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08 November 2004
In Pernas Construction Sdn Bhd v Syarikat Rasabina Sdn Bhd  2 CLJ 707 a majority of the Malaysian Court of Appeal upheld the decision of the Kuala Lumpur High Court, which decided in favour of the subcontractor plaintiff in a building contract dispute.
The defendant was the main contractor employed under a government project for the construction and completion of a secondary vocational school. It employed the plaintiff as its subcontractor. Pursuant to the subcontract, the plaintiff procured a performance bond in the sum of over M$1 million to guarantee the due performance of the subcontract. A few months into the subcontract, the defendant issued the plaintiff with an order to stop work.
Specifically, the plaintiff was instructed to:
After receiving the order on March 31 1990, both parties entered into a termination agreement of the subcontract.
The termination agreement was referred to as the mutual termination agreement of the subcontract and was subject to the following terms and conditions, among others:
Prior to the execution of the termination agreement, the site architect was
asked to conduct tests in respect of the piling works. Tests were conducted
on the piles driven before March 26 1990 (ie, before the order was given to
the plaintiff) and the results, which were made known on July 9 1990 (ie, after
the termination agreement was executed), indicated that the piles satisfied the
technical requirements of the subcontract.
The plaintiff claimed against the defendant for unpaid sums for completed works under the subcontract, which were payable in accordance with the terms of the termination agreement. The defendant rejected the plaintiff's claims on the basis that the sums claimed were excessive. Instead the defendant made a call on the performance bond supplied by the plaintiff, stating that the plaintiff had failed to proceed with the works diligently and had fallen behind schedule, thus making it likely that the defendant would be delayed in its contract with the employer, rendering it liable for LAD. The plaintiff claimed that the defendant had wrongly called on the performance bond, thus causing loss to the plaintiff in the amount of the performance bond which it had to pay the insurance company as issuer of the bond. The plaintiff further claimed general damages for loss of reputation as a result of the order to stop work and the termination of the subcontract.
The plaintiff alleged that the order to stop work was in respect of the whole works under the subcontract and that by issuing the order, the defendant had wrongfully terminated the subcontract. However, the defendant took the view that the order applied only to the piling works.
The Court of Appeal, by a two to one majority, agreed with the High Court judge that when the defendant gave the instruction to stop work on the piling works, the order was in respect of all building works and that the defendant had wrongfully terminated the contract.
The majority also found that the termination agreement was not mutually agreed and was therefore invalid. The High Court was right to disregard the termination agreement.
The majority found that the plaintiff was pressured to agree to and sign the termination agreement with no opportunity to negotiate or refuse. Once the test results were known (ie, that the piles satisfied the technical requirements of the subcontract), the defendant should have nullified the termination agreement, lifted the order to stop work and requested the plaintiff to proceed with the works and complete the project.
The majority went on to hand down its judgment regarding the sum claimed for unpaid works, the reimbursement of the performance bond sum that had been paid to the insurance company, general damages for breach of contract including the loss of anticipated profit of RM3.7 million, and damages to the plaintiff's reputation in the sum of RM500,000.
Judge Arifin Zakaria, delivering the minority decision of the court, took the view that:
Accordingly, the plaintiff was only entitled to judgment in respect of the certified sums and the reimbursement of the performance bond sum that had been paid to the insurance company. This is a considerably lower sum than that ultimately awarded by the majority.
It appears from the majority decision that the main contractor may have taken advantage of its more dominant position by refusing to pay on the certified sums and pressuring the subcontractor into entering into the termination agreement and later calling on the performance bond.
By finding itself able to admit extrinsic evidence to the construction of the termination agreement and the order to stop work, the majority of the court was able to hold that the termination agreement was invalid and that the stop work order had the effect of terminating the subcontract. This had grave financial consequences for the main contractor, which was found was liable for the sum of RM3.7million (being loss suffered as a result of the wrongful termination of the subcontract).
However, the majority found that the plaintiff was forced or coerced into signing the mutual termination agreement despite the absence of any contention to that effect in the pleadings or in the evidence before the High Court. This point was made by Zakaria in his minority decision.
It is interesting that the majority of the court allowed the plaintiff a sum of RM500,000 in respect of the injury to its reputation, since the defendant had reported the plaintiff to the relevant authorities and this resulted in the plaintiff being passed over for additional contracts.
For further information on this topic please contact Vinayak Pradhan at Skrine by telephone (+60 3 2094 8111) or by fax (+60 3 2094 3211) or by email (firstname.lastname@example.org).
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