ARTICLE
November 11, 2014

IBA Tokyo : Standard Forms of Contract – The Malaysian Position by Datuk Professor Sundra Rajoo

Standard Forms of Contract – The Malaysian Position

(by Professor Datuk Sundra Rajoo © September 2014*)             

A paper presented at the International Bar Association (IBA) Annual Conference 2014 in Tokyo on the session entitled “East meets West – a comparative approach to EPC project delivery”, organised by the International Construction Projects Committee on 20^th October 2014.

*The author would like to express his sincere gratitude to Mr Lam Wai Loon and Ir Harbans Singh KS for their respective contributions towards this paper. 

Introduction

i.          A successful standard form of contract would lend itself to regulate the day-to-day relationship on a construction site and provide a clear and definitive understanding to the parties, professionals and site personnel of their roles and responsibilities. Users and practitioners must be familiar with the particular standard form of conditions of contract being used. It would therefore be useful in expressing the obligations of the parties and setting out with reasonable clarity the scope of the project. It is based on the perceived good sense of providing for the problems which experience has taught in the course of construction contracts. Precision in the drafting of a contract is critical to the avoidance of disputes.

ii.         In Malaysia, standard forms of contract which are predominantly formulated and published by authoritative bodies of the industry, as well as recognised by the contracting parties, are among the most popular choice of standard form of contracts being used among industry leaders.

iii.        This paper discusses the Malaysian position relating to the aforesaid topic in four sections:

• The first section introduces the various types of standard forms of contract which are commonly used in Malaysia in both the private and the public sectors, and according to the kind of construction works involved.

• The second section sets out the author’s view on the popularity, or otherwise, of the use of foreign standard forms of contract, such as FIDIC, by the Malaysian industry players, and the reasons for the same.

• In the third section, the author highlights the growing trend of the usage of bespoke contract, describes the parties preferring the use of such contracts, and the reasons for this growing trend.

• In the fourth and last section, the author highlights and discusses various issues peculiar to Malaysia, and the recent development relevant to the contracting practice in Malaysia.

1.         Types of Standard Forms of Contract Commonly Used in Malaysia

1.1          Upon settlement by the parties on their choice of contractual arrangement and contract procurement method, the next step involves the determination of issues pertaining to the terms of the preferred legal framework that is intended to form the basis of the agreement between the parties. This is usually achieved through the employment of Forms of Contract which may be any of the types listed below:

• Standard Forms of Contract;
• Modified Standard Forms of Contract; and
• ad hoc or bespoke Forms of Contract.

            In Malaysia, whilst standard forms still form the bulk of all engineering/construction contracts let out,[1] there is a growing preference by the larger employers to utilize modified or ad hoc forms. The latter also seem to prevail in the sub-contracting and material supply fields, perhaps due to the unavailability of any Standard Forms covering these categories of contracts on the local scene.

1.2              Categories of Standard Forms of Contract utilized in Malaysia

1.2.1    For a relatively small country, Malaysia boasts of quite a number of Standard Forms of Contract in the engineering/construction field. This may or may not augur well for the industry as a whole since these Standard Forms are being supplemented by an increasing number of modified or ‘bespoke’ forms. This may also reflect on the extent of fragmentation of the industry. Nevertheless, for the purposes of this paper, it may be prudent to review the fundamental forms under the following categories[2]:

• government/public sector contracts;
• private sector contracts; and
• contracts of an international nature.

1.2.2   Whilst there are other so called standard forms involving particular sectors of the industry, e.g. petrochemical, power generation, highways, etc. or being generated by specific employers, i.e. Petronas, Tenaga Nasional Berhad (TNB), MAB, etc., the general scope that is about to be discussed in this paper does not permit for these to be addressed in detail.

1.3              Government/Public Sector Contracts

1.3.1   Historically, the initial set of government Standard Forms were drafted by various government agencies for works in the public sector. In the local context, this is evidenced by the genesis of the Public Works Department (PWD)[3] / Jabatan Kerja Raya (JKR)[4] Standard Forms; these being modelled on the 1931: RIBA[5] Standard Form of Contract.[6] Over the years the above Standard Forms were modified progressively to suit local conditions and to keep up with the current political and industry developments; the latest revisions coming in 2010 (and issued in June 2011).

1.3.2   As the bulk of all engineering/construction work let out until the mid-nineteen eighties were through governmental agencies, the said Standard Forms enjoyed widespread popularity. However, with the advent of privatisation and a consequential reduction of projects undertaken directly by governmental agencies, be these Federal, State or Statutory, the usage of such forms has shown a marked decrease with further erosion in utility expected to continue in the coming decades. Nevertheless, these Standard Forms do remain of importance to the industry and the practitioners in small to medium projects involving primarily the state and/or quasi-governmental project.

1.3.3   In more recent times, the Construction Industry Development Board (CIDB)[7] has drafted and published a standard form of its own for building works (undertaken under Traditional General contracting) under the style of the ‘CIDB Standard Form of Contract For Building Works: 2000 Edition’. A standard form for the nominated sub-contract[8] has also been published. Whether there are still more Standard Forms to be issued by the CIDB is still not clear[9]. Although it appears that CIDB’s intention is to make the use of their forms commonplace, the question as to whether these CIDB Standard Forms will ultimately replace the existing JKR Standard Forms for the moment at least begets no precise answer.

