construction law digest - dec 2011

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Construction

Law DigestA SOCIETY OF CONSTRUCTION LAW,MALAYSIA NEWSLETTERISSUE 1/2011 DECEMBER 2011 KDN NO. : PP 17626/12/2012 (031404)

Welcome to the rst issue of the CONSTRUCTION LAW DIGEST.

It is my great pleasure to launch this inaugural issue of the Construction LawDigest with the intent of providing a forum for lawyers and other professionalsand stakeholders in the construction industry to publish their contributions and todisseminate their knowledge about developments in the eld of construction law andpractice, both within the country and overseas.

e Construction Law Digest is the rst newsletter published by the Society ofConstruction Law, Malaysia (previously known as the Society of Construction Law Kuala Lumpur & Selangor) since its inception in 2004. e Society of Construction

Law, Malaysia has strong links with its sister Societies of Construction Law based inthe United Kingdom, Australia, Singapore, Hong Kong, New Zealand, Mauritius, theCaribbean, the Gulf States (UAE, Bahrain, Qatar) and Europe.

In this rst issue, we have an interesting array of articles and case notes in the contextof recent developments in construction law and practice contributed by the membersof the Societies of Construction Law in Malaysia and in other jurisdictions, such asAustralia, Singapore and Hong Kong.e contributions from the members of otherjurisdictions may serve as useful guides and/or persuasive authorities for Malaysia.

e coverage of the Construction Law Digest includes an event to be organised bythe Society of Construction Law, Malaysia, namely, the Vincent Powell-Smith Prize

Essay Writing Competition which is modelled after the highly acclaimed HudsonsPrize, and the up-coming Fourth International Construction Law Conference jointlyorganised by the Society of Construction Law, Australia and Society of ConstructionLaw, New Zealand which will be held in Melbourne, Australia from 6 8 May 2012.

I would like to thank the Editors for their hard work and enterprise in producing thisnewsletter. I would also like to cordially thank the authors for their excellent supportand timely contributions to this newsletter.

e Editors and I are looking forward to bringing you more interesting articles andcase notes in the coming issues. ank you for your support.

Wilfred AbrahamPresident,Society of Construction Law, Malaysia

MESSAGE FROM

THE PRESIDENTCONTENTSARTICLES

3 If And When: e Interpretation of

Pay When Paid Clauses

11 Taxation Ofe PropertyDevelopment Industry

15 Enforcing DAB DecisionsUnder e FIDIC 1999Red Book

18 Singapore And e PreventionRule A Step Too Far?

21 e Operation Of DisputeClauses : Litigation Is Note Factory Setting

25 Construction DisputesOn e Rise

CASE COMMENTARIES

8 Retention Monies :Yours Or Mine?

EVENTS

2 Vincent Powell-Smith PrizeEssay Writing Competition

24 Fourth InternationalConstruction Law Conference,Melbourne

PUBLISHED BY :Society of Construction Law, MalaysiaNo. 28-1, Medan Setia 2,Bukit Damansara, 50490 Kuala LumpurTel : 03-2096 2228

PRINTED BY :N.C. Print Sdn Bhd(197139-T)AS 101, Jalan Hang Tuah 4,Salak South Garden,57100 Kuala Lumpur, Malaysia


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THE SOCIETY OF

CONSTRUCTION LAW,MALAYSIA

proudly announces the introduction of the

Vincent Powell-Smith PrizeEssay Writing Competition

Modelled along the highly acclaimed Hudson Prize, this competition is foressays on subject matters related to Construction law of MALAYSIA

It oers entrants:

1st Prize : RM5,000 and a trophy

2nd Prize : RM2,000 and a trophy(Commendations may also be awarded)

with winning entries to be published by SCL Malaysia

Topics could be in relation to any aspect of Construction law of MALAYSIA - Construction &Engineering Contracts; Dispute Resolution / Avoidance; Arbitration; Litigation; Company Law;

Taxation; Torts. Maximum of 5000 words.

Entries are invited from all disciplines. Entries could be from engineers, lawyers (including pupils inchambers), lecturers, quantity surveyors and post-graduate students.

e Panel of Judges will allocate marks based on: Originality of thought or approach and contribution to the study or practice of construction law

or its applications in the industry Quality of analysis, explanation and discussion of chosen topic Freshness of ideas and the value of the work Clarity of presentation, grammar, spelling, punctuation and any referencing

Details of the competition will be published soon.For more information, please email to [email protected] or [email protected]


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3CONSTRUCTION LAW DIGEST

ayananthan Baskaran1 and Imran Ismail2

IF AND WHEN

INTRODUCTION

It is the norm in the constructionindustry for a main contractorto sub-contract part of the worksto a sub-contractor. e sub-contract will often provide thatthe main contractor will pay thesub-contractor, when the maincontractor receives payment fromhis employer. Such a provision in asub-contract is called a pay whenpaid clause. Pay when paidclauses are prevalent in Malaysia,although they are not providedfor in the two main domesticstandard forms of contract i.e. thePWD Form 203N (Rev 1/2010)and the PAM Sub-Contract 2006.is article will examine how our

courts have dealt with pay whenpaid clauses.

INTERPRETATION

e courts in Malaysia haveconsidered the question ofenforceability of pay when paidprovisions as primarily a matter ofinterpretation. For example, theHigh Court, in Pernas Otis ElevatorCo Sdn Bhd v. Syarikat PembenaanYeoh Tiong Lay Sdn Bhd & Anor[2004] 5 CLJ 34 at pp 39, 43-44,interpreted a clause that reads asfollows:Payment in respect of any work,material or goods comprised in thesubcontract shall be made within seven(7) days after receipt by the Contractor

from the Employer

to mean:-

In our present case, the eect ofcl. 2.3 of the subcontract is the same.Clause 2.3 is clear and unambiguous,in that the defendant (the maincontractor) is only liable to pay the

plainti(the subcontractor) whenthe defendant had received the said

payment or sum from the employer

and the payment to the plaintimust be made within seven days afterthe receipt of the said sum by thedefendant. ere is no reason whythis court should not follow the sameinterpretation as that of the courts inSingapore and Hong Kong over thesaid provisions. In coming to the abovedecision, the court has to consider theinterest of the main contractor as wellas the interest of the out-of-pocketsubcontractor; the freedom of contractand the fact that contracts may dier

from case to case. A pay when paidclause in one contract may be wordeddierently from another. Clausessuch as cl. 2.3 in our present case, arecommon industry clauses, which mustbe accepted by the parties with theknowledge of the attendant risks.

e problem arises only when theemployer fails to pay the maincontractor. Parties (main contractorsand subcontractors) are free tonegotiate their contracts and agree towhatever terms in the agreements orcontracts unless they are prohibited bylaw. While the courts will readily wrapa caring arm around the weak and

1 Partner, Zul Raque & Partners2 Associate, Zul Raque & Partners

MALAYSIA

THE INTERPRETATION OF

PAY WHEN PAID CLAUSES


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4 CONSTRUCTION LAW DIGEST

the meek, they cannot do so in everyinstance. Everyone negotiates his owncontract. He is at liberty to give andtake as much as he can mutually agreewith the other side. e subcontractor

per se is not a special species whorequires special principles of law to

give him a generous dose of legalprotection.

Here, the High Court gave the paywhen paid clause its literal meaningand dismissed arguments that suchclauses are unfair.

However, the Court of Appeal, inAntah Schindler Sdn Bhd v SsangyongEngineering & Construction Co Ltd[2008] 3 MLJ 204 at para 5, 15-16,

interpreted a similar clause thatreads:

at payment in respect of any work,materials or goods comprised in thesub-contract shall be made within 14days after receipt by the Contractor of

payment from the Employer againstthe architects certicate under clause

30 of these Conditions which statesas due in amount calculated by

including the total value of such work,materials or goods, and shall whendue be subject to the retention by theContractor of the sums mentioned insub-paragraph (viii) of para (a) of thisCondition.

to mean:-

15. By the very language alluded toin the relevant provisions of the current

main contract and subcontract, readtogether with cl 27(a)(vii), we hadconstrued the latter as a mere provisionimposing a time limit for payment.We found no express provisionmounted into it which imposedany restriction over the rights of the

plaintito pursue its claim againstthe defendant. Master Towle inSmith & Smith Glass Ltd v Winstone

Architectural Cladding Systems Ltd[1992] 2 NZLR 473 had occasion to

state:While I accept that in certain cases itmay be possible for persons contractingwith each other in relation to a major

building contract to include in theiragreement clear and unambiguousconditions which have to be fullledbefore a subcontractor has the rightto bepaid, any such agreementwould have to make it clear beyonddoubt that the arrangement was tobe conditional and not to be merely

governing the time for payment. Ibelieve that the contra proferentem

principle would apply to such clauseand that he who seeks to rely uponsuch a clause to show that there wasa condition precedent before liabilityto pay arose at all should show thatthe clause relied upon contain noambiguity.16. It was our view that, since itwas not unambiguously expressed in

cl 27(a)(vii) that the plaintiwasto be denied its rights from pursuingthe claim in the current format, thisaction was procedurally correct. Wenow discuss the merit of the appeal.

e Court of Appeal, inAntahSchindlersupra, strictly interpretedthe pay when paid clause to beeectively unenforceable, as it didnot expressly provide that payment

by the employer to the maincontractor would be a conditionprecedent to the main contractorpaying the sub-contractor.

is interpretation gave rise tothe distinction between pay when

paid and pay if paid clauses.Pay if paid clauses that expresslymake payment by the employer acondition precedent to the main

contractor paying the sub-contractorare enforceable. While pay whenpaid clauses that do not have suchexpress conditions precedent areeectively unenforceable, as they aresaid to merely regulate the time forpayment.

e distinction however issomewhat tenuous, as clauses withalmost identical wording have beeninterpreted as either pay when paidor pay if paid clause. e clausesconsidered in Pernas Otissupra and

Antah Schindlersupra are themselvesalmost identical.

