1
CHAPTER 1
INTRODUCTION
1.1
Background of study
Contract is defined as agreement between two or more parties enforceable by
law.1 Agreement is created by the interaction2 of offer3 and acceptance.4 An agreement
becomes a contract when it contains the essential elements of valid contract.5 One of the
essential elements is that the parties enter into the agreement with free consent.6 Once a
contract is validly created, the parties are bound to comply and fulfil the terms of the
contract.
One of the roles of contract is to bind the parties in a legal relationship. It simply
means that if a party does not fulfil his part of the bargain, he is in breach of contract and
1
Section 2(h) Contract Act 1950
section 2(e) Contract Act 1950
3
section 2(a) Contract Act 1950
4
section 2(b) Contract Act 1950
5
section 10(1) Contract Act 1950 and common law principles
6
section 13 Contract Act 1950
2
2
may be liable to the other party for damages for breach of contract.7 In addition, under
certain circumstances,8 that innocent party may terminate the contract.9
If contract is created by the interaction of legal principles of offer and
acceptance, a contract is brought to an end also by legal principles. Under the law of
contract, the principles are generally referred to as principles of discharge of contract.
There are five main methods of discharge of contract: one, by performance,10 two, by
frustration,11 three, by agreement,12 four, by breach,13 and five, by statutory provisions.
Standard forms of construction contract generally contain express terms relating
to termination of contract.14 It is submitted that the basis of those clauses are founded on
the common law principles and also relevant sections in the Contract Act 1950. Thus
there are clauses that relate to terminations by employer15 or contractor16 due to breach
of contract. There are also non-breach based termination clauses.
In brief, it is suggested that the discharge of contract are based either on breach
of contract or non-breach events. In relation to discharge or termination of contract
based on breach, the breach must breach of conditions of the contract17 and not merely a
breach of warranty.18 However, even if the breach is merely a breach of warranty under
7
Unliquidated damages or liquidated damages or equitable remedies
If the breach is a breach of condition
9
Section 40 Contract Act 1950
10
sections 38– 59 Contract Act 1950
11
Section 57 Contract Act 1950
12
Section 10 Contract Act 1950
13
Section 40 Contract Act 1950
14
PWD 203A 2010, clauses 52.0, 53.0, 54.0; PAM 2006, clauses 25, 26; CIDB 2000, clauses 44,45, 46;
IEM, clauses 51, 52
15
PWD 203A 2010, clause 55.0; PAM 2000, clause 25.1(a) – (e); CIDB 2000, clause 44; IEM, clause 51 due to breach by contractor
16
PWD 203A 2010, clause 51.0; PAM 2000, clause 25.1(a) – (e); CIDB 2000, clause 45; IEM, clause 51 due to breach by contractore
17
Fundamental terms or breach that goes to the root of the contract or repudiatory breach
18
Less important term
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3
the common law19 the contract may stipulate otherwise and entitles the breach to be a
terminating event.20
The non-breach events include complete performance of the contract by the
parties.21 Insolvency or bankruptcy of the parties22 may also be considered as nonbreach.23 PWD203A 2010 has included termination on national interest,24 and
corruption,25 that entitled the government to terminate the contract. CIDB 2000 grants
the employer to terminate the contract event when the contractor commits to default.26
There are also termination events based on doctrine of frustration: civil commotion,27
force majeure,28 etc.
It appears that parties in contractual relationship may only bring the relationship
to an end according to the terms expressly stated in the contract. However, there may be
certain circumstances that place the parties in a difficult situation and they wish to
terminate the contract. Such a situation when the parties are experiencing mutual
problems that make it undesirable to continue the work under the contract.
For example the economic situation makes it very difficult for both the employer
and the contractor to proceed with the construction of a project.29But none of the
termination clauses could be operated to end the contract. It therefore becomes an issue
19
e.g. non-payment of interim certificate by the employer
PAM 2006, clause 26.1; CIDB 2000, clause 46; IEM, clause 52, there is no corresponding clause in
PWD 203A 2010
21
This is normally signified by the issuance of Final Certificate and Final Payment
22
PWD 203A 2010, clauses 52.0, 53.0, 54.0; PAM 2006, clauses 25, 26; CIDB 2000, clauses 44, 45, 46;
IEM, clauses 51, 52
23
Insolvency or bankruptcy of a party is not a breach of contract
24
PWD 203A 2010, clause 52.0
25
PWD 203A 2010, clause 53.0; FIDIC, clause 15
26
CIDB 2000, clause 46termination without default
27
PAM 2006, clause 18
28
PWD 203A, clause 58.0
29
East Coast Express Highway
20
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if the parties wish to end the legal relationship but there is nothing in the contract that
allows them to terminate the contract.
