Construction 2024 Comparisons

The construction market is generally governed by the laws of Malaysia, which include the statutes enacted as well as the case laws.

The main legislation relevant to construction contracts includes:

• the Contracts Act 1950; and
• the Construction Industry Payment and Adjudication Act 2012 (CIPAA).

There are also statutes relating to the planning of and actual works, including:

• the Occupational Safety and Health Act 1994;
• the Street, Drainage and Building Act 1974;
• the Town and Country Planning Act 1976;
• the Uniform Building By-Laws 1984;
• the Environmental Quality Act 1974; and
• the Construction Industry Development Board Act 1994.

The statutes above can be found on the Federal Legislation website. Some statutes may be applicable in Peninsular Malaysia only.

The use of standard form construction contracts is quite common, albeit not mandatory. A few types of standard form construction contracts used in Malaysia are discussed below.

PAM Contracts

PAM is short for Pertubuhan Akitek Malaysia(Malaysian Institute of Architects). PAM contracts are build-only contracts under which the architect is the contract administrator. PAM has published several standard form contracts, as follows.

• For use between employer and main contractor:
1. PAM Contract 2018 (With Quantities);
2. PAM Contract 2018 (Without Quantities);
3. PAM Contract 2006 (With Quantities); and
4. PAM Contract 2006 (Without Quantities).
• For use between main contractor and subcontractor:
1. PAM Sub-Contract 2018; and
2. PAM Sub-Contract 2006.

FIDIC Contracts

International employers and/or contractors may prefer to use the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils, or FIDIC) suite of contracts due to their familiarity with the FIDIC contracts, which are administered by engineers. The type of FIDIC contract used will depend on the nature of the project. The more commonly seen FIDIC contracts in Malaysia include the Red Book (Construction Contract), the Silver Book (EPC/Turnkey Contract) and the Yellow Book (Plant and Design-Build Contract).

PWD Contracts

Standard form contracts published by the Public Works Department of Malaysia (PWD) are commonly used in government-related projects in Malaysia. PWD contracts are administered by the superintending officer.

PWD contracts used between employer and main contractor are:

• PWD Form 203 (where drawings and specifications form part of the contract);
• PWD Form 203A (where bills of quantities form part of the contract); and
• PWD Form DB (for design and build).

PWD Form 203N is used between the main contractor and nominated subcontractor where the main contract uses PWD Form 203 or PWD Form 203A. PWD Form 203P is used for the engagement of nominated supplier in conjunction with PWD Form 203A.

Other Standard Form Contracts

Other standard form contracts used in projects in Malaysia (albeit less frequently than the above-mentioned contracts) include:

• standard form contract for building works by the Construction Industry Development Board (CIDB);
• standard form contracts for engineering works by the Institute of Engineers Malaysia (IEM); and
• standard form contracts for building works/design-and-build works by the Asian International Arbitration Centre (AIAC).

General

Employers in construction projects in Malaysia vary depending on the nature of such projects. In public projects, the employer can be either the federal or state government, a statutory body or a government-linked company. On the other hand, in private projects, the employer can be a public limited company, a private limited company, or an incorporated or unincorporated joint venture/consortium or partnership.

Rights and Obligations

The rights and obligations of the employer vary depending on the nature of the projects and the type of construction contract adopted.

Generally, the employer has the right to receive the completed project or works based on the designs and specifications provided within the stipulated timeline. In return, the employer has obligations to make payments and to provide site access in accordance with the contract. The employer is also under a general obligation not to prevent the contractor from performing the contractor’s obligations. In build-only projects, the employer will also provide the design of the building or plant to be constructed.

Relationship between employer and contractor

The relationship between the employer and the contractor is normally of a contractual nature and is governed by the construction contract.

Relationship between employer and subcontractor

In most cases, the contracting structure is such that the employer will not have any contractual relationship with the subcontractor, and this is expressly specified in the main contract. The contractor will usually be liable for all acts and omissions of the subcontractor. This is the most preferred way of contracting for ease of project management, as ‒ from the employer’s risk perspective ‒ there is a single point for responsibility.

Relationship between employer and financiers

The relationship between the employer and the financiers is usually governed by the financing documents. The financiers are not usually party to the construction contract, but they may request certain financiers’ rights to be included, such as assignment of certain rights or interests under the contract to the financiers. In project financing, there are requirements for the parties to enter into direct agreements with the financiers in order to allow these financiers certain rights under the construction contracts, in case of default.

General

Contractors in construction projects in Malaysia vary depending on the nature of such projects. They can be a public limited company, a private limited company, or an incorporated or unincorporated joint venture/consortium or partnership.

Rights and Obligations

The rights and obligations of the contractor vary depending on the nature of the projects and the type of construction contract adopted.

The contractor will be under the obligation to carry out the works in a timely manner in accordance with requirements under the contract. In design-and-build projects, the contractor usually will also provide the design of the building or plant to be constructed based on certain requirements/specifications provided by the employer.

In return, the contractor will be entitled to timely payment in accordance with the contract.

