Issues in Construction Contract

With reference to the PAM 2006 Standard Forms of Contract, evaluate the rights under the
followings circumstances.
a) The employer wishes to take possession of a building before practical completion, state
the procedure and the effect to the contract thereon.
In this case, it is called partial possesion by employer that stated under
clause 16. It is allowed for the Employer to take possession of a building before
practical completion of the works, provided that the Employer has obtained consent
from the contractor. Before that, the Employer has to issue a notice of intention to the
Contractor that the Contractor shall accept the request reasonably under clause 16.1.
Once the Contractor agree on the partial possession requested by the Employer, the
Employer has to employ Architect to issue a Certificate of Partial Completion within
14 days from the date which the Employer has taken possession of the occupied part.
The Certificate of Partial Completion should state the approximate total value of the
occupied part that estimated by the Architect.
The occupied part possessed by the Employer shall deem to have practical
completion. Therefore, the defeat liability period in respest of the occupied part shall
start on the date which the Employer has taken possession. In clause 15.4, the
Contractor need to make good the defects that have been specified by the Architect
within 28 days after the receipt of the defects schedule. Afterwards, the Architect will
issue a Cerificate of Making Good Defects to the Contractor in respect of the
occupied part within 14 days once the defects have been made good by the
Contractor that stated under clause 15.6. A certificate for the release of the remaining
amount of the retention fund in respect of the occupied part need to be issued by the
Architect within 24 days so that the Contractor can make a claim within the Period of
Honouring Certificates. In addition, the liquidated damages is reduced based on the
ration of the estimated value of the relevant parts to be occupied to the contract sum
under clause 22.1.
Besides, clause 16.2 state that the Employer can take the possession of
building before the practical completion without the consent of Contractor.
However,this might cause the delayed of construction works as the entry of
occupaied part can effect the progress of Contractors remaining works and the
Certificate of Non-Completion might issued by the Architect to the Contractor under
clause 22.1 due to the incompleted of works on time.

Once the Employer has taken possession on the partial building, no matter it
is through the consent of Contractor or not, the Architect has to inform the Contractor
to remove the site facilities, construction plant, materials and goods from the
occupied part through written instruction as stated under clause 16.3.
Although the Certificate of Partial Completion has been issued, however, the
contract between the Employer and the Contractor is unaffected. The Contractor is
entitled to receive payment from the Employer within the Period of Honouring
Certificates under clause 30 based on the Interism Certificate, Certificate of Making
Good Defects and Certificate of Practical Completion. Similary, under clause 37, the
performace bond can only be returned by the Employer to the Contractor after the
completion of the entire works by the Contractor within the completion date that
stated in the contract. Moreover, a Certificate of Sectional Completion should be
issued by the Architect that stated under clause 21.3 given that there are different
completion dates for the sections of the works.
In conclusion, the Employer is allowed to occupy a building before the
practical completion of the entire works with the condition that the request must be
reasonable. The Contractor can only claim on the payment within the Period of
Honouring Certificates and after the completion date of the entire works as stated in
the contract. This shows that the partial possession by employer has no effect to the
contract.

b) Whether the Employer can recover from the Contractor the cost incurred when it was
necessary for the Employer to employ other specialist sub-contractor to remedy serious
defect works left by the Contractor.
Regarding the rectification of defect works, it refers to clause 15.0 of PAM 2006, which
discussed about practical completion and defects liability. In this case, it asked about
whether contractor should pay the costs to other specialist sub-contractor for rectification
work, instead incurred by the employer during occurrence of serious defects. Clause 15.4
shows that:
Any Defects in the Works which appear within the Defects Liability Period shall be specified by
the Architect in a schedule of defects which he shall deliver to the Contractor not later than fourteen
(14) Days after the expiration of the Defects Liability Period. The Contractor shall make good the
Defects specified within twenty eight (28) Days after receipt of the schedule of defects (or within such
longer period as may be agreed in writing by the Architect at Contractors cost. If the Contractor fails
to attend to the Defects, the Employer may, without prejudice to any other rights and remedies which
he may possess under the Contract, employ and pay other Person to rectify the Defects and all costs
incurred shall be set-off by the Employer under Clause 30.4. If the Architect with the consent of the
Employer, instructs the Contractor to leave the Defects in the Works, then an appropriate deduction
for such Defects not made good by the Contractor shall be set-off by the Employer under Clause 30.4

In simple terms, Defect Liability Period (DLP) is the key point of the clause, which
serious defect works must be delivered to contractor by the architect with not later than
fourteen (14) days after the DLP expiration. It is the responsibility of the contractor to make
goods of the defects by using contractors cost. If contractor failed to do so, employer could
pay other specialist to rectify the defects, which rectification cost shall be paid by the
employer at the beginning (setting off). Clause 15.5 is the addition for previous sub-clause, it
shows that:
Notwithstanding Clause 15.4, the Architect may at any time during the Defects Liability
Period issue an AI requiring any critical Defects which need urgent rectification to made good within a
reasonable time specified by the Architect at the Contractors cost. If the Contractor fails to attend to
such Defects within the time specified by the Architect, the Employer may employ and pay other
Person to rectify such Defects and all costs incurred shall be set-off by the Employer under Clause
30.4.

