This is Part 1 of an article series comparing two of the more commonly used standard forms of construction contract in Malaysia i.e. Agreement and Conditions of ‘Pertubuhan Akitek Malaysia’ (PAM) 2018 and Standard Form of Contract of ‘Jabatan Kerja Raya’ (JKR) or Public Works Department (PWD). In order to ensure a like for like comparison, the basis of procurement pathway shall be lump sum contract without quantities i.e. PAM (Without Quantities) and PWD/ JKR Form 203 (with drawings and specifications forming part of the contract). It should be noted that contract forms are usually organised based on procurement pathways of choice because it fundamentally affects some of the key clauses e.g. variations, risks allocations, basis of contract sum etc. 

Liquidated damages is one of the more commonly encountered provision in construction contract. It is a genuine pre-estimate of damages that the culpable party is liable for in case of delay in completion. There are a few aspects of liquidated damages that are unique and notable in its use in Malaysia. Firstly, although Malaysia’s legal system is heavily modelled after English common law, its contracts law is codified under Contracts Act 1950. Therefore construction contracts in Malaysia are subject to Contracts Act 1950, of which there are certain parts of this legislation that are applicable to liquidated damages provision in particular its Section 75. The effect of Section 75 is such that the amount stipulated as liquidated damages in construction contract invariably ends up as the maximum cap or ceiling amount that the defaulting party is liable for. Therefore for those who are responsible for calculating the sum for liquidated damages such as consultant quantity surveyors, they ought to be aware of the legal implication of the arithmetical exercise. In reality, most prudent consultant quantity surveyors will estimate liquidated damages based on a few applicable methods e.g. revenue loss approach, cost of capital employed approach etc and thereafter propose a sum based on an average of different methods of calculation. The reason is because whilst the sum ought to accurately reflect the actual loss projected, it should not be so financially overwhelming that it may end up inflating tender sums offered or even outright rejections to participate in tender. In other words, the legal effects of Section 75 of Contracts Act 1950 may not necessarily be in sync with the commercial practice in the industry. This is because the sums indicated as liquidated damages in tender document may not have intended to reflect the maximum amount of loss that may potentially be incurred by the aggrieved party. What will be evident in comparing PAM and JKR contract, is that the wordings used for non completion damages are influenced by Section 75 of Contracts Act, which will be elaborated further in this article.

PAM contracts are generally used for private sector projects whilst JKR contracts are mainly to cater to public sector construction works. Such difference in nature of project funding may have significant impact on how delay could impact the project and associated damages that may be incurred. Whilst private sector projects tend to be profit driven, public sector projects may not necessarily be commercially oriented. There may not be any revenue generating reasons behind constructing a tunnel or bridge or any publicly funded infrastructure. Such difference in financial nature should reasonably have an effect on liquidated damages provision including the application of Section 75 of Contracts Act. Such awareness may be helpful in tender negotiation for both public and private sector projects.

When the relevant certification provisions under PAM and JKR contracts are compared, it is evident that there are quite distinct characteristics. Notwithstanding that, most contractors that are involved in projects using both contract forms tend to adopt an identical method of contract administration despite these distinctions. The next few sections of this article can hopefully raise awareness on the need for bespoke contract administration practices based on the characteristics of the contract form in used.

Section 75 of Contracts Act 1950 

Section 75 of Contracts Act 1950 deals with compensation for breach of contract where penalty is stipulated. In essence this provision states that in case of contract breach where a stipulated sum is payable, the claimant is entitled to a ‘reasonable compensation not exceeding such amount’, regardless of whether actual damage had been proven. In 2019 the Federal Court clarified the legal position on Section 75 via its decision on ‘Cubic Electronics Sdn Bhd v MARS Telecommunication Sdn Bhd’. For the purposes of this article, three legal findings are particularly relevant namely (1) the amount claimable is subject to the maximum amount stated in the contract, (2) there is no legal requirement for the claimant to prove its actual loss in order to demonstrate what is reasonable compensation (3) the burden of proof is on the defendant to show that the sum stipulated is unreasonable. These principles are relevant because all contracts in Malaysia, including PAM and JKR are subject to Contracts Act 1950 including the court’s interpretation of the relevant parts of the Act. Whilst these binding principles are not expressly spelt out under the liquidated damages clauses of PAM and JKR contracts, these continue to be binding on the contracting parties. Therefore any review of any liquidated damages clause under construction contract forms will not be complete without an understanding of Section 75 of Contracts Act 1950.

