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The Malaysian Construction Industry The Present Dilemmas of Unpaid Contractors

By Lim Chong Fong, BS(Bldg) Hons (NUS), MRICS, MISM, MCIOB, MCIArb, LLB Hons (Lond), CLP, Barrister at Law
he construction industry is an important cog in the wheel propelling the Malaysian economy. The market size of the industry is RM43 billion based on the value of gross output in 2004. The industry then provides work for many ranging from professionals such as architects, engineers and surveyors to main contractors, sub contractors, suppliers and ultimately manual labourers who are employed by these contractors. The industry works and will only continue to work on the premise that these people are paid for work and services that have been properly rendered. The quantum of payment for work and services rendered are often huge in the thousands, if not in the millions of Ringgit. That notwithstanding, the construction industry is prone to disputes. It is therefore common for the claimant pursuing his claim for work or services rendered to meet with a cross claim instead for defective work, delayed completion, etc. So, payment is postponed until the resolution of the dispute. There can be many reasons for these disputes ranging from under capitalisation of the respondent to the in competency of the claimant. As it stands today, the legal enforcement of the claim and cross claim is unlikely to be summarily concluded but more likely to involve a protracted trial. In the meanwhile, there is ordinarily no security for the claim. These are the dilemmas of the unpaid contractor as his or her cost flow and profitability are often put in jeopardy. Enforcement of Payment
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presently by way of arbitration or litigation. Summary judgment via litigation may be obtained for clear-cut unpaid certified payment claims.1 More often than not, the claims are not clear-cut involving uncertified work done and disputed variation orders. In addition, there are always cross claims of set offs. The problems are clearly echoed by Edgar Joseph Jr FCJ in the Pembenaan Leow Tuck Chui case :It is well known to lawyers engaged in the field of construction contract law that the question whether a building owner or main contractor is entitled to refuse to make payment of money to a contractor or contractor, as the case may be, allegedly due and payable under an interim certificate issued by an architect or engineer, pursuant to provisions in a RIBA contract and other known forms of building contracts and sub contracts, on the ground that he has crossclaims alleging defective work or overvaluation or damages for delay, is a question of ever-recurring importance, which inevitably throws open for discussion the actual terms of the particular contract or sub-contract in the case and the all too familiar trilogy of cases of Dawnays Ltd v FG Minter Ltd & Anor [1971] 2 All ER 1389; [1971] 1 WLR 1205, Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; [1973] 3 All ER 195; [1973] 3 WLR 421, Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 Lloyds Rep 197 and their progeny.

Litigation is affordable but it takes too long. On the other hand, arbitration is faster but it is expensive. In any case, both modes will still take a considerable length of time as the disputes will have to be determined and disposed in accordance with the law, which must amongst others require affording the disputant parties natural justice in the presentation of their respective case. In the United Kingdom, New Zealand, the states of New South Wales, Victoria, Western Australia and now Singapore, the principal mode of construction dispute resolution has shifted to adjudication.This is a swift dispute resolution process that results in a decision that carries temporary finality unless reversed in arbitration or litigation. In the meanwhile the successful claimant is at liberty to enforce the decision. There is however no equivalent process of adjudication in the USA o*Canada. The common mode of enforcement is by way of a lien action and arbitration though parties are increasingly resorting to mediation that has proven to be rather successful.2 There are limited remedies and security pending dispute resolution for the unpaid claimant in Malaysia. There is no general common law right of suspension of work for non-payment.3 In the Kah Seng case, Low Hop Bing J succinctly held: -

The common modes of enforcement of construction claims in Malaysia are

Pembenaan Leow Tuck Chui Sdn Bhd v Dr Leela Medical Centre Sdn Bhd [1995]2 MLJ 57, but see also article by the author entitled Pembenaan Leow Tuck Chui Revisited, MBJ 1st Quarter 2003 @ page 74 Article by author entitled Legal Enforcement of Construction Payment Claim An American Perspective KLRCA Newsletter December 2003 Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1997] 1 CLJ Supp 448

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In my judgment, it is trite law that a contractor can only terminate his contract with his employer (at common law, as opposed to the exercise of an express termination clause) if he shows, inter alia, a repudiatory breach by the employer in the sense that the employer has evinced an absolute refusal not to perform his side of the contract. There is no intermediate right in a building contract to suspend works. If the contractor insists on the continued performance of the contract, i.e. he affirms the contract, he must himself continue to perform his primary obligations under the contract, i.e. to continue performing the contract works. This is why suspension of the works by the contractor, i.e. not continuing with his primary obligations, becomes itself a repudiatory breach by the contractor. Even if the plaintiff can establish that the defendant is in repudiatory breach of contract, the plaintiff would have no right to suspend works, but instead would have had to elect to either terminate the contract or insist on due performance. By suspending works without valid legal cause, the plaintiff has in fact repudiated its contractual obligations. The standard forms of construction contract do not provide for such a remedy other than the CIDB 2000 form and the PAM-NSC form. The right of suspension is quite useless if the sub contract is subjected to a pay when paid condition which is rather common unless of course the contractor has absconded with the money paid by the employer. The unpaid claimant is left with the option of progressing with the work concurrent with suing for payment with interest or if the non-payment is so serious to constitute a repudiatory breach, then there is the option of terminating the contract.4 Some of the standard forms such as the PAM 98 and CIDB 2000 also contain express provisions for determination. However as a matter of practice, many unpaid claimants are reluctant to go on the route of termination.