It highlights that the Architect shall issue an Architects Instruction (AI) on

rectification of critical defects at the Contractors cost. Whilst it is similar to previous subclause as it mentions that all costs incurred shall be set-off by the Employer under Clause
30.4.Under Clause 30.4, it shows that:
The Employer shall be entitled to set-off all cost incurred and lost and expense where it is
expressly provided under Clauses 2.4, 4.4, 5.1, 6.5(e), 6.7, 14.4, 15.3(b), 15.3(c), 15.4, 15.5, 19.5 and
20.A.3. Any set-off by the Employer shall be recoverable from the Contractor as debt or from any
monies due or to become due to the Contractor under the Contract and/or from the Performance
Bond

In short, the cost incurred that are initially paid by the employers shall be recoverable
from the Contractor as debt as it judges under valid contract or performance bond. To
answer this question, any serious defects occurred within Defect Liability Period (DLP)
rectified by other specialist sub-contractor at the contractors cost. Employer shall set-off the
cost during employment of other specialist sub-contractor, then recovered from the
Contractor

as

debt.

Figure 1 Flowchart for Clause 15 Practical Completion & Defects Liability

Source: (The Entrusty Group, 2007)

Figure 1 shows the overall flowcharts for rectifcation of serious defects after issuance
of cerfiticate of practical completion For example, in P & M Kaye Ltd v Hosier & Dickinson
Ltd (1972), It summarised that:
The contractor is under an obligation to remedy the defects in accordance with the
architects instructions. If he does not do so, the employer can recover as damages the cost of
remedying the defects, event though this cost is greater than the diminution in value of the works as a
result of the unremedied defects.

In this case, it has been judged that employer can recover the cost of defects
rectification, although rectification cost is more than the diminution of degraded works. On
the other hands, rectification costs are not fully recoverable in some circumstances. In H.W.
Nevill (Sublest) v William Press and Son (1981), it conludes that:
The clause 15(2) and (3) (the clause relating to DLP) provided an efficient way of dealing
with defects to the advantage of both parties. If the owner have had seek contractors new to the site
to do the remedial work it might well have had difficulty in finding them. It would also almost certainly
have had to pay them more and would then have sought to have recovered from the Contractor more
than the cost to the Contractor of making good the defects.

The judge opined different in this case, as if the employer hire new contractors that
not not familiar with the site, it might be more costly due to their difficulties in carry out
rectification work compared to the rectification works done by the main contractor. It seems
like unfair to the contractor if extra repair costs are incurred to them if other pricey specialist
subcontractor is appointed. In this circumstance, the contractor is obliged to return site for
rectification to avoid the extra cost incurred as a result of employment of other subcontractor. If they failed to do so, employer can recover rectification cost from contractor
which the payables are within the contract provisions. In order to avoid confusion, the law
case Pearce & High Limited v Baxter (1999) has great example in terms of recoverable cost:
In my judgment, the contractor is not liable for the full cost of repairs in those circumstances.
The employer cannot recover more than the amount which it would have cost the contractor himself to
remedy the defects. Thus, the employers failure to comply with clause 2.5 (the clause relating to
rectification of defects), whether by refusing to allow the contractor to carry out the repair or by failing
to give notice of defects, limits the amount of damages which he is entitled to recover. The result is
achieved as a matter of legal analysis by permitting the contractor to set off against the employers
damages the amount by which he, the contractor, has been disadvantaged by not being able or
permitted to carry out the repairs himself, or more simply, by reference to the employers duty to
mitigate his loss.

Hence, it is a duty for the employer to notify main contractor to carry such rectification
works with regards to serious defects before considering other sub-contractor during Defect
Liability period when the contract is still valid. If the employer failed to do so, it limits the
recoverable from contractors by the employer when the rectification costs is more expensive
by newly employed sub-contractor.

c) Differences between defects after completion and unfulfilled obligations.

References
The Entrusty Group, 2007. What Are The Obligations Of The Contractor During Defect
Liability Period?. In: 1. Quarter, ed. Master Builder: 1st Quarter. Kuala Lumpur: Master
Builders Association Malaysia, pp. 100-103.