A REPUDIATORY BREACH IN THE CONSTRUCTION INDUSTRY –
NON-PAYMENT
LEE SHIH YIN
UNIVERSITI TEKNOLOGI MALAYSIA
iii
To my beloved dad, mom, Kah Wei, Yong Sin and Jiih Kui
iv
ACKNOWLEDGEMENTS
A debt of gratitude is owed to many individuals who have given me the
benefit of their unconditional help, tolerance and knowledge in writing and
completing this master project. First of all, I would like to express my highest
gratitude to my supervisor, Encik Norazam Othman for his guidance, advice and
support in order to complete this master project.
Next, my special thanks are due to all the lecturers for the course of Master
of Science (Construction Contract Management), for their patient and kind advice
during the process of completing the master project.
Not forgetting my dearest parents, brother and sister, a token of appreciation
goes to them for giving full support. Lastly, I would like to express my special
thanks to my fellow classmates, who have in their own way helped me a great deal
throughout the preparation and production stages of this master project.
v
ABSTRACT
Many complaints have been voiced about non-payments and it is causing
severe cash flow problems to contractors. The reaction of many contractors when
faced with non-payment is to consider stopping work on site. Whilst this is
understandable in many instances, it may amount to a repudiatory breach by the
contractor. The contractors are only entitled to terminate the contract when nonpayment is a repudiation of contract. But is the act of non-payment goes to the root
of the contract? Whether failure to pay amounts to repudiation will depend on the
circumstances of the case. Therefore, this study is to identify circumstances where
non-payment by an employer constitutes a repudiatory breach of contract. Findings
of this study will assist the contractor to understand his position before he takes
action when the employer fails to make payment. The approach adopted in this
research is case law based; only cases specifically centered on issue of non-payment
will be discussed in this study. The selection of sample court cases involved a depth
study rather than a random sample. A total number of 11 cases were studied, where 7
of them were involving construction contracts and 4 were contracts of sales of goods.
It is found that there are 2 circumstances in which non-payment constitutes to
repudiatory breach and 9 circumstances in which non-payment does not amount to
repudiation of the contract. As a conclusion, the result of the analysis seems to
suggest that, in most of the circumstances, non-payment is not a repudiatory breach
of contract by the employer. The contractors are not advised to stop work at the site
when the employer refused to make payments, or he himself would be guilty of a
breach of contract in failing to maintain regular and diligent progress. But, an
employer may be held to be in repudiatory breach of contract in failing to make
payment if his action shows an intention no longer to be bound by the contract and
his default goes to the root of the contract.
vi
ABSTRAK
Terdapat banyak kontraktor yang tidak dibayar dan mereka menghadapi
masalah kewangan yang serius. Apabila kontraktor tidak dibayar, mereka akan
memikir untuk meninggalkan kerja di tapak pembinaan. Walaupun ini dapat
difahami, ia mungkin merupakan pecah kontrak oleh kontraktor. Kontraktor hanya
boleh menamatkan kontrak apabila tindakan tidak bayar merupakan pecah kontrak
oleh majikan. Adakah tindakan tidak bayar merupakan repudiasi? Sama ada tindakan
tidak bayar merupakan repudiasi adalah bergantung kepada keadaan. Maka, kajian
ini adalah untuk mengenalpasti keadaan di mana tindakan tidak bayar merupakan
repudiasi pihak majikan. Hasil kajian akan membantu kontraktor memahami haknya
sebelum ia mengambil tindakan apabila majikan tidak membayar. Pendekatan yang
diguna dalam kajian ini adalah berdasarkan kes mahkamah, hanya kes yang berpusat
pada isu tidak bayar akan dibincang dalam kajian ini. Pemilihan kes adalah secara
mendalam, bukannya secara rawak. Sebanyak 11 kes dikaji, di mana 7 melibatkan
kontrak pembinaan dan 4 melibatkan kontrak jual beli. Didapati, hanya 2 daripada 11
kes menunjukkan keadaan di mana tidak bayar merupakan repudiasi majikan, dan 9
menunjukkan keadaan di mana tidak bayar tidak merupakan repudiasi majikan.
Sebagai kesimpulan, hasil kajian mencadangkan tidak bayar tidak merupakan
repudiasi oleh majikan dalam kebanyakan keadaan. Kontraktor adalah tidak
dicadangkan untuk meninggalkan kerja di tapak pembinaan apabila majikan tidak
bayar, supaya dia tidak didakwa pecah kontrak atas alasan gagal untuk melaksanakan
kerja dengan tekun. Tetapi, seseorang majikan akan didakwa repudiasi kerana gagal
membayar jika tindakannya menunjukkan dia tidak ingin diikat oleh kontrak, dan
tindakannya memecah asas kontrak.
vii
TABLE OF CONTENTS
CHAPTER
1.0
TITLE
PAGE
DECLARATION
ii
DEDICATION
iii
ACKNOWLEDGEMENTS
iv
ABSTRACT
v
ABSTRAK
vi
TABLE OF CONTENTS
vii
LIST OF TABLES
xi
LIST OF ABBREVIATIONS
xii
LIST OF CASES
xiv
INTRODUCTION
1.1
Background Studies
1
1.2
Problem Statement
3
1.3
Objective of the Research
8
1.4
Scope of the Research
8
1.5
Importance of the Research
8
1.6
Research Methodology
9
viii
2.0
PAYMENTS IN THE CONSTRUCTION INDUSTRY
2.1
Introduction
10
2.2
The Right to Payment
11
2.2.1
Lump Sum Contract
12
2.2.1.1 Entire Contracts
13
2.2.1.2 Substantial Performance
15
2.2.1.3 Non-Completion
15
2.2.2
Contract other than for a Lump Sum Contract
16
2.2.3
Quantum Meruit
17
2.3
Arrangements for Interim Payment
18
2.4
Mode of Payment
19
2.4.1
Payment in Cash
19
2.4.2
Payment in Bills
19
2.4.3
Payment in Debentures or Shares
20
2.4.4
Payment in Land
20
2.5
3.0
Conclusion
21
REPUDIATORY BREACH IN CONSTRUCTION CONTRACT
3.1
Introduction
22
3.2
Common Law Termination
24
3.2.1
Discharged by Performance
25
3.2.2
Discharged by Agreement
26
3.2.3
Discharged by Frustration
27
3.2.4
Discharged by Repudiation
28
3.3
Contractual Termination
29
3.4
Repudiatory Breach
30
3.4.1
Repudiation
31
3.4.1.1 Intention to Repudiate
32
3.4.1.2 Misapprehension of Contract Obligations
33
Fundamental Breach
35
3.4.2.1 General Principles
35
3.4.2.2 Rule of Construction
37
3.4.2.3 Onus of Proof
39
3.4.2
ix
3.4.3
Breach of Fundamental Terms
39
3.4.3.1 By Statutory Implication
41
3.4.3.2 Because the Parties have explicitly made
it so
3.5
3.4.3.3 Because the Court so Construes it
41
3.4.4
Non-Fundamental Breaches after Notice
42
3.4.5
Erroneous Expression of View
43
3.4.6
Arbitration Agreements
44
Recourse for Repudiation and Fundamental Breach
44
3.5.1
Innocent Party Elects to Terminate the Contract
45
3.5.2
Innocent Party Elects to Treat the Contract
as Continuing
3.6
3.7
4.0
41
47
Grounds of Termination by the Contractor
47
3.6.1
Employer’s Refusal to be bound
48
3.6.2
Preventing Execution of Works
49
3.6.3
Failure to Give Possession of the Site
50
3.6.4
Failure to Pay
51
3.6.5
Under-Certification of Payments
53
3.6.6
No General Right to Suspend Work
54
3.6.7
Interference or Influence of Certifier
55
3.6.8
Other Breaches
55
Conclusion
56
CIRCUMSTANCES WHERE NON-PAYMENT IS / IS NOT A
REPUDIATORY BREACH BY THE EMPLOYER
4.1
Introduction
4.2
Circumstances Where Non-Payment by an Employer
4.3
58
Constituted a Repudiatory Breach of Contract
60
4.2.1
Circumstance 1
61
4.2.2
Circumstance 2
64
Circumstances Where Non-Payment by an Employer
Did not Constitute a Repudiatory Breach of Contract
67
4.3.1
68
Circumstance 1
x
4.4
5.0
4.3.2
Circumstance 2
77
4.3.3
Circumstance 3
83
4.3.4
Circumstance 4
86
4.3.5
Circumstance 5
89
4.3.6
Circumstance 6
92
Conclusion
95
CONCLUSIONS AND RECOMMENDATIONS
5.1
Introduction
97
5.2
Summary of Research Findings
97
5.3
Problems Encountered during Research
103
5.4
Further Studies
104
REFERENCE
105
BIBLIOGRAPHY
107
xi
LIST OF TABLES
TABLE NO TITLE
5.1
Circumstances where non-payment constituted a repudiation
of contract by the employer
5.2
PAGE
98
Circumstances where non-payment did not amount to
repudiation of contract by the employer / purchaser
99
xii
LIST OF ABBREVIATIONS
AC
Law Reports Appeal Case
All ER
All England Law Reports
ALJ
Australian Law Journal
ALR
Australian Law Reports
ALJR
Australian Law Journal Reports
App Cas
Appeal Cases
B
Beavan
B&S
Best and Smith’s Reports
Build LR
Building Law Reports
CA
Court of Appeal
CB
Common Bench Reports
Ch
Chancery
Ch App
Chancery Appeal
Ch D
The Law Reports, Chancery Division
CIDB
Construction Industry Development Board
CLD
Construction Law Digest
DC
Divisional Court, England
Const LJ
Construction Law Journal
Const LR
Construction Law Reports
CP
Law Reports, Common Pleas
CPD
Law Reports, Common Pleas Division
DLR
Dominion Law Reports
Exch
Exchequer Reports
Eq
Equity Case
EWHC
High Court of England and Wales Decisions
xiii
FC
Federal Court
F&F
Foster & Finlayson’s Reports
H&N
Hurlstone & Norman’s Exchequer Reports
HL
House of Lords
HKC
Hong Kong Cases
HKLR
Hong Kong Law Reports
IR
Irish Reports
JKR
Jabatan Kerja Raya
KB
King Bench
LGR
Local Government Reports
LJKB (QB)
Law Journal Reports, King’s (Queen’s) Bench
Lloyd’s Rep
Lloyd’s List Reports
LR
Law Reports
LT
Law Times Reports
JP
Justice of the Peace / Justice of the Peace Reports
MLJ
Malayan Law Journal
NZLR
New Zealand Law Reports
PAM
Pertubuhan Arkitek Malaysia
PWD
Public Work Department
PD
Probate, Divorce and Admiralty Division of High Court
QB
Queen Bench
TCC
Technology and Construction Court
SLR
Singapore Law Reports
WLR
Weekly Law Reports
WR
Weekly Reports
xiv
LIST OF CASES
CASES
PAGE
AA Valibhoy & Sons Pte Ltd v. Banque Nationale de Paris
[1983] 2 MLJ 26 (CA)
39
Acrow (Automation) Ltd. v. Rex Chainbelt Inc. (1971) 1 WLR 1676
50
Afovos Shipping v. Pagnan [1983] 1 WLR195
31
Appleby v. Myers (1867) LR2CP 651
12, 13, 16
Architectural Installation Services v. James Gibbons (1989)
16 ConLR 68
30
Associated Pan Malaysian Cement Sdn Bhd v. Syarikat Teknikal
& Kejuruteraan Sdn Bhd (1990) 3 MLJ 287
Ban Hong Joo Mines Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83
82
61, 67, 95, 98
Bickerton (T.A.) & Sons Ltd v. N.W. Regional Hospital Board
[1970] 1 WLR 607
56
Bolton v. Mahadeva [1972] 1 WLR 1009
16
Bradley v. Newson [1919] AC 16
32
Brani Readymixed Pte Ltd v. Yee Hong Pte Ltd [1994] 2 SLR 552
Bremer Vulkan v. South India Shipping Corporation [1981] AC 909
68, 74, 95, 99
44
British Steel Corporation v. Cleveland Bridge and Engineering
[1984] 1 All ER 504
Bunge Corporation v. Tradax [1981] 1 WLR 711
17
40, 41
C J Elvin Building Services Ltd v. Noble and Another
[2003] EWHC 837 (TCC)
Canterbury Pipe Lines v. Christchurch Drainage (1979) 16 BLR 76
5, 64, 95, 98
43, 54, 59,
89, 95, 102
Carr v. A. J. Berriman (1953) 27 A.LJR 273
43, 51
xv
CASES
PAGE
Cehave N.V. v. Bremer m.b.H. [1976] 1 QB 44
42
Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd
[1992] 2 All ER 609
5
Chilean Nitrate Sales v. Marine Transportation [1982] 1 Lloyd’s Rep. 570
31
Compagnie General Maritime v. Diakan Spirit [1982] 2 Lloyd’s Rep 574
40
Coombe v. Greene (1843) 11 M&W 480
55
Cornwall v. Henson [1900] 2 Ch 298
70, 86, 95, 101
Cort v. Ambergate Railway (1851) 17 QB 127
49
Cory Ltd v. City of London Corp [1951] 2 KB 476 (CA)
49
Croudace v. London Borough of Lambeth (1986) 33 BLR 20 (CA)
50
Ctr. Jones v. Cannock (1852) 3 HLC 700
55
Cutter v. Powell (1795) 6 TR 320
13, 15
Dakin v. Lee [1916] 1 KB 566
15
Davidson v. Gioyne (1810) 12 East 381
36
Davis Contractors Ltd. v. Fareham Urban Council (1956) [1956] AC 696
27
De Waal v. Adler (1886) 12 App. Cas. 141
20
Décor-Wall International SA v. Practitioners in Marketing Ltd
[1971] 2 All ER 216
36, 37, 59,
68, 70, 95, 99
Duncan v. Blundell (1820) 3 Stark
13
Earth & General Contractors Ltd v. Manchester Corp. (1958) 108 LJ 665
50
Ellis v. Hamlen (1810) 3 Taunt. 52
15
Farnsworth v. Garrard (1807) 1 Camp 38
15
Federal Commerce v. Molena Alpha [1979] AC 757
th
31, 34, 42
Felton v. Wharrie (1906) HBC (4 ed.), Vol. 2, P.398 (CA)
50
Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190
15
Frederick Leyland & Co. v. Panamena Europea Navigacion Cia
(1943) 76 Lloyd L.R. 113
Freeth v Burr (1873-74) 9 CP 208
54
62, 77, 78,
95, 100
Gaze Ltd. v. Port Talbot Corp. (1929) 93 JP 89
General Billposting Co. Ltd v. Atkinson [1909] AC118
Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA)
55
31, 60
17
xvi
CASES
PAGE
H Dakin & Co. Ltd v. Lee [1916] 1 KB 566
14
Heyman v. Darwins [1942] AC 356
30, 37
Hiap Hong & Co. Pte. Ltd. v. Hong Huat Development Co. (Pte) Ltd.
[2001] 2 S.LR 458 (CA)
54
Hoare v. Rennie (1859) 5 H & N 19; 29 LJ Ex 73; 1 LT 104; 8 WR 80;
157 ER 1083; 39 Digest 572, 1766
77
Hochster v. De La Tour (1853) 2 E&B 678
31, 45, 48
Hoenig v. Issacs [1952] 2 All ER 176
5, 13, 14, 15
Holland Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80
17
Hong Kong Fir Shipping v. Kawasaki Kison Kaisha [1962] 2 QB 26 (CA) 37, 40, 42
Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1
31, 60
Hunt and Winterbotham Ltd v. BRS (Parcels) Ltd [1983] 2 MLJ 26 (CA)
39
Hunt v. Bishop (1853) 8 Ex. 675
55
Hunter Engineering Inc v. Syncrude Canada Ltd (1989) 57 DLR (4d) 321
38
Hutchinson v. Harris (1978) 10 BLR 19
15
Hyundai Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129 (HL)
46
James Shaffer Ltd. v. Findlay, Durham & Brodie [1953] 1 WLR106 (CA)
43
Jonassohn v. Young (1863) 4 B & S 296; 2 New Rep 390; 32 LJQB 385;
10 Jur NS 43; 11 WR 962; 122 ER 470; 39 Digest 652, 2459
79
Joseph Thorley Ltd v. Orchis Steamship Co [1907] 1 KB 660
36
Kah Seng Construction Sdn Bhd v. Selsin Development Sdn Bhd
Suit No 22-309 of 1992
77, 79, 95, 100
Karsales (Harrow) Ltd. v. Wallis [1956] 2 All E.R. 866
35
Keys v. Harwood (1846) 2 CB 905
21
King v. Allen & Sons Billposting Ltd. [1916] 2 AC 54
31
Kingdom v. Cox (1848) 5 CB 522
49
Lee Poh Choo v. Sea Housing Corporation Sdn Bhd [1982] 1 MLJ 324 92, 96, 102
Lilley v. Doubleday [1907] 1 KB 669
36
Lim Sew Lan v. Pembangunan Hysham Sdn Bhd [1995] 5 MLJ 670
37
Lombard v. Butterworth [1987] QB527
41
Low Kon Fatt v. Port Klang Golf Resort (M) Sdn Bhd [1998] 6 MLJ 448
37
Lubenham Fidelities & Investment Co. v. South Pembrokeshire
District Council and Wigley Fox Partnership (1986) 33 BLR 39 (CA)
4, 53, 54
xvii
CASES
PAGE
Macintosh v. Midland Counties Railway (1845) 14 LJ Ex. 338
55
Marshall v. Mackintosh (1898) 78 LT 750
5
Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434
5, 31, 32, 43, 48,
52, 60, 63, 83,
95, 101, 103
Modern Engineering (Bristol) v. Gilbert-Ash [1974] AC 689
30
Munro v. Butt (1858) 8 EB 739
13
Levison v. Patent Steam Carpet Cleaning Co. Ltd [1983] 2 MLJ 26 (CA)
39
Needler v. Guest (1647) Aleyn 9
11
Newfoundland Government v. Newfoundland Ry.
(1888) 13 App. Cas. 199 (PC)
16
Panamena, etc. v. Frederick Leyland & Co. Ltd [1947] AC 428
53
Parker Distributors (Singapore) Pte Ltd v. Svenborg [1959] AC 576;
[1959] 3 All ER 182 (PC)
39
Percy Bilton v. Greater London Council [1982] 1 WLR 794
56
Perini Corporation v. Commonwealth of Australia (1969) 12 BLR 82
53, 54
Peter Dumenil v. James Ruddin [1953] 1 WLR 815 (CA)
43
Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827
38, 45, 46
Portman v. Middleton (1858) 4 CB (NS)
13
Re Aldborough Hotel Co., Simpson’s Case (1869) 4 Ch. App. 184
20
Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405
19
Rees v. Lines (1837) 8 C&P 126
51
Roberts v. Bury Commissioners (1870) LR4CP 755
50, 51
Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.
[1940] 3 All ER 60
31, 33, 43, 60
Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC 694
41
Schuler (L.) A.G. v. Wickman Machine Tool Sales [1974] AC 235 (HL)
42
Simpson v Crippin (1872-73) 8 QBD 14
62
Sinclair v. Bowles (1829) 9 B&C 92
13, 15
Smyth v. Bailey [1940] 2 All ER 60
32
Southern Foundaries v. Shirlaw [1940] AC 701
49
Spettabile v. Northumberland Shipbuilding Co. (1919) 121 LT 628
49
State Trading Corporation of India v. Golodetz [1989] 2 Lloyds’s Rep. 277 (CA) 41
xviii
CASES
PAGE
Stegmann v. O’Connor (1899) 81 LT 627 (CA)
15
Stevens v. Taylor (1860) 2 F&F 419
55
Stirling v. Maitland (1864) 5 B&S 840, 852
49
Sumpter v. Hedges (1898) 1 QB 673
14
Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361
31, 37,
40, 44, 47, 60
Supamarl v. Federated Homes (1981) 9 ComLR 25
54
Sutcliffe v. Chippendale & Edmondson (1971) 18 BLR 149
30
Sutcliffe v. Thackrah [1974] AC 727
53
Sweatfield Ltd. v. Hathaway Roofing Ltd. [1997] CILL 1235
49
Sweet & Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 QB699 (CA)
43
Sze Hai Tong Bank v. Rambler Cycle Co [1959] AC 576;
[1959] 3 All ER 182 (PC)
38
Terry v. Duntze (1795) 2 Hy. Bl. 389
11
The Mihalis Angelos [1971] 1 QB 164 (CA)
31
Toepfer v. Cremer [1975] 2 Lloyd’s Rep.118 (CA)
43
Tramways Advertising Pty Ltd. v. Luna Park (NSW) Ltd.
