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DECLARATION OF THESIS / UNDERGRADUATE PROJECT PAPER AND COPYRIGHT

Author’s full name : NUR SYAIMASYAZA BT. MANSOR

Date of birth : 12 JANUARI 1987

Title : NOTICE AS CONDITION PRECEDENT TO CLAIM _

LIQUIDATED DAMAGES _

Academic Session : 2010/2011 _

I declare that this thesis is classified as:

I acknowledged that Universiti Teknologi Malaysia reserves the right as follows:

1. The thesis is the property of Universiti Teknologi Malaysia.

2. The Library of Universiti Teknologi Malaysia has the right to make copies for the

purpose of research only.

3. The Library has the right to make copies of the thesis for academic exchange.

Certified by:

SIGNATURE SIGNATURE OF SUPERVISOR

870112-02-5026 Assoc Prof. Dr. Rosli Abdul Rashid

(NEW IC NO. / PASSPORT NO.) NAME OF SUPERVISOR

Date: JULY 2011 Date : JULY 2011

NOTES : * If the thesis is CONFIDENTAL or RESTRICTED, please attach with the letter from

the organization with period and reasons for confidentiality or restriction.

UNIVERSITI TEKNOLOGI MALAYSIA

CONFIDENTIAL (Contains confidential information under the Official Secret

Act 1972)*

RESTRICTED (Contains restricted information as specified by the

organization where research was done)*

OPEN ACCESS I agree that my thesis to be published as online open access

(full text)

√

PSZ 19:16 (Pind. 1/07)

NOTICE AS CONDITION PRECEDENT TO CLAIM LIQUIDATED

ASCERTAINED DAMAGES (LAD)

NUR SYAIMASYAZA BT. MANSOR

A thesis submitted in fulfilment of the

requirements for the award of the degree of

Master in Science of Construction Contract Management.

Faculty of Built Environment

Universiti Teknologi Malaysia

July 2011

ii

DECLARATION

I declare that this thesis entitled “Notice as Condition Precedent to Claim Liquidated

Ascertained Damages (LAD)” is the result of my own research except as cited in the

references. The thesis has not been accepted for any degree and is not concurrently

submitted in candidature of any other degree.

Signature : ....................................................

Name : ....................................................

Date : ....................................................

NUR SYAIMASYAZA BT. MANSOR

iii

Dedicated to

My beloved mother and father,

for the

Love and Support

iv

ACKNOWLEDGEMENT

With high gratitude to Allah S.W.T. who gave me the ideas and physical

strength in preparing this master project.

In preparing this master project, I was fortunate as I was supported and aided

by many individuals. First and foremost the special thank goes to my supervisor,

Assoc Prof. Dr. Rosli Abdul Rashid for his guidance and advice in order to complete

this master‟s project.

A special thanks to all the lecturers in Master of Science in Construction

Contract Management, for their patience and kind advice during the process of

completing this master project.

I am also thankful to my parents for their helpfulness and encouragement

while preparing this master project.

Lastly, I would like to thank my classmates for their great support, opinion

and willingness to share their knowledge towards the completion of my research.

.

v

ABSTRACT

Most forms of building contract include a clause entitling the employer to a specified

amount of damages, referred to as liquidated and ascertained damages (LAD) if the

contractor is late in constructing a project. This clause sets out the procedure and

condition that need to be followed by the employer. Some provision for example in

clause 40.1 PWD 203A (Rev. 2007) require the employer to issue notice of intention

before claiming LAD. The purpose of the issuance of notice is to inform the

contractor about the payment or deduction. However, does the issuance of notice is

condition precedent to the said claim? Some provision does not specifically expressly

state the requirement to issue notice. So, there is an argument that section 56(3) of

Contract Act is effective as an implied term to the contract. Based on the respective

situations, question arises whether the employer‟s entitlement to liquidated damages

is waived if he fails to issue the said notice. This study is carried out to determine

whether notice is condition precedent to claim liquidated damages and the legal

impact of notice provision for liquidated damages claim. The study was carried out

mainly through documentary analysis of law journals. It was found that when the

provision expressly state that notice is condition precedent, the failure to comply

with notice provision might jeopardize the employer‟s claim. However, the

employer‟s claim is not totally rejected because based on prevention principle, the

contractor who caused the delay, cannot benefit from its wrong act. When the

provision did not expressly state that notice is a condition precedent, it can be

condition precedent by implication. The argument that section 56(3) is an implied

term to the contract was wrong because section 56(3) is only applicable when the

contract becomes voidable.

vi

ABSTRAK

Kebanyakan borang kontrak pembinaan mengandungi klausa bagi membolehkan

majikan menuntut ganti rugi jika kontraktor tidak menyiapkan kerja pada tarikh siap

yang ditetapkan yang dikenali sebagai Ganti Rugi Tertentu dan Ganti Rugi

Ditetapkan. Klausa ini mengandungi prosedur dan syarat yang perlu diikuti oleh

pihak yang berkontrak. Terdapat sesetengah klausa yang menyatakan bahawa

majikan perlu mengeluarkan notis niat sebelum memohon ganti rugi seperti yang

dinyatakan di dalam klause 40.1 JKR 203A (Sem. 2007). Tujuan pengeluaran notis

adalah untuk memaklumkan kepada kontraktor mengenai pembayaran atau

pemotongan yang akan berlaku. Namun, adakah pengeluaran notis menjadi syarat

yang perlu dipenuhi sebelum membuat tuntutan tersebut? Sesetengah klausa tidak

menyatakan keperluan untuk mengeluarkan notis niat sebelum menuntut ganti rugi.

Oleh itu, terdapat pendapat mengatakan seksyen 56(3) Akta Kontrak 1950 akan

bertindak sebagai syarat tersirat kepada kontrak mereka. Berdasarkan situasi yang

dinyatakan di atas, persoalan timbul sama ada hak majikan terhadap ganti rugi akan

terjejas jika dia gagal mengelurkan notis. Kajian dijalankan untuk mengetahui sama

ada notis menjadi syarat sebelum menuntut ganti rugi dan kesan peruntukan notis

tersebut dari sudut undang-undang. Kajian telah dijalankan dengan menjalankan

analisis dokumentari jurnal undang-undang. Hasil kajian mendapati apabila klausa

menyatakan notis menjadi syarat sebelum memohon ganti rugi, kegagalan untuk

mematuhi syarat tersebut akan menjejaskan hak majikan terhadap ganti rugi tersebut.

Namun, majikan masih layak untuk menerima pampasan kerana berdasarkan prinsip

pengelakan, kontraktor tidak boleh mendapat keuntungan daripada kesalahannya

sendiri. Pendapat yang menyatakan seksyen 56(3) adalah syarat tersirat kepada

kontrak adalah salah kerana seksyen 56(3) hanya boleh terpakai apabila kontrak

tersebut menjadi kontrak yang boleh dielakkan.

vii

TABLE OF CONTENT

CHAPTER TITLE PAGE

DECLARATION ii

DEDICATION iii

ACKNOWLEDGMENTS iv

ABSTRACT v

ABSTRAK vi

TABLE OF CONTENT vii

LIST OF CASES xi

LIST OF ABBREVIATIONS xiii

LIST OF FIGURE xiv

1 INTRODUCTION 1

1.1 Background of the Study 1

1.2 Problem Statement 7

1.3 Previous Studies 8

1.4 Objective of the Study 9

1.5 Scope of the Study 10

1.6 Significance of the Study 10

1.7 Research Methodology 11

1.7.1 Identifying the Research Issue 11

1.7.2 Literature Review 12

1.7.3 Data Collection 12

1.7.4 Research Analysis 13

1.7.5 Conclusion and Recommendation 13

viii

1.8 Organization of the Thesis 15

2 LIQUIDATED AND ASCERTAINED DAMAGES (LAD) 17

2.1 Introduction 17

2.2 Definition of LAD 17

2.3 Issues Concerned on LAD 18

2.3.1 Liquidated damages vs. Penalty clause 19

2.3.2 The Requirement to Prove Loss 22

2.3.3 The Validity of LAD if the Architect/Engineer fails

to grant a timely extension of time 24

2.3.4 Can a Party Challenge the Validity of a Liquidated

Damages Sum after the Contract has been signed? 25

2.3.5 Provisional Liquidated Ascertained Damages 26

2.4 Principle element of enforceable liquidated damages 26

2.5 Benefits of imposing liquidated damages 30

2.6 Conclusion 32

3 PROVISION OF LIQUIDATED DAMAGES 34

3.1 Introduction 34

3.2 Contractual Procedure to claim LAD 35

3.2.1 Establish the Default of the Contractor 35

3.2.2 Establish the Existence and Validity of the

Liquidated Damages Clause 36

3.2.3 Determine if Employer has Waived his Rights 37

3.2.4 Determine Whether the Relevant Certificates/Notices

Have Been Issued 38

3.2.5 Employer Recovers the Liquidated Damages 39

3.3 Liquidated Damages Provision in Various Standard Forms 39

3.3.1 JKR 203A (Rev. 2007) 40

3.3.2 PAM 2006 Forms (With and Without Quantities)

Editions 40

ix

3.3.3 IEM.ME 1/94 Form 41

3.3.4 JCT 98 Standard Forms Contracts 41

3.4 Principle of Contract 43

3.4.1 Express Terms 43

3.4.2 Implied Terms 44

3.4.2.1 Terms implied by statute 44

3.5 Notices as Condition Precedent 45

3.5.1 Definition of „notice‟ 46

3.5.2 The Purpose of Notice 47

3.5.3 Definition of „condition precedence‟ 48

3.5.4 Court Interpretation of „condition precedence‟ 49

3.5 Conclusion 54

4 THE STATUS AND IMPLICATION OF NOTICE

PROVISION 55

4.1 Introduction 55

4.2 Case Analysis 56

4.2.1 Notice as Condition Precedent 56

4.2.2 Notice Not Expressly Stated as Condition

Precedent 60

4.2.3 No Notice Provision 64

4.2.4 Validity of notice 73

4.3 Conclusion 78

5 CONCLUSION AND RECOMMENDATION 79

5.1 Introduction 79

5.2 Summary of Research Findings 79

5.3 Research‟s Constraints 81

5.4 Suggestions for Further Research 81

5.5 Conclusion 82

REFERENCES 83

BIBLIOGRAPHY 88

x

LIST OF CASES

CASES PAGE

A.Bell & Son (Paddington) Ltd v CBF Residential Care &

Housing Association [1990] 46 BLR 102....................................................4,60

Alfred McAlpine Capital Projects Ltd v. Tilebox Ltd

(2005) EWHC 281 (TCC)…………………………………………...………27

Bethlehem Steel Corporation v. City of Chicago

(1965) 234 F.Supp. 726……………………………………………………..27

Brammal and Ogden Ltd v. Sheffield City Council

[1983] 29 BLR 73………………………………………………………...…36

Brisdale Resources Sdn Bhd v. Law Kim [2004] 6 MLJ 76…………………………68

Bovis Lend Lease Ltd v. Braehead Glasgow Ltd

[2000] All ER (D) 633………………………………………………..47,54,75

Bunge Corporation v. Tradax Export S.A. [1981] 1 W.L.R. 711…………..……60,63

CJ Sims Ltd v. Shaftesbury PLC [1991] 60 BLR 94…………...……………………49

Clydebank Engineering and Shipbuilding Company Limited v. Don

Jose Ramos Ysquierdo-y-Castaneda and Others [1905] AC 6…………..21,28

Dunlop Tyre v. New Garage [1915] AC 60…………………………………...…19,32

Gaymark Investments Pty Ltd v. Walter Construction Group Ltd [1999]

NTSC 143…………………………………………………………………...58

Hadley v Baxendale (1854) 9 EX 341..........................................................................1

Hariram a/l Jayaram & Ors v. Sentul Raya Sdn Bhd

[2003] 1 MLJ 22…………………………………………………………….66

Holloway Holdings Ltd v Archway Business Centre Ltd

19 August 1991, unreported..............................................................................4

xi

Jarvis Brent Ltd v. Rowlinson Construction Ltd [1990] 6 Const LJ 292............7,63,74

J.F. Finnegan Ltd v. Community Housing Association Ltd

[1995] 65 BLR 103...............................................................................62,63,73

Linggi Plantations Ltd v Jagatheesan [1972] 1 MLJ 89.......................................21,32

London Borough of Merton v. Stanley Hugh Leach [1985] 32 BLR 51…………….52

Lord Elphinstone v. Monkland Iron and Coal Company [1886]

11 App. Cas 332..............................................................................................21

Mardale Pipes Plus Ltd v Malaysian International Trading Corp

(Japan) Sdn Bhd [2009] 5 MLJ 691............................................................6,71

Multiplex Construction v Honeywell [2007] 1 BLR 195……………………………47

Osceola County, FI v. Bumble Bee Construction (1985) 479 So.2d 310………...…27

Peak Construction (Liverpool) Ltd v. McKinney Foundations

Ltd (1970) 1 BLR 114………………………………………………...24,33,57

Philips v. Attorney General of Hong Kong (1993) 61 BLR 41………………25,31,33

Pym v, Campbell [1856] 6 E & B 370………………………………………………49

Robinson v Harman (1848) 1 EXCH 850.....................................................................2

Sakinas Sdn Bhd v. Siew Yik Hau & Anor [2002] 5 MLJ 497……………...6,23,32,64

Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995]

1 MLJ 817………………………………………………………………..23,32

SS Maniam v. State of Perak [1957] MLJ 75……………………………………...3,21

Tai Kim Yew & Ors v. Sentul Raya Sdn Bhd [2004] 4 MLJ 227……………………69

Temloc v Errill Properties (1987) 39 BLR 30…………………………………...24,33

Token Construction Co Ltd v. Charlton Estates Ltd (1973) 1 BLR 48………...…...38

Tool Metal Manufacturing Co. Ltd v. Tungsten Electric Co. Ltd

[1955] 2 All ER 657…………………………………………………………37

Tunjang Wawasan Sdn. Bhd. v TNB Generation Bhd [2007] MLJU 362....................6

Wearne Brothers (M) Ltd v Jackson [1966] 2 MLJ 155…………………………….22

Wise v. United States (1919) 249 U.S. 361………………………………………….27

WW Gear Construction Ltd v. McGee Group Ltd. [2010]

EWHC 1460 TCC………………………………………………………..50,54

xii

LIST OF ABBREVIATION

All ER - All England Law Report

BLR - Building Law Report

CIDB - Construction Industry Development Board

EWHC - High Court of England and Wales

EXCH - Law Reports: Court of Exchequer

FIDIC - Federation Internatonale des Ingenieurs-Conseils

IEM - The Institute of Engineers, Malaysia

LAD - Liquidated and Ascertained Damages

MLJ - Malayan Law Journal

MLJU - Malayan Law Journal Unreported

PAM - Pertubuhan Arkitek Malaysia

PWD - Public Work Department

JCT - Joint Contracts Tribunal

xiii

LIST OF FIGURE

FIGURE NO. TITLE PAGE

1.1 Research Flow Chart 14

CHAPTER 1

INTRODUCTION

1.1 Background of the Study

A contract is an agreement between two or more parties which creates

obligations to do or not do the specific things that are the subject of that agreement

and it is enforceable by law.1 If one of the parties failed to perform his part of the

obligation or he does it not according to the contract, he is considered to be in breach

of the contract.2 It now gives the other party the right to claim for damages for the

breach. Damages are normally assessed when breach occurs, and are designed to be

compensatory in nature.3 Two principles important for assessment of damages are

the principles of remoteness derived from the famous case of Hadley v Baxendale4 in

which Baron Alderson said:

1 Section 2 of Contracts Act 1950

2 Beatson J. (2002). Anson‟s Law of Contract. (28th ed.). United States: Oxford University Press.

p.172 3 Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter, 4 May p.1

4 (1854) 9 EX 341

2

"Where two parties have made a contract which one of them has broken, the

damages which the other party ought to receive in respect of such breach of

contract should be such as may fairly and reasonably be considered either

arising naturally, i.e. according to the usual course of things, from such

breach of contract itself, or such as may reasonably be supposed to have

been in the contemplation of both parties, at the time they made the contract,

as the probable result of the breach of it".5

The measures of damages are derived from the equally old case of Robinson v

Harman6 where it was stated:

"The rule of common law is that where a party sustains a loss by reason of a

breach of contract, he is, so far as money can do it, to be placed in the same

situation, with respect to damages, as if the contract had been performed".7

Damages calculated from these principles are normally assessed after the

breach occurs and are known as general or unliquidated damages. However, such

approach is difficult to assess and usually the contracting parties like certainty.8 This

lead party to include within their contracts remedies for most common breaches

which are known as liquidated damages.

