an afternoon discussion on direct payments
TRANSCRIPT
An Afternoon Discussion on
Direct Payments
1
Types of Direct Payments
1. Contractual
2. Non-Contractual
2
Contractual Direct Payments
PAM Contract 2006 (With Quantities)
“27.6 The Architect may...request the Contractor to furnish to him reasonable
proof that all amounts stated as due and included in the previous certificates have
been discharged. The Contractor shall provide such proof...If the Contractor has
any reasons for withholding any NSC’s payments...he shall provide the Architect
written details...If the Contractor fails to comply...the Architect may (but not obliged
to) issue a certificate stating the amount in respect of which the Contractor has
failed to provide such proof...the Employer may (but not obliged to) pay such
amounts directly to the Nominated Sub-Contractor and deduct the same from any
sums due or to become due to the Contractor…”
3
Contractual Direct Payments (continued)
PAM Contract 2006 (With Quantities)
“27.10 Neither the existence of or the exercise of the foregoing provisions nor
anything else contained in the Contract shall create a privity of contract between
the Employer and any of the NSCs”.
4
Contractual Direct Payments (continued)
Pam Sub-Contract 2006
“26.5 ...The Contractor shall provide the Architect...reasonable proof that all
amounts stated as due and included in the previous payment certificates to the
Sub-Contractor have been discharged. Where the Contractor fails to discharge his
payment obligations and where requested by the Sub-Contractor, the Architect
may...issue a certificate stating the amount in respect of which the Contractor has
failed to provide such proof. Where the Architect has so certified, the Employer
may (but not obliged to) pay such amounts directly to the Sub-Contractor...Any
direct payment made under Clause 27.6 of the Main Contract Conditions shall not
create a privity of contract between the Employer and Sub-Contractor.”
5
Contractual Direct Payments (continued)
There are direct payment provisions also in JKR, IEM, and FIDIC forms.
In short:
1. Where the contract provides for direct payments, then the clauses of the
contract would apply.
2. Such forms of direct payments does NOT create a privity of contract between
the Employer and the Sub-Contractor.
3. This means that the Main Contractor continues to be responsible for all
payments due to the Sub-Contractor, and for all defects/delays to the
Employer.6
Non-Contractual Direct Payments
The issue becomes more interesting when it involves non-contractual direct
payments, i.e. when the Employer makes direct payments to the Sub-Contractors
not in accordance with a particular express term of the contract, but as a matter of
practice.
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Problem with Direct Payments
“Main contactors are generally not in favour of such an arrangement as they are
denied the most effective control mechanism against a delinquent sub-contractor,
ie a financial sanction but at the same time are left shouldering the bulk of the
liabilities vicariously, for and on behalf of the latter. Save for the meagre profit and
attendance which is paid directly to them, they do not have any other entitlement
and/or monetary control over a sub-contractor nominated by the employer and
who is reimbursed directly by the latter.”
- Construction of Contingent Payment Clauses: Is there light at the end of the
tunnel by Ir Harbans Singh KS [2006] 3 MLJ ix
8
General Position of the Law- Sigma Elevator
Sigma Elevator (M) Sdn Bhd v Isyoda (M) Sdn Bhd & Anor [2016] 10 MLJ 635,
HC
[61] ...the Settlement Agreement...does not involve (the Sub-Con). By no means is
it a tripartite agreement between the three parties...where it was agreed that (the
Sub-Con) is to be paid directly by (the Employer). It is simply an
agreement...between (the Main Con) and (the Employer)...The parties did not
include (the Sub-Con) directly as a contracting party.
[62] ...the Settlement AGreement does not absolve (the Main Con) from its
obligations to pay (the Sub-Con) for work done under the subcontract.
9
Lessons from Sigma Elevator
1. Court looks at the privity of contracts. Any side arrangement that does not
involve the consent of all parties will not alter the obligations of the contract.
10
Case Study 2: Mega Mayang
Mega Mayang M&E Sdn Bhd v Ehsan Bina Sdn Bhd & Ors [2017] MLJU 630,
HC
[16] ...the (Sub-Con’s) contract is with (the Main Con). The (Sub-Con) has not
pleaded any contract with (the Employer). At the risk of stating the obvious, only
parties to a contract may sue each other. Non-parties to a contract cannot be sued
under contract. This is so even when the consideration for a contract might have
flowed from some third party as in this case where arrangement for payments is
from (the Employer).
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Mega Mayang (continued)
[17] ...there was no tripartite agreement between (the Sub-Con), (the Main Con)
and (the Employer). In the event that (the Employer) dod not pay (the Sub-Con) as
agreed or arranged, it is still for the (Sub-Con) to sue (the Main Con) and for (the
Main Con) to sue (the Employer).
[18] The matter becomes more obvious when it comes to a claim against the
(Sub-Con) for defective works or damages under the…(LAD) clause. It is for (the
Employer) to sue (the Main Con) and for (the Main Con) to sue (the Sub Con). If
(the Employer) were to sue (the Sub Con) for costs of rectifying defective works or
for LAD, one can almost hear a roar of objection that there is no privity of
contract...Non parties to a contract cannot sue and be sued...
12
Mega Mayang (continued)
[20]...Even though the source of funds for payments to the (Sub Con) had come
from (the Employer), yet the payment is contractually the obligation of (the Main
Con) and to emphasise this point, the cheques concerned were paid through (the
Main Con) handing it over to the (Sub Con). Paying on behalf of a contracting
party does not make the party paying a party to the contract between the
contracting parties…
[32] The fact of payments proceeding from a third party (the Employer), not a party
to the contract between the (Sub Con) and (the Main Con), does not make (the
Employer) liable under contract to the (Sub Con). Consideration can flow from a
third party who is not a party to the contract...
13
Mega Mayang (continued)
[39] A payment arrangement term in the contract between the (Sub Con) and (the
Main Con) where (the Employer) makes direct payment to the (Sub Con) does not
convert the contract between the (Sub Con) and the (Main Con) into one where
the (Sub Con) can enforce the direct payment arrangement against (the
Employer) direct.
[56] ...unless all these various averments and allegations of the (Sub Con) lead to
a pleaded case of the creation of a contract between the (Sub Con) and (the
Employer)...it is just nothing but hot air...
14
Lessons from Mega Mayang
1. Court will strictly observe the privity of contracts.
2. Only exception if there is a tripartite agreement.
15
Case study 3: Bond M&E
Bond M&E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd (Brampton Holdings Sdn
Bhd, third party) 2017 MLJU 376, HC
[1] This case explores the question of who a sub-contractor should sue for
payment due to it under a Sub-Contract with its main contractor when there is a
separate agreement between the Main Contractor and its Employer that the
Employer would pay the Sub-Contractor direct. The Sub-Contractor is not a party
to that agreement between the Main Contractor and its Employer. There has been
some previous direct payments from the Employer to the Sub-Contractor.
16
Bond M&E (continued)
[27]...Back to basics, the rule of privity of contracts dictate that only parties to a
contract may sue and be sued contractually. Even if a benefit is conferred on a
non-party, that non-party cannot sue unless made a party in a tripartite agreement
where the initial obligation of (the Main Contractor) to pay (the Sub-Contractor) is
now taken over by (the Employer) with the corresponding right of (the
Employer) to sue (the Sub-Contractor) for any defective works...
17
Bond M&E (continued)
[36] To be clear, there had been 2 direct payments made by (the Employer) to (the
Sub-Contractor)...Even when these payments were made, it was made by
cheques payable to (the Sub-Contractor) but handed over to (the Main Contractor)
for it to in turn transmit it to (the Sub-Contractor)...I agree that these direct
payments do not corroborate (the Main Contractor’s) alleged Direct Dealing &
Payment Agreement for the following reasons: a) ...main contract
conditions...allows...direct payment…; b) (the Sub-contractor) continued to
demand and pursue its claim against (the Main Contractor) after receiving direct
payments...c) section 2(d) of the Contracts Act 1950 allows for consideration to
come from a third party.
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Lessons from Bond M&E
1. When Employer makes cheque to Sub-Contractor but passes it to Main
Contractor, it is not considered direct payment, but is a consideration by a
third party.
2. The Court will uphold the privity of contracts.
3. But the Court left open the possibility of a tripartite agreement where the Sub-
Con agreed to be paid directly by the Employer with the possibility that
correspondingly the Sub-Con will be liable directly to Employer for defects
4. If Sub-Con is liable directly for defects, then why not for delays also?
5. That leaves open the possibility for the Main Con to be released from the
obligation of defects and delays if there is such a tripartite agreement19
Therefore, the conclusion so far is...
Main Contractor remains stuck!
a. Liable to the Sub-Contractor for all payments even though the Employer has
agreed to make direct payments.
b. Liable to the Employer for all defects and liabilities of the Sub-Contractor
despite the Employer making direct payments.
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The darkest hour is
just before the dawn...
21
The Court of Appeal comes to the rescue
JKP Sdn Bhd v PPH Development (M) Sdn Bhd [2007] 6 MLJ 239
Brief facts:
JKP Sdn Bhd is a wholly-owned company of MOF. To revive a project in Bayan
Lepas, it allocated the project to a developer under a privatisation agreement. The
developer appointed PPH Development (M) Sdn Bhd as the Main Contractor.
There was no “privity of contract” between PPH and JKP, but JKP has been
making “direct payments”. PPH sued JKP direct for non-payment of certified
sums. PPH said there were representations made by JKP that it would make
direct payment, and that was the reason PPH continued with the works.
22
JKP v PPH (continued)
[19] ...at the material time when the representation was allegedly made, (JKP) was
well aware that a substantial sum was due and owing by (the developer) to (PPH)
and (the developer) had no means at the material time to satisfy this…(JKP) also
knew that if this was not paid, (PPH) would stop work. (JKP) being the owner of
the project could not risk this...Under such pressing circumstances, and with a
track record for bailing out (the developer) financially with direct payments to
(PPH), we agree with the trial judge’s finding that it is very probable that (JKP) did
make the representation to (PPH).
23
JKP v PPH (continued)
[20] This conclusion is further supported by the comfort letters and the
Supplementary Agreement…
[21] Though...these comfort letters do not expressly declare that (JKP) would be
responsible for the debts incurred by the developer...By themselves, these letters
do not contain the representation nor do their contents bind (JKP) to any
contractual promise to pay (PPH) for the outstanding debts. But by being
contemporaneous documents, they infer that the representation was made by
(JKP) to (PPH).
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JKP v PPH (continued)
[22] The other document which carries more weight is the Supplementary
Agreement…(PPH) is not privy to the terms and conditions therein. But this is not
the issue. The focus on this document is that it contains provisions to pay the
debts of (the developer) direct to (PPH). This is exactly what (PPH) claimed that
(JKP) represented to them. When there exist such similar undertakings, especially
made in a self declaratory statement in a formal document to a party who is very
much involved in the matter, then it strongly implies that the representation was
made.
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JKP v PPH (continued)
[23] Then of course there is also, as the trial Judge found, the correspondence
from (PPH) to (JKP) where (PPH) complained that (JKP) had not acted on its
promise to pay...being a contemporaneous document. It strongly adds support to
the existence of the representation.
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Lessons from JKP v PPH
1. There was strictly speaking no privity of contract between JKP v PPH. But the
Court allowed the claim for direct payment.
2. This claim was based on a “representation” by JKP to make direct payment to
PPH. That representation seems to be an oral representation.
3. That representation was evidenced by various contemporaneous documents.
Although these documents by themselves did not create the contractual
relationship, the Court found these documents to be evidence that there was
in fact the representation made.
27
The Federal Court’s position
Desa Samudra Sdn Bhd v Bandar Teknik Sdn Bhd & Ors [2012] 1 MLJ 729,
FC
Facts
DS (employer) appointed Autoways (main con) to construct an office building. BT
was the sub con. Autoways got into financial difficulty and petitioned under s176
Companies Act 1965. DS terminated Autoways and Autoways surrendered the
site. BT then, with consent of Autoways, re-entered the site and removed their
plants, tools, equipment and goods. DS sued for trespass. BT counter-sued for
monies owed, relying on an oral contract by DS to make direct payment.
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DS v BT (continued)
[43]...the fact that there had been payment on two previous occasions after the
meeting goes to show that indeed there was an oral contract for direct payment to
be made by DS to the subcontractors. Indeed, there being a legally binding
relationship between DS and the subcontractors...DS must be estopped from
asserting that there was no such oral contract…
[44] ...even if the minutes were not considered in evidence, we are of the view that
there was sufficient oral evidence raised at trial to show that there was indeed an
oral agreement to the effect as alluded to above.
29
DS v BT (continued)
[45]...there was an oral contract between the parties to the present appeal
whereby the (subcontractors) were induced to perform and complete the works.
This is not only established by the said minutes but by other contemporaneous
evidence and also circumstantial evidence. We also note and endorse the
approach taken by the Court of Appeal in JKP v PPH…
[46]...we are of the view that there was an agreement between DS and the
(subcontractors) that DS would make direct payment to the subcontractors to
complete the works. DS’ breach of this agreement towards the tail end of the
project entitled the subcontractors to succeed in their counterclaim.
30
Lessons from DS v BT
1. The Court allowed oral evidence, past payments, and contemporaneous
documents to establish an agreement for direct payment, that allowed the
sub-contractors to sue the employer directly.
2. This was very important in this case because the main contractor was already
in financial difficulty.
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2 questions arising
1. If sub-contractors can sue employers directly for payment, does that mean
also that sub-contractors can be liable directly to employers for defective
works and delays?
2. What happens to the main contractor’s obligation to make payments to the
sub-contractor?
At this point, we are venturing into legal speculation and we are no longer
standing on terra firma.
32
Direct obligations of sub-contractors to employers
JKP v PPH
In this case, JKP (a non-contracting party) sought to challenge the interim
certificates. Impliedly, JKP is claiming that PPH has direct obligations to JKP for
any defects due to the direct payment arrangement. The Court said:
[29]...We agree with the trial Judge that this should be refused. The reason is
simple. The defence did not plead that the quality of work and materials supplied
as mentioned in Interim Certificates were unsatisfactory….if the employer desires
to challenge this, then it is imperative for him to say so in his defence, otherwise
he is deemed to have conceded to the quality and materials stated therein.”
33
Direct obligations of sub-con to employers (cont’d)
Bond M&E (KL) Sdn Bhd v Isyoda (M) Sdn Bhd
[27] ...Even if a benefit is conferred on a non-party, that non-party cannot sue
unless made a party in a tripartite agreement where the initial obligation of (the
main con) to pay (the sub con) is now taken over by (the Employer) with the
corresponding right of (the Employer) to sue (the sub con) for any defective
works...
34
Direct obligations of sub-con to employers (cont’d)
In other words:
1. Bond requires an express tri-partite agreement to transfer the obligation from
the Main Con to the Sub Con.
2. But JKP v PPH seems to leave open the possibility that where there is a
direct payment agreement, there should also be direct obligations.
3. Therefore, if there is a direct payment agreement with corresponding direct
obligations, the Main Contractor could arguably set up a case for it to be
discharged of any liabilities for defects and delays arising from the particular
sub-con. Emphasis on “arguably”.
35
How would such a case be set up?
In the same way as DS v BT, and as JKP v PPH, through oral representations
evidenced by contemporaneous documents in the form of minutes of meetings,
letters, supplemental agreements, and circumstantial evidence.
Not easy…
But not impossible either.
36
What happens to the Main Con’s obligations to pay?
Section 42 Contracts Act 1950
“When a promisee accepts performance of the promise from a third person, he
cannot afterwards enforce it against the promisor.”
1. Clearly if Sub Con has received direct payment in the past, he cannot claim
the same payment again from the Main Con.
2. But question: Does that apply to “future” payments as well? (i.e. can the Main
Con say because you have this direct payment agreement, you cannot claim
future payments from me?)
37
Possibly, yes
Chinn Swee Onn v Puchong Realty Sdn Bhd [1990] 1 MLJ 108, SC (non-
building contract case)
“...by virtue of the appellant’s letter of 27 May 1985, the provisions of s 42 applied
and therefore the respondents having accepted the performance of the appellant’s
obligation to pay his debt to them by a third party, namely Hock Hin Leong Sdn
Bhd, the respondents were precluded from enforcing the judgement debt against
the appellant…”
Note: HHLSB has not fully paid the judgement debt at that point in time, yet the
Supreme Court said the judgement creditor cannot enforce
38
Possible, yes (again)
Pembinaan Purcon v Entertainment Village (M) Sdn Bhd [2004] 1 MLJ 545,
HC
The “sub-con” through direct negotiation with MDC (JV partner of main-con and a
non-contracting party) had accepted MDC’s offer to assume liability for the
outstanding amount and so the respondent was relieved of the obligation to
pay...And pursuant to that undertaking to pay, MDC had made several payments.
Since the petitioner had accepted MDC’s offer and undertaking to pay, it could not
attempt to enforce payment against the respondent by way of a winding up
proceedings…”
39
Going beyond payments and defects
Pembinaan Juta Mekar Sdn Bhd v SAP Holdings Bhd (previously known as
Shah Alam Properties Bhd) & Anor [2014] 11 MLJ 821
D2 awarded 2 contracts to “Perangsang” (main con) which then appointed PJM as
the subcon. Subcon claimed not only for progress claim, VO and retention sum,
but also loss and expense. Subcon says the defendants had taken over
Perangsang’s responsibility to pay for works done and by conduct represented
that they had a contractual relationship. There had been past direct payments
made.
40
PJM v SAP (continued)
[7] ...there had been an agreement by the defendants to pay directly to the
plaintiff. This together with letters, instructions and meetings attended showed the
existence of a contractual relationship with the defendants…
[8] The words ‘direct payment proposal’ in letter of 12.9.2002 and ‘future interim
progress payment…’ in letter of 23.9.2002 must necessarily mean there was an
arrangement by D1 for future payments to be made directly to the plaintiff…
[10] This direct payment cannot possibly mean the defendant was at liberty to
discontinue making any payments due...There was a contractual arrangement to
pay.
41
PJM v SAP (continued)
[14] The letters, instructions from the defendants and the other consultants and
attendance at meetings together with the direct payment arrangement show that
there was a contractual relationship between the plaintiff and the defendants.
[15] The case of JKP v PPH supports the proposition there can be a liability to pay
on a representation made…
But quite significantly, the Court did not only allow for claims of direct payments,
but also for loss and expense arising from prelim due to EOT, office overheads
due to prolongation costs, overdraft interest and adjustment of fluctuation on
labour and materials!
42
Some thoughts on PJM v SAP
1. Claiming for direct payments (because there were previous direct payments
and representations) does not seem overly far-fetched. After all, the Contracts
Act allows for oral agreements.
2. When there is an obligation to pay, then the fact that there can be a
corresponding obligation to ensure that the works paid for are free from
defects would also not seem far-fetched.
3. But PJM has stretched the principle to the point of allowing for even a L&E
claim. A L&E claim arises from acts of prevention of the main con. So, how
can an employer be liable for acts of prevention of main con leading to L&E,
when employer does not take an active role in the actual construction?43
Conclusion
General rule: privity of contract applies.
The general rule can be replaced by representation, oral agreements, conduct of
parties, minutes of meetings, letters etc.
That can lead to a direct contractual relationship between the employer and the
subcontractor. How that interplays with the main contractor’s obligations for
payment and defects is very much a factual issue.
But perhaps it would be a stretch too far for that direct contractual relationship to
extend to loss and expense claims? One High Court has allowed it, and so the
saga continues.
44