(1938) 38 S.R. (NSW) 632
36
th
Trollope & Colls v. Singer (1913) HBC (4 ed.)
55
Turriff v. Richards & Wallington (1981) 18 BLR 19
44
UGS Finance v. National Mortgage Bank of Greece [1964] 1 Lloyd’s Rep. 446
38
Valpy v. Oakeley (1851) 16 QB 941
19
Vigers v. Cook [1919] 2 KB 475 (CA)
13, 15
Wates Ltd. v. Greater London Council (1983)
28
Wells v. Army & Navy Co-op Society (1902) 86 LT 764
55
Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA)
15
Withers v. Reynolds (1831) 109 ER 1370
Wong Poh Oi v. Guok Gertrude & Anor [1965-1968] 1 SLR 455
Woodar v. Wimpey [1980] 1 WLR 277
52, 79
68, 95, 99
31, 32, 33, 43, 60
CHAPTER 1
INTRODUCTION
1.1
Background Studies
The practice of efficient and timely payment in construction projects is a
major factor leading to a project’s success. Payment has been referred to as the
lifeblood of the construction industry due to latter’s inherent nature that takes
relatively long durations and large amounts of money to complete. 1 The primary
obligation upon the employer is to give the contractor the sum of money which
forms the consideration for the contract.2 Furthermore, the contractor has a right to
be paid on time.3 The contractor’s right to payment depends upon the wording of the
contract. Within the limits of legality parties can make what arrangements they
please.4
1
2
3
4
Construction Industry Development Board, “A Report of a Questionnaire Survey on Late and
Non-Payment Issues in the Malaysian Construction Industry.” (Kuala Lumpur: CIDB, 2006), p.i.
John Murdoch and Will Hughes, “Construction Contracts: Law and Management.” Third Edition.
(London: Spon Press, 2000), p.197.
Sundra Rajoo, “The Malaysian Standard Form of Building Contract (The PAM 1998 Form).”
Second Edition. (Kuala Lumpur: Malayan Law Journal, 1999), p.295.
Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:
Sweet & Maxwell, 1991), p.69.
2
In the construction industry contractors and subcontractors have become
accustomed to regular monthly payments. It is this facility which has enabled many
businesses to commence with a low capital base. Monthly payment does not result
from a basic legal entitlement. The opposite is the case in that, at common law,
payment is due following completion of the work. The entitlement to monthly
payment comes about from the express provisions in the contract.5 One of the main
purposes of this is to reduce the need for the contractor to fund the development of
the project. This is because the total value of each contract forms a large proportion
of a contractor’s annual turnover. Payment by instalments should eliminate the need
for the contractor to borrow money pending final payment.6 The amount of money
due in each instalment is recorded by the contract administrator in an ‘interim
certificate’. The issue of such a certificate by the contract administrator imposes
upon the employer a strict obligation to make payment.7
In the local scene, many complaints have been voiced about the events of late
and non-payments but the information has been mainly in the form of hearsays. A
research conducted by the Master Builders Association of Malaysia (MBAM) has
demonstrated that the issue of late and non-payment has persisted in the Malaysian
construction industry for quite some time now, but have yet to be fully resolved.8
According to the Works Minister Datuk Seri S. Samy Vellu9:
“More than 18,000 contractors and sub-contractors were either paid
late or have yet to receive payment for completed work totaling
RM23.7billion since 2000. This is a very huge sum, about 14% of the
allocation for development projects under the 9th Malaysia Plan. The
Construction Industry Development Board (CIDB) had carried out a
5
6
7
8
9
Rodney Martin, “52 Contractual Issues Relevant to Malaysia and Their Resolution.” (Kuala
Lumpur: James R Knowles Sdn Bhd, 2005), p.19.
Supra note 2.
Supra note 2.
Supra note 1.
The Star, “18,000 Contractors and Sub-Contractors Paid Late.” (Kuala Lumpur: The Star, 22
August 2006).
3
six-month survey on 330 contractors, in which 273 cases of payment
problems involving RM877.8mil were reported.”
This shows that Malaysian construction industry now is prone to late and
non-payment culture. Such a problem is felt not only in a fast developing economy,
as in the case of Malaysia, but also in developed countries, such as the United
Kingdom and Singapore. Late and/or non-payment will cause severe cash flow
problems especially to contractors, and this would have a devastating knock-on
effect down the contractual payment chain.10
Malaysia has set its vision to be a fully developed nation by 2020. The
construction industry has set its own vision to be ‘among the best in the world’ by
2015. One cannot have a ‘world class construction industry’ if even ‘mundane’
things like payment is not being honoured – whether in a timely manner or at all!
Malaysia too must not under-estimate the potential disastrous consequences of
persistent payment default across the industry and the economy.11
1.2
Problem Statement
There is a chronic problem of delayed and non-payment in the Malaysian
construction industry affecting the entire delivery chain.12 Contractors faced with an
employer who simply does not pay are in serious difficulties. This can be a very
10
11
12
Supra note 1.
Noushad Ali Naseem Ameer Ali, “A “Construction Industry Payment and Adjudication Act”:
Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.”
(Kuala Lumpur: Master Builder, 2006), p.1.
Ibid.
4
serious matter for the contractor who may not be able to fund continuation of the
project in the face of the employer’s breach.13
The reaction of many contractors when faced with non-payment is to
consider stopping work on site.14 Some contractors who were complaining of late
payment retaliated by withdrawing their labour and most of their plant from the site
and thus slowed down progress considerably. 15 Whilst this is understandable in
many instances such action could prove fatal.16 A contractor who suspended work on
the ground of not having been paid would be guilty of a breach of contract in failing
to maintain regular and diligent progress.17 The contractor has no right at common
law to stop work just because he has not been paid what he considers to be the
correct amount.18
Whether or not such a right exists is generally a complex matter and
contractors are well advised to be extremely cautious and to examine all the potential
pitfalls. A contractor may himself be in breach if the correct procedures as may be
stipulated in the contract are not followed when attempting suspension /
termination.19 It sometimes happens that one contracting party (‘A’) is in breach of
contract and the other party (‘B’) treats this as a repudiatory breach, but it is later
held that A’s breach was not sufficiently serious to justify this. The question which
then arises is whether this mistake means that B, who clearly intended no longer to
be bound by the contract, is now guilty of a repudiatory breach, so that A is entitled
to terminate the contract!20 But, can the employer gain profit by his own wrong? The
13
14
15
16
17
18
19
20
David Chappell and Vincent Powell-Smith, “The JCT Design and Build Contract.” Second
Edition. (London: Blackwell, 1999), p.154.
Lim Chong Fong, “The Malaysian PWD Form of Construction Contract.” (Kuala Lumpur: Sweet
& Maxwell Asia, 2004), p.108.
Supra note 2, p.328.
Supra note 5.
Supra note 2, p.328.
Lubenham Fidelities & Investment Co. v. South Pembrokeshire District Council and Wigley Fox
Partnership (1986) 33 BLR 39 (CA).
Supra note 14.
Supra note 2, p.323.
5
employer cannot rely upon its own breach to justify a contention that the contractor
was itself in repudiatory breach.21
At common law, one contracting party (A) had no right to suspend
performance of contractual obligations on a temporary basis, on the ground that the
other party (B) was in breach of contract. 22 Unless B’s breach was sufficiently
serious to justify A in terminating the contractor altogether, A’s only remedy was to
claim damages, in the meantime continuing with the contract. The absolute refusal to
carry out the work or abandonment of the work before it is practically completed
without any lawful excuse is a repudiation by the contractor.23 Abandonment of the
work or refusal to carry on is plainly a breach which goes to the roof of the
contract.24
Therefore, the absolute refusal to carry out the work is a repudiation by the
contractor. The issue arises then is, is the contractor still liable for repudiation if the
employer failed to make payment at the first place? Clearly, the employer is in
breach of contract when they refuse to make payment, but is the act of non-payment
goes to the root of the contract?
An employer’s obligation to pay the contractor is determined by the payment
arrangement envisaged in the terms of the underlying contract.25 This cannot be a
repudiation if there is no contractual duty to pay them. Where there is such a duty it
is a question in each case whether failure to pay is a repudiation.26
21
22
23
24
25
26
C J Elvin Building Services Ltd v. Noble and Another [2003] EWHC 837 (TCC).
Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1992] 2 All ER 609.
Supra note 3, p.251.
Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434; Marshall v. Mackintosh (1898) 78
LT 750; Hoenig v. Issacs [1952] 2 All ER 176 (CA).
Chow Kok Fong, “Law and Practice of Construction Contracts.” (Singapore: Sweet & Maxwell
Asia, 2004), p.335.
Supra note 4.
6
Generally, there is no common law right for any party to treat a contract as
repudiated simply because the other party is in breach of his obligation to pay.27
Failure to pay one instalment out of many due under the terms of the contract is not
ordinarily sufficient to amount to a repudiation.28 In addition, a simple delay of a few
days in payment, even if persistently repeated, would probably not amount to
repudiation.29
Under common law, it is probably insufficient to sustain an allegation that
the employer has repudiated a contract, unless he has fallen behind in honouring a
series of progress payment over a period of time. 30 However, persistent delay in
payment can no doubt amount to repudiation, if sufficiently serious. 31 So a clear
indication of refusal or inability to pay future instalments will be a repudiation, as
also a repeated failure to pay on time in response to warnings, if raising the inference
of an intention to pay late habitually so as to derive financial advantage, it is
submitted.32
What does “repudiation” actually mean? The word “repudiation” is
ambiguous and has several meanings, but it is the most convenient term to describe
circumstances where “one party so acts or so express himself as to show that he does
not mean to accept the obligations of a contract any further. To amount to
repudiation a breach must go to the root of the contract. Repudiation is a drastic
conclusion which should only be held to arise in clear cases of a refusal, in a matter
going to the root of the contract, to perform contractual obligations. Repudiation by
one party standing alone does not terminate the contract. It takes two to end it, by
repudiation on the one side, and acceptance of the repudiation on the other.33
27
28
29
30
31
32
33
Supra note 13, p.268.
Supra note 4.
Supra note 3, p. 295.
Supra note 25.
Supra note 29.
Duncan Wallace, “Hudson’s Building and Engineering Contracts.” Eleventh Edition. (London:
Sweet & Maxwell, 1995), p.623.
Supra note 4.
7
Various acts by the employer can result in a repudiatory breach and thus
entitle the contractor to terminate the contract.34 A party contemplating to terminate
a contract following a breach by the other party must necessarily consider the nature
and magnitude of the breach. 35 The remedy for non-payment if it constitutes
repudiation is to terminate the contract pursuant to express termination provisions in
the contract, or rescission at common law for a breach going to the root of the
contract, or suing for interim payments or requiring arbitration where that is
provided. If the contractor chooses not to rescind or terminate, his own obligations
continue and he is bound to go on with the work.36
In a nutshell, the contractor alleges that his cash flow is seriously disturbed
when the employer fails to make payment. As a consequence, he treats this as a
repudiatory breach by the employer and chooses to stop his work at the site because
he is not able to fund the project without the employer paying for his works.
However, it is later held that the employer’s breach is not sufficiently serious to
justify the contractor in stopping his work. This mistake means that the contractor is
now guilty of a repudiatory breach, and the employer is entitled to terminate the
contract. Therefore, the issue arises is, is non-payment by the employer sufficiently
enough to be considered as a repudiatory breach?
From the above discussion, whether the failure to pay amounts to repudiation
will depend on the circumstances of the case. Therefore, this study is to identify
circumstances where non-payment by an employer constitutes a repudiatory breach
of contract. Findings of this study will assist the contractor to understand his position
before he takes action when the employer fails to make payment. The contractors
need to know that whether they are entitled to terminate the contract when faced
with non-payment by the employer.
34
35
36
Supra note 2, p.197.
Supra note 25.
Supra note 5.
8
1.3
Objective of the Research
To identify circumstances where non-payment by an employer constitutes a
repudiatory breach of contract.
1.4
Scope of the Research
Given the legalistic nature of this study, the approach adopted in this research
is case law based. Only cases specifically centered on issue of non-payment will be
discussed in this study. Types of contract involved include construction contracts
(between employer and main contractor, and between main contractor and
subcontractor) and contracts of sales of goods and land.
1.5
Importance of the Research
The purpose of this study is to give an insight into the non-payment issue. It
is hoped that the findings of this study will assist the contractors to understand their
rights in the non-payment issue without making mistake in terminating the contract.
It will also help the players in the construction industry to understand their positions
in this issue.
9
1.6
Research Methodology
Careful thought and planning in the preparation of the research methods, data
collection techniques and measurements is very important for conducting research.
Initially, a literature review was undertaken to study and understand the problems of
non-payment in construction industry and review the contractual provisions in
relation to payment in building contract. It was carried out using published journals,
textbooks and standard form of building contracts.
In order to meet the goals and objectives, the primary data collection was
based on the Malaysia Law Journal (MLJ) court cases. It was carried out using the
university’s library online e-database37 via the Lexis-Nexis website38. The selection
of sample court cases involved a depth study rather than a random sample.
37
38
http://www.psz.utm.my
http://www.lexisnexis.com
CHAPTER II
PAYMENTS IN THE CONSTRUCTION INDUSTRY
2.1
Introduction
Money must be paid promptly and fully unless there are specific reasons for
withholding it.1 Payment in any industry has generally been an issue of concern. In
the construction industry payment is an issue of major concern. This is because2:
1.
Unlike many other industries, the durations of construction projects are
relatively long;
2.
The size of each construction project is relatively large and each progress
payment sum involved are often relatively large; and
3.
1
2
Payment terms are usually on credit rather than payment on delivery
John Murdoch and Will Hughes, “Construction Contracts: Law and Management.” Third Edition.
(London: Spon Press, 2000), p.197.
Noushad Ali Naseem Ameer Ali, “A “Construction Industry Payment and Adjudication Act”:
Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.”
(Malaysia: Master Builder, 2006), p.5.
11
2.2
The Right to Payment
An employer’s obligation to pay the contractor is determined by the payment
arrangement envisaged in the terms of the underlying contract. The situation of a
construction contract for a small project is comparable with that of a sale of goods
transaction. The contractor in such a contract, like the seller of goods, is normally
paid the contract price in a single sum on the completion of the works, under what is
known as a lump sum or an entire contract. In larger and more complex projects, the
more common payment arrangement, however, is one where work is certified and
paid progressively according to the value of work completed through a series of
“interim payment” or “progress payments”. Alternatively, the contract may prescribe
for work to be paid at predetermined stages in the progress of the works, an
arrangement termed in the industry as “stage payment”. Other arrangements which
have been encountered from time to time in the industry include an instalment
payment structure and, in the case of residential developments, developers with
limited financing means may agree with contractors to adopt payment arrangement
premised on the sale of the residential units.3
Whichever method is agreed upon as that in accordance with which payment
is to be made, nothing becomes due to the contractor until he has done anything to
entitle him to receive payment. 4 Where the contract does not make completion a
condition precedent to payment, there may be an implied stipulation on the part of
the employer to pay from time to time reasonable instalments of the whole cost to
the contractor during progress of the work.5
3
4
5
Chow Kok Fong. “Law and Practice of Construction Contracts”. Third Edition. (Singapore:
Sweet & Maxwell Asia, 2004), p.335.
Needler v. Guest (1647) Aleyn 9.
Terry v. Duntze (1795) 2 Hy. Bl. 389.
12
The contractor’s right to payment depends upon the wording of the contract.6
Within the limits of legality parties can make what arrangement they please, but
there are three broad heads under which the right can arise:-
2.2.1
Lump Sum Contract
A lump sum contract is a contract to complete a whole work for a lump sum,
e.g. to build a house for £60,000. If the house is completed in every detail required
by the contract the contractor is entitled to £60,000, and if extra work was carried out
he may be able to recover further payment. If he does not complete the house,
detailed clauses may provide what amount, if any, he is to receive. But parties
entering into a contract do not always contemplated its breach, and in the absence of
such clauses, and even to some extent when they are present, a difficult problem may
arise as to what payment, if any, the contractor can recover.7
If a contractor agrees to do a whole work according to a specification which
consists of 40 items for a lump sum of £5,000 and fails to carry out 20 of the items, it
is obvious that he is not entitled to recover the whole of the £5,000 and that the
employer may have an action against him for damages. But is the contractor entitled
to recover any of the £5,000? Can the employer say to him, “You agreed to complete
the whole and to be paid when the whole was completed?8 The work is incomplete,
therefore you are entitled to nothing?” and can the employer rely on the same
argument where only two out of the 40 items are omitted? These problems, which
have greatly exercised the courts, require discussion of entire contracts and
substantial performance.9
6
7
8
9
Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:
Sweet & Maxwell, 1991), p.69.
Ibid.
See Appleby v. Myers (1867) LR2CP 651.
Supra note 6.
13
2.2.1.1 Entire Contracts
An entire contract is one where entire performance by one party is a
condition precedent to the liability of the other party 10 and where therefore the
contractor’s right to payment depends on entire performance on his part. An entire
contract is an indivisible contract, one where the entire fulfillment of the promise by
either party is a condition precedent to the right to call for the fulfillment of any part
of the promise by the other. Whether a contract is an entire one is a matter of
construction.11
Clear words are needed to bring an entire contract into existence.12 The type
of contract which may be entire is that where the contractor undertakes some simple
clear obligation such as to put some broken article or part of a house in working
order and completely fails to do so. In such a case he may be entitled to nothing
although he has expended much work and labour, for the main purpose of the
contract is that the article or part of the house shall work and there is no scope in the
contract for terms collateral to the main purpose.13
It is perhaps academically debatable whether or not a lump sum contract is by
definition an entire contract. It is submitted that, subject to provisions for
instalments14:
1.
Most lump sum contracts are entire contracts in the sense that “the builder
can recover nothing on the contract if he stops work before the work is
10
11
12
13
14
Cutter v. Powell (1795) 6 TR 320; Munro v. Butt (1858) 8 EB 739; Appleby case, supra note 8;
Hoenig v. Isaac [1952] 2 All ER 176 (CA).
Hoenig case, supra note 10.
Appleby case, supra note 8; Hoenig case, supra note 10.
Duncan v. Blundell (1820) 3 Stark; Sinclair v. Bowles (1829) 9 B&C 92; Portman v. Middleton
(1858) 4 CB (NS); Hoenig case, supra note 10; Vigers v. Cook [1919] 2 KB 475 (CA).
Supra note 6, p.71.
14
completed in the ordinary sense – in other words abandons the contract”15;
but
2.
Most lump sum contracts are not entire contracts in the sense that they are
construed as excluding the principle of substantial performance.
The traditional position in these situations is to regard these contracts as
entire contracts so that a contractor has to necessarily complete the whole of the
works in scrupulous compliance with the prescribed requirements of the underlying
contract before he is entitled to any payment. This position has, through the years,
been gradually modified, so that in the mid 1950s, the English courts were prepared
to rule that a contractor may sue on the lump sum if the contractor has substantially
completed his works, although the building owner may bring a cross-claim for
defects and outstanding works or, alternatively, set these claims in diminution of the
price.16 In Hoenig v. Isaacs17, Lord Denning MR in delivering his judgment of the
English Court of Appeal in that case stated the position as follows:
“Where a contract provides for a specified sum to be paid on
completion of specified work, the courts lean against a construction of
the contract which would deprive the contractor of any payment at all
simply because there are some defects or omissions.”
Thus, in an early case, it has been held that where a contractor did work on a
house under a lump sum contract, he was entitled to receive payment for his work,
notwithstanding that he has departed from the terms of the contract.18 However, this
entitlement to be paid is extinguished where the works were incomplete because the
contractor abandoned the works.19 A contractor also forfeited his entitlement to be
15
16
17
18
19
Hoenig case, supra note 10.
Supra note 3.
[1952] 2 All E.R. 176 (CA).
H Dakin & Co. Ltd v. Lee [1916] 1 KB 566.
Sumpter v. Hedges (1898) 1 QB 673.
15
paid where there was a total failure of consideration, as where the works delivered
conferred no benefit whatsoever to the building owner 20 and where the work
undertaken was different from which he has contracted to deliver.21
2.2.1.2 Substantial Performance
In the ordinary lump sum contract the employer cannot refuse to pay the
contractor merely because there are a few defects and omissions, if there is
substantial completion he must pay the contract price subject to a deduction by way
of set-off or counterclaim for the defects.22
2.2.1.3 Non-Completion
This may occur by express or implied agreement, because the employer
prevents completion, because the contractor in breach of contract fails to complete or
because the contract is frustrated. If the contractor fails to complete in breach of
contract, his breach will normally amount to repudiation. Prevention by the employer
may amount to repudiation.
