The primary pieces of legislation which are relevant to the construction market in Malaysia include the following.

• Contracts Act 1950
• Street, Drainage and Building Act 1974
• Uniform Building By-Laws 1984
• Construction Industry Payment and Adjudication Act 2012 (CIPAA 2012)
• Construction Industry Development Board Act 1994
• Occupational Safety and Health Act 1994
• Town and Country Planning Act 1976
• Environmental Quality Act 1974

Most primary and subsidiary legislation in Malaysia may be accessed here.

Standard contracts are commonly used in the Malaysian construction industry. However, there are parties who opt for bespoke construction contracts.

The most common standard form of contracts are as follows.

Pertubuhan Akitek Malaysia (PAM) has published a set of build-only contracts, whereby the contract is administered by the architect.

• PAM Contract 2018 (With Quantities)/(Without Quantities).
• PAM Contract 2006 (With Quantities)/(Without Quantities).
• Pam Sub-Contract 2018.
• Pam Sub-Contract 2006.

Jabatan Kerja Raya (JKR)/Public Works Department (PWD) has published a set of standard form contracts which are used in government-linked projects. A superintending officer acts as the contract administrator.

• PWD Form 203 (drawings and specifications are part of the contract).
• PWD Form 203A (bill of quantities are part of the contract).
• PWD Form DB (design & build).
• PWD Form 203N – used by nominated subcontractors where the main contract is PWD Form 203.
• PWD Form 203P – used by nominated suppliers where the main contract is PWD Form 203A.

The International Federation of Consulting Engineers’ (FIDIC) standard form contracts are favoured by foreign employers and by cross-border parties. These contracts are administered by an engineer.

• FIDIC Red Book (Construction Contract).
• FIDIC Silver Book (Engineering, Procurement and Construction Contract/Turnkey Contract).
• FIDIC Yellow Book (Plant and Design-Build Contract).

The Asian International Arbitration Centre (AIAC) published the Standard Form of Building Contract 2024, which is suitable for building works and design & building works. Parties are free to appoint the contract administrator. However, if none is specified, the contract administrator would be the architect.

The Construction Industry Development Board (CIDB) published the CIDB Standard Form of Contract for Building Works 2022. The contract is administered by a superintending officer.

The Institution of Engineers, Malaysia (IEM) have also published standard form contracts for engineering works, which are administered by an engineer.

• IEM Form of Contract for Civil Engineering Works.
• IEM Form of Contract for Mechanical and Electrical Engineering Works.
• IEM Form of Nominated Sub-Contract for Engineering Works.

Generally, the types of companies or institutions that act as employers depends on the type of project. Private projects are usually commissioned by private companies or joint ventures or consortiums. In contrast, government-backed or public projects are usually commissioned by the federal government, state government and statutory bodies. Government-linked companies may be involved in both private and public projects.

The employer and contractor would have a contractual relationship. The employer’s rights and obligations would depend on the parties’ contract. Generally, it is understood that the employer will make payments for the work done. The employer would then have the right to receive the completed works within the contractually specified time.

The employer and subcontractors generally do not share a direct contractual relationship as the construction contract would be in a “chain” system. The employer would have a contractual relationship with the contractor, whereas the contractor would have a contractual relationship with the subcontractor.

Financiers are usually not a party to construction contracts. The employer and financier would have a separate contractual relationship for the project financing. However, financiers may require certain rights, interests or benefits under the construction contract to be assigned to financiers as security in case of default.

Contractors in construction projects may either be public listed companies, private companies, joint ventures or consortiums, government-linked companies or foreign companies.

The employer and contractor would share a contractual relationship. In build-only contracts and models, the contractor’s rights and obligations would depend on the parties’ contract. The contractor is entitled to receive payment for the work done. The contractor is required to deliver the works on time based on the contractual completion date and the contract specifications. In design and build contracts and models, the contractor would also undertake the design of the project based on the employer’s requirements and specifications.

The contractor and subcontractor would share a contractual relationship. Some main construction contracts stipulate that the contractor must engage a subcontractor nominated by the employer. The contractor is responsible to ensure that the subcontractor complies with the main construction contract between the employer and subcontractor.