Relationship between contractor and employer

See 2.1 The Employer.

Relationship between contractor and subcontractor

The relationship between the contractor and the subcontractor is normally of a contractual nature and is governed by the subcontract. See 2.1 The Employer for more on the contractor’s liability to the employer for all acts and omissions of the subcontractor.

Relationship between contractor and financiers

In Malaysia, the contractor does not normally have financiers for the project. If financing is required, the relationship will be governed by the financing documents.

General

Subcontractors in construction projects in Malaysia vary depending on the nature of the subcontract works to be carried out, and can be a public limited company, a private limited company, or an incorporated or unincorporated joint venture/consortium or partnership. Subcontractors are normally engaged to provide works in specialised areas. See 8.2 Subcontracting for further details.

Rights and Obligations

The rights and obligations of the subcontractor are governed by the subcontract. The subcontractor will not have rights under the construction contract, owing to lack of privity of contract, unless it is made a contracting party.

Under the subcontract, the subcontractor will have the obligation to carry out the subcontract works in a timely manner in accordance with requirements under the subcontract. In return, the subcontractors will be entitled to timely payment in accordance with the subcontract.

Relationship between subcontractor and employer

See 2.1 The Employer.

Relationship between subcontractor and contractor

See 2.2 The Contractor.

Relationship between subcontractor and financiers

In Malaysia, the subcontractor does not normally have financiers for the project. If financing is required, the relationship will be governed by the financing documents.

General

Financiers in construction projects in Malaysia are typically financial institutions or banks.

Rights and Obligations

The rights and obligations of the financiers are governed by the financing documents and the financiers will not have rights under the construction contract, owing to lack of privity of contract – except for any rights expressly included in the contract, such as assignment of certain rights or interests under the contract to the financiers.

Relationship between financiers and employer

See 2.1 The Employer.

Relationship between financiers and contractor

See 2.2 The Contractor.

Relationship between financiers and subcontractor

See 2.3 The Subcontractors.

General

In build-only projects, the designer is typically the consultant/consultancy company engaged separately by the employer, or the designing works can be done in-house by an engineer or architect within the employer.

In design-and-build projects, the contractor will undertake the role of the designer.

Rights and Obligations

In build-only projects, the rights and obligations of the designer are governed by a separate agreement between the employer and the designer, and the designer will not have rights under the construction contract owing to lack of privity of contract.

In design-and-build projects, as the contractor is the designer, the contractor will provide the design of the building or plant to be constructed in accordance with the contractual requirements. See 2.2 The Contractor.

Relationship between designer and employer

The relationship between the designer and the employer is normally of a contractual nature and is governed by a separate agreement or the construction contract, depending on the nature of the project.

Relationship between designer and contractor

In build-only projects, typically the designer will not have any contractual relationship with the contractor. However, in design-and-build projects, the designer is the contractor.

Generally, the scope of works in a construction contract is set out in the documents forming the contract. These contract documents may include:

• conditions of contract;
• employer’s requirements/specifications;
• tender documents;
• drawings;
• bills of quantities; and
• contractor’s proposal.

Scope for Variations

The scope for variations is typically determined in accordance with the relevant variation provisions in the construction contract. Construction contracts will typically provide for:

• definition of variation (including any addition, alteration or omission to the contractor’s initial scope of works);
• the process of requesting or instructing variation ‒ variation is usually effected through a variation order;
• the presentation of a variation proposal by the contractor;
• the valuation procedures and methodology;
• adjustment to contract price; and
• extension of time (EOT) and/or prolongation cost claims due to variation.

Price for Variations

The price for variations is established based on the contractual provisions setting out the method of valuation. Depending on the character and conditions of the variation, the value of the variation may be calculated based on the stipulated rates and prices in the construction contract, fair market rate or “daywork rates” basis.

In the event of omission of work, valuation will normally be done by referring to the rates or prices provided in the contract, as the omission will be on an existing scope with an agreed rate/price. The value of the omission will be deducted from the contract price.

Some standard form contracts contain valuation mechanisms from which parties can take guidance, as follows.

• PWD Form 203A – the valuation of the variation is primarily based on the rates provided in bills of quantities. If the variation work cannot be properly measured or valued, the value of variation will be determined based on the actual net cost incurred by the contractor for the materials, plant and labour for the work plus 15%.
• PWD Form 203 – if the work involves the addition of the whole of any similar item of work and is executed under similar conditions as work priced in the summary of tender, such price in the summary of tender shall be the basis of valuation. The valuation of the other types of variation works, including omission, is primarily based on the rates provided in the schedule of rates. If the variation work cannot be properly measured or valued, the value of the variation will be determined based on the actual net cost incurred by the contractor for the materials, plant and labour for the work plus 15%.
• PAM Contract 2018 ‒ the variation work shall be measured and valued by the quantity surveyor (With Quantities) or the architect (Without Quantities). The valuation of variation work (including any omission) is primarily based on the rates and prices set out in the contract documents, with fair adjustments to be made if the work is not executed under similar conditions or in a similar quantity. Fair market rates and prices determined by a quantity surveyor or an architect will apply if the work is not of a similar character to those set out in the contract documents. Where the works cannot be properly measured and valued in the preceding ways, the contractor will be entitled to either the daywork rates in the contract documents or ‒ if no such daywork rates are available ‒ the actual cost incurred by the contractor for the materials, additional construction plant and scaffolding, transport and labour plus 15%.