Liquidated damages or usually known as liquidated and ascertained damages

(LAD) arise where the parties to a contract agree from the start the amount of

damages that one party will pay to the other in the event of a specified breach of

contract.9 In England, the imposition of the word “ascertained” is aim to put a

distinction between “liquidated damages” with “penalty” where this word will lend

5 Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter, 4 May p.1

6 (1848) 1 EXCH 850

7 Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter, 4 May p.1

8 Ibid.

9 Murdoch J. (2009). Being Late Can Have Damaging Effects. The Estates Gazette. ProQuest Direct.

3

more weight to the argument that the liquidated damages is a genuine and ascertained

pre-estimate of the Employer‟s loss. However in Malaysia, there is no such

distinction between liquidated damages and penalty.10

Most forms of building contract include a clause entitling the client to a

specified amount of damages, referred to as “Liquidated Damages” or “Liquidated

and Ascertained Damages” (LAD) if the Contractor is late in handing over the

building.11

LAD replaces the client‟s common law right to damages for late

completion with a contractual right to a pre-determined sum for the period of delay.12

These clauses are favoured by employers because they alleviate the need to prove an

actual loss. However, this did not apply in Malaysia, because the client still need to

prove the actual damages suffered pursuant to section 75 of the Contract Act 1950.13

The imposition of LAD is also purport to provide for a negotiated and fair method of

allowing for the possibility of a delay in completion of the project, which provides

adequate compensation for the purchaser/owner, while ensuring that the contractor is

not too heavily penalized for the delay.14

One of the issues that can be discussed is regarding the issuance of notice of

intention before claiming liquidated damages. If the contract clearly stated that the

employer should issue notice of intention to claim liquidated damages, does it

invalidate the employer‟s right to deduct payment if he fail to issue them? Does the

issuance of certificate of non-completion is enough to entitle the employer to claim

LAD? For example in section 40 P.W.D. Form 203A (Rev. 2007):

10

SS Maniam v. State of Perak [1957] MLJ 75 11

Clause 40.1 PWD 203A (Rev. 2007), Clause 22.1 PAM 2006, Clause 26.2 CIDB (2000 Edition) 12

Turner B., 2011. Liquidated damages clauses in construction contracts. [online] Available at:

http://www.boyesturner.com/news-article.html?id=66 [Accessed 22 January 2011]. 13

Lim C. F. (1993). Enforcement of Liquidated Damages- To Prove Actual Loss?. The Malayan Law

Journal Articles. Vol 1, 1-9. Lexis Nexis Business Solution. 14

PM Professional Resources (2010). Construction Claim and Dispute Resolution. [online] Available

at: http://www.pm-pro.com.my/ [Accessed 20 October 2010].

http://www.boyesturner.com/news-article.html?id=66

http://www.pm-pro.com.my/

4

If the Contractor fails to complete the Works by the Date for Completion or

within any extended time granted pursuant to clause 43 (Delay and Extension

of Time), the S.O. shall issue a Certificate of Non-completion to the

Contractor. Prior to the issuance of the Certificate of Non-completion, the

S.O. shall issue a notice to the Contractor informing the Contractor the

intention of the Government to impose Liquidated and Ascertained Damages

to the Contractor if the Contractor fails to complete the Works by the Date

for Completion or within any extended time granted.

The clause stated that prior to the issuance of the Certificate of Non-

completion the Superintending Officer shall issue a notice to the contractor

informing the intention of the government to impose Liquidated and Ascertained

Damages. However, does the issuance of notice is considered “condition precedent”

or just information. If it is considered as condition precedent, does it waive the

employer‟s right to claim liquidated damages if the employer fail issue the notice?

In A.Bell & Son (Paddington) Ltd v CBF Residential Care & Housing

Association15

Judge John Newey QC state that the certificate of failure to complete

and a written requirement of payment or allowance under the middle part of clause

24.2.1 (JCT 98) were conditions precedent to the making of deductions on account of

liquidated damages. In Holloway Holdings Ltd v Archway Business Centre Ltd16

a

similar clause in IFC 84 was considered and it was again held that for the employer

to be able to deduct liquidated damages there must both be a certificate from the

Architect and a written request to the contractor from the employer.17

On another issue, for example in PWD 203A (Rev. 10/83), it did not mention

the requirement to give written notice of intention to claim liquidated damages.

Below is the example of the clause:

15

[1990] 46 BLR 102 16

19 August 1991, unreported 17

Chappell D. (2007). The JCT Design and Build Contract 2005. (3rd

ed.). Oxford:Wiley-Blackwell.

5

Clause 40 Damages for Non-completion (PWD 203A (Rev. 10/83))

If the Contractor fails to complete the Works by the “Date for Completion”

stated in the Appendix or within any extended time under Clause 43 hereof

and the S.O. certifies in writing that in his opinion the same ought reasonably

so to have been completed the Contractor shall pay or allow the Government

a sum calculated at the rate stated in the Appendix as Liquidated and

Ascertained Damages for the period during which the said Works shall so

remain and have remained incomplete and the S.O. may deduct such

damages from any monies due to the Contractor. The certificate issued under

this Condition shall be referred to as the “Certificate of Non-completion”.

The clause entitled the employer to claim for damages for late completion of

the project. From the clause above, there is no requirement for the employer to issue

notice of intention to claim liquidated damages. If such situation occurs, can the

contractor argue that the employer must issue notice as mention under section 56(3)

of the Contract Act? Does section 56(3) of the Contract Act is an implied term to

contract between parties?

In Section 56 (3) of Contract Act 1950 states:

If, in case of a contract voidable on account of the

promisor‟s failure to perform his promise at the time

agreed, the promisee accepts performance of the promise at

any time other than that agreed, the promisee cannot claim

compensation for any loss occasioned by the non-

performance of the promise at the time agreed, unless, at

the time of the acceptance, he gives notice to the promisor

of his intention to do so.

6

From section 56(3) of the Act, it briefly explain that when a party to the

contract cannot perform his promise within the stipulated time, the innocent party

may either terminate the contract or to treat it as still subsisting. If the innocent party

choose to treat the contract as still subsisting, either expressly or by conduct, the

contract will continue to exist but the time cease to be of the essence and becomes at

large. Consequently, the innocent party will lose their right to claim liquidated

damages under the contract. The time can be revived to be of the essence if the

innocent party serve a notice to the defaulting party before the time lapse. The notice

include the intention of the innocent party to claim compensation due to the breach

and setting a new date of completion. The issue here is whether the absence of a

clause in the contract such as in PWD 203A (Rev. 10/83) requiring the employer to

issued notice, does section 56(3) of the Contract Act 1950 serves as an implied terms

and the failure to follow them can waive the employer‟s right to liquidated damages.

In Sakinas Sdn Bhd v. Siew Yik Hau & Anor18

Abdul Aziz held that section

56(3) did not apply and that it was not necessary to give notice before a right to

impose LAD charges arose under a LAD clause. The court in Tunjang Wawasan Sdn.

Bhd. v TNB Generation Bhd19

also held the same decision that where there is a

liquidated damages clause section 56(3) does not apply.

However in Mardale Pipes Plus Ltd v Malaysian International Trading Corp

(Japan) Sdn Bhd (ExxonMobil Exploration and Production Malaysia Inc, third

party)20

the defendant argue that the requirement to give notice of intention to claim

liquidated damages as stated in section 56(3) of the Contract Act on the ground of the

Act did not apply where there was an LAD clause in the contract. The court held that

the failure to issue notice by the defendant had invalidate their right to claim LAD. In

fact the LAD clause could only be invoked when a notice under section 56(3) of the

Act had been properly given by the defendant.

18

[2002] 5 MLJ 497 19

[2007] MLJU 362 20

[2009] 5 MLJ 691

7

In Jarvis Brent Ltd v. Rowlinson Construction Ltd21

a contractor challenge

recovery of liquidated damages on grounds that the document actually received from

the employer is not the notice of liquidated damages required under the contract.22

So, what constitutes a notice? Since the clause did not specify what information

should be included in the notice, there is argument regarding the issue.

1.2 Problem Statement

Although most of the standard form contain provision for liquidated damages,

but the procedure and language in the clause is not similar. For example clause 40

(Damages for Non-completion) in PWD 203A (Rev. 10/83), there is no requirement

to issue notice by the employer before claiming liquidated damages. While in clause

22.1 PAM 2006 only state that the employer need to inform the contractor in writing

of the deduction of LAD. Although there is no requirement to issue notice in the

contract, contractor argue that notice should be given before claiming liquidated

damages pursuant to section 56(3) of Contract Act 1950 which states that at the time

of the acceptance of late delivery, the innocent party need to issue notice to state

their intention to claim damages. Question arises whether section 56(3) of Contract

Act is an implied term and shall be followed by the contracting parties.

In the new version of PWD standard form of contract, government had made

an amendment in clause 40 of PWD 203A (Rev. 2007) provides clearly express

notice requirement in the clause. It states that the employer prior to the issuance of

Certificate of Non-completion must issue notice of intention to claim liquidated

damages to inform the contractor about the payment or deduction. However, the

clause did not expressly state that notice is condition precedent to the said claim. It is

21

[1990] 6 Const LJ 292 22

Ndekugri I. and Rycroft M. (2000). The JCT 05 Standard Building Contract Law and

Administration. (2nd

ed.) Oxford: Elsevier.

8

not clear whether notice is deem as condition precedent before claiming liquidated

damages.

The foregoing discussion brings us to several pertinent questions:

1) The status of notice if it is stated as condition precedent in the LAD

provision?

2) If the provision stated the requirement to issue notice before claiming

liquidated damages but without expressly stated as condition precedent,

does it considered as condition precedent?

3) If the contract contains no express provision for notice of intention to

claim liquidated damages, is it possible to impose general act into the

contract in order to make notice as condition precedent?

4) What information should be included in the notice?

1.3 Previous Studies

There is several research studies had been carried out concerning liquidated

damages. Yong (2006) has done studies on “Liquidated and Ascertained Damages

(LAD) and Requirement of Mitigation”. The objectives were to determine the

requirement of mitigation and the extent of the employer‟s duty to mitigate his losses

when enforcing his right under the liquidated damages clause. From the research, it

was found that an employer‟s requirements to mitigate the losses is silent in standard

forms of contract, but despite that, the employer is bound to comply with the

requirements of mitigation in enforcing LAD by taking all reasonable steps or action

in accordance with principles of mitigation.

9

Chia (2009) had tried to identify the enforceability of the liquidated damages

provision in construction contract. The finding from the research found that the party

suffered losses will need to prove when claiming for compensation and required to

mitigate the losses before claim for damages. But there is an exceptions to contract of

sale and purchase under the Housing Developers Regulation 1989. This contract also

exempts the party from the need to issue notice of intention when claiming for

damages.

Mohamad Noor (2008) studied on the legal status of the practice of

provisional liquidated damaged (PLD) and identified the reasons and the effect of

imposing PLD on contractors. It was found that the contractual provisions must be

strictly adhered by the government in order to secure their right to liquidated

damages. Furthermore, in Malaysia the provisions are subject to the statutory

provisions under the Act.

1.4 Objective of the Study

The objective of study is to ascertain whether:

1) The issuance of notice is a condition precedence

2) If so, how it arise

Contract Act; or

Common Law

3) The implication of notice provision

10

1.5 Scope of the Study

The approach adopted in this research is case law based. There are no

limitations as for the court cases referred to in this study in terms of type of projects

as long as the case is related to “liquidated ascertained damages” and “notice to

claim LAD”. 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. The standard forms of contract that will be

referred to are:

a) Public Works Department (P.W.D) Form 203A (Rev. 10/83) & (Rev. 2007)

b) Pertubuhan Arkitek Malaysia (PAM) (2nd Edition, 2006)

c) Construction Industry Development Board (CIDB) Standard Form of

Contract for Building Works (2000 Edition)

d) The Institution of Engineers, Malaysia (IEM.ME 1/94 Form)

e) Joint Contracts Tribunal (JCT) Standard building contract guide (SBC/G),

(1998) & (2005b).

1.6 Significance of the Study

Poor understanding of the requirement of notification or the lack of notice has

led to disputes and disagreement amongst the various parties in construction contract.

The purpose of this study is to give an insight into the issues regarding the notice as

condition precedent to claim liquidated damages and the court reaction and its

decision concerning the issue. It is hoped that the findings of this study will assist the

players in the construction industry to understand the significance of the liquidated

damages clause in their contract, plus understand the requirement to issue notice of

11

intention to claim liquidated damages and put their best effort to avoid disputes

involving those issues.

1.7 Research Methodology

Research process and method of approach is vital as guidelines in preparing

the research so that the research could be done in an organized way to achieve the

research objective. Basically, this research process comprise of five major stages,

which involve identifying the research issue, literature review, data collection,

research analysis, conclusion and recommendation.

Stage 1 – Development of Proposal

1.7.1 Identifying the Research Issue

The initial stage involves the identification area of issues as well as

formulating the research objective. First, the overview of the concept of this

topic will be done through the initial literature review. The study issue arises

from intensive reading of books, journals and articles which can be attained

from the UTM library, Building Construction Information Centre (BCIC)

and Resource Centre of Alam Bina (RC). Once research objective has been

formulated, the scope and limitations for the research will be determined as

well as the research title.

12

1.7.2 Literature Review

Collection of various documentation and literature regarding the study

field is of most important in achieving the research objectives. Data will be

collected mainly through documentary analysis. All collected data and

information will be recorded systematically. Data will be collected mainly

from Malayan Law Journal, Singapore Law Report, Building Law Report,

Construction Law Report and other law journals. Data is collected by

browsing through the LexisNexis legal database. Important and relevant

cases will be collected and used for the analysis at the later stage. In

addition, secondary data from books, article reports, seminar papers,

newspapers and articles from the internet, is also useful for this research. All

the relevant books will be obtained from the Universiti Teknologi Malaysia

library and other public libraries.

Stage 2 – Data & Information Collection

1.7.3 Data Collection

At this stage, all the collected data, information, ideas, opinions and

comments will be arranged and recorded systematically. Important and

relevant cases is collected and use for the analysis at the later stage.