The most common action that parties experiencing such situation is to use the
principles of contract, i.e. the principle of freedom of contract. Basically if the parties
may freely agree to enter into a contractual relationship, they may also freely enter into
an agreement to end that relationship. In the process of ending the relationship they may
negotiate the terms of the termination. The end result is a mutual termination agreement.
This mutual termination agreement has been applied in construction contracts.
For example in the case of the luxury residential project ‘The Macalister’ that was
initially jointly developed by Jetson Development Sdn. Bhd. and Fortress Effect Sdn.
Bhd.was announced to have been mutually terminated.30 Another example was a the
‘Construction of Two (2) Blocks of Four (4) Storey Building and other related works of
Sekolah Rendah Agama Taman Tun Dr. Ismail Kuala Lumpur.31
However not all attempt to mutually terminate a contract was successful. There
are examples of unsuccessful attempts. This essentially because it requires both party to
mutually agree to terminate the contract. If the suggestion comes from one party and the
other does not agree, no mutual termination can occur.32 For example one party may
suggest that the contract be mutually together with the terms but the other party does not
agree, no mutually termination occurs.33
30
Reported in Star Property on December 19, 2012
.Reported in Contract and Quantity Surveying Division PWD-Iktibar Tuntutan Keshttps://www.jkr.gov.my/ckub/intibartuntutan.asp
32
Lim Chiew v. Siteman Construction [2011] MLJU 674
33
Nafas Abadi Sdn. Bhd. v. Putrajaya Holdings Sdn. Bhd. [2004] MLJU 148
31
5
In other circumstances, the parties may have successfully entered into a mutual
termination but because the terms were fully clear on the effects, problems may emerge.
For example the employer’s entitlement to call the performance bond34, or contractors
claim for direct loss and expense35.
In the English case of Foster v Dawber36, it was held that it is competent for both
parties to an executor contract, by mutual agreement, without any satisfaction, to
discharge the obligation of that contract. But an executed contract cannot be discharged
except by release under seal, or by performance of the obligation, as by payment, where
the obligation is to be performed by payment. The agreement to discharge must
therefore be under seal, or be supported by some other consideration on the part of the
person seeking to be released.37
Meanwhile, in the case of Morris v Barron & Co.38, it was held that after signed
the mutual termination agreement, parties are no longer bound by the sub-contract.39
In 2009 Amran introduced a form of the mutual termination agreement to
complement the Treasury’s Instructions No. 3 of 2008 as at Clause 32 Mutual
Termination. The agreement can be accessed from the JKR website.
Asniah40 (2007) categories the main reasons which lead to termination of
contract:
34
Karya Lagenda Sdn. Bhd. v. Kejuruteraan Bintai Kindenko Sdn. Bhd. & Anor [2008] 6 MLJ 636
CKUB report fn 34 above
36
[1851]6 Exch.839
37
Beatson, J. (2002). Anson's Law of Contract (28th ed.). New York: Oxford Univeristy Press.
35
38
(1918) AC.1
http://www.lawofcontract.co.uk
40
Asniah Abidin, “The Profile of Construction Disputes”, Master thesis, University Technology
Malaysia, (2007).
39
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1. Payment
2. Variation
3. Termination
4. Delay
5. Defect
6. Damages
7. Performance bond
8. Default
Standard form of construction contract that we commonly used nowadays, i.e.
PWD 203A (2010), PAM (2006), CIDB (2000) and IEM contains clauses for
termination and determination only. None of them contain any provision on that
standard of contract covers for mutual termination.
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Table 1.1: Clauses on Termination of Contract in various forms of contract
Standard form of
contract that been using
in Malaysia
PWD 203A (2010)
PAM (2006)
Clause
52.0
Termination on National Interest
53.0
Termination on Corruption, Unlawful or
Illegal Activities
Determination of Contractor’s Employment
by Employer
Determination of Contractor’s Employment
by Employer
Determination by Employer
Determination by the Contractor
Termination without Default
Termination of Contractor’s Employment
25.0
26.0
CIDB (2000)
IEM (1992)
Explanation
44
45
46
51
As highlighted earlier, there is no expressed provision or terms on mutual
termination. So, in 2008, the Government through the Treasury’s Instruction introduced
the Treasury’s Instructions No. 3 of 2008 The Implementation terms of price changes in
the employment contract (Appendix A).
The Clause 32 Mutual termination page 7, mentioned:
“If the contractor is not able to proceed with the project despite the conditions of
price changes is given to cope with rising prices, the contract may be terminated by
mutual agreement at the request of the contractor. The Contractor shall not be liable
provided it is not attributed to the shortcomings of the contractor. However, 50 % of the
performance bond shall be confiscated”.