When entire completion is a condition precedent to payment, the contractor
cannot recover anything either under the contract or on a quantum meruit if he has
failed to complete in every detail. 23 For an ordinary lump sum contract, the
contractor cannot recover anything either under the contract or on a quantum meruit
unless he shows substantial completion.
20
21
22
23
Farnsworth v. Garrard (1807) 1 Camp 38.
Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190.
Hoenig case, supra note 10; Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA); Hutchinson
v. Harris (1978) 10 BLR 19.
Cutter case, supra note 10; Sinclair case, supra note 13; Ellis v. Hamlen (1810) 3 Taunt. 52;
Dakin v. Lee [1916] 1 KB 566; Stegmann v. O’Connor (1899) 81 LT 627 (CA); Vigers case,
supra note 13.
16
It has been said that the rule that a contractor who has not substantially
completed cannot recover payment does not work hardly upon him if only he is
prepared to remedy the defects before seeking to resort to litigation to recover the
lump sum. 24 It seems to follow that ordinarily there is an implied duty upon an
employer to give a willing contractor an opportunity to remedy defects, breach of
which duty amounts to prevention. Such duty does not, it is submitted, arise if the
defects are so grave as to show that the contractor is unable to perform the contract.
2.2.2
Contract other than for a Lump Sum Contract
The manner of payment can be arranged in a variety of ways and it is
impossible to attempt any exhaustive classification. A contract to do a whole work in
consideration of the payment of different sums for different parts of the work is
prima facie subject to the same rules about completion as an ordinary lump sum
contract. 25 A contract to do a whole work with a provision for payment of each
completed part of the whole may be a divisible contract in the sense that if the whole
is not completed through the default of the contractor, he may be entitled to payment
under the contract for those part he has completed subject to the employer’s right to
counterclaim for non-completion of the whole.26
24
25
26
Bolton v. Mahadeva [1972] 1 WLR 1009.
Appleby case, supra note 8.
Newfoundland Government v. Newfoundland Ry. (1888) 13 App. Cas. 199 (PC).
17
2.2.3
Quantum Meruit
The expression quantum meruit means “the amount he deserves” or “what
the job is worth” and in most instances denotes a claim for a reasonable sum. It is
used to refer to various circumstances where the courts award a money payment
whose amount at least is not determined by a contract. In some instances, the basis
for the payment also is less than contractual.27
“A quantum meruit claim (like the old actions for money has and
received and for money paid) straddles the boundaries of what we now
call contract and reinstitution; so the mere framing of a claim as a
quantum meruit claim, or a claim for a reasonable sum, does not assist
in classifying the claim as contractual or quasi-contractual.”28
A claim on a quantum meruit cannot arise is an existing contract between the
parties to pay an agreed sum.29 But there may be a quantum meruit claim where
there is:30
1.
An express agreement to pay a reasonable sum
2.
No price fixed
3.
A quasi-contract
4.
Work outside a contract
5.
Work under a void contract
27
28
29
30
Supra note 6, p.78.
British Steel Corporation v. Cleveland Bridge and Engineering [1984] 1 All ER 504; Holland
Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80.
Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA).
Supra note 27.
18
2.3
Arrangements for Interim Payment
Where a contract provides for a contractor to be paid by way of interim
payments, an arrangement is usually provided for the works to be valued and
certified at prescribed intervals throughout the contract. In what are normally termed
“measurement and value contracts”, this takes the form of designating a particular
person to ascertain the value of work, completed up to a particular point of time and
thereupon, to certify this value as the amount which is due to the contractor. The
contractor’s entitlement to be paid is then conditioned on the presentation of the
payment certificate issued by the designated certifier. 31
The certifier designated in the contract forms used in the public sector is
normally referred to as the “Superintending Officer”. This is usually a senior public
building professional – frequently the Director of a Department, the Chief Architect
or Chief Engineer who is responsible for the administration of the construction
works department in a public agency. 32
Several issues are frequently encountered in the operation of these
arrangements and these may be briefly mentioned:
a.
The conditions which have to be fulfilled before the certifier are obliged to
issue an interim payment certificate.
b.
The nature of the certification function – how does the certifier exercise this
function independently, given that he is usually an appointee of the employer
(owner)?
c.
31
32
The extent to which certificates operate as a condition precedent to payments.
Supra note 3, p.337.
Ibid.
19
d.
Circumstances under which a certificate may be challenged.
2.4
Mode of Payment
2.4.1
Payment in Cash
Where a contractor does not make special provision as to payment, the
contractor is entitled to be paid in cash; in some contracts, however, special
provisions are contained stipulating that payment may be made either in whole or in
part in bills of exchange, debentures, shares, land or Lloyd’s bonds.33
2.4.2
Payment in Bills
If a contractor takes bills which are dishonoured, he, the contractor, unless he
has accepted them in complete satisfaction of his debt, may either treat them as a
nullity and sue on the contract, or he may elect to sue upon the dishonoured bills.
The holders in due course of such bills do not acquire any charge over or lien on the
subject matter of the contract even when it is, as in the case of a ship, not being
construed on the land of the employer.34
33
34
William Gill, “Emden and Gill’s Building Contracts and Practice”. Seventh Edition. (London:
Butterworth, 1969), p.235.
Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405; Valpy v. Oakeley (1851) 16 QB941.
20
2.4.3
Payment in Debentures or Shares
If payment is to be by way debentures or shares either party can insist on the
prescribed mode of payment though the price of the debentures or shares may have
increased or decreased since the contract was made.35 If a builder agrees to take
shares in a company in consideration of being employed as a contractor to execute
works for the company, this is a conditional contract, and if he is not given the
contract he need not take the shares and is entitled to be struck off the list of
contributories.36
For example: a contractor was to be paid a large proportion of his contract
price in shares to be issued to him upon certificate of the chief engineer, except
works to the value of £10,000 to form a retention fund. In the course of the works
delay was caused by the refusal of the resident engineer to approve certain materials
and the consequent suspension of operations until the chief engineer in London had
been consulted. During the delay certain Argentine stocks in which retention moneys
were not responsible for the mistakes of the engineer under the contract, the loss in
respect of the securities could not be cast upon them.37
2.4.4
Payment in Land
If the payment is to be made in land the contractor will, it seems, be entitled
to claim specific performance of the contractor if he has performed every condition
precedent to his right of payment, or he may treat the contract as at an end and bring
an action for quantum meruit for the work done, or he may bring action for breach of
35
36
37
De Waal v. Adler (1886) 12 App. Cas. 141.
Re Aldborough Hotel Co., Simpson’s Case (1869) 4 Ch. App. 184.
Supra note 35.
21
contract, in which case it is suggested the damages recoverable will be limited to the
value of the land.38
For example: H agreed to pay K a weekly sum for board and lodging which
was to be satisfied by certain furniture at a fixed valuation. After the agreement the
furniture was seized under a judgment by a creditor of H. it was held that the effect
was the same as if H had himself taken away the furniture and sold it, and K was,
therefore, entitled to recover the value of the board and lodging by an ordinary action
of debt as if the special contract had never existed.39
2.5
Conclusion
The primary obligation upon the employer is to give the contractor the sum
of money which forms the consideration for the contract. An employer’s obligation
to pay the contractor is determined by the payment arrangement envisaged in the
terms of the underlying contract. Within the limits of legality parties can make what
arrangement they please, but there are three broad heads under which the right can
arise which are: entire contract, contractor other than for a lump sum contract and
quantum meruit. Next, arrangement for interim payment and mode of payment are
elaborated in a detail in the chapter.
38
39
Supra note 33, p.236.
Keys v. Harwood (1846) 2 CB 905.
CHAPTER III
REPUDIATORY BREACH IN CONSTRUCTION CONTRACT
3.1
Introduction
Contracts rest on the agreement of the parties: as it is their agreement which
binds them, so by their agreement they may be discharged.1 Contractual obligations
may come to an end in a number of ways. In the ordinary course of things this will
most commonly be brought about by the parties performing all their contractual
obligations or promises.2
A very varied terminology has been used both judicially and in commerce to
describe the process by which a party, unilaterally and by his own action, brings a
contract to an end before it has been fully performed either by himself or the other
party. Thus, forfeiture, determination, termination, renunciation, rescission (and even
repudiation when applied to the action of the innocent party in ending the contract),
have been variously used in the cases and elsewhere. In context the different
1
2
Guest, “Anson’s Law of Contract.” Twenty-Forth Edition. (Oxford: Clarendon Press, 1975),
p.464.
Neil Jones and David Bergman, “A Commentary on the JCT Intermediate Form of Building
Contracts.” (London: Collins, 1985), p.266.
23
descriptions should generally be regarded as synonymous, with no significant
differences of consequential effect.3
The common law right to terminate or “repudiate” a contract can arise in
either of two situations. First, one party can make clear that it has no intention of
performing its side of the bargain. Secondly, that party may be guilty of such a
serious breach of contract that it will be treated as having no intention of performing.
A breach of this kind is known as a “repudiatory breach”. In both cases, the innocent
party has a choice; either to “affirm” the contract and hold the other party to its
obligations (while claiming damages as appropriate for the breach), or to bring the
contract to an end. If repudiation is opted for, then both parties are released from any
further contractual obligation to perform.4
Not all breaches are equal, nor do the contracting parties necessarily have the
same rights and remedies for the different breaches. Although the breach can take
various forms, there is a dividing line between a material, or substantial, breach and
an immaterial breach, or minor, breach. A material breach will give rise to certain
remedies, whereas an immaterial breach may well have other remedies. The
distinction between the two is a matter of degree, often left to the judge’s discretion.5
Many contracts specifically provide and list various forms of breach which may be
deemed material; one cannot assume that a material breach in one contract will
automatically be a material breach in another contract. The distinction and awareness
that a difference exists is of utmost importance because if the contractor should
employ the remedies for the material breach, e.g., throwing a subcontractor off the
job, when in fact only an immaterial breach exists, the contractor might find out the
hard way that it reacted unreasonably and used unreasonable force and remedies, and
it might be declared the one in default.6
3
4
5
6
Duncan Wallace, “Hudson’s Building and Engineering Contracts”. Eleventh Edition. (London:
Sweet & Maxwell, 1995), p.1243.
John Murdoch and Will Hughes, “Construction Contracts Law and Management.” Third Edition.
(London: Spon Press, 1992), p.324.
Micheal S. Simon, “Construction Contracts and Claims.” (London: McGraw-Hill Book
Company, 1979), p.95.
Ibid.
24
3.2
Common Law Termination
It is probably trite to state that the rights of a party to terminate a contract and
the consequences of the termination itself are governed both by common law
principles and the provisions of the subject contract. Nevertheless, it should be
appreciated that the absence of any express provision on termination will, in most
cases, simply preserve the parties’ position under common law and this perspective
should not be lost in the enthusiasm of negotiations leading to the conclusion of a
contract.7
This will be by operation of law, and will occur where the guilty party has
committed a fundamental breach and the innocent party has then by word or action
elected to accept the repudiation and terminate the contract. This total process, often
described in this book and elsewhere to distinguish it from contractual
determinations as “rescission”, does not depend on any express contractual provision,
except insofar as the contract may have chosen by its terms to indicate such
importance or gravity to a particular contractual obligation that any breach of which
will justify a common law determination.8
The effect of such a common law determinations is to release both parties
from further performance and to entitle the innocent party most importantly to
damages for breach of the contract, including those resulting from the loss or
abandonment of the contract itself, though with certain alternatives or supplementary
remedies also available. Provided that the determining party acts reasonably within
the rules of mitigation of damage, however, there will be no particular course of
action required of him, so that a construction owner rescinding the contract at
common law, for example, will no, provided he acts reasonably, necessarily be
7
8
Chow Kok Fong, “Law and Practice of Construction Contracts.” Third Edition. (Singapore:
Sweet & Maxwell Asia, 2004), p.555.
Supra note 3, pp.1243-1244.
25
obliged to complete the project, but may abandon it and compute his resulting
damages accordingly.9
While a common law determination will provide a high degree of freedom
and flexibility of remedy to the determining party, therefore, he must assume the
burden of establishing that the breach of contract was, either intrinsically or on the
particular facts, sufficiently fundamental to justify the determination in law. 10
Most contract provisions on termination either add or to subtract from the
grounds of termination which are normally afforded under common law. They also
typically focus on providing some scheme of procedural regulation as where these
provisions stipulate that a party should be afforded sufficient notice whenever
termination is being seriously contemplated. The termination regime will also
provide, in most cases, a basis for loss and expense arising from the termination to
be allocated between the parties.11
3.2.1
Discharged by Performance
This is the ideal way of bringing a contract to an end when both parties have
carried out their obligations under the contract and nothing further remains to be
done, At that point, the purpose for which they entered into the contract has been
accomplished and the contractual relationship ceases.12
9
10
11
12
Ibid.
Ibid.
Supra Note 7.
David Chappell and Vincent Powell-Smith, “The JCT Design and Build Contract.” Second
Edition. (London: Blackwell, 1999), p.267.
26
Parties to a contract are bound by an obligation and they must “either
perform, or offer to perform, their respective promises, unless the performance is
dispensed with or excused” under the law. When the parties have carried out exactly
what they have undertaken to do, there is a complete discharge but if only one party
performs his part of the bargain, he alone will be discharged. As a general rule,
performance must be strictly in accordance with the terms of the contract unless the
parties have agreed otherwise.13
3.2.2
Discharged by Agreement
If the parties to a contract so wish, they may agree to bring the contract to an
end, what they are actually doing is entering into another contract whose sole
purpose is to end the first contract. In most cases, when a contract is ended by
mutual agreement it is because the parties gain something from so doing, thus
satisfying the requirement for consideration as an essential element of the contract.
However, it is prudent for the parties to execute the second contract as a deed, thus
avoiding any question of consideration arising.14
A contract that is created by consent can be extinguished by consent,
expressed or implied. The consent of all parties to the contract is necessary.
Expressed consent may be given at the time of the contract or subsequently. For
instance, the parties may agree at the time of making the contract that on the
occurrence of an event, one or more parties will be discharged. Consent given
subsequent to the contract may be a waiver, release, novation, remission or
rescission. Novation is the substitution of a new contract for an earlier one,
particularly a contract between a creditor, a debtor and a third party whereby they
13
14
Beatrix Vohrah and Wu Min Aun, “The Commercial Law of Malaysia.” (Kuala Lumpur:
Longman, 2004), p.151.
Supra note 12.
27
agree to substitute a third party for the debtor or creditor under the original contract
which will be discharged.15
3.2.3
Discharged by Frustration
Most legal systems make provision for the discharge of a contract where,
subsequent to its formation, a change of circumstances renders the contract legally or
physically impossible of performance. In English law, such a situation is provided
for by the doctrine of Frustration. Originally, this term was confined to the discharge
of maritime contracts by the “frustration of the adventure”, but it has now been
extended to cover all cases where an agreement has been terminated by supervening
events beyond the control of either party. This development is no mere linguistic
accident, for it is not strictly necessary that performance should have become
literally impossible, provided that it cannot be properly demanded in the
fundamentally different situation which has unexpectedly occurred.16
A useful definition of frustration was given by Lord Radcliffe in Davis
Contractors Ltd. v. Fareham Urban Council (1956)17:
“It occurs wherever the law recognizes that without default of either
party a contractual obligation has become incapable of being
performed because the circumstances in which performance is called
for would render it a thing radically different from that which was
undertaken by the contract.”
15
16
17
Supra note 13, p.163.
Supra note 1.
[1956] AC 696.
28
A straightforward example of a contract being frustrated is if a painting
contractor entered into a contract to repaint the external woodwork of a house and
before he could commence work, the house was destroyed by fire which was neither
the responsibility of the building owner nor the painter. There are other cases where
it will be a question of degree whether the contract is frustrated. The fact that a
contractor experiences greater difficulty in carrying out the contract or that it costs
him far more than he could reasonably have expected is not sufficient ground for
frustration. Neither will a contract be frustrated by the occurrence of some event
which the contract itself contemplated and for which it made provision.18 In practice,
it is very rare for a contract to be frustrated.19
3.2.4
Discharged by Repudiation
If one of two parties to a contract breaks the obligation which the contract
imposes, a new obligation will in every case arise – a right of action conferred upon
the party injured by the breach. Besides this, there are circumstances under which the
breach not only gives rise to a right of action but will also discharge the injured party
from such performance as may still be due from him. However, not every breach of
contract operates as a discharge. In order to have this effect the breach must be such
as to constitute a repudiation by the party in default of his obligations under the
contract.20
Further explanation regarding repudiatory breach will be discussed under the
topic of “repudiatory breach”.
18
19
20
Wates Ltd. v. Greater London Council (1983).
Supra note 12, p.268.
Supra note 13, p.173.
29
3.3
Contractual Termination
The second way in which a party may lawfully determine the contract will be
exercising powers to that effect expressly provided for in a contractual termination
clause. Such a termination will be different from a common law determination in
two vital respects. In the first place, it will not be necessary to establish that the
breach or event on which the clause is expressly conditioned is of the fundamental
repudiatory character required for a common law determination. It will be sufficient
that it has been contractually defined or nominated as a ground for contractual
determination.21
On the other hand, however, a contractual termination will provide no
remedies to the rescinding party beyond those expressly conferred by the termination
clause itself. As will be seen, the draftsmanship of termination clauses in
construction contracts has been traditionally inept, not frequently stipulating
financial consequences or seizures of property which could not be justified on a
common law determination or by the ordinary rules governing the measure of
damage, so that they may be unenforceable as penalties, while on the other hand
unduly circumscribing a determining owner’s damages or remedies on the
assumption that he will always wish or be in a position to complete the project.22
Moreover, exact and meticulous compliance by the determining party with
any formal or procedural requirements laid down in the termination clause, for
example, as to notice or time limits, will usually be required if a contractual
termination is to be successful, whereas the formal requirements for a successful
common law determination are much more broadly based and require little more
than a clear and unequivocal indication of his intentions by the determining party.23
21
22
23
Supra note 3.
Ibid.
Ibid.
30
A party who purports to operate a contractual determination clause when he
is not entitled to do so either factually or legally is likely to repudiate the contract.24
This is because a party who acts upon a contractual determination clause usually
refuses or ceases to perform his own obligations. If this is not in accordance with the
contract, he will usually himself be in fundamental breach.25
Contractual determination clauses do not exclude common law remedies
available upon repudiation unless the agreement expressly provides that the
contractual rights are to be the exclusive remedy for the breaches in question.26 It is
theoretically possible that such exclusion might also arise by implication, but it is
thought that in practice this is unlikely.27
3.4
Repudiatory Breach
The word “repudiation” is ambiguous and has several meanings, but it is the
most convenient term to describe circumstances where “one party so acts or so
expresses himself as to show that he does not mean to accept the obligations of a
contract any further.” Such a repudiation if accepted by the innocent party releases
the innocent party from further performance.28
24
25
26
27
28
Architectural Installation Services v. James Gibbons (1989) 16 ConLR 68.
Furst, S. and Ramsey, V., “Keating on Building Contracts”. 7th ed. London: Sweet & Maxwell,
2001, pp.153.
Modern Engineering (Bristol) v. Gilbert-Ash [1974] AC689; Architectural Installation Services
case, supra note 24; Sutcliffe v. Chippendale & Edmondson (1971) 18 BLR 149.
Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:
Sweet & Maxwell, 1991), p.153.
Heyman v. Darwins [1942] AC 356.
31
The following will dwell in various serious breaches of contract which are
repudiatory and entitle the innocent party to regard himself as discharged from any
further performance of his contractual obligations.
3.4.1
Repudiation
Repudiation is a drastic conclusion which should only be held to arise in
clear cases of a refusal, in a matter going to the root of the contract, to perform
contractual obligations. 29 It may consist of a renunciation, an absolute refusal to
perform the contract 30 , or it may arise as the result of a breach, or breaches of
contract such that ‘the acts and conduct of the party evince an intention no longer to
be bound by the contract.’31 Repudiation before performance is due is termed an
anticipatory breach.32
A party repudiates a contract when he intimates by words or conduct that he
does not intend to honour his obligations as and when they fall due.33 In other words,
he has decided to unilaterally “put an end to the contract”. In Hochster v. De La
Tour34 , Lord Campbell cited the case of a man who contracts to sell and deliver
certain goods on a specified date, but before that day, he sells and delivers them to
another, the repudiation here is implicit, but remains clearly operative and the
defaulting seller is liable. Again, in King v. Allen & Sons Billposting Ltd.35 , the
owner of a billposting site who, having granted a license to post bills on the site,
29
30
31
32
33
34
35
Woodar v. Wimpey [1980] 1 WLR 277; Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.