13

Stage 3 – Analysis

1.7.4 Research Analysis

The fourth stage of research is analysis phase. It involves data

analysis, interpretation and data arrangement. Once the previous related

court cases are collected, reviewing and clarifying all the facts of the cases

will be conducted. The focus will be on the issue of this research. After

identifying issues in each case, a thorough discussion and comparison will

be done in order to achieve objectives of this study.

1.7.5 Conclusion and Recommendation

In this final stage, discussions will be done based on the findings from

the previous stage to fulfil the aims or objective of this research and reach a

conclusion. Recommendations for further research will be made as a

suggestion for future researcher.

14

STAGE 2: DATA & INFORMATION COLLECTION

STAGE 4: CONCLUSION

STAGE 3: RESEARCH ANALYSIS

STAGE 1: DEVELOPMENT OF PROPOSAL

DATA AND INFORMATION COLLECTION 1. BREACH OF CONTRACT, DAMAGES

2. LIQUIDATED AND ASCERTAINED

DAMAGES (LAD)

3. NOTICE OF INTENTION TO CLAIM LAD

4. LEGAL ISSUES IN RELATION TO NOTICE

RESOURCES: 1. Books, Journals, Statutory, and cases.

2. UTM library electronic database: Lexis-Nexis

Legal Database eg. Malayan Law Journal, Appeal

Cases Report, All England Report, Building Law

Report

DETERMINATION OF

RESEARCH TITLE

SCOPE AND

LIMITATIONS

RESEARCH

OBJECTIVES

ISSUE OF THE

RESEARCH

RESEARCH METHODOLOGY 1. LITERATURE REVIEW

2. DATA AND INFORMATION

COLLECTION

3. RESEARCH ANALYSIS

CONCLUSION

OBJECTIVE:

TO ASCERTAIN WHETHER NOTICE IS CONDITION

PRECEDENT BEFORE CLAIMING LIQUIDATED DAMAGES

Figure 1.1 Research Flow Chart

15

1.8 Organization of the Thesis

1.8.1 Chapter 1: Introduction

The first chapter is an introduction to the research topic and covered a few

subtopics. The first subtopic is background of the study, followed by problem

statement which stated the issues that will be discuss in the study. Then, the next

subtopic covered on the previous research on the similar topic; objectives of the

research which stated the aims of the study; scope of the research; significance of the

study and finally the research methodology that to be used during the process of

research.

1.8.2 Chapter 2: Liquidated and Ascertained Damages (LAD)

Briefly, this chapter will covered on definition of liquidated damages, issues

concerned on LAD which include liquidated vs. penalty clause; the requirement to

prove loss; the validity of LAD if the Architect/Engineer fails to grant a timely

extension of time; can a party challenge the validity of a liquidated damages sum

after the contract has been signed; and provisional liquidated ascertained damages.

16

1.8.3 Chapter 3: Provision of Liquidated Damages

This chapter discuss on contractual procedure to claim liquidated damages. It

is divided into five subtopics ie. Establish the default of the contractor; establish the

existence and validity of the liquidated damages clause; determine if employer has

waived his rights; determine whether the relevant certificates/notices have been

issued; and employer recovers the liquidated damages. After that, the topic expend to

discuss on liquidated damages provision in various standard forms for example in

JKR 203A (Rev. 2007), PAM 2006, CIDB 2000 and etc; definition and purpose of

notice; definition and court interpretation of condition precedent.

1.8.4 Chapter 4: The Status and Implication of Notice Provision

This chapter is essential part of the research. Here, case law on condition

precedent and notice requirement before claiming liquidated damages shall be

analysed and the result discuss in a logical qualitative analysis. The task is to

ascertain the status of notice provision in liquidated damages clause; whether it is

condition precedent upon claiming liquidated damages.

1.8.5 Chapter 5: Conclusion and Recommendations

This chapter is the final part of the whole report and is a conclusion chapter. Briefly,

this chapter will give a detail summary of the research finding to a logical conclusion

of the previous chapter, highlight the problem encountered during the course of the

research and give recommendation on improving the subject area.

CHAPTER 2

LIQUIDATED AND ASCERTAINED DAMAGES (LAD)

2.1 Introduction

This chapter discusses briefly the principles of liquidated damages and its

attributes. It will be dealt with under five headings: (1) definition of LAD, (2) issues

concerned on LAD, (3) principle element of enforceable liquidated damages, (4)

benefits of imposing liquidated damages, and (5) conclusion.

2.2 Definition of LAD

Liquidated damages are variously defined. Glazov (2009) define liquidated

damages as an amount of money that contracting parties agree on as the amount of

damages one of them can recover if the party breaches the contract. For an example,

the amount of damages can be charge for per day of delay or per week.

18

Liquidated damages means a fixed and agreed sum as opposed to

unliquidated damages which is a sum which is neither fixed nor agreed, but must be

proved in court, arbitration or adjudication.23

It is a means of making the sanction for

breach explicit within a contract.

Eggleston (1997) defines liquidated damages as „a genuine pre-estimate of

the loss likely to be suffered or a lesser sum they can rightly be termed liquidated

damages.‟

2.3 Issues Concerned on LAD

Liquidated damages are always an emotive topic for both contractors and

employers alike.24

Many critics of liquidated damages provisions correctly assert that

these provisions foster finger-pointing between the parties and result in an

unnecessarily antagonistic relationship between the owner and contractor from day

one of the project.25

Apart from the issue of issuing notice of intention to claim

liquidated damages, there seems a lot of gray area concerned on the implementation

of LAD. Other issues concerned on LAD are discusses as follows.

23

Chappel D., Powell-Smith V. & Sims J. (2004). Building Contract Claims. (4th

ed.). Oxford:

Blackwell Publishing Ltd. pp 42 24

Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter. 25

Viscarello K. (2006) The Use of Liquidated Damages Clauses in Construction Contracts. [online]

Available at: http://www.sheehan.com/publications/good-company-newsletter/The-Use-of-

Liquidated-Damages-Clauses-in-Construction-Contracts.aspx [Accessed 20 October 2010].

http://www.sheehan.com/publications/good-company-newsletter/The-Use-of-Liquidated-Damages-Clauses-in-Construction-Contracts.aspx


19

2.3.1 Liquidated damages vs. Penalty clause

Many construction industry participants mistakenly consider a liquidated

damages provision to be a penalty clause because it often functions as an incentive

for the contractor to complete the project on time.26

Penalties, like fines or

forfeitures, may be imposed only by the courts or by other representatives of the

government, after due process of law.27

Powell-Smith (1989) defines penalty as a

sums of money inserted in a contract which is extravagant and unconscionable, the

purpose being to coerce a party to performance. Most modern forms of contract

eschew the use of „penalty‟ in favour of „liquidated damages‟, but the term is often to

be found in correspondence, site minutes and occasionally in forms of contract

drafted by construction professionals.28

It is important to note that the effect of a

penalty clause is that it is invalid and the sum is irrevocable in contrast to a bona fide

liquidated damages clause.29

The distinction between liquidated damages and penalty are defined in case

Dunlop Tyre v. New Garage.30

In this case, the clause in question was a standard

form, imposed on all of Dunlop‟s customers, that required the payment of £5 by way

of “liquidated damages” if the customer did any one of the acts of tampering with

marks on the goods; selling at under list price; supplying to persons blacklisted by

Dunlop; or exporting without Dunlop‟s consent. Lord Dunedin ruled that:

26

Friedlander M. C. (2001). Contractor Marketing- Penalty Clauses. [online] Available at:

http://www.schiffhardin.com [Accessed 23 January 2011]. 27

Ibid. 28


ed.). Oxford:


Harban Singh (2002). Engineering and Construction Contracts Management Commencement and

Administration. Malaysia: LexisNexis Business Solution. 30

[1915] AC 60

http://www.schiffhardin.com/

20

„The distinction between penalties and liquidated and ascertained damages

depends on the intention of the parties to be gathered from the whole of the

contract. If the intention is to secure performance of the contract by the

imposition of a penalty or a fine, then the sum is a penalty; but if, on the other

hand, the intention is to assess the damages for breaches of contract, it is

liquidated and ascertained damages.‟

The principles enunciated by Lord Dunedin in Dunlop case can be

summarized as follows:

1) It will be held to be a penalty if the sum stipulated for is extravagant and

unconscionable in amount in comparison with the greatest loss that could

conceivably be proved to have followed from the breach. The essence of a

penalty is a payment of money stipulated as in terrorem of the offending

party whilst the essence of liquidated damages is genuine covenanted pre-

estimate of damage.31

2) Though the parties to a contract who use the words penalty or liquidated

damages may prima facie be supposed to mean what they say, yet the

expression used is not conclusive.32

3) The question whether a sum stipulated is a penalty or liquidated damages

is a question of construction to be decided upon the terms and inherent

circumstances of each particular contract, judged of as the time of the

making of the contract, not as at the time of the breach.33

4) It is no obstacle to the sum stipulated being a genuine pre-estimate of

damage that the consequences of the breach are such as to make precise

pre-estimation almost an impossibility.34

31



Ibid. 33

Ibid. 34

Ibid.

21

Apart from the Dunlop case, there are few cases had laid down some

principle or approach taken in distinguishing the matter. For example Lord Watson in

Lord Elphinstone v. Monkland Iron and Coal Company35

held that there is a

presumption that it is a penalty when, „a single lump sum is made payable by way of

compensation, on the occurrence of one or more or all of several events, some of

which may occasion serious and others but trifling damage.‟ On the other hand, Lord

Halsbury in Clydebank Engineering and Shipbuilding Company Limited v. Don Jose

Ramos Ysquierdo-y-Castaneda and Others36

explained that it will be held to be a

penalty if the sum stipulated for is extravagant and unconscionable in amount in

comparison with the greatest loss that could conceivably be proven to have followed

form the breach.

In Malaysia, the existence of statutory provision37

said to cut the most

troublesome knot in the common law doctrine of damages namely, the distinction

between a penalty clause and a provision for liquidated and ascertained damages.38

It

was held in Maniam v The State of Perak39

and in Linggi Plantations Ltd v

Jagatheesan40

, there is no difference between penalty and liquidated damages. The

Privy Council in Linggi Plantations held that the intention of s 75 is to cut through

the rather technical rules of English law relating to the liquidated damages and

penalties and to apply in substance the equitable rule to all cases whether the sum

provided in the contract was in substance a penalty or a genuine pre-estimate of the

damages likely to be suffered. The equitable rule is that the court will only grant a

sum which is reasonable as representing the plaintiff s actual loss.41

35

[1886] 11 App. Cas 332 36

[1905] AC 6 37

Section 75 of Contract Act 1950 38



[1957] 1 MLJ 75. 40

[1972] 1 MLJ 89. 41


Journal Articles. Vol 1, 1-9. Lexis Nexis Business Solution.

22

Lal (2008) concluded that there will be a good arguable challenge to a

specified sum stated to be liquidated damages where the payer can prove on the

balance of probabilities that the stated sum had the dominant purpose of acting as a

deterrent; and the payer can prove on the balance of probabilities that the sum was

not a genuine pre-estimate of loss, because there was a substantial discrepancy

between the stated sum and the actual claim for damages.

2.3.2 The Requirement to Prove Loss

In theory, a liquidated damages clause is an unenforceable penalty when the

actual damages are markedly less than the stipulated contractual damages.42

In

practice, however, courts will enforce a liquidated damages clause if it provides a

reasonable forecast of the losses expected to result from a breach.43

With the

distinction between liquidated damages and penalty now well settled in Malaysia, it

means that an injured party must now prove his actual loss when claim for

compensation notwithstanding the liquidated damages clause in his contract.44

The Malaysian legal position is governed by section 75 of the Contract Act

1950 which stated that the amount provided for liquidated damages will only be

enforced in favour of the innocent party if it can be shown that this amount was a

genuine pre-estimate of the damages likely to flow from the specified breach.45

The

true intention of section 75 was observed by Abdul Aziz J in Wearne Brothers (M)

42

Coldwell D., Burchett-Williams A. & Celeste M. (2010). Liquidated Damages. Franchise Law

Journal [e-journal] 29 (4) Available through: ProQuest Database [Accessed on 25 Mei 2011] 43

Ibid. 44

Lim, G. and Kasim, K. (2002). Sakinas Sdn Bhd V Siew Yik Hau & Anor (2002) 5 MLJ 498: One

Step Forward, Two Steps Back? The Malayan Law Journal Articles. Vol 3, Lexis Nexis Business

Solutions. 45


Journal Articles. Vol 1, 1-9. Lexis Nexis Business Solution.

23

Ltd v Jackson46

who held that: The plaintiff must prove the damages they have

suffered unless the sum named is a genuine pre-estimate. Sinnadurai (1979)

commented that the cases seem to suggest that the plaintiff cannot recover simpliciter

the sum fixed in the contract, whether as a penalty or liquidated damages. The

plaintiff is required to prove the actual damages he has suffered.47

The failure to

proof of any actual loss might jeopardize their claim for liquidated damages.

In Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy48

the court has

laid out the principle regarding the requirement to prove actual loss suffer. This case

concerned the disputes between medical practitioners and was decided in the context

of a sale of a medical practice. It must be note that this case was heard in Federal

Court, which is the highest court in Malaysia. Therefore, this principle is binding to

all other courts. However, there is some evidence that it is not applied by the courts

in a construction context.49

In Sakinas Sdn Bhd v. Siew Yik Hau & Anor50

, the breach by the developer to

hand over vacant possession on stipulated time had caused them to pay liquidated

damages to the respondents (buyers) as stipulated in the Sale and Purchase

Agreement. The court held that late completion was a species of breach which „no

known measure of damages was employable‟ and thus the court would have to

decide the fair amount to be paid as „reasonable compensation‟. These two different

contradiction decisions thus left the issue whether actual losses need to be proved

prior to LAD being granted in a gray position. 51

46

[1966] 2 MLJ 155 47



[1995] 1 MLJ 817 49

Chia M. L. (2009). The Enforceability of Liquidated and Ascertained Damages in Construction

Contract. Master. University Teknologi Malaysia. 50

[2002] 5 MLJ 498 51

Chia M. L. (2009). The Enforceability of Liquidated and Ascertained Damages in Construction

Contract. Master. University Teknologi Malaysia.

24

2.3.3 The Validity of LAD if the Architect/Engineer fails to grant a timely

extension of time.

Most forms of contract set down very rigid time limits for the contractor to

serve notice of a claim for an extension of time but few are so strict on the time

within which the contract administrator must act.52

A question often asked is if the

contract administrator does not grant an extension of time in a timely manner does

this invalidate the liquidated damages provisions.53

The answer to this is much to the

contractor's disappointment. In the case of Temloc v Errill Properties54

(a case

concerning the JCT form of contract) the court held that:

"Even if the provision of clause 25.3.3 [requirement for the architect to

review extension of time within 12 weeks of practical completion] is

applicable, it is directory only as to time and is not something which would

invalidate the calculation and payment of liquidated damages. The whole

right of recovery of liquidated damages under clause 24 does not depend on

whether the architect, over whom the contractor has no control, has given his

certificate by the stipulated day".

However, in Peak Construction (Liverpool) Ltd v. McKinney Foundations

Ltd55

, Lord Justice Salmon held that if the failure to complete on time is due to the

fault of both the employer and the contractor, in his view, the clause does not bite.