The contractor usually would not share a contractual relationship with the project financier. However, should the contractor require financing, it would have a separate agreement with its own financier.

Subcontractors in construction projects may either be public listed companies, private companies, joint ventures or consortiums, government-linked companies or foreign companies.

Subcontractors usually share a contractual relationship with the contractor. Subcontractors are typically engaged for specialised works, such as mechanical work, electrical work, earth works, plumbing, and elevator and escalator installations. Some main construction contracts stipulate that the contractor must engage a subcontractor nominated by the employer.

The subcontractor usually would not share a contractual relationship with the project financier. However, should the subcontractor require financing, it would have a separate agreement with its own financier.

Project financiers are usually banks or financial institutions. Financiers are usually not a party to construction contracts. The employer and financier would have a separate contractual relationship for the project financing. However, financiers may require certain rights, interests or benefits under the construction contract to be assigned to financiers as security in case of default.

In build-only contracts and models, the employer would engage a consultant to undertake the design for the project separately. The designer would not be a party to the construction contract.

In design and build contracts and models, the contractor would undertake the design of the project based on the employer’s requirements and specifications. The contractor may engage a third-party consultant to design the project.

Generally, the scope of works is provided for in the construction contract, which could include:

• conditions of contract (general conditions and special conditions);
• bill of quantities;
• tender documents;
• specifications/requirements; and
• construction drawings.

Scope

The construction contract would usually:

• define what “variation” means for the project;
• provide for powers of the employer and/or contract administrator to issue variations;
• provide for the procedure for issuing variations (some contracts stipulate that oral instructions for variations must be reflected in writing subsequently within a certain time);
• provide for the method of valuing variations;
• provide for the contractor’s procedure to submit claims for variation works;
• provide for the contractor’s entitlement to extension of time for variation works; and
• provide for procedure to claim for additional expenses and/or loss and expense incurred following variation works, etc.

Price

The construction contract would usually set out the method for valuing variations.

Variations should be valued based on the procedures and methods set out in the contract. Notwithstanding that, should the contract be silent on the valuation method for variations, they should usually be valued according to the accepted methods of valuation or upon the parties’ mutual agreement. Accepted methods of valuation for variations could be based on contractual rates, adjusted rates, market rates or cost-plus method and daywork rates.

Variations may also cause the contractor to incur additional expenses, such as increased preliminaries and overheads. Clause 11.7 of the PAM 2018 and Clause 11.9 of the AIAC Standard Form 2019 expressly allow the contractor to claim for additional expenses caused by variations. In contrast, Clause 44 of the PWD Form 203A provides that the contractor should claim these additional expenses as part of the contractor’s loss and expense claim.

Variations may also give rise to a contractor’s claim in quantum meruit and Section 71 of the Contracts Act 1950 in the following situations:

• where the contract provides for variations to be instructed but no price was fixed between the parties for the value of the works; and
• where the contractor was instructed to perform works outside the scope of the contract and the valuation of the variation works were not agreed upon.

In such situations, the contractor would be entitled to a reasonable sum for the work done. The factors to be considered when valuing work done in quantum meruit claims may include the market value of comparable similar works, the reasonable or objective value of the works done and the usual sum imposed by the party who performed the works.

Responsibilities regarding the design process generally depends on the type of construction contract and model between parties.

In build-only models, the design consultant is engaged separately by the employer. The designs are then executed and built by the contractor.

In design and build models, the contractor undertakes the responsibility of designing. The contractor may also engage consultants to carry out the design works.

Responsibilities regarding construction work is usually undertaken by the contractor, who may subcontract specific portions of the works to specialist subcontractors. The employer and/or contract administrator would supervise the works.

The employer is obliged to give the contractor and subcontractors access to the site to carry out the construction work. The contract may further stipulate that there are certain restrictions to access, or access may be given progressively based on the progress of works executed.

Pollution

The construction contract would usually require the parties to comply with the applicable environmental laws, such as the Environmental Quality Act 1974. The Environmental Quality Act 1974 contains provisions prohibiting pollution.

