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CHAPTER 1
INTRODUCTION
1.1
Background Study
The construction industry is an important component in the wheel propelling the
Malaysian economy. It is vital for the nation’s growth by establishes buildings and
infrastructure works required for social economic development which contribute to the
overall economic growth. Construction industry also provides work for many ranging
from professionals such as engineers, architects, quantity surveyors, surveyors, suppliers
and also labourers who are employed by contractors involved in the project.
One of the major factors leading a project’s success is the practice of efficient
and timely payment in construction project. This is because of the nature of the
construction industry due to the large capital expenditure and the extended period of
construction resulting difficulty to the contractor to finance the entire project until
completion. Unlike many other industries, construction projects are of long durations,
involving multiple phases of construction works and also involves many parties and
professionals such as employers, engineers, architects, quantity surveyors, surveyors,
supervisor, skilled works and labourer. Problems in payment at the higher end of the
hierarchy will lead to a serious knock-on cash flow problem down the chain of contracts.
Cash flow is also critical to the construction industry since the terms of payment are
usually based on credit rather than payment upon delivery.
However, over the years, cash flow problems due to non-payment culture have
worried contractors in the industry. A failure of the contractors getting payment resulting
project in delay, reducing profitability and in the extreme case, knocking effect on the
whole of construction business chain due to non-payment downwards to the sub-
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contractor, suppliers and vendors. When payment due under the contract are zero, the
contractor’s financial position suffers due to failure to get factoring, capital venture and
long-term finance from institutional finance which lead to the insolvency.
1.2
State of the Problems
Often in the construction project, the employer will require the project to be
structured such that it has only a single contractual relationship with one of the
participants, which is the main contractor. From the employer's perspective, there is much
attraction in structuring the project such that the main contractor acts as the single point
of responsibility. However, in main contractor side, they require assistants from other
parties to complete tasks for various trades under the contract, which called subcontracting. Sub-contracting in other word may be defined as a delegation of part of the
responsibilities acquired under a contract without transferring any of the contractual
accountability.
Sub-contracting is most prevalent in the construction industry where main
contractors hire sub-contractors to assist with a wide variety of functions. Main
contractors often sub-contract mechanical work, plumbing and sanitary work, electrical
work, lift, interior design work, raised floor work and other tasks to perform. Hiring subcontractors offers a number of advantages for small business because it is less expensive
than hiring a full-time employee.
There are two (2) types of sub-contractors in construction industry, which are [1]
domestic sub-contractor who was selected and appointed by the main contractor; and [2]
nominated sub-contractor who was selected and appointed by the employer. Domestic
sub-contractors are selected by main contractor as early as the tender stage or as late as
the construction phase, with the main contractor solely responsible for their replacement
in the event of default or insolvency and for meeting any consequent additional costs.1
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David Mosey,(2009), Early Contractor Involvement in Building Procurement – Contracts, Partnering and
Project Management, Wiley-Blackwell, p102
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The appointment process does not require any consent from the employer and parties in
the contract are only between the main contractor and domestic sub-contractor.
Nominated subcontractors are selected by the client and usually prior to
commencement of the construction phase. Nominating a subcontractor is the prerogative
of the employer and derives a number of advantages from the procedure. This is because
with a single contractual relationship, the employer may gains from specialist work being
done by the expert, who is nominated sub-contractor and the responsibility remains with
the main contractor. However, it may not be so advantageous to both main contractor and
nominated sub-contractor.
One of the disadvantages of the nomination of sub-contractors is once the subcontractor enters a contract with main contractor; they have no dealing with the employer
in any way. The parties in the contract are only between the employer and the main
contractor. In other words, nominated sub-contractor has no privity with the employer.
Doctrine of privity claims that an individual cannot have any rights or put into
effect any right found on a contract and not be liable to any concerns relating to the
contract which he is not considered a party. Notwithstanding, some standard conditions
of contracts have a provision for doctrine of privity. Privity clause spelled in PAM
Contract 2006 under Clause 27.10 states:
“Neither the existence of or the exercise of the foregoing provisions nor
anything else contained in the Contract shall create a privity of
contract between the Employer and any of the Nominated SubContractors.”
PWD Form 203A (Rev. 1/2010) quoting ‘no liability of Government’ for no
privity towards nominated sub-contractors, spelled under Clause 62.0 states:
“Nothing in clauses 60 or 61 or anything else contained in this
Contract shall render the Government in any way liable to any
Nominated and/or Sub-Contractor or Supplier.”
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The above clauses clearly provided that there would be no privity of contract
between the employer and the nominated sub-contractor. Hence, any contractual issues
including payments, the parties to the contract were wholly and exclusively the main
contractor and the sub-contractor, and the employer being a third party are stranger.