He further commented that there is no way that the employer can insist on

compliance with a condition if it is partly his own fault that it cannot be fulfilled. In

any event, it is clear that, even if clause 23 had provided for an extension of time on

account of the delay caused by the contractor, the failure in this case of the architect

to extend the time would be fatal to the claim for liquidated damages. Accordingly,

as the architect has not made „by writing under his hand such an extension of time‟,

52

Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter. 53

Ibid. 54

(1987) 39 BLR 30 55

(1970) 1 BLR 114

25

there is no date under the contract from which the defendants‟ liability to pay

liquidated damages for delay could be measured. And therefore none can be

recovered.

2.3.4 Can a Party Challenge the Validity of a Liquidated Damages Sum after the

Contract has been signed?

In English law and also the legal position in Singapore, it is always open to

the contractor to challenge that the agreed sum is a penalty.56

Whilst in the case of

Philips v. Attorney General of Hong Kong57

, the court emphasizes that the fact that

the parties were able to agree beforehand the damages recoverable for a breach of

contract was to the advantage of both parties since they should be able to estimate

with a reasonable degree of certainty the extent of their liability and the risks which

they run, it is nonetheless clear that the parties to a contract can challenge terms, if

for example, they are contrary to the law either in Statute – Control of Exemption

Clauses Ordinance or in this case at common law where for example liquidated

damages are a penalty.58

56


Journal Articles. Vol 1, 1-9. Lexis Nexis Business Solution. pp. 1. 57

(1993) 61 BLR 41 58

Molloy J. B., (2001). Liquidated Damages – Some General Principles. HKIS Newsletter.

26

2.3.5 Provisional Liquidated Ascertained Damages

In Malaysia, there is a practice by some of the contract administrators who

are found to impose provisional liquidated damages (PLD) without complying with

the specified contractual procedures.59

The act of deducting liquidated damages

provisionally means that the contract administrator deducts liquidated damages

without complied with the contract procedure to issue the official Certificate of Non-

completion. The prevailing local practice of deducting liquidated damages

„provisionally‟ is found to be illegal and should be discontinues.60

It may amount to a

repudiation of the contract by the employer which may entitle the contractor to

determine the contract.61

2.4 Principle element of enforceable liquidated damages

The basic essence of liquidated damages is that they represent a genuine pre-

assessment of the likely loss that will flow from the breach of contract in question.62

This follows from the general principle that the aim of damages is to place the

innocent party in the position he would have occupied had the contract been

performed without breach.63

59

Mohamad Noor S. B. (2008). Provisional Liquidated Damages (PLD). Master. University

Teknologi Malaysia. 60


Administration. Malaysia: LexisNexis Business Solution. pp533 61

Ibid. 62



ed.) Oxford: Elsevier. pp 280 63

Ibid.

27

The US courts apply a three-pronged test in order to determine the

enforceability of the LAD clause.64

1) The intent test, which essentially assesses whether the parties intended to

liquidated damages in advance of the parties‟ act and works.65

2) The difficulty test, which places great weight on the ascertainment of the

contractual damages regarding the degree of uncertainty involved in the

estimate. The greater the degree of difficulty in calculating the likely

future damages accurately, the more valid the LAD clause becomes in the

eyes of the court and vice versa.66

3) The reasonable test, which assesses LAD amount in view of the actual

damages suffered due to the breach. Should the court construe the

proposed damages as significantly greater than actual damages, then the

LAD provision generally is determined to be a penalty and ruled invalid.67

Tuuli, Baiden and Badu (2007) have identified the similarities between

English law and the US system regarding LADs and penalties, albeit some

differences as well. The intent test of the US system is similar to Jackson J‟s

observation68

of the primary test of genuine pre-estimate being an objective one. The

reasonableness tests in the two systems are essentially the same.69

64

Tuuli M.M., Baiden B.K. & Badu E. (2007). Assessment and Enforcement of Liquidated Damages

in Construction Contracts in Ghana. Structural Survey [e-journal] 25 (3/4) Available through:

Emerald database [Accessed 25 Mei 2011]. 65

Bethlehem Steel Corporation v. City of Chicago (1965) 234 F.Supp. 726, the court denied

Bethlehem‟s claim for $52,000.00 liquidated damages withheld by the defendant together with certain

items of interest. The court in determining this case had made consideration of the argument in Wise v.

United States which state that the courts will endeavor, by a construction of the agreement which the

parties have made, to ascertain what their intention was when they inserted such a stipulation sum for

remedies for breach of contract. 66

Osceola County, FI v. Bumble Bee Construction (1985) 479 So.2d 310 67

Wise v. United States (1919) 249 U.S. 361 68

Alfred McAlpine Capital Projects Ltd v. Tilebox Ltd (2005) EWHC 281 (TCC), Jackson J stated that

although many authorities use the phrase “genuine pre-estimate”, the test does not turn upon the

genuineness or honesty of the parties who made the pre-estimate. The test is primarily an objective

one, even though the court has some regard to the thought processes of the parties at the time of

contracting. 69

Tuuli M.M., Baiden B.K. & Badu E. (2007). Assessment and Enforcement of Liquidated Damages

in Construction Contracts in Ghana. Structural Survey [e-journal] 25 (3/4) Available through:

Emerald database [Accessed 25 Mei 2011].

28

Evidence of the difficulty tests also apply in UK which is drawn from the case

Clydebank Engineering and Shipbuilding Company Limited v. Don Jose Ramos

Ysquierdo-y-Castaneda and Others.70

In this case, Halsbury LC dismissed the claim

that the likely damages were extremely difficult to quantify and he expressed the

view that the LAD clause served a useful purpose, precisely because the true amount

of damages was uncertain and difficult to assess.

Glazov (2009) identified five principal elements of enforceable liquidated

damages and stated that these elements vary from state to state and country to

country.

1) Actual damages must be difficult to quantify

2) The amount must be liquidated (i.e., agreed on and set in advance)

Liquidated means that the contract must set the amount of damages that

the party will receive, or pay, if the other party breaches a specific promise

in the contract.

3) The amount must be reasonable

There is no exact percentage in determining whether a stipulated amount is

reasonable or not. The court will generally look to whether the presumed

loss was a reasonable estimate of potential loss at the time the clause was

agreed to.71

If so, the court will analyze whether the liquidated damages

sum is grossly and unreasonably disproportionate by examining the actual

damages.72

70

[1905] AC 6 71

Viscarello K. (2006) The Use of Liquidated Damages Clauses in Construction Contracts. [online]

Available at: http://www.sheehan.com/publications/good-company-newsletter/The-Use-of-

Liquidated-Damages-Clauses-in-Construction-Contracts.aspx [Accessed 20 October 2010]. 72

Ibid.



29

4) They must be compensation, not a penalty

The contract must focus on compensating for the party who did not breach

the contract, not punishing the party who breached the contract. If a judge

think the amount set for liquidated damages are really a penalty imposed

on the party who breach the contract, or coercive device for deterring a

potential breach, then the judge will not enforce the liquidated damages.

5) They must be exclusive (i.e., the only remedy available)

The liquidated damages must be the innocent party exclusive remedy. If

the contract provides the innocent party with an alternate way to measure

their damages, chances for the liquidated damages will be enforce is very

slim.

On the other hand, Harban Singh (2002) also listed some elements for a

successful claim for liquidated damages. For a successful imposition of liquidated

damages, it is incumbent on the employer to comply with the applicable pre-

condition, a typical list of which includes:

1) There must be included in the contract an express clause enabling the

deduction of the liquidated damages;

2) The liquidated damages clause included in the contract is valid and

enforceable;

3) The details of the liquidated damages, eg rate for the section/sections

of work covered, etc, are clearly filled in the contract;

4) All specified contractual procedures have been strictly complied with;

5) There is a definite date fixed contractually from which the damages

can run;

6) The employer has not waived the right to deduct the liquidated

damages.

30

2.5 Benefits of imposing liquidated damages

The function of LAD is to act as an inducement to „due performance of

particular contractual obligations, or to regulate beforehand in an agreed and certain

manner the rights of the parties‟.73

The imposition of LAD clause will give many

advantages. Some of the advantages are contracting parties have the certainty of

knowing in advance what the financial cost of delay is and how that risk is

allocated.74

The non-defaulting party benefits from making a recovery of damages

without the difficulty and expense of proving actual loss.75

Traditionally, the employer were having a hard time to claim damages

because the only remedy is to claim unliquidated damages which there have the

burden to prove their claim. This process involves time-consuming and costly

litigation which involves the professionals‟ fees and costs (e.g. lawyers, consultants,

expert witnesses, travel, document production and copying). As many people know,

litigation is generally recognised as being expensive and lengthy.76

To avoid this

difficulty, the LAD clause will come in handy. Fixing the damages payable for delay

beforehand may removes the uncertainty, cost and risk of suing at common law for

damages caused by the breach of contract.77

By having LAD clause, the contracting

parties can reduce the legal costs with recovery of compensation made under the

contract.78

Consequently, contractual obligations are reinforced to deter breach and

commercial tension is created for performance and/or timely delivery.79

73

Adriaanse J. (2005) Construction Contract Law – The Essential. Basingstoke: Palgrave Macmillan.

pp. 152 74

Turner & Townsend (2009). Liquidated Damages Contract Risk Management. [online] Available

at: www.turnerandtownsend.com/Liquidated_Damages_oeN9s.pdf.file [Accessed 22 January 2011]. 75

Ibid. 76


ed.). Oxford:



pp. 152 78



Ibid.

http://www.turnerandtownsend.com/Liquidated_Damages_oeN9s.pdf.file


31

Basically the LAD clause not only advantages the employer but also gives

advantage to contractor. It is common use to provide advance warning to the

contractor of the financial consequences of failing to achieve practical completion by

the stipulated date.80

The liquidated damages provisions enable the contractor to

know in advance the extent of his potential liability for which he can make adequate

provisions, as to the amount and the limit involved.81

In a tender situation, it makes

fixing the contract price more certain, since the contractor can price the level of

LADs into his tender bid.82

Besides, the contractor can appreciate the financial

implications of completing, plan to complete on time or price the risk of delay.83

Contractors know from the outset how much “exposure” they have if they finish the

work late and use this information to prepare their schedules, deploy their forces, and

schedule the timing and sequence of subcontractor‟s work.84

Also, if the project is behind schedule, the contractor can make a commercial

decision to whether it would be preferable to hand the building over late and to pay

the LADs or to devote more resources to the project to bring it back on time.85

Contractors and sub-contractors benefit from the knowledge that any breach will

result in a set cost to it and often liability is capped once a certain level of liquidated

damages are reached.86

Additionally, should the Liquidated and Ascertained

Damages fail the common law default position would likely only allow the employer

to recover unliquidated damages, which are effectively „capped‟ to level of the

Liquidated and Ascertained Damages, since after all they were suppose represent a

genuine pre-estimate of the employer‟s loss.87

80

Murdoch J. (2009). Being Late Can Have Damaging Effects. The Estates Gazette. ProQuest Direct. 81

Philips Hong Kong Ltd v. Attorney General of Hong Kong [1993] 61 BLR 41 82





Glazov J. (2009). Liquidated Damages in Construction Contracts- Enforcing Liquidated Damages.

[online] Available at: http://www.constructionlawtoday.com/ [Accessed 20 Oktober 2010]. 85



Hawkswell Kilvington (2003). Liquidated Damages. [online] Available at:

http://www.thkp.co.uk/media/bulletins-new/Liquidated%20Damages%20%20HK.pdf [Accessed 24

Mei 2011]. 87

Always Associates (2004). Drafting for Liquidated and Ascertained Damages- Avoiding Pitfalls.

[online] Available at: http://www.alway-associates.co.uk/ [Accessed 24 Mei 2011].



http://www.constructionlawtoday.com/


http://www.thkp.co.uk/media/bulletins-new/Liquidated%20Damages%20%20HK.pdf

http://www.alway-associates.co.uk/

32

In the Malaysian context, at the moment, the advantages of the inclusion of

such provision appear to lean more toward the contractor‟s favour88

especially in the

light of the Federal Court‟s decision in Selva Kumar a/l Murugiah v. Thiagarajah a/l

Retnasamy.89

Nevertheless, taken as a whole, the positive attributes for the inclusion

of such provisions, prima facie, outweigh the drawbacks.90

2.6 Conclusion

Liquidated damages are a fixed and agreed sum agreed by contracting parties

as the amount of damages to be paid in the event of a breach of contract.

There are many critics on the implementation of liquidated damages. Some of the

issues raised is the liquidated damages provision to be a penalty clause. Principles

laid in Dunlop Tyre v. New Garage.91

held that the court will deem the clause as

penalty if it can be prove that the sum stipulated for is extravagant and

unconscionable in amount in comparison with the actual loss. However, in Malaysia,

as in Linggi Plantations Ltd v Jagatheesan92

there is no difference between penalty

and liquidated damages. The innocent party must prove his actual loss

notwithstanding the liquidated damages clause in the contract. This principle was

held in case Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy93

but it has

been contradicted by the decision made in the case of Sakinas Sdn Bhd v. Siew Yik

Hau & Anor.94

88


Administration. Malaysia: LexisNexis Business Solution pp.517 89

[1995] 2 MLJ 817, the purpose of LAD clause is to avoid the difficulty in proving the loss suffers

by the employer. However, in view of section 75 of the Contract Act 1950, provides that the court

must determine in every case, what is the reasonable compensation, whether or not actual damages or

loss is proved to have been caused thereby. 90


Administration. Malaysia: LexisNexis Business Solution pp.517 91

[1915] AC 60. 92

[1972] 1 MLJ 89. 93

[1995] 1 MLJ 817 94

[2002] 5 MLJ 498

33

The issue on validity of LAD if the Architect/Engineer fails to grant a timely

extension of time has been held to be valid in case Temloc v Errill Properties95

,

however in Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd96

, the

court held that the failure of the Architect to grant timely extension of time would be

fatal to the liquidated damages claim. In the case Philips v. Attorney General of

Hong Kong97

, it was held that the contractor can challenge the agreed sum is a

penalty even after the contract has been signed. On the other hand, the research

shown that the practice of deducting liquidated damages provisionally is found to be

illegal and may entitle the contractor to determine the contract.

Some principle elements of enforceable liquidated damages are the actual

damages are difficult to quantify; the amount must be reasonable; they must be

compensation; and etc. The use of liquidated damages can benefit both employer and

contractor. For employer, it will release the burden to prove loss in the event of

delay, while, for contractor, it provide advance warning to the contractor of the

financial consequences of failing to achieve practical completion by the stipulated

date.

95

[1987] 39 BLR 30 96

[1970] 1 BLR 114 97

[1993] 61 BLR 41

CHAPTER 3

PROVISION OF LIQUIDATED DAMAGES

3.1 Introduction

For the employer to seek recovery of the liquidated damages it is necessary

for him and his contract administrator to follow the detailed procedure as laid down

in the particular contract being implemented.98

Construction contract, however, are

rarely simple so it is necessary in every case to analyse the wording of the particular

conditions of contract to see what conditions precedent they impose and when they

permit damages to be deducted.99

This chapter will generally discuss on the

procedure to claim liquidated damages, the provision of liquidated damages in

various standard forms, definition and purpose of notice, definition of condition

precedent and court interpretation of its meaning.

98


Administration. Malaysia: LexisNexis Business Solution. pp.530 99

Eggleston B. (1997). Liquidated Damages and Extensions of Time in Construction Contracts.

Oxford: Blackwell Science.