[1940] 3 All ER 60.
Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361; Mersey Steel & Iron
Co. Ltd v. Naylor (1884) 9 App. Cas. 434.
General Billposting Co. Ltd v. Atkinson [1909] AC118.
The Mihalis Angelos [1971] 1 QB 164 (CA); Federal Commerce v. Molena Alpha [1979] AC
757; Afovos Shipping v. Pagnan [1983] 1 WLR195; Chilean Nitrate Sales v. Marine
Transportation [1982] 1 Lloyd’s Rep. 570.
Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1.
(1853) 2 E&B 678.
[1916] 2 AC 54.
32
subsequently alienated the site without making any arrangement regarding the
licensing contract. He was held to have repudiated on the licensing contract.
A mirror of this in a building contract situation may be the case where an
employer who, having employed a contractor to construct a building, subsequently
sold the land on which the building was to be sited to a third party without arranging
to assign the building contract. It is open, of course, to the building contractor to
accept the assignment, but in the absence of any such arrangement, it is clear that the
employer has placed himself in a position where he can no longer perform his
obligations under the original contract.36
3.4.1.1 Intention to Repudiate
The sentiments expressed by the authorities are best summed up by Lord
Wrenbury’s observation that a breach which amounts to a repudiation is a “serious
matter not to be lightly found or inferred”. 37 The plaintiff must show that the
defendant has made his intention to repudiate abundantly clear. Thus, repudiation
has been described as “a drastic conclusion which should only be held to arise in
clear cases of a refusal, in matter going to the root of the contract, to perform
contractual obligations.” 38 Lord Selborne in Mersey Steel and Iron Co v. Naylor
Benzon & Co.39 described the approach to be taken by the courts as follows:
“You must look at the actual circumstances of the case in order to see
whether the one party to the contract is relieved from its future
performance by the conduct of the other; you must examine what that
36
37
38
39
Supra note 7, p.557.
Bradley v. Newson [1919] AC 16.
Woodar case, supra note 29; Smyth v. Bailey [1940] 2 All ER 60.
(1884) 9 App. Cas. 434.
33
conduct is so as to see whether it amounts to a renunciation, to an
absolute refusal to perform the contract … and whether the other
party may accept it as a reason for not performing his part.”
3.4.1.2 Misapprehension of Contract Obligations
There is some support for the proposition that a party who refuses to proceed
with the contract because of a bona fide misapprehension of his obligations under a
contract will not held to have repudiated the contract. This is provided that he is able
to demonstrate his readiness to perform the contract according to its terms, and
would have so performed if not for the misconstruction of the contract. Lord Wright
in Ross Smyth & Co v. Bailey, Son & Co 40 stated the position as follows:
“A mere honest misapprehension, especially if open to correction, will
not justify a charge of repudiation.”
The case frequently cited on this subject is the House of Lords decision in
Woodar Investment Development Ltd v. Wimpey Construction United Kingdom
Ltd..41. A contract was executed under which Woodar agreed to sell certain land to
Wimpey. The parties had agreed that the transaction was to be completed within two
months from the date when outline planning permission was granted and at any rate
not later then 21 February 1980. Subsequently, because of adverse changes in the
property market, Wimpey sought to exercise a provision in the contract to extricate
them from the transaction, although the factual circumstances which entitled them to
exercise this right did not exist, Wimpey was able to show that they honestly
believed that they were entitled so to act. The House of Lords held that Wimpey’s
conduct did not, therefore, amount to a repudiatory breach.42
40
41
42
(1940) 3 All E.R. 60.
[1980] 1 W.L.R. 277; [1980] 1 All E.R. 571.
Supra note 7, p.563.
34
With respect, it is not easy to reconcile this decision with that reached by the
House in another case decided a year earlier. In Federal Commerce and Navigation
Co. Ltd. v. Molena Alpha Inc., 43 following a series of disputes between the
characters of certain ships and the ships’ owners, the chatterers proceeded to deduct
claims against their hire payments. In turn, the owners, after seeking legal advice,
stopped the issue of freight pre-paid bills of lading and arranged for the bills of
lading to be endorsed with the charter party terms. These actions had the effect of
making it impossible for the chatterers to operate the ships. It was accepted that
despite their coercive acts towards the chatterers, the ship owners honestly believed
that they were entitled to act in this manner. The House of Lords ruled that the
owners had wrongfully repudiated the contract despite the fact that the owners were
genuine in their misapprehension of their rights. Professor Michael Furmston, in
attempt to reconcile the two decisions, wrote:
“In the Woodar case, there was no call for the plaintiffs to take
immediate action and they could, for instance, have taken out a
construction summons to test the correctness of their view of the
contract’s meaning. Again, the time for completion was some way off.
It would seem that Wimpeys had actually refused to complete on this
ground that would have been a repudiatory breach. In the Federal
Commerce case, although the breach was probably anticipatory, the
gap between repudiation and performance was fairly short and the
pressure on the chatterers correspondingly great.”
Nevertheless, this distinction is a very fine one. With respect, it is quite
speculative that their lordships in both cases could have addressed themselves in
these terms. The better view must be that the position is still largely unsettled.44
43
44
(1979) A.C. 757.
Supra note 7, p.564.
35
3.4.2
Fundamental Breach
Fundamental breach occurs when the defaulting party has committed a
fundamental breach, that is, a breach which undermines the very foundation on
which the contract was transacted.45
3.4.2.1 General Principles
An aggrieved party is entitled to treat the contract as coming to an end is
where the defaulting party, either explicitly or implicitly, commits a fundamental
breach of contract.46 The characteristic situation envisaged is that as exemplified by
Karsales (Harrow) Ltd. v. Wallis47. In that case, the seller of a car had sought to
deliver an empty car body, relying on an exemption clause purporting to exclude any
warranty of road worthiness or fitness of purpose. The English Court of Appeal
found for the buyer because it held that what was actually delivered was not the
object contracted for. The exemption clause could not operate as there was a
fundamental breach of the contract.48
Undoubtedly, the fact in the Karsales case represents an extreme situation. As
a general principle, in deciding whether a fundamental breach has been committed,
the authorities appear to have regard to both the importance that the parties are
presumed to have attached to the particular term of the contract which has been
breached and the gravity of the consequences arising from that breach. Furthermore,
both the importance of the term breached and the gravity of the consequences must
be quite apparent to the party who is held to account for the performance of the
45
46
47
48
Supra note 7, p.557.
Supra note 44.
[1956] 2 All E.R. 866.
Supra note 44.
36
contract. A common expression used in the judgments to describe this approach is
whether the breach “goes to the root of the contract”.49 The test was perhaps most
clearly enunciated by Jordan CJ in the leading Australian case of Tramways
Advertising Pty Ltd. v. Luna Park (NSW) Ltd.50:
“The test… is whether it appears from the general nature of the
contract considered as a whole, or from some particular term or terms,
that the promise is of such importance to the promise that he would
not have entered into the contract unless he had been assured of a
strict or substantial performance of the promise, as the case may be,
and that this ought to have been apparent to the promisor.”
The concept of fundamental breach is perhaps most frequently encountered
in contracts for the carriage of goods and particularly, to deviations of shipping
voyages. In Joseph Thorley Ltd v. Orchis Steamship Co51, a cargo was contracted for
shipment on a vessel “bound for London”. However, instead of proceeding straight
for London, the ship called at ports in Asia Minor, Palestine and Malta. On reaching
London, the cargo was damaged through the negligence of stevedores. It was held
that although the deviation was not the direct cause of the damage, it was
nonetheless so serious a breach as to change the character of the contemplated
voyage. Accordingly, the ship owners had in the circumstances committed a
fundamental breach of contract. Similarly, in Lilley v. Doubleday 52 , where the
defendant had agreed under a contract to store the plaintiff’s goods in a repository,
but in fact stored them in warehouse, where they were subsequently destroyed by
fire, the court has no difficulty in holding that the defendant had “stepped out of his
contract” and thereby committed a fundamental breach.53
49
50
51
52
53
This metaphor was first used by Lord Ellenborough in Davidson v. Gioyne (1810) 12 East 381. A
recent judgment which resorted to his metaphor is that of Sachs LJ in Décor-Wall International
SA v. Practitioners in Marketing Ltd [1971] 2 All ER 216.
(1938) 38 SR (NSW) 632.
[1907] 1 KB 660.
[1907] 1 KB 669.
Supra note 7, p.565.
37
Other tests have been to ask whether the breach is total54 or fundamental55 or
whether the effect of the breach is such that it would be unfair to leave the injured
party to a remedy in damages.56 In commercial contracts, in particular those relating
to shipping, a prime test seems to be whether the commercial purpose of the
enterprise is frustrated.57 It is submitted that, in relation to building contracts, to ask
whether the breach goes to the root of the contract is often more helpful. The
deliberate character of a breach makes it easier for, but does not compel the court to
find that it was fundamental.58
3.4.2.2 Rule of Construction
It is now settled in both England and Singapore that the concept of a
fundamental breach is not a rule of law, but a rule of construction.59 The rule is
raised primarily to justify rescission as well as to defeat an exemption clause. In
Suisse Atlantique Societe d’Armement Maritime SA v. NV Rotterdamsche Kolen
Centrale60, the plaintiff ship owners chartered to the defendants a ship for two years
to transport coal between Europe and the United States. The defendant agreed to
load and unload cargoes at specified rates and to pay demurrage for any delay in so
doing. As it turned out, delays in loading and unloading in fact occurred. Instead of
restricting their claims to the demurrage, the plaintiff argued that the defendants’
delays were such as to amount to a repudiation of the contract and that the
demurrage clause was thus inoperative. The House of Lords rejected the plaintiffs’
arguments and held that on the facts there was no fundamental breach which would
have rendered the demurrage clause inoperative. In the course of their judgment,
54
55
56
57
58
59
60
Heyman case, supra note 28.
Suisse Atlantique case, supra note 30.
Decro-Wall International S.A. case, supra note 49.
Hong Kong Fir Shipping v. Kawasaki Kison Kaisha [1962] 2 QB 26 (CA).
Suisse Atlantique case, supra note 30.
The position in Malaysia is not clear at present. There are some Malaysian authorities suggesting
that fundamental breach should operate as a rule of law. These include the comparatively recent
decisions of the Malaysian High Court in Low Kon Fatt v. Port Klang Golf Resort (M) Sdn Bhd
[1998] 6 MLJ 448 and Lim Sew Lan v. Pembangunan Hysham Sdn Bhd [1995] 5 MLJ 670.
[1967] 1 A.C. 361; [1967] 2 All E.R. 61.
38
their Lordships approved the following statement of law by Pearson LJ in UGS
Finance v. National Mortgage Bank of Greece61:
“… I think there is a rule of construction that normally an exception
or exclusive provision or similar provision in a contract should be
construed as not applying to a situation created by a fundamental
breach of contract. This is not an independent rule of law imposed by
the courts on the parties willy-nilly in disregard of their contractual
intention. On the contrary, it is a rule of construction based on the
presumed intention of the parties.”
This proposition was reaffirmed by the House more recently in Photo
Production Ltd v. Securicor Transport Ltd 62 . In his judgment in that case, Lord
Wilberforce noted:63
“I have no second thoughts as to the main proposition that the
question whether, and to what extent, exclusion clause is to be applied
to a fundamental breach, or a breach of a fundamental term, or indeed
to any breach of contract, is a matter of construction of the contract.”
This approach was adopted by Dickson CJC of the Canadian Supreme Court
in Hunter Engineering Inc v. Syncrude Canada Ltd64. It must also be taken to be the
present position in Singapore. This is notwithstanding the Privy Council decision in
Sze Hai Tong Bank v. Rambler Cycle Co65, which adopted the rule of law approach.
In more recent years, the courts here have cited and applied the principles in Photo
Production. These cases include the Court of Appeal decision in Parker Distributors
61
62
63
64
65
[1964] 1 Lloyd’s Rep. 446.
[1980] AC 827.
Supra note 7, p.566.
(1989) 57 DLR (4d) 321.
[1959] AC 576; [1959] 3 All ER 182 (PC).
39
(Singapore) Pte Ltd v. Svenborg66 and the High Court decision in AA Valibhoy &
Sons Pte Ltd v. Banque Nationale de Paris67.
3.4.2.3 Onus of Proof
A difficulty which may surface on this subject concerns the party who should
shoulder the onus of proof.68 It would have been thought that the onus should fall on
the party alleging fundamental breach. In Hunt and Winterbotham Ltd v. BRS
(Parcels) Ltd69, the defendants contracted to deliver fifteen parcels of woolen goods
to Machester, but only managed to deliver twelve. The court held that the onus was
on the plaintiffs to prove that the defendants had committed a fundamental breach of
contract and that until this was accomplished, the defendants were entitled to rely on
an exemption clause limiting liability for loss. However, a different result was
reached in Levison v. Patent Steam Carpet Cleaning Co. Ltd.70. In that case, the
defendants were entrusted with the cleaning of a carpet. The carpet disappeared in
circumstances which could not be explained by the defendants. The Court of Appeal
ruled that the onus lies on the defendants to prove that the loss of the carpet arose
from some cause which did not constitute a fundamental breach.
3.4.3
Breach of Fundamental Terms
Where there has been a breach of a fundamental term, that is, a term which
the parties have agreed expressly or by implication to be so important that its breach
66
67
68
69
70
[1983] 2 MLJ 26 (CA).
[1994] 2 SLR 772.
Supra note 7, p.567.
[1962] 1 QB 617.
[1978] QB 69; [1977] 3 All ER 498.
40
should entitle the innocent party to treat himself as discharged from further
performance.71
Where the parties indicate expressly by the contractual language that a single
breach of a particular contractual obligation is to have the same consequences as a
fundamental breach entitling the innocent party to rescind the contract, even though
it would not otherwise be treated as a fundamental breach justifying immediate
termination. This is frequently brought about by “legal jargon” involving the use of
express words such as “condition” or “condition precedent” or “of the essence” in
regard to a particular contract obligation. However, the mere use of these
expressions, and particularly the simple word “condition”, will not by itself be
conclusive. The contract as a whole will be examined to see that it is consistent with
this intention.72
Contractual terms can be classified as “conditions”, “warranties” and
“intermediate or innominate” terms. 73 A condition in this context is a contractual
term breach of which entitles the other party to operate the election referred to above
irrespective of the nature or seriousness of the breach.74 Whether a contractual term
is a condition is a question of construction. A term may be a condition:
71
72
73
74
Supra note 7, p.557.
Supra note 3, p.617.
Hong Kong Fir Shipping case, supra note 57; Bunge Corporation v. Tradax [1981] 1 WLR 711;
Compagnie General Maritime v. Diakan Spirit [1982] 2 Lloyd’s Rep 574.
Suisse Atlantique case, supra note 30.
41
3.4.3.1 By Statutory Implication
3.4.3.2 Because the Parties have explicitly made it so
It is open to the parties to agree that, as regards any particular obligation, any
breach shall entitle the party not in default to treat the contract as repudiated,75 i.e. to
make the term a condition, even if it would not be so in the absence of such a
provision.76 The parties may use language which explicitly says that a contractual
term is to be so regarded. The actual use of the word “condition” is not required.
“Any term or terms of the contract, which, fairly read, have the effect indicated are
sufficient.” 77 A common instance is where it is stipulated that “time is of the
essence.”78
3.4.3.3 Because the Court so Construes it
Although the parties may not have explicitly agreed that a contractual term is
a condition, the court may find that it is.79 If the parties have not expressly ascribed a
degree of importance to the consequences of breach, the court asks what
consequences ought to be attached to it having regard to the contract as a whole.80
This must inevitably involve a value judgment about the commercial significance of
the term in question. 81 The court does not here consider the breach actually
committed since parties to commercial transactions should be entitled to know their
rights at once and should not, when possible, be required to wait upon event before
those rights can be determined.82 The court will not be over ready, unless required by
75
76
77
78
79
80
81
82
Bunge Corporation case, supra note 73; Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC
694.
Lombard v. Butterworth [1987] QB527.
Bunge Corporation case, supra note 73.
Scandinavian Trading case, supra note 75.
Supra note 27, p.148.
Bunge Corporation case, supra note 73.
State Trading Corporation of India v. Golodetz [1989] 2 Lloyds’s Rep. 277 (CA).
Bunge Corporation case, supra note 73.
42
statute or previous authority, to construe a term in a contract as a condition,83 and
will be unlikely to do so where the effect of some breaches of the term is trivial. 84
“Warranties” are terms whose breach sounds in damages but does not
terminate or entitle the other party to terminate the contract. The use of the word
“warranty” to describe a term is not conclusive that that term is not a condition. In
insurance law, breach of warranty is treated as breach of condition and it may well
be that in a building contract the parties intend an express “warranty” of performance
or as to the result or use of the works to have the effect of a condition. 85
Whereas, intermediate terms are terms capable of operating as conditions or
warranties according to the gravity of the breach86 and it is thought that, in building
contracts, most terms which are not conditions are intermediate. There is thus
fundamental breach when the gravity of the breach of an intermediate term has the
effect of depriving the other party of substantially the whole benefit which it was the
intention of the parties that he should obtain from the contract. To amount to
repudiation a breach must go on to the root of the contract.87
3.4.4
Non-Fundamental Breaches after Notice
Breaches of terms not in themselves fundamental may evince an intention not
to be bound if persisted in for long periods, or after receipt of notice, or it willful or
deliberate in character. Where there is a breach of term which, while not by itself
sufficient serious, maybe so protracted or repeated, despite protest or notice by the
83
84
85
86
87
Cehave N.V. v. Bremer m.b.H. [1976] 1 QB 44.
Cehave N.V. case, supra note 83; Hong Kong Fir Shipping case, supra note 57; Schuler (L.) A.G.
v. Wickman Machine Tool Sales [1974] AC 235 (HL).
Supra note 79.
Hong Kong Fir Shipping case, supra note 57; Bunge Corporation case, supra note 73.
Federal Commerce case, supra note 43; Cehave N.V. case, supra note 83.
43
innocent party, that it either evinces a subjective intention not to be bound by the
contract, as in the case of deliberate and continued breaches (however minor), or
simply an objective involuntary inability to perform the contract properly.88 Notice
calling on the party to perform, while not always strictly necessary if the facts speak
for themselves, is highly desirable from the evidentiary point of view to establish
both the seriousness of the continued breach and the unwillingness or inability of the
guilty party to perform, as well as to dispel any defence based on alleged waiver of
the breach.89
3.4.5
Erroneous Expression of View
There can be repudiation where a party intends to fulfill a contract, but “is
determined to do so only in a manner substantially inconsistent with his obligations
and not in any other way.”90 But it is not repudiation merely to put forward in good
faith an interpretation of the contract which is wrong,91 the more especially if it is
put forward in such a was as show that it is open to correction.92 A party who bona
fide relies upon an express stipulation in a contract in order to rescind or terminate
the contract is not, by that fact alone, treated as having repudiated his contractual
obligations if he turns out to be mistaken as to his rights.93 It is necessary to pay
proper regard to the impact of the party’s conduct operates contractual determination
machinery upon a mistaken, albeit bona fide, view of the facts or his legal rights, that
will normally be repudiation. The impact of such conduct on the other party suggests
no other conclusion.94
88
89
90
91
92
93
94
Carr v. A. J. Berriman (1953) 27 ALJR 273.
Supra note 3, p.613.
Ross T. Smith & Co. Ltd case, supra note 40.
Mersey Steel & Iron Co. Ltd case, supra note 39; James Shaffer Ltd. v. Findlay, Durham &
Brodie [1953] 1 WLR106 (CA); Peter Dumenil v. James Ruddin [1953] 1 WLR 815 (CA); Sweet
& Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 QB699 (CA); Toepfer v. Cremer [1975]
2 Lloyd’s Rep.118 (CA).
Ross T. Smith & Co. Ltd case, supra note 40; Sweet & Maxwell Ltd. case, supra note 91.
Woodar case, supra note 41.
Canterbury Pipe Lines v. Christchurch Drainage (1979) 16 BLR 76.