However, over the years, cash flow problems due to non-payment or late payment
culture have worried contractors in the industry.The situation of non-payment by the
main contractor to the sub-contractors might happen in certain project although there is
no issue on non-payment by the employer to the main contractor. Since payment is an
important issue in the construction industry to ensure the continuous work due to the
large capital expenditure, the non-payment by the main contractor may give major impact
to the progress of works, as a result may delay the completion date. In this situation,
question arises like; how can employer protect its position and on-going development
when main contractor disputed particularly in his obligation to pay the sub-contractor?
Can the employer step in the main contractor’s position and pay direct to the subcontractor, when there would be no privity of contract between the sub-contractor and the
employer?
This study will study on the doctrine of privity and its application in construction
industry.
1.3
Objectives of the Study
This study is for the Master thesis entitled “Doctrine of Privity and Its
Application in Relation to Sub-Contractor’s Payment”. The objectives of this study are as
follows:
1.2.1
To study the recognition and application of doctrine of privity in
relation to sub-contractor’s based on court decision.
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1.4
Scope of Study
The scope of this study is as follows:
1.3.1
The approach adopted in this study is case law based. The case
chosen must have connection to the doctrine of privity and
includes terms determine at the initial study; and
1.3.2
The cases chosen are limited to the judgment date within previous
ten (10) years and limited to the Malaysian and United Kingdom
cases only.
1.5
Research Methodology
This study was carried out based on court decision in precedence cases, which
related to the scope of work. In order to achieve the objectives of this study, a systematic
process of conducting this study had been organized. Basically, this study flow consists
six major stages and the flow were as follows: [1] identify problems; [2] literature
review; [3] determine objectives; [4] data collection; [5] data analysis; and
[6]
conclusion and suggestion.
1.5.1
Identify Problems
Stage 1 of this study is to identify issue to be discussed. Issue identified based on
the discussion with the supervisor, author’s experience working in construction industry
and from intensive reading books, journals and articles which can be attained from the
Perpustakaan Sultanah Zanariah, Universiti Teknologi Malaysia, Johor Bahru.
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1.5.2 Literature Review
An early perspective towards the study can be obtained through conversations
with supervisor. Sources of literature review will consist of articles in journals, published
conference articles, books, websites, magazines and legal cases obtained from Lexis
Nexis search engine available online in UTM database.
1.5.3 Objectives
As mentioned in item 1.3 earlier, the objective of this study is to study the
recognition and application of doctrine of privity in relation to sub-contractor’s payment.
1.5.4 Data Collection
There were two (2) sources for the data collection in this study. The sources were
from primary data and secondary data, which both can be detained in the Perpustakaan
Sultanah Zanariah, Universiti Teknologi Malaysia, Johor Bahru.
Sources of the primary data were source out from legal cases based on written
opinions of court, which are related to the scope of study. The data was collected from
sources such as Malayan Law Journals access of Lexis Nexis available in UTM’s online
database.
Secondary data was collected from intensive reading materials consists of analysis
and researches done by people such as articles in journals, magazines, published
conference articles, books and websites.
The author had introduced a method for collecting data that will be used in this
study. The method was by selecting few terms as a keyword and these were elaborated in
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Chapter 4 of this study. Another parameter set up for the data collection was the time
frame for the cases to be chosen, which was from year 2002 to year 2012.
1.5.5 Data Analysis
All primary and secondary data identified in Chapter 4 were analysed and
documented. The focus was on the data related to the objective of this study. All relevant
information and findings were later written.
1.5.6 Conclusion and Suggestion
Suggestion for the solution of the issue was addressed in the end of this study.
The conclusion was answered the issue discussed. The produced report writing was sent
for documentation and binding.
Figure 1.0 below demonstrates research methodology flowchart.
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Identify Problems:
Literature Review:
(CHAPTER 1)
(CHAPTER 1 & 2)
Issue identified based on the
Sources of literature review will
discussion with the supervisor,
consist of articles in journals,
author’s experience working in
published conference articles,
construction industry and from
books, websites, magazines and
intensive
legal cases.
reading
books,
journals and article.
Data Collection:
Objective:
(CHAPTER 3)
(CHAPTER 1)
Method of collecting data:
-
-
The objective is to study the
selecting few terms as
recognition and application of
keywords; and
doctrine of privity in relation to
time frame for cases
sub-contractor’s payment.
with
judgment
date
between 2002 to 2012.
Data Analysis:
Conclusion & Suggestion:
(CHAPTER 4)
(CHAPTER 5)
From data collection, all data
Suggestion
were analysed and documented.
were written in Chapter 5 of this
The relevant information and
study.
and
findings were written in Chapter
4 (Detail) and Appendix B
(Summary).
Figure 1: Research Methodology Flowchart
Conclusion