35

3.2 Contractual Procedure to claim LAD

3.2.1 Establish the Default of the Contractor

Harban Singh (2002) state that the event that triggers the whole process for

the recovery of liquidated damages is the failure of the contractor to complete on

time. Therefore, it is a necessary pre-requisite for the contract administrator to

establish that100

:

All extensions of time for which the contractor is entitled under the contract

have been properly evaluated and issued to the contractor;

The contractor, based on the available facts and prevailing circumstances, is

not entitled at the material time to further extensions of times;

The contractor has failed to complete the works by either:

a) The original date for completion, ie in the event that he is not entitled

to any extension of time at all; or

b) The revised date for completion fixed by the contract administrator, ie

in the situation where the contractor is entitled to extension of time.

100


Administration. Malaysia: LexisNexis Business Solution. pp.530

36

3.2.2 Establish the Existence and Validity of the Liquidated Damages Clause

Once the hurdle of establishing breach of contract by the contractor in failing

to complete on time has been surmounted, the contract administrator must next verify

substantive issues such as101

:

The existence of an express provision in the contract pertaining to liquidated

damages;

The validity and enforceability of the said clause; and

Miscellaneous issues such as:

a) The proper filling in of the details pertaining to the liquidated

damages;

b) The existence of a definite date from which the liquidated damages

can run.

Some common grounds for challenging the validity and enforceability of

liquidated damages clause are for example the contractual provision on liquidated

damages being a penalty clause102

and that provision are being uncertain or

inconsistent103

.

101



See Chapter 2 pp.19 103

Brammal and Ogden Ltd v. Sheffield City Council [1983] 29 BLR 73, liquidated damages were

expressed at the rate of £20 per week for each uncompleted dwelling, but the Appendix gave only one

date for completion and the works covered not only dwellings but also communal areas. It was held

that, in the absence of provisions for sectional completion, liquidated damages could not be claimed.

The LAD clause was held to be unenforceable because of lack of uncertainty and inconsistency.

37

3.2.3 Determine if Employer Has Waived His Rights

Eggleston (1997) stated that waiver occurs when one party expressly or

implicitly, indicates to the other his intention to forgo certain rights under a contract

and it is effective in law when the other party changes their position in reliance on

the waiver. In Tool Metal Manufacturing Co. Ltd v. Tungsten Electric Co. Ltd104

,

Lord Justice Denning held that:

„if the defendant, as he did, led the plaintiffs to believe that he would not

insist on the stipulation as to time and that if they carried out the work he

would accept it, and they did it, he could not afterwards set up the stipulation

as to time against them. Whether it be called waiver or forbearance on his

part, or an agreed variation or substituted performance, does not matter.‟

If the employer agrees to relinquish his right to liquidated damages either

expressly (by a written letter, oral representation) or impliedly105

(by inaction in

enforcing the right) the contractor is relieved of his liability accordingly.106

Therefore, for a successful claim of liquidated damages, the employer must make

sure he did not made some representations or given assurances to the contractor or

led him to believe that he would not insist on the stipulations liquidated damages.

104

[1955] 2 All ER 657 105

Centerre Trust Co. v. Continental Insurance Co. , the owner was found to have waived his right to

liquidated damages by making final payment rather than retaining funds to offset accruing liquidated

damages. The owner would have been within his right to withhold all remaining contract balances to

recover the accruing liquidated damages if he had not made final payment to the contractor. 106


Administration. Malaysia: LexisNexis Business Solution. pp.532

38

3.2.4 Determine Whether the Relevant Certificates/Notices Have Been Issued

Most of liquidated damages provision contains some requirement to be fulfil

before any claim can be made. Usually, the issuance of Certificate of Non-

completion is condition precedent to the said claim. Some standard forms require the

employer to issue notice of intention to claim liquidated damages which operate as a

forewarning to the contractor of the likely deductions from the amount due.

The importance of the said pre-conditions cannot be underestimated as

reflected in the judgment of Token Construction Co Ltd v. Charlton Estates Ltd107

where it was held, inter alia, that failure to comply with the conditions precedent

would render the deduction of liquidated damages unlawful and the contractor would

be able to sue for their return.108

Hence, the prevailing local practice of deducting liquidated damages

„provisionally‟ (before the issue of the official Certificate of Non-completion) or

impose provisional liquidated damages (PLD) without complying with the specified

procedures in the contract can jeopardize the employer‟s right to liquidated damages

and is prima facie illegal. This act should be discontinued because it can amount to a

repudiation of the contract by the employer which may entitle the contractor to

determine the contract, provided the corresponding ground for determination is

expressly included in the contract, for example Clause 26.1 (i) PAM 1998 Forms

(With and Without Quantities) Editions.109

107

(1973) 1 BLR 48 108


Administration. Malaysia: LexisNexis Business Solution. pp533 109

Ibid.

39

3.2.5 Employer Recovers the Liquidated Damages

All standard forms of conditions of contract make it clear that the recovery of

the liquidated damages is undertaken not by the contract administrator but by the

employer.110

It must be noted that the contract administrator is only act as the

employer representative and he did not have any rights to claim liquidated damages

from the contractor. The contract administrator is responsible merely in advising the

employer of this contractual right, the amount of the entitlement, the contractual

formula and the mode of affecting the same.111

Harban Singh (2002) stated that, by issuing the Certificate of Non-completion

and copying the same to the employer, the contract administrator to a large extent

fulfils the said advisory role, leaving the employer therefore to decide as to whether

to exercise his right of recovery and if so, as to the appropriate timing.

3.3 Liquidated Damages Provision in Various Standard Forms

Most standard form of contracts use in construction industry contains

provision for damages in the event of non-completion by the contractor. This

provision covers the procedure and requirement that need to be fulfilled before

claiming the liquidated damages. Some of the requirements are identified as

condition precedent. The example of the provision of this clause in various standard

forms will be discussed below.

110



Ibid.

40

3.3.1 JKR 203A (Rev. 2007)

In JKR 203A (Rev. 2007) issuance of notice to the contractor informing the

deduction of money for liquidated damages is make condition precedent as stated in

Clause 40.1 Damages for Non-completion.

40.1 If the Contractor fails to complete the Works by the Date for Completion or

within any extended time granted pursuant to clause 43 (Delay and Extension of

Time), the S.O. shall issue a Certificate of Non-completion to the Contractor. Prior

to the issuance of the Certificate of Non-completion, the S.O. shall issue a notice to

the Contractor informing the Contractor the intention of the Government to impose

Liquidated and Ascertained Damages to the Contractor if the Contractor fails to

complete the Works by the Date for Completion or within any extended time granted.

3.3.2 PAM 2006 Forms (With and Without Quantities) Editions

In PAM 2006 Forms giving of notice is not expressly stated in Clause 22.1

Damages for Non-completion.

22.1 If the Contractor fails to complete the Works by the Completion Date, and the

Architect is of the opinion that the same ought reasonably so to have been completed,

the Architect shall issue a Certificate of Non-completion. Upon the issuance of the

Certificate of Non-completion, the Contractor shall pay or allow to the Employer a

sum calculated at the rate stated in the Appendix as Liquidated Damages for the

period from the Completion Date to the date of Practical Completion. The Employer

may recover such sum as a debt or may deduct such sum from any monies due or to

become due to the Contractor under the Contract or the Employer may recover such

41

sum form the Performance Bond. The Employer shall inform the Contractor in

writing of such deduction or such debt due from the Contractor.

3.3.3 IEM.ME 1/94 Form

In IEM.ME 1/94 Form Clause 31.4 deals with damages for non-completion.

Similar with JKR and PAM Form, this clause state clearly that the employer is

required to issue notice of his intention to claim a reduction for liquidated damages.

If the contractor fails to complete the works within the Time for Completion, the

employer shall be entitled to a reduction in the Contract Price unless it can be

reasonably concluded from the circumstances that the employer will suffer no loss.

The Employer shall within a reasonable time give the contractor notice of his

intention to claim a reduction. The reduction shall be the percentage per day in the

Appendix of that part of the Contract Price which is attributable to such part of the

works as cannot in consequence of the failure be put to the intended use. The

reduction shall be computed for each day between the Time for Completion and the

actual date of completion.

3.3.4 JCT 98 Standard Forms Contracts

This is an example of United Kingdom standard form of contract regarding

clause for liquidated damages. Clause 24 did not expressly stated that the employer

shall issue notice of intention before deducting. The wording in the clause did not

expressly stated the requirement to issue notice. It only stated that the employer shall

42

informed the contractor in writing that he may require payment of liquidated and

ascertained damages.

24.1 If the Contractor fails to complete the Works by the Completion Date then the

Architect shall issue a certificate to that effect....

24.2 Provided:

- The Architect has issued a certificate under clause 24.1; and

- The Employer has informed the Contractor in writing before the date of

the final Certificate that he may require payment of, or may withhold or

deduct, liquidated and ascertained damages

Almost all the local conditions of contract make the issue of the Certificate of

Non-completion (CNC) by the contract administrator a condition precedent to the

recovery of the liquidated damages by the employer, e.g. Clause 26.1 CIDB Form

(2000 Edition), Clause 22.1 PAM 1998 Forms (With and Without Quantities)

Editions, Clause 40 JKR Form 203 and 203A and IEM.CE 1/89 Form, etc.112

Some

conditions of contract for example JKR 203A (Rev. 2007)113

, PAM 2006 Forms114

,

IEM.ME 1/94115

, and JCT 98116

stipulate a further pre-condition being the giving of a

written notice by the employer of his intention to deduct damages.

112



Clause 40 114

Clause 22.1 115

Clause 31.4 116

Clause 24

43

3.4 Principle of Contract

Principle of contract relates to doctrine of laissez-faire which reflects the

importance of freedom of contract.117

This doctrine promotes the ideas that since

parties are the best judges of their own interests; they should be free to make

contracts on any terms they choose – on the assumption that nobody would choose

unfavourable terms.118

Once this choice is made, the job of the courts is simply to act

as an umpire, holding the parties to their promises; it is not the courts‟ role to ask

whether the bargain made was a fair one.119

The terms of the contract can be divided

into two categories which are express terms and implied terms.

3.4.1 Express Terms

In essence, express terms are terms that have been formally asserted or

expressed.120

Vincent Powel-Smith in An Engineering Contract Dictionary describes

express terms as:

Terms which are actually recorded in a written contract or which are

expressed and agreed openly at the time the contract was made. An express

term will prevail over any term which would otherwise be implied on the

same subject matter.

117

Elliot C. and Quinn F. (2007) Contract Law. 6th

edition. Edinburgh: Pearson Education Limited.

pp.3 118

Ibid. 119

Ibid. 120

Harban K.S. (2002) Engineering and Construction Contracts Management Law and Principles.

Singapore: Lexis Nexis pp.144

44

3.4.2 Implied Terms

The law may imply into a contract a terms which the parties have not

themselves inserted which is called implied terms. Implied terms can be defines as

follows121

:

A term which will be implied (eg from statute or custom) where it is

necessary to carry out the presumed intention of the parties to a contract and

is so obvious that the parties must have intended it to apply. Such term will

not override an express term.

The implied terms may be divided into four groups: terms implied in fact;

terms implied in statute; terms implied by custom; and terms implied by trade usage.

However for this research study, the discussion will be focus on terms implied by

law.

3.4.2.1 Terms implied by statute

These are terms which the law dictates must be present in certain types of

contract, in some cases, regardless of whether or not the parties want them. For

example in this research study, the issue is whether section 56(3) of the Contract Act

1950 can be identified as an implied terms to the contract. Harban (2002) identified

three common statutes which provide that certain terms are to be implied into

particular contracts are:

121

Harban K.S. (2002) Engineering and Construction Contracts Management Law and Principles.

Singapore: Lexis Nexis pp.145

45

The Sale of Goods Act 1957;

The Hire Purchase Act 1967; and

The National Land Code 1965.

The general principles are that an implied term must122

:

1) not contradict any express term of the contract

2) be reasonable and equitable

3) be necessary to give business efficacy to the contract, such that the contract

cannot be effective without it

4) so obvious that it goes without saying, and

5) be capable of being clearly expressed.

3.5 Notices as Condition Precedent

Standard forms of contract often contain conditions precedent to the

deduction of liquidated damages (e.g. Clause 31.4 of IEM.ME 1/94).123

These work

principally to the benefit of the contractor in forewarning him of likely deductions

from amounts due, but they are also of benefit to the employer in drawing attention

to this entitlement to damages.124

122

Gillhams Solicitors (2005). Contracts & Disputes: Importance of Implied Terms. [online]

Available through: http://www.gillhams.com/articles/141.cfm [Accessed on 1 June 2011] 123


Oxford: Blackwell Science. pp.196 124

Ibid.

http://www.gillhams.com/dictionary/475.cfm

http://www.gillhams.com/articles/141.cfm

46

It is common to find that provision for liquidated damages contain condition

precedent to be fulfilled. Usually, there are three stated condition precedent in

liquidated damages clause125

:

1) The contractor shall fail to complete on time;126

2) The architect shall issue a certificate to that effect (e.g. certificate of non-

completion);127

3) The employer shall give written notice of his intention to deduct damages.128

3.5.1 Definition of ‘notice’

Notice is defined as the information given of some act done, or the

interpellation by which some act is required to be done.129

It serves as a medium of

communication between the contracting parties seeking to make its recipient aware

of a fact or thing, as required by law or contract.130

It is use to state of awareness of a

fact or thing.131

There are several types of notice including public notice (or legal

notice), actual notice, constructive notice, and implied notice.132

125



Clause 40.1 of JKR 203A (Rev. 2007) 127

Clause 40.1 of JKR 203A (Rev. 2007) 128

Clause 31.4 of IEM.ME 1/94 Form 129

Lectric Law Library (2011). Notice. [online] Available at: http://www.lectlaw.com/def2/n075.htm

[Accessed on 17 Jun 2011]. 130

YourDictionary.com (2011). Notice Law Definition. [online] Available at:

http://law.yourdictionary.com/notice [Accessed on 17 Jun 2011]. 131

Ibid. 132

Wikipedia (2011). Notice. [online] Available at: http://en.wikipedia.org/wiki/Notice [Accessed on

17 Jun 2011].

http://www.lectlaw.com/def2/n075.htm

http://law.yourdictionary.com/notice

http://en.wikipedia.org/wiki/Notice

47

In this research study, notice is refer to as the notification by the employer to

the contractor of his intention to deduct the liquidated damages as per stated in the

contract.

3.5.2 The Purpose of Notice

In order to understand the importance of issuing notice, we can refer to case

Multiplex Construction v Honeywell133

. In this case Jackson J stressed the importance

of giving notice of delay:

„Contractual terms requiring a contractor to give prompt notice of delay

serve a valuable purpose; such notice enables matters to be investigated

while they are still current. Furthermore, such notice sometimes gives the

employer the opportunity to withdraw instructions when the financial

consequences become apparent.‟

The purpose of giving notice of intention to deduct liquidated damages is to

let the contractor know beforehand that their payment is going to be deducted for

compensation of late completion. Furthermore, the contractor can review the notices

received and if the correct number or form of notices have not been served properly,

then the contractor can challenge the validity of notice and the amount of liquidated

damages stated.134

Dyson J. in Bovis Lend Lease Ltd v. Braehead Glasgow Ltd135

held that the rationale for the requirement of notice stated in the provision of

liquidated damages is simply to avoid unexplained deductions from interim

payments. The employer should not be permitted to make a deduction for liquidated

damages without making clear to the contractor that that is what he is doing.