Security for Payment In any case the unpaid claimants claim is not secured pending the conclusion of the dispute resolution process. In other words, there is no guarantee that the claimant will be paid or that there are assets available for execution upon obtaining a successful result after a lengthy dispute resolution process. There is the availability of the Mareva injunction procedure in Malaysia but the applicant has the onerous burden to establish that it has a good arguable case (especially in the light of a cross claim of set off ) and a real risk of dissipation of assets.5 If the injunction is granted, there is some comfort because breaching the injunctive order or even taking willful steps to frustrate the application to obtain the order might constitute contempt of court6 . It does not still however make the applicant a secured creditor. The adjudication process in the United Kingdom does not also make the claimant a secured creditor after a decision is obtained. The successful claimant must still apply to the court for summary judgment and thereafter execute the judgment in the usual ways. Nevertheless

the principal advantage of adjudication is that the time taken between the referral of the dispute and the entry of the successful decision in the form of a judgment is considerably shortened. In this regard, there is hopefully a better prospect that there are assets available for execution. It cannot however address the problems of a secured creditor such as the lending financier taking first priority and/ or the unsuccessful party going insolvent and having earlier dissipated assets whether in breach of the pari-passu principle or not. It has been suggested7 that there are only three effective legal mechanisms to provide security for payment. i.e. the concept of the lien, trust and bond. The problem of security is to a considerable extent addressed in USA and Canada by way of mechanic lien statutes that is absent in Malaysia. In gist, any unpaid claimant who has expended labour or material to build has the right to apply for a lien to be attached to the land whereon the building was constructed. After the entry of the lien, the claimant can then apply to auction the building wherein the proceeds of sale will then be

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Ban Hong Joo Mines Ltd v Chen & Yap Ltd [1969] 2 MLJ 83 Pacific Centre Sdn Bhd v United Engineers (M) Bhd [1984] 2 CLJ 56 Monatech (M) Sdn Bhd v Jasa Keramat Sdn Bhd [2002] 4 CLJ 401 Contemporary Issues in Construction Law Vol. 1 , Construction Law Press London 1996

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utilised for payment. The dispute thus always centers on the unpaid claimants application for lien which is often resolved via arbitration. The lien security nevertheless usually takes effect from visible construction of the building long before the conclusion of the arbitration and this makes the unpaid claimant a secured creditor usually second only to the lending financier bank taking first priority as an even earlier secured creditor. The other attraction is that the lien statutes have resulted in the lending financier taking steps to ensure that payments are made to the relevant people who have expended labour and material to prevent its security from being encumbered by a lien order especially lien statutes based on the Pennsylvanian model which obliges the employer or financier to pay the unpaid sub contractor notwithstanding that the main contractor was already paid. The trust operates on the premise that any party receiving money holds the whole or part of it on trust for others who have expended labour and material to carry out

the work. The trust is created at every level of contract. Thus the aggrieved unpaid claimant has the right to trace the money notwithstanding that the recipient party is insolvent and/or has dissipated the money. The trust concept is not alien in Malaysia in respect of retention of monies. It is provided in the PAM 1969/1998 form, CIDB 2000 form and the PAM NSC form. The trust is however a conditional one in that it permits the employer or the contractor to set off permissible deductions there from. In the absence of set off, the employer or the main contractor may be compelled by way of an injunction to set aside the retained money into a trust account8 . However, most of the time, the application is defeated by set offs. In the unusual case of R&G Engineering Sdn Bhd v ESPL (M) Sdn Bhd9 , the Malaysian Court of Appeal found that the progress payment under a sub contract was subject to an express trust and the Court ordered that the corpus of the trust i.e. unpaid progress payment money be

interlocutory secured pending trial notwithstanding set offs. The payment bond is a straightforward devise basically requiring a third party such as a bank or an insurance company to guarantee payment in the event of default on the part of the paying party. The provision of bond by the employer is presently uncommon in Malaysia other than for bullet payment contracts10 . The CIDB 2000 form nevertheless provides for it as an option. Conclusion It is clear that there are various avenues that are available to improve the payment problem in the industry and some of these options have been incorporated in the construction contract or statutes in the other developed countries. In summary, these avenues include: i) Payment of stipulated interest ii) Suspension of work or going slow iii) Eradication of pay when paid iv) Adjudication v) Liens vi) Trust vii) Payment bonds It is basically up to us now to choose the avenue or a combination of avenues that best suits and serves the Malaysian construction industry. MBJ

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Lee Kam Chun v Syarikat Kukuh Maju Sdn Bhd (SPPK Sdn Bhd, Garnishee) [1988] 1 MLJ 444, LEC Contractors (M) Sdn Bhd v Castle Inn Sdn Bhd [2001] 3 CLJ 31 [2004] 4 CLJ 674 Pekeliling Triangle Sdn Bhd & Anor v Chase Perdana Bhd [2003] 1 CLJ 153

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