1.3.4           JKR Standard Forms for Traditional General Contracts

Currently, JKR has a couple of Standard Forms of Contract for both engineering and building works undertaken on the basis of traditional general contracting. These are:

• JKR Form 203A (Rev 1/2010): Conditions of Contract to be used where bills of quantities form part of the contract;

• JKR Form 203 (Rev 1/2010): Conditions of Contract to be used for contract based on drawings and specifications;

• JKR Form 203N (Rev 1/2010): form of contract to be used for nominated subcontractors where the main contract is based upon Form JKR 203 or 203A

• JKR Form 203P (Rev 1/2010): form of contract to be used for nominated suppliers where the main contract is based upon Form 203 or 203A

The above-mentioned Standard Forms are time-tested and as adverted to hereinbefore, have been utilised quite successfully for a wide range of building, infrastructure and engineering projects of varying sizes and complexities.

1.3.5           JKR Standard Form for Turnkey Design & Build Contracts

Owing to the popularity, as of recent, of works being let out on the Design & Buildmethod of contract procurement, JKR has developed and published a set of standard Conditions of Contract for such works under the title of ‘PWD Form DB (Rev 1/2010)’. This form represents at the moment the only local standard form for such contracts. However, there is no similar form for turnkey contracts.

1.3.6           JKR Standard Form for Other Contracts

To date JKR has no Standard Forms for the other types of contracts previously discussed, e.g. Turnkey, domestic sub-contracts, management contracts, construction management contracts, serial contracts, continuation contracts, etc. Judging by the current trend in privatising more projects, it is doubtful if JKR will, in the future, generate/publish such Standard Forms.

1.3.7           CIDB Standard Forms      

As discussed above, CIDB has started the ball rolling by drafting and publishing Standard Forms of Contract with the ‘CIDB Standard Form of Contract for Building Works (2000 Edition)’ being the first such form. This form has been joined by the Standard Form of Contract for Nominated Sub-contractors, i.e. Form CIDB.B(NSC)/2002. For domestic sub-contracts, CIDB has introduced the ‘Model Terms of Construction Sub-Contract Work (Rev 2007)’ whilst a standard Form for Design & Build Contracts remains in the pipeline and is speculated to be published in the coming years. Unfortunately, just like JKR, CIDB has still not generated any Standard Forms for the other types of contracts, such as, turnkey, management contracts, etc.

1.3.8           Miscellaneous Forms

Some statutory bodies and also private sector employers utilise the JKR Standard Forms with slight modifications and/or amendments. Examples of such usage include projects involving the Drainage and Irrigation Department (DID/JPS), Lembaga Pelabuhan Kelang (LPK), Urban Development Authority (UDA), to name a few.

1.4              Private Sector Contracts

 Parallel to the procurement path adopted by the public sector for its works up to the mid-eighties, the private sector inevitably developed its own Standard Forms to cater for projects undertaken along the traditional general contracting route. The impetus was provided by the Malaysian Institute of Architects or Pertubuhan Arkitek Malaysia (PAM) for its primary activity, i.e building works, which saw the publication of the PAM/ISM series of Standard Forms in 1969. Engineers did not find the PAM/ISM forms suitable for their applications in the engineering and infrastructure fields. Early attempts to modify the PAM/ISM and ICE, IMECHE and IEE Forms to meet the particular local applications did not result with much success as evidenced by the lack of enthusiasm in such usage and the litany of disputes generated. This resulted in the Institution of Engineers Malaysia (IEM) developing their own Standard Forms in the late-eighties and early nineties. Presently the PAM and IEM forms represent the main Standard Forms used in the private sector; with CIDB making a recent entry.

1.4.1        PAM Forms

Rather than developing and drafting a new standard form on its own, PAM in collaboration with the Institute of Surveyors Malaysia (ISM) in 1969 adopted the 1963: JCT[10] Standard Form of Building Contract (Reprinted 1968)[11] with necessary modifications as its flagship standard form. These forms to be used for private sector building works undertaken through the traditional general contracting contract procurement method comprised:

• PAM/ISM 69: Standard Form of Building Contract With Quantities;

• PAM/ISM 69: Standard Form of Building Contract Without Quantities; and

• PAM NSC 70: Standard Form of Contract for Nominated Sub-contractors to be Used With PAM/ISM 69.

Though the JCT 1963 Form was revised progressively over the years to rectify its weaknesses and shortcomings, the PAM/ISM Form remained relatively unaltered until its complete overhaul and replacement with a new standard form in 1998, i.e the PAM 1998 Form.[12]

1.4.2           The PAM 1998 Forms

The anachronistic and archaic PAM/ISM 69 Forms were replaced with the new and updated PAM 1998 Forms which included, inter alia, the following Standard Forms:

• The Malaysian Standard Form of Building Contract (PAM 1998 Form ‘With Quantities’ edition);

• The Malaysian Standard Form of Building Contract (PAM 1998 Form ‘Without Quantities’ Edition); and

• The PAM 1998 Sub-contract Form (to be used for nominated sub-contracts where the main contract is based upon the PAM 1998 Form).