Where the construction contract is silent on the valuation for variation, parties may rely on the following.

• Section 36 of the CIPAA – the value shall be calculated based on fees prescribed by the relevant regulatory body under the law and, where there are such no prescribed fees, valuation shall be made based on rates prevailing in the construction industry at the time of the carrying out of the construction work.
• Quantum meruit ‒ Section 71 of the Contracts Act 1950 allows the contractor to be compensated a reasonable sum for the variation works done.
• Settlement discussion – parties are free to negotiate and agree on price for variations.

Time/Cost Impact of Variation

Where the variation causes delay to the completion of the works that is not due to any acts/omissions by the contractor, the contractor may be entitled to EOT for the completion of the works. Depending on the parties’ agreement reflected in the contract, the contractor may also be entitled to costs for the delay.

The responsibilities for the design vary depending on the nature of the construction project. See 2.5 The Designer for further details.

In most construction projects, the contractor will undertake the construction works under the construction contracts. The employer and/or the contract administrator/consultant usually assume a supervisory role regarding the works.

If the contractor subcontracts some works under the construction contract to the subcontractor, the subcontractor will carry out a portion of the construction works.

Site Access

One of the employer’s main obligations under a construction contract is usually the provision of site access for the contractor and/or subcontractor to carry out the works. The contract may provide for certain restrictions/limitations to such access, or access may be given in stages based on the works to be carried out.

Site Conditions

A construction contract will typically contain provisions regarding the site conditions. The contractor is usually required to warrant that it has studied/inspected and has satisfied itself of the site conditions for the purposes of performing its obligations under the contract and that it would have no claims against the employer arising from or in connection with any site conditions.

Pollution

On the issue of pollution, parties under the construction contract are required to comply with the applicable laws (including the Environmental Quality Act 1974, which contains provisions prohibiting any pollution of soil, surface of land, water, etc).

Archaeological Finds

For archaeological finds such as fossils or antiquities on site, the construction contract will normally provide that the ownership of such items vests in the employer, and the contractor has certain obligations arising from the finds (such as preservation and notification to the employer/contract administrator). Apart from the contractual terms, the National Heritage Act 2005 requires ‒ among other things – the person who discovers at the site any object with cultural heritage significance to report such discovery to the Commissioner of Heritage, authorised officer or district officer.

Generally, the permits or approvals required for construction are governed by the Street, Drainage and Building Act 1974, the Uniform Building By-Laws 1984 and the Environmental Quality Act 1974, which include planning permission, building plan approval, and development order, fire safety plan and environmental impact assessment approval. The construction contract will typically place the obligation to obtain any permits/approvals on the party carrying out the works (ie, the contractor). If certain permits/approvals need to be applied in the name of the employer, the contractor will usually have an obligation to assist the employer with such applications.

Further, unless exempted, the contractor and subcontractors (whether local or foreign) will need to be registered with the CIDB before undertaking any construction works in Malaysia, pursuant to the Construction Industry Development Board Act 1994.

Prior to completion of the construction works, the construction contract typically provides that the contractor is responsible for the maintenance and protection of the works, including the permanent works, temporary works, materials, goods, equipment and machinery on site.

Post-completion, the completed works will be handed over to the employer. The construction contract will not typically provide for maintenance post-completion, apart from the contractor’s obligations in relation to defects within the defects liability/warranty period. The employer may by itself maintain the completed works or it may enter into a separate maintenance agreement with the contractor or a third party.

It is not common for the employer in Malaysia to instruct the contractor on other functions in the construction process such as operation, finance and transfer. These scopes of work are usually undertaken either by the employer themselves or by third parties separately engaged by the employer.

Generally, the contractor has the responsibility to carry out the tests in accordance with the construction contract. The employer’s requirements/specifications will typically set out the tests that need to be done by the contractor, including the tests for completion. The contractor usually bears its own costs and expenses for the tests (including any re-tests), as these would have been priced into the contract price.

The typical process for tests for completion is as follows:

• notification by the contractor to the employer/contract administrator when the works are ready for test for completion;
• the employer/contract administrator may have a right to be present to observe the test;
• the contractor shall carry out the test for completion (including any re-testing) until the test has been successfully passed; and
• the contractor shall then provide the test report to the employer/contract administrator.

Typically, once the constructions works have been practically completed in accordance with the requirements of the construction contract, the contractor will notify the employer/contract administrator to inspect the works to determine if the works have achieved practical completion.

If the works have any deficiency, it would be notified to the contractor and the contractor will fix such deficiency before the process of notification and inspection is repeated until the employer/contract administrator is satisfied that the works have achieved practical completion.