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But this clause does not mentioned clearly how the Contractor will face them if
the mutual termination is really happen. What is the condition precedent to it? What is
condition is called unfinished of work at site?
To answers those types of questions, the Senior Principal Assistant Director, Sr
Amran Mohd Majid (2009) introduced the model of Mutual Termination Agreement.
Table 1.2: Mutual termination agreement by Amran (2009)
Clause
Explanation
4
Repayment of Advance Payment
5
Contractor’s obligation to protect, etc., site equipment and
materials
6
Site Possession by the Government
7
Intellectual Property Rights
8
Forfeiture of Performance Bond
9
Confidentiality
10
Costs and Expense
11
Successors-in-Title
12
Time
13
Governing Law
14
Loss & Expense
Those clause benefits only one party, which is the client. The client lastly does
not have to pay single money to the contractor. If the contractor is from higher class of
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contractor, may be this is not the big issue. But what is if the contractor is just a small
company that likelihood just starts their operation.
Jambol (2011), from his interviewed to contractors that went to mutual
termination agreement, they said, there are some clauses may be added to complete the
existing mutual termination introduced by Amran (2009).
Before entering to mutual termination agreement, there are condition precedents
that contractor must follow:-
(a)
Submit or return all the Contract Drawings, plans, designs, specification
and other documents related to the Project;
(b)
Handover or return all relevant documents/site records or any documents
which are material to the Project; and
(c)
Submit all receipts to show proof of payment for the purchase of the
materials, goods, equipment;
But that clause (14 all of them) does not cover other aspect of the whole
construction process and procedures. Most of contractor’s belonging have to remove
immediately from site and their money will be retain until the site is clear.
10
Jambol (2011), mutual termination happen during the construction of the East
Coast Expressway41, East Coast Expressway in Malaysia, is an extension of Kuala
Lumpur-Karak Expressway, which starts from Kuala Lumpur to Karak. Total length is
358 km and it was started to be constructed since year 200142.
Both parties either the government or the contractor may apply for the mutual
termination of contract for the particular project. However, mutual termination of
contract for public project will only be considered after the Contract Administrator
confirm and ensure that the obligations of the contract cannot be performed after
contract has been signed.
Mutual termination of contract shall not be considered on the reasons of the
contractor is unable to perform his obligations or the contractor was in breach of
performing his contract obligations and he interviewed 12 respondents; most of them
were not satisfied for Mutual Termination Agreement during construction of East Coast
Expressway. (Jambol, 2011)
Mutual termination agreement unequivocally stated that the parties agreed to a
mutual termination subject to the terms and conditions set out therein. The effect of this
is that the principle contract is thereby rescinded and the parties thereon are bound by
the terms and conditions of the mutual termination agreement. Henceforth, if any claim
should arise between the parties it is governed by the mutual termination agreement and
not by the principle contract which had expressly been rescinded by mutual consent.
(Jambol, 2011)
41
http://en.wikipedia.org/wiki/East_Coast_Expressway
https://www.google.com.my/search?q=east+coast+highway&ie=utf-8&oe=utf-8&gws_rd=cr&ei=KtcVLOIG9DkuQS--oHQCQ
42
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Wong (2005) gives meaning for termination that is often termed to be a taboo
among the players in the construction industry owing to the severity of the consequences
arising from it. Common words such as determination or forfeiture are termed as
synonymous to termination. Briefly, termination of contract takes place at a point in time
in the course of a contract period when a legally binding contract is brought to an end
before it has been discharged by performance due to the acts of one or both parties.
After having signed the mutual termination agreement the parties are no longer
bound by the principle contract and hence no action can be brought on the principle
contract. With reference to the case of Morris v Barron & Co.43, it was held that;
‘After signed the mutual termination agreement, parties are no longer bound by
the sub-contract.’
1.2
Statement of Issues
The foregoing discussion highlighted the problems associated with mutual
termination. Firstly, there is no specific provision in PWD 203/203A (2010) on mutual
termination. But in 2008, Treasury of Malaysia has come out with the Treasury’s
Instructions No. 3 of 2008 which described the process and procedures for mutual
termination.
43
(1918) AC.1
12
However, the contracting community were not happy about the provisions in the
Treasury’s Instructions No. 3 of 2008 because they appear to be one ambiguous and one
sided.
So, in 2009, the CKUB produced to complement the Treasury’s Instructions. It is
to be used in the case of mutual termination between the Government and the
Contractor. However, it seemed that the model agreement failed to resolve the issues
brought up by the Contractors. It appeared that the model agreement does not
incorporate several important matters on mutual termination.
1.3
Research Questions
The discussion and the statement brought up several pertinent questions:
(a) Are Contractors aware of the Treasury’s Instructions on the mutual termination
and the model agreement on mutual termination as drafted by the Contract and
Quantity Surveying Branch (CKUB)?