For details on the philosophy behind and the making of these forms, reference can be made to the scholarly treatise entitled, The Malaysian Standard Form of Building Contract [2^nd Edn].[13]

1.4.3           The PAM 2006 Forms

After only five years of the publication of the PAM 1998 Form, PAM started a review process to produce a more balanced Standard Form of Contract. The above culminated in the drafting and publication of the latest revised forms comprising:[14]

• Agreement and Conditions of PAM Contract 2006 (With Quantities);
• Agreement and Conditions of PAM Contract 2006 (Without Quantities); and
• Agreement and Condition of the PAM Sub-Contract 2006.

It should be noted that the PAM 2006 Forms are used essentially for:

i)       Private sector projects;

ii)     Building works; and

iii)    Contracts undertaken through Traditional General contracting (TGC) procurement route.

 Cognisance should be taken of the fact that there are currently no standard PAM forms for the following contracts:[15]

i)       Engineering/construction contracts (other than building contracts);

ii)     Package deal/turnkey types of contracts;

iii)    Management types of contracts, e.g. management contracting and construction management;

iv)    Domestic sub-contracts;

v)     Serial contracts;

vi)    Periodic/term contracts;

vii)   Continuation contracts; and

viii) Other miscellaneous types of contracts.

It is submitted that save for package deal/turnkey type of contracts where there may be some motivation to draft a standard form, it is highly unlikely to see PAM generating any other forms for the remaining contracts. Therefore, reliance may have to be placed on the other Standard Forms available in the market to fill this void.

1.4.4         IEM Forms

Realising the rigours and pitfalls of the JKR forms and the unsuitability of the PAM forms for primarily engineering and infrastructure projects, practitioners in the engineering/construction field attempted to employ various British engineering forms such as the ICE Forms, IMECHE forms, IEE forms, JCT forms and to a lesser extent, FIDIC forms. Modifications to these forms were undertaken on a job specific and ad hoc basis leading to much uncertainty and disputes in the local engineering industry.[16]

The Institution of Engineers, Malaysia (IEM) then stepped in to rectify the seemingly confusing situation and addressed the lacuna in this area of the industry by drafting and publishing a series of Standard Forms for engineering works procured by way of traditional general contracting. The process commenced in 1989 with the advent of the first form and five years later a much awaited form for Mechanical and Electrical works made its debut.

1.4.5    To date IEM has published three main forms, viz:

• IEM.CE 1/89: IEM Conditions of Contract for Works mainly of Civil Engineering Construction (Second Reprint September 1994). This has recently been replaced with the IEM.CE 2011: IEM Form of Contract for Civil Engineering Works (Second Edition, July 2011).

• IEM.CES 1/90: IEM Standard Conditions of Sub-contract for use in conjunction with the IEM Conditions of Contract for Civil Engineering Works (First Reprint September 1994); and

• IEM.ME 1/94: IEM Conditions of Contract for Mechanical and Electrical Works (First Edn 1994).

Markedly absent is the IEM Standard Conditions of sub-contract for use in conjunction with the IEM Conditions of Contract for Mechanical and Electrical Works.

1.4.6    The IEM Standard Conditions of Contract are used essentially for:

i)       Private sector projects;

ii)     Civil Engineering, Mechanical and Electrical Works; and

iii)    Contracts procured under the Traditional General Contracting (TGC) procurement route.

However, they do not cater for the following contracts:

i)     Package deal type/ turnkey  type of contracts;

ii)    Management types of contracts, eg management contracting and construction management;

iii)  Domestic sub-contracts;

iv)  Serial contracts;

v)    Periodic/term contracts;

vi)  Continuation contracts; and

vii) Other miscellaneous types of contracts.

The IEM Forms, in addition, also do not cover building contracts as there is a desire not to duplicate the existing PAM Forms (and perhaps the new CIDB form)

1.4.7   With the emergence of CIDB as the new source of Standard Forms for the construction industry, it is anticipated that IEM may not, in the near future, draft and publish any new forms. However, for engineering works (as distinct from construction works), IEM will still be looked upon as a source of the relevant Standard Forms within the local context. Attempts have been made over the years to review and revise the above forms. Although drafts of these forms have been generated, these have to date not been finalised for publication except for the recently published IEM.CE 2011.

2.         Usage of Foreign Standard Forms of Contract in Malaysia

2.1      Standard forms of contract of foreign origin have been, and continue to be employed in Malaysia for various projects despite the emphasis on the use of the so called local or ‘home grown’ forms. The reasons for such usage are many but for conciseness these can be classified under the following principal categories:[17]

• Where the contract is essentially of an international nature funded by an international agency such as the World Bank, Asian Development Bank or foreign promoter or investor, e.g. a multi-national corporation;

• Where, though locally funded or promoted, the employer or contractor is of foreign domicile and insists on the adoption of a foreign or international standard form of contract with which he is familiar or which meets his expectations;

• Where there is no local standard form available to cater for the particular contract involved, e.g. a management contract or a construction management contract; or

• Where though there is a local standard form at the disposal of the parties, it is nevertheless not wholly suitable for the particular project or contract involved, e.g. either its provisions are not extensive or its stipulations lacking in clarity as to the respective obligations and/or liabilities of the parties.