Following that, the employer/contract administrator will issue a certificate certifying the practical completion of the works, typically known as the “Certificate of Practical Completion” or the “Taking Over Certificate”.

The works are normally handed over and delivered by the contractor to the employer on the date stated in the certificate issued. The certificate may contain a punch-list of minor items that do not affect the operation or use of the works but need to be completed by the contractor within a specified period. Upon handover, the contractor may be entitled to certain payments and the defects liability period (DLP) will commence.

Upon the taking over of the completed works by the employer, the DLP will commence for a period agreed by the parties in the construction contract. The DLP typically ranges from 12 to 36 months, depending on the type and complexity of the works. During the DLP, the contractor is obliged to make good any defects in the works. The contract may provide rights for the employer to make good the defects itself or by engaging a third party (under certain circumstances such as the failure of the contractor to make good defects within a reasonable time) at the contractor’s cost.

Upon expiry of the DLP and making good of all identified defects, the employer will issue a certificate (typically known as the “Certificate of Making Good Defects” or “Final Completion Certificate”) and the contractor will be entitled to a final payment under the contract.

Depending on the nature of the projects, the construction contract may provide separate obligations for the contractor vis-à-vis endemic defects, which normally involve significant defects or failure in the design. Such obligations are more commonly seen in contracts under which the contractor is responsible for the design.

Sometimes, a separate DLP will be provided for the contractor’s obligations on latent defects (ie, defects that are not reasonably capable of being discovered prior to the expiry of the usual DLP).

Unless otherwise agreed by the parties, the provisions concerning defects and the DLP and any remedies provided in the construction contract will not normally limit the other causes of action or remedies available to the employer, including recovery of damages for breach of contract or tort.

In Malaysia, the contract price of a construction contract is usually established in one of the following ways.

• Fixed lump sum contract – the contract price will be a fixed amount (subject to adjustments allowed under the contract, such as variation or EOT) for the contractor to perform all its obligations under the contract.
• Measure and value/remeasurement contract – the contract price provided is an indicative amount that is subject to the measurement and valuation of the actual works carried out by the contractor. The measurement and valuation will be based on an agreed mechanism under the contract, normally calculated based on the bills of quantities and/or schedule of rates.

Milestone payments are commonly used in projects where there are identifiable major milestones to be achieved by the contractor. Otherwise, if there is no clear milestone set out in the contract, the interim payment mechanism is more commonly used.

Indexation of prices is not commonly seen in construction contracts in Malaysia. The allocation of risks, including the risk of price fluctuations, is usually agreed to between the parties when they enter into the contract. However, nothing prohibits the parties from agreeing otherwise and if there is going to be any adjustment of the contract price due to this, it must be express.

Some instances of how construction contracts deal with the fluctuation of prices can be seen in standard form contracts, as follows.

• Under both PWD Form 203A and PWD Form 203, any adjustment to the contract price due to fluctuation upwards and/or downwards will have to be expressly agreed between the parties in the special provisions.
• Under both PAM Contract 2018 (With Quantities) and PAM Contract 2018 (Without Quantities), the contract price shall not be adjusted in any way other than in accordance with the express provisions in the contract. Therefore, in the absence of specific clauses allowing the adjustment of the contract price on the ground of price fluctuations, any associated risks will be borne by the contractor.
• Under the FIDIC Yellow Book, adjustments of payment for changes in costs will only be allowed if a schedule of cost indexation is included in the contract; otherwise, the contract price will be deemed to have included amounts to cover the contingency of rises and falls in costs.
• Under the FIDIC Red Book and Pink Book, adjustments for rises or falls in the costs of labour, goods and other inputs to the works will be determined by the formulae prescribed in the contract by using the cost indices and reference prices in the table of adjustment data; otherwise, the contract price will be deemed to have included amounts to cover the contingency of rises and falls in costs.

Advance Payment

Some construction contracts provide for advance payment to the contractor, which normally means that the contractor will receive the payment before it commences the works. This mechanism is typically used to ease the cash flow or financial burden on the contractor to fork out enough financing to carry out the works up to the first payment under the contract.

If there is advance payment, the contractor will be required to provide a bank to secure the repayment of such advance payment. The advance payment is normally repaid through percentage deductions by the employer on the interim/milestone payments.

Interim Payment

If the construction contract provides for interim payment mechanism, typically this means that the contractor will submit a payment application/claim on a regular and fixed interval basis, such as monthly or quarterly.

The employer/contract administrator will inspect and review the payment application/claim submitted and the progress of the works to determine the amount of payment that the contractor is entitled to in accordance with the contract, which will normally be recorded in an interim payment certificate. The employer will then pay the contractor the amount recorded in the interim payment certificate within the period provided in the contract.

Milestone Payment

The milestone payment mechanism typically works in the same way as the interim payment mechanism, except that the contractor will only make the payment application/claim upon achievement of a milestone set out in the contract. Each milestone will normally be tagged to a percentage of the contract price.