44
3.4.6
Arbitration Agreements
In certain limited circumstances, one party to an arbitration agreement may
treat the other party as guilty of repudiatory breach of that agreement.95
3.5
Recourse for Repudiation and Fundamental Breach
Where one party has repudiated a contract or committed a fundamental
breach, on the principles laid down by Lord Upjohn in the Suisse Atlantique v. N. V.
Rotterham Kolen Centrale96 , the innocent party is presented with two course of
action. He can elect either to affirm the contract by treating it as remaining in force
or he may treat the contract as having been finally and conclusively discharged.97
One party to a contract may, by reason of the other party’s breach, be entitled
to treat himself as discharged from any obligations to further perform his contractual
premises under the contract, and may instead be entitled to accept that other party’s
breach as being a repudiation by him of his contractual obligations. The innocent
party will additionally have a right to claim damages consequent on the breach.98
The innocent party may, if he wishes, treat the contract as continuing if this is
still a possibility, despite the existence of repudiatory conduct. This will not prevent
95
96
97
98
Bremer Vulkan v. South India Shipping Corporation [1981] AC 909; Turriff v. Richards &
Wallington (1981) 18 BLR 19.
[1967] 1 AC 361; [1967] 2 All ER 61.
Supra note 7, p.569.
Supra note 2, p.269.
45
him from claiming damages while at the same time continuing with his contractual
obligations.99
It is essential that the innocent party establishes clearly the legal basis for this
course of action. More importantly, it should be appreciated that the aggrieved party
is always entitled to seek recourse for a particular breach through an action in
damages. The act of terminating a contract should, thus, be a remedy of last resort,
where any probable quantum of compensation in the form of an award for damages
is estimated to be insufficient to justify the continuance of the subject contract.100
3.5.1
Innocent Party Elects to Terminate the Contract
Operation of the election to put an end to all remaining primary obligations
of both parties is variously referred to as the “determination” or “rescission” of the
contract or as “treating the contract as repudiated” or “accepting the repudiation” of
the contract breaker.101
Once a repudiation has been accepted by the innocent party, both parties are
excused from further performance of their primary obligations under the contract.
Instead, secondary obligations are imposed on the guilty party, namely to pay
monetary compensation for non-performance. 102 In choosing this course, he can
institute proceedings immediately for damages, notwithstanding that the time for the
performance of his obligations has still not arisen. 103
99
100
101
102
103
Supra note 2, p.270.
Supra note 7.
Supra note 27, p.147.
Photo Production case, supra note 62.
Hochster case, supra note 34.
46
A contract is only terminated as regards future rights and obligations; the
rights and obligations which have accrued prior to the repudiation remain alive.
Furthermore, parties may provide in a contract for certain obligations to survive
termination of the main incidents of a contract. Thus, in Hyundai Industries Co. Ltd.
v. Papadopoulos104, it was held that acceptance of repudiation by the employer did
not affect a contractor’s accrued rights to the payment of instalments of the contract.
One notion is that termination effectively substitutes the original primary obligations
of the defaulting party for the loss suffered. This proposition was advances by Lord
Diplock in Photo Production Ltd. v. Securior Transport Ltd.105:
“There is substituted by implication of law for the primary obligations
of the party in default which remain unperformed a secondary
obligation to pay money compensation to the other party for the loss
sustained by him in consequence of their non-performance…”
The innocent party must make it plain that “in view of the wrongful act of the
party who has repudiated he claims to treat the contract as at an end.” By doing this
he is usually said to rescind the contract.106 There will be no successful rescission,
whatever the nature or extent of the guilty party’s breach, unless there has been a
clear and unequivocal acceptance of the breach by word or action on the part of the
innocent party. 107 Once made it cannot be withdrawn.108
If the breach is of a “one-off” character, however serious, failure to elect to
accept a known breach within a reasonable time will lose the right to rescind, though
it will not affect the right to damages. If the breach is a continuing one and
104
105
106
107
108
[1980] 1 WLR 1129 (HL).
[1980] AC 827.
Hyundai Industries case, supra note 104.
Supra note 3, p.617.
Supra note 2, p.270.
47
sufficiently fundamental, however, the innocent party will be able to rescind later (as,
for example, in a case of a sustained failure to proceed with due diligence).109
If one party mistakenly treats an event as amounting to a repudiation by the
other party and purports to accept it as such, this will in itself create a repudiation
which the wrongly accused party will very often be forced to accept. Indeed, in
practice it is not unusual for both sides to argue that they have accepted a repudiation
by the other.110
3.5.2
Innocent Party Elects to Treat the Contract as Continuing
Where the innocent party intimates that, with full awareness of the facts and
circumstances, he intends to keep the contract alive, what happens is that essentially
the status quo is preserved. He remains entitled, therefore, to exercise the original
rights and obligations under the contract.111 The breach will nevertheless in principle
sustain a claim for damages. 112
3.6
Grounds of Termination by the Contractor
As a general observation, standard forms of construction contract add very
little to the rights of a contractor under common law to terminate a contract for
breach. The majority of those standard forms which expressly provide for the
109
110
111
112
Supra note 107.
Supra note 2, p.270.
Suisse Atlantique case, supra note 30.
Supra note 27, p.147.
48
contractor’s right to terminate, in reality, afford nothing more than first, a restatement of these rights and secondly, the prescription of a procedure to ensure that
there could be no doubt as to the intention to terminate when the termination process
is triggered.
Nevertheless, there is one area which a contractor must rely on specific
provisions in the contract to address. This is the possibility that the owner or
employer may become financially insolvent and this is a problem which has in recent
years been accentuated by the tendency for construction projects to be funded by
highly leveraged schemes. Common law does not afford any recourse where an
owner or employer who, while falling inexorably down a financial abyss, manages to
still maintain the appearance of an on-going business concern.113
For the purpose of the research conducted, only grounds of termination by
the contractor are discussed.
3.6.1
Employer’s Refusal to be bound
An absolute refusal by the employer to carry out his part of the contract,
whether made before the works commences or while they are being carried out is a
repudiation of the contract.114 Like any party to a contract, an employer repudiates
the contract when he intimates a refusal to discharge his obligations under the
contract. In Mersey Steel & Iron Co. Ltd. v. Naylor Benzon & Co. 115 , Lord
Blackburn described the principle as follows:
113
114
115
Supra note 7, p.571.
Hochster case, supra note 34; Mersey Steel & Iron Co. Ltd case, supra note 39.
(1884) 9 App. Cas. 434.
49
“If one of the parties had said to the other in effect “if you go and
perform your side of the contract I will not perform mine”, that, in
effect, amounts to saying “I will not perform the contract.” In that
case the other party may say, “You have given me distinct notice that
you will not perform the contract. I will not wait until you have broken
it, but I will treat you as having put an end to the contract, and if
necessary I will sue you for damages, but at all events I will not go on
with the contract.”
An employer may demonstrate his refusal to be bound by simply ordering the
contractor not to complete the works without any clear justification116 or, where an
employer failed to provide necessary drawings as required by the contract 117 and
where an employer, concerned that work was falling behind schedule, employed
other workmen to carry out part of the contractor’s work,118 or the employer may
deliberately disable himself from performing his obligations by disposing of the land
on which the building is to be sited before the contractor could proceed with the
works. The important feature is that a refusal to be bound must be clearly
demonstrated, whether by deed or word: “it must be shown that the party to the
contract made quite plain his own intention not to be bound by it”.119
3.6.2
Preventing Execution of Works
It is, in general, a repudiation if the employer wrongfully by his own acts,
and without lawful excuse 120 , renders completion impossible. 121 If the employer
116
117
118
119
120
121
Cort v. Ambergate Railway (1851) 17 QB 127.
Kingdom v. Cox (1848) 5 CB 522.
Sweatfield Ltd. v. Hathaway Roofing Ltd. [1997] CILL 1235.
Spettabile v. Northumberland Shipbuilding Co. (1919) 121 LT 628.
Cory Ltd v. City of London Corp [1951] 2 KB 476 (CA).
Stirling v. Maitland (1864) 5 B&S 840, 852; Roberts v. Bury Commissioners (1870) LR4CP 755;
Southern Foundaries v. Shirlaw [1940] AC 701.
50
unjustifiably interferes in the supply of materials necessary for the contract, he
commits a breach of this implied term in his contractual relationship with the
contractor, notwithstanding the absence of any direct contract between the supplier
and the contractor.122
An act of prevention can also be one of omission. Thus, in Croudace v.
London Borough of Lambeth 123 , the terms of a building contract provided that a
contractor’s claim for loss and expense had to be certified by an architect. The
original architect retired, but no replacement was appointed, the English Court of
Appeal held that, in the circumstances, the employer’s failure to appoint a
replacement architect amounted to an act of prevention and rendered them liable to
the contractor for breach of contract.124
3.6.3
Failure to Give Possession of the Site
The employer repudiates the contract if he fails to give possession of the site
at all, or without lawful excuse ejects the contractor from the site before
completion.125 While the minor interference by the employer with the contractor’s
possession of the site is not a repudiatory breach, 126 an outright refusal to give
possession in the first place will be so. Similarly, wrongful ejection of the contractor
from the site is such a breach.127
122
123
124
125
126
127
Acrow (Automation) Ltd. v. Rex Chainbelt Inc. (1971) 1 WLR 1676.
(1986) 33 BLR 20 (CA).
Supra note 7, p.574.
Felton v. Wharrie (1906) HBC (4th ed.), Vol. 2, P.398 (CA); Earth & General Contractors Ltd v.
Manchester Corp. (1958) 108 LJ 665.
Earth & General Contracts Ltd. case, supra note 125.
Roberts case, supra note 121.
51
As to mere delay in giving possession, the crucial question (and it is one of
degree) is whether the employer’s conduct indicates an intention no longer to be
bound by the contract. For example, where an employer delayed giving possession
of the site for two months despite repeated requests from the contractor, and also
announced that part of the contract work was to be omitted and given to another
contractor, it was held that these two breaches, taken together, amounted to a
repudiatory breach of contract. 128 However, most modern construction contracts
contain express provisions regulating situations under which site possession may be
delayed.129
3.6.4
Failure to Pay
Prompt payment of certified amounts is essential to the contractor’s cash
130
flow.
This cannot be a repudiation if there is no contractual duty to pay them.131
Where there is such a duty it is a question in each case whether failure to pay is a
repudiation.
As a general principle of law, failure to pay on time what is due under a
contract will not normally be treated as a sufficient breach to justify the other party
in terminating the contract. 132 Not every failure to pay a certified amount will
amount to a repudiatory breach.133
128
129
130
131
132
133
Carr case, supra note 88.
Supra note 7, p.571.
Sundra Rajoo, “The Malaysian Standard Form of Building Contract (The PAM 1998 Form).”
Second Edition. (Kuala Lumpur: Malayan Law Journal Sdn Bhd, 1999), p.264.
Rees v. Lines (1837) 8 C&P 126.
Mersey Steel & Iron Co. case, supra note 39.
Supra note 130.
52
In some cases, an employer who does not pay the sum certified on the
presentation of a certificate may be held to have committed a breach which strikes at
the root of the contract. The contractor is entitled, in the circumstances, to treat the
breach as a repudiation of the contract. However, it is considered that such a drastic
set of consequences only arise where the non-payment is part of some persistent
conduct or is otherwise of such a serious character as to threaten the fundamental
premise on which the contract was founded in the first place.134
An employer may have an arguable defence where his failure to pay arises
from his belief that the amount due to the contractor can be set off against the
contractor’s liability for liquidated damages or defective work. There is, however, a
distinction between this situation and one where non-payment amounts to an
intimation by the employer not to be bound by the payment terms of the contract
regardless of how well the contractor fulfilled his obligations under the contract.135
To determine this, the courts may be expected to consider the likelihood of the
repetition of the breach and the fact that in most construction contracts, the time for
payment may not be of the essence of the contract.136
If the employer makes any deduction, the contractor must seriously consider
whether such deduction is justified before launching into the determination
procedure. But if the contractor is in error in determining, he could be held to be in
repudiatory breach of contract by his actions although much will depend on the
extent to which the contractor has honestly relied on the contract provision, even
though he may do so mistakenly. 137 Whether the failure to pay amounts to
repudiation will depend on the circumstances of the case. Therefore, this study is to
identify circumstances where non-payment by an employer constitutes a sufficient
breach of contract. Findings of this study will assist the contractor to understand his
position before he takes action when the employer fails to make payment. Court
134
135
136
137
Supra note 7, pp.575-576.
Ibid.
Felton case, supra note 125; Mersey Steel & Iron Co. case, supra note 39; Withers v. Reynolds
(1831) 109 ER 1370.
Supra note 12, p.268.
53
cases will be analyzed to determine circumstances of non-payment that entitle the
contractor to terminate the contract. Results of analysis will be discussed further in
chapter four to achieve the objective of the study.
3.6.5
Under-Certification of Payments
Can an employer who pays certificates issued by the architect be guilty of
repudiation if those certificates are substantially too low? These are difficulties in
saying that he can because prima facie he is doing what the contract requires of him.
But it has now been settled that the architect is the employer’s agent when giving his
certificate.138 It has been held that an employer cannot stand by and take advantage
of his architect applying a wrong principle in certifying. 139 It has been more recently
held that, where there was a wide arbitration clause and where the employer was not
obliged to pay more than the amount stated on the certificate. The contractor’s
simple remedy was to go to arbitration and have the certificates corrected.140
There is thus a narrow dividing line between cases where an employer who
has paid certified amounts may be in breach of contract and cases where he may not.
In principle, if there are circumstances in which he may be in breach, he could also
in extreme cases be in repudiatory breach. But it seems that this would at least
require both clean knowledge by the employer that the architect was persistently
under certifying and a contract without a relevant arbitration clause.141
138
139
140
141
Sutcliffe v. Thackrah [1974] AC 727.
Panamena, etc. v. Frederick Leyland & Co. Ltd [1947] AC 428; Perini Corporation v.
Commonwealth of Australia (1969) 12 BLR 82.
Ludenham Fidelities v. South Pembrokeshire District Council (1986) 33 BLR 39 (CA).
Supra note 27, p.157.
54
The general position under common law used to be that the employer may be
answerable for the defaults of a certifier of progress payments only if he is aware of
these defaults and did nothing to rectify them.142 In Ludenham Fidelities v. South
Pembrokeshire District Council143, the English Court of Appeal decided that where
the only problem was that the architect exercised his judgment wrongly, then given
the presence of a wide arbitration clause, there was no need or scope for the
implication of any further term into the contract which seeks to attach liability to an
owner for an architect’s exercise of his certifying powers. A simple remedy was
available to the contractors to fog or arbitration and to have the interim certificates
corrected. The Court of Appeal in Singapore has affirmed this position in Hiap Hong
& Co. Pte. Ltd. v. Hong Huat Development Co. (Pte) Ltd.144 Accordingly, in the light
of Hiap Hong, the principal expectation of an architect or any certifier is that he
must act fairly and independently in respect of his certification duties and that in
discharging these duties, he should not be regarded as an agent of the client.145
3.6.6
No General Right to Suspend Work
Although particular contracts may give the contractor express rights if
certificates are not paid, there is no general right to suspend work if payment is
wrongly withheld.146 This is consistent with the principle that, except where there is
a breach of condition or fundamental breach of contract, breach of contract by one
party does not discharge the other party from performance of his unperformed
obligations.147
142
143
144
145
146
147
Frederick Leyland & Co. v. Panamena Europea Navigacion Cia (1943) 76 Lloyd L.R. 113 and
Perini Corporation case, supra note 139.
(1986) 33 BLR 39 (CA).
[2001] 2 S.LR 458 (CA).
Supra note 7, p.575.
Ludenham Fidelities case, supra note 143; Canterbury Pipe Lines case, supra note 94; Supamarl
v. Federated Homes (1981) 9 ComLR 25.
Supra note 27, p.157.
55
3.6.7
Interference or Influence of Certifier
Interference or obstruction by the employer in relation to the issue of any
certificate by the architect is a very serious matter indeed. It is certainly a serious
breach of contract and may well be seen as undermining the independence of the
architect in certain circumstances.148
If the employer interferes with the architect in the performance of those
functions where he has to act fairly between the employer and the contractor it is, it
is submitted, a question in each case depending both upon the nature of the
employer’s acts and their effect whether such interference amounts to a
repudiation.149
3.6.8
Other Breaches
It depends upon the construction of the contract and the circumstances
whether the acts and conduct of the employer show that he no longer intends to be
bound by the contract. Thus, assuming there is a breach, it may or may not be a
repudiation if the employer fails to appoint an architect,150 or to supply plans151 or
materials,152 or to make a fresh nomination of a sub-contractor.153
148
149
150
151
152
153
Supra note 2.
Supra note 27, p.158.
Coombe v. Greene (1843) 11 M&W 480; Hunt v. Bishop (1853) 8 Ex. 675; Ctr. Jones v. Cannock
(1852) 3 HLC 700.
Wells v. Army & Navy Co-op Society (1902) 86 LT 764; Trollope & Colls v. Singer (1913) HBC
(4th ed.), Vol. 1, p.849; Stevens v. Taylor (1860) 2 F&F 419.
Macintosh v. Midland Counties Railway (1845) 14 LJ Ex. 338; Gaze Ltd. v. Port Talbot Corp.
(1929) 93 JP 89.
Bickerton (T.A.) & Sons Ltd v. N.W. Regional Hospital Board [1970] 1 WLR 607; Percy Bilton v.
Greater London Council [1982] 1 WLR 794.
56
Whether in each case the breach is sufficiently serious to warrant the
contractor treating it as a repudiation of the contract depends on the circumstances,
including the provisions of the contract and the conduct of the parties. Thus, in one
instance, a particular breach may justify termination, while in another context, the
same breach may not warrant this action.154
3.7
Conclusion
A contracting party may find it necessary to terminate a building contract in a
number of situations, and are governed both by common law principles and the
provisions of the subject contract. Under the principles of common law, contractual
obligations may be discharged by way of performance, agreement, frustration or
repudiation.
This chapter also dwells in detail about repudiatory breach. Situations that
warrant termination are emphasized as the objective of the research if to determine
whether non-payment by the employer (breach by employer) is sufficient to allow
the contractor to regard himself as discharged from further performance of his
contractual obligations.
Besides, grounds of termination by the contractor are discussed in detail.
Grounds of termination by the employer are not discussed as it is out of the scope of
the research.
154
Supra note 7, p.575.
57
In conclusion, where one party has repudiated a contract, the innocent party
is entitled to affirm the contract by treating it as remaining in force or he may treat
the contract as having been fully discharged. But it will be no successful rescission,
unless there has been a clear and unequivocal acceptance of the breach by the
innocent party. While any breach of contract can give rise to a claim for damages, it
is not every breach of contract which will entitle the innocent party to a discharge
from further liability to perform his own contractual promises. The default must be
of a particularly serious or fundamental nature.155
155
Supra note 2, p.269.
CHAPTER IV
CIRCUMSTANCES WHERE NON-PAYMENT IS / IS NOT A
REPUDIATORY BREACH BY THE EMPLOYER
4.1
Introduction
The preceding chapter discussed in detail about the topic of repudiatory
breach. Situations that warrant termination were emphasized due to the objective of
the research is to determine whether non-payment by the employer is sufficient to
allow the contractor to regard himself as discharged from further performance of his
contractual obligations. Besides, grounds of termination by the contractor was
discussed in detail to give the readers an insight where types of breaches of contract
by the employer that entitle the contractor to terminate the contract.
This chapter is done in order to achieve the objective of this research. It
discusses the circumstances where non-payment by an employer constitutes a
repudiatory breach of contract. It is a question whether failure to pay is a
repudiation.1 There may be some cases in which the contractor can treat the stoppage
1
Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:
Sweet & Maxwell, 1991), p.156.
59
of payment as a repudiation. Much will depend on the facts.2 A principle laid down
by Salmon LJ in Decro-Wall International S. A. v. Practitioners in Marketing Ltd3:
“A breach of contract may be of such a nature as to amount to
repudiation and give the innocent party the right (if he desires to
exercise it) to be relieved from any further performance of the contract
or the breach may entitle the innocent party only to damages. How is
the legal consequence of a breach to be ascertained? Primarily from
the terms of the contract itself. The contract may state expressly or by
necessary implication that the breach of one of its terms will go to the
root of the contract and accordingly amount to repudiation. Where it
does not do so, the courts must look at the practical results of the
breach in order to decide whether or not it does go to the root of the
contract.”
The circumstances are illustrated based on court cases. The decisions of the
cases will be discussed in order to understand the solution made for each case. The
relevant court cases are limited to those available in the database of Lexis Nexis
website4 through its own search engine5.
