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PRIVATISATIONCONTRACT

Speaker: En Abdul Aziz EnganLegal Section, Public PrivatePartnership Unit, PrimeMinisters Department

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PUBLIC PRIVATE PARTNERSHIP UNIT (3PU)

On 22nd April 2009, Y.Bhg. Tan Sri Mohd Sidek bin Haji Hassan,the Chief Secretary to the Government, announced theestablishment of a new unit under the Prime Minister'sDepartment known as Privatisation and Private FinanceInitiative Unit - PFI (currently known as Public Private Partnership -3PU) in line with the economic transformation effort towardsbeing more competitive.

Y.Bhg. Dato' Sri Dr. Ali bin Hamsa was appointed as the firstDirector General of 3PU. Now Dato Ahmad Husni Hussain is thecurrent Director General of 3PU.

3PU is under the purview of the Prime Ministers Department.Under Ministerial Function Order 2013 [P.U.(A)184/2013], thefunctions of 3PU are as follows:

merancang, menyelaraskan, menilai, merunding sertamemantau semua projek penswastaan dan Kerjasama AwamSwasta (PPP) serta projek-projek pembangunan Koridor.

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What Is Privatisation?

Any measure resulting in the transfer to theprivate sector of activities or functions whichhave traditionally rested with the public sectorinvolving one or combination of the following:

entity

activity e.g. management responsibility

assets (with or without liabilities) / right to useassets

personnel

Transfer can either be an outright transfer or fora certain concession period

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Government Policy on Privatisation

Guidelines on Privatisation 1985 Pekeliling Am Bil. 2 Tahun 1985(KSN)

Pelan Induk Penswastaan 1991, PMs letter to all Menteris Besar anChiefs Minister 1991 & DG EPUs letter 1993

Outsourcing - EPUs letter dated 10 Oct 2007

More than RM25 million

7 years or more

Charge to be imposed on to the public

Require inter agency coordination

Garis Panduan Perkongsian Awam Swasta 2009

(* The above list is NOT exhaustive AND since policies are subject tochange there is a need to keep yourself abreast with the latest policy)

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Objectives of Privatisation

To relieve/reduce financial & administrative burden ofGovernment

Improve efficiency, increase productivity of services &Government enterprises

Facilitate/promote economic growth in the economythrough higher investment from the private sector(private sector as engine of growth)

Reduce the size and presence of the public sector in theeconomy

Help meet the restructuring objectives of the NationalDevelopment Policy vis--vis the ownership pattern inthe economy

To encourage competition an efficiency in allocation ofscarce national resources

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Approaches Adopted

GOVERNMENT INITIATED PRIVATE SECTOR INITIATED

Proposal are identified andsubmitted by Ministries orGovernment agencies to UnitKerjasama Awam Swasta(UKAS)

Government to determinemode of privatisation

Proposal are identified andsubmitted by Ministries orGovernment agencies to UnitKerjasama Awam Swasta(UKAS)

Guided by the principle ofchoosing a feasible methodwhich maximise privatesector investment

Private sector proposesmode of privatisation subjectto negotiation withGovernment

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Jawatankuasa KerjasamaAwam Swasta (JKAS)

Evaluation of overall privatisation proposal and submitrecommendation to Jawatankuasa Tertinggi Awam Swasta(JTAS) and the Cabinet

Members:

Unit Kerjasama Awam Swasta (UKAS)

Economic Planning Unit (EPU)

Ministry of Finance (MOF)

Attorney General Chambers (AGC)

Federal Lands Commissioner Department

Valuation Department

Relevant Ministry/Agency

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Jawatankuasa TertinggiAwam Swasta (JTAS)

Evaluation of overall privatisation proposal and makingrecommendation to the Cabinet to be chaired by KSN

Members:

Unit Kerjasama Awam Swasta (UKAS)

Economic Planning Unit (EPU)

Ministry of Finance (MOF)

Attorney General Chambers (AGC)

Federal Lands Commissioner Department

Valuation Department

Relevant Ministry/Agency

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Privatisation Committee

Financial Committee Technical Committee

Evaluation of financial proposals and submit

recommendation to JKAS

Members:

UKAS, EPU, MOF, AGCValuation Department

Relevant Ministry/Agency

Evaluation of technical proposals and submit

recommendation to JKAS

Members:

Relevant Ministry/AgencyRelevant Technical Department

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Key Process

PLANNING

Evaluation of privatisation proposal and getting the right business model, financial model and tariff / charges

Negotiating the terms and conditions of privatisationagreement

Getting the necessary approval and signing of concessionagreement

CONSTRUCTION/PROJECT IMPLEMENTATION

Meeting the condition precedent (CPs) Commencement and construction Completion of works

OPERATION

Obligations of Government Obligations of concession company

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oPrimary Aim:

safeguard Governments interest

oGovernment is a big andconsistent purchaser of goods andservices

IMPORTANCE OF CONTRACT PREPARATION

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oPrivatisation projects involve hugesums of $$$

oPrivatisation also involves transfer /lease of Government properties toconcession company (e.g. landswap)

IMPORTANCE OF CONTRACT PREPARATION

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ARTICLE 69 (1) FEDERAL CONSTITUTION

The Federation has power to

Acquire; Hold; & Dispose

- property of any kind &

- to make contracts

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The Federation may:

Sue &

Be sued.

Capacity as a legal entity

ARTICLE 69 (2) FEDERAL CONSTITUTION

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Constitutional Issues

Jurisdiction

Federal Constitution

1. Articles 73-812. Ninth Schedule

a. Federal Listb. State Listc. Concurrent List

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EXAMPLE

PRIVATISATION OF NATIONAL SEWERAGE SERVICES

SCOPE:

Taking over the operations of the existing public sewerage systems within the various operational areas of all local authorities in Malaysia

Manage, maintain, upgrade and refurbish existing sewerage systems

Design, construct, finance and commission new public sewerage systems and operate and maintain

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Constitutional Position

Item 7 of the Concurrent List public health,sanitation. has been interpreted byChamber to include solid waste

Accordingly under Article 80(2) both theFederal or State Authority have the legislativeas well as executive power over sewerage,solid waste management & public cleansing

Effect if both legislate - Article 75 FederalConstitution

Therefore new law has to be legislated toconfer the executive power to the FederalGovernment

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EXAMPLE

PRIVATISATION OF SOLID WASTE & PUBLIC CLEANSING

SCOPE:

Taking over the operations of the existing solid waste management & public cleansing within the various operational areas of all local authorities in Malaysia

Manage, maintain, upgrade and refurbish existing solid waste facilities

Design, construct, finance and commission new solid waste facilities and operate and maintain

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Constitutional Position

Integrated solid waste management policy

Solid Waste And Public Cleansing Management Act 2007 [Act 672]

Amendment of Local Government Act 1976 [Act 171], Street, Drainage and Building Act 1974 [Act 133] and Town and Country Planning Act 1976 [Act 172]

Establishment of Perbadanan PengurusanSisa Pepejal dan Pembersihan Awam vide Solid Waste and Public Cleansing Management Corporation Act 2007 [Act 673]

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EXAMPLE

RESTRUCURING OF WATER SUPPLY SERVICES

SCOPE:

Taking over the operations of existing public water supply services from various State Departments or its statutory bodies in West Malaysia & Labuan

Manage, maintain, upgrade and refurbish existing water supply systems

Design, construct, finance and commission new public water supply systems

Operate and maintain

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Constitutional Position

State List to Concurrent List

Restructuring of water services industryand sewerage services 2007

Sewerage Services Act 1993 [Act 508] isrepealed by Water Services Industry Act2007 [Act 655]

Establishment of SuruhanjayaPerkhidmatan Air Negara videSuruhanjaya Perkhidmatan Air Negara Act2007 [Act 654]

Establishment of Pengurusan Air Berhad

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Identification of Existing Laws

Does existing legislation permit privatisation?

Whether new laws or amendments is needed- Depend upon:

Status of existing entity the activity or functions to be

privatised mode of privatisation

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Status of Existing Law Universitiesand University Colleges Act 1971 [Act 30]

Section 6: Effect of Incorporation Order and general powers of a higher educationalinstitution which is a University.

(1) If, the Yang di-Pertuan Agong is satisfied that it is expedient in the national interest that a University should be established, he may by order

(a) declare that there shall be established a higher educational institution hav ing the status of a University, which shall be a body corporate, for the purpose of prov iding, promoting and developing higher education in all such branches of learning as shall be specified in the order;

(b) assign a name and style to that University; and

(c) specify the location of the site which shall be the seat of that University.

(1A) The Yang di-Pertuan Agong may amend, vary or revoke an order made under subsection (1) by a subsequent order published in the Gazette.

(2) An Order made under subsection (1) (hereinafter referred to as the "Incorporation Order" or (1A)) shall, at the next meeting of Parliament, be laid before both Houses of Parliament.

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Continue Section 7: Effect of Incorporation Order and general powers of a higher educational institution which is a University.

(1) Upon the coming into force of the Incorporat ion Order made under section 6, a higher educational inst itut ion having the status of a University, with the name and style assigned to it by the Order, shall be deemed to have been established, and by which name the Chancellor, the Vice-Chancellor and the members for the t ime being of the Board and the Senate shall be deemed to have been const ituted a body corporate with perpetual succession and with full power and authority by and in such name

(a) to sue and be sued in all courts;

(b) to have and use a common seal and to alter the same at its pleasure;

(c) to purchase any immovable or movable property and to take, accept and hold any such property which may become vested in it by virtue of any such purchase or by any grant or donation, lease, subventions, legacies, testamentary disposit ion or otherwise;

(d) to sell, lease, exchange or otherwise dispose of any such property not inconsistent with any condit ion or restrict ion as may be imposed by the Const itut ion; and

(e) to exercise, discharge and perform all such powers, dut ies and functions as may be conferred or imposed on the University by this Act or the Const itut ion.

(2) The powers conferred on a University by subsection (1) shall, unless otherwise expressly provided by this Act or the Const itut ion, be exercised by the Board.

First Schedule: Constitution of the University

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STATUS OF EXISTING ENTITY Established under Specific Act/legislation

UPM University established under University Putra Malaysia (Incorporation)Order 1971 [P.U.(A)387/1971]. The powers of UPM can be found in theConstitution of the University Putra Malaysia [P.U.(A) 106/1998]/ P.U.(A)448/2010].

UITM - University established under University Teknologi Mara Act 1976 [Act 173]

o Section 4: Powers of the Universiti

UM University established under University of Malaya Act 1961 [Act 682]

o Section 3: The Constitution shall, upon the appointed day, take effect and havethe force of law within Malaysia.

Established under Companies Act 1965 [Act 125]

UIAM University established under the Companies Act 1965 [Act 125]

o Need to look at the Memorandum of Association (MOA) of the University.

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Government Contracts Act 1949[Act 120]

Financial Procedure Act 1957[Act 61]

Minister of Finance(Incorporation) Act 1957 [Act375]

RELEVANT ACTS/CIRCULARS

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Ministerial Functions Act 1969 [Act 2]

Federal Lands Commissioner Act 1957 [Act 349]

National Land Code; and

Treasury Instructions (Arahan Perbendaharaan)

RELEVANT ACTS/CIRCULARS28

GOVERNMENT CONTRACTS ACT 1949 [ACT 120]

Section 2 of Act 120

All contracts made in Malaysia on behalf of theGovernment shall, if reduced in writing, be madein the name of the Government of Malaysia andmay be signed by a Minister or by any publicofficer duly authorized in writing by a Minister,either specially in any particular case, orgenerally for all contracts below a certain valuein his department or otherwise as may bespecified in the authorization.

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Refer to

SPP 8/1995 perenggan 4

SPP 5/2007 perenggan 46

Ensure that the signatory has the authority to signthe contract

PARTIES TO GOVERNMENT CONTRACT

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CONTRACTS ON BEHALF OF A STATE GOVERNMENT Section 3 Act 120

(1) All contracts made in Malaysia on behalf of a State Government shall, if reduced to writing, be made in the name of the Government of that State, and may be signed by the Chief Minister of the State, or by any public officer duly authorized in writing by the Chief Minister, either specially in any particular case, or generally for all contracts below a certain value in his department or otherwise as may be specified in the authorization.

(2) (2) In the application of this section to Sabah andSarawak "Chief Minister" includes any StateMinister.

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AUTHORIZATION

Section 9 Act 120Authorization shall be in the appropriate form set out in the

Schedule

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SCHEDULEAuthorization under Section 2 and 3 Act 120

I Minister / Chief Minister ..hereby authorize..to sign the contract between the Government of Malaysia/ the Government of the State of..and.for.(describe the particular contract)

Signed

Minister/Chief Minister/Minister of State of..

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FORM OF CONTRACT

A contract may be oral or written.

However it is advisable that a contractbe written to avoid later disputes as towhat terms were actually agreedupon.

A written contract should thereforecontain all the terms and conditionsagreed upon between the contractingparties in respect of the work/services.

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TYPES OF CONTRACT

Procurement of goods- examples:

Purchase of office equipment (computers, printers,stationery, office furniture etc)

Purchase of vehicles (e.g. aircrafts)

Purchase of license to use software

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Tenancy Agreement

Rental of office buildings/premises for the use of Government from private party.

Renting of Government buildings to private sector

Lease Agreement

Lease of Governments land (title held by Federal Land Commissioner (FLC)) to private sector/company

Services Agreement Consultancy Services Cleaning Services Photostate Services Security Services

TYPES OF CONTRACT

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TYPES OF CONTRACTS

Procurement of services(purchase of skill or manpower) -examples:

Building maintenance services (e.g. cleaning of office premises)

Consultancy services (e.g. to conduct study on specific subject matter)

Computer maintenance services (hardware and software)

Hybrid - both procurement of goods and services

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Privatisation Agreement

Toll Roads

Hospitals Support Services

Ports

Construction of Government's asset (building)

ICT Agreement

Software

Developing, Testing, Commissioning

Maintenance of Hardware

TYPES OF CONTRACT

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Forms Of Privatisation

Privatisation can take number of forms. Selectionof appropriate form will depend on the nature ofthe activities to be privatised and factors which areof significance to the activities concerned (e.gbusiness model):

Complete Privatisation

entire ownership or control of existing enterprise, activityor service is transferred from public to the private sector

Partial Privatisation

portion of equity or ownership is transferred or sold-off &Government still maintain the other portion

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Continue Selective Privatisation

a selection or part of the services provided by theGovernment is sold-off

Commercialisation and privatisation

Leasing

specific facilities leased for a specific period for theuse of the facilities (renting out of specific facilitiesin return of specified payment)

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Continue Management

Government retains ownership and controlbut the know-how and management expertiseis required from private sector

Outsourcing/Contracting out

Provision of certain services or activitieswithout any change in the organisation

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Careful consideration before selecting servicesand interest to be privatised

Its viability and potential of profitability

Evaluation of costs and benefits of privatisingservices and activity

Feasibility of fragmentation

Special characteristics of services i.e. security implications

Social objectives

Employees

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Modes Of Implementation1. Build-Operate-Transfer (BOT)

2. Build-Own-Operate (BOO)

3. Build and Transfer (BT)

4. Build-Lease-Transfer (BLT)

5. Build-Lease-Mantain-Transfer (BLMT / BLMOT)

6. Sale of Equity, Assets or Business (SOE or SOA)

7. Management Buy Out (MBO)

8. Services contract / Management Contract (MC) / Outsourcing

9. Land Development:

(a) Land Swap(b) Long term Lease(c) Land exchange

10. Off-take

11. Contract Manufacturing

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Build-Operate-Transfer (BOT) Concession Company will be given a

concession to design, build, completeand operate and maintain for aconcession period

Strategic asset to the country

Demand risk is with the company andnot the Government

Useful life of the asset goes beyondthe concession period

At the end of the concession period,transfer it back to the Government atno cost

E.g: highways, ports, rail, wasteto energy

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Concession agreement

Government

Lenders

Company

BOT (Highway) Salient terms

Grant of concession

Condition precedent

Estimated cost

Toll

Finance/shareholding structure

Design/construction/Operation

Step in right

Default/termination/consequences of termination

Expropriation

Concession agreement

CompanyLenders

Government

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Build-Operate-Own (BOO)

Concession Company will be given a concession todesign, build, complete and operate and maintain for aconcession period and the concession company will ownthe project

Government is only interested in output (services) andmake payment for the services rendered

Subject to rapid to technological change or its useful lifeis shorter (junk/scrap)

Not necessary on Government land

Upon expiry of the concession the Government can takeover for a price to be negotiated with the concessioncompany

E.g: Independent power producer (IPP),biometric identification (Immigration),neurosurgery equipment (MU), environmentmonitoring services

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Government

Concession agreement

Company

Lenders

Build and Transfer (BT)

Company to design, build and transfer to the Government upon completion

Upon handing over the Government may appoint another company to operate it

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Government

Concession agreement

Company

Lenders

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Build-Lease-Transfer (BLT)

Concession Company will be given aconcession to design, build, completeand operate and maintain for aconcession period

Lease the land and facilities to thecompany

Government will pay sublease rental(a.k.a deferred payment)

At the end of the concession period,transfer it back at no cost

E.g: Government Building in Putrajaya

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Government

Concession agreement

Company

Lenders

Build-Lease-Mantain-Transfer (BLMT)

Concession Company will be given a concession to design, build, complete and operate and maintain for a concession period

Lease the land and facilities

At the end of the concession period, transfer it back at no cost

E.g: UiTM, HWKK, HPKK, PagohEducation Hub, etc.

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Government

Concession agreement

Company

Lenders

Build-Lease-Mantain-Transfer (BLMT) -Campus Salient terms

Grant of concession

Condition precedent

Estimated cost

Availability Payment

Maintenance Payment

Maintenace Reserved Fund

Land Matters

Finance/shareholding structure

Design/construction/Operation

Substituted Entity (lenders step in right)

Default/termination/consequences of termination

Expropriation

Concession agreement

Government

CompanyLenders

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Sale of equity/asset/business (SOE/SOA)

Company is valued on its asset, business, goodwilland liabilities. Sale of equity is basically sale ofshares. If it is not profitable, then only asset aresold whereas in some other projects both asset andliabilities are sold

Sale of assets - assets are sold but the Governmenttakes over the liabilities and sell a clean companyfor a purchase price. For a strategic activity forcompany, Government retains a golden share totake care of national interest, policy and security

E.g: PERWAJA, MARA HOLDINGS, Penang Port

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Management Buyout (MBO)

Divestment or sale exercise of a companywhere the personnel are normally themanagement teams intends to hold equityof the said company. In most cases aportion of the shares of the company willbe sold to the MBO team

e.g: UDA, MARDEC, PERDA

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Off-take

Company is appointed to undertake to docertain obligation

Government will provide a guarantee/capacityand make payment

No transfer of asset at the end of theconcession

E.g: University Perdana, plasma fractionation

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Services contract/Management/Outsourcing

Company is appointed to undertake to do certainobligation

Government Agency will make payment for theservices rendered

No transfer of asset at the end of the concession

E.g: Federal Government building maintenanceservices, road maintenance services, managedICT services, Hospital Support Services.

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Leasing

Company is appointed to provide facilityand Government will make payment basedon usage of the facility

No transfer of asset at the end of theconcession

E.g: Medical equipment enhancementtenure (Government clinics), broadcastingequipment, MES (Government Hospital)

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Land Development

Company to construct the buildings & develop theland. The company to be given another piece ofland to the value of the development to beundertaken

Under a long term and lease arrangement, thecompany shall develop and lease from the Gov forcertain period of time

Land development agreement involves a tripartiteagreement between Sykt. Hartanah, Gov and thecompany

E.g: Projek Rumah Guru, Mindef Projects

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Method of Privatisation

Project Category Method

New Project

Build-Operate-Transfer (BOT)Build-Own-Operate (BOO)Build-Lease-Manage-Transfer(BLMT)Build-Transfer (BT)Land Swap

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Method of Privatisation

Project Category Method

Existing Project/Activities

Sale of Equity or Sale of Assets(SOE/SOA)Lease of Asset (LOA)Management-Buy-Out (MBO)Management Contract (MC)

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Joint Venture

What is Joint Venture?

What is the difference between JV and Partrnership?

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JV is - an association of two or more individuals or companies engaged in asolitary business enterprise for profit without actual partnership orincorporation.

JV vs Partnership? a partnership generally involves an ongoing, long-termbusiness relationship, whereas a joint venture is based on a single businesstransaction.

A joint venture is

(a)contractual business undertaking between two or more parties.

(b)Individuals or companies choose to enter joint ventures in order to sharestrengths, minimize risks, and increase competitive advantages in themarketplace.

(c)Joint ventures can be distinct business units (a new business entity may becreated for the joint venture) or collaborations between businesses. In acollaboration, for example, a high-technology firm may contract with amanufacturer to bring its idea for a product to market; the former providesthe know-how, the latter the means.

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Continue Generally JV Contract consists the following features:

(a) specifies their mutual responsibilities and goals.(b) the parties must be specific about the intent of their joint venture

as well as aware of its limitations.(c) involve certain rights and duties.(d) The parties have a mutual right to control the enterprise, a right

to share in the profits, and a duty to share in any losses incurred.(e) Parties have fiduciary responsibilities, owes a standard of care to

the other members, and has the duty to act in good faith inmatters that concern the common interest or the enterprise (afiduciary responsibility is a duty to act for someone else's benefitwhile subordinating one's personal interests to those of the otherperson).

(f) A joint venture can terminate at a time specified in the contract,upon the accomplishment of its purpose, upon the death of anactive member, or if a court decides that serious disagreementsbetween the members make its continuation impractical.

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EXAMPLEDBKL JVs Agreement consists of the following:

Consideration Project Land Value, MinimumGuaranteed Profit, Additional Profit

Land Matters; DBKLs option to purchase; Housing Development Account (for the purposes of

depositing progressive payments, all moneyswhatsoever, received from the purchaser or endfinanciers in respect of the residential unit);

Commercial Escrow Account (for the purposes ofdepositing progressive payments, all moneyswhatsoever, received from the purchaser or endfinanciers in respect of the commercial unit);

Bumiputeras purchasers & discount;

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Letter of intent What is Letter of Intent (LOI)?

Oxford Business English Dictionary: A formal letter in which somebody stateswhat they intend to do about something. It is not a promise or a legalcontract but shows that they are serious about it.

[In summary LOI is an expression in writing of a Partys intention to enter intoa contract at a future date and it has no binding effect as the LOI issubject to a formal contract to be entered between the parties.]

Two characteristics of LOI:

a) The expression to enter into contract in future;

b) The LOI will create no liability to that future contract.

References for Letter of Intent

i) Surat Pekelil ing Perbendaharaan Bil. 5 Tahun 2007 (SPP Bil. 5/ 2007)

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SAMPLE OF LOI SPP 5/2007 Dear Sir,............................................... ..

With reference to your tender for the above mentioned *Supply/Services /Works, the Government of Malaysia wishes to indicate to you that generally the terms of your tender are acceptable to the Government.

2. The Government however is unable to accept your tender without further discussion/negotiat ion with you in relat ion to other specific terms of the proposed Contract, in part icular the terms relat ing to the following matters:

*2.1 tender price;*2.2 financing of the proposed contract;*2.3 local/Bumiputera part icipation;*2.4 transfer of technology/training of locals;*2.5 terms of payment;*2.6 local content - in respect of eg. materials, t ravel, t ransportat ion, insurance etc.;*2.7 .............................................................................

3. For the purpose of discussion/negotiat ion, the Government proposes to arrange a series of meeting between the Government's representat ives and yourselves. Please indicate officially your agreement to discuss/negotiate *within ............. days from the date of this letter. If you do agree, the dates for the meeting will be determined later.

4. This letter is considered as a GOVERNMENT SECRET and cannot be made known to others.

5. This is a letter of intent and shall not be construed to bind the Government in any manner whatsoever.

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Sample of Letter:

Dengan segala hormatnya saya merujuk perkara di atas.

2. Dimaklumkan bahawa Kerajaan telah bersetuju secara prinsip [**namasyarikat/tuan] melaksanakan ...........[nama projek]................... tertakluk kepadaterma dan syarat yang akan dirundingkan antara Kerajaan dan pihak[syarikat/tuan] dan perkara-perkara berikut:

(a) Kerajaan tidak bertanggungan terhadap apa-apa kos atau perbelanjaan yangditanggung oleh pihak [**syarikat/tuan] akibat daripada apa-apa tindakan yangdiambil oleh [**syarikat/tuan] lanjutan daripada persetujuan Kerajaan; dan

(b) Kerajaan juga berhak (reserves the right) untuk tidak meneruskan ataumenangguhkan pelaksanaan cadangan projek atau menukar/mengubahpelaksanaan cadangan projek sama ada dari segi skop dan kos projek. Dalamkeadaan ini, Kerajaan tidak bertanggungan terhadap apa-apa kos atauperbelanjaan yang ditanggung oleh [**syarikat/tuan] sekiranya projek tidakditeruskan, ditangguhkan atau pelaksanaan projek ditukar/diubah atau apa-apakelewatan di pihak Kerajaan berhubung pelaksanaan cadangan projek dankeadaan tersebut tidaklah dengan apa-apa cara sekalipun melayakkan[**syarikat/tuan] untuk membuat sebarang tuntutan gantirugi atau pampasanterhadap Kerajaan.

