Practical Construction

Law for Practitioners

- Payments
Chan Kheng Hoe
Topics Covered

● Must retention sum be in separate account?

● Can sub-contract provide for back-to-back

payments?

● Can contractor suspend, go slow or

terminate due to non-payment?

● Difference between interim, penultimate and

final certs?

● Can certificates be revised?

Retention Monies- must it be
in a separate account? (1)

For discussion

Why is this question important?

Retention Monies- must it be
in a separate account? (2)

Why is this question important? ● If not set aside in separate account:

● Most contracts provide for retention ○ Employer may utilise monies for its
sum (usually 5%) own purposes

○ Monies at risk if employer enters into

● Usually released in 2 moiety
liquidation before full release
○ 1st moiety upon CPC
○ Employer may be indebted to other
○ 2nd moiety upon CMGD creditors whose claim may affect the
monies held
Retention Monies- must it be
in a separate account? (3)
Contractually:
● PAM
○ Employer has fiduciary duty as trustee of
money to Contractor
○ Contractor’s beneficial interest subject to
deductions certified by Architect
○ Contractor can demand for monies to be
held in trust account at its cost
● CIDB
● JKR
○ No retention sum - use of performance bond
instead
For discussion:
● Even though PAM provides for contractors
to demand for monies to be held in trust
account, it is extremely rare for contractors
to do so. Why do you think that is so?
Retention Monies- must it be
in a separate account? (4)

Case Law: Qimonda Malaysia Sdn Bhd (in Employer’s Arguments:

liquidation) v Sediabena Sdn Bhd & Anor
[2012] 3 MLJ 422, CA ● Contract does not provide for a trust

Facts: ● Retention sum not set aside in separate

account (no request by Contractor either)
● Employer voluntarily wound up
● Contractor filed proof of debt as creditor-
● Did not release in excess of RM6m of claim as trust money would be preferential
retention sum to contractor & sub-con treatment of Contractor as a creditor

● Contractor sought declaration retention ● So, how would you argue against the
monies were held in trust Employer in this case?
Retention Monies- must it be
in a separate account? (5)

Case Law: Qimonda Malaysia Sdn Bhd (in ● No issue of preferential treatment because
liquidation) v Sediabena Sdn Bhd & Anor retention monies do not belong to Employer
[2012] 3 MLJ 422, CA in the first place

Contractor’s Arguments: ● Filing of proof of debt as an estoppel is an

afterthought and non-issue, and is without
● Retention monies, by nature, are trust prejudice to Contractor’s claim for retention
monies sum as trust money

● Express clause not a precondition of trust- So, how would you decide if you were the
can be by operation of law panel?

● Employer is fiduciary to the trust

Retention Monies- must it be
in a separate account? (6)
Case Law: Qimonda Malaysia Sdn Bhd (in
liquidation) v Sediabena Sdn Bhd & Anor
[2012] 3 MLJ 422, CA
Held by the Court:
● Property in retention sum resides with
Contractor and is held by Employer in trust
● Retention Sum already earned by
Contractor for works already done- mere
provision for making good defects. Even if
mixed in common fund, is traceable
● No requirement to be held in separate
account or Contractor must make such
request. Contractor may not want to
jeopardise relationship/applied its mind
● Failure to separate monies cannot defeat
the trust. Release or preservation of monies
after liquidation is not preferential treatment
because monies do not belong to Employer
● Allowing retention to be part of general
funds would unjustly enrich other creditors
Back to Back Payments (1)

Commonly known as:

● Back-to-back

● Pay when paid

● Pay if paid
Back to Back Payments (2)

Not so much an issue any longer. For discussion:

Section 35(1) CIPAA ● Are conditional payment clauses in

construction contracts entered into
● Renders conditional payment prior to CIPAA void?
provisions void
● Wouldn’t a retrospective application of
CIPAA be an interference with vested
interests/rights?
Back to Back Payments (3)
Case Law: UDA Holdings Bhd v Bisraya
Construction Sdn Bhd & Anor and
another case [2015] 11 MLJ 499, HC
Central Issue: Whether CIPAA applies to
payment disputes and their underlying
contracts which arose before the coming
into force of CIPAA
Important Consideration:
● CIPAA not only introduces
adjudication but also affects
substantive rights, including:
○ Right of Contractor to suspend works
○ Right of Contractor to demand direct
payment from principal
○ Prohibition of conditional payments
Back to Back Payments (4)
Case Law: UDA Holdings Bhd v Bisraya
Construction Sdn Bhd & Anor and
another case [2015] 11 MLJ 499, HC
Held by Court:
● “Substantive rights” are not vested by
written law but merely in contracts
● Rights not accrued, vested or acquired
save for pending liti/ arb preserved
under s41
● CIPAA as new procedural legislation
introduces new forum, and no vested
rights under law affected, so can apply
retrospectively
● Section 35 CIPAA is merely
declaratory in nature
● In any case, if conditional payment
defence is allowed, it would defeat
CIPAA
Right of Contractor to
Suspend, Go Slow and
Terminate (1)

For Discussion

Based on general principles of law, do you

think that a contractor has the right to
suspend works, go slow on works, or even
terminate the contract for failure of the
Employer to make timely progress
payments?
Right of Contractor to
Suspend, Go Slow and
Terminate (2)

100% Safe Approach ● When he does so, the Contractor:

Section 29 CIPAA ○ Is not in breach of contract

● Contractor may suspend works or ○ Is entitled to reasonable EOT

reduce rate of progress after 14 days’
○ Is entitled to recover loss and
notice if adjudicated sum is not paid expenses

○ Must resume work within 10 working

days after being paid
Right of Contractor to
Suspend, Go Slow and
Terminate (3)

Outside the scope of CIPAA, the Contractor
would have to rely on contractual provisions
or common law principles
For example, PAM:
● Failure to pay certified sums allows
Contractor to suspend works after 14
days’ notice
● Contractor may also terminate the
contract for failure to pay certified
sums or obstruction from issuance of
certificates by Employer
● Note: Going slow is not provided in all
contracts. If not provided, it would
seem a riskier approach because time
continues to run leading to potential
issues with delay/LAD
Right of Contractor to
Suspend, Go Slow and
Terminate (4)

Case Law: Kah Seng Construction Sdn ● On basis of estimated costs for
Bhd v Selsin Development Sdn Bhd defective works and LAD, Employer
[1997] 1 CLJ Supp 448, HC withheld payment of later certificates

Facts: ● Contractor suspended works and sued

for payment. Employer counterclaimed
● There was no formal contract for damages.

