Affirming a construction contract – instead of terminating it due to the contractor’s delay – resulted in the loss of entitlement to liquidated and ascertained damages (“LAD”). This was one of the grounds for dismissing a LAD claim in the recent High Court case of Universiti Tecknologi MARA v Magna Metier Sdn Bhd [2022] 5 AMR 583.
In that case, the Plaintiff (the “employer”) appointed the Defendant (the “contractor”) to design and build a hockey stadium. The contract between them included a standard form of contract used by the Government, i.e. the Condition of Contract for Design and Build Contract, PWD Form DB (Rev 2007) (the “PWD Form”) (see para 2).
During the course of the project, the employer had complained to the contractor about the latter’s slow progress in executing the works.
On 18 July 2013, the employer retrospectively extended the original completion date to 27 March 2013. See para 5(3).
Looking back, the employer did not terminate the contract when the contractor failed to complete the works by 27 March 2013. Instead, the employer allowed the contractor to continue its works, and made part-payments to the contractor for works carried out. See para 44.
On 10 October 2013, the employer issued a Certificate of Non-Completion (“CNC”) to the contractor. The CNC stated that (i) the contractor failed to complete its works by the extended completion date of 27 March 2013; and (ii) the contractor was required to pay LAD to the government (not the employer). See para 5(4).
The employer subsequently issued to the contractor a default notice dated 30 January 2014 (the contractor denied having received this), and a notice of termination dated 14 February 2014. See paras 6, 7.
The employer appointed another contractor to complete the works; see para 9. This meant that in the end, the contractor did not complete its works.
The employer filed the present court action against the contractor claiming for LAD, amongst other things. See para 11(2).
The Decision
The High Court found that the employer was not entitled to LAD on 3 grounds (see para 45):
A – the employer failed to give notice of intention to claim LAD as required by s 56(3), Contracts Act 1950;
B – although the contract between the parties allowed the employer to claim LAD from issuance of the CNC, the CNC was unlawfully issued; and
C – the employer is estopped by its conduct from claiming LAD under s 75, Contracts Act 1950.
Ground A – Notice of Intention to Claim LAD per s 56(3), Contracts Act 1950
Where ground A is concerned, the High Court found that as the contract stipulated that time is of the essence, the contractor breached a condition of the contract when it failed to complete its works by the extended completion date, thereby giving the employer an option whether to affirm or terminate the contract. By its conduct, the employer affirmed the contract.
In such a situation, s 56(3) precludes the employer from claiming compensation for failing to complete the works on time unless the employer gave notice of its intention to do so at the time he affirmed the contract.
Section 56(3) provides as follows:
“Effect of acceptance of performance at time other than that agreed upon
(3) If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of the promise at any time other than that agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of the acceptance, he gives notice to the promisor of his intention to do so.”
Although not expressly stated in the case, it is likely that the High Court had in mind the following detailed reasoning:
a) The contract was “voidable on account of the promisor’s failure to perform his promise at the time agreed” because (i) time is of the essence, thereby making the contractor’s obligation to complete its works by the extended completion date a condition (as opposed to a warranty) of the contract; (ii) the breach of a condition renders the contract “voidable” i.e. the employer has a choice whether to terminate or affirm the contract.
b) By allowing the contractor to continue performing its obligations (i.e. continue its works) beyond the “agreed time” (in this context, the contractually extended time), the employer has thereby accepted “the performance of the promise at any time other than that agreed”.
Ground B – CNC Unlawful
The CNC was found to be invalid because (i) the employer failed to issue to the contractor a prior notice of intention to impose LAD, as required by the contract; and (ii) the contents of CNC stated that the contractor should pay LAD to the wrong person. See paras 34, 35.
As to reason (ii) – the CNC wrongly stated that the LAD should be paid to the “Government”; it should be paid to the employer (a university) instead. The employer is a distinct entity from the Government, although they are related. As mentioned earlier, the contract included a Government standard form of contract i.e. the PWD Form. Even though the employer was referred to in the said Condition of Contract as the “Government”, it did not mean that the employer is the Government or vice versa.
From the above, entities related to the Government should take care in the drafting of certificates and notices, so that they refer to the correct legal entity. It is common for many to regard government linked entities as the “Government”, and the usage of a government standard form of contract adds to the confusion.
Ground C – Estoppel by Conduct
The conduct that estopped the employer from claiming LAD was – the employer chose not to terminate the contract when the contractor failed to complete its works by the extended completion date, but instead the employer (i) allowed the contractor to continue its works and (ii) made part-payments for the works. See paras 44, 45(3).
The High Court did not elaborate on how the said conduct would amount to such an estoppel.
From the reported case, it would appear that estoppel is a distinct ground for dismissing the LAD claim that can stand alone, without grounds A and B. Assuming so, the take away from this is – an employer who is entitled to terminate the contract when the contractor has failed to complete by the completion date, but chooses not to do so, will risk losing its entitlement to LAD.
The above puts an employer in a difficult position. On the one hand, the employer may not wish to terminate the contract even though the completion date has passed, because for example the outstanding works are not many and it will cost the employer more time and money to engage a replacement contractor. On the other hand, LAD will be at risk if the employer affirms the contract. Which is the lesser of two evils will depend much on the specific circumstances in play.
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.