Underground Obstacles and Geotechnical Conditions of the Site

Further to the above, the contract may usually stipulate that the contractor has inspected and is satisfied with the site conditions and, therefore, waives any right to claim against the employer any claims arising from or in connection with site conditions.

Archaeological Finds

Should fossils or antiquities be found on site, the construction contract would usually provide that the employer owns the fossils and antiquities found. The contractor may be required to preserve or notify the employer and contract administrator of what was found. Further, parties who discover archaeological finds at the site or items of cultural heritage would be required to report the same to the Commissioner of Heritage pursuant to the National Heritage Act 2005.

Permits that are generally required in the construction process include planning permission, development orders, building plan approval, fire safety plan and environmental impact assessment approval. These permits are usually provided for in the Town and Country Planning Act 1976, Street, Drainage and Building Act 1974, Uniform Building By-Laws 1984, Environmental Quality Act 1974, and others.

The principal submitting person (PSP) for obtaining these permits is usually the consultant architect or consultant engineer engaged by the employer. The contractor and subcontractors would also be required to assist the employer and consultants with obtaining permits and approvals.

Further, contractors and subcontractors would need to be registered with the Construction Industry Development Board (CIDB) as well.

The construction contract usually states that the contractor is responsible for the maintenance of works, including permanent works, temporary works, goods, equipment, machinery and construction materials at the site.

The parties may also agree that the contractor is responsible for such maintenance after the completion of construction works. Alternatively, the employer may enter into a contract with a third party for the maintenance.

The employer usually does not instruct the contractor on operation, finance or transfer. These functions are usually undertaken by the employer internally or the employer may engage a third party for these functions.

The construction contract usually requires the contractor to carry out testing. The contract would stipulate the type and specifications of the tests required to be carried out. The costs and expenses of the tests would be undertaken by the contractor, or it may be included in the contract sum. The employer and contract administrator may inspect the tests carried out and the results obtained.

Typically, once construction works are completed, the contractor, contract administrator, employer and consultants would conduct a joint site inspection. If there are any defects, the contractor would have to rectify these defects.

Should the contract administrator be satisfied that the works are practically completed, the contract administrator will issue a certificate of practical completion (CPC).

The CPC confirms the date that the construction works are completed and delivered to the employer. The defects liability period (DLP) would start to run, based on the contractual DLP period. Usually, upon issuance of the CPC, the contractor would be entitled to certain payment, such as release of half of the retention sum.

Defects Liability Period (DLP)

The DLP could range from 12 to 36 months, depending on the parties’ construction contract. The DLP clause would state the procedure for reporting defects and the contractor’s obligation to make good any defects during this period.

The employer may also be entitled to make defects good themselves or have the option to engage a third party to do so if the contractor fails to make defects good within a reasonable time. In such situations, the employer would be entitled to seek rectification costs against the contractor.

Once the DLP expires and the contractor has completed its obligations to make defects good, a Certificate of Making Good Defects (CMGD) would be issued to the contractor. Usually, the issuance of the CMGD entitles the contractor to obtain final payment or release of the balance retention sum.

Latent Defects

Latent defects are defects not reasonably able to be discovered during the DLP. Some construction contracts would also provide for making good latent defects.

Under common law, the employer may pursue a claim for breach of contract based on latent defects. Section 6(1) of the Limitation Act 1953 provides that the limitation for bringing an action in court for breach of contract or tort would expire within six years from the date the cause of action accrues. Sometimes, latent defects are discovered after the limitation period has expired.

Section 6A of the Limitation Act 1953 provides that a party may commence an action for damages for negligence in respect of latent defects within three years from the date the defects are discovered. Section 6A of the Limitation Act 1953 does not extend the limitation period for contractual claims for latent defects. This extended limitation period is subject to a final cut off limitation period of 15 years from the date on which the cause of action accrued.

Usually, the DLP and latent defects clauses would not restrict other causes of action or remedies available to the employer, who may seek redress under breach of contract or in tort.

In Malaysia, the general method of establishing the contract price of construction contracts are as follows.