In situations as adverted to above, to ensure that the legal framework to be put in place adequately meets the commercial and legal expectations of the respective parties, there is a compulsion to use a standard form whatever its origin so long as the objectives of the agreement reached are ultimately met. Hence, the necessity to explore the possibility of using international/foreign Forms of Contract which in all probabilities will be of British origin due to our traditional association with and dependence on British sources of engineering/construction Conditions of Contract.[18]

The following are some of the main types of international/foreign standard forms of contracts utilized in Malaysia:

• FIDIC Standard Forms of Contract;

• JCT Standard Forms of Contract;

• ICE Standard Forms of Contract; and

• 1MechE and IEE Standard Forms of Contract.

2.2              FIDIC Standard Forms of Contract

FIDIC[19], the International Federation of Consulting Engineers, in association with the European International Federation of Construction (FEIC) produces a whole series of Standard Forms of Contract for use worldwide with modifications, if necessary to suit the legal system of the country of a particular application, i.e. the domicile of the employer.

In the Malaysian context, FIDIC forms are used in specific instances particularly where:

• The project is being funded by or is being under the purview of an international agency of the likes of the World Bank, Asian Development Bank, etc;

• Where the parties find the FIDIC forms the most appropriate  for their transaction owing to factors such as familiarity, comprehensiveness, etc; and

• Where there are either no local forms available for the particular application or if there exist such forms, these being inadequate or deficient.

2.2.1   Locally to date, the most frequently used FIDIC forms comprise:

• FIDIC Conditions of Contract for Civil Engineering Works (4^th Edn.): The Red Book;

• FIDIC Conditions of Contract for Mechanical and Electrical Works (3^rd Edn.): The Yellow Book; and

• FIDIC Conditions of Contract for Design, Build and Turnkey: The Orange Book.

The contracting practice in Malaysia also seems to be consistent in adapting the 1999 revisions made by FIDIC upon the above said forms and in utilizing the following new forms, namely:

• FIDIC Conditions of Contract for Construction: The New Red Book – for building and engineering works designed by the employer;

• FIDIC Conditions of Contract for Plant and Design Build: The New Yellow Book – for electrical and mechanical plant and for building and engineering works designed by the contractor;

• FIDIC Conditions for EPC Turnkey Contracts: The New Silver Book – for privately or public/private financial EPC Turnkey projects – BOT Model; and

• FIDIC Short Form of Contract: The New Green Book – for minor building or relatively uncomplicated construction works.

2.2.2           Application of FIDIC Standard Form of Contract as a choice of contract in a Malaysian construction project

In general, the doctrine of freedom to contract continues to be applied by the Malaysian court to all contracts before it. The courts take the view that the parties to a contract have the right to determine the terms and conditions it wishes to contract upon so long as such terms do not conflict with the Contracts Act 1950.

It is only in very limited circumstances that a Malaysian court would rewrite the terms of the contract entered into by the parties freely and with consent. In respect of the application of FIDIC standard forms of contract in Malaysia, parties to a contract would be free to contract to the terms and conditions of the FIDIC Conditions for EPC Turnkey Contract (“The Silver Book”), FIDIC Conditions of Contract for Construction: (“The Red Book”) and the FIDIC Conditions of Contract for Plant and Design Build: (“The Yellow Book”).[20]

The FIDIC Form of Contract in its present day form traces its roots to the ICE Form used by the Federation of Civil Engineering Contractors and the Institution of Civil Engineers in the United Kingdom after the Second World War (and the different forms prior to the War).[21] However, despite the fact that Malaysia’s legal system and common law is to a large extent derived from that of the United Kingdom, the FIDIC Form appears not to have received wide-spread application for domestic contracts. This is particularly in light of certain local standard forms which has received widespread use.

2.2.3   Pertinent revisions were introduced in the Fourth Edition of the FIDIC Conditions of Contract for Works of Civil Engineering Construction (“the Red Book”) as well as in the 1999 Red Book. In 1987, a revision was made which involved the change of name which removed the reference to the contract as an international contract. It was perhaps feared that the title of the Red Book would imply its use be restricted to construction contracts with an international flavour to it.[22]

2.2.4   In most ways, international building contracts may involve the application of several laws instead of just one. When considering the choice of law applicable to a particular contract, the Malaysian courts would refer to the following factors, in addition to the express terms of the contract –

• the country where the contract was executed;
• the country wherein entire or substantial performance of the contract is to take place;
• the country where one or more of the parties to the contract are domiciled;
• the country where a significant part of the works are manufactured; and/or
• the country from which the contract is financed.

2.2.5   It is common practice for the employer to determine the choice of law applicable to the project. To the extent that the choice of law is made in good faith based on relevant considerations, the courts do not often find reason to interfere with the choice.[23] What remains undisturbed is the autonomy of the parties to determine the law under which they are subject to.