133

[2007] 1 BLR 195 134

Barton Legal (2007). Liquidated Damages – A Three Stage Process. [online] Available at:

http://www.bartonlegal.com/commercialServices.asp?Id=69&menu=7 [Accessed 28 Jun 2011]. 135

[2000] All ER (D) 633

http://www.bartonlegal.com/commercialServices.asp?Id=69&menu=7

48

3.5.3 Definition of ‘condition precedence’

A condition may be defined as a statement of fact, or a promise, which forms

an essential term of the contract.136

If the statement of fact proves untrue, or the

promise is not fulfilled, the breach may be treated as a repudiation which discharges

the innocent party from further performance of the contract.137

While, condition precedent can be defined as an event or state of affairs that

is required before something else will occur. A condition is precedent if it provides

that the contract or a term or condition within a contract will not be binding until a

specified event occurs.138

One party has to perform a condition before the other‟s

promise to perform arises.139

Before the occurrence of the specified condition/event,

there is no duty on either party to render the principal performance promised by

him/her under the agreement or relevant part thereof.140

136

Beatson, J. (2002). Anson‟s Law of Contract. (28th ed.). United States: Oxford University Press.

pp.135 137

Ibid. 138

Osborne D. (2006). Effect of Conditions Precedent on Building Contracts. Journal of Building

Appraisal. Vol 2, 188-192, Palgrave Macmillan Ltd. 139


pp.52 140


Appraisal. Vol 2, 188-192, Palgrave Macmillan Ltd.

49

3.5.4 Court Interpretation of ‘condition precedence’

The case Pym v, Campbell141

is an early example of the importance of a

condition precedent in law.142

Mr Pym who invented a “crushing, washing and

amalgamating machine” had entered into negotiations with Mr Campbell to sell a

one eight share of the machine‟s patent. Mr Campbell agreed to purchase the one

eight share with the proviso that the machine was to be approved by a third party

engineer. The agreement was drawn and signed by both parties. However the

requirement of the engineer‟s approval was not included in the written agreement.

Plus, the third party engineer refused to give his approval. Therefore, Campbell

refused to pay and was subsequently sued by Pym. The court held that the approval

of the engineer was a condition precedent to the contract and the court found in

favour of Campbell.

A more recent case on condition precedent can be found in case CJ Sims Ltd

v. Shaftesbury PLC143

. In this case Sims started construction work on a project after

receiving a letter of intent from Shaftesbury but before an actual contract was signed

between the parties. Work carried on and negotiations continued but no contract was

ever entered into. The letter stated:

„in the unlikely event of the contract not proceeding, CJ Sims will be

reimbursed their reasonable costs which have been and will be incurred and

costs for which they are liable including those of their sub-contractors and

suppliers, such costs to include loss of profit and contribution to overheads,

all which must be substantiated in full to the reasonable satisfaction of our

quantity surveyor.‟

141

[1856] 6 E & B 370 142

Donohoe S. (2011). The WW Gear Case, Conditions Precedent and Construction Contracts.

Structural Survey [online] 29 (2) Available through: Emerald Database [Accessed on 17 Jun 2011]. 143

[1991] 60 BLR 94

50

No agreement was ever reached and Sims claimed £1,090,038 plus value

added tax (VAT) as their reasonable costs of carrying out the work. It was held that

the letter of intent created a condition precedent so that the claimants were not

entitled to make a claim until they had substantiated their claim to the reasonable

satisfaction of the defendant‟s quantity surveyor. The result was that until the

condition was satisfied (the quantity surveyor certified the amount owed), no

payment was due to the contractor.144

The judge held that the requirement for the

quantity surveyor to substantiate the claims was a condition precedent that Sims had

to comply with before making their claim.145

Some guidelines as to how judges interpret condition precedent in a contract

were laid down by the judgement in WW Gear Construction Ltd v. McGee Group

Ltd.146

WW Gear (the employer) entered into a contract with McGee (contractor) for

substructure works for a hotel using an amended JCT Trade Contract Terms (TC/C)

2002 edition with Amendment No 1:2003 together with further bespoke

amendments. The contract contained a number of conditions precedent. The relevant

conditions of the amended JCT Trade Contract are set out below:

4.21 If the Trade Contractor makes written application to the Construction

Manager stating that he has incurred or is likely to incur direct loss and/or

expense [. . .] because the regular progress of the Works has been or is likely

to be materially affected [. . .] then the Construction Manager from time to

time [. . .] shall ascertain the amount of such loss and/or expense which has

been or is being incurred by the Trade Contractor; provided always that:

4.21.1 The Trade Contractor‟s application shall be made as soon as and in

any event not later than two months after it has become, or should have

become apparent to him that the regular progress of the Works [. . .] has

144


pp.53 145



[2010] EWHC 1460 TCC

51

been or was likely to be affected [. . .] and such application shall be formally

made in writing and fully documented and costed in detail, and it shall be a

condition precedent to the Trade Contractor’s entitlement [. . .] that the

Trade Contractor has complied fully with all of the requirements of this

clause.

The contractor submitted applications for payment every month. However in

his 18th

application for payment, there was a claim for loss and/ or expense for

approximately £1.5 million. The employer refused to pay the claim and the matter

was referred to adjudication. The decision found in favour of the contractor despite

the presence of an alleged condition precedent outlining a procedure to be followed

in the event of a claim. The adjudicator stated that the alleged condition precedent

had no effect and could be ignored.

Not satisfied with the adjudicator decision, the case was brought to

Technology and Construction Court (TCC) where Mr Justice Akenhead had to

consider a few questions regarding the condition precedent:

1) Was there an effective condition precedent in the Trade Contract between

WW Gear and McGee?

2) If there was a condition precedent, how ought it to be construed?

3) Was the condition precedent reasonable?

4) Was the condition precedent enforceable?

1) Was there an effective condition precedent in the Trade Contract between

WW Gear and McGee?

The judge in determining the issue of whether a condition precedent is

effective or not said that it depends on the form that it takes the condition

precedent‟s relationship to the contract as a whole and the general principles

52

of the Law of Contract. The use of the word “if” in clause 4.21 provided a

trigger to the procedure for ascertainment of loss and/or expense.147

The use

of the words “provided always that” was important. The judge held that this

type or wording was often the strongest sign that the parties intend there to be

a condition precedent.148

2) If there was a condition precedent, how ought it to be construed?

Counsel for the contractor argued that there was a body of case law

which said that the condition precedent ought to be construed strictly.149

Counsel for the contractor further argued that there had been an error in

drafting and therefore if construed strictly the clause became meaningless and

therefore the contractor was not prevented from claiming loss and/or

expense.150

The judge confirmed that conditions precedent was to be

construed strictly but not so strictly as to make them unenforceable where the

intention of the parties was clear.151

3) Was the condition precedent reasonable?

The judge held that the requirements of the condition precedent were

neither onerous nor difficult to comply with.152

The judge felt that the two

month time limit was not unduly onerous and noted that the words “has been

or was likely to be affected” contained in clause 4.21 gave a certain amount

of flexibility to the contractor in the submission of claims.153

The judge felt

147

London Borough of Merton v. Stanley Hugh Leach [1985] 32 BLR 51 148



Ibid. 150

Ibid. 151

Ibid. 152

Ibid. 153

Ibid.

53

that the wording of condition precedent in this particular contract was

reasonable.

4) Was the condition precedent enforceable?

The answer to the question above was “yes” however the judge held

that in the absence of express words the contractor still had the right to pursue

a common law claim against WW Gear.154

The judgement in this case had laid down some criteria that will determine

the enforceability of condition precedent in the contract. First, it was held that if the

wording of a condition is clear, the judges will not interfere with the expressed

intention of the parties. Second, the judges will only make the condition enforceable

if the condition is reasonable. If the condition precedent is found to be onerous, it is

more likely that the judge will decide that the condition precedent is unenforceable.

154


Structural Survey [online] 29 (2) Available through: Emerald Database [Accessed on 17 Jun 2011].

54

3.6 Conclusion

Most standard form of contract use in construction contains liquidated

damages provision in the event of delay of practical completion by the contractor.

The wording in the provision stated that the employer shall issue notice of intention

to claim LAD to the contractor. In Bovis Lend Lease Ltd v. Braehead Glasgow

Ltd155

, it was held that the purpose of issuing notice is to avoid unexplained

deductions from interim payments. However, most of the provision did not expressly

state that the notice is condition precedent to the said claim. In WW Gear

Construction Ltd v. McGee Group Ltd156

the court held that the type or wording is

the strongest sign that the parties intend there to be a condition precedent. The use of

the word “if” and “provided always that” provided a trigger to the procedure for

ascertainment of loss and/or expense. Plus, the court confirmed that the condition

precedent was to be construed strictly but not so strictly as to make them

unenforceable where the intention of the parties was clear.

155

[2000] All ER (D) 633 156

[2010] EWHC 1460 TCC

CHAPTER 4

THE STATUS AND IMPLICATION OF NOTICE PROVISION

4.1 Introduction

As discuss in previous chapter, most standard form of contract contain

liquidated ascertained damages provision and most importantly it stated that the

employer shall issue notice before claiming liquidated damages. Even so, not every

provision spells out the same requirement. Some standard forms of contract do not

specifically state the requirement to issue notice to claim liquidated damages. This

can be found in Clause 40 PWD 203A (Rev. 10/83), Clause 26.2 CIDB Form (2000

Edition) and Clause 22.1 PAM 2006. While in a new version of PWD form, there is a

requirement from the employer to issue notice of intention to the contractor before

claiming LAD. This can be found in clause 40.1 PWD 203A (Rev. 2007).

Consequently, this chapter focus on analyzing the issues for this study in relation to

different case laws whereby, it will determine whether the objectives of the study

could be achieved.

56

4.2 Case Analysis

This chapter focus on discussing to ascertain whether notice is condition

precedent to claim LAD. The discussion will be divided into four parts;

1) The status of notice if it is stated as condition precedent in the LAD

provision

2) If the provision stated the requirement to issue notice before claiming

liquidated damages but without expressly stated as condition precedent,

does it considered as condition precedent?

3) If the contract contains no express provision for notice of intention to

claim liquidated damages, is it possible to impose general act into the

contract in order to make notice as condition precedent?

4) What information should be included in the notice?

4.2.1 Issue 1 – Notice as Condition Precedent

The status of notice if it is stated as condition precedent in the LAD provision.

Condition precedent occurs most commonly in construction contracts157

and

it is not limited in LAD provision. For example in clause 23.1(a) of PAM 2006 states

that the giving of notice of intention to claim extension of time shall be a condition

precedent to the said claim. While, clause 24.1(a) of PAM 2006 states that notice is a

condition precedent to contractor‟s entitlement to loss and/or expense. So, if the

provision expressly states that notice is condition precedent to the entitlement of the

157


Appraisal. Vol 2, 188-192, Palgrave Macmillan Ltd.

57

claim, does failure to comply with notice provision will cause the party lose his right

to the said claim? Osborne (2006) stated that in such cases, the extension of time

clause provides that the issuance of notice of intention is condition precedent before

claiming extension of time, failure to comply with the condition precedent in such a

case would appear to remove the contractor‟s entitlement to an extension of time.

However, it is not right to deny one‟s right to claim his right although he did

not comply with the notice provision. Under certain circumstances, the innocent

party may be entitled to additional time or compensation even if it fails to abide by

contract notice provisions. This common law principle is the exceptions to notice

requirement known as Prevention Principle. The prevention principle comes from a

generally stated legal principle that a party cannot benefit from its own wrong.158

Sometimes known as „Peak‟ principle, the principle was first applied in the

case of Peak Construction (Liverpool) v McKinney Foundations159

where Peak

Construction (Liverpool) Ltd („Peak‟), the head contractor, contracted with the

employer, Liverpool Corporation („the corporation‟) for the construction by Peak of

a multi-storey block of flats. McKinney Foundation Ltd („McKinney‟) was the

nominated subcontractor responsible to design and construct the foundation piles. By

clause 22 of the head contract, time was to be considered of the essence on the part

of Peak who becomes liable to pay the corporation liquidated damages if the work

was not completed on time. By clause 23 of the head contract, the architect was

entitled to extend time as to him may seem reasonable” by reason (inter alia) of any

variations to the works or other “unavoidable circumstances”.

158

Winser C. (2007). The Prevention Principle After Multiplex v Honeywell. [online] Available

through: http://www.crownofficechambers.com/downloads/174.pdf [Accessed on 1 June 2011]. 159

(1990) 1 BLR 111

http://www.crownofficechambers.com/downloads/174.pdf

58

In early October 1964 it was discovered that a grave fault existed in one of

the building‟s perimeter piles and the work stopped. The parties agreed to submit the

problem to an expert. The expert reported to the parties in late May 1965. The

following day Peak wrote to the corporation asking for an instruction to carry out the

work recommended by the expert. Peak heard nothing and so wrote to the

corporation in late June. The expert‟s recommendations were finally approved by the

corporation on 30 July 1965. The remedial work was commenced by Peak on 12

August 1965 and completed in early November 1965 – some 58 weeks after the

works had been suspended. As a result of the delay, the corporation sought liquidated

damages from Peak. Peak, in turn, sought liquidated damages for that entire period

from McKinney.

The Court of Appeal held that Peak was not entitled to recover liquidated

damages from McKinney as the corporation not entitled to recover those liquidated

damages from Peak. The reason for this decision was because the court found that at

least part of the delay had been caused by the corporation itself.

In Gaymark Investments Pty Ltd v. Walter Construction Group Ltd160

employer is prevented from levying liquidated damages since the delay is caused by

his own act of prevention even though the contractor failed to submit a written notice

which under the terms of the contract was a condition precedent to the right to an

extension of time. The employer, Gaymark Investments entered into a contract with

the contractor, Walter Construction for the construction of a hotel, retail and office

complex in Darwin, Australia. Delays occurred to the progress of the works,

including a 77 days delay for which the employer was responsible. The contract

provided that the contractor should give a notice within 14 days of the cause of any

delay event, followed up by particulars of its claim for extension of time within 21

days, failing which the employer's agent would have no power to allow an extension

of time. Walter had failed to comply with these requirements.

160

[1999] NTSC 143, Supreme Court of the Northern Territories

59

As a result, the employer took liquidated damages for the period of his own

delay.161

The matter went to arbitration where the arbitrator held that the delays

caused by the employer were acts of prevention making the time for completion at

large and removing the employer‟s right to take liquidated damages.162

The employer

appeal and the case were brought to the Supreme Court. The court held that the

prevention principle did indeed present a formidable barrier to Gaymark's claim for

liquidated damages based on delays of its own making. The court agreed with the

arbitrator's reasoning that the contract failed to provide for a situation in which

Gaymark caused actual delays and Walter failed to comply with the notice

provisions. With those observations the Supreme Court refused to overturn the

decision of the arbitrator.

The findings from the above cases show that although there is condition

precedent requirement, under common law, a party cannot benefits from its wrong

act. Therefore, if the LAD clause expressly stated that the issuance of notice of

intention is condition precedent to the said claim, contractually, failure to issue the

notice may risk the employer‟s entitlement to LAD. However, the delay is not cause

by the employer‟s act of prevention and totally cause by contractor‟s fault. So, is it

fair to deny employer‟s right to LAD if he fail to issue notice as per contract? It must

be noted that the purpose of issuance of notice is to inform the contractor of the

possibility of deduction of LAD because of delay. However, although notice is not

been issued, the contractor should already aware that the project is delay since he is

the one responsible to construct the project. Plus, when there is delay, the contractor

should already expect the deduction of liquidated damages.