● Contractor made claims progressively So how would you decide if you were the
and certificates were issued judge in this case?
Right of Contractor to
Suspend, Go Slow and
Terminate (5)

Case Law: Kah Seng Construction Sdn ● There is no intermediate right to

Bhd v Selsin Development Sdn Bhd
[1997] 1 CLJ Supp 448, HC
Held:
● Contractor can elect to terminate if
there is repudiatory breach by
Employer or to affirm the contract and
proceed with works
suspend works
● Any suspension becomes a
repudiatory breach by the Contractor
In Conclusion, how would you advise a
Contractor client who wants to suspend
works for non-payment?
Interim, Penultimate and Final
Certs (1)
Interim certificates:
● Issued progressively to estimate
amount and value of work carried out
and payment due to Contractor
Penultimate certificate:
● Issued after completion and before
final certificate- usually after CPC to
facilitate release of retention sums
Final certificate:
● Issued at end of contract period to
verify final amount due (after CMGD)
The effect and conclusiveness of the
certificate largely depends on the
contractual terms, but even a “conclusive”
certificate may be reviewed by an arbitrator
or challenged before a judge.
Interim, Penultimate and Final
Certs (2)

Example of Contractual Term in PAM:

● Final Certificates are conclusive with

regard to the final value of the works
carried out

● But not conclusive that any work,

materials, goods and designs are in
accordance with the Contract
Interim, Penultimate and Final
Certs (3)
Case Law: Shen Yuen Pai v Dato Wee
Hood Teck & Ors [1976] 1 MLJ 16
● This case discussed, inter alia, the
position of the Architect’s Final
Certificate
Held by Court:
● Architect is owner’s agent to give
instructions for works
● But for issuing certificates, Architect is
independent authority
● Architect owes duty of care not to
issue final certificate unless satisfied
with work. Once issued, final cert is
conclusive
● Form of cert depends on contract
terms. If no form is prescribed,
Architect can determine the form.
Interim, Penultimate and Final
Certs (4)
c.f. Thamesa Designs Sdn Bhd & Ors v
Kuching Hotels Sdn Bhd [1993] 3 MLJ
25, SC
Held:
Employer handed over site late to
contractor
Employer therefore not entitled to LAD
Certificate of final payment issued by
consultant authorizing deduction of
LAD is invalid and not binding on
parties
LAD which was deducted from retention
fund must be restored
Note: Article by Vinayak Pradhan questions
case- Shen Yuen Pai not brought to
Court’s attention
Revision of certificates (1)

PAM: CIDB:

● Architect cannot revise payment ● Superintending Officer can by any

certificates except for clerical, Interim Certificate correct any error in
computational and typographical previous Interim Certificate and adjust
errors amount due to account for any under
or over valuation
● But Architect can by a subsequent
certificate correct or modify any
valuation errors in earlier certificates
Revision of certificates (2)
Case Law: Fairweather Ltd v Asden
Securities Ltd (1979) 12 BLR 40
Facts:
● After issuing Final Certificate,
Architect subsequently issued CNC
Held by Court:
● After issuing Final Certificate,
Architect was functus officio and
precluded from issuing further CNC
cf. Bukit Cerakah Development Sdn Bhd v
L’Grande Development Sdn Bhd [2008] 3
MLJ 547, CA held:
● It is a question of construction and not
a question of general law as to
whether an Architect is functus
Claims for Direct Payment (1)

For discussion:

Can a sub-contractor make a claim for

direct payment from the Employer?

Would your answer be different if it was a

nominated sub-contractor?
Claims for direct payment (2)

General Principle: Privity of Contract Exceptions:

There is no privity of contract between a ● Contractual exceptions (eg JKR

subcontractor and an Employer to allow a contracts)
direct claim
● Statutory exceptions (CIPAA)
Claims for direct payment (3)
Contractual Exceptions
● JKR contracts provide for direct
payment to nominated sub-contractors
● Even in non-JKR contracts, some
NSCs require direct payment when
nominated- usually by a side letter or
supplemental agreement
● Must be agreed to by the Main
Contractor
Statutory Exception
● Section 30 CIPAA allows for requests
to be made to principal for direct
payment of adjudicated sum
● But there is no provision for
consequences to principal who fails to
comply
● So what can be done if principal fails
to comply?
Claims for direct payment (4)

Practical Problems with Direct Payment ● This issue arose in:

● Potentially creates a collateral contract ○ Joo Yee Construction Pte Ltd v

between sub-contractor and Employer Diethelm Industries Pte Ltd & Ors
[1990] 2 MLJ 66, HC (S’pore)
(would it subject Employer to potential
adjudication claims?) ● Direct payment to sub-contractor may
not have taken into account defects or
● Potentially an undue preference of the
delays, leaving main contractor
sub-contractor as an unsecured
saddled with all defects and LAD
creditor in the event of insolvency of
claims by Employer
Main Contractor
That’s all Folks!

Thank You

Chan Kheng Hoe

khenghoe@khenghoe.com