. This mistake means that the contractor is now guilty of a repudiatory breach, and the employer is entitled to terminate the contract. Therefore, the issue arises is, is non-payment by the employer sufficiently enough to be considered as a repudiatory breach? From the above discussion, whether the failure to pay amounts to repudiation will depend on the circumstances of the case. Therefore, this study is to identify circumstances where non-payment by an employer constitutes a repudiatory breach of contract. Findings of this study will assist the contractor to understand his position before he takes action when the employer fails to make payment. The contractors need to know that whether they are entitled to terminate the contract when faced with non-payment by the employer. 34 35 36 Supra note 2, p.197. Supra note 25. Supra note 5.

8 1.3 Objective of the Research To identify circumstances where non-payment by an employer constitutes a repudiatory breach of contract. 1.4 Scope of the Research Given the legalistic nature of this study, the approach adopted in this research is case law based. Only cases specifically centered on issue of non-payment will be discussed in this study. Types of contract involved include construction contracts (between employer and main contractor, and between main contractor and subcontractor) and contracts of sales of goods and land. 1.5 Importance of the Research The purpose of this study is to give an insight into the non-payment issue. It is hoped that the findings of this study will assist the contractors to understand their rights in the non-payment issue without making mistake in terminating the contract. It will also help the players in the construction industry to understand their positions in this issue.

9 1.6 Research Methodology Careful thought and planning in the preparation of the research methods, data collection techniques and measurements is very important for conducting research. Initially, a literature review was undertaken to study and understand the problems of non-payment in construction industry and review the contractual provisions in relation to payment in building contract. It was carried out using published journals, textbooks and standard form of building contracts. In order to meet the goals and objectives, the primary data collection was based on the Malaysia Law Journal (MLJ) court cases. It was carried out using the university s library online e-database 37 via the Lexis-Nexis website 38. The selection of sample court cases involved a depth study rather than a random sample. 37 38 http://www.psz.utm.my http://www.lexisnexis.com

CHAPTER II PAYMENTS IN THE CONSTRUCTION INDUSTRY 2.1 Introduction Money must be paid promptly and fully unless there are specific reasons for withholding it. 1 Payment in any industry has generally been an issue of concern. In the construction industry payment is an issue of major concern. This is because 2 : 1. Unlike many other industries, the durations of construction projects are relatively long; 2. The size of each construction project is relatively large and each progress payment sum involved are often relatively large; and 3. Payment terms are usually on credit rather than payment on delivery 1 2 John Murdoch and Will Hughes, Construction Contracts: Law and Management. Third Edition. (London: Spon Press, 2000), p.197. Noushad Ali Naseem Ameer Ali, A Construction Industry Payment and Adjudication Act : Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction. (Malaysia: Master Builder, 2006), p.5.

11 2.2 The Right to Payment An employer s obligation to pay the contractor is determined by the payment arrangement envisaged in the terms of the underlying contract. The situation of a construction contract for a small project is comparable with that of a sale of goods transaction. The contractor in such a contract, like the seller of goods, is normally paid the contract price in a single sum on the completion of the works, under what is known as a lump sum or an entire contract. In larger and more complex projects, the more common payment arrangement, however, is one where work is certified and paid progressively according to the value of work completed through a series of interim payment or progress payments. Alternatively, the contract may prescribe for work to be paid at predetermined stages in the progress of the works, an arrangement termed in the industry as stage payment. Other arrangements which have been encountered from time to time in the industry include an instalment payment structure and, in the case of residential developments, developers with limited financing means may agree with contractors to adopt payment arrangement premised on the sale of the residential units. 3 Whichever method is agreed upon as that in accordance with which payment is to be made, nothing becomes due to the contractor until he has done anything to entitle him to receive payment. 4 Where the contract does not make completion a condition precedent to payment, there may be an implied stipulation on the part of the employer to pay from time to time reasonable instalments of the whole cost to the contractor during progress of the work. 5 3 4 5 Chow Kok Fong. Law and Practice of Construction Contracts. Third Edition. (Singapore: Sweet & Maxwell Asia, 2004), p.335. Needler v. Guest (1647) Aleyn 9. Terry v. Duntze (1795) 2 Hy. Bl. 389.