A total number of 11 cases centered on issue of non-payment were studied,
where 7 of them were involving construction contracts and the remaining were
contracts of sales of goods and contract of sale of land.
2
3
4
5
Canterbury Pipe Lines Ltd v. Christchurch Drainage Board [1979] 2 NZLR 347; 1979 NZLR
LEXIS 405.
[1971] 2 All ER 216, [1971] 1 WLR 361.
http://www.lexisnexis.com.
The relevant court cases are collected by browsing the keyword of “building contract, nonpayment, repudiation, repudiatory breach.”
60
4.2
Circumstances Where Non-Payment by an Employer Constituted a
Repudiatory Breach of Contract
Repudiation is a drastic conclusion which should only be held to arise in
clear cases of a refusal, in a matter going to the root of the contract, to perform
contractual obligations. 6 It may consist of a renunciation, an absolute refusal to
perform the contract7, or it may arise as the result of a breach, or breaches of contract
such that ‘the acts and conduct of the party evince an intention no longer to be bound
by the contract.’ 8 A party repudiates a contract when he intimates by words or
conduct that he does not intend to honour his obligations as and when they fall due.9
In other words, he has decided to unilaterally “put an end to the contract”. It is very
crucial for the contractor to understand whether non-payment is a repudiation of
contract and in what conditions, non-payment is capable to be considered as an act to
put an end to the contract.
Out of the 11 cases chosen, only 2 of them gave illustrations where nonpayment by an employer constitutes a repudiatory breach of contract. The cases will
be discussed in detail in order to give a better understanding to the readers that, the
principle lying behind that drove the judge to come to a judgment that non-payment
was a repudiatory breach of contract. The following are the circumstances illustrated
in the cases where non-payment by an employer constitutes a repudiatory breach of
contract.
6
7
8
9
Woodar v. Wimpey [1980] 1 WLR 277; Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.
[1940] 3 All ER 60.
Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361; Mersey Steel & Iron
Co. Ltd v. Naylor (1884) 9 App. Cas. 434.
General Billposting Co. Ltd v. Atkinson [1909] AC118.
Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1.
61
4.2.1
Circumstance 1
Where an employer’s deliberate and unjustified refusal to pay what was
already due coupled with his unjustified order to the contractor to stop work
Prompt payment of certified amounts is essential to the contractor’s cash
flow, and in some cases the employer may be held to have repudiated the contract by
his failure to pay instalments when due. This was well defined in the case of Ban
Hong Joo Mines Ltd v. Chen & Yap Ltd10.
In this case, the plaintiff and defendant entered into an agreement for earth
excavation in May, 1963. The preamble to and clause 1 of the agreement provided
for the removal by the plaintiffs of earth to a depth of 25 feet from an area of
approximately 9 acres of land situate at Timor to be pointed out by the defendants.
They were to complete excavation work on an area of not less than 3 acres within a
period of four months. Under clause 4 of the agreement the defendants were to pay
to the plaintiffs a sum of fifty cents per cubic yard of earth so removed by the
plaintiffs, seventy per cent of the amount due for the work done being payable once
in every two weeks.
The defendants made the first progress payment of $ 1,500 on 11th June,
1963. The second progress payment of $ 1,600 was made on 16th July, 1963 by
which date the plaintiffs had removed 10,6551/2 cubic yards of earth which had been
excavated to a depth of 17 or 18 feet over a part of the area of 3 acres which was to
be excavated first. This was the first phase of the work. Before making the two
progress payments the defendants did not complain about the earth not having been
dug to a depth of 25 feet.
10
[1969] 2 MLJ 83.
62
The plaintiffs next moved to the second phase of their work but no progress
payments were made in spite of demands for them. Work was carried on until 9th
September when the plaintiff was told by the defendant company to stop work. It
was agreed that during the second phase the plaintiffs removed a total of 16,940
cubic yards of earth and that the average depth of the earth dug was only 7 feet.
The issue arose in the case was, whether the defendant was in repudiation of
contract when they failed to make payment. However, there were a few contentions
put forward by the defendant in their defence. The main point taken by the
defendants in denying the plaintiffs' claim was that on a true construction of clause 4
of the agreement, when read in conjunction with the recitals and clause 3, the
plaintiffs were not entitled to any payment until and unless they had excavated the
earth to a depth of 25 feet. That was also their major ground of appeal.
It was argued that the non-payment by them of the sum of $ 1,800 did not,
ipso facto, amount, in law, to repudiation of the contract and did not, in law, entitle
the respondents to rescind the contract and to sue to recover a sum of money in
respect of work done. In support of this argument the defendant cited a number of
authorities, the first three of which relate to contracts for the sale of goods. In
Simpson v Crippin11, the goods were to be delivered in monthly quantities. It was
held that the breach by the plaintiffs in taking less than the stipulated quantity during
the first month did not entitle the defendants to rescind the contract. In Freeth v
Burr12, there was to be a delivery of goods in parcels at different times. It was held
that the mere refusal to pay for the first parcel did not, under the circumstances,
warrant the defendant in treating the contract as abandoned and refusing to deliver
the remainder, and that the plaintiffs were entitled to damages for the breach.
11
12
(1872-73) 8 QBD 14.
(1873-74) 9 CP 208.
63
In Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co 13, the goods were to
be delivered by instalments. Affirming the decision of the Court of Appeal, the
House of Lords held that, upon a true construction of the contract, payment for a
previous delivery was not a condition precedent to the right to claim the next
delivery, and that the respondents had not, by postponing payment under erroneous
advice, acted so as to show an intention to repudiate the contract, or so as to release
the company from further performance.
However, the learned trial judge held that the plaintiffs' right to the
fortnightly progress payments for work done in digging and removing the earth is
not dependant on their digging down to the agreed depth of 25 feet. It is to be
observed that the contract was not a lump sum payment contract. It is also to be
observed that the first progress payment was, in fact, made at the end of or not long
after the first fortnight from the date of commencement of the excavation work.
Therefore, there was no merit in this major ground of appeal either.
It is abundantly clear that the defendants had at all times been in breach of
their obligation to make periodic payments and the plaintiffs would have been
completely justified, if they were not in fact told to stop work, in treating be
defendants' breach as repudiation of the agreement on the part of the defendants and
in suing for payment on the basis of quantum meruit.
In conclusion, the appellants were in breach of their obligation to make
fortnightly payments. Their deliberate refusal to pay what was already due by way of
fortnightly payments was an important element on the question of their repudiation
of the contract. Furthermore, they ordered the respondents to stop work. This
stoppage of work by them clearly went to the root of the contract. In this
circumstance, the respondents had no option but to treat the contract as at an end and
to sue for payment for the work which they had already done. They were entitled to
13
(1884) 9 App Cas 434, [1881-5] All ER Rep 365
64
recover the amount claimed either on the basis of work done by them at the
appellants' request or by way of damages on the basis of quantum meruit.
4.2.2
Circumstance 2
Where the employer was in breach of what to the contractor was a most
important term of the contract, namely that reasonable sum due should be paid
at reasonable intervals. Financial difficulties were not a valid excuse for the
employer to put forward as an excuse not to pay. Moreover, they were
threatening not to pay any further sums until the works were completed.
In the case of C J Elvin Building Services Limited v. Noble and another14, it
provides another circumstance where non-payment by the employer constitutes a
repudiatory breach of contract. It was a contract that related to extensive
refurbishment and alteration works carried out at sums were paid to the claimant.
The claimant effectively suspended work in October 2001 and, although the
parties and their solicitors communicated Stortford Lodge, 25 Clarence Road, St
Albans, Hertfordshire. The claimant was and is builders with considerable
experience. The defendants, Mr and Mrs Noble, were the owners of Stortford Lodge
which they had purchased several years before the claimant was involved. The
claimant was engaged by the defendants in late 2000 to carry out extensive works at
Stortford Lodge. The claimant carried out such work until about August 2001 at
which time disputes surfaced between the parties. Although some further work was
done thereafter, no further thereafter, proceedings were commenced by the claimant
on 31 January 2002.
14
[2003] EWHC 837 (TCC).
65
The principle disputes in this case revolve around the following two areas of
issue:
(i)
Did the defendant repudiate the contract by withholding payment?
(ii)
Whether the claimant was entitled to suspend work.
It is to be noted that it is only the defendants who are alleging that the
claimant repudiated the contract. It is not the claimant who is alleging that the
defendants repudiated the contract.
It was held that the defendant repudiated the contract by withholding
payment. It was not a valid excuse for the defendants to put forward, as they did, as
an excuse not to pay, financial difficulties. Those financial difficulties were not in
any way of the claimant's making; they had arisen because the defendants were
unable to raise appropriate levels of cash in liquid form. This was attributed to the
fact that following the events of September 2001 in the USA, their holdings in the
Stock Market had "plummeted". Whilst one sympathises with the defendants'
predicament, the risk of reasonably prompt payment of interim invoices rests with
the paying employer.
It became clear by the end of October 2001 that the defendants were simply
not prepared, whether sums were available or not, to make any further interim
payment. By their letter of 28 October 2001 to the claimant, the defendants proposed
four significant alterations to the simple contractual arrangements which they had,
namely:
(a)
Any sum outstanding to the claimant would not be paid immediately, but
would be paid on total completion of the works; in the meanwhile it was to
be held by the defendants' solicitors;
66
(b)
Completion should be no later than 30 November 2001;
(c)
There should be a penalty or liquidated damages for delay beyond that date at
the rate of £ 250.00 per day; and
(d)
An independent surveyor was to be appointed to value the work and confirm
that the work was completed.
None of these proposals were acceptable to the claimant who was entitled to
reject them. They all involved significant changes in the contractual relationship, the
most important one being that the claimant was not to be paid any further sums on
account.
It was held that the defendants were in breach of what to the claimant was a
most important term of the contract, namely that reasonable sum due should be paid
at reasonable intervals. Not only were the defendants in breach of contract by late
October 2001 for not paying, they were threatening (in breach of contract) not to pay
any further sums until the works were completed.
Although the claimant was financially able to complete the works, it is
undoubtedly the case that the claimant's suspension was brought about directly as a
result of the defendants' breach of contract in failing to pay. In those circumstances,
the claimant was entitled to suspend the work. The claimant was not willing to
continue with the work and complete it unless further sums due were paid.
A very important rule laid down by the court in making judgment was that
the defendant cannot rely upon its own breach to justify a contention that the
claimant was itself in repudiatory breach.
67
In a nutshell, only 2 cases out of 11 cases gave illustrations where nonpayment was a repudiatory breach. An important principle laid down by Gill FJ in
Ban Hong Joo Mines Ltd v. Chen & Yap Ltd15
“The real matter for consideration is whether the acts or conduct of
the one do or do not amount to an intimation of an intention to
abandon and altogether to refuse the performance of the contract”
4.3
Circumstances Where Non-Payment by an Employer Did not Constitute
a Repudiatory Breach of Contract
The reaction of many contractors when faced with non-payment is to
consider stopping work on site.16 Whilst this is understandable in many instances
such action could prove fatal.17 It sometimes happens that one contracting party (‘A’)
is in breach of contract and the other party (‘B’) treats this as a repudiatory breach,
but it is later held that A’s breach was not sufficiently serious to justify this.18 A
contractor who suspended work on the ground of not having been paid would be
guilty of a breach of contract in failing to maintain regular and diligent progress.19
Therefore, a contractor needs to ensure that non-payment by the employer was a
repudiatory breach of contract before he terminates the contract. Non-payment which
is not a repudiation does not give a right of termination to the contractor; it only
entitles him to sue for damages.
15
16
17
18
19
[1969] 2 MLJ 83.
Lim Chong Fong, “The Malaysian PWD Form of Construction Contract.” (Kuala Lumpur: Sweet
& Maxwell Asia, 2004), p.108.
Rodney Martin, “52 Contractual Issues Relevant to Malaysia and Their Resolution.” (Kuala
Lumpur: James R Knowles Sdn Bhd, 2005), p.19.
John Murdoch and Will Hughes, “Construction Contracts Law and Management.” Third Edition.
(London: Spon Press, 1992), p.323.
Ibid, p.328.
68
Out of the 11 cases chosen, 9 of them gave illustrations where non-payment
by an employer does not constitute a repudiatory breach of contract. The cases will
be discussed in detail especially the principle taken into consideration by the judge to
decide that non-payment was not a repudiation of contract. The following are the
circumstances illustrated in the cases where non-payment by an employer does not
constitute a repudiatory breach of contract.
4.3.1
Circumstance 1
Time was not intended to be of the essence of the contract
If time is not of the essence, a default by the employer in making payment at
the time specified in the contract will not entitle the contractor to treat himself as
discharged from further liability. Unless the employer’s neglect or refusal to pay the
price makes it plain that he is unwilling or unable to perform the contract. This
circumstance were well illustrated in the cases of Wong Poh Oi v. Guok Gertrude &
Anor20, Decro-Wall International SA v. Practitioners in Marketing Ltd21 and Brani
Readymixed Pte Ltd v. Yee Hong Pte Ltd22.
a.
The delay and refusal of the purchaser to pay for the extras could not be
regarded as showing an intention no longer to be bound by the contract
In Wong Poh Oi v. Guok Gertrude & Anor23, it arose out of the repudiation
by the defendants of their agreement to build a house for the plaintiff. The facts were
20
21
22
23
[1965-1968] 1 SLR 455.
[1971] 2 All ER 216, [1971] 1 WLR 361.
[1994] 2 SLR 552.
Supra, note 20.
69
that the firm of Phoenix Building Enterprise, of which the two defendants were
partners, was the developer of a housing estate at Holland Heights. Their modus
operandi was to sell the land and the building to prospective purchasers by two
agreements -- one for the sale of the land and the other for the sale of the building. In
the present case the plaintiff agreed to purchase the land under the sale of land
agreement for $ 6,000 and the building under the building agreement for $ 31,900.
The plaintiff paid the $ 6,000 for the land and also made certain progress
payments in accordance with the progress of the building operations as set out in the
schedule to the building agreement amounting to $ 9,900. The sum together with the
$ 6,000 paid for the land represented a total of $ 15,900 actually paid by the plaintiff
leaving a balance of $ 22,000 to be raised on mortgage. Reference is made to this
amount to be raised on mortgage in cl 3(a) of the sale of land agreement.
In addition there were certain extras ordered by the plaintiff under a works
order dated 15 October 1962, amounting to $ 4,913. These extras were not in dispute
and were admitted by the plaintiff. What was in dispute was the time of payment for
them.
It was held that the time of payment was not of the essence of the contract.
Although cl 3 of the building agreement states that as regards the date fixed for
payment of the final instalment time shall be deemed to be of the essence of the
contract, cl 5 thereof clearly indicates that deferred payments were contemplated and
could be made on payment of 15% interest. Both cl 5 and cl 6 appeared to show
clearly that time was not intended to be of the essence of the contract.
By assuming for a moment that the plaintiff was wrong in refusing to pay
these two sums of $ 4,913 and $ 1,460 then payment of them was not, a condition
precedent to the assignment nor did failure to pay constitute such a breach of a
fundamental term of the agreement as would justify a repudiation. It is not every
70
breach of a stipulation by one party that entitles the other to repudiate. Mere non
payment of an instalment unattended by any other act on the part of the purchaser
does not put an end to the contract.24
b.
The time for payment had been extended with the consent of seller on
occasions. The seller never doubted that the bills would be paid albeit
late
In the case of Decro-Wall International S. A. v. Practitioners in Marketing
25
Ltd , the terms of the contract relating to time of payment of the bills cannot
properly be regarded as of the essence of the contract, or, to put it the other way,
there is nothing expressed in or to be implied from the contract to suggest that a
failure punctually to pay the bills goes to the root of the contract and thereby
amounts to a repudiation. Moreover, the correspondence shows that the changes
made from time to time in the terms of payment, and at the other changes which
came under discussion, it seems plain that terms as to payment were at all times
negotiable.
In the present case, by an oral agreement made in March 1967 the plaintiffs,
a French manufacturing company, undertook:
(i)
Not to sell their goods in the United Kingdom to anyone other than the
defendants;
(ii)
To ship goods with reasonable dispatch on receipt of the defendants' orders
and;
(iii)
24
25
To supply the defendants on demand with certain advertising material;
Cornwall v. Henson [1900] 2 Ch 298.
[1971] 2 All ER 216, [1971] 1 WLR 361.
71
The defendants undertook:
(i)
Not to sell goods competing with the plaintiffs' goods,
(ii)
To pay for the goods which they bought by bills of exchange due 90 days
from the date of the invoice, and;
(iii)
To use their best endeavours to create a market for the plaintiffs' goods in the
United Kingdom and to develop it to its maximum potentiality.
The agreement was terminable by reasonable notice on either side.
The defendants incurred heavy expenses in promoting the plaintiffs' products
in the United Kingdom, but as a result of their efforts the sales of those products
increased very substantially each year and by April 1970 accounted for 83 per cent
of the defendants' business. The defendants were however consistently late in
meeting the bills of exchange. They were, as the plaintiffs knew before entering into
the contract, short of working capital and they had to rely on money received from
customers to meet the bills. The delays in payment varied from two to 20 days. The
plaintiffs never doubted that the bills would be paid albeit late. On occasions the
time for payment had been extended with their consent. The financial detriment to
the plaintiffs of the delay in payment was in the area of £ 20 on each bill (being the
interest on loans from their bank). This loss could have been but was not debited to
the defendants.
At the beginning of April 1970, without a word to the defendants, the
plaintiffs arranged for another company to be appointed their sole concessionaires in
the United Kingdom. On 9th April the plaintiffs wrote to the defendants in effect
alleging that the defendants had wrongfully repudiated the agreement by failing to
pay the bills on time and purporting to accept the repudiation and bring the
agreement to an end.
72
In an action by the plaintiffs claiming the amount of the bills accepted and
unpaid, sums for goods sold and delivered and a declaration that the defendants had
ceased to be from 10th April 1970 their sole concessionaires in the UK, the trial
judge gave judgment for the plaintiffs in respect of the dishonoured bills and the
goods sold and delivered, and for the defendants on their counterclaim for a
declaration that they remained the plaintiffs' sole concessionaires in the United
Kingdom. He further held that the agreement was only terminable by 12 months'
notice by either party and ordered the plaintiffs to pay the defendants damages for
their own breach of contract. The plaintiffs undertook (a) to continue supplying the
defendants with their products until the expiry of 12 months' notice to terminate the
agreement, (b) not to appoint any other persons as concessionaires for their products
in the United Kingdom until that date and (c) not themselves to sell or distribute such
products in the United Kingdom until that date. They subsequently served a notice to
determine the agreement on the defendants.
The issue arose was, whether the defendants, by failing punctually to pay the
bills of exchange prior to 9th April 1970, repudiated the agreement made in March
1967.
The Court has come to the conclusion that the learned judge was plainly right
in holding that there had been no repudiation by the defendants. The failure to pay
the bills of exchange promptly and the likelihood of similar delays in the future did
not constitute a repudiation of the agreement by the defendants; such a breach could
only amount to a repudiation which the plaintiffs would be entitled to accept as a
cancellation of the contract if the breach went to the root of the contract, since
nothing expressed or implied in the agreement suggested that the terms relating to
time of payment were of the essence of the contract, the inference drawn from the
practical consequences of the defendants' conduct was that the breaches did not go to
the root of the contract.
73
Section 10 (1) of the Sale of Goods Act 1893 provides:
“Unless a different intention appears from the terms of the contract,
stipulations as to time of payment are not deemed to be of the essence
of a contract of sale...”
The terms of the contract relating to time of payment of the bills cannot
properly be regarded as of the essence of the contract, or, to put it the other way, there
is nothing expressed in or to be implied from the contract to suggest that a failure
punctually to pay the bills goes to the root of the contract and thereby amounts to a
repudiation.
Moreover, looking at the correspondence as a whole, at the changes in fact
made from time to time in the terms of payment, and at the other changes which
came under discussion, it seems plain that terms as to payment were at all times
negotiable. The plaintiffs incidentally never gave notice that if the defaults continued
they would terminate the contract.
The plaintiffs showed themselves to be willing on numerous occasions to
negotiate extension of bills of exchange and to extend the defendants' credit beyond
the 90 days' limit, having regard to the defendants' financial difficulties and to the
supervening of devaluation in this country and the imposition of the import quota
scheme. The evidence does not establish that the plaintiffs have suffered any grave
loss as the result of the defendants' failure to honour the bills punctually, and in
many instances the delay in payment was not of long duration. The history of the
whole matter indicates that punctual payment was a matter of much less importance
to the plaintiffs than other aspects of the contract. The learned judge was justified in
concluding, as he did, that the defendants' conduct did not amount to repudiation.