Subsequently, the Court of Appeal,inAsiapools (M) Sdn Bhd v IJMConstruction Sdn Bhd[2010] 3 MLJ7 at para 15, 25, inter alia, held:

15. At this juncture, it is appropriatefor us to refer to cl 13.01 which readsas follows:13.00 Progress Payment/Interim

Payment13.01 Notwithstanding the provision

of Clause 27 pertaining tonominated sub-contractorand the payment for worksexecuted, it is hereby agreedthat in the event of anyinterim certicate whichincludes, for nominated sub-contract works, the payment

in respect of any works, 75%material or goods comprised inthe sub-contract shall be madeto the sub-contractor within14 days after receipt by the

Main Contractor of paymentcertied as due in the InterimCerticate from the Client i.e.

Messrs Ng Chee Yee Sdn Bhd....

25. Reverting to the instant appeal, inordinary parlance, progress paymentportrays any payment according toprogress ie the forward movement ofthe works. Progress payment clearlyincludes a payment at any stage,

from therst stage, to the secondstage, culminating in thenal stageie thenal payment. Upon the trueconstruction of cl 13.01, in particularthe expression progress payment, we

are of the view that it is sucientlywide to include thenal paymentclaimed by the plainti, in which case,the plaintiis only entitled to paymentafter the defendant has been paid bythe employer, Hence, we are unable tosustain the submission presented for the

plainti.

Again, the clause was almostidentical to those in Pernas Otissupra andAntah Schindlersupra, butthe Court of Appeal held that theclause was enforceable on its literalinterpretation.


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e Federal Court, in Seloga JayaSdn Bhd v UEM Genisys Sdn Bhd[2010] 3 MLJ 721 at para 2, 23, 27-28, interpreted the following clause:

You have agreed that payment willbe made to you within Forty Five (45)days from the date of receipt by thecontactor of any certicate of duplicatecopy thereof from the Architect or untilreceipt of main contract payment fromthe Employer, whichever is later.

to mean:-

23. To cushion themselves fromexcessive loss in the event of theemployer becoming insolvent andwhen the subcontractor has completed

his work, some main contractorshave resorted to drafting into thesubcontract a pay when paidclause. is literally means that thesubcontractor will only be paid whenthe main contractor gets paid by theemployer. Clause 10 in the agreementbetween the parties in this case isof this nature. But the issue in thiscase goes beyond this: can the maincontractor after having been paid

by the employer in the form of stocksrather than money in turn settle withthe subcontractor in the same form heobtained from the employer?...

27. e essence of the third ground ofthis appeal is the construction by thecourts below on the means of paymentis wrong on the face of the factualmatrix of this case. Regrettably wedisagree. In both the letter of oer

by the appellant to the respondentdated 30 November 1994 and thesubsequent formal agreement enteredinto by the parties, the contract sumis explicitly spelled out in words aswell as ingures with the currencyxed as Ringgit Malaysia. Apartfrom this, there is no other form ofpayment ascribed. So upon the plainconstruction of these words in thecontract between the parties, therecan be no other form of payment or

settlement with the respondent exceptby money upon receipt of maincontract payment from the Employerwhich the appellant did when they

accepted the said FGB ICULS stock.28. e appellant has argued before usthat they have no option to reject thesestocks as payment by the employer.isis not correct. From the correspondence

found in the appeal record, weobserved that the appellant did notobject to this payment in the form ofFGB ICULS stock nor register withscheme of companies their refusal orthat of the respondent to accept thiskind of payment. Having acceptedthis from the employer as payment forthe main contract debt then under theterms of the subcontract, the appellanthas no option except to pay therespondent in the form as stipulated money rather than by the stockdescribed.

e Federal Court enforced the paywhen paid clause in its literal sense,although from the report, thereappears to have been no argument assuch on the various interpretationsof such clause. e conicting

judgments of the Court of Appeal inAntah Schindlersupra andAsiapoolssupra are notably not referred to inthe report on Seloga Jayasupra.

A fairly recent judgment of the HighCourt, in Rira Bina Sdn Bhd v. GBCConstruction Sdn Bhd[2011] 2 MLJ378, at para 1, 68-70, 88, recognisedthe distinction between pay when

paid and pay if paid clauses, whenit was inter alia held:

1. Dierent industries have dierent

legal lingo with its own peculiarinterpretation and the constructionindustry is no exception. Oftenbandied about as they may appearconvenient are the terms pay when

paid and pay if paid. Are the twoterms materially dierent one fromthe other and can the terms of aconstruction contract where paymentsare to be made within 30 daysupon issuance of the certicate betransformed into a pay when paid or

pay if paid contract by the conductof the parties?ese issues shall beexplored as counsel for both the partiesexpounded on the interpretation of the

contract and the implications of theirclients actions....68. In this regard the authoritiesclearly make a vital distinctionbetween:

(a) a pay when paid condition,which merely means thecontractor can delay paymentuntil the same is received

from the employer of the maincontractor up to a reasonabletime; and

(b) a pay if paid clause whichgrants the contractor absoluteprotection against paymentto the subcontractor untiland unless payment is made

by the employer of maincontractor, as pointed out inEngineering & ConstructionContracts Management PostCommencement Practice,(2002), LexisNexis by IrHarbans Singh KS at pp 385-

392.69. A pay when paid clause has neverbeen interpreted to be an absolutebar to payment. On the other hand a

pay if paid clause must be clear andunambiguous in its eect before thecourt will lend credence to it...70. e defendants counsel thereforesubmitted that, in light of the vagueand ambiguous terms of the pay when

paid condition, this court cannothold that such a condition bars thedefendant from payment. is is evenmore so since the plaintiis unable toeven precisely dene the terms of this

alleged condition. In the light of theauthorities cited I would agree withthe defendants counsel that a paywhen paid condition, even assuming

for a moment that it had been agreedupon, does not prevent the defendant

from claiming thenal sum ofRM2,439,228.22 from the plainti

forthwith88. A one syllable word such as whenand if in the context of a construction

contract payment clause whether itbe pay when paid or pay if paidis not as innocuous as it appears tobe; indeed it has implications of far


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reaching consequences. Only those inthe construction industry are perhapsmost aware and appreciative of this forthey are most aected by it as paymentis the lifeblood of the industry.

Unfortunately the judgments inAsiapoolssupra and Seloga Jayasuprado not appear to have been referredto and reliance only appears to havebeen placed onAntah Schindlersupra.

CONCLUSION

e courts have treated the questionof enforceability of pay when paidor pay if paid clause as one ofinterpretation. However, clauses

with almost identical wording have

been held to be either enforceableor unenforceable. e distinctionmade between pay when paid andpay if paid clauses also appearstenuous, as businessmen like maincontractors who provide that they

will pay their sub-contractors whenthey receive payment from theiremployer must intend such paymentby their employer to be a conditionprecedent.

e uncertainties with respect to theenforceability of pay when paidclauses are likely to be resolved soonby the legislature, rather than by our

courts. e Construction IndustryPayment and Adjudication Bill isexpected to provide that all paywhen paid clauses are void.

Although the legislation, when itcomes into force, will be welcomeinsofar as it provides certainty, thepolicy considerations appear unclear.e reason for the prohibition ofthese clauses is understood to be adesire to curb the pervasive unfaircash ow risk transfer practice.However, as some of the judgmentsof our courts have said, there is nocommercial reason why the risk ofthe employers insolvency should notbe shared between a main contractorand sub-contractor. is would beespecially so where the employer

has himself nominated a sub-contractor to be appointed by themain contractor. Furthermore, asrecognised in Pernas Otissupra, thesubcontractor per se is not a specialspecies which requires special principlesof law to give him a generous dose oflegal protection.

e policy considerations behindthe expected prohibition of these

clauses appear misplaced, however tothe extent that certainty is achieved,and arguments need no longer bemade as to the tenuous distinctionbetween a pay when paid and

pay if paid clauses they are to bewelcomed.

e courts have treated the question of enforceability of pay

when paid or pay if paid clause as one of interpretation.

