Malaysia: Can A Standard Form Of Contract Be Implied By The Conduct Of The Parties?

Introduction

In most circumstances, parties to a construction project would elect which standard form of contract they wish to apply to their project and thereafter execute the same. In the normal course of things, a Letter of Award is first issued and accepted which makes reference to a particular standard form of contract.

In recent case of Fateh Construction Sdn Bhd v Maharani Specialist Sdn Bhd & Anor [2022] MLJU 771, the Court had to consider if, in the absence of an executed standard form of contract and with only an executed Letter of Award, would parties still be bound by the terms of the standard form of contract?

Background Facts

The 1st Defendant, Maharani Specialist Hospital Sdn Bhd operates a private hospital known as KPJ Seremban Specialist Hospital ("the Hospital"). The 2nd Defendant, KPJ Healthcare Berhad was the holding company of the 1st Defendant ("KPJ"). By way of a letter of acceptance dated 16.1.2018 ("LOA"), the Hospital appointed the Plaintiff, Fateh Construction & Services Sdn Bhd ("Fateh Construction") as the design and build contractor for the upgrading works of the sewerage station ("Station") at the Hospital. The LOA specifically provided that parties were required to executed a formal contract agreement and had made reference to "conditions of contract". It was claimed that the understanding of the parties was that the PWD Design and Build DB (Rev 1/2010) would be used as the standard form of contract which was to be executed between the parties and was the conditions of contract referred to in the LOA ("the Conditions of Contract").

During the course of the work, some variations had to be made and thus Fateh Construction submitted the design for the variations to Indah Water Consortium Negeri Sembilan ("IWKNS") and the same was approved by IWKNS on 2.4.2018. Consequently, Fateh Construction on 20.4.2018 submitted its quotation the Defendants for their approval. Fateh Construction took possession of the site to carry out the upgrading works of the Station on 27.7.2018.

Despite not receiving approval from the Defendants as to the revised quotation, Fateh Construction proceeded with the upgrading works of the Station based on the revised design approved by IWKNS. A revised LOA was issued by the Defendants on 21.4.2019 based on Fateh Construction's quotation ("Revised LOA").

The Plaintiff thereafter proceeded to complete the remaining works that involved the variation required by the IWKNS and finally completed the upgrading of the Station as evidenced by the Certificate of Practical Completion issued on 9.7.2019 ("the CPC").

Subsequently, on 19.8.2019, Fateh Construction made a claim for loss and expense amounting to RM1,780,910.25 on the basis of 'idling costs' ("Letter of Demand"). The Defendants rejected the claim on the basis that Fateh Construction had failed to comply with the relevant conditions in the Conditions of Contract and disputed the same. The Defendants also raised the issue that there had been several defects discovered on the Site which needed to be rectified before vacant possession of the Station could be delivered to IWKNS. Fateh Construction in turn denied that the obligation to rectify the said defects was theirs.

As the result, Fateh Construction commenced legal action against both the Hospital and KPJ for the following:-

1. A sum of RM1,992,910.25 (being the alleged idling costs plus the release of the performance bond and the retention sum);
2. A sum of RM102,400.00 per month calculated from 1.7.2019 until vacant possession of the Station is delivered to the Defendants and/or IWKNS;
3. Interest;
4. Costs;
5. Any other relief deemed fit.

The Defendants in turn counterclaimed for the following:-

1. A sum of RM165,000.00 being cost of appointing a 3rd party to rectify the defects;
2. A declaration that Fateh Counstruction reimburse the Defendants for backcharges from IWKNS;
3. Losses and damages to be assessed;
4. Interest;
5. Cost;
6. Any other relief deemed fit.

As regards the main suit by Fateh Construction, the Defendants essentially took the position that firstly, Fateh Construction was never idle, secondly, even if they had a claim for any additional loss and expense, the terms of the Conditions of Contract must be adhered to which Fateh Construction failed to do and that the alleged sums claimed as special damages had not been proven.

Fateh Construction denied the applicability of the Conditions of Contract by reason that it has no knowledge of the Conditions of Contract and had never executed the same.

High Court's Findings

Datuk Lim Chong Fong J noted that contrary to the stipulations of the LOA, the formal contract agreement, Conditions of Contract and Special Conditions which are normally collated and bound together as Contract Documents had not materialized or been executed by the parties.

However, subsequent to the issuance of the LOA, the learned High Court Judge found that Fateh Construction itself had on several occasions accepted the applicability of the Conditions of Contract without reservation. This was seen from the fact that the documents such as the Revised LOA and the CPC had specifically mentioned clauses in the Conditions of Contract and Fateh Construction acknowledged the said documents. Furthermore, the Letter of Demand itself had made reference to the Conditions of Contract.

In arriving to this decision, the High Court also referred to Vistanet (M) Sdn Bhd v Pilecon Civil Works Sdn Bhd [2005] 7 CLJ 101 which concluded that although it is settled law that an agreement may not be interpreted by reference to the subsequent conduct of the parties, it is equally well settled that parties may by their subsequent conduct give a term in an agreement a particular meaning.

The High Court went on to examine the evidence and found that essentially, there was no suspension of work by Fateh Construction albeit the works had progressed more slowly. As a result, Fateh Construction's pleas and claim for idling costs was bade as no ilding of work had occurred as a matter of fact.

The learned High Court Judge then went on to examine if Fateh Construction's claim had complied with the Conditions of Contract. In the interest of completion, the clauses in question, namely Clauses 50.1-50.3 are reproduced below:-

On the facts of the case, the Letter of Demand was sent on 19.8.2019. However, the it was argued that the relevant event had to be, at the very latest, when the Revised LOA was issued i.e. 21.4.2019 and received by Fateh Constuction on 22.4.2019. Thus, pursuant to Clause 50.1, Fateh Construction had an obligation to give notice of writing of its intention to claim any additional loss and expense within 60 days of such an event.

Fateh Construction had argued that if the Conditions of Contract applied (which was denied), then there was still compliance as the Letter of Demand was sent within 90 days of the CPC pursuant to Clause 50.2. The Defendants argued that this was still fatal as Clause 50.3 clearly states that both Clauses 50.1 and 50.2 must be complied with before such a claim can be brought.

Upon analysing the evidence, the above clauses and the cases that had been submitted, the learned High Court Judge found that by virtue of Clause 50.3, it did not exonerate Fateh Construction from its failure to comply with Clause 50.1 and thus, this was fatal to their claim.

As regards the rest of the claims by Fateh Construction, the High Court Judge dismissed all other claims save for the sum of RM53,000.00 being one half of the retention monies. This sum was allowed on the basis that the learned High Court Judge took judicial notice that it is customary in the Malaysian construction industry that one half of the retention monies should be released upon practical completion. Fateh Construction has since appealed to the Court of Appeal and the matter is pending Hearing.

Conclusion

Whilst it is always prudent and necessary for parties to execute all related contract documents which the parties intend to be expressly bound by, parties should be wary that by their conduct, certain circumstances may infer that there is an intention to be bound by a particular form of contract.

This is especially so when contract documents such as the Letters of Award, Certificates of Practical Completion and correspondences make specific reference to particulars of a form of contract. Thus, parties should be aware when acknowledging and/or accepting these documents as to what clauses have been made reference to and if there was indeed an intention to be bound by the same. As there are several forms of standard contract being used in the construction industry, contracting parties should also be aware of the terms of the same including the strict timelines therein to ensure there is compliance and that the said party is not prevented from bringing a claim due to non-compliance of the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.