2.2.6   In the Malaysian decision of Aloe Vera (M) Sdn. Bhd. v Avacare Inc.[24] the court held that it would give effect to an exclusive jurisdiction clause contained in a contract. However, the court went on to say that it would, in exceptional circumstances, allow a party to sue in Malaysia notwithstanding the agreement. The reason for this was that the court held that if not, the action would have to be commenced first in the foreign jurisdiction, and then in Malaysia. The court was of the opinion that this would lead to duplicity of proceedings as well as costs, not to mention generate a significant delay in enforcing the claim thus further inhibiting the Plaintiff from ultimately obtaining his remedy.

2.2.7   A closer look at the Malaysian Court of Appeal decision of Inter Maritime Management Sdn. Bhd. v Kai Tai Timber Co. Ltd., Hong Kong[25] brings about further discussion. The appeal court held that the merits of having a trial in Malaysia or in a foreign country and the considerations that had to be weighed in deciding whether to give effect to a forum selection clause was a matter which laid entirely within the discretion of the trial judge. An appellate court would very rarely interfere with this exercise of the trial judge’s discretion.

As such, the aforementioned Court of Appeal decided not to adopt the American approach to forum selection. Thus when dealing with a forum selection clause, the test to be satisfied before effect can be given to the clause is whether the court considers the forum selected or some other forum elsewhere to be more convenient for the purpose of adjudicating the dispute. In such instance, the party disputing the clause must show reason why the clause ought not to be enforced

2.2.8   In short, it ought to be clear that a Malaysian court is not bound to give effect to such a clause for the simple reason that the parties cannot by agreement create or confer jurisdiction upon a court of law where the facts show that the court is or is not already seized of jurisdiction.[26]

2.2.9   The following is a brief guide for understanding the contractual context within which the Engineer under a FIDIC contract operates in Malaysia:

Role of Engineer (FIDIC Clause 5 – apart from the Red Book)

 i)              Design

The design is the first of the engineer’s tasks to be completed by the time the Employer finalises the terms and conditions of the construction contract. The definition of design is varied and its limits would be defined by the circumstances of the contract.[27] Where the design is complete by the tender stage, the eventual contractor who successfully bids for the project would enter the scene with more complete knowledge of the circumstances of the project and what would be expected of the contractor.

Amongst the elements that the engineer has to ensure the design of the project encompasses are the shape and dimensions of the project bearing in mind the ultimate objective the employer has in mind. This would include the use of skills and materials which would further the objectives. The anticipated cost of the project is a further item to be in the forefront of the engineer’s mind. An accurate bill of quantities, where such is the responsibility of the engineer is a major factor that would impact on the overall cost of the project.[28]

ii)            Agent of Employer

The fact that the consultant engineer is the agent of the employer is not something easily disputed. The engineer is rightfully considered the agent of the employer for various reasons. First, the work carried out by the engineer is carried out for the benefit and with the objectives of the employer in mind. Also, upon the appointment of the contractor, certain duties devolve upon the employer. These duties require some familiarity with the design philosophy of the works and the engineer best performs it. The engineer’s role as supervisor in terms of quality control is another factor. As agent of the employer, the engineer may have the authority to authorise variations or further work to be performed. This would depend upon the contract and its terms.[29]

iii)           Supervisor

The duty of achieving the quality objective under a construction contract lies with the contractor. However, owing to the engineer’s first-hand knowledge in the construction design and specifications, the role as supervisor of construction has evolved. In Oldschool vs. Gleeson,[30] the judge had to determine the extent of the consulting engineer’s duty in relation to the design and supervision of the works. The court held that the consultant was not under the obligation to instruct the contractor as to how to perform his duties. He has the right to offer advice but the obligation ultimately falls on the contractor to achieve the design agreed upon. The supervisory role is therefore supportive and ancillary to the contractor’s duty of achieving the standard prescribed by contract.[31]

Certification of Progress and Project Completion (FIDIC Clause 14)

The contract would normally provide for the issue of certificates of progress to mark the approach towards completion. These certificates, where the contract provides so, allows for payments to be released to the contractor. It is a fact in most instances where certificates of payment are not issued that the contractor would become physically hampered in performing the contract due to cash flow problems. The certificate records the value of the work so far performed, and it may be contractually mandated that the issue of such certificate be a condition precedent to the release of funds to the contractor.

The engineer performs the role of certifier when he issues extension of time, including dates by which certain portions of work have to be completed and when he values variations to the contract or design specifications.[32]

 Adjudicator and Quasi-Arbitrator (FIDIC Clause 3.5)

Generally, the engineer is an arbitrator only when he has to determine a dispute between the contractor and the employer. The contractor often provides for the engineer to hear disputes that may arise from time to time. The fact that the engineer has useful expertise and first-hand experience in the subject construction is thought to allow an expedient means of dispute resolution. In contrast, the rationale behind the appointment of the engineer as quasi-arbitrator has been questioned so far as the duty of impartiality of the quasi-arbitrator is concerned.[33]The contractual relationship between the engineer and employer is often used as reasons why the engineer might well be biased in reaching his decision, although the duties owed by the engineer to the employer as agent do not impinge on his duty as quasi-arbitrator.