161

Molloy J. B. (2001). Notice Provisions – A Change in Attitude?. HKIS Newsletter. 162

Ibid.

60

4.2.2 Issue 2 – Notice Not Expressly Stated as Condition Precedent

If the provision stated the requirement to issue notice before claiming liquidated

damages but without expressly stated as condition precedent, does it considered

as condition precedent?

In determining whether the said requirement is condition precedent or not, the

approach of the courts is to determine the expressed intention of the parties from the

terms of the agreement itself. For example in Bunge Corporation v. Tradax Export

S.A.163

, a case concerned a contract for the sale of soya bean meal, the sellers were

required, by 30 June 1975, to load the goods on board chip at a single United States

Gulf port to be nominated by them. The contract further provided that the buyers

should give to the sellers „at least 15 consecutive days‟ notice of probable readiness

of vessel and of the approximate quantity required to be loaded. The buyers did not

give that notice until 17 June, by which time less than 15 days of the loading period

remained. The sellers declared the buyers in default and claimed damages for

repudiation of the contract on the ground that the term as to notice was a condition.

The House of Lords held that the term, though not expressly stated in the contract to

be a condition, was one by implication, so that its breach entitled the sellers to treat

themselves as discharged.

In A.Bell & Son (Paddington) Ltd v. CBF Residential Care & Housing

Association164

the contract used was JCT 80 Private Edition with Quantities. A date

for possession of the site was given as 28 May 1985 with a date for completion of 28

February 1986. The contractor was granted extension of time and, when he failed to

complete by the extended date, the architect issued a certificate of non-completion

and the employer gave written notice of his intention to deduct liquidated damages.

The architect granted further extension of time and the employer deducted damages

from this later date to the eventual date of practical completion. The question arise

163

[1981] 1 W.L.R. 711 164

[1990] 46 BLR 102

61

whether the architect have to issue fresh certificates of completion after every grant

of extension in a delay period, and does the employer have to issue fresh written

notices of intention to deduct?

The contractor argued that liquidated damages should not have been deducted

as the procedures required by JCT 80 had not been properly complied with since the

non-completion certificate was not re-issued to reflect the revised dates for

completion in addition with no fresh written notice of intention to deduct from

employer. There is no express word stating that notice is condition precedent to

claim liquidated damages.

Judge John Newey stated:

„there can be no doubt that a certificate of failure to complete given under

clause 24.1 (JCT 98) and a written requirement of payment or allowance

under the middle part of clause 24.2.1 were conditions precedent to the

making of deductions on account of liquidated damages or recovery of them

under the latter part of clause 24.2.1.‟

The court further stated that:

„Construing clause 24.1 strictly and in accordance with its plain and

ordinary meaning, it demands the issue of a certificate when a contractor had

not completed by "the completion date" ...... I think that when a new

completion date is fixed, if the contractor has not completed by it, a

certificate to that effect must be issued, and it is irrelevant whether a

certificate has been issued in relation to an earlier, now superseded

completion date.

62

Construing clause 24.2.1 in a similar manner to clause 24.1, since the giving

of a notice is made subject to the issue of a certificate of non-completion, if

the certificate is superseded, then logically the notice should fall with it. .....

If a new completion date is fixed, any notice given by the employer before it is

at an end.‟

From the judgement in this case, it was held that the issuance of notice of

intention to claim liquidated damages is by implication a condition precedent and

must be comply by the employer. In the event that a fresh certificate of non-

completion had been issued, a fresh notice should follow since the previous notice

has been superseded by the new certificate of non-completion.

In J.F. Finnegan Ltd v. Community Housing Association Ltd165

, Peter Gibson

LJ held that the employer‟s written requirement was a condition precedent to the

deduction of liquidated damages.166

In this case, the employer and the contractor

entered into a written contract in the JCT 80 for the construction of 18 flats in a 7

storey block with associated and site development works at 46-47 Coram Street,

London WC1. The completion date was 15 months after the date for possession of

the site. The issue in this case was whether notice is condition precedent and what

information must such requirement in writing give?

The provision in the contract was as follow:

24.2.1 Subject to the issue of a certificate under clause 24.1 the Contractor

shall, as the Employer may require in writing not later than the date of the

Final Certificate, pay or allow to the Employer the whole or such part as may

be specified in writing by the Employer of a sum calculated at the rate stated

165

[1995] 65 BLR 103 166


ed.). Oxford:

Blackwell Publishing Ltd. pp 224

63

in the Appendix as liquidated and ascertained damages for the period

between the Completion Date and the date of Practical Completion and the

Employer may deduct the same from any monies due or to become due to the

Contractor under this Contract (including any balance stated as due to the

Contractor in the Final Certificate) or the Employer may recover the same

from the Contractor as a debt.

The provision did not expressly state that notice should be issued before

claiming liquidated damages. The requirement in writing means no more and no less

than was the employer intention with regard to liquidated damages.167

The language

of the clause makes clear that the entitlement of the employer to deduct or recover

liquidated damages is dependent on the employer indicating by such requirement.168

From the language of the clause, there are only two matters which must be contained

in the written requirement. First, whether the employer is claiming a payment or a

deduction in respect of liquidated damages and second, what sum is being deducted,

the whole or only part of the sum for the liquidated damages.169

The judge went on

stating that the notice should indicate at least the basic details which are being relied

upon to justify the deduction including the period of overrun and the figure for

deduction which is claimed.170

Based on the judgement of the cases discuss above, shows that where there is

notice requirement in liquidated damages provision, although it is not stated as

condition precedent, but it can be by implication condition precedent to claim

liquidated damages. This decision was supported in case Bunge Corporation v.

Tradax Export S.A.171

. Important to note that, when interpreting the meaning of a

contractual term, the judges will try to discover what the parties appeared to intend

the contract to mean and the intention of the parties. From the cases, it was held that

the language of the clause makes clear that the entitlement of the employer to deduct

167

Jarvis Brent Ltd v. Rowlinson Construction Ltd [1990] 6 Const LJ 292 168

J.F. Finnegan Ltd v. Community Housing Association Ltd [1995] 65 BLR 103 169

Ibid. 170

Ibid. 171

[1981] 1 W.L.R. 711

64

or recover liquidated damages is dependent on the employer indicating by such

requirement.

4.2.3 Issue 3 – No Notice Provision

If the contract contains no express provision for notice of intention to claim

liquidated damages, is it possible to impose general act into the contract in

order to make notice as condition precedent?

In Malaysia, when there is no requirement to issue notice in the contract,

some contractor will argue that the employer is not entitle to liquidated damages

without issuing notice pursuant to section 56(3) of Contract Act 1950. Does section

56(3) of Contract Act 1950 is an implied term for the issuance of the notice?

First, the analysis will be done by referring to Malaysian cases regarding this

issue. In Sakinas Sdn Bhd v. Siew Yik Hau & Anor172

, the respondents entered into an

agreement („SPA‟) to purchase an apartment from the developer. Vacant possession

of the apartment should have been given on 13 December 1997. There was a failure

on the part of the appellant to hand over vacant possession of the apartment and to

complete the common facilities in time. The respondents brought an action in the

magistrate‟s court to claim damages for the delay. The respondents applied for

summary judgment and succeeded. The appellant appealed. The appellant argue that

the respondent is not entitled for the liquidated damages since at the time the

respondents received vacant possession on 15 September 1998, they had accepted

performance of the appellant‟s promise at a time other than the agreed date of

delivery of vacant possession. Since the respondents did not give to the appellant

172

[2002] 5 MLJ 497

65

notice of their intention to claim compensation for late delivery on 15 September

1998 pursuant to s 56(3) of the Contracts Act 1950, the appellant argued that the

respondents could not claim compensation now.

Abdul Aziz J interpreted s 56(3) of the Contracts Act 1950 as follow:

In my opinion, the words „at any time other than that agreed‟ do not refer to

the act of accepting performance of the promise, but refer to the performance

of the promise itself. The words „If ... the promisee accepts performance of

the promise at any time other than that agreed‟ do not mean that

performance has been delayed but is now completed and the promisee now,

at a time later than the agreed time, accepts the performance. If that were so,

and the promisee now gives notice of intention to claim compensation, the

notice cannot be of any practical use to the promisor, except to enable him to

know in advance that there will be a claim against him and he had better get

ready with the money to pay his lawyers, and the promisee, if the promisee

should succeed, which I do not think is the intended purpose of the notice.

The phrase really means, in my opinion, the promisee accepting, meaning

agreeing, that the promisor who has been in breach as to time may perform

his promise at some other time, which has to be a time later than the time of

the promisee‟s so agreeing. At the time of the promisee‟s so agreeing, the

performance has not been completed yet. The promisee says, „It‟s all right.

Although the contract is now voidable because of your delay, I will not void

it. You may complete it later, on such and such a date‟. At the time that he

says so, the promisee, if he wants to claim compensation for the delay, must

give notice of his intention to claim compensation, otherwise the promisor is

entitled to assume that he will not be liable to any compensation. The notice

is important as it will enable him to come to a commercial decision whether it

is viable for him to go on performing if he is going to have to pay

compensation.

66

The judge concluded that s 56(3) does not apply to the respondents unless

when the contract became voidable on 13 December 1997, or soon after that, they

indicated to the appellants that it was acceptable to them if the appellants fulfilled

their promise at some other time. However, it must be noted that s 56(3) only

applicable if the contract is voidable. The circumstances that contract is voidable is

when the contract formed is influence by coercion173

, undue influence174

, fraud175

and misrepresentation.176

In this case, the act of failure to give notice of intention to

claim liquidated damages did not amount to voidable contract but only a breach.

Therefore, the respondents still entitled liquidated damages although notice has not

been issued.

In Hariram a/l Jayaram & Ors v. Sentul Raya Sdn Bhd177

, the plaintiffs

agreed to purchase condominium units from the defendant (the developer). The

agreements were in accordance with Schedule „H‟ to the Housing Developers

(Control and Licensing) Regulations 1989 („the Housing Regulations‟) which were

in turn made under the Housing Developers (Control and Licensing) Act 1966 („the

Housing Act‟). The defendant failed to hand over vacant possession within the

stipulated time and the plaintiff claim RM 1,592,074.89 as liquidated damages. There

were two issues raised by the defendant:

(i) whether s 56(3) of the Contracts Act 1950 („the Contracts Act‟) would

operate to exclude a claim for liquidated ascertained damages by reason

of the failure on the part of the plaintiffs to give the relevant notices to the

defendant of their intentions to claim liquidated ascertained damages at

the time of acceptance of later performance;

(ii) whether the terms of the sale and purchase agreements can be said to

operate to entitle the plaintiffs to liquidated ascertained damages in any

173





[2003] 1 MLJ 22

67

event despite the provisions of s 56(3) of the Contracts Act as to the

requirement of the relevant notices.

There was an express term in clause 24(2) of the sale and purchase

agreements, that if the defendants failed to complete the common facilities within 36

months, the defendant shall pay immediately to the plaintiffs liquidated damages to

be calculated from day to day at the rate of 10% pa of the last 20% of the purchase

price. Abdul Malik Ishak J held that one must not purport to go around the Housing

Act and the Housing Regulations so as to remove the protection accorded to the

plaintiffs as house-buyers by importing s 56(3) of the Contracts Act. It would

certainly be erroneous in the extreme to burden the plaintiffs as purchasers with the

requirement of s 56(3) of the Contracts Act when the Housing Act and the Housing

Regulations do not impose such a burden. Any attempt to impose such a burden will

taint and remove the very protection which the Housing Act under which the

Housing Regulations were made was enacted for. Plus the presence of the words

„shall pay immediately‟ in the LAD clause has given a purposive interpretation,

meaning automatically attracting the invocation of the LAD without the need to issue

a notice at the time of acceptance of late delivery.

The judge further explained that the Contracts Act 1950 is a piece of

legislation of a general nature setting out the general law governing contracts

between the parties, in general, whereas, the Housing Act was enacted to „provide for

the control and licensing of the business of housing development in West Malaysia

and for matters connected therewith‟. In short, it is a piece of specific legislation

governing the sale of houses by a licensed developer. The plaintiffs‟ claims for

liquidated ascertained damages were not based on the general contract but rather on

the standard sale and purchase agreements as set out in accordance with Schedule

„H‟ to the Housing Regulations which were made under the Housing Act.

68

The judge in this case also referred to the decision in Sakinas and referred to

Abdul Aziz J interpretation of s 56(3). From the interpretation, Abdul Malik Ishak J

commented that Sakinas case laid down the principle that the notice is to be given

when the promise expressly affirms the contract. However, the judge failed to

identify that the s 56(3) is only applicable when the contract is voidable. Although

the decision to allow the purchaser to claim liquidated damages without issuing

notice is a correct decision, but the judge could make the argument stronger and

certain if he recognize this fact.

In other different case, Brisdale Resources Sdn Bhd v. Law Kim178

, the

respondent, being the plaintiff in the sessions court proceedings, had succeeded in

obtaining a summary judgment against the appellant (the defendant in the said

proceedings) for liquidated damages for late delivery of vacant possession. Displease

with the judgment, Brisdale appeal to the court and the one of the issues raised were

whether the plaintiff needs to give notice of his intention to claim for damages for

delivery.

Faiza Tamby Chik J held that:

It is true that the sale and purchase agreement is a „contract‟, however it was

made in accordance with Schedule H of the Housing Developers (Control

and Licensing) Act 1966 for accommodation units. As there is a specific Act

pertaining to the area of law to it, the Contracts Act 1950, which is a general

Act, is therefore not applicable in the instant case. The said sale and

purchase agreement was drafted in accordance with „Schedule H‟ of the

Housing Developers (Control and Licensing) Act 1966 for accommodation

type and it is a statutory contract which cannot be „contracted out‟, unless

with the consent of the Controller of Housing or Government. The intention is

to protect purchasers such as the plaintiff from the defendant who has a more

178

[2004] 6 MLJ 76

69

bargaining power and who unilaterally takes advantage of interpreting the

plaintiff‟s conduct as a waiver and who could refuse to pay compensation

even though in breach of the agreement.

The judge further added that there is no provision in the said sale and

purchase agreement which requires the plaintiff to give the said notice. If the

defendant required notice to be given by the plaintiff as soon as the defendant

breached the time in handing over vacant possession, then the defendant should

provide for the same as an important term in the sale and purchase agreement by

applying to the authorities for approval to add the terms pertaining to the notice.

Basically, Faiza Tamby Chik J also did not acknowledge that s 56(3) of

Contract Act 1950 is applicable to a voidable contract. The judge went on explaining

application of general act with specific act by commenting that s 56(3) of Contract

Act 1950 was applicable in general for all types of contract, while „Schedule H‟ of

the Housing Developers (Control and Licensing) Act 1966 is specific to sale and

purchase agreement.

The case of Tai Kim Yew & Ors v. Sentul Raya Sdn Bhd179

is quite similar to

the above cases. The 15 plaintiffs, who are purchasers of apartments (condominium

units) in a condominium in Kuala Lumpur known as Sang Suria Condominium,

claim for delay in the delivery of vacant possession against the defendant company, a

property developer from whom they had purchased the condominium units. The

defendant however, refused to acknowledge the plaintiffs‟ claim invoking s 56(3)

Contracts Act 1950 that plaintiff must give notice of his intention to claim LAD.

Mohd Hishamudin J made judgment in favour of the plaintiff and held that:

179

[2004] 4 MLJ 227

70

In my judgment, I am in agreement with the learned counsel for the plaintiffs

that the right of the plaintiffs to LAD is solely governed by cll 22(2) and 24(2)

of the sale and purchase agreement entered into between each of the

plaintiffs and the defendant and the Housing Developers Regulations (as well

as the ousing Developers Act); and that s 56(3) of the Contracts Act 1950 has

no relevance. The presence of the words „shall pay immediately‟ in both the

clauses is very significant in the interpretation of both the clauses; and what

the phrase means is that the right to be paid LAD is automatic once there was

a delay by the developer to hand over possession or to complete the common

facilities. The developer/defendant must pay the LAD to the purchaser at

once, without further ado, once there was a delay. If the right to be paid is

automatic, it follows then that there was no obligation on the part of the

purchasers/plaintiffs to give any notice to the defendant. The phrase „shall

pay immediately‟ would be meaningless if the defendant‟s argument that

notice was required were to be accepted.

All the four cases discuss above involved the sale of property and the

purchaser claim liquidated damages without issuing notice pursuant to their contract.

However, the developer did not satisfied and contended that notice should be given

before claiming liquidated damages pursuant to s 56(3) of Contract Act 1950. All

cases decided on favour of the purchaser but the judges failed to acknowledge that s

56(3) is only applicable when the contract is voidable contract. Plus, the contract was

in accordance with Schedule H of the Housing Developers (Control and Licensing)

Act 1966 which is drafted to protect purchaser‟s right. So, in the four cases, notice is

not condition precedent and the purchaser need not to issue notice before claiming

liquidated damages.

71

In Mardale Pipes Plus Ltd v. Malaysian International Trading Corp (Japan)

Sdn Bhd180

, the plaintiff was awarded the contract to supply duplex stainless steel

piping materials to the defendant. It was an express term in the letter of award that

time was of the essence of the contract, especially as the goods were intended for

delivery to ExxonMobil Exploration and Production Malaysia Inc. There was also a

provision for the imposition of liquidated damages for such delay in delivery.

The time stipulated for delivery of GOODS in the LETTER OF AWARD shall

be of essence. SUPPLIER agree to effect delivery of GOODS on or before the

stipulated delivery schedule. If for any reason, delivery shall be delayed,

SUPPLIER to notify MITCO JAPAN immediately in writing, giving reason(s)

for such delay. For late delivery of GOODS, liquidated damage (LD) of 1% a

week or part thereof of slippage from the agreed delivery period/date

stipulated up to the maximum of 10% of contract value shall be imposed.

The defendant refused to pay the sum amounted €255,267.26 (shipments of

goods between 2004 and 2006) on the grounds, inter alia, that LAD was occasioned

by the plaintiff‟s failure to ensure timely readiness of the delivery of the goods,

which sum was substantially the same as that imposed by ExxonMobil. The plaintiff

applied for summary judgment and managed to get €22,923.23 instead of the whole

sum. Dissatisfied, the plaintiff applied to High Court. The plaintiff relied on s 56(3)

of the Contracts Act 1950 („the Act‟) and submitted that since the defendant had

chosen to accept a late delivery where time was of the essence of the contract and

had not given notice at the time of acceptance of his intention to claim damages for

late delivery, it was not entitled to LAD.

This case was decided in favour of the plaintiff. Mary Lim JC explained that

in most commercial contracts, it would be agreed between the parties that time was

of essence. As such, non-performance by the due dates allowed the innocent party to

180

[2009] 5 MLJ 691

72

treat the contract as voidable, that is, to reject late delivery. Despite time being of the

essence of this contract, no notice was given by the defendant at the material time of

acceptance of the goods, of its intention to claim for damages for delivery at dates

other than those stipulated in the orders. Therefore, the issue of damages for late

delivery did not arise. The judge further stated that the LAD clause could only be

invoked when a notice under s 56(3) of the Act had been properly given by the

defendant.

However, the judge in this case was wrong. As discuss in the earlier cases, s

56(3) of the Contract Act 1950 is only applicable for voidable contract, but the

failure to issue notice did not amount to voidable contract but only a breach.

Therefore, in the first place, s 56(3) is not appropriate to be used as an argument by

the plaintiff.

Generally, the findings from the cases stated above show that for those

contracts which involve sale and purchase agreement under the Housing Developers

(Control and Licensing) Act 1966, notice of intention before claiming for damages is

not a condition precedent. The argument that section 56(3) of the Contract Act 1950

must comply in their contract has been prove to be wrong. Plus, the buyers are

protected under Housing Act and the Housing Regulations. Any attempt to impose

section 56(3) will remove the very protection which the Housing Act under which

the Housing Regulations were made was enacted for.

73

4.2.4 Issue 4 – Validity of Notice

What information should be included in the notice?

Many provision regarding liquidated damages in various standard form only

stated that the employer need to give written notice of intention to deduct liquidated

damages. Not many provisions give detail of information that should be included in

the notice. Thus, it gives rise to the contractor to challenge the sufficiency of

information in the notice and claim that the document sent did not meet the

requirement of notice as per contract.

In J.F. Finnegan Ltd v. Community Housing Association Ltd181

, one of the

issues raised is regarding what information must be include in the notice. The

Employer contends that it had to require the Contractor to pay or allow LADs and, if

only part is claimed, to specify what part of the total sum of LADs the Contractor

was to pay or allow; the period of overrun or any other details need not be contained

in the written requirement. The Contractor contends that it must specify three

matters: (i) that the Employer was requiring payment or allowance of LADs; (ii) that

the payment or allowance was of the whole or part of the LADs and if a part, what

part; and (iii) the period in respect of which the deduction was being made. The

judge held that:

“From the language of clause 24.2.1 I consider that there are only two

matters which must be contained in the written requirement. One is whether

the Employer is claiming a payment or a deduction in respect of LADs. The

other is whether the requirement relates to the whole or a part (and, if so,

what part) of the sum for the LADs. I stress the words "the sum" because it is

181

[1995] 65 BLR 103

74

quite clear, in my view, from the language of clause 24.2.1 that what is

required is a statement of the sum in respect of LADs.”

A contractor may challenge recovery of liquidated damages on grounds that

the document actually received from the employer is not the notice of liquidated

damages required under the contract.182

In Jarvis Brent Ltd v. Rowlinson

Construction Ltd183

, the claimant (Jarvis) carried out work as main contractors for

Rowlinson on the terms of the JCT 80. After a Non-completion Certificate had been

issued, the employer sent to Jarvis a letter enclosing a cheque and a letter sent to

Rowlinson by the Quantity Surveyor. The cheque was in the amount due under an

Interim Certificate reduced by an amount stated by the Quantity Surveyor in his letter

to be recoverable as liquidated damages. For subsequent Interim Certificates,

Rowlinson only sent cheques which reflected deductions for liquidated damages. The

claimant argued that a written requirement was a condition precedent to the

deduction of liquidated damages and the letter accompanied by the cheque did not

constitute such a requirement. The judge held that:

„...that there was no condition precedent that the employer‟s requirement had

to be in writing. What was essential was that the contractor should be in no

doubt that the employer was exercising its power under 24.2 in reliance on

the architect‟s certificate given under 24.1 and deducting specific sums from

monies otherwise due under the contract.‟

Judge Fox-Andrews held, in a judgment which was conflicting with Bell

case:

182



ed.) Oxford: Elsevier. pp.315 183

[1990] 6 Const LJ 292

75

1) The employer‟s letter was an adequate request in writing as it got the message

across to the contractor;184

2) In any event:

a) The employer‟s written request was not a condition precedent to his

right to deduct liquidated damages;185

b) The contractor by his conduct had led the employer to believe that

strict contractual rights would not be insisted upon and he was thereby

stopped from making the challenge.186

The judge emphasized that what was essential was that the contractor should

not be left in any doubt that the employer was deducting liquidated damages and in

this case the judge found that the contractor was in no such doubt.187

The judge went

on to hold that the written requirement was satisfied by a letter, written by the

quantity surveyor and forwarded to the contractor, which stated the amount which

the employer was entitled to deduct; alternatively, that the cheques issued by the

employer form which liquidated damages had been deducted constituted such written

requirements.188

Similar issue can be found in case Bovis Lend Lease Ltd v. Braehead

Glasgow Ltd.189

Bovis as contractor for Braehead Glaslow Limited were responsible

to design and construct a shopping and leisure centre at Braehead, Glaslow. Bovis

make an application for summary relief in respect of two interim applications for

payment, nos. 53 and 54. The sums claimed (excluding interest and VAT) are

respectively £2.2M and £6,645,619, ie. a total of £8,845,619 excluding VAT and

184



Ibid. 186

Ibid. 187



ed.) Oxford: Elsevier. pp.316 188


ed.). Oxford:

Blackwell Publishing Ltd. pp.224 189

[2000] All ER (D) 633

76

interest. Bovis asserts that Braehead is not entitled to deduct or recover any LADs

based on some ground. One of their arguments is Braehead failed to make a

requirement in writing pursuant to clause 24.2 of the contract. Further, or

alternatively, it is not entitled to LADs in respect of the delayed completion of some

sections of the works, because it failed to issue a notice of failure to complete in

accordance with clause 24.1.

However, Braehead had sent out two letters to Bovis which serves as notice

as require in the contract. The first is dated 27 October 1999, in which Braehead said:

"CSC will make post valuation deductions for LADs . . ."

The second is dated 26 November 1999. In this letter Braehead stated:

With specific regard to liquidated damages, pending receipt and analysis of a

fully documented and substantiated application for an extension of time we

have no alternative other than to deduct damages from the contract

completion date of 31 July 1999."

The judge held that:

I find it surprising that the clause did not spell out what information the

requirement in writing had to contain.

The reality is that there are only 3 elements to a claim for LADs. The first is

the date when the Works or Section of the Works ought to have been

completed. For the purposes of a deduction of LADs, this is fixed, for the time

being at least, by the giving of a notice under clause 24.1. The second is the

77

date of practical completion of the Works or the relevant Section. The third

is the application of the amount or amounts included in the contract for

LADs to the period between the two dates just mentioned, a matter of simple

arithmetic.

The judge was satisfied that Braehead has a real prospect of succeeding in its

arguments that its letters of 27 October and 26 November were requirements in

writing within the meaning of clause 24.2.

In conclusion, the purpose of notice is to inform the contractor about the

deduction beforehand. The contractor must not be leave in doubt and questioning

about the deduction. From the cases, some of the information that should be included

in the notice is:

State the intention of claiming a payment or deduction in respect of LADs;

State whether the payment or deduction relates to the whole or a part of the

sum for the LADs;

The date when the works or section of the works ought to have been

completed;

The date of practical completion of the works or the relevant section;

The amount of payment or deduction for LADs.

78

4.3 Conclusion

For contract which consist notice as condition precedent before claiming

LAD, failure to comply the notice provision contractually will risk the employer‟s

right to LAD. However, based on prevention principle, one party cannot benefit by

its own fault. Since, the contractor is responsible for the delay of the project, the

contractor should compensate the employer since the employer had suffered losses

because of the delay even though the employer did not give notice of intention before

claiming LAD.

A contract may be subject to terms that are sanctioned by the relevant statute,

although these terms have not been expressly mentioned by the parties in their

contract. For example, the argument by some party although their contract did not

mention the requirement to issue notice but section 56(3) of Contract Act 1950 is by

implication stated that notice of intention should be issued before claiming LAD. It is

clear that section 56(3) is only applicable went the contract is voidable. The contract

becomes voidable if it involves coercion, undue influence, fraud and

misrepresentation. Therefore, when the party is in breach because they fail to issue

notice of intention before claiming LAD, the other party cannot rely on section 56(3)

because the breach is not amount to voidable contract.

79

CHAPTER 5

CONCLUSION AND RECOMMENDATION

5.1 Introduction

Briefly this chapter consists the research findings based on the literature review,

case studies, and analysis; together with research‟s constraint, some suggestions for

future studies and conclusion to the whole study. This chapter will summarize all the

findings regarding status and implication of notice of intention before claiming

liquidated damages.

5.2 Summary of Research Findings

80

The objective of this study is to determine whether notice is condition precedent

to claim liquidated damages. In summary, examination the facts and findings from

previous chapter have leads to the following findings.

Where there is notice provision expressly stated as condition precedent, the

failure to comply them contractually amount to breach of contract and could

jeopardize the party‟s claim. However, it is not necessarily that the claim is

totally rejected because based on prevention principle, one cannot benefits from

its own wrong act. So, if the employer fail to issue notice of intention before

claiming LAD as per stated in the contractor, the contractor is most probably will

have to compensate the employer based on common law. This is because the

delay is totally cause by the contractor‟s fault. So, the employer who suffered

losses should be compensated because of the delay although he fail to issue

notice.

According to Section 56(3) of the Contract Act 1950, giving of a notice is a

condition precedent to the promisee‟s right to claim damages for non-compliance

within the stipulated time. However, section 56(3) did not apply because it is

only applicable for voidable contract. Plus the sale of property agreement is

protected under the Housing Developers (Control and Licensing) Act. Therefore,

the buyers who experience late delivery of vacant possession may claim for

damages without issuing notice of intention.

When there is notice provision in the contract, although it did not expressly

stated that the issuance of notice is condition precedent to claim liquidated

damages, but by implication, the notice requirement can be held to be condition

precedent because the interpretation of the language of the clause shows that it

was the intention of the parties to make the notice a condition precedent to the

said claim.

81

Although the liquidated damages provision did not specifically state what

information should be included in the notice, the findings from the cases shows

that notice should contains the following information:

1) State the intention of claiming a payment or deduction in respect of

LADs;

2) State whether the payment or deduction relates to the whole or a part of

the sum for the LADs;

3) The date when the works or section of the works ought to have been

completed;

4) The date of practical completion of the works or the relevant section;

5) The amount of payment or deduction for LADs.

5.3 Research’s Constraints

The main constraint of this study is insufficient of time. Due to the fixes time

frame, the extent and scope of this research has been narrowed down and limited to

certain objectives. This limitation led to less cases being found to support the findings.

With more cases, claim and waiver of notice requirement time can be presented more

comprehensively.

5.4 Suggestions for Further Research

82

This research was done to determine whether notice is condition precedent to

claim liquidated damages and research done by analyzing liquidated damages provision

in various standard form use construction. There are some aspects that further study can

be conducted. Further study can be done by narrowing the scope to analyze provision of

liquidated damages but focus in one standard form use in Malaysia. Perhaps further

research may give a more comprehensive and concretive findings.

5.5 Conclusion

The imposition of liquidated damages provision is intended to give certainty of

the financial cost of delay190

and the non-defaulting party can make recovery of damages

without the difficulty and expense of proving actual loss.191

However, there are some

conditions and procedure that need to be followed in order to have a successful claim of

liquidated damages. One of the conditions is the requirement to issue notice. In

Malaysia, section 56(3) of the Contract Act 1950 was claimed to give an implied

meaning in the contract. Therefore, the issue of condition precedent arise. However,

section 56(3) of the Contract Act 1950 is only applicable for voidable contract. While

most cases, the party is only in breach because of failure to issue notice before claiming

LAD. Therefore, the reference to section 56(3) is not appropriate in the first place. In

conclusion, to ensure a successful claim for liquidated damages, ones must know and

understand the procedure and requirements that need to be fulfilled by the party.

190

Turner & Townsend (2009). Liquidated Damages Contract Risk Management. [online] Available at:

www.turnerandtownsend.com/Liquidated_Damages_oeN9s.pdf.file [Accessed 22 January 2011]. 191

Ibid.


83

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