12 The contractor s right to payment depends upon the wording of the contract. 6 Within the limits of legality parties can make what arrangement they please, but there are three broad heads under which the right can arise:- 2.2.1 Lump Sum Contract A lump sum contract is a contract to complete a whole work for a lump sum, e.g. to build a house for 60,000. If the house is completed in every detail required by the contract the contractor is entitled to 60,000, and if extra work was carried out he may be able to recover further payment. If he does not complete the house, detailed clauses may provide what amount, if any, he is to receive. But parties entering into a contract do not always contemplated its breach, and in the absence of such clauses, and even to some extent when they are present, a difficult problem may arise as to what payment, if any, the contractor can recover. 7 If a contractor agrees to do a whole work according to a specification which consists of 40 items for a lump sum of 5,000 and fails to carry out 20 of the items, it is obvious that he is not entitled to recover the whole of the 5,000 and that the employer may have an action against him for damages. But is the contractor entitled to recover any of the 5,000? Can the employer say to him, You agreed to complete the whole and to be paid when the whole was completed? 8 The work is incomplete, therefore you are entitled to nothing? and can the employer rely on the same argument where only two out of the 40 items are omitted? These problems, which have greatly exercised the courts, require discussion of entire contracts and substantial performance. 9 6 7 8 9 Stephen Furst and Vivian Ramsey, Keating on Building Contracts. Fifth Edition. (London: Sweet & Maxwell, 1991), p.69. Ibid. See Appleby v. Myers (1867) LR2CP 651. Supra note 6.

13 2.2.1.1 Entire Contracts An entire contract is one where entire performance by one party is a condition precedent to the liability of the other party 10 and where therefore the contractor s right to payment depends on entire performance on his part. An entire contract is an indivisible contract, one where the entire fulfillment of the promise by either party is a condition precedent to the right to call for the fulfillment of any part of the promise by the other. Whether a contract is an entire one is a matter of construction. 11 Clear words are needed to bring an entire contract into existence. 12 The type of contract which may be entire is that where the contractor undertakes some simple clear obligation such as to put some broken article or part of a house in working order and completely fails to do so. In such a case he may be entitled to nothing although he has expended much work and labour, for the main purpose of the contract is that the article or part of the house shall work and there is no scope in the contract for terms collateral to the main purpose. 13 It is perhaps academically debatable whether or not a lump sum contract is by definition an entire contract. It is submitted that, subject to provisions for instalments 14 : 1. Most lump sum contracts are entire contracts in the sense that the builder can recover nothing on the contract if he stops work before the work is 10 11 12 13 14 Cutter v. Powell (1795) 6 TR 320; Munro v. Butt (1858) 8 EB 739; Appleby case, supra note 8; Hoenig v. Isaac [1952] 2 All ER 176 (CA). Hoenig case, supra note 10. Appleby case, supra note 8; Hoenig case, supra note 10. Duncan v. Blundell (1820) 3 Stark; Sinclair v. Bowles (1829) 9 B&C 92; Portman v. Middleton (1858) 4 CB (NS); Hoenig case, supra note 10; Vigers v. Cook [1919] 2 KB 475 (CA). Supra note 6, p.71.

14 completed in the ordinary sense in other words abandons the contract 15 ; but 2. Most lump sum contracts are not entire contracts in the sense that they are construed as excluding the principle of substantial performance. The traditional position in these situations is to regard these contracts as entire contracts so that a contractor has to necessarily complete the whole of the works in scrupulous compliance with the prescribed requirements of the underlying contract before he is entitled to any payment. This position has, through the years, been gradually modified, so that in the mid 1950s, the English courts were prepared to rule that a contractor may sue on the lump sum if the contractor has substantially completed his works, although the building owner may bring a cross-claim for defects and outstanding works or, alternatively, set these claims in diminution of the price. 16 In Hoenig v. Isaacs 17, Lord Denning MR in delivering his judgment of the English Court of Appeal in that case stated the position as follows: Where a contract provides for a specified sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. Thus, in an early case, it has been held that where a contractor did work on a house under a lump sum contract, he was entitled to receive payment for his work, notwithstanding that he has departed from the terms of the contract. 18 However, this entitlement to be paid is extinguished where the works were incomplete because the contractor abandoned the works. 19 A contractor also forfeited his entitlement to be 15 16 17 18 19 Hoenig case, supra note 10. Supra note 3. [1952] 2 All E.R. 176 (CA). H Dakin & Co. Ltd v. Lee [1916] 1 KB 566. Sumpter v. Hedges (1898) 1 QB 673.