Naturally, in order to perform his role the engineer must be free to decide without first seeking the approval of the employer.[34] Where this is an obstacle, [35] it is fuel for the argument that the choice of engineer as dispute revolver is not wise. A quasi-arbitrator is required to be impartial and to use his faculties of logic and reason in reaching a decision. In performing the role of a quasi-arbitrator/adjudicator, it can be seen how the law might impose the above conditions on him. It might be seen also how he would be encouraged to provide reasoned decisions, though arguably the failure to do so would not nullify the decision or determination. A subsequent arbitrator may however revise the decision more readily where a reasoned decision is not provided.[36]

Upon closer examination of Clause 4.4 of the 1999 Edition of the Red Book, there is no reason why the assigning or subcontracting of the contract would lead to problems as seen in the English decision of Linden Gardens v. Lenesta Sludge Disposals Ltd.; St. Martin’s Property Corporation Ltd. v. Sir Robert McAlpine & Sons Ltd.[1994] 1 A.C. 85. In Malaysia, the requirements for a legal assignment are provided in section 4(3) of the Civil Law Act 1956. For a valid legal assignment, the assignment must be absolute and granted by the assignor in writing with notice. The Courts in Malaysia would also recognise and enforce an equitable assignment provided that the common law requirements for an equitable assignment are satisfied.

2.2.10 It is submitted that going by the current trends in the industry and the swing towards globalization, we will see quite a bit of the new Yellow and Silver Books. As for the 2006 Blue-Green Book or “Dredger’s Contract”, except for marine works involving dredging, there appears to be no other field where it can be employed locally. However, the major factor militating against the adoption of these new forms is the relative novelty of such forms. No one knows for sure their shortcomings nor their ambit as these forms have not been applied/tested in the market. It is averred that the time tested ‘old’ forms will still be preferred until the ‘new’ forms have established a foot-hold in the industry.

2.2.11 The fourth section of this paper shall review the relevant Malaysian law as construed where a foreign standard form of contract (e.g. FIDIC Forms of Contract, ICE Forms of Contract, etc.) is used as the choice form of contract in a construction project, or where one of the local forms of contract are used, which is also subject to the Contracts Act 1950. In addition, the fourth section shall provide a more detailed look at the pertinent developments within the contracting practice in Malaysia in relation to civil engineering and building works which have no doubt affected the application of these forms.

2.3                   JCT Standard Forms of Contract

The Joint Contracts Tribunal (JCT) is an ‘affiliation of interest groups within the British construction industry which operates as a forum for discussing and determining the content of the clauses of the standard form of building contracts’.[37] It issues and regularly amends the Standard Forms of Contract with supporting documentation and Practice Notes.

2.3.1               Application

JCT Standard Forms of Contract in their original form are rarely used in Malaysia. The only limited exceptions have been in very specific applications involving special types of contracts, e.g. management contracts, continuation contract, etc. In most cases, the JCT forms have been used either with necessary modifications or as a basis of a locally generated ad hoc or ‘bespoke’ form of conditions of contract, e.g. one with contractor’s design.[38]

2.3.2               Common Types[39]

JCT has, since its inception, generated a whole list of Standard Forms of Contract. Of relevance to the Malaysian construction industry are only the following main types; which at one time or another have been used in various styles:

• JCT Standard Forms of Building Contract (1980): JCT 80;

i)       Private With Quantities;

ii)     Private Without Quantities;

iii)    Private With Approximate Quantities;

iv)    Nominated Sub-contracts: NSC/1 to 4; and

v)     Domestic Sub-contracts: DOM/1;

• JCT Standard Form of Building Contract With Contractor’s Design (1981): JCT CD 81;
• JCT Intermediate Form of Building Contract (1984): JCT IFC 84;
• JCT Standard Form of Management Contract (1998): JCT MC 98;
• JCT Standard Form of Measured Term Contract (1989);
• JCT Standard Fixed Fee Form of Prime Cost Contract (1967); and
• JCT Standard Form of Construction Management Agreement (C/CM 2002).

2.3.3   As part of its general revision and updating, JCT has recently issued a new set of Standard Forms listed below, cognisance of which should be taken:

• JCT Standard Forms of Building Contract (1998 Edn.);
• JCT Standard Form of Building Contract With Contractor’s Design (1998 Edn.);
• JCT Intermediate Form of Building Contract (1998 Edn.);
• JCT Standard Form of Management Contract (1998 Edn.);
• JCT Standard Form of Measured Term Contrat (1998 Edn.); and
• JCT Standard Form of Prime Cost Contract (1998 Edn.).

Whether these new forms will be used by local practitioners is purely speculative at the moment. Much depends on the ability of local bodies, e.g. CIDB to generate suitable standard forms to cover the major applications adequately.[40]

2.4                  Standard Institutional Forms

History reveals that even in Britain, before bodies such as FIDIC or JCT started developing Standard Forms of Contract, the principal institutions, i.e. the Institution of Civil Engineers (ICE), Institution of Mechanical Engineers (IMechE) and Institution of Electrical Engineers (IEE) had initiated the process of drafting Standard Forms to address their respective areas of concern, i.e. engineering works.

