LEAPFROGGING SUB-CONTRACT CLAIMS

In two recent Court of Appeal (“CA”) cases, the sub-contractor was successful in claiming against the employer for payment of work done.  The sub-contractor was allowed to leapfrog over the main contractor, and won its claim direct against the employer.

In Mega Mayang M & E Sdn Bhd v Utama Lodge Sdn Bhd (unreported), the appellant was the subcontractor whereas the respondent was the employer of the project.  The appellant’s claim against the respondent was allowed by the CA, based on quantum meruit (“QM”) and s 71 of the Contracts Act 1950.

The situation in Kraas Solutions Sdn Bhd v Konsesi Kota Permatamas Sdn Bhd [2018] 3 AMR 790 was more extreme.  The plaintiff was the employer of the project.  The plaintiff engaged Tech Art as the main contractor.  Tech Art appointed Novanexus Design Studio as a sub-contractor.  Novanexus Design Studio entered into an arrangement with Novanexus Design and Build.  Then Novanexus Design Studio and Novanexus Design and Build engaged the defendant as a sub-contractor.  The defendant was many levels down the contractual chain from the plaintiff.  Yet the CA allowed the defendant’s counterclaim against the plaintiff for work done.  This was also on the basis of s 71 and unjust enrichment.

We shall first briefly discuss the 3 bases of liability (s 71, QM and unjust enrichment), before touching on the following peculiar issues that arise from a claim by the sub-contractor direct to the employer:

(a)        What if the employer already paid the main contractor?  Does the employer have to pay again to the sub-contractor?

(b)        What if the employer has cross-claims against the main contractor?

(c)        Can this type of claim be pursued in an adjudication under the Construction Industry Payment And Adjudication Act 2012 (“CIPAA”)?

 

Section 71, Contracts Act 1950

Section 71 reads as follows:

“71.       Obligation of person enjoying benefit of non-gratuitous act

Where a person lawfully does anything for another person or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.”

A sub-contractor must fulfil four conditions in order to establish a claim under s 71 against the employer, i.e. the work done by the sub-contractor (1) must be lawful; (2) must be done for the employer; (3) must not be intended to be done for free; and (4) must be such that the employer enjoyed the benefit of the work.

The four conditions were fulfilled in both Mega Mayang and Kraas Solutions.  The interesting points were conditions (2) and (4).  From one perspective, it can be argued that the contractual relationship between the sub-contractor and main contractor should be taken into account, such that:

(a)        re condition (2), the sub-contractor’s work was done for the main contractor (and not the employer); and

(b)        re condition (4), it was the main contractor (not the employer) who enjoyed the benefit of the sub-contractor’s work.

However, the CA took a broader perspective of the situation.  The CA found that notwithstanding the contractual chain, the sub-contract works were done for, and benefited, the employer.

 

Quantum Meruit (“QM”)

Under QM, a plaintiff who has done work for the defendant can recover reasonable remuneration for it.  The concept is similar to s 71 discussed above.

 

Unjust Enrichment

In Kraas Solution, the employer received and claimed ownership of the goods supplied by the sub-contractor.  However, the sub-contractor has not been paid by any party.  Hence, the retention of those goods without payment amounted to an unjust enrichment of the employer.  The employer was therefore liable to the sub-contractor for payment of those goods.

 

What if the employer already paid the main contractor?  Does the employer have to pay again to the sub-contractor?

This issue seems to have been considered in Mega Mayang.  But on the facts, the employer failed to prove that he had already paid for the sub-contract works concerned.  Therefore, his defence on this point failed.

The CA did not reject this issue as being irrelevant to the sub-contractor’s claim.  Instead, the CA delved into the merits, by examining the evidence to see if there was in fact such payment by the employer to the main contractor.  Presumably, if such payment was proven, it would be a valid defence against the sub-contractor’s claim or else the employer would be made to pay twice for the same works.

This issue did not arise in Krass Solution.

 

What if the employer has cross-claims against the main contractor?

The employer in Mega Mayang alleged that it has cross-claims against the main contractor.  The employer used these cross-claims to set-off against the main contractor.  As a result, no money was due to the main contractor.  Therefore the employer had in effect already “paid” the main contractor.

However, the above arguments were rejected by the CA.  This was because (i) the main contract did not allow the set-off alleged; and (ii) the employer’s cross-claims related to the whole main contract works whereas the sub-contractor was involved in only part of the works.

Perhaps the employer may have succeeded if (i) there was a contractual right of set-off; and (ii) the employer has apportioned his cross-claim to those related to the sub-contract works.

The issue of the employer having cross-claims did not arise in Krass Solution.

 

CIPAA adjudication?

It will not be possible for a sub-contractor to make a claim against the employer in a CIPAA adjudication based on s 71, QM or unjust enrichment.  To qualify for such an adjudication, the claim has to be based on a construction contract between the sub-contractor and the employer.  Claims based on s 71, QM and unjust enrichment are not based on contract.  Hence, in both Mega Mayang and Krass Solution, the sub-contractor sued the employer in court.

 

The contents of this article are published for the purpose of general information only; they are not to be regarded, used or relied on as legal advice for any matter.  Please contact us if you require legal advice specific to your case.