Delayed Payment/Non-Payment

Some construction contracts may provide for late payment interest. In the absence of such provisions, the contractor is normally not contractually entitled to any late payment interest. Notwithstanding the foregoing, the courts in Malaysia (under Section 11 of the Civil Law Act 1965), arbitral tribunals (under the relevant arbitration rules such as the AIAC Arbitration Rules) and adjudicators (under the CIPAA) are empowered to award late payment interest at a rate to be determined in the event the contractor is successful in its claims against the employer for breach of contract through one of the dispute resolution mechanisms detailed in 10.1 Regular Dispute Resolution and 10.2 Alternative Dispute Resolution.

For court proceedings, the contractor may also rely on Order 42 rule 12 of the Rules of Court 2012 to claim post-judgment interest from the date of judgment until the date when the judgment is satisfied, either at the rate expressly provided for in the construction contract or at the rate determined by the Chief Justice from time to time (currently 5% per annum).

The need for invoicing is typically agreed between the parties in the construction contract and will be issued in accordance with the payment provisions in the contract. Invoices will be issued by the contractor to the employer following the issuance of the interim payment certificate. Payments will be made within a period upon the receipt of the invoice by the employer.

The process of planning and preparing the programme is usually governed by the relevant provisions in the construction contract. It is possible that a finalised programme is agreed at the time of signing the contract and therefore no specific planning procedures would be set out in the contract. Otherwise, the process of planning will be a requirement under the contract and the responsibility typically lies with the contractor to plan and prepare the programme, which needs to be updated from time to time throughout the construction period to reflect the actual progress of the works on site.

The programme will typically contain the sequence in which the contractor will carry out the works, detailed activities of the works, and the methods of construction to be adopted by the contractor. The programme is usually subject to the review and approval of the employer/contract administrator. If the programme is required to be revised owing to any delay in the progress of the works, the revised programme will usually also contain measures to mitigate the delay or to accelerate the works.

The construction contract normally provides that the programme does not form part of the contract/is not binding but is used as a planning tool to measure and monitor the progress of the works. Sometimes, the programme will be used as a basis to assess any delay and EOT.

Generally, the construction contract will provide for mechanisms to deal with delays in the works. The applicable mechanism may differ depending on the cause of the delay.

Employer’s Delay

For delay caused by the employer, the contract will normally provide for an EOT mechanism, which extends the scheduled completion date. There may be certain notice and/or claim requirements imposed on the contractor to be entitled to EOT.

The time-related costs suffered by the contractor owing to the employer’s delay will usually be claimed together with the EOT and are subject to assessment by the employer/contract administrator.

Contractor’s Delay

For delay caused by the contractor, the contractor will usually not be entitled to any EOT. It is common for the contract to provide liquidated damages provisions if the contractor fails to achieve completion and/or certain milestones on or before the scheduled date(s) provided in the contract. The liquidated damages are typically calculated at a daily rate for each day of delay up to the achievement of completion or the relevant milestone. The employer’s entitlement to liquidated damages may be subject to the issuance of a certificate of non-completion/default.

Other Delay

There may be other causes of delay, which are not attributable to either party, such as a force majeure event. The parties will usually agree to the allocation of risks in relation to such delays in the contract. By way of example, it is common for the parties to share the risk of delay caused by force majeure events by allowing the contractor to claim EOT but not allowing claims for time-related costs.

Concurrent Delay

It is not uncommon for concurrent delay to occur in construction works (ie, two or more overlapping causes of delay have caused delay in the works). Sometimes, the contract will provide for the allocation of risks relating to concurrent delay.

If there is no such provision in the contract, the treatment of concurrent delay by the court or the arbitral tribunal will vary from case to case, depending on the factual circumstances. However, generally, the court or arbitral tribunal is minded to award some EOT to the contractor if it is proven that the employer has contributed to the delay.

The remedies available to the employer in the event of delays will depend on the construction contract. Remedies available to the employer include the following.

• Liquidated damages payable by the contractor to the employer calculated at a daily rate for each day of delay up to the achievement of completion or the relevant milestone – see 5.2 Delays. Most construction contracts that contain liquidated damages provisions will provide for a cap on the amount of liquidated damages for which the contractor will be liable. Once the liquidated damages accumulate up to the cap amount, this may give rise to a right of termination of the construction contract by the employer.
• Termination of the contract for breach of contract – see 9.6 Termination.
• The option to step-in and undertake the works itself or engage a third party to complete the works – if such remedy is exercised by the employer, the employer may have recourse on the contractor for the additional costs incurred by setting off such costs against any payment due or any retention money under the construction contract or by making a demand on any available bank guarantee.

See 5.2 Delays. The relevant delay events that may entitle the contractor to EOT will normally be set out or defined in the contract. Such events may include:

• any acts of prevention by the employer, such as delay in granting site access, delay in approval/supply of drawings, and delay in giving instructions;
• variation of the works; and
• force majeure events.