• Lump sum contracts, whereby the contractor agrees to carry out the tasks outlined in the construction contract for a fixed sum of money.
• Measure and value contracts, whereby the contract sum is an estimate which is subject to measurement and valuation during the performance of the contract or after completion. Payment to the contractor is based on an agreed price mechanism or formula agreed by the parties.

Milestone payments are common in construction contracts.

Construction contracts in Malaysia do not typically provide for indexation of prices.

Price fluctuations are a concern for parties in construction contracts. The parties may have clauses to allocate the risk of price fluctuations for materials and goods. Some contracts stipulate that the contract sum may only be adjusted due to price fluctuations by the parties’ express agreement. Some other contracts may stipulate that the contract sum is not affected by price fluctuations and the contractor would bear the risk for any such price fluctuations.

Interim/Progress Payment

Where the construction contract provides for progress payment, the contractor would usually submit a payment claim monthly. The contract administrator will assess the payment claim and determine the amount to be paid to the contractor. The contract administrator will then issue a certificate of payment (or interim certificate) to reflect the amount to be paid to the contractor. The contractor will then issue an invoice with tax to the employer. The employer will pay the contractor based on the payment terms and period stipulated in the contract.

Milestone Payment

The milestone payment system is similar to the interim/progress payment system. However, the contractor will issue payment claims based on work progress milestones stipulated in the contract.

Advanced Payment

Some construction contracts allow for advanced payment to the contractor before the contractor commences or completes the works, subject to certain conditions. Advanced payment would improve the contractor’s cash flow in the course of performing the works.

Delayed Payment

Some construction contracts provide that the contractor is entitled to interest at a certain rate for late payment. However, in the event that there is no such late payment interest clause, a successful party in arbitration, statutory adjudication under the CIPAA 2012 or in court may be awarded interest from the date the sums were due until full and final settlement.

The means and procedure for invoicing is usually stipulated in the construction contract. Generally, once a certificate of payment (or interim certificate) is issued by the contract administrator, the contractor would issue an invoice for the certified sum plus sales and service tax to seek payment from the employer. The employer would then have to make payment within the stipulated time in the contract.

Work Programme

The work programme would generally outline what works are to be done, which contractor or subcontractor would undertake the work and when it should be completed.

The finalised programme is likely agreed by the parties at the time the parties execute the contract. Usually, the contractor would have to deliver the work programme within a certain time after the receipt of the Letter of Award. The work programme would need to be updated from time to time to reflect actual work progress or any acceleration or extension of time that would affect the completion date.

Clause 3.6 of the PAM Contract 2006 specifies that the work programme is not part of the contract. However, the work programme is crucial for contract administration. It would assist the contract administrator and the parties to track actual progress and ascertain potential risk of delays.

Safeguarding the Work Programme with Progress or Milestone Payments

Progress payments, milestone payments and certificates are commonly used by parties in a construction contract. This type of payment structure allows parties to manage cash flow effectively.

In terms of progress payments, the parties would usually agree on a monthly billing date in the construction contract. On that date, the contractor would submit its progress claim to the contract administrator (copying the employer). The contract administrator would assess the claim and issue a certificate of payment (or interim certificate). Then, the contractor would issue its invoice based on the certificate of payment to the employer.

As for milestone payments, the contractor would submit its claim upon achieving the work milestone. The milestone claim would be submitted to the contract administrator (copying the employer). The contract administrator would assess the claim and issue a certificate of payment (or interim certificate). Then, the contractor would issue its invoice based on the certificate of payment to the employer.

The construction contract would usually set out the procedures, rights and obligations of the parties when delays occur. The parties’ rights and obligations would vary depending on the type and cause of delay.

Delays Attributable to the Contractor

The contractor would generally not be entitled to extension of time where the delays are attributable to the contractor. The contractor may still request for extension of time in such circumstances, but it would be the contract administrator or employer’s decision on whether to grant extension of time.

Should the contractor fail to meet the contractual completion timelines, they may be liable for liquidated ascertained damages (LAD). Usually, the contract administrator must issue a certificate of non-completion (CNC) before LAD may be imposed on the contractor.

Delays Attributable to the Employer

Delays attributable to the employer would include late site handover, late instructions, etc. The construction contract would usually provide for the procedure and the contractor’s right for an extension of time where the delays are attributable to the employer.