15 paid where there was a total failure of consideration, as where the works delivered conferred no benefit whatsoever to the building owner 20 and where the work undertaken was different from which he has contracted to deliver. 21 2.2.1.2 Substantial Performance In the ordinary lump sum contract the employer cannot refuse to pay the contractor merely because there are a few defects and omissions, if there is substantial completion he must pay the contract price subject to a deduction by way of set-off or counterclaim for the defects. 22 2.2.1.3 Non-Completion This may occur by express or implied agreement, because the employer prevents completion, because the contractor in breach of contract fails to complete or because the contract is frustrated. If the contractor fails to complete in breach of contract, his breach will normally amount to repudiation. Prevention by the employer may amount to repudiation. When entire completion is a condition precedent to payment, the contractor cannot recover anything either under the contract or on a quantum meruit if he has failed to complete in every detail. 23 For an ordinary lump sum contract, the contractor cannot recover anything either under the contract or on a quantum meruit unless he shows substantial completion. 20 21 22 23 Farnsworth v. Garrard (1807) 1 Camp 38. Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190. Hoenig case, supra note 10; Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA); Hutchinson v. Harris (1978) 10 BLR 19. Cutter case, supra note 10; Sinclair case, supra note 13; Ellis v. Hamlen (1810) 3 Taunt. 52; Dakin v. Lee [1916] 1 KB 566; Stegmann v. O Connor (1899) 81 LT 627 (CA); Vigers case, supra note 13.

16 It has been said that the rule that a contractor who has not substantially completed cannot recover payment does not work hardly upon him if only he is prepared to remedy the defects before seeking to resort to litigation to recover the lump sum. 24 It seems to follow that ordinarily there is an implied duty upon an employer to give a willing contractor an opportunity to remedy defects, breach of which duty amounts to prevention. Such duty does not, it is submitted, arise if the defects are so grave as to show that the contractor is unable to perform the contract. 2.2.2 Contract other than for a Lump Sum Contract The manner of payment can be arranged in a variety of ways and it is impossible to attempt any exhaustive classification. A contract to do a whole work in consideration of the payment of different sums for different parts of the work is prima facie subject to the same rules about completion as an ordinary lump sum contract. 25 A contract to do a whole work with a provision for payment of each completed part of the whole may be a divisible contract in the sense that if the whole is not completed through the default of the contractor, he may be entitled to payment under the contract for those part he has completed subject to the employer s right to counterclaim for non-completion of the whole. 26 24 25 26 Bolton v. Mahadeva [1972] 1 WLR 1009. Appleby case, supra note 8. Newfoundland Government v. Newfoundland Ry. (1888) 13 App. Cas. 199 (PC).

17 2.2.3 Quantum Meruit The expression quantum meruit means the amount he deserves or what the job is worth and in most instances denotes a claim for a reasonable sum. It is used to refer to various circumstances where the courts award a money payment whose amount at least is not determined by a contract. In some instances, the basis for the payment also is less than contractual. 27 A quantum meruit claim (like the old actions for money has and received and for money paid) straddles the boundaries of what we now call contract and reinstitution; so the mere framing of a claim as a quantum meruit claim, or a claim for a reasonable sum, does not assist in classifying the claim as contractual or quasi-contractual. 28 A claim on a quantum meruit cannot arise is an existing contract between the parties to pay an agreed sum. 29 But there may be a quantum meruit claim where there is: 30 1. An express agreement to pay a reasonable sum 2. No price fixed 3. A quasi-contract 4. Work outside a contract 5. Work under a void contract 27 28 29 30 Supra note 6, p.78. British Steel Corporation v. Cleveland Bridge and Engineering [1984] 1 All ER 504; Holland Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80. Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA). Supra note 27.