Typically, when a relevant delay event occurs, the contractor will be required to notify the employer/contract administrator and submit an application for EOT. The contractor may be required to prove that it has reasonably mitigated the delay and/or submit sufficient documents to show that the delay falls on the critical path and has actually delayed the scheduled completion date. The submission of notice and/or claim may be made mandatory in the contract. Some contracts may provide that any failure to comply with such requirements will be deemed to be a waiver by the contractor of any entitlement to EOT.

Once sufficient documents have been submitted, the employer/contract administrator will assess the application and ‒ if it is of the view that the contractor is entitled to any EOT ‒ the employer/contract administrator will normally be required to issue a certificate of EOT recording the EOT granted and the new scheduled completion date.

General

In Malaysia, force majeure is a purely contractual concept that must be expressly provided for in the contract otherwise it will not be implied into the contract.

The events constituting force majeure will typically be defined in the contract. Generally, force majeure is defined in one of the following ways.

• Non-exhaustive definition – this provides general criteria for an event to qualify as force majeure, such as events that are beyond the reasonable control of parties, not reasonably foreseeable at the time of the contract and not attributable to either party. Examples of events may be provided but are not intended to limit potential force majeure events. Events excluded from qualifying as force majeure may also be provided.
• Exhaustive definition – this provides for an exhaustive list of events that can qualify as force majeure. Any events not listed will not be recognised as force majeure.

Common force majeure events are war, riots, embargo, natural disasters, industrial strikes or other labour disputes, pandemics, and the like.

Consequences of Force Majeure

The consequences of force majeure are normally agreed by parties to the contract and typically include:

• the affected party being relieved from performing its contractual obligations for the period when the force majeure is subsisting, without liability to the other party;
• the affected party must reasonably mitigate the effect of force majeure; and
• if the affected party is the contractor, the contractor may be entitled to EOT (see 5.2 Delays and 5.4 Extension of Time).

Generally, the allocation of the risks of unforeseen circumstances will be negotiated and agreed upon by the parties in the construction contract. If the contract does not provide for the rights and obligations upon the occurrence of unforeseen circumstances, and such unforeseen circumstances have rendered the contract impossible to be performed or otherwise frustrated, the contract will become void pursuant to Section 57(2) of the Contracts Act 1950. Upon frustration of the contract, the rights and liabilities of the parties will include:

• recovery of the sums paid and/or valuable benefit obtained pursuant to Sections 15 and 16 of the Civil Law Act 1956; and
• restoration of or compensation for any advantage received under the contract pursuant to Section 66 of the Contracts Act 1950.

In Malaysia, most construction contracts do not expressly deal with disruption in general terms as a ground for EOT and/or compensation. Depending on the nature and extent of the disruption, it may fall within the ambit of variation or employer’s act of prevention, which may entitle the contractor to claim EOT and/or compensation; otherwise, the contractor may have recourse for additional costs incurred by recovering such costs as general damages if the disruption amounts to a breach of contract by the employer.

Exclusion of liability is not as common as limitation of liability in construction contracts. Section 29 of the Contracts Act 1950 prohibits an absolute restriction on a party from enforcing any rights under the contract.

Section 14(2) of the Civil Law Act 1956 provides that any provision in a contract of service or apprenticeship having the effect of excluding or limiting an employer’s liability for personal injuries caused by negligence is void. This applies to employment contracts between a party and its personnel but is likely not applicable to construction contracts. Construction contracts typically have fault-based indemnity clauses relating to death or personal injury. See 7.1 Indemnities.

The concepts of “wilful misconduct” and “gross negligence” exist under common law and have been interpreted by the courts in Malaysia. They are not fixed and their scope may differ from case to case based on the factual circumstances. Therefore, it is not uncommon for parties to agree to certain definitions of wilful misconduct and gross negligence in the construction contract in order to have more certainty concerning what these concepts entail.

Construction contracts in Malaysia typically provide for limitation of liability clauses, such as:

• liquidated damages being capped at a percentage of the contract price;
• the contractor’s maximum liability under the contract being capped at a percentage of or the amount of the contract price; and
• limitation on damages recoverable under the contract to only direct loss and damage.

It is common for the construction contract to provide for indemnity by a party to another party for:

• any damage to property (including third party’s property) or personal injury (including death) caused by the act or omission of the indemnifying party; and
• any claims by third party (including indemnifying party’s employee) against the indemnified party as a result of the act or omission of the indemnifying party.

The use of guarantees in construction contracts is common in Malaysia to limit risk for the employer. The common types of bank guarantees in construction contracts are:

• advance payment guarantee to secure the repayment of the advance payment – the bank guarantee is usually in the amount of the advance payment;
• performance guarantee to secure the proper performance of the contractor’s obligations – the bank guarantee is usually in the amount of a percentage of the contract price;
• DLP/warranty guarantee to secure the contractor’s performance of its obligations during the DLP – the bank guarantee is usually in the amount of a percentage of the contract price; and
• parent company/corporate guarantee provided by the contractor’s parent company to secure the proper performance of the contractor’s obligations.