Delays attributable to the employer may also lead to increase of time-related costs, ie, contractor’s claims for loss and expense, such as increased preliminaries and increased overheads for the extended period of time.

Neutral Delay Events

Neutral delay events are those which are neither attributable to the employer or contractor, such as inclement weather, delays caused by authorities, natural disaster, etc. These are generally found in force majeure delay clauses. The parties are generally free to agree on the extension of time and claims mechanism in terms of neutral delay events. Usually, the contractor would be entitled to extension of time for neutral delay events, but the contract may specifically state that the contractor would not be entitled to loss and expense for neutral delay events.

Concurrent Delay Events

Concurrent delay is also referred to as “overlapping delay” when there is more than one cause of delay. Where one of the delays are attributable to the employer, the contractor would be entitled to extension of time.

Most construction contracts would contain a LAD clause. LAD clauses usually provide that LAD is calculated at a daily rate for each day of delay.

In the event the contractor fails to meet the contractual completion timeline, the employer would be entitled to impose LAD, subject to certain conditions precedent (if any). Usually, the contract would require the contract administrator to issue a CNC before the employer is entitled to impose and enforce the LAD clause.

The manner in which a contractor would typically request for an extension of time would be outlined in the construction contract. The construction contract would also include the grounds and reasons for delay which would entitle the contractor (who would decide the number of days for extension of time granted) to extension of time.

Conditions Precedent

Most construction contracts include conditions precedent that must be fulfilled by a contractor for extension of time claims. These conditions precedent may come in the form of time limitations to make the claim or notice provisions prior to making a claim. Compliance with conditions precedent is mandatory. Failure to comply may cause a party to lose their right to claim for extension of time.

Grounds for Awarding Extension of Time

See 5.2 Delays.

Establishing Entitlement to Extension of Time

The contractor would have to submit supporting documents in its extension of time. Subsequently, the contract administrator would assess the application. The contract administrator assessing the application for extension of time should act fairly, reasonably and impartially. Should the application for extension of time be allowed, the employer or the contract administrator would have to issue a certificate of extension of time or a letter to vary the contractual completion date for the works.

In Malaysia, there is no general “force majeure” doctrine. However, force majeure clauses are commonly found in all types of contracts in Malaysia, including construction contracts.

Parties are free to agree on force majeure events and the effect of occurrence of force majeure events to their construction contract. Common force majeure events include war, pandemic, statutory prohibitions, natural disasters, riots, etc. The force majeure clause would then address the parties’ rights, liabilities and/or obligations upon invoking the force majeure clause, for example:

• the contractor may be entitled to an extension of time; or
• the parties would be discharged from their obligations under the contract, etc.

If the parties do not incorporate a force majeure clause in their contract, the parties may alternatively rely on the doctrine of frustration of contract.

Parties would generally provide for unforeseen circumstances in their force majeure clause.

However, if the unforeseen circumstance is not governed under the force majeure clause, the unforeseen circumstance which leads to impossibility of performance may give rise to the doctrine of frustration of contract. The doctrine of frustration of contract is found in Section 57(2) of the Contracts Act 1950.

To rely on the doctrine of frustration of contract, a party must demonstrate that (i) the intervening event was not provided for in the contract, (ii) the intervening event must not be self-induced and (iii) the intervening event renders the performance of the contract radically different from what was initially undertaken by the parties.

The effect of frustration is found in Sections 15 and 16 of the Civil Law Act 1956, whereby all sums paid by a party before the discharge of the contract are recoverable. However, the other party may retain sums paid for expenses it incurred and if the other party provided a valuable benefit based on the contract.

Alternatively, pursuant to Section 66 of the Contracts Act 1950, a party may seek restoration or compensation for any advantage received under the contract.

Disruption is distinct from delays. Pursuant to the Society of Construction Law Delay and Disruption Protocol (2nd edition), disruption is a disturbance, hindrance or interruption to a contractor’s normal working methods, resulting in lower efficiency. Disruption claims are based on loss of productivity when executing works, which causes the contractor to incur time-related costs (loss and expense).