2.4.1   Notable is the emphasis of JCT on building works whilst FIDIC appeals more to an international engineering/construction audience. The institutions seem more focused to their fields of specialisation. Hence, it is inevitable that they represent the most suitable bodies to draft and issue Standard Forms of Contract in their particular areas of competence; hence the so called institutional forms. It is no secret that when local bodies such as the Institution of Engineers, Malaysia develop their own Standard Forms, they fashion these after the British institutional forms.[41]

2.4.2               Application

            Well before JKR came out with its standard form for Turnkey/Design & Build contracts, the local practitioners used to employ the ‘ICE Design and Construct Conditions’. Since the local private sector is still without such a standard form, the ICE’s version continues to be the basis of private design and construct contracts. In parallel, the ICE’s ‘Standard Form of Contract for Civil Engineering Works’ is adopted in situations where it is preferred over the corresponding IEM or FIDIC Forms.

2.4.3   As for the IMechE and IEE Standard Forms, these have been adapted for local use by employers for certain Mechanical and Electrical works; a classic example being Tenaga Nasional Berhad.[42] Such forms will continue to fill in the voids on the local scene where there is a lack of motivation to address issues pertaining to Mechanical and Electrical works in favour of the seemingly more lucrative building and civil works.[43]

2.4.4               Common Types

The primary forms of ICE Standard Forms of Contract utilised locally are:

• ICE Conditions of Contracts for Works of Civil Engineering Construction (6^thEdn). The 7^th Edn. which has been recently issued supercedes the 6^th Edn.;
• ICE Conditions of Contracts for Design and Construct [1992];
• ICE Conditions of Contract for Minor Works (2^nd Edn.) [1995]; and
• ICE Conditions of Contract for Ground Investigation [1983].[44]

Of the above-mentioned forms, the first two are the most popular. The last form is suitable only for investigations carried out under the control and supervision of an independently employed engineer.

2.4.5               Miscellaneous Standard Forms

From time to time local practitioners have looked upon or may be compelled to look at various other Standard Forms that may suit their particular applications, examples of which include:

• the New Engineering Contract;
• ACA[45] Forms of Contract;
• GC[46] Forms of Contract;
• ‘New Singapore SIA’[47] Forms of Contract.

This does not mean that the parties cannot employ any other Standard Forms from any other jurisdiction provided it is in line with their requirements and meets their legal and commercial objective.

 3.         Usage of “Bespoke” or “Ad hoc” Forms of Contract in Malaysia

3.1      Whilst standard forms of contracts generated and published by the authoritative bodies of the construction industry in Malaysia remain a popular choice for use amongst parties, it must be noted that it is rare for the aforementioned standard forms to be used without amendments or modifications being undertaken to suit the principal’s particular requirements. Unless such amendments are undertaken by competent professionals, experience has shown that they have led to serious claims and disputes, thereby “watering down” the purpose and effectiveness of the said standard forms.

3.1.1   In Malaysia, it is quite common to encounter the use of standard forms of conditions, of which have been subjected to amendments or modifications to meet local conditions and the particular requirements of the parties (principally the employer as the principal).

3.1.2   Certain employers or specific sectors of the industry may prefer not to use any of the above mentioned standard forms even with amendments or modifications but prefer to have these drafted from their own point of view. These are popularly called “bespoke” or “ad hoc” or “client-specific” or even “custom-made” forms of conditions of contract. Among the examples of such “bespoke” conditions of contract are the ‘Putrajaya’ Form, ‘KLCC’ Form, ‘KLSSB’ Form, and ‘KLIA’ Form.

3.1.3   A more direct example of such “bespoke” forms are the so-called JKR or PWD Standard Forms of Conditions of the Contract; the word “standard” connoting that these are standardised for use in all public sector projects under purview of JKR (Jabatan Kerja Raya / Public Works Department). These comprise the JKR Forms 203 (Rev 1/2010), Form 203A (Rev 1/2010), Form 203N (Rev 1/2010) and 203P (Rev 1/2010) for Main Contracts and Nominated Subcontracts undertaken along the traditional general contracting route of procurement. A separate form, i.e. the JKR Form DB (Rev 1/2010), is to be used for Design & Build Contracts. JKR Sarawak has published its own Form of Contract in 2006 which is meant to apply to traditional general contracts based on Bills of Quantities as well to those based on drawings and specifications.

3.1.4   The FIDIC form, whilst not often used in its original form except for international contracts, is noteworthy in that it often forms the template for other forms, some of which have been used for some very substantial projects in Malaysia.

3.1.5   Other institutional or corporate employers, both in the public and private sectors, have generated and are drafting their own bespoke forms of conditions of contract either due to their particular policies, or specific requirements. This has resulted in a myriad range of forms of conditions of contract with which practitioners must be familiar in undertaking their works.

3.1.6   It is pertinent to note that a true standard form which is produced by a body which is representative of the industry, e.g. CIDB, is in principle unlikely to attract the application of the “contra proferentem” rule of construction. In the case of Union Workshop (Construction) Co. v Ng Chew Ho Construction Co. Sdn. Bhd. [1978] 2 MLJ 22, it was held that the meaning of the sub-contract in question was perfectly clear that there could be no resort to other documents to give another meaning to it. The facts were that the appellant had sub-contracted to build steel frames for the respondent in fulfilment of the respondent’s much larger contract with the contract principle.