The bank guarantees usually must be unconditional and on-demand guarantees issued by a financial institution approved by the employer. The contractor is normally obliged to renew the bank guarantees if the initial expiry date is earlier than the period in which such bank guarantees must remain valid under the contract. The contract may also provide for circumstances under which the employer may make a demand under the bank guarantees.

Normally under the construction contract, the contractor will need to take out and maintain insurances throughout the contract period, including:

• insurance to cover liability of the contractor and subcontractor for personal injuries, death, or damage to property arising from the execution of the works, such as contractor’s/construction all-risks, workmen’s compensation, public liability, and motor vehicle insurance;
• insurance to cover the executed works, materials and goods on site against loss and damage; and
• professional indemnity insurance to cover design works and/or professional services if such scope is provided by the contractor.

The contractor is normally required to include the employer as an insured and to provide proof of the insurances. The employer may have a right to take out any insurance that the contractor fails to take out and to back-charge the premiums to the contractor by either setting off against the payments due under the contract or having recourse against the bank guarantees.

Some contracts may provide for specific insurances to be taken out by the employer.

Most construction contracts will provide allow a party to terminate the contract in the event of insolvency of the other party. Such right is typically available for both the employer and the contractor. If the contractor consists of a consortium of companies, parties may agree that the insolvency of a consortium member will not automatically trigger the employer’s right to terminate if the other consortium members can prove their ability to complete the outstanding works.

The consequences of termination due to insolvency will typically be similar to the consequences of termination for breach by the employer or the contractor. See 9.6 Termination.

Risk sharing is not a common practice in Malaysia because one main component of a construction contract is risk allocation. Parties usually prefer to have clear allocation of risks in the contract to avoid any dispute as to the responsible party for certain risks.

Most risks relating to the construction will be placed on the contractor, given that it is the party executing the works on site. The employer may agree to take up certain risks owing to commercial considerations (eg, to lower the contract price).

The allocation of risks also depends on the nature of the project.

• In a build-only project, the risk of design defects lies with the employer, as the employer or its consultant will undertake the design.
• In a design-and-build project, the risk of design defects normally lies with the contractor, which is the designer.

Notwithstanding the foregoing, it is still up to the parties to negotiate the sharing of certain risks. Instances of risk sharing in construction contracts are as follows.

• Fluctuation of material costs – the parties can agree to a mechanism of adjustment of contract price in the event the increment in costs is more than a percentage. This means that the contractor will take the risk of material costs increment up to the prescribed percentage and any further increment will be at the employer’s risk.
• Force majeure – typical risk sharing in the event of force majeure is that the delay will be at the employer’s risk (ie, the contractor will be entitled to EOT), whereas any prolongation costs will be at the contractor’s risk (ie, the contractor will not be entitled to any additional costs).

Generally, parties to the construction contract are responsible for the acts or omissions of their own personnel. The contractor is usually required to warrant that it will provide sufficient and skilled personnel to perform all its obligations under the contract.

Parties may be required to appoint their representatives. Such representatives will have all the rights and obligations provided under the contract, such as the giving and receiving of any notice, instructions and documents. The acts of a party’s representative are normally binding on such party. Where there is a contract administrator, such contract administrator will usually assume the role as the employer’s representative vis-à-vis the exercise of the employer’s powers under the contract. At the same time, the contract administrator is required to act independently and neutrally in assessing applications and issuing certificates under the contract.

Some contracts may contain provisions dealing specifically with the contractor’s “key personnel” (ie, personnel who play an important role in ensuring the due execution of the works). It is not uncommon for the construction contract to provide that the key personnel cannot be removed or replaced without the consent from the employer.

Most construction contracts will allow for the subcontracting of part of the works subject to the consent of the employer. Sometimes there may be express prohibition on subcontracting a substantial portion of or the entire works.

Some contracts contain provisions specifically on nominated subcontractors (ie, the subcontractors nominated and approved by the employer). The contract may provide that the contractor does not need to obtain the employer’s prior consent for the subcontracting of works to the nominated subcontractor or that certain works can only be subcontracted to the nominated subcontractor and not any other persons. The contractor may be given rights to raise objections to the subcontractors nominated by the employer.

Construction contracts will typically provide that the contractor is responsible and liable for the acts and omissions of the subcontractors and shall not be relieved from any of its obligations under the contract, regardless of any approval or nomination by the employer.

The IP provisions differ from one contract to another. Normally any IP provided by the employer and IP created in the project will belong to the employer. The contractor usually remains the owner of its IP used in the project but is required to grant a licence to the employer for the use of such IP without charging separate licensing fees or royalties.

The typical IP provisions in construction contracts may also deal with any infringement of IP of a third party and will normally require the contractor to indemnify the employer against any infringement claims by a third party.

In the event of a breach of the construction contract, apart from the employer and the contractor, other third parties will have no claim for the breach as they are not party to the contract.

Remedies for Employer

If the contractor breaches the construction contract, it will typically give the employer a right to terminate the contract by providing a notice. The employer may be required to allow the contractor a period in which to remedy the breach before it can exercise the termination right.