Most standard form construction contracts used in Malaysia do not specifically provide for disruption claims. However, parties are free to provide for disruption events and allocate the risks involved. Some disruption events are addressed in parties’ construction contracts as delay events which would entitle the contractor to extension of time and/or loss and expense, for example, unforeseen ground or soil conditions or late instructions from the contract administrator or employer.

Disruption is not a cause of action on its own. The contractor must provide a legal basis for its claim based on disruption, such as breach of contract under Section 74 of the Contracts Act 1950 (if applicable).

Based on the principle of freedom of contract, the Malaysian courts would generally uphold and give full effect to the parties’ bargains, including clearly drafted exclusion clauses. Exclusion clauses must be worded clearly and unambiguously. Further, exclusion clauses must not be contrary to public policy or any written laws in Malaysia.

Pursuant to Section 29 of the Contracts Act 1950, parties are prohibited from contractually excluding or limiting another parties’ right to pursue court proceedings or to limit the time for the other party to enforce their rights.

The concepts of wilful misconduct and gross negligence are common law concepts in Malaysia. The Malaysian courts will interpret wilful misconduct and gross negligence based on specific factual circumstances.

Parties may limit the extent of liability in their construction contracts. However, parties cannot absolutely restrict another party’s right to pursue court proceedings or limit the time for the other party to enforce their rights (see 6.1 Exclusion of Liability).

Common clauses in construction contracts which limit the parties’ liabilities include the following.

• Liquidated ascertain damages (LAD) are usually limited at a certain percentage of the contract sum.
• The contractor’s total liability to the employer is usually capped at the contract sum.

Indemnity clauses are commonly found in construction contracts. These clauses would generally limit the risk of employers.

Generally, the contract will stipulate that the contractor shall indemnify the employer in the following circumstances:

• claims by workers employed by the contractor for the construction works;
• suits, claims or demands by third parties against the employer based on acts of the contractor and/or the contractor’s subcontractors;
• claims based on damage to property caused by the contractor; and
• claims by third parties for any infringement of intellectual property rights by the contractor, etc.

Most contractors are required to provide performance bonds in the form of bank guarantees that are issued by a licensed bank or financial institution in Malaysia in favour of the employer. Performance bonds are a form of security in favour of the employer to guarantee the contractor’s performance of the construction contract.

The performance bond sum is usually a certain percentage of the contract sum. The contract would usually stipulate that the employer may call on the performance bond upon occurrence of certain default events by the contractor.

The form of the performance bond is usually annexed to the contract, which may stipulate whether it is an unconditional on-demand performance bond or whether it is a conditional performance bond whereby demand requires the employer to prove the default.

Construction contracts typically stipulate the specific types of insurance that must be taken out by the parties. Contractors would usually be required to maintain these types of insurance policies.

• Insurance against liability of contractors and subcontractors for death or personal injury, damage to property, materials and goods from date of site possession:
1. contractor’s all risk policy;
2. erection all risk policy; and
3. worker’s compensation insurance for foreign workers.

• Insurance to cover executed works, materials and goods on-site against loss and damage by fire, natural disasters, ground subsistence, bursting or overflowing of water tanks, apparatus or pipes, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion, theft, etc.

Some construction contracts have an automatic termination clause upon insolvency of the other party, whereas some other construction contracts allow a party to terminate the other party on the grounds of insolvency.

Construction contracts would reflect the parties’ allocation of risks. Most of the risk is usually allocated to the contractor in the following clauses.

• Performance bonds in the event of the contractor’s default or non-performance.
• LAD in the event of the contractor’s late completion of the works.
• Indemnity clauses in favour of the employer.

Certain risks are generally shared by both the employer and the contractor, such as:

• delays which are caused by force majeure events;
• change in the law; or
• fluctuation of material prices and costs.

The personnel addressed in construction contracts would usually include:

• the contract administrator; and
• consultants, such as the quantity surveyor, electrical engineer, mechanical engineer, or civil engineer.

The contract administrator is the most significant personnel in construction contracts. The contract administrator is named differently in the various standard form construction contracts:

• JKR – “Superintending Officer”;
• PAM – “Architect”;
• CIDB – “Superintending Officer”; and
• FIDIC – “Engineer”.