Clause 40 of JKR contract deals with ‘Damages For Non-Completion’ which essentially refers to liquidated damages. In general both Clauses 40.1 and 40.2 stipulate the certification procedures prior to any recovery of liquidated damages by the Employer. These clauses do not deal with any matters relating to the sum stipulated for liquidated damages including the burden of proving that such amount is reasonable compensation or the basis of pre-estimation for delay damages. Therefore the drafting of Clause 40 of JKR contract steer clear from the application of Section 75 of Contracts Act 1950 for avoidance of contradiction or conflict. On the other hand, the PAM contract takes quite a different approach. Under Clause 22 of PAM contract on Damages For Non Completion, apart from setting out the certification procedures, it also deals with the issue of burden of proof. Clause 22.2 in particular states amongst others that ‘the parties agree that by entering into the contract, the contractor shall pay to the Employer the said amount, if the same becomes due without the need for the Employer to prove his loss and/or damage unless the contrary is proven by the contractor’. There are a few observations arising from Clause 22.2 of PAM. Firstly, by virtue of the application of Section 75 of Contracts Act 1950 including the Federal Court’s findings in 2019, the Employer (being the claimant for liquidated damages) is already not required to prove its actual loss in order to demonstrate what is reasonable compensation. However such relief appear to be waived ‘if the contractor is able to prove that the sum stipulated is not fair and reasonable’. It should be noted that since the version of PAM contract referred to in this article is dated 2018 (prior to the 2019 decision by the Federal Court), the general position back then was that the claimant must prove the actual damage he has suffered unless its case falls under limited situation where it is difficult to assess actual damage or losses. In other words, the conditions in Clause 22.2 was useful prior to Federal Court’s findings in 2019. However in view of the 2019 decision, the burden of proof is shifted to the contractor (respondent) that the sum is unreasonable. Therefore the unintended consequence of Clause 22.2 is such that the Employer may be forced to resume shouldering its original burden of proof as soon as there is any attempt by the contractor to challenge the stipulated sum. In the absence of the relevant wordings in Clause 22.2, the burden of proof remains firmly with the contractor and it is up to the contractor to satisfy the court of its case on the balance of probability. 

For the Employers who are contractually savvy in utilising PAM contract, it is likely that particular conditions may be introduced to amend Clause 22.2 in light of Federal Court’s findings in 2019. On the other hand, the original unamended Clause 22.2 may now be favourable to the contractors’ position. However from a practical perspective, contractors who enter into  construction contract that utilises PAM standard conditions would be deemed to have accepted the proposed liquidated damages. If the contractor took issue with the proposed liquidated damages included in the tender document, its tender offer would invariably contain certain qualifications or exclusions to the relevant liquidated damages. So how is it that a contractor that was deemed to have ‘accepted’ the liquidated damages, perform an inexplicable volte-face on the reasonableness of liquidated damages as soon as culpable delay is in issue? This sudden change in position may not sit well with certain arbitral tribunal in case of legal proceedings. Out of abundant of caution it may be prudent for the contractor to include statements in its tender offer that its position on liquidated damages is ‘without prejudice to Clause 22.2 of the PAM contract’. 

Certification Mechanism Under Clause 22 of PAM And Clause 40 of JKR

Although it may be easy to specify a sum payable as liquidated damages in case of delay, the actual recovery of such compensation may not be as straightforward. There are a few reasons for this. Firstly, liquidated damages are usually expressed as sum payable per calendar day i.e. rate of damages. In order to ascertain the quantum of damages, it is necessary to first determine the extent of delay to project completion. Thereafter one should establish whether the contractor is entitled to any extension of time for the period of project delay. The contractor may not be culpable for the entire period of project delay if the delaying events are ‘excusable’. The contractor’s entitlement to any extension of time in turn is dependent on, amongst others its compliance with condition precedents included in the agreement. In essence, the Employer is only authorised to recover liquidated damages for the period of delay in which the contractor is culpable. Beyond these sequence of steps, there may be added complexities if the contractor’s employment is terminated prior to project completion. Given the variety of delay analysis issues that require assessments, most contract forms including PAM and JKR set out its own unique certification mechanism to regulate the manner in which the quantum for liquidated damages that the contractor may be liable  for could be determined. PAM and JKR contract have fairly different certification mechanism which will be examined in the immediate few paragraphs below.

Clause 40.1 of JKR contract states as follow – ‘If the contractor fails to complete the Works by the Date for Completion or within any extended time granted pursuant to Clause 43, the [Superintending Officer or SO] shall issue a Certificate of Non-Completion to the Contractor. Prior to the issuance of the Certificate of Non-Completion, the SO shall issue a notice to the Contractor informing the Contractor the intention of the Government to impose Liquidated and Ascertained Damages to the Contractor if the Contractor fails to complete the Works by the Date of Completion or within any extended time granted’. The subsequent first half of Clause 40.2 is particularly relevant – ‘Upon issuance of the Certificate of Non-Completion, the Government shall be entitled to recover from the Contractor Liquidated and Ascertained Damages calculated at the rate stated in Appendix from the period of the issuance of the Certificate of Non-Completion to the date of issuance of Certificate of Practical Completion or the date of termination of this Contract’. 

The following hypothetical example may help to illustrate the application of certification mechanism for liquidated damages. Let us assume a project with liquidated damages of $1000/day that commenced on 1 January 2024 and scheduled for practical completion on 31 December 2024. Suppose part of the contractor’s works were rejected on 1 December 2024 resulting in delay due to various ‘remedial works’ which were disputed by the contractor.

Under the Clause 40.2 of JKR’s certification mechanism, the recovery of liquidated damages shall be calculated from the period of the issuance of Certificate of Non-Completion and that such recovery can only be effected ‘upon issuance’ of Certificate of Non-Completion. In other words, the date of issuance of Certificate of Non-Completion shall fall on 31 December 2024 which was the original Practical Completion Date. There are several glaring implications in this regard. Whilst the parties do not dispute that the project is delayed, it may not be immediately clear whether the contractor is culpable on 31 December 2024. The parties may dispute over the wordings in the technical specifications and whether the works in contention were rightly rejected. The contractor may take the position that the ‘remedial works’ were variation works that entitle additional payment and extension of time. These disputes may take time to crystallise, assessed, reviewed and resolved pursuant to Clause 65 of JKR dispute resolution provision. It should also be noted that under Clause 43 of JKR contract, there are no time restrictions imposed for duration taken for any assessment of extension of time. Notwithstanding that there are likely various outstanding matters that are pending resolution such as the establishment of culpability of the contractor, the Employer shall be entitled to commence recovery of liquidated damages on 31 December 2024. In fact, according to Clause 40.1, the Superintending Officer shall inform the contractor via a written notice prior to the issuance of Certificate of Non-Completion. In other words, such written notice shall be issued any time before 31 December 2024 which indicate that the decision to recover liquidated damages shall be made even before the original Practical Completion Date. The date of issuance of Practical Completion Certificate may not be clear immediately after 31 December 2024, although there may be certain projections made based on revised construction programme. It is therefore entirely possible that the recovery of liquidated damages, on a monthly basis of an average of $30,000/month can be effected progressively prior to the ascertainment of the final quantum of liquidated damages. It is perhaps fair to say that most contractors may not be comfortable to have its progress payments be subject to deductions (or possibly to have its performance bond called) when its culpability is not even ascertained even on an interim basis. This is perhaps an area of negotiation during tender as regards potential amendments to the relevant JKR contract clauses.   

Although there may be cause for concern for the contractor based on the JKR’s certification regime described above, it is also fair to say that the contractor is not completely vulnerable. There are provisions within JKR contract that allow the contractor to mitigate its risk. It is important to note that the contractor is usually in a better position (relative to the Employer) in detecting delaying events in advance and producing documentations to supports its case for any extension of time. This is largely due to its responsibility for the overall management and supervision of the works on site. Under Clause 43.1 of JKR, the contractor shall notify the certifier when it becomes apparent of any delay to the progress of works. Further, the certifier may grant extension of time as soon as he is able to estimate the length of delay, which is dependent on information available for his assessment. In this regard there are usually legal requirements for the certifier to act fairly and reasonably. In other words, the contractor could utilise its access to contemporaneous records and be proactive in mitigating risk where possible.  

The certification mechanism for PAM can be found in Clause 22.1 of which the first half of this provision states as follow – ‘If the Contractor fails to complete the Works by the Completion Date, and the Architect is of the opinion that the same ought reasonably to have been completed, the Architect shall issue a Certificate of Non-Completion. Upon issuance of the Certificate of Non-Completion, the Contractor shall pay or allow to the Employer a sum calculated at the rate stated in the Appendix as Liquidated Damages for the period from the Completion Date to the date of Practical Completion.’ It should be noted that the term ‘Completion Date’ is defined as inclusive of both the original practical completion date or any extended date thereof. Whilst this part of Clause 22.1 of PAM appear to resemble the essence of the previously discussed JKR provisions, there are certain subtle but important differences. Firstly, the contractor shall be made liable for liquidated damages upon the occurrence of two events namely (1) if the contractor fails to complete the works by the Completion Date and (2) the Architect is of the opinion that the works ought reasonably to have been completed. The second event is arguably more notable because it is an indication that the certifier had already made an in-principle assessment that the delay is non excusable, i.e. the contractor is culpable and therefore not entitled to any extension of time. This requirement is not expressly provided for under JKR contract, which may be a cause for concern for the contractor for reasons provided above. Secondly, the liquidated damages is not accrued from the date of issuance of Certificate of Non-Completion but rather from Completion Date. Therefore using the hypothetical example above, it is entirely possible for the certifier to exercise some flexibility by issuing the Certificate of Non-Completion after 31 December 2024. The timing of issuance of such certificate is crucial because it ‘triggers’ the contractor’s liability for liquidated damages, which is an identical feature between Clause 40.2 of JKR and Clause 22.1 of PAM. Where the certifier is accorded flexibility to discharge its certification function later, such latitude facilitates a proper assessment for any entitlement to extension of time. Therefore the contractor may not be liable for liquidated damages prior to being determined as culpable for the delay. It is also noteworthy that unlike JKR contract, the PAM contract under its Clause 22.1 does not allow the Architect to take into account the imposition of liquidated damages in its issuance of payment certificates as well as any set off procedures pursuant to Clause 30.4. This provides considerable cashflow relief to the contractors in contention over culpability of project delay.

Liquidated Damages After Termination

Under English common law, the general position is that liquidated damages is not payable beyond termination of the contractor’s employment under the contract unless there is express agreement between the parties. This is because the contractor has no control over the project completion upon its termination and the Employer could enter into a fresh liquidated damages agreement with the replacement contractor. Clause 40.2 in JKR contract appear to affirm this position given that liquidated damages shall be calculated from the period of the issuance of the Certificate of Non-Completion to the date of issuance of Certificate of Practical Completion or ‘the date of termination of this Contract’. Therefore, it is highly likely that if the contractor’s employment is terminated prior to practical completion, the liquidated damages is accruable until the date of termination of the contract. It should be noted that whilst delay related liquidated damages cease to accrue, other termination related costs and damages continue to apply pursuant to Clause 55 of JKR contract. 

PAM contract appears to take a different position in this regard. Clause 22.1 of PAM states amongst others that liquidated damages shall be recoverable from the Completion Date to the date of ‘Practical Completion’. Although there is no reference to the phrase ‘date of termination’ as found in JKR contract, there is a reference to a defined term of ‘Practical Completion’. Under Article 7(aq) of PAM, ‘Practical Completion’ means the state of completion described in Clause 15.1 which refers to the ‘Contractor’ making an undertaking to complete all minor works that do not prevent the Employer from making full use of the Works for its intended purpose. Although such definition is not inclusive of practical completion by replacement contractor or third party contractor, there is no express agreement between parties for the liquidated damages to cease to accrue after termination. Further, Clause 25.4(d) of PAM which deals with determination of contractor’s employment by the Employer states that the contractor shall allow or pay to the Employer all cost incurred to complete the works including all loss and/or expense suffered until completion of the works by replacement contractor under Clause 25.4(a).  This broad definition of loss and/or expense is likely to include delay related losses i.e. liquidated damages.

Conclusion

It is evident that both PAM and JKR contract differ quite significantly on application of liquidated damages provision. These differences relate to, amongst others the certification mechanism and the extent to which the Employer bears the burden of proof of reasonable compensation. These issues are often overlooked as compared to the sum or amount stipulated as liquidated damages which typically draws more attention during tender. An understanding of such differences may be helpful for effective negotiation during procurement as well as providing clarity to the ways in which contracts ought to be administered.




Koon Tak Hong Consulting Private Limited