The employer may also exercise the contractual remedies specific to certain breaches – for example, liquidated damages for delay in the achievement of completion or a milestone. The contract may also provide the employer rights to other remedies such as withholding payment, setting off against payment, and demand on bank guarantees.

Apart from the contractual remedies provided, the employer will have a right at common law to claim for damages suffered due to the contractor’s breach. If the breach is a fundamental breach that goes to the root of the contract, the employer may choose to terminate the contract at common law.

Remedies for Contractor

If the employer breaches the construction contract, it will typically give the contractor a right to terminate the contract by providing a notice. The contractor may be required to allow the employer a period in which to remedy the breach before it can exercise the termination right.

The contractor may also exercise contractual remedies that are specific to certain breaches, such as late payment interest. The contract may also provide the contractor rights to other remedies such as suspension of works.

Apart from the contractual remedies provided, the contractor will have a right at common law to claim for damages suffered due to the employer’s breach. If the breach is a fundamental breach that goes to the root of the contract, the contractor may choose to terminate the contract at common law.

It is common for the construction contract to provide certain limits or restrictions on the remedies available to a party. See 6.1 Exclusion of Liability and 6.3 Limitation of Liability.

Some construction contracts may provide that certain remedies are the sole and exclusive remedies for specific breaches. As long as such clauses are clearly and unambiguously drafted, they will usually be upheld and enforced by the court or the arbitral tribunal. See 6.1 Exclusion of Liability and 6.3 Limitation of Liability.

It is common for parties to exclude the liability for indirect and consequential losses arising from or in connection with the construction contract, such as loss of profits, loss of goodwill, and loss of business. See 6.1 Exclusion of Liability and 6.3 Limitation of Liability.

Retention of Title

Generally, the construction contract provides for the timing whereby the title to the goods and materials is transferred, and such clause will normally be enforceable. Depending on the nature of the projects, the parties can agree that:

• title to the goods and materials remains with the contractor until such goods and materials have been paid for/are incorporated into the works; and
• title to the goods and materials passes to the employer upon delivery to the site.

Normally the risks to the goods and materials will pass together with the title but parties are free to agree on separate provisions on the passing of such risks.

Suspension of Works

Unless expressly provided under the construction contract, there is generally no right for the contractor to suspend works, regardless of the reasons for such suspension. Suspension without right will be a breach of the contract.

Some contracts may provide rights of suspension in the following circumstances:

• the contractor may suspend works in the event of non-payment by the employer of any certified/undisputed sum; and
• the employer/contract administrator may have rights to instruct the contractor to suspend any part of the works.

Under Section 29 of the CIPAA, if the contractor obtains a favourable adjudication decision, it may suspend or reduce the progress of the works until such adjudicated sum is paid by the employer.

Generally, the construction contract will set out events of default that allow a party to terminate the contract. Alternatively, if a party commits a fundamental breach of the contract, a termination right may arise at common law.

Some contracts may allow the employer to terminate the contract for convenience.

In public projects involving the government/government-linked companies, there may be provisions for termination on national interest or corruption – see the JKR standard form contracts.

Consequences of Termination

Consequences of termination are typically provided under the contract and normally include the following:

• parties are relieved from any rights and obligations, apart from those accrued before the termination date and those intended by the parties to survive the termination;
• payment for the works properly executed up to the termination date;
• the contractor ceasing all operations, removing all materials, equipment and goods belonging to the contractor from the site and vacating the site; and
• liability for any loss/damage suffered by the non-defaulting party due to the termination.

Parties to construction contracts are free to agree to their preferred dispute resolution avenue, which is usually arbitration or court.

Arbitration

Most construction contracts in Malaysia provide for any dispute to be resolved through arbitration. The arbitrations in Malaysia are governed by the Arbitration Act 2005.

Typically, construction contracts in Malaysia will provide for arbitration administered by the AIAC. However, parties are free to agree to the institution administering the arbitration, the rules to be adopted for the arbitration, as well as the seat, language and governing law of the arbitration, and the number of arbitrator(s).

Court

Without an arbitration agreement, disputes under construction contracts will be resolved through the courts of Malaysia. Some contracts expressly provide for parties’ submission to the jurisdiction of the courts of Malaysia. The High Courts in Kuala Lumpur and Shah Alam, Selangor have specialised Construction Courts that deal with construction matters.

Statutory Adjudication

Apart from the above, there is an additional avenue for statutory adjudication under the CIPAA. The CIPAA came into force on 15 April 2014 to provide speedy resolution of payment disputes under construction contracts.

The whole adjudication process is primarily based on documents only and usually takes around three to four months for the adjudication decision to be rendered. The decision is binding on the parties until such dispute is finally resolved in arbitration or court.

Mediation

Mediation is encouraged but is not mandatory. It is uncommon for parties to a construction contract to resolve disputes through mediation, unless it has been pre-agreed in the contract or directed by the court. The Mediation Act 2012 governs the conduct of mediations in Malaysia.