The contract would usually outline the contract administrator’s duties, powers, authority and obligations. When assessing claims submitted by the contractor, the contract administrator must exercise his/her independent judgment and assess the claims fairly and reasonably. In other circumstances, the contract administrator would have to act as the employer’s agent by carrying out the employer’s instructions and acts as the liaison between the employer and contractor.

Usually, parties will subcontract works where specialist skills and trade are required, such as:

• mechanical works;
• electrical works;
• civil engineering works;
• piling works;
• earth works; and
• installation of lifts and escalators.

Most contracts provide for the procedure for appointment of nominated subcontractors (NSC), including whether consent of the employer or contract administrator is required, what works may be subcontracted, and the nomination and appointment process. The employer may even have the discretion to reject the appointment of subcontractors by the contractor. Usually, the contract will provide that the contractor is responsible for any breach of contract by the subcontractor and the contractor is responsible for ensuring that the subcontractor will comply with the construction contract.

Clauses addressing intellectual property are commonly found in construction contracts. These clauses generally provide as follows.

• The intellectual property rights for the works and materials developed and supplied by the contractor pursuant to the construction contract shall vest with the employer.
• Should the contractor propose alternative designs or where design matters are left to the contractor, the intellectual property rights for that design shall belong to the contractor. However, the employer shall be entitled to use the design for the works under the construction contract.
• Should any claims or proceedings be brought by a third party against the employer due to the contractor infringing the third-party’s intellectual property rights, the contractor shall indemnify and hold harmless the employer for any damages, costs and expenses incurred as a result of those claims or proceedings.

Generally, in construction contracts, a party’s breach of contract would allow the innocent party to terminate the contract based on the procedure specified in the contract. The contract may also specify a period whereby the defaulting party may remedy the breach before the innocent party can exercise the right to terminate.

At common law, in the event a party breaches a fundamental term of the contract, the innocent party has the following choices.

• Affirm and continue with the construction contract and reserve its right to claim for damages resulting from the breach.
• Rescind and bring the contract to an end and claim for damages resulting from the breach.

Common Contractual Remedies for the Employer

In the event of breach by the contractor, the usual contractual remedies available to the employer are as such, depending on the event of breach:

• LAD for the contractor’s late completion of the works;
• rectification costs to remedy defective works by the contractor;
• call on the performance bond; or
• set-off sums owed by the contractor from the retention sum.

Common Contractual Remedies for the Contractor

The common contractual remedies available to the employer are as such, depending on the event of breach:

• claim for loss and expense for delay or disruption;
• claim for loss of profit;
• damages for variation;
• interest for late payment; and
• suspension of works for late payment.

It is common practice for parties to contractually limit the remedies available to a party. Most significantly, there is usually a cap on the sum of LAD that can be imposed on the contractor. The contractor’s liability to the employer may also be capped at the contract sum.

Sole remedy clauses are not common in Malaysian construction contracts. So long as a clause is worded clearly and unambiguously, the courts will uphold and enforce these clauses.

Some construction contracts exclude entitlement to loss of profits, loss of goodwill and consequential losses. Loss and expense claims as a result of delay may also be excluded contractually by parties. However, loss and expense may be claimed under common law pursuant to a breach of contract under Section 74 of the Contracts Act 1950.

Retention Rights

Generally, construction contracts would include a retention-of-title clause, whereby the ownership and title to building materials and goods supplied by the contractor remains with the contractor until the occurrence of either of the following:

• the employer has paid for the building materials and goods; or
• the contractor has delivered the building materials and goods to the construction site.

Suspension Rights

Most construction contracts have provisions for suspension of works in specific circumstances. The employer may give instructions to the contractor to suspend works.

The contractor is usually not allowed to suspend works. However, where the employer fails to make timely payment for certified sums, the contractor may be entitled to suspend works upon giving such notice to the employer.

Under Section 29 of the CIPAA 2012, where a contractor succeeds in statutory adjudication, but the employer still fails to pay the adjudicated sum, the contractor would be entitled to suspend works. Upon the employer’s payment of the adjudication sum, the contractor would have to resume works. The contractor would be entitled to an extension of time and reasonable loss and expense for the period of suspension.