Writers e-mail:[email protected]@zulraque.com.my


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Lam Wai Loon (Partner, Skrine) and Tan Lai Yee (Associate, Skrine)

RETENTION MONIES :

YOURS OR MINE ?It is common to nd a provision ina standard form building contractwhich allows an employer to retainand hold a specied percentage ofthe amount certied in an interimcerticate of payment for the workdone and materials supplied bythe contractor to ensure repairby contractor within the defectliability period of any defect in theconstruction works.

Based on English law, the contractorwill not be able to claim for therelease of the retention monies inthe event the employer goes intoliquidation or has a winding uppetition presented against it, if theemployer has not put the retentionmonies into a designated account

separate from its general funds. isis the position notwithstanding thatthe contract specically provides thatthe retention monies are to be heldby the employer as duciary on trustfor the contractor.

In the recent case of Sediabena SdnBhd & anor v Qimonda MalaysiaSdn Bhd (in liquidation), the HighCourt decided not to follow the

English position, but instead heldthat the retention monies underthe contract are monies held intrust by the employer in favour ofthe contractor, and as such, the

contractor as beneciary of themonies was still entitled to claimfor their release after the employerhas gone into liquidation eventhough the retention monies werenot set aside in a designated accountseparate from the employers generalfunds.

BRIEF FACTS

e Plaintis were the Defendantscontractors for a project knownas the Design and Build ForQimonda Global Module HouseProject at Senai Johor (Works)

which adopted the SingaporeREDAS Design and Build Contract(Contract). Retention monies werededucted by the Defendant from

the Plaintis interim certicatesfor the purpose of making gooddefects in the Works carried out bythe Plaintis during the liabilityperiod (Retention Monies). eContract did not expressly state thatthe Retention Monies were held bythe Defendant as a duciary for thePlaintis.

e Defendant went into voluntary

liquidation before the RetentionMonies were released to thePlaintis and Liquidators wereappointed over the Defendant. eRetention Monies were not set aside

in a separate account prior to theDefendants liquidation.

e Plaintis requested that theRetention Monies be released tothem under the Contract. However,the Liquidators refused to do socontending, in the main, that theRetention Monies are not trustmonies as there was no express trustprovision which provided for theRetention Monies to be held by theDefendant as a duciary in favourof the Plaintis. e Liquidatorsalso contended that as the RetentionMonies were not separated prior tothe liquidation of the Defendant,they had become part of the generalliquidation fund and that the releaseof the same to the Plaintis would

constitute a preferential treatment tothe Plaintis over the other creditorsof the Defendant who have a rightto the liquidation fund.

As a result, the Plaintis sought adeclaration in the High Court thatthe Retention Monies were heldin trust by the Defendant for thePlaintis and for a further order thatthe Retention Monies be released to

the Plaintis.


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DECISION OF THE COURT

e issues for decision by the HighCourt were, in the main, whetherthe Retention Monies held by theDefendant were trust monies; and

whether the Plaintis were stillentitled to claim for the release ofRetention Monies which had notbeen set aside in a separate accountprior to the Defendants liquidation.

e High Court granted thedeclaration sought by the Plainti,namely that the Retention Monies

were trust monies and furtherordered the Defendant to release thesame to the Plaintis.

e Learned Judge took the view

that the Retention Monies was, byits nature and purpose, trust moniesbecause the Retention Monies couldbe deducted by the Defendant foronly one purpose, namely, to rectifyany defects during the liabilityperiod. e absence of any expressprovision for trust in relation to theRetention Monies did not dilutethe Plaintis benecial interestin such monies. His Lordship was

of the opinion that there was alegitimate expectation on the partof the Plaintis that the RetentionMonies would be released to themif no claim was made against them

under the Contract for defective oruncompleted Works.

e Learned Judge also took theview that there was no requirementfor the Plaintis to take steps toensure that the Retention Monies

were set aside before the Defendantsliquidation in order to safeguard thePlaintis benecial interest in suchmonies. e fact that the RetentionMonies were not set aside prior tothe Defendants liquidation didnot raise the issue of preferentialtreatment to the Plaintis over theother creditors as the RetentionMonies did not belong to theDefendant in the rst place.

e High Court held that the act

of separating the Retention Monieswould be useful, but by no meansconclusive evidence of the creationof a trust. e Judge took theview that the requirement for theseparation of the Retention Monies

would impose an extremely highobligation upon the contractors tosafeguard the retention funds duringthe performance of a contract, andmore often than not, would not

reect the commercial reality of theconstruction industry, particularly inthe Malaysian context.

e Learned Judge also highlightedthat the reported case laws inMalaysia would reveal onlya handful of cases where thecontractor had actually applied forthe preservation of the retentionmonies during the pendency of acontract, and there could be manyreasons why the fund was not setaside, the obvious ones being thatthe contractor would not wantto jeopardise the commercialrelationship of the parties whenthe contract was subsisting as thecontractor would not really applyhis mind to taking such actionto preserve the retention fundsespecially when the employer waspaying monies under the paymentcerticates.

In coming to its decision, the HighCourt chose not to follow the longline of established cases in Englandfor the proposition that the failureby a contractor to take steps toensure that the retention monies areset aside in a separate account wouldresult in the contractor losing hisright to claim for their release in theevent of the employers liquidation.

is article was rst published in Issue 2/2011 ofLEGAL INSIGHTS, a Skrine Newsletter.Updated and Reproduced with permission of SKRINE.

MALAYSIA


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CLOSING NOTE

e Defendants appeal to the Court of Appeal was dismissed on 12 July2011.

e Defendants application for leave to appeal to the Federal Court wasdismissed on 31 October 2011.

Writers e-mail: [email protected] and [email protected]

With this decision, contractorsin Malaysia will be assured that,notwithstanding the liquidationof the employer, their benecialinterest in the retention sum willbe safeguarded even though theemployer did not set aside the

retention sum in a separate accountprior to its liquidation. is HighCourt decision is certainly onethat all contractors in Malaysia will

welcome.


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Harold Tan Kok LengPartner, Skrine

TAXATIONOF THE PROPERTY

DEVELOPMENT INDUSTRYINTRODUCTION

Taxation of income derivedfrom the business of propertydevelopment is often technicaland complicated as the nature ofthe industrys business is such thatdevelopment projects are oftencarried out in phases which stretchout over a number of years ofassessment to complete.

In order to understand therules under which the propertydevelopment industry in Malaysiais taxed, one has to be familiar

with the Public Ruling No. 1/2009(Ruling) entitled PropertyDevelopment issued by the InlandRevenue Board (IRB) on 22 May

2009. e 2009 Ruling supersededan earlier ruling issued by the taxauthority in 2006 on the samesubject. It should be noted fromthe onset that the Ruling althoughinstructive is nevertheless onlyreective of the IRBs interpretationof the relevant provisions of theIncome Tax Act 1967 (ITA) andthat the authoritys views are oftenquestioned and can be challenged in

a court of law.

is article aims to provideits readers with an overviewof the salient tax concept and

issues concerning the propertydevelopment industry throughthe examination of some of thepertinent tax rules provided forin the Ruling, including therules governing the deemedcommencement date of a businessand completion of a project,recognition of income as well asdeductibility or otherwise of variousoutgoings and expenses.

DATE OF COMMENCEMENTOF BUSINESS

e Ruling provides that a propertydevelopment business shall bedeemed to be commenced on a date

when some signicant activities oressential preliminaries to the normal

operations of property developmentare undertaken. Examples given ofsuch signicant events include:

(i) the physical possession of thedevelopment site;

(ii) the active development of theland such as levelling of land orpiling works; and

(iii) booking of properties by endpurchasers.

e date of commencement of aproperty development business isimportant for tax purposes to aproperty developer as it would have

a bearing on the deductibility ofcertain expenses incurred prior tothe commencement of business.

As a rule, general administrativeoverhead expenses, such assalary, printing, stationery andother general expenses whichare not directly attributableto a development project, butnevertheless incurred prior to thedate of commencement of thebusiness, are not tax deductible.On the contrary, the same expenses

would be allowed for tax deductionif they are incurred after thecommencement of the propertydevelopment business.

ose expenses which are directly

attributable to the developmentproject such as land cost, surveyfees, architect fees, conversionpremiums, quit rent, assessmentand soil investigation costs, whichare typically incurred very earlyon in a project can be capitalisedas development expenditure. Suchdevelopment expenditure will onlybe accorded a revenue deduction ona progressive basis according to the

stages of completion of the project.

MALAYSIA


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RECOGNISING PROFITSACCORDING TO PERCENTAGEOF COMPLETION

e gross income of a propertydeveloper is assessed on a receivableor accrual basis as opposed to areceived basis. is requires the

matching of revenues to expensesat the time at which the transactionoccurs rather than when payment ismade or received.