74
The case would have been quite different if the defendants' breaches had
been such as reasonably to shatter the plaintiffs' confidence in the defendants' ability
to pay for the goods with which the plaintiffs supplied them.
The defendant in his evidence plainly stated that the plaintiffs never doubted
that, if they went on supplying the defendants with goods, the defendants would
meet the bills. They would, however, in all probability, meet them some days late, as
they had done throughout the whole course of the dealings between the parties. For
these reasons, the defendants' breaches did not amount to a repudiation of the
contract; they were not fundamental breaches going to the root of the contract. They
certainly gave the plaintiffs no right to treat the contract as at an end.
c.
Failure of the purchaser to supply the supplier the schedule was not a
breach which amounted to repudiation of contract
In Brani Readymixed Pte Ltd v. Yee Hong Pte Ltd.26, it was also held that
stipulations as to time of payment are not of the essence of a contract of sale
according to s 10(1) of the Sale of Goods Act 1979.
In this case, the plaintiffs were suppliers of ready mixed concrete and the
defendants were building contractors. In or about July 1990, the defendants were
awarded a contract by the Port of Singapore Authority to build the Service Complex
at the Brani Terminal, Pulau Brani. The defendants entered into a contract with the
plaintiffs for the supply of ready mixed concrete required for the project. Several
amendments to the contract were then agreed to. The material amendment was to cl
13 which stated that the contractor was required to provide a casting schedule for the
whole project and 24 hours advance notice must be given prior to each supply
required. In the event that the supplier failed to supply due notice having being given,
26
[1994] 2 SLR 552.
75
the contractor shall have the right to source for its concrete requirements from an
alternative supplier and any cost difference is recoverable from the supplier.
The supply from the plaintiffs appeared to be unsatisfactory from the initial
stages of the contract. There were short and irregular supplies and even non-delivery
at times. On 18 April 1991, the defendants entered into an agreement with Rite-mix
for the supply of the remaining quantity of concrete. Rite-mix was a company in
which the main shareholders of the defendants had the majority interest. The two
companies also had common directors. The defendants' complaints about the
unsatisfactory supply from the plaintiffs culminated in their letter to the plaintiffs of
7 May 1991. Relying on cl 13 the defendants sought an alternative supplier, which
was Rite-mix. On 9 May 1991 the plaintiffs replied refuting the defendants'
allegations and rejecting the applicability of cl 13.
From 11 May 1991 onwards no orders were placed by the defendants for the
supply of concrete which clearly evinced an intention on the part of the defendants to
put an end to their contract with the plaintiffs. Notwithstanding that, however, the
plaintiffs did not accept this repudiation. By letter dated 30 May 1991 the plaintiffs
requested for a proper casting schedule and payment of the outstanding invoices to
be made within three days. On 7 June 1991 the plaintiffs followed up with another
letter stating that the defendants' failure to give them a proper casting schedule and
failure to make payment of the outstanding invoices amounted to a repudiation of the
contract and this repudiation was accepted by them.
No payment was made by the defendants in compliance with the plaintiff’s
demand. The plaintiffs commenced these proceedings for recovery of the total sum
of $ 278,969 due to them and damages by way of loss of profits. The defendants
counterclaimed for $ 253,598.08 being the additional cost incurred in procuring
supplies from Rite-mix. The plaintiffs' claim was based on breaches of contract on
the part of the defendants in failing to make payments of the amounts due and failure
to furnish the casting schedule.
76
The issue arose was, is the failure of the defendant in making payment and
furnishing the casting schedule entitle the plaintiff to treat him as discharged from
further liability?
The judge held that unless a different intention appears from the terms of the
contract, stipulations as to time of payment are not of the essence of a contract of
sale according to s 10(1) of the Sale of Goods Act 1979. Thus if time is not of the
essence, a default by the buyer in making payment at the time specified in the
contract will not entitle the seller to treat himself as discharged from further
liability ... unless the buyer's neglect or refusal to pay the price makes it plain that he
is unwilling or unable to perform the contract. Therefore, by cl 12 of the contract the
remedy available to the plaintiff was the right to withhold further supply until after
payment of the outstanding had been made but it did not discharge the plaintiff from
further performance of the contract.
In addition, the defendants' failure to give the plaintiffs a casting schedule
was not a breach which amounted to repudiation of the contract, as the plaintiffs had
been able to supply according to the defendants' orders without the casting schedule
and they never alleged that their inability was in any way due to lack of the casting
schedule. In any case, if there was repudiation, the plaintiffs had not accepted it.
Therefore, the plaintiffs were not discharged from further performance of their
contract and their letters of 30 May and 7 June 1991 constituted wrongful
repudiation of the agreement on their part. The default by the defendant in making
payment did not entitle the plaintiff to treat him as discharged from further liability.
When the parties indicate expressly by the contractual language that a single
breach of a particular contractual obligation is to have the same consequences as a
fundamental breach entitling the innocent party to rescind the contract, this is
frequently brought about by “legal jargon” involving the use of express words such
as “condition” or “condition precedent” or “of the essence” in regard to a particular
contract obligation. Therefore, if time of payment was intended to be of the essence
77
of the contract, employer will be in repudiatory breach of contract if he fails to make
payment that gives the right to the contractor to terminate the contract.
In Hoare v Rennie27, the principle laid down was that where time was of the
essence of the contract, and there had been a failure to deliver part of the goods and
the whole object of the contract was frustrated, the non-delivery under the
circumstances was an act by which the party renounced all intention to perform his
part of the contract, and thereby set free the other party.
4.3.2
Circumstance 2
Single act of refusing to pay was not an act that put an end to the contract
Non-payment of one certificate is not a repudiatory breach. A contractor can
only terminate his contract with his employer if he shows a repudiatory breach by
the employer in the sense that the employer has evinced an absolute refusal not to
perform his side of the contract. This was well illustrated in the case of Freeth and
another v. Burr and another 28 and Kah Seng Construction Sdn Bhd v. Selsin
Development Sdn Bhd29. An important principle laid down by the judge in Freeth v.
Burr, Lord Coleridge, CJ:
“I think it will be found that the true principle running through all is
this: Is the act to be relied on as rescission an act which on the part of
27
28
29
(1859) 5 H & N 19; 29 LJ Ex 73; 1 LT 104; 8 WR 80; 157 ER 1083; 39 Digest 572, 1766.
[1874-1880] All ER Rep 751; [1874-80] All ER Rep 751.
Suit No 22-309 of 1992.
78
the person doing it amounts to an abandonment, or refusal by him to
perform his part of the contract?”
a.
Non-payment by the purchaser for the first parcel was not such an
abandonment or refusal to perform their part of the contract. In
addition, there was no evidence of any inability on their part to perform
In the case of Freeth and another v. Burr and another30, the plaintiff and the
defendant entered into a contract dated 28 November 1871, where the plaintiff
agreed to buy 250 tons of iron from the defendants. By the terms of the bought note
the iron was to be delivered to the plaintiffs in two instalments, the delivery of the
first 125 tons to take place in two weeks from the date of the contract and that of the
second 125 tons in four weeks. No iron was delivered within the periods specified,
but the time was extended by arrangement, and a quantity of iron was delivered on
different days between 19 February and 18 May 1872, under constant pressure from
the plaintiffs for a continuous delivery. On the last-mentioned day the delivery of the
first parcel of 125 tons was completed, and fourteen days afterwards the defendants
demanded payment for that parcel.
No such payment was however made, but about 18 June 1872, an application
was made by the plaintiffs for a continuous delivery of the residue of the iron,
whereupon there was an absolute refusal on the part of the defendants to deliver any
more, and the plaintiffs accordingly brought an action for the non-delivery of the
second parcel, the defendants having first sued the plaintiffs and obtained payment
for the first parcel.
The issue arose was: whether the undoubted fact of the refusal to pay what
was due for 125 tons on May 18 was such an abandonment or refusal to comply with
30
[1874-1880] All ER Rep 751; [1874-80] All ER Rep 751.
79
such part of the contract as lay on the plaintiff, to perform, as to set free the
defendants, and entitle the latter to treat the contract as non-existent and to decline to
perform it.
It was held that, the non-payment by the plaintiffs for the first parcel was not
such an abandonment or refusal to perform their part of the contract as to free the
defendants from their liability to deliver the rest of the iron. This single act of
refusing to pay was not an act which, by itself, and unattended by other
circumstances, to put another quality upon it, amounted to more than a refusal to do
one particular thing, held that it did not put an end to the contract. Furthermore, there
were no evidence whatever of any inability on their part to perform.
The breach was one which frustrated the whole contract, and released the
other party.31 In Withers v Reynolds32 a case where the non-delivery of a particular
portion of a quantity of hay had put an end to the contract. It is because as Patteson, J,
says, non-payment for the particular contract was, under the circumstances, an
intimation: "It is no use for you to go on, because I tell you that I do not mean to
keep to the contract"; and, therefore, was an act which justified the other party in
considering the contract to be at an end.
b.
Non-payment of one certificate and partial non-payment of the employer
did not evinced an absolute refusal not to perform his side of the
contract
Whereas, in the case of Kah Seng Construction Sdn Bhd v. Selsin
Development Sdn Bhd33, it was a claim by the plaintiff against the defendant for a
sum of RM 114,623.87, two retention sums of RM 40,000.00 and RM 40,522.69
31
32
33
Jonassohn v. Young (1863) 4 B & S 296; 2 New Rep 390; 32 LJQB 385; 10 Jur NS 43; 11 WR
962; 122 ER 470; 39 Digest 652, 2459.
(1831) 2 B & Ald 882; 1 LJKB 30; 109 ER 1370; 39 Digest 570, 1755.
Suit No 22-309 of 1992.
80
respectively, general damages and interest, arising out of certain contractual works.
There was also a counterclaim by the defendant for damages, interest and costs
against the plaintiff.
There was no formal contract entered into between the plaintiff and the
defendant. The plaintiff was invited to give a quotation on the basis of drawings or
plans prepared by the defendant's architect and engineering consultants. A letter of
acceptance of tender signed by both the plaintiff and the defendant and annexed to
the minutes of the second site meeting held on 2nd January 1991 was sent to the
plaintiff. The date of site possession and the completion date were, by subsequent
agreement between the plaintiff and the defendant, changed to 8 January 1991 and 8
November 1991 respectively.
The plaintiff's progress was such that as the completion date approached, the
works were far from complete, due to:
(a)
A lack of construction and resource planning;
(b)
No competent site supervisory staff until at least 50% of the contract
period has passed; and
(c)
Material shortages as the plaintiff did not pay the suppliers on time.
The engineer issued various interim certificates, most of which were paid
although the contract documents did not provide for payments on an interim basis.
The certificates were based on a valuation of the works carried out, and took no
account of the defects or the cost of rectifying them. By the time certificates 10 and
11 were issued on 21 December 1991 and 21 January 1992 respectively, the
amended completion date of 8 November 1991 had already passed and the Plaintiff
was liable for agreed liquidated damages, at RM 328.00 per day.
81
On the basis of the estimated cost of rectifying the defects and the agreed
liquidated damage of the plaintiff already incurred and increasing daily, the
defendant exercised its rights of set-off and withheld payment for part of the sum
certified in interim certificate No.10 amounting to RM 21,273.20 and all the sums
certified in interim certificate No.11 amounting to RM 93,350.67.
The plaintiff then proceeded to demand for payment of the sums withheld,
and despite being informed of the defendant's position as to the disputed sum,
suspended works. After giving notice to resume works through its solicitors, the
defendant terminated the contract with the plaintiff.
Against the above background, it is common ground that the following issues
arise for determination by the court:
1.
Whether the defendant was entitled to exercise a right of set-off in respect of
rectification of defective works and agreed liquidated damages for delay on
the part of the plaintiff in completing the works?
2.
Even if the defendant was not entitled to the right of set-off, whether the
plaintiff was entitled to suspend works on the grounds that part of
certificate No. 10 and the whole of certificate No. 11 were unpaid?
It was held that, since there is no formal express provision in the contract for
the defendant to be bound to pay certified sums to the plaintiff, there is no
contractual obligation to pay any certified sums until the works are completed, as the
contract is an entire contract. In any event, the defendant is entitled at common law
to set off against these certified sums all sums necessary to rectify the serious
defective works and agreed liquidated damages for delay. There was indeed no
express or implied term negativing this common law right in the contract.
82
The plaintiff contends that it was entitled to suspend works because of nonpayment of one certificate and partial non-payment of another. Learned counsel for
the plaintiff cites the decision in Associated Pan Malaysian Cement Sdn Bhd v.
Syarikat Teknikal & Kejuruteraan Sdn Bhd 34 as authority for this proposition.
However, it was held that the Associated Pan Malaysian Cement Sdn Bhd v. Syarikat
Teknikal & Kejuruteraan Sdn Bhd 35 case is not authority for the proposition
advanced by him. Upon a careful reading of the judgment in that case, the judge is of
the view that it reaffirms, inter alia, the following established rules of contract:
(a)
Whether time is of the essence of the contract depends on the terms of
the contract and its surrounding circumstances;
(b)
Whether a term is intended to be a condition of a contract depends on the
intention of the parties;
(c)
If the parties to a contract expressly set out therein the consequences of a
breach of contract, a court will give effect to the contract's express words.
In the absence of a specific provision in the contract, a contractor has no
automatic right to suspend works simply because one or two of his certificates have
not been paid. It was held that, it is trite law that a contractor can only terminate his
contract with his employer (at common law, as opposed to the exercise of an express
termination clause) if he shows, inter alia, a repudiatory breach by the employer in
the sense that the employer has evinced an absolute refusal not to perform his side of
the contract.
Although in this contract there was no contractual determination clause, the
plaintiff's conduct in refusing to be bound by the contract, and in particular by failing
to carry out its primary or fundamental obligations to work was repudiatory in nature
34
35
(1990) 3 MLJ 287.
Ibid.
83
and entitled the defendant to terminate the contract between the parties, as the
defendant was left with no other option. The defendant's termination of the contract
on 3 July 1992 was therefore justified in law.
Based on this two cases, it can be concluded, single act of refusing to pay
was not an act that put an end to the contract. It is trite law that a contractor can only
terminate his contract with his employer if he shows a repudiatory breach by the
employer in the sense that the employer has evinced an absolute refusal not to
perform his side of the contract.
4.3.3
Circumstance 3
The purchaser had not, by postponing payment under the erroneous advice of
their solicitor, so shown an intention no longer to be bound by the contract
As a general principle of law, failure to pay on time what is due under a
contract will not normally be treated as a sufficient breach to justify the other party
in terminating the contract, but a stated intention not to pay in any event clearly
would. In the case of Mersey Steel and Iron Company v. Naylor, Benzon, & Co.36,
Bowen, L.J explained:
“The test was whether the conduct of one party to the contract was
really inconsistent with an intention to be bound any longer by the
contract.”
36
(1884) 9 App Cas 434.
84
In the present case, the defendants agreed to purchase from the M. Co. a large
quantity of steel to be delivered on board ship in five monthly instalments,
commencing with January, 1881, payment to be made within three days after receipt
of the shipping documents. In January, 1881, the company delivered about half the
first instalment, but before the payment became due a petition was presented on the
2nd of February to wind up the company. The defendants were advised by their
solicitor that they could not without leave of the Court safely pay the company
pending the petition, and asked the company to obtain an order of the Court to
sanction their doing so.
On the 10th of February the company replied that they should treat the
refusal to pay as releasing the company from and further obligation to carry out the
contract. On the 15th of February a winding-up order was made. The defendants'
solicitor, on the 17th of February, wrote to the liquidator that the defendants claimed
damages for non-delivery in January, and were prepared to accept and pay for all
further deliveries without deducting damages if the payments were carried to a
separate account subject to their claims for damages. He further suggested that the
defendants would probably be willing to accept the January instalments and waive
damages. The liquidator refused to make any further deliveries and commenced an
action to recover the price of what had been delivered. The defendants set up a
counter-claim for damages.
It was held that, by reversing the decision of Lord Coleridge, C.J., that the
defendants had not, by postponing payment under the erroneous advice of their
solicitor, so shown an intention no longer to be bound by the contract as to release
the plaintiffs from further performance of it, and that the plaintiffs were liable for
damages for non-delivery.
85
The judge, Jessel, M.R further elaborated his reasons for giving judgment to
the defendant:
“That being so, the only point we have to consider is, whether the
evidence in this case ought to lead us to the conclusion that the
buyers refused to go on with the contract? I think the evidence is very
strong, that the buyers were both ready and willing to pay if it had
not been for the unlucky circumstance that induced them to refuse to
pay under a mistake of law.”
Furthermore, it is not suggested for a moment that this well-known firm were
in any pecuniary difficulty, or wished to delay payment because it was not
convenient to pay. There is nothing from the correspondence, which can be fairly
construed into a refusal by the purchasers to comply with the terms of the contract.
The true inference to be drawn from the correspondence is that they were ready
enough to pay, but felt embarrassed, and did not know how to pay.
86
4.3.4
Circumstance 4
Failure by the purchaser to pay the last instalment (relatively small amount)
did not amount to a repudiation on his part of the contract
Mere breach of a payment obligation does not constitute a common law
repudiation. A failure to pay is less likely to be a repudiation if it occurs towards the
end of a contract. This is well illustrated in the case of Cornwall v. Henson37.
In 1892, the defendant agreed in writing to sell and the plaintiff to purchase a
certain plot of land for £ 150, the plaintiff paying £ 40 on account (but not by way of
deposit), and the balance by instalments. In case default was made for thirty days in
payment of any one instalment, the whole of the remaining instalments were to
become due and payable, and, if not paid within thirty days, the defendant was to be
at liberty to resell the land and apply the net proceeds in payment of the amount due.
The plaintiff took possession of the land, and by August 1895 had paid all but
the last instalment. Much correspondence took place between the plaintiff and the
defendant between the date on which the last instalment became due and 23 October
1896. Finally, on 23 October 1896, the plaintiff wrote a long letter to the defendant,
asking him to reply to a particular address in Jamaica Road, Bermondsey. Shortly
after that date the plaintiff disappeared, and letters addressed by the defendant to him
at Jamaica Road were returned through the Dead Letter Office. Inquiries made by
the defendant at former addresses and from his relations led to no result.
Under these circumstances, the defendant took possession and agreed to let
the property to a Mr Burns for a term of three years from 25 March 1898, with
37
[1900-3] All ER Rep Ext 1734, Also reported: [1900] 2 Ch 298; 69 LJ Ch 581; 82 LT 735; 49
WR 42; 16 TLR 422; 44 Sol Jo 514.
87
liberty to erect a house on it and with the option to purchase at any time during the
said term. Burns accordingly erected a house, and was actually in possession.
The plaintiff meanwhile reappeared upon the scene, and desired to pay the
final instalment and obtain a conveyance free from the lease. The defendant declined
to grant it.
The issue arose was whether the conduct of the plaintiff in failing to pay the
last instalment amount to a repudiation on his part of the contract.
It was held that failure by the purchaser to pay the last instalment did not
amount to a repudiation on his part of the contract. The payment for this land was to
be made by a number of small instalments spread over a considerable lapse of time,
and all of these instalments, except the last, had been actually paid, and the plaintiff
had been for some years in actual possession. During that period there had been, in
connection with this land, some considerable out-of-pocket expenses, such as taxes,
tithe, rent-charge, and the like, for example, and the plaintiff had been treated, in the
matter of paying these expenses, as the owner of the property.
The contract had been performed by the plaintiff except for the non-payment
of about £ 10 out of a total of £ 150. There was no declaration of any incapacity on
the plaintiff's part to make this payment; and there are letters showing that the
defendant was not likely to insist on immediate payment. It is true, of course, that the
defendant had done what he had no right to do; but there is nothing to show that he
ever had the intention of treating the contract as dead.
88
Webster MR further gave explanation of his judgment:
“When we remember that the payment of the purchase money was
originally spread over a period of five years, it would be pressing the
law very harshly to say that the contract was gone because of the
neglect of 18 months.”
Collins LJ in arriving his judgment that non-payment by the plaintiff was not
a repudiation:
“Here about £ 10 only owed, and to say that the plaintiff refused to
carry out the contract is a conclusion at which I cannot arrive.”
Therefore, it was held that the plaintiff had lost his right to specific
performance by reason of his delay, yet his conduct did not amount to a repudiation
on his part of the contract, and that he was entitled to damages by reason of the
breach of the contract by the defendant.