At common law, in the event a party breaches a fundamental term of the contract, the innocent party has the following choices:

• affirm and continue with the construction contract and reserve its right to claim for damages resulting from the breach; or
• rescind and bring the contract to an end and claim for damages resulting from the breach.

Most construction contracts would set out events of default that would give rise to the innocent party’s right to terminate the contract and the procedure to effect the termination. Some contracts may have termination for convenience clauses, which would allow a party to terminate the contract by giving notice, without the need to provide a reason for the termination.

Common contractor default events that would allow the employer to terminate the contract include:

• failure to proceed regularly and/or diligently with the works;
• abandonment of the works;
• suspension of the works without reasonable cause; and
• failure to comply with the contract administrator’s instructions.

Common employer default events that would allow the contractor to terminate the contract include:

• failure to pay certified sums; and
• interference or obstruction on the issuance of certificates by the contract administrator.

Usually, construction contracts would have automatic termination clauses upon the insolvency of a party.

Consequences of Termination

The construction contract would come to an end and the parties would usually hold a joint site inspection to determine the value of works executed up to the date of termination. The contractor would usually be entitled to payment for work done up to the termination. The contractor would also cease works on site, demobilise and leave the site. The termination may also give rise to liability for damages suffered by the innocent party following the termination.

Where there is no arbitration agreement, construction disputes would be resolved through the Malaysian courts. The High Court of Kuala Lumpur has two specialist construction courts, whereas the High Court of Shah Alam has one specialist construction court.

Notwithstanding that, parties usually refer construction payment disputes for statutory adjudication under the CIPAA 2012 first (see 10.2 Alternative Dispute Resolution).

Generally, parties are free to agree to the mode of alternative dispute resolution in construction contracts.

All standard forms of construction contracts would typically specify that any dispute shall be resolved by arbitration. Arbitrations in Malaysia are governed by the Arbitration Act 2005. Typically, parties would opt for arbitrations to be governed by institutions such as the AIAC, ICC or PAM. Typically parties would also agree on the arbitration rules, the seat of arbitration, the official language of the arbitration, the governing law of the arbitration and the number of arbitrators.

Parties usually refer construction payment disputes to statutory adjudication under the CIPAA 2012. The AIAC administers statutory adjudication in Malaysia. The statutory adjudication regime was introduced to provide a speedy resolution for construction payment disputes, with adjudication decisions being rendered within three to four months from commencement of the adjudication process. Adjudication decisions are “temporarily final” and are enforceable and binding until the dispute is finally resolved in court or in arbitration. However, the dispute between the parties, which may not be limited to payment issues, may be subject to final resolution in court or by arbitration.

Parties may also refer their dispute to contractual mediation. Contractual mediation is not mandatory in Malaysia and is governed by the Mediation Act 2012. Generally, contractual mediations in Malaysia are administered by the Asian International Arbitration Centre or the Malaysian International Mediation Centre. Whilst contractual mediations may not entirely resolve a dispute, it could assist to narrow down the issues in dispute in eventual court or arbitration proceedings. Contractual mediation is commonly found in multi-tiered dispute resolution clauses (also known as “escalation clauses”), which sets out the procedure for dispute resolution between the parties. These clauses must be strictly complied with. Otherwise, should the dispute be referred to arbitration when the parties failed to comply with the procedure in the multi-tiered dispute resolution clause, the arbitral tribunal would not have jurisdiction to hear the dispute.

Alternatively, the court may, at its own discretion, direct litigating parties to pursue Court-Annexed Mediation. Generally, the judge presiding over the case does not act as the mediator. However, the parties may agree otherwise. The procedure to conduct Court-Annexed Mediation is flexible and would be determined by the mediator. Should the parties reach a settlement following Court-Annexed Mediation, the parties may enter into a consent judgment before the mediator-judge.

Parties may also agree to refer their disputes to contractual adjudication, rather than statutory adjudication under the CIPAA 2012. The contract would then set out the procedure for contractual adjudication.