The dispute was related to the question whether payment for the construction was to be by the nett weight of the structural frames only or was to be by the gross weight of the steel used including bolts, washers and connecting plates. The terms of the sub-contract between the parties were clear and provided for payment not only for the steel girders or frames but also for ancillary steel used in the erection of the girders.

The High Court held that where the draftsmen had purposely left out any condition which he could without difficulty have put in, then the contra proferentem rule applied so that the inevitable conclusion was that the clause of the main agreement did not form part of the agreement between the parties and that payment was to include the weight of steel other than the girders.

3.1.7   However, the position may well be different where the parties contract on the basis of a standard form of contract containing the parties’ own amendments or one that is self-styled as a standard form. Referable is the case of Chester Grosvenor Hotel Co. Ltd. v. Alfred McAlpine Management Ltd. (1995) 56 BLR 115 where J Stannard held that a management contractor should not be held responsible for a trade contractor’s default:

“I accept that where a party invariably contracts in the same written terms without material variation, those terms will become its ‘standard form contract’ or ‘written standard terms of business’. However, it does not follow that because terms are not employed invariably, or without material variation, they cannot be standard terms.

What are alleged to be standard terms may be used so infrequently in comparison with other terms that they cannot realistically be regarded as standard, or on any particular occasion may be so added to or mutilated that they must be regarded as having lost their essential identity. What is required for terms to be standard is that they should be regarded by the party which advances them as its standard terms and that it should habitually contract in those terms. If it contracts also in other terms, it must be determined in any given case, and as a matter of fact, whether this has occurred so frequently that the terms in question cannot be regarded as standard, and if on any occasion a party has substantially modified its prepared terms, it is a question of fact whether those terms have been so altered that they must be regarded as not having been employed on that occasion.”

3.1.8   In a similar fashion to construction contracts as alluded to above, the conditions of contract for the engagement of professionals such as consultants can also be of various types. Professional bodies such as the Board of Engineers Malaysia (BEM), Pertubuhan Arkitek Malaysia (PAM), etc. have developed and published Standard Forms of Conditions of Contract such as the BEM Model Form of Agreement (BEM Form 1999) and the PAM Standard Form of Memorandum of Agreement for Professional Services Fifth Schedule (Rule 28), which are recommended to be used in the construction industry.

3.1.9   However, this has sadly not occurred in practice where most employers, including the government, have either modified these standard forms, or even drafted “bespoke”, or “client-specific” conditions for the engagement of professionals. Whether the latter has really protected the rights of the parties and improved professionalism and the quality of service rendered is a moot point but it reflects the often misguided lack of confidence in standard forms generally, be these for professional work or even the actual works under a construction contract.[48]

3.1.10 Most of the standard forms provide for the professionals to be paid according to a Standard Scale of Fees. In practice however this has been taken to be merely a guide and no more by the industry and the courts.[49]

4.        Pertinent Issues and Development Affecting the Contracting Practice in Malaysia

4.1      Construction and building contracts in Malaysia are governed by the general law of contract which is embodied in the Contracts Act of 1950. The Malaysian Act has been derived largely from the Indian Contract Act 1872[50], appropriately amended to suit commercial conditions prevalent in Malaysia. The courts of law in Malaysia frequently refer to decisions pronounced by the Indian courts. English common law is also held to be a part of Malaysian law and is used extensively by the courts in cases where provisions of a statute cannot be directly applied.

4.1.1   The courts of law in Malaysia have upheld the doctrine of freedom of contract by taking the view that parties are free to contract into any terms they wish to by mutual agreement provided that the agreement is legal and is capable of being enforced by law in Malaysia. Section 24 of the Act specifies that the consideration or object of an agreement is lawful unless:

i)              It is forbidden by law;

ii)             It is of such a nature that, if permitted, it would defeat any law;

iii)           It is fraudulent;

iv)           It involves or implies injury to the person or property of another; or

v)             The courts regard it as immoral, or opposed to public policy.

            We will now focus our attention on some pertinent developments in the contracting law applicable in Malaysia.

4.2                  Section 75 of Contracts Act 1950

4.2.1   Under the Malaysian law, the contractual right to liquidated damages in the sum as agreed under a contract is not automatic. In the landmark decision by the Federal Court in the case of Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy[1995] 1 MLJ 817, it was held that, pursuant to Section 75 of the Malaysian Contracts Act 1950, notwithstanding the stipulated liquidated damages entitlement under the contract, no damages would be awarded to the employer if it failed to prove actual loss suffered as a result of the delay caused by the contractor’s breach of contract, unless the employer could show to the satisfaction of the court that the losses suffered by it were such that it would be impossible for the court to assess. These principles enunciated by the Federal Court in Selva Kumar was subsequently confirmed by the majority decision of the Federal Court in the case of Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd [2009] 3 MLJ 445.

4.2.2   Section 75 of the Contracts Act reads as follows:

                  “Compensation for breach of contract where penalty stipulated for… 75. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved