EOT, CNC, and LAD in Construction Contracts

Explore the implications of EOT (Extension of Time), CNC (Contract Not Completed), and LAD (Liquidated Damages) in construction contracts. Learn about what happens when the contract completion date lapses, the process of issuing a CNC, the Employer's claim for LAD, and how CIPAA (Construction Industry Payment and Adjudication Act) factors in.

• Construction contracts
• EOT
• CNC
• LAD
• CIPAA

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1. 1 CNC or EOT, CNC or EOT, Kisah Liquidated Damages or Loss & Liquidated Damages or Loss & Expense Expense Kisah Benar Benar, , 20th July 2019 Foo Joon Liang, FCIArb Partner

2. 2 What happens when the contract completion date is up and no EOT was granted? Can I issue a CNC while there is a pending EOT application? The Employer has a claim for LAD. I have not issued a CNC. How does it affect the LAD claim?

3. 3 The Employer has a claim for LAD. Does the Employer have to prove the extent of its losses? CIPAA How does the Employer apply its LAD claim? CIPAA and architect s fees. How does CIPAA help the Architect?

4. 4 What happens when the contract completion date is up and no EOT was granted? If the contractor is entitled to EOT -> Time is at large If contractor is not entitled to EOT -> CNC; event of default

5. 5 What happens when the contract completion date is up and no EOT was granted? If the contractor is entitled toEOT -> Time is at large Kerajaan Malaysia v Ven-Coal Resources Sdn Bhd [2014] 5 CLJ 186 [28] When the SO improperly refused to grant an EOT in a situation that would warrant an EOT, then time for completion is set at large.

6. 6 What happens when the contract completion date is up and no EOT was granted? If the contractor is not entitled to EOT -> Issue CNC; event of default Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [2019] 1 MLJ 281 CA Contractor applied for 3 EOTs. 2 EOTs were granted. EOT no.2 expired on 18.7.2013.

7. 7 What happens when the contract completion date is up and no EOT was granted? Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [2019] 1 MLJ 281 CA A week before the expiry of EOT no.2, the contractor submitted EOT no.3. This application was disputed. EOT No.3 was discussed and considered in meetings (see: para 72) CNC was issued a day before the scheduled completion date (i.e. 18.7.2013).

8. 8 What happens when the contract completion date is up and no EOT was granted? Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [2019] 1 MLJ 281 CA The Court of Appeal held : [80] The table shows that the progress of the works was only at 53.3% as at 30 May 2013 when it should be almost 100%. The CNC was issued a day before the scheduled completion date, ie 18 July 2013. If CNC is not issued then the defendant will not be able to deduct LAD. The defendant possessed the contractual right to issue the CNC if the plaintiff fails to complete the works by the date for completion or by the extended time granted. Thus, the issuance of the CNC a day before the expiry of the second extended date of completion is in accordance with the contractual terms.

9. 9 Can I issue a CNC while there is a pending EOT application? No CNC is invalid with a live EOT application

10. 10 Can I issue a CNC while there is a pending EOT application? CNC is invalid with a live EOT application Pembinaan LCL Sdn Bhd v. SK Styrofoam (M) Sdn Bhd [2007] 3 CLJ 185 [7] Next, he found that the certificate of non-completion (CNC) was invalid because the architect had not properly assessed the appellant's request for extension of time. The architect could not therefore know the precise completion time. How then could he, asked the arbitrator, "express an opinion that the works ought reasonably to have been completed on a certain date?" This point really flows from the first. Since time was not of the essence of the contract, the architect was in no position to determine when the actual completion date was unless he had given reasonable notice of the respondent's Accordingly, the arbitrator committed no error of law in this part of his award. intention to reinstate the time clause.

11. 11 Can I issue a CNC while there is a pending EOT application? CNC can be validly issued before the expiry of the new contract completion date? Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd The Court held: [73] Upon our perusal of the evidence that the defendant had at all material time assisted the plaintiff to achieve its targeted completion dates. Contrary to the learned High Court judge s findings we are of the view that even if the third EOT application was not considered it does not prejudiced the defendant s right in any way whatsoever in electing to terminate the contract. [74] The next issue that we have to considered pertained to whether the defendant had validly issued the CNC pursuant to cl 40 of the Contract.

12. 12 Can I issue a CNC while there is a pending EOT application? Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [74] The next issue that we have to considered pertained to whether the defendant had validly issued the CNC pursuant to cl 40 of the contract. The general rule is that as a contractor t he plaintiff is bound by the terms of the contract to complete the work by the original date for completion as stipulated in the contract. If the plaintiff fails to do so under the terms of the contract the plaintiff will be liable for liquidated damages. [80] .....Thus the issuance of the CNC a day before the expiry of the second extended date of completion is in accordance with the contractual terms

13. 13 The Employer has a claim for LAD. I have not issued a CNC. How does it affect the LAD claim? No CNC -> Condition precedent absent; not entitled to LAD Right to LAD arises after service of CNC

14. 14 The Employer has a claim for LAD. I have not issued a CNC. How does it affect the LAD claim? No CNC -> Not entitled to LAD Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [75] As a prerequisite to claiming liquidated and ascertained damages the defendant must issue a certificate of non-completion (CNC) to the plaintiff. The CNC gives formal written notice to the plaintiff that they have failed to complete the works by the completion date that was last agreed. The defendant may then deduct LAD from the plaintiff. Generally, contractors may challenge claims for LAD if the procedures and the notice periods set out in the contract have not been allowed.