(b) Are the provisions on mutual termination clearly defined the process and
procedure of mutual termination?
(c) Has the Mutual Termination Agreement drafted by the Contract and Quantity
Surveying Branch (CKUB) incorporated all terms and conditions which may
significant to the Mutual Termination Agreement?
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1.4
Objective of the study
The objective of the study is to determine the sufficiency of the terms and
conditions contains in the model of Mutual Termination Agreement.
1.5
Scope of Study
This research will be focused on following matter:-
(a) The related provisions in the standard forms of contract used in Malaysia; Public
Work Department (PWD 203/203A Revised 2010);
(b) Treasury’s Instructions No. 3 of 2008;
(c) A model of the Mutual Termination Agreement drafted by the Contract and
Quantity Surveying Branch (CKUB).
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1.6
Significance of Study
This research is very important in order to benefit all the stakeholders in the
construction industry especially the Contractors and the Client (Government) briefly as
follows:
(a) Contractors
Contractors are important to have the knowledge on his obligations whether to
aware if they are entering the mutual termination agreement, or just to follow
what they was instructed for (appointed legal department to check on this), etc.
(b) Employers
The employers normally do not have necessary skills and expertise in the
construction industry and thus engages consultants to provide him advice and to
administer the contracts. This study would bring knowledge to the employers to
understand whether contractors understand the terms of mutual termination in the
construction contract.
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1.7
Research Methodology
In order to achieve the objectives, a systematic process of conducting it had been
organised. Basically, the process consists of five major stages; which involves the
identifying the issue, literature review, data collection, data analysis, conclusions and
suggestions.
1.7.1
Stage 1: Identifying the Research Issue
The issue arises from discussions with colleagues and lecturers, reading of
books, journals and articles which can be attained from the UTM library and Internet.
From the research issue, the objective of the study has been identified.
1.7.2
Stage 2: Literature Review
After the research issue and objective had been identified, various documentation
and literature review regarding to the research field will be collected to achieve the
research objective.
Generally, secondary data is collected from the latest reading, materials in
printing from such as books, journals, research papers, reports as well as from the
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internet. It is important to identify trends and knowledge concerning the subject area of
determination of contract such as background, definition, procedures, relevant events
and etc.
1.7.3
Stage 3: Data Collection
After identifying all the background and relevant issue through discussions and
opinions, which are related to the research issue and collected data from Malayan Law
Journals via UTM library electronic database, namely Lexis-Nexis Legal database.
1.7.4
Stage 4: Research Analysis
The analysis is based on the documentary study, using PWD 203A (2010), SPP
Bil. 3 Tahun 2008, Mutual Termination Agreement model by Sr Amran Mohd Majid
(2009) from Cawangan Kontrak dan Ukur Bahan (CKUB).After that, the author has
focused on the issues, discussions and comparisons would be done.
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1.7.5
Stage 5: Discussion, Conclusion and Recommendations
Lastly, the author will review the whole process of the study with the intention to
identify whether the research objective have been achieved. After presenting the
research findings, further research will be suggested.
1.8
Organisation of the Chapters
This research covers 5 segments. The segments are as follows:
1.8.1
Chapter 1: Introduction
This chapter is to introduce the geese of the study. The definition, mutual
termination agreement is discussed in this chapter. The objective for this research is
presented in Chapter 1. It also presents the scope of study; significance of study; as well
as the methodology and the outline of this research.
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1.8.2
Chapter 2: Discharge of Contract
This chapter will discuss generally on discharge of contract, the principal of
contract act and the principal of common law. It also will be discuss on the introduction
of discharge by agreement.
1.8.3
Chapter 3: Determination/Termination Clauses in Standard Form of
Building Contract
This Chapter 3 will explain what is determination and termination. This chapter
should discuss the differences between “termination” and “determination”. This chapter
also will focus on termination without default and mutual termination.
1.8.4
Chapter 4: Methodology
Chapter 4 will explain the methodology method used by author in order to finish
this research study.
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1.8.5
Chapter 5: Data Analysis and Discussions
Chapter 5 is to analyse and discussion in for the material used for this topic
research. The table will be constructing in order to analyse the data.
1.8.6
Chapter 6: Conclusions and Recommendations
Chapter 5 is to conclude all the discussion in all chapters and in this chapter also
have a suggestion for next further study for this topic research. As a conclusion, in order
to achieve the research objectives, a systematic process and methodology of study shall
be determine and identified in early stage.
A researcher need to focus and conducted the study based on an appropriate
method. Thus, a study on mutual termination agreement hopefully will benefit to the
contracting parties in the construction industry as a guideline and references in the
future.