18 2.3 Arrangements for Interim Payment Where a contract provides for a contractor to be paid by way of interim payments, an arrangement is usually provided for the works to be valued and certified at prescribed intervals throughout the contract. In what are normally termed measurement and value contracts, this takes the form of designating a particular person to ascertain the value of work, completed up to a particular point of time and thereupon, to certify this value as the amount which is due to the contractor. The contractor s entitlement to be paid is then conditioned on the presentation of the payment certificate issued by the designated certifier. 31 The certifier designated in the contract forms used in the public sector is normally referred to as the Superintending Officer. This is usually a senior public building professional frequently the Director of a Department, the Chief Architect or Chief Engineer who is responsible for the administration of the construction works department in a public agency. 32 Several issues are frequently encountered in the operation of these arrangements and these may be briefly mentioned: a. The conditions which have to be fulfilled before the certifier are obliged to issue an interim payment certificate. b. The nature of the certification function how does the certifier exercise this function independently, given that he is usually an appointee of the employer (owner)? c. The extent to which certificates operate as a condition precedent to payments. 31 32 Supra note 3, p.337. Ibid.

19 d. Circumstances under which a certificate may be challenged. 2.4 Mode of Payment 2.4.1 Payment in Cash Where a contractor does not make special provision as to payment, the contractor is entitled to be paid in cash; in some contracts, however, special provisions are contained stipulating that payment may be made either in whole or in part in bills of exchange, debentures, shares, land or Lloyd s bonds. 33 2.4.2 Payment in Bills If a contractor takes bills which are dishonoured, he, the contractor, unless he has accepted them in complete satisfaction of his debt, may either treat them as a nullity and sue on the contract, or he may elect to sue upon the dishonoured bills. The holders in due course of such bills do not acquire any charge over or lien on the subject matter of the contract even when it is, as in the case of a ship, not being construed on the land of the employer. 34 33 34 William Gill, Emden and Gill s Building Contracts and Practice. Seventh Edition. (London: Butterworth, 1969), p.235. Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405; Valpy v. Oakeley (1851) 16 QB941.

20 2.4.3 Payment in Debentures or Shares If payment is to be by way debentures or shares either party can insist on the prescribed mode of payment though the price of the debentures or shares may have increased or decreased since the contract was made. 35 If a builder agrees to take shares in a company in consideration of being employed as a contractor to execute works for the company, this is a conditional contract, and if he is not given the contract he need not take the shares and is entitled to be struck off the list of contributories. 36 For example: a contractor was to be paid a large proportion of his contract price in shares to be issued to him upon certificate of the chief engineer, except works to the value of 10,000 to form a retention fund. In the course of the works delay was caused by the refusal of the resident engineer to approve certain materials and the consequent suspension of operations until the chief engineer in London had been consulted. During the delay certain Argentine stocks in which retention moneys were not responsible for the mistakes of the engineer under the contract, the loss in respect of the securities could not be cast upon them. 37 2.4.4 Payment in Land If the payment is to be made in land the contractor will, it seems, be entitled to claim specific performance of the contractor if he has performed every condition precedent to his right of payment, or he may treat the contract as at an end and bring an action for quantum meruit for the work done, or he may bring action for breach of 35 36 37 De Waal v. Adler (1886) 12 App. Cas. 141. Re Aldborough Hotel Co., Simpson s Case (1869) 4 Ch. App. 184. Supra note 35.

21 contract, in which case it is suggested the damages recoverable will be limited to the value of the land. 38 For example: H agreed to pay K a weekly sum for board and lodging which was to be satisfied by certain furniture at a fixed valuation. After the agreement the furniture was seized under a judgment by a creditor of H. it was held that the effect was the same as if H had himself taken away the furniture and sold it, and K was, therefore, entitled to recover the value of the board and lodging by an ordinary action of debt as if the special contract had never existed. 39 2.5 Conclusion The primary obligation upon the employer is to give the contractor the sum of money which forms the consideration for the contract. An employer s obligation to pay the contractor is determined by the payment arrangement envisaged in the terms of the underlying contract. Within the limits of legality parties can make what arrangement they please, but there are three broad heads under which the right can arise which are: entire contract, contractor other than for a lump sum contract and quantum meruit. Next, arrangement for interim payment and mode of payment are elaborated in a detail in the chapter. 38 39 Supra note 33, p.236. Keys v. Harwood (1846) 2 CB 905.