15. 15 Can I issue a CNC while there is a The Employer has a claim for LAD. I have not issued a CNC. How does it affect the LAD claim? Kerajaan Malaysia (Jabatan Kerja Raya) v Global Globe (M) Sdn Bhd [76] contractual procedures must be adhered to. In the case of Octoesse LLP v Trak Special Projects Ltd [2016] EWHC 2180 (TCC) Justice Jefford held that Octoesse was not entitled to deduct liquidated damages as they had agreed to an extension of time after a certificate of non-completion had been issued. As Octoesse had not issued a further certificate of non-completion, they were not entitled to deduct liquidated damages. When LAD is imposed and subsequently deducted the correct

16. 16 The Employer has a claim for LAD. I have not issued a CNC. How does it affect the LAD claim? Right to impose LAD arises after CNC Kerajaan Malaysia v KCSB Konsortium SDN BHD (HC) [2019] MLJU 418 "[90]The Plaintiff had wanted to claim LAD from 17.1.2003 which is a day after the expiry of the EOT 1 until 10.5.2011 which is the date of effective termination. The right to impose LAD would generally be after the service of the CNC for otherwise the Defendant would be labouring under the notion that time had become at large upon the expiry of the EOT 1 and thereafter the Defendant would have a reasonable within which to complete the Project"

17. 17 The Employer has a claim for LAD. Does the Employer have to prove the extent of its losses? No necessity to prove actual loss or damage Has to be reasonable Not excessive

18. 18 The Employer has a claim for LAD. Does the Employer have to prove the extent of its losses? The current position The Employer does not have to prove the extent of its losses but the LAD claim has to be reasonable and not excessive. Cubic Electronics Sdn Bhd (In Liquidation) v. Mars Telecommunications Sdn Bhd [2019] 2 CLJ 723 (FC) [65] With respect and for reasons we shall set out below, we are of the view that there is no necessity for proof of actual loss or damage in every case where the innocent party seeks to enforce a damages clause. Selva Kumar (supra) and Johor Coastal (supra) should not be interpreted *as what the subsequent decisions since then have done) as imposing a legal straightjacket in which proof of actual loss is the sole conclusive determinant of reasonable compensation. Reasonable compensation is not confined to actual loss, although evidence of that may be a useful starting point.

19. 19 The Employer has a claim for LAD. Does the Employer have to prove the extent of its losses? Cubic Electronics Sdn Bhd (In Liquidation) v. Mars Telecommunications Sdn Bhd [2019] 2 CLJ 723 (FC) [88] In light of the foregoing, the onus now lies on the plaintiff to show that the forfeiture of the additional RM2 million was excessive. From the evidence, the plaintiff had not adduced any proof showing that the forfeited payment were exorbitant or unreasonable. It only insisted that it should be entitled to a refund because the defendant had not proved actual loss or damage. Since there was no real argument from the plaintiff on the reasonableness or otherwise of the forfeiture clause, we hold that it has not discharged its burden of proof. Consequently, we rule that the forfeiture of the additional RM2 million amounts to reasonable compensation.

20. 20 CIPAA How does the Employer apply its LAD claim? By way of set-off as defence in Payment Response/Adjudication Response

21. 21 CIPAA How does the Employer apply its LAD claim? Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd & Other [2017] 1 LNS 177 (HC) [142] ... Generally it is the contractors who would be in a position to make a Payment Claim and not the Employer and that is because the Employer claim against a contractor would be more in the nature of a damages claim whether under LAD claim, rectification costs or additional costs incurred in engaging a new contractor. These are not Payment Claims under CIPAA but they may be set up as valid defences of set-off against a claimant's claim.

22. 22 CIPAA and the architect s fees. How does CIPAA help the architect? Architect s fee falls under S.4 CIPAA S.4 CIPAA Construction contract means a construction work contract or construction consultancy contract; Construction consultancy contract means a contract to carry out consultancy services in relation to construction work and includes planning architectural work, engineering, surveying, exterior and interior decoration, landscaping and project management services; and feasibility study,

23. 23 CIPAA and the architect s fees. How does CIPAA help the architect? Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal [2018] 4 MLJ 496 (CA) The Respondent ( ARMC ) was a firm of architects engaged by the Appellant ( Martego ) as the project architect for a proposed development. Works had been performed by ARMC when a dispute arose as to the amount of fees which ARMC was entitled to. ARMC filed a CIPAA claim to recover its fees.

24. 24 CIPAA and the architect s fees. How does CIPAA help the architect? Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal [2018] 4 MLJ 496 (CA) The claim made before the Adjudicator was in the sum of RM599,500 being the professional fees. The Adjudicator awarded the sum of RM258,550 being the balance amount of the total entitlement of RM631,228 less the amount paid of RM372,678. Martego applied to set aside the Adjudicator s Decision under S.15 of CIPAA.

25. 25 CIPAA and the architect s fees. How does CIPAA help the architect? Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal [2018] 4 MLJ 496 (CA) The Court of Appeal held that the architect s fees is within the definition of payment set out in s 4 of CIPAA. [44] It is our considered view that as long as the claims are within the definition of payment set out in s 4 of the CIPAA 2012 comes into play. Again, we see no mention of interim or final in the s 4 definition. The crucial words are simply work done or services rendered under the express terms of a construction contract . That being the case, it does not matter whether the payment claims are interim or final or claims made after unilateral or mutual termination. As long as they are payment claims relating to a construction contract as defined in s 4 of the CIPAA 2012 applies.

26. 26 Thank You Foo Joon Liang,FCIArb Partner D-32-02, Menara SUEZCAP 1, KL Gateway No. 2, Jalan Kerinchi, Gerbang Kerinchi Lestari 59200 Kuala Lumpur, Malaysia Tel: +603 7931 7060 Fax: +603 7931 8063 Email: office@ganlaw.my