For tax purposes, the Percentage ofCompletion method of accountingis adopted in the computation ofincome, whereby income from aproperty development business isto be recognised, as development

activity progresses, by referenceto the stage of completion of thedevelopment activity.

e Completion of Contractmethod of accounting is notacceptable to the IRB for thecomputation of gross prot fortax purposes. e Ruling providesthat a property developer whoprepares its accounts on this basis

must be prepared to re-compute itsincome by using the Percentage ofCompletion method to determineand declare its estimated prots orlosses annually.

A salient feature of the Percentageof Completion method ofrecognising income and expensesis that it enables the tax authorityto assess the prots of the property

developer on a yearly basis basedon the anticipated prot during theduration of the development, withanal tax adjustment to be madeupon the completion of the project.is requires an exercise by theproperty developer to estimate thegross income from a developmentproject.

Income recognition commenceswhen the sale of the development

units is eected (e.g. when the saleand purchase agreements are signed)and when development activitieshave commenced.

Estimatedgross prot(for a year ofassessment)

= Sum of progress payments in respect of theproject, received and receivable in that basisperiod

Total estimated sale value of the project

X Totalestimated grossprot from theproject

Estimatedgross prot(for a year ofassessment)

= Costs incurred to date in respect of aproject, paid and payable in that basisperiod

Total estimated costs of the project

X Totalestimated grossprot from theproject

e tax authority may allow a property developer to use a formula otherthan the above to estimate its gross prot for a year of assessment. Anothercommon formula used in the industry is the cost incurred to date basis, whichappears like the formula below:

e formula chosen by a property developer must in any event be one that isconsistent with accepted accounting standards that reect a fair and reasonablespread of the estimated gross prot, and be applied consistently throughoutthe duration of the project.

DETERMINING ESTIMATED GROSS PROFIT

e stage of completion of a development project and hence the estimated grossprot from a development project for a particular year of assessment may bedetermined in a number of ways. e common methods include:

(i) progress billings basis;(ii) costs incurred to date basis; and

(iii) surveys of work performed basis.

As a rule of thumb, the IRB adopts the following formula based on progressbillings to determine the estimated gross prot for any particular year ofassessment:

ESTIMATED LOSS TO BE SET

OFF AGAINST OTHER PROFITMAKING PROJECTS

If a property developer anticipatesthat it will incur a loss in one ormore of its property developmentprojects in a basis period for a yearof assessment, the estimated lossor aggregate of estimated loss fromthose projects can be set oagainstthe aggregate of the estimated gross

pro

ts from its other pro

t makingprojects for the same basis period.

Any excess of estimated loss after theset o is disregarded.

REVISION OF ESTIMATES AND

TAX COMPUTATION

It is often the case that theanticipated protability of a projectmayuctuate during the course ofits development due to competingmarket forces that are not withinthe developers control. It is forthis reason that the IRB allows aproperty developer to revise itsestimated gross prot or loss under

the following circumstances:

(i) when there is a variation in thedevelopment cost of the project;

(ii) when there is a variation in the


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selling price of the developmentunits of the project; or

(iii) for any commercial reasonsthat may be acceptable to theDirector General of InlandRevenue (DGIR).

Although the revised estimates may

be accepted by the IRB on a case bycase basis, the revised gures for costand revenue, even if allowed, canonly be incorporated for the purposeof assessing the developers currentand subsequent years of assessment.Prior years assessments calculatedbased on the original estimates

would not generally be allowed to bereopened.

DATE OF COMPLETION OFPROJECT

e Ruling provides that a propertydevelopment project shall be deemedto be completed upon the issuanceof the Temporary Certicate orCerticate of Fitness for Occupation(CFO), or any other certication ofsimilar eect, such as the Certicateof Completion and Compliance

(CCC), whichever is the earlier.e date of completion is importantfor tax purposes as the propertydeveloper is required under theRuling to ascertain its actual grossprot or loss from the project bypreparing anal account upon thecompletion of the project. It is tobe noted that the preparation ofsuch nal account may not be thatstraight forward as certain expenses

attributable to the development,such as liquidated and ascertaindamages (LAD) and strata titleexpenses, may be incurred somemonths or even years after the nalaccount is required to be submitted.

Be that as it may, once the nalaccount is prepared and the nalgures become available, the actualprot or loss from the project, as thecase may be, can be ascertained.

e following three situations mayarise:

(i) Actual gross prot exceedsestimated gross prot.

- If this situation arises, theamount equal to the excessprot shall be taken as grossincome for the nal basisperiod and taxed accordingly.

(ii) Actual gross prot is less thanestimated gross prot.

- Under this scenario, theproperty developer maychoose to reopen all the prioryears assessments to haveits actual prot apportionedand the aected assessmentsrevised. e property

developer may also choosenot to have its precedingyears assessment reviewed.is would be allowed if theDGIR is satised that thereare no tax implications in thedeveloper so opting.

(iii) e property developer incursan actual loss.

- If a project nally ends in aloss, the actual gross loss hasto be apportioned to eachrelevant year of assessment.

DEDUCTIBILITY OFOUTGOINGS AND EXPENSES

As a general rule, all outgoingsand expenses incurred wholly andexclusively by a property developer

in the production of its incomeduring the basis period in a yearof assessment are deductible fromthe gross income from the businessunless specically excluded pursuantto section 39 of the ITA.

PROPERTY DEVELOPMENTCOSTS

All direct expenses and outgoingsattributable to development

activities are to be capitalised asdevelopment expenditure which

would be accorded a revenuededuction based on the projects

percentage of completion recognisedin a particular year of assessment.

Property Development Costs wouldinclude:

(i) infrastructure costs such asdrainage, inner roads, reservoir

and oxidation pond that addvalue to the project;

(ii) interest paid or payable on loanstaken to nance the purchase ofland or development works;

(iii) expenses incurred prior to thedate of commencement of theproject such as cost of land,survey fees, soil investigationexpenses, architect fees, designand technical fees and cost of

construction materials; and(iv) proportion of common

infrastructure costs.

ALLOCATION OF LAND COST

e Ruling provides that where adevelopment project consists ofmore than one phase with dierenttypes of properties, the land cost foreach phase of the project has to be

apportioned based on land acreage.

ALLOCATION OF COMMONINFRASTRUCTURE COST

Contrary to the stringent ruleimposed on the allocation of landcost, the IRB allows commoninfrastructure cost to be allocatedeither using the acreage method,relative sales value method or any

other method that is acceptable bythe DGIR.

FEES PAID FOR SOLICITINGPROJECTS

e deductibility of such fees woulddepend on its purpose, nature andthe circumstances under which thepayment arises. Such fees wouldnot qualify for deduction wherethe services provided by the payee

involve no more than securingthe project. However, if the payeeafter securing the project is activelyinvolved in the management and


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running of the project, then thefees may qualify as a commissionor management fee that isdeductible as part of the developersadministration expenses.

WARRANTY AND DEFECTLIABILITY EXPENSES

Warranty and defect liabilityexpenses incurred by a propertydeveloper are allowable deductionsagainst the income for the basisperiod or may be carried forwardto the following basis periods.However, if the developer hasinsucient or no gross income inthe basis period or the followingbasis periods to take advantage of

this deduction, then the developermay either:

(i) elect to have the defect liabilityexpenses allowed as a deductionagainst the gross income fromthe same project for the basisperiod or periods precedingthe basis period in which theexpenses are incurred until theyare fully deducted; or

(ii) not to make such an election, inwhich event the expenses will beallowed as a deduction againstthe aggregate gross incomefrom the developers otherprojects for the basis period orany following basis periods, asthe case may be, and thereafteragainst other sources of incomeof the developer.

LIQUIDATED ANDASCERTAINED DAMAGES(LAD) AND STRATA TITLEEXPENSES

Provisions for LAD as well as stratatitle expenses are not tax deductibleuntil and unless such expenses havein fact materialised.

e Ruling nevertheless providesthat a developer who:

(i) develops only one project/phase;

(ii) has sold all the units in thatproject/phase;

(iii) goes into liquidation uponcompletion of the project/phase; and

(iv) has insucient or no incomefrom the project to osetthe LAD and/or strata title

expenses, may carry back suchexpenses to be deducted againstthe gross income from the sameproject for the basis period orperiods preceding the periodin which the expenses areincurred.

LEGAL AND PROFESSIONALFEES

Legal and other professional feesthat are allowed to be deductedagainst gross income according tothe Ruling include:

(i) valuation fees paid at the timeof purchase by the propertydeveloper;

(ii) legal fees paid for transfer ofland titles, sub-division andconversion of land;

(iii) compensation for eviction ofsquatters from the land;

(iv) cost incurred in arrangingend-nancing facilities forpurchasers.

Legal and other professional feessuch as stamping, ling and feesincurred in connection with thearrangement of loans for the benetof the property developer, including

bridging loans, are not allowabledeductions pursuant to section 39 ofthe ITA.

MARKETING ANDPROMOTIONAL EXPENSES

Marketing expenses in anyform of advertisements (media,billboards, brochures, etc) as wellas promotional expenses such asfree legal fees, free cabinets or free

air-conditioners, provided theyare wholly related to the sales ofthe development, are allowabledeductions.

GUARANTEE FEES

e Ruling provides that guaranteefees paid to a guarantor in respectof a loan or credit facility is not adeductible expense.

GENERAL ADMINISTRATIVE

EXPENSES

General administrative expensessuch as audit fees and bank chargesare deductible against gross incomeprovided they satisfy the whollyand exclusively incurred in theproduction of income test.

CONCLUSION

It is hoped that readers have gainedsome insights into the rules under

which the property developmentindustry in Malaysia is taxed. Itshould be remembered that althoughthe Ruling serves as a useful guideas to the manner in which theincome derived from a propertydevelopment is to be taxed, theRuling nevertheless only reects theIRBs views and is not binding on

the courts.

Writers e-mail:[email protected]


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By Gordon Smith (Partner) and Glen Rosen (Associate), Kennedys, Singapore

ENFORCING DAB DECISIONSUNDERTHE FIDIC 1999 RED BOOK

INTRODUCTION

is case summary discusses therecent decision of the SingaporeCourt of Appeal in CRW JointOperation v PT Perusahaan GasNegara (Persero) TBK [2011]SGCA 33, which expands upon theconcept of a Final Partial Awardpublished by a tribunal to enforcea Dispute Adjudication Board(DAB) decision under sub-cl 20.6of the Federation Internationalede Ingenieurs Conseils (FIDIC)Conditions of Contract forConstruction (1st Edition, 1999)(1999 Red Book). is is the rstjudicial case in which this issue isconsidered.

e Court of Appeal upheld theHigh Courts decision to set aside anal award issued by the MajorityMembers in the ICC InternationalCourt of Arbitration Case No16122/CYK under the SingaporeInternational Arbitration Act(the IAA). e Court of Appealdismissed CRWs application on thebasis that the Majority Membershad breached their jurisdiction and

breached the rules of natural justiceby failing to review the merits of theDABs decision and accord PGN theopportunity to defend its position.

FACTS

PT Perusahaan Gas Negara (Persero)TBK (PGN) entered into a contract

with CRW Joint Operation (CRW)to design, procure, install, test andpre-commission an optical brecable in Indonesia (the Contract).e Contract adopted the GeneralConditions of the 1999 Red Book.

A dispute arose between the partiesregarding 13 dierent variationproposals issued by CRW to PGN.In accordance with the procedure setout in sub-cl 20.4 of the Contract,the dispute was referred to a DAB.e DAB issued a decision infavour of CRW for the sum ofUS$17,298,834.57.

In accordance with the procedureset out in the Contract PGN issueda notice of dissatisfaction (NOD)alleging the amount awarded bythe DAB was excessive. On 13February 2008 CRWled a requestfor arbitration pursuant to sub-cl20.6 of the Contract with the ICC,

with the seat of the arbitration beingSingapore. e purpose of CRWs

request was to give prompt eect tothe adjudicators decision.

PGN led its response submittingthat the DABs decision was not

yet nal and binding as PGN hadissued a NOD in accordance withterms of the Contract. PGN furthersubmitted that the DABs decisionought to be re-opened and thatCRWs request for prompt paymentof the amount of the DABs decisionshould be rejected.

ICC Arbitration

CRW referred to arbitration not theunderlying dispute which formedthe basis of the DAB decisionbut rather a Second Dispute asto whether PGN was obliged tocomply with the DAB decision andpay the sum of US$17,298,834.57.

Following arbitration proceedings

in Singapore, the Arbitral Tribunalissued a Final Award in favourof CRW entitling CRW toimmediate payment of the sum ofUS$17,298,834.57. In reaching thisconclusion the Arbitral Tribunalfound that PGN was not entitledin the arbitration to request the

Arbitral Tribunal to open up, reviewand revise the DABs decision.

Singapore High Court

CRW sought to enforce the FinalAward in Singapore and on 7January 2010 an order giving eect

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to CRWs application was made(Enforcement Order). PGN leda separate application in the HighCourt in Singapore to have theEnforcement Order and Final Awardset aside.

e High Court set aside the Final

Award under the IAA on the basis:(a) the Majority Members had

issued anal award onthe Second Dispute eventhough the dispute had notbeen referred to the DAB inaccordance with the provisionsset out in the Contract; and

(b) even if the Second Dispute wasreferable to arbitration, theContract did not entitle the

Arbitral Tribunal to make theDABs decision nal withoutrst hearing the parties on themerits of the decision.

In eect the High Courts decisionmeant that where a contractor suchas CRW was seeking to enforce aDAB decision for payment it neededto:

(a) rst refer back to the DAB thedispute as to whether paymentis owing, which is a timelyprocess; and

(b) frame the Request forArbitration so that thecontractor is challenging theunderlying disputes, whichthe DAB has already madea decision on and not solely

whether immediate payment is

owing.

COURT OF APPEAL

CRW appealed the High Courtdecision and on 13 July 2011 theCourt of Appeal dismissed CRWsappeal.

In reaching the conclusion thatCRWs appeal should be dismissedthe Court of Appeal held that the

scope of the Arbitral Tribunalsjurisdiction was dened by sub-cl 20.6 of the Contract and theterms of reference (TOR) of the

arbitration. e Court of Appealheld that sub-cl 20.6 of the Contractand TOR made it clear that the

Arbitral Tribunal was to decide notonly whether CRW was entitledto immediate payment but alsoadditional issues of fact or law

which the Arbitral Tribunal deemed

necessary to decide.

Sub-cl 20.6 of the Contractprovides:Unless settled amicably, any dispute inrespect of which the DABs decision (ifany) has not becomenal and bindingshall benally settled by internationalarbitration

e arbitrator(s) shall have full power

to open up, review and revise anycerticate, determination, instruction,opinion or valuation of the Engineerand decision of the DAB relevant tothe dispute

Neither Party shall be limited in theproceedings before the arbitrator(s) tothe evidence or arguments previously

put before the DAB to obtainits decision, or to the reasons for

dissatisfaction given in its notice ofdissatisfaction.

e Court of Appeal held that itwas quite plain that a reference toarbitration under sub-cl 20.6 of theContract in respect of a binding butnon nal DAB decision is clearly inthe form of a rehearing so that theentirety of the parties disputes canbe resolved afresh, and therefore the

Majority Members had not issuedits Final Award in accordance withsub-cl 20.6 of the Contract.

In coming to this conclusionthe Court of Appeal referred tothe Dispute Board FederationSeptember 2010 newsletter notingthe ICC decision (in whichKennedys acted for the successfulparty), where the tribunal made itclear that whilst the DABs decision

was enforceable under a partialaward the subject matter of theDAB decision could be opened up,reviewed and revised by the arbitral

tribunal in the same arbitration inaccordance with sub-cl 20.6 of the1999 Red Book.

In reaching the conclusion that theFinal Award should be set aside, theCourt of Appeal noted that this issueturned on whether the Majority

Members had the power to issuethe Final Award without openingup, reviewing and revising the

Adjudicators decision. e Courtof Appeal held that the MajorityMembers had exceeded their

jurisdiction (contrary to Art 34(2)(iii) of the Model Law) by failingto consider the merits of the DABsdecision prior to the making of theFinal Award.

e Court of Appeal noted thatthey found it dicult to understand

why the Majority Member ignoredthe clear language of sub-cl 20.6of the Contract to nally settlethe dispute between the parties andinstead abruptly enforce the DABsdecision without reviewing themerits of that decision.e Court of Appeal noted the

Majority Members should havemade an interim award in favour ofthe CRW for the amount assessedby the DAB and then proceeded tohear the parties substantive disputeafresh before making anal award.

Accordingly, the Court of Appealheld that the Final Award was notissued in accordance with sub-cl20.6 of the Contract.

e Court of Appeal also heldthat the Majority Members hadbreached the rules of natural justice(contrary to s24(b) of the IAA) byfailing to allow PGN an opportunityto present its case on the DABdecision. In addition, the Court of

Appeal held that PGN suered realprejudice as a result.


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IMPLICATIONS

is decision will have a numberof implications for contractorsand tribunals alike in which DABdecisions under the 1999 Red Book(and indeed the 1999 Yellow andSilver Book equivalents) are referred

to arbitration:

(a) from a contractors perspectiveif it wishes to enforce paymentof a DAB decision it needs torefer the DABs underlyingdecision itself to arbitration,in the course of which it couldseek an interim award forpayment of the DABs decision.Like CRW, this may not be a

contractors rst inclination incircumstances where the DABsdecision is in its favour; and

(b) from the Tribunals perspective,if it intends to issue an awardfor payment of the DABdecision, it needs to ensurethat it is anal interim awardpending its determination of anal interim or partial award onthe underlying issues.

One issue the Court of Appeal didnot address was the High Courtsview that a dispute between theparties concerning immediatepayment of the DAB decision(which will always be disputed bythe employer) must rst be referredto the DAB prior to the contractorseeking anal interim award fromthe Tribunal. With respect, we do

not consider this to be the intendedpurpose of sub-cl 20.4. If a DABhas given its decision, it has clearlydone so on the understanding thate Decision shall be binding onboth Parties who shall promptly giveeect to it (sub-cl 20.4), and it

would be otiose for the contractor tospend a further 112 days under sub-cl 20.4 to go through a procedure ofhaving the DAB conrm this.

Importantly, for the guidance ofreaders, the authors have beeninvolved in the enforcement byarbitration of numerous DAB

decisions in which a referral backto the DAB was not deemedto be necessary for the eectiveenforcement of a DAB decisionby an arbitral tribunal. One suchcase was referred to by the Court of

Appeal.

e reader should note that sub-cl 20.9 of the FIDIC Conditionsof Contract for Design, Build andOperate Projects (1st ed, 2008)(the Gold Book) addresses thissituation by providing for a situation

whereby a failure to comply with aDAB decision can itself be referredto arbitration rather than theunderlying dispute. Sub-cl 20.9states:

In the event that a Party fails tocomply with any decision of theDAB, whether binding or nal andbinding, then the other Party may,

without prejudice to any other rightsit may have, refer the failure itselfto arbitration under Sub-Clause20.8 [Arbitration] for summary orother expedited relief, as may beappropriate

It is the authors view that there isalready a settled practice at the levelof international arbitration whereDAB decisions can be enforceddirectly by an arbitral tribunal, atleast on a temporary basis pendinga Final Award. It is signicant thatthe Court of Appeal shares this view(to our knowledge being the rstcommon law Court to rule on this),

at least with respect to binding butnot nal DAB decisions renderedunder the 1999 FIDIC Conditionsof Contract.


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Avinash PradhanSENIOR ASSOCIATE,

COMMERCIAL LITIGATION PRACTICE,RAJAH & TANN LLP

SINGAPORE AND THE PREVENTION RULE

A STEP TOO FAR?

e prevention rule is concernedwith an act or omission of theemployer which prevents thecompletion of the works, andwhich does not give rise to acontractual entitlement to thecontractor for an extension oftime. Such an act or omission hastwo key eects.

Firstly, time is set at large thecontractors obligation to completeby the contractual date is replaced

with an obligation to completewithin a reasonable period of time.e employer would have to showthat the works were not completed

within a reasonable time, in orderto sustain a claim for delay incompletion.

Secondly, the employer is disentitledfrom claiming liquidated damagesfor delay. e disapplication ofthe liquidated damages clause isitself traditionally premised onthe replacement of the obligationto complete by the contractuallystipulated date, with an obligationto complete the works within a

reasonable time. e corollary isthat there is no contract date from

which liquidated damages can run1.Accordingly, not only does theemployer have to prove that the

works were not completed withina reasonable time. e employer

would also have to prove the lossowing from delay, subject to theusual limits on recovery.

THE WILD CARD

e wild card nature of theprevention rule is highlightedby three ancillary rules. Firstly,the law appears to be that theliquidated damages provision would,notwithstanding its disapplication,continue to operate as a limitation

on liability2. us, once theprevention rule bites, not onlydoes the employer have to proveits loss; its recoverability in respectof that loss is capped. Secondly, asrecently recognised by Jackson Jin Multiplex Constructions (UK)v Honeywell Control Systems3,actions by the employer whichare perfectly legitimate under a

construction contract may still becharacterised as acts of prevention(for example, a variation orderissued pursuant to the terms of thecontract). irdly, on the authorityof Peak Construction v McKinneyFoundations4, even if only one oftwo separate and distinct periodsof delay with two separate causesis the result of an act of preventionnot catered for in the contract, theprevention rule would apply.

e prevention rule has its rootsin the 19th century view of clausesproviding for sums payable uponbreach as weapons of oppression.Since then, the courts havestruggled in reconciling the rule

with commercial sense. us, in

Rapid Building v Ealing HousingAssociation5, Lloyd LJ remarkedthat he was somewhat startled tobe told that if any part of thedelay was caused by the employer,no matter how slight, then theliquidated damages clause in thecontract becomes inoperative.Lloyd LJ went on to state that hecould well understand how that

1 Hudsons Building and Engineering Contracts (2010, 12th Edn), at 6-0282 Elsley v Collins Insurance Agencies Ltd (1978) 2 SCR 13 [2007] 1 BLR 1954 [1976] 1 BLR 1115 (1984) 29 BLR 5


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must necessarily be so in a case inwhich the delay is indivisible, andthere is a dispute as to the extentof the employers responsibility forthat delay. Ironically, in the recentEnglish High Court decision of

Adyard Shipping6, it was consideredthat where there are two concurrentcauses on delay, one of which wasdue to the fault of the employerand not covered by the contractor,the principle would not in fact betriggered because the contractorcould not show that the employersconduct made it impossible for himto complete within the stipulatedtime.

Lim Chin San and the causal analysisIn the recent decision of Lim Chin

San Contractors v LW InfrastructurePtd Ltd7, the Singapore High Courthad the opportunity to considerthe prevention rule. e limitedquestion before the court wasphrased in the following terms:

where there were acts of preventionwhich caused delay in the progressof the works and which were not

extendable [sic] under the sub-contract, whether it was necessary for[the contractor] to have been prevented

from completing the works by aprescribed date in order for time to beset at large.

e Singapore High Court decidedthat it was necessary for the actof prevention to delay the date ofcompletion of the works. Whatis perhaps of greater signicanceis that the reasoning of the HighCourt suggests that in order forthe prevention rule to bite thecontractor must show that thecontractual date for completionof the works is not achievable asa result of the purported act oromission of the employer. Further,

the principles to be applied indetermining the suciency of thecausal connection would appear tobe analogous to those applicable toa contractors claim for a reasonableperiod of extension based on acontractual entitlement. Indeed, theCourt expressly linked the questionof proof of prevention of completionto issues ofoat and to critical path

analysis. In other words, the decisionsuggests that it is not sucient forthe contractor to show that the eventhad an impact on the critical pathon its own programme. Instead,the contractor must go the wholehog, and show, on the basis of afull programming analysis, that theprevention caused completion to bedelayed beyond the contractual datefor completion.

NEW LAW OR OLD?

It is perhaps beyond dispute thatan act of the employer which doesnot actually aect the completionof the works would not satisfy therequirements of the prevention rule8.However, the law has never been

entirely clear on what precisely it isthat the contractor needs to provein order to invoke the operation ofthe rule. Many of the early cases in

which the rule was developed weredecided on pleas of demurrer.

It is this commentators view thatthe true test is whether the act oromission of the employer aects

6 Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm)7 [2011] SGHC 1628 A good example is Baskett v Bendigo Gold-Dredging Co Ltd (1902) 21 NZLR 166

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the contractors own critical path.Cases such as Fernbrook Tradingv Taggart9, are reconcilable withthe views that it is sucient forthe contractor to show that theprevention has delayed a criticalpath event, and unnecessary toshow that the actual completion

was delayed. Indeed, in PeakConstruction v McKinney10 itself,the reasoning of Salmon LJ suggeststhat the onus falls on an employerto show that once it is accepted thatdelay to completion is a likely resultof the alleged act of prevention,the onus falls on the employer toshow that the act of prevention didnot delay actual completion (asopposed to contractual completion)

of the works. Recently, in JerramFalkus Construction Ltd v FeniceInvestments Inc, it was stated that inorder for the prevention principle toapply, the contractor must be ableto demonstrate that the employersacts or omissions have prevented thecontractor from achieving an earliercompletion date 11.

Take the following hypothetical

example. Assume the contractorsprogramme provides for aoatof 1 month. An employers act ofprevention, not covered by a clausein the contract, results in a delay, toa critical path event, of 10 days. Acontractors time risk event resultsin a separate critical delay of 25days. e decision in Lim ChinSan would appear to suggest thatthe contractor would not be able to

argue that time was set at large bythese events, as, given the periodofoat, the contractor would notbe able to show that the act ofprevention delayed the contractualdate for completion. is wouldhave the eect of denying thecontractor the oat time to hedgeagainst his own delays.

A question of principle

In any event, given that a contractoris generally master of his ownprogramme, and given that theprevention principle is premisedon there being no contractualmechanism for the allocation of

the time risk of the act or omissionof the employer, it is submittedthat the better (albeit strained)interpretation of Lim Chin San isthat the case is premised on the factof the contractor not having passedthe initial hurdle of showing that thealleged act of prevention has aectedits critical path.

e prevention rule is based on two

principles. e rst principle is thata party ought not to be entitled totake advantage of its own wrong.e second principle, the product of19th century thinking, is that clausesproviding for sums payable onbreach are in terrorem and ought tobe viewed with disfavour.

e tightening of the scope of theprevention rule in Lim Chin San is

perhaps understandable, given thewild card nature of the preventionrule. However, the approachsuggested by Lim Chin San wouldmake inroads into the rst principleunderlying the rule. is, it issubmitted, would be unjustied.e principle that a party ought notto be entitled to take advantage ofits own wrong is and ought to be apillar of commercial justice.

It is the second principle thatraises the problem. e traditionalcircumspection of the law in itsview of sums payable upon breach isoutdated. Provisions for liquidateddamages are a valuable commercialtool, a lifeline to commercial partiesmanaging risk in the shipwreck ofthe common law on damages. In

any event, the Dunlop Pneumatictest (and, in Malaysia, ss. 75 ofthe Contracts Act), provides morethan adequate protection againstthe potential injustice of liquidateddamages clauses.

Given that the common law

is beginning to recognise thecommercial sense even in reducingthe scope of the penalty jurisdiction(see for example AG HongKong v Philips12), perhaps it istime to recognise that an act ofprevention ought not to result ina disapplication of the liquidateddamages clause, but rather, thatany delay attributable to an act ofprevention ought to result in an

extension of the contractual date,with any evidential uncertainty inrelation to the attribution of thedelay being resolved in favour of thecontractor, all else being equal.


9 [1979] 1 NZLR 55610 [1976] 1 BLR 111, 119-12011 [2011] EWHC 1935 (TCC), at [52].12 [1993] 61 BLR 41


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By Kanaga Dharmananda SCFrancis Burt Chambers, Perth; Visiting Fellow, UWA Law SchoolMichael Collins

Francis Burt Chambers, Perth

THE OPERATION OF DISPUTE CLAUSES:

LITIGATION IS NOTTHE FACTORY SETTING

INTRODUCTION

It is common in constructioncontracts for there to be detailedclauses as to the giving of notice,and the resolution of disputesthrough a serious of procedures,escalating in the level of formality.

Such step clauses may work, likeScott v Avery clauses, to precludecourt litigation until there is fullcompliance with the clause. It issometimes thought that the lastresort, once all the steps in the stepclause have been completed, is courtlitigation. However, the issue willturn on the proper construction ofthe clause. Court litigation is notnecessarily the default factory setting

for such clauses. Just as arbitrationis an entirely appropriate, nalself-contained method of resolvingdisputes, including constructiondisputes, other methods may be setby the parties and the courts willhold the parties to their bargain.

One method chosen by the parties isexpert determination.

EXPERT DETERMINATION

Expert determination is an informal,private fact method of resolvingdisputes. ere is, however, no

legislative super-structure supportingexpert determination, unlikearbitration. Hence, the conductand eect of expert determination isultimately a matter of contract.

An expert determination clausewhich states that it is nal andbinding on the parties can only beattacked on limited grounds. isposition has recently been rearmedin Lipman Pty Ltd v EmergencyServices Superannuation Board[2010] NSWSCA 710, a decision ofthe Court of Appeal in New South

Wales.

THE LIPMAN CASE - FACTS

In that case, by agreement dated 19March 2002, Lipman Pty Ltd (the

plainti/ principal) entered intoa construction contract with theEmergency Services SuperannuationBoard (defendant / contractor)in relation to the redevelopmentof a shopping centre at Faireldnear Sydney. e agreementcontained clause 42 entitledDispute Resolution. Relevantly,clauses 42.10 and 42.11 were in thefollowing terms:

42.10 Determination by Experte determination of the expert:(a) must be in writing; and(b) isnal and binding unless a

party gives notice of appeal to theother party within 21 days of thedetermination; and

(c) is to be given eect to by theparties unless and until it isreversed, overturned or otherwisechanged under the procedure inthe following clauses.

42.11 Executive NegotiationIf a notice of appeal is given underclause 42.10, the dispute is to bereferred to the persons described in

Annexure Part A who must:(a) Meet and undertake genuine and

good faith negotiations with aview to resolving the dispute; and

(b) If they cannot resolve the disputeor dierence, endeavour to agree

upon a procedure to resolve thedispute.

e plaintimade a number ofclaims against the defendant, severalof which the defendant disputed.By agreement dated 14 March2005, the parties appointed MessrsNorman Fisher and P Callaghan SCto resolve their dispute as expertsunder clause 42. By determination

dated 7 December 2005, the expertsdetermined that the plaintiowedthe defendant a small amount.

AUSTRALIA


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On 13 January 2006, the plaintiserved a document titled Notice of

Appeal of Determination of ExpertPursuant to Clause 42.10 on thedefendant, the defendant havingpreviously agreed to extend thetime for service. During the next 5months, the parties met to resolvethe dispute in accordance with theprocedure contained in clause 42.11of the agreement. e parties wereunable to resolve their disagreement.ree and a half years later on11 December 2009, the plainticommenced proceedings againstthe defendant in the amount of$1,021,782.

e trial judge stated that the soleissue for determination was whether,

on the proper construction of clause42 (in particular, clauses 42.10 and42.11), the expert determination

was nal and binding and if not,whether the plaintiwas freeto pursue its claims against thedefendant e plaintiargued thatan expert determination underclause 42.10 was nal and bindingon the parties only where a partydoes not give a notice of appeal.

e trial judge rejected the plaintisargument and held that the:

plain and unambiguous words ofclause 42.10(c) require the expertdetermination to be given eectto unless and until it is reversed,overturned or otherwise changed underthe procedure under clause 42.11.at

procedure has done whatever work itcould do in the present circumstancesand the expert determination has notbe reversed, overturned or otherwisechanged. It follows that it remainsbinding.

e plaintiappealed arguing thatthe trial judge did not give proper

weight to the phrase commencingwith the word unless in clause42.10. e plaintiargued thatthe expert determination was notnal and binding should a notice of

appeal be led, which it did.

President Allsop, with whom YoungJA and Tobias AJA concurred,agreed with the trial judge.

President Allsop stated thatthe trial judge had approachedthe construction of the disputeresolution clause by reference to aliberal approach expressed in Francis

Travel Marketing Pty Ltd v VirginAtlantic Airways Ltd (1996) 39NSWLR 160 and Fiona Trust &Holding Corporation v Privalov[2007] UKHL 40. His Honour

stated that to adopt the liberalapproach was to:

give eect to a coherent businesspurpose through an assumptioncommercial courts around the worldwill make that parties are unlikelyto have intended multiple venues oroccasions for the resolution of theirdisputes unless they say so. (Lipmanv Pty Ltd v Emergency ServicesSuperannuation Board [2011]NSWCA 163 at [8])

is meant that clause 42.10 shouldbe given its full eect, subject to it notbeingnal and binding if the partieswere able to give substance and eectto their good faith negotiations asper clause 42.11. So, in eect, if the

parties could not settle on termsafter the determination, then thedetermination prevailed.

e Court adopted the reasoningin Francis Travel, although thecase concerned an arbitrationclause. In Francis Travel, theCourt was asked to consider themeaning and eect of Article 19of an agency agreement. Article 19

stated relevantly that any disputeor dierence arising out of thisagreement shall be referred to thearbitration in London of a singlearbitrator to be agreed by the parties

Questions may arise as to whether a step dispute clause, endingin expert determination is an ouster of the courts jurisdictionand are thus void.


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. Gleeson CJ, with whomMeagher Sheller JJA agreed heldthat:

When the parties to a commercialcontract agree, at the time of makingthe contract, and before any disputeshave yet arisen, to refer to arbitrationany dispute or dierence arising outof the agreement, their agreementshould not be construed narrowly. eyare unlikely to have intended thatdierent disputes should be resolvedbefore dierent tribunals, or thatthe appropriate tribunal should bedetermined byne shades of dierencein the legal character of individualissues, or by the ingenuity of lawyersin developing points of argument.(Francis Travel Marketing Pty Ltd v

Virgin Atlantic Airways Ltd (1996)39 NSWLR 160, 165 [D])

Lipman continues the recent trendtowards Courts giving eect tothe parties bargain, and to upholddispute clauses, despite unsettlingcourt litigation as the defaultprocess. (See also Straits Exploration(Australia) Pty Ltd and Another vMurchison United NL and Another

(2005) 31. WLR 187 at 193 [15])

CONCLUSION

Questions may arise as to whether astep dispute clause, ending in expertdetermination, is an ouster of thecourts jurisdiction and are thusvoid. e better, and modern view, isthat such clauses are valid. Wheeler

JA in Straits Exploration stated:

ere is increasingly, as amatter of commercial practice, atendency of parties to provide forthe determination of some or alldisputes by reference to an expert.ere are a number of reasons forthat course, including informalityand speed; suitability of some typesof disputes for determination bypersons with particular expertise;

privacy; and a desire to resolvedisputes in a way which may be seenas reasonably consistent with themaintenance of ongoing commercialrelationships. e law has longrecognised that those are properconsiderations to which the Courtshould give appropriate weight, andthat it is desirable therefore thatparties who make such a bargainshould be kept to it. e tendency

of recent authority is clearly infavour of construing such contracts,

where possible, in a way that willenable expert determination clausesto work as the parties appear to have

intended, and to be relatively slow todeclare such provisions void eitherfor uncertainty or as an attempt tooust the jurisdiction of the court.

So, it will become increasinglydicult for parties who haveaccepted a particular method forresolving their disputes to escapethe consequences from that choiceby recourse to ouster doctrines orconceptions of the default position.

We must lie in the beds we make.

Writers e-mail:[email protected] [email protected]


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By Mike Allen

Global Head of Contract SolutionsEC Harris

CONSTRUCTION DISPUTESON THE RISE

Resolving major contractdisputes represents an extremelyexpensive, time consuming andoften unnecessary distraction forclients and contractors alike, sowith our recent EC Harris GlobalConstruction Disputes Reportshowing that the number ofconstruction disputes is increasing,there is cause for concern.

Overall, the report found that theMiddle East and North America hadboth seen an increase in the numberof disputes during 2010 whencompared to 2009 with Europe theonly region to see a fall in disputes.e number of disputes in Asia wassimilar to the previous year.

In a year that saw several highprole, major value disputes in theMiddle East and Asia, we found thatdisputes were lasting, on average, 9.1months from inception to resolution.Disputes in Asia, however, continuedthe longest up to 11.4 months, UKexperienced the shortest period at6.75 months.

Overall, the average value of disputes

handled by the EC Harris teamwas US$35.1m in 2010, with thehighest average value being in Asia(US$64.5m) followed by the MiddleEast (US$56.25m). e highest

value dispute handled by EC Harris during the course of 2010 was forUS$200m in Asia, albeit EC Harris did work on a major dispute in theMiddle East where the disputed value was higher but undisclosed.

GLOBAL COMPARISON:AVERAGE LENGTH OF DISPUTES IN MONTHS

GLOBAL COMPARISON:AVERAGE VALUE OF DISPUTES IN US$MILLION

HONG KONG


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COMMON CAUSES

e research found that a failureto properly administer thecontract was the most commoncause of construction disputein 2010, demonstrating poorgovernance during the course of the

construction project. e top vecauses of dispute in constructionprojects during 2010 were:

1. A failure to properly administerthe contract

2. Ambiguities in the contractdocument

3. A failure to make interimawards on extensions of timeand monetary relief

4. Unrealistic risk allocationbetween employers andcontractors

5. Change imposed by theemployer

JOINT VENTURES

Where a Joint Venture was in placeto deliver a construction project,our research found that nearly a

third (31%) of these JVs resultedin dispute. In these JV disputes,the conduct of the Project Manageror Engineer was found to be atthe heart of the dispute on morethan half (53%) of occasions witha lack of understanding of contractprocedure and a partiality to theemployers interests the two biggestPM or Engineer mistakes.

DISPUTE RESOLUTION

When resolving their clientsdisputes, we also tracked themost common means of disputeresolution. Overall, arbitration wasthe most popular method, followedby party-to-party negotiation andcontract or ad hoc adjudication.

WHAT DOES THIS RESEARCHTELL US?

ere is no doubting that one mustconsider the context of this data.Regional variances on the lengthand value of the disputes are relatedto the size, complexity and number

of construction projects that arebeing undertaken within the variousregions.

e common causes mentionedabove suggest that whilst thecontracts themselves contain inter-related time management andnotication provisions, they are onlyas good as the operation of thoserespective provisions. is cannot

only aect the timely capture ofrelevant data, but can also severelyinuence and aect the project cashow, sub-contractors and also themorale and relationships betweenthe parties and the Engineer orProject Manager.

Directly related to this is a failureto provide interim extensions oftime and monetary relief. is issue

would appear to have a number offeatures that would be inuencedby the quality and standard ofsubstantiation provided to supportthe application, the level andexperience of the Engineer or PM(who is administering the Contract),the impartiality of the Engineer orPM, the levels of authority providedto the Engineer or PM and alsothe dispute resolution mechanism,

which will be explored in moredetail below; and

Incorrect contract selection alsoappears to be a common featurerelating to the causes of disputes.e allocation of risk betweenparties, the way that constraints areincorporated and also the pricingmechanism, all need to be adaptedfor each project. e contract itselfneeds to be tted around the project

constraints and characteristics (andnot the reverse).

A related factor to the length of thedispute is the method of alternativedispute resolution that is adopted

within each region and also theapproach or type of contractingarrangement.

It is interesting to note the various

collaborative contracting initiativeswhere target cost contracting, usingad-hoc or NEC forms are now beingapplied on a limited basis in theMiddle East and Asia regions.

Adjudication in the UK featureshighly as the method of disputeresolution and recent statisticsshow that most adjudicationdecisions are accepted by the parties

without recourse to the courts for arehearing of the matter. ere hasbeen a slow down in the numberof decisions where enforcement isbeing challenged through the courts.is demonstrates the success of theprocess and explains why disputes

within the UK are generally resolvedmore swiftly than elsewhere in the

world. In addition, parties appearto like the fact that the adjudication

process is conducted privately andmaintains condentiality.

Adjudication does feature in Asia,but on a limited basis contractuallyin Hong Kong and at a statutorylevel in Singapore.

In the Middle East and Asia,arbitration dominates the disputeresolution process. Dubai, Hong

Kong and Singapore all featurehighly as being hubs for topinternational arbitration, whichhas no doubt been inuenced bythe endorsement of the respectivegovernments as well as the adoptionof the New York Convention. ecase loads for each of the centreshas shown an increase, and aninteresting feature is the growth ofCIETAC arbitrations in China, andthe related cross border relations

with Hong Kong.

With a vibrant construction industryand multi cultural contracting


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relationships, the option of usingarbitration as a method of disputeresolution is appealing. is allowsparties from dierent jurisdictions toopt for a neutral country to host andresolve their dispute.

In addressing most of the main

causes of disputes, applying theright skills at the right time andbeing targeted on delivering whatthe employer needs and deliveringthat in accordance with the contract,

would go a long way to reduce thenature and extent of any dispute. Anearly involvement by independentspecialist consultants focused onbusiness outcomes, can signicantlyassist in achieving this.

EC Harriss specialist ContractSolutions team helps clients avoid,mitigate and resolve disputes.e team is based around theglobe and encompasses oneof the industrys largest poolof procurement, contract, riskmanagement and also quantum,delay, project management, defectsand building surveying experts.

e Contract Solutions teamprovides procurement, contract anddispute avoidance and managementstrategies, management expertiseand expert witness services. isis delivered through a blend oftechnical expertise, commercialism,sector insight and the use of liveproject data, combined with a multidisciplined and professional focus.

e Society of Construction Law, Malaysia (previously known as the Society ofConstruction Law Kuala Lumpur & Selangor) was formed in 2004 with theobjective of promoting education, study and research in the eld of constructionlaw and practice as well as related subjects including project management, riskmanagement, arbitration, adjudication, mediation and other modes of alternativedispute resolution. e Society has organised and held various Seminars and Talksrelated to construction law, both at introductory and advanced levels.

e Society is autonomous but has strong links with similar societies around theworld including the Society of Construction Law UK and in Singapore, HongKong, the Gulf States (UAE, Bahrain, Qatar), Australia, New Zeland, Mauritius,Caribbean and the European Society of Construction Law which consists of 17national construction law societies in Europe.

Anyone who is interested and professionally involved in construction law isencouraged to apply to become a member of the Society. Membership is opento all sectors of the construction industry, for example, architects, engineers,surveyors, contractors, developers, lawyers, arbitrators and experts. Studentpursuing engineering, construction and law courses are welcome to join theSociety.

ABOUT THE SOCIETY OFCONSTRUCTION LAW,MALAYSIA

EDITORS

Lam Wai Loon

ayananthan Baskaran

SOCIETY OF CONSTRUCTION LAW,MALAYSIA COMMITTEE 2011-2012

Wilfred Abraham (President)

Ivan Loo Yew Fook (Deputy President)

David Cheah Ming Yew (Vice President)

Lam Wai Loon (Honorary Secretary)

James Patrick Monteiro (Honorary Treasurer)

Belden Premeraj (Council Member)

Tan Swee Im (Council Member)

T. Kuhendran (Council Member)

Shanti Supramaniam (Council Member)

Harban Singh (Council Member)

ayananthan Baskaran (Council Member)

Vanitha Annamalai (Council Member)

Richard Ingham Moss (Council Member)



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yofConstructionLaw,

Malaysia.Allrightsreserved.

construction law digest - dec 2011

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