89
4.3.5
Circumstance 5
The withholding of money had only a temporary quality because the employer
intended to resume payments when the contractor's men returned to work and
rectified their mistake.
In the case of Canterbury Pipe Lines Ltd v. Christchurch Drainage Board38,
it was clear that the defendant would resume payments as soon as position regarding
the question of road restoration was covered. The withholding of the certificate for
the progress payment was not justified by the contract, but it was not in the way in
which it was done and the manner in which the intimation of it was passed to the
contractor in any sense an indication that the defendant did not propose to make any
further payments.
In April 1960 the Board accepted the tender of the contractor for the laying
of certain sewer pipes and incidental work. The contract price was $ 29,228.
Completion date was 27 January 1961. As regards progress payments the general
conditions stated that no sum should be considered due to the contractor until the
Board's engineer had given a certificate. Any sum so certified was not to be
considered to be payable until the expiration of 14 days after presentation of the
certificate by the contractor to the Board, "nor shall any omission to pay the amount
of such certificate at the time the same shall be held payable be deemed or held to be
a breach or vitiate the contract". All disputes were to be referred to the engineer. The
contractor was given, in a limited class of matters, the right if aggrieved by the
engineer's decision to serve notice requiring arbitration under the Arbitration Act,
but work was to continue during the arbitration proceedings if deemed by the
engineer reasonably possible.
38
[1979] 2 NZLR 347; [1979] NZLR LEXIS 405
90
Work commenced in July 1960 and was carried on until September when,
with the acquiescence of the Board, there was a delay pending delivery to the
contractor of new machinery. After five months the contractor resumed work with
the new machinery and progress was quite rapid until mid-April. By then progress
payments made to the contractor totaled $ 22,690.
Then the Board's engineer took the view that an amount of some $ 926
allowed by the contractor in its tender for restoration of the road surface was
inadequate; and conversely he maintained that other items had been treated by the
contractor too generously in arriving at the total tendered price. The engineer though
that $ 3,200 was likely to be needed for the restoration. A difference of opinion arose
between the engineer and the governing director of the contracting company, Mr
Bloemen, as to the extent of the company's responsibility in the matter. The amount
of restoration needed appears to have been much in excess of anything contemplated
on either side at the time of the tender. Against that immediate background and
certain difficulties that had arisen between the two men regarding other contracts
being carried out by the company for the Board, the engineer decided that the $
3,200 should be built up in effect in the Board's hands before any further monthly
progress payments were made to the contractor. Normally the next progress payment
would have been made in May and would have been for about $ 1,600; but for the
reason just mentioned the engineer did not certify for it.
As well as objecting to the withholding of progress payments the contractor
claimed payment for certain extras at other than schedule rates and also for extra
backfilling caused by the new machinery. The contractor elected not to rescind the
contract but suspended all work under the contract.
On 14 June 1961 the engineer wrote to the contractor formally notifying it
that it had failed to make such progress with the works as the engineer deemed
sufficient to ensure their completion within the time specified, and had failed to
employ a sufficient number of men on the works. When the contractor failed to
91
resume work, the Board took the work out of the contractor's hands in reliance on a
forfeiture clause in the contract. The Board sued the contractor for extra expense
incurred in having the work completed by other contractors. The contractor
counterclaimed for, inter alia, damages for loss of the contract or on the basis of
quantum meruit. In the Supreme Court the Judge gave judgment for the Board on the
claim and counterclaim and awarded the Board $ 13,140 with interest totaling $
13,925. The contractor appealed.
It was held that although the contractor had valid grounds for complaint, the
express terms of the contract did not give him the right to suspend the work.
In certifying or acting under the forfeiture clause the engineer, though not
bound to act judicially in the ordinary sense, was bound to act fairly and impartially.
Viewed objectively the engineer had not acted fairly in not certifying progress
payments and calling upon the contractor to complete within the specified time
which had already passed. Accordingly, the employer was in the wrong in purporting
to act under the clause by taking the work out of the contractor's hands and reletting
to other contractors.
The contractor should recover payment at the contract rates for work actually
done and should also recover its deposit and retention moneys; but not damages for
loss of profits or on a quantum meruit. In the result the appeal was allowed and the
contractor was awarded $ 9,405 without interest.
It is concluded that although the withholding of the certificate for the
progress payment was not justified by the contract and accordingly was a breach by
the Board of a serious kind, it was not "in the way in which it was done and the
manner in which the intimation of it was passed to the contractor in any sense an
indication that the Board did not propose to make any further payments". The judge
considered that it was clear that the Board would resume payments as soon as the
92
position regarding the question of road restoration was covered; he held that this was
not a repudiation by the Board of the contract. The withholding of money had only a
temporary quality because the Board intended to resume payments when the
appellant's men returned to work.
4.3.6
Circumstance 6
Where the employer set-off the amount she was entitled to as liquidated
damages against the balance of the purchase price due to the contractor
In the case of Lee Poh Choo v. Sea Housing Corporation Sdn Bhd 39 the
plaintiff sued for damages for breach of contract and for delivery of documents of
title relating to land and house in Petaling Jaya. The plaintiff had agreed to purchase
the property from the defendant and it was a term of the agreement that the building
on the said property should be completed within a period of eighteen months from
the date of the agreement. The building was only completed some twenty three
months after that date. The defendants claimed that the non-fulfillment was caused
by circumstances beyond their control.
On January 2, 1974 by a written agreement the plaintiff agreed to purchase
from the defendant the said property (a three-storey shop house plus mezzanine floor
in phase 5 for SEA Park, Petaling Jaya, Kuala Lumpur) at the purchase price of
$ 175,000. Under the said agreement the defendant was to complete the said building
on the said property within a period of 18 months from the date of the said
agreement, i.e. on or before July 1, 1975. In the meantime the plaintiff continued to
pay the purchase price progressively and there was a balance of 10% being the last
39
[1982] 1 MLJ 324.
93
payment due and payable by her to the defendant upon the issue of the Certificate of
Fitness. It is a fact that the said building was not completed within the period
stipulated in the agreement. It is a term of the said agreement that the defendant
should pay liquidated damages at the rate of 8% per annum on the purchase price for
any delay in the completion of the said building up to the date of actual completion
and delivery of possession.
By a letter dated June 16, 1977 the defendant wrote to the plaintiff notifying
her that the said building has been completed and the Certificate of Fitness were
ready for collection. The defendant demanded from the plaintiff payment of the
balance amounting to $ 17,500 being the final instalment of the purchase price and
$ 407.20 being the quit rent for a period of 4 years.
Upon receipt of the abovementioned letter, the plaintiff replied and pointed
out to the defendant that under Clause 17 of the Purchase Agreement the building
was to be completed within 18 months from the date thereof and yet the said
building was only completed on June 16, 1977. Further, the plaintiff alleged that she
was entitled to liquidated damages at 8% per annum on the purchase price which
according to her calculation amounted to $ 27,826.66, i.e. from July 2, 1975 to June
1, 1977.
The plaintiff further stated in the said letter that the balance of $ 17,907.20
which was payable by her being the final balance of the purchase price was far
below the amount which she would be entitled as liquidated damages. Therefore she
suggested the defendant should hand over the keys together with the payment of
$ 9,919.46.
94
The issues arose were:
1.
Can the plaintiff set off the last payment of the purchase price
against liquidated damages?
2.
Was the plaintiff in breach for non-payment of the last instalment of
the purchase price?
It was held that the defendants have failed to prove that the delay was due to
circumstances beyond their control. Therefore, the plaintiff is entitled to damages
calculated at the rate of 8% per annum on the purchase price from July 2, 1975 to
June 1, 1977 for $ 27,826.66.
The defendant has argued that the plaintiff was in breach of the said
agreement due to her failure to comply with the demand of the defendant to pay the
balance of the purchase price for $ 17,907.20. This is pleaded in paragraph 12 of the
defence. And under Clause 21 of the said agreement, if the purchaser shall fail to pay
any instalment of the total purchase price or any part thereof, or any interest, then it
shall be lawful for the vendor at any time thereafter to annul the sale and forthwith
terminate the agreement.
It is found that the failure on the part of the plaintiff to pay the balance does
not amount to a repudiation of the contract. The reply by her to the defendant's letter
of demand cannot be construed as her intention to repudiate. What she wanted to do
was merely to set-off the amount she was entitled to as liquidated damages against
the balance of the purchase price due to the defendant. At any rate, the defendant has
not pleaded that the plaintiff has repudiated the contract or that the defendant has
accepted the repudiation. "The act and conduct of the defaulting party relied on as
amounting to a repudiation of the contract should be clearly pleaded and it is
necessary to plead and prove that the repudiation was accepted."
95
4.4
Conclusion
In a nutshell, out of the 11 cases studied, only 2 cases provided circumstances
where non-payment was a repudiatory breach of contract by the employer which
entitled the contractor to have the right to terminate the contract. The non-payment
by the employer simply showed an intention no longer to be bound by the contract
when he deliberately refused to pay the contractor what was already due40 and were
not prepared to make any further payment due to financial difficulties which are not
the responsibility of the contractor.41
However, in most of the circumstances, it has been decided by the courts that
non-payment is not a repudiatory breach of contract by the employer. It happened
especially when the courts construed time of payment was not of the essence of the
contract.42 On occasions, time for payment had been extended with the consent of
the seller and the seller never doubted that the bills would be paid albeit late.43
Besides, single act of refusing to pay was not an act that put an end to the contract.44
There was no evidence whatever of any inability on the purchaser to perform.45 The
purchaser had not, by postponing payment under the erroneous advice of their
solicitor, so shown an intention no longer to be bound by the contract.46 Failure by
the purchaser to pay the last instalment (relatively small amount) did not amount to a
repudiation on his part of the contract. 47 The withholding of money had only a
temporary quality because the employer intended to resume payments when the
contractor's men returned to work and rectified their mistake.48 Lastly, where the
40
41
42
43
44
45
46
47
48
Ban Hong Joo Mines Ltd case, supra note 10.
CJ Elvin Building Services Ltd case, supra note 14.
Wong Poh Oi case, supra note 20; Decro-Wall International SA case, supra note 21; Brani
Readymixed Pte Ltd case, supra note 22.
Decro-Wall International SA case, supra note 22.
Freeth case, supra note 12; Kah Seng Construction case, supra note 29.
Freeth case, supra note 12.
Mersey Steel and Iron Company case, supra note 13.
Cornwall case, supra note 37.
Canterbury Pipe Lines Ltd case, supra note 38.
96
employer set-off the amount she was entitled to as liquidated damages against the
balance of the purchase price due to the contractor49
However, an important principle laid down by Salmon LJ in Decro-Wall
International SA v. Practitioners in Marketing Ltd50:
“The case would have been quite different if the defendants' breaches
had been such as reasonably to shatter the plaintiffs' confidence in the
defendants' ability to pay for the goods with which the plaintiffs
supplied them.”
Therefore, non-payment would be a repudiatory breach if it shatters the
contractor’s confidence in receiving payments.
As a conclusion, the result of the analysis seems to suggest that, in most of the
circumstances, non-payment is not a repudiatory breach of contract by the employer.
The contractors are not advised to stop work at the site when the employer refused to
make payments, or he himself would be guilty of a breach of contract in failing to
maintain regular and diligent progress. Therefore, an employer may be held to be in
repudiatory breach of contract in failing to make payment if his action shows an
intention no longer to be bound by the contract and his default goes to the root of the
contract. The employer cannot rely upon its own breach to justify a contention that
the contractor was itself in repudiatory breach.
49
50
Lee Poh Choo case, supra note 39.
2 All ER 216, [1971] 1 WLR 361.
CHAPTER V
CONCLUSION AND RECOMMENDATIONS
5.1
Introduction
This chapter is the last chapter that summarizes the finding of the research
according to the research objective. It also contains the problems encountered during
the research as well as the recommendations for future researches.
5.2
Summary of Research Findings
A total number of 11 cases centered on issue of non-payment were studied,
where 7 of them were involving construction contracts and the remaining were
contracts of sales of goods. Table 5.1 shows the circumstances where non-payment
constitutes a repudiation of contract by the employer. Table 5.2 shows the
circumstances where non-payment does not amount to repudiation of contract by the
employer / purchaser.
Table 5.1: Circumstances where non-payment constituted a repudiation of contract by the employer
No
Cases
1
Ban Hong Joo Mines Ltd v.
Chen & Yap Ltd
[1969] 2 MLJ 83
2
C J Elvin Building Services
Ltd v Noble and Another
[2003] EWHC 837 (TCC)
Circumstances and Remarks
- Where the defendant’s deliberate and unjustified refusal to pay
what was already due coupled with his unjustified order to the
plaintiff to stop work constituted a repudiation of contract.
- Plaintiffs' right to the fortnightly progress payments for work done in
digging and removing the earth is not dependant on their digging
down to the agreed depth of 25 feet.
- Defendants had at all times been in breach of their obligation to
make periodic payments
- The defendants ordered to the plaintiffs to stop work and this
stoppage of work by them clearly went to the root of the contract.
- The defendant was in breach of what to the claimant was a most
important term of the contract, namely that reasonable sum due
should be paid at reasonable intervals.
- It was not a valid excuse for the defendant to put forward financial
difficulties as an excuse not to pay.
- The defendants were simply not prepared, whether sums were
available or not, to make any further interim payment.
- The defendants proposed four significant alterations to the simple
contractual arrangements which they had which were threatening
not to pay any further sum until the works were completed.
- Therefore, the claimant was entitled to suspend the work
- The defendant cannot rely upon its own breach to justify a contention
that the claimant was itself in repudiatory breach.
Type of Contract/
Contractual
Relationship
Construction
Contract/
Employer and
Contractor
Construction
Contract/
Employer and
Contractor
Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser
No
1
2
3
Cases
Wong Poh Oi v. Guok
Gertrude and Another
[1965-1968] 1 SLR 455
Circumstances / Judicial Decisions
Time of payment was not of the essence of the contract.
-
-
Both cl 5 and cl 6 appeared to show clearly that time
was not intended to be of the essence of the contract.
The delay or refusal of the plaintiff to pay for the extras could not be
regarded as showing an intention no longer to be bound by the
contract.
Time of payment was not of the essence of the contract.
Decro-Wall International
- The time for payment had been extended with the consent of seller
SA v. Practitioners in
on occasions. The correspondence shows that the changes made from
Marketing Ltd
time to time in the terms of payment, and at the other changes which
[1971] 2 All ER 216, [1971]
came under discussion, it seems plain that terms as to payment were
1 WLR 361
at all times negotiable.
- The seller never doubted that the bills would be paid albeit late
- The failure to pay the bills of exchange promptly and the likelihood
of similar delays in the future did not constitute a repudiation of
the agreement by the defendants.
Brani Readymixed Ptd Ltd Time of payment was not of the essence of the contract.
- Failure of the purchaser to supply the supplier the schedule was not a
v. Yee Hong Pte Ltd
breach which amounted to repudiation of contract
[1994] 2 SLR 552
- Therefore, the supplier were not discharged from further performance
of the contract.
Type of Contract/
Contractual
Relationship
Construction
Contract/
Employer and
Contractor
Contract of Sale of
Goods/ Seller and
Purchaser
Construction
Contract/
Contractor and
Supplier
Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser (cont’d)
No
Cases
Circumstances / Judicial Decisions
4
Freeth & Another v Burr &
Another
[1874-1880] All ER Rep
751; [1874-80] All ER Rep
751
5
Kah Seng Construction v
Selsin Development
Suit No 22-309 of 1992
Single act of refusing to pay was not an act that put an end to the
contract.
- Non-payment by the purchaser for the first parcel was not such an
abandonment or refusal to perform their part of the contract.
- In addition, there was no evidence of any inability on their part to
perform.
Single act of refusing to pay was not an act that put an end to the
contract.
- Non-payment of one certificate and partial non-payment of the
employer did not evinced an absolute refusal not to perform his side
of the contract
- It is trite law that a contractor can only terminate his contract with his
employer if he shows, inter alia, a repudiatory breach by the
employer in the sense that the employer has evinced an absolute
refusal not to perform his side of the contract.
Type of Contract/
Contractual
Relationship
Contract of Sales
involving 250 tons
of iron/ Seller and
Purchaser
Construction
Contract/
Employer and
Contractor
Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser (cont’d)
No
6
Cases
Circumstances / Judicial Decisions
Mersey Steel and Iron
Company v. Naylor, Benzon,
& Co.
(1884) 9 App Cas 434.
-
-
7
Cornwall v Henson
[1900-3] All ER Rep Ext
1734
-
The buyers had not, by postponing payment under the erroneous
advice of their solicitor, so shown an intention no longer to be
bound by the contract.
The buyers were both ready and willing to pay if it had not been for
the unlucky circumstance that induced them to refuse to pay under a
mistake of law.
Therefore, the buyers did not show an intention no longer to be bound
by the contract to release the seller from further performance.
It is not suggested for a moment that the buyers were in any
pecuniary difficulty, or wished to delay payment because it was not
convenient to pay.
There is nothing from the correspondence, which can be fairly
construed into a refusal by the buyers to comply with the terms of the
contract.
Failure by the purchaser to pay the last instalment (relatively small
amount) did not amount to a repudiation on his part of the contract.
Purchaser paid the deposit and agreed that balance to be paid by
instalments.
All other instalments were paid and the purchaser had been in actual
possession for some years but he failed to pay final instalment.
It did not amount to a repudiation on his part of the contract.
It cannot be said that the plaintiff refuse to carry out contract as only
£ 10 (relatively small amount) was owed.
Type of Contract/
Contractual
Relationship
Contract of Sales
involving large
quantity of steel/
Seller and
Purchaser
Contract of Sale of
Land/ Seller and
Purchaser
Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser (cont’d)
No
Cases
Circumstances / Judicial Decisions
8
Canterbury Pipe Lines Ltd v Christchurch Drainage
Board
[1979] 2 NZLR 347; [1979] NZLR LEXIS 405
9
Lee Poh Choo v Sea
Housing Corporation Sdn
Bhd
[1982] 1 MLJ 324
-
The withholding of money had only a temporary quality because the
employer intended to resume payments when the contractor’s men
returned to work and rectified their mistake.
The withholding of the certificate for the progress payment was not
justified by the contract, but it was not in the way in which it was
done and the manner in which the intimation of it was passed to the
contractor in any sense an indication that the defendant did not
propose to make any further payments.
The employer set-off the amount she was entitled to as liquidated
damages against the balance of the purchase price due to the
contractor is not a repudiation of contract.
Type of Contract/
Contractual
Relationship
Construction
Contract/
Employer and
Contractor
Construction
Contract/
Developer and
Contractor
As a conclusion, the result of the analysis seems to suggest that, in most of
the circumstances, non-payment 1 is not a repudiatory breach of contract by the
employer. The contractors are not advised to stop work at the site when the employer
refused to make payments, or he himself would be guilty of a breach of contract in
failing to maintain regular and diligent progress. However, as per Earl of Selborne
L.C. in Mersey Steel & Iron Co Ltd v. Naylor, Benzon & Co2:
“You must look at the actual circumstances of the case in order to see
whether the one party to the contract is relieved from its future
performance by the conduct of the other, you must examine what that
conduct is, so as to see whether it amounts to a renunciation, to an
absolute refusal to perform the contract, such as would amount to a
rescission if he had the power to rescind, and whether the other party
may accept it as a reason for not performing his part.”
Therefore, an employer may be held to be in repudiatory breach of contract in
failing to make payment if his action shows an intention no longer to be bound by the
contract and his default goes to the root of the contract. The employer cannot rely
upon its own breach to justify a contention that the contractor was itself in
repudiatory breach.
5.3
Problem Encountered During Research
Constraint and insufficiency of time was the main and only problem encountered
in completing this research. Only eight (8) weeks’ time was available for this research
1
2
Inclusive of delayed payment and where the amount paid by the employer is fewer than the
amount claimed by the contractor.
(1884) 9 App Cas 434.
and hence every process has been carried out in a very fast manner, especially during the
data collection process, which involved collecting and sorting court cases from different
law journals. This limitation led to less cases being found to support the findings. If
there were more time given, the study can be done in more comprehensive and thorough
way.
5.4
Further Studies
The followings are some recommendations for future researches: -
i.
To look into repudiatory breaches (other than non-payment) by the employer
that entitles the contractor to terminate the contract.
ii.
To look into repudiatory breaches by the contractor that entitles the employer
to terminate the contract.
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