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3. Sehubungan itu ditegaskan persetujuan secara prinsip ini olehKerajaan tidak boleh dianggap mengikat dalam apa cara sekalipunsehingga rundingan mengenai terma dan syarat perjanjiandimuktamadkan dan perjanjian mengenainya ditandatangani oleh pihak-pihak.

Sekian, terima kasih.

BERKHIDMAT UNTUK NEGARA

Saya yang menurut perintah,

(..................................................)[Ketua Setiausaha/Ketua Jabatan]

* peringkat keselamatan RAHSIA/SULIT/TERHAD hendaklahditentukan oleh Kementerian/Jabatan berkenaan dan ditanda di penjuruatas sebelah kiri dan hujung bawah sebelah kanan setiap muka suratbergantung kepada peringkat keselamatan dokumen (rujuk perenggan48 Arahan Keselamatan).

** potong jika/mana yang tidak berkenaan.

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Issue

Whether LOI is binding and whether any liability shallattach to the person who issues the LOI

Halsburys Laws of England, Volume 9(1) stated:

an agreement in principle is no agreement at all. Tobind the parties, a contract must be concluded in all itsfundamental terms, withnothing left to negotiate

Moria and Another v Bednash [2011] All ER (D) 87 (Apr); [2011] EWHC 839 (Ch)

It is common ground that an agreement in principleis one that is not intended to be binding i.e anagreement that is subject to contract

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Turiff Construction Ltd v Regalia KnittingMills Ltd 9 BLR 20 QBD 20A letter of intent would ordinarily have twocharacteristics one, that it will express an intention toenter into a contract in future and two, it will itselfcreate no liability in regard to the future contract.

Ayer Hitam Tin Dredging Malaysia Bhd. vChin Enterprise Sdn. Bhd. [1994] 3 CLJ 133(SC)But it is now settled that when an arrangement ismade subject to contract or subject to thepreparation and approval of a formal contract andsimilar expressions, it will generally be construed tomean that the parties are still in a state of negotiationsand do not intend to be bound unless and until a formalcontract is exchanged.

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In the case of Ayer Hitam Tin Dredging Malaysia Bhd. v Chin Enterprise Sdn. Bhd. [1994] 3 CLJ 133 (SC) the Supreme Court held as follows:

(1) The existence of an agreement depends upon the intention of the parties, who must be ad idem. Itmay be inferred from the language used, the parties' conduct having regard to the surroundingcircumstances and the object of the contract. The court will generally apply an objective or reasonableman test.(2) Merely because the parties contemplate the preparation of a formal contract, that would notprevent a binding contract from coming into existence before the formal contract is signed. However,when an arrangement is made 'subject to contract' or 'subject to the preparation and approval of aformal contract', it will generally be construed to mean that the parties are still negotiating and do notintend to be bound until a formal contract is exchanged.But it is now well settled that when an arrangement is made 'subject to contract'(see Rossdale v Penny)or 'subject to the preparation and approval of a formal contract'(see Winn v Bull) and similarexpressions, it will generally be construed to mean that the parties are still in a state of negotiation anddo not intend to be bound unless and until a formal contract is exchanged.We say 'generally' because in exceptional circumstances, the 'subject to contract' formula will not be sointractable as always and necessarily to prqvent the formation of a contract. (see, for example,Richards (Michael) Properties Ltd v Corp of Wardens of St Savious's Parish Southwark, Alpenstow Ltd vRegalian Properties pic, Filby v Hounsell)."Having said that, however, we consider that the case which is especially relevant to the facts andcircumstances of the present appeal is Crossley v Maycock where Sir George Jessel MRsaid:If the agreement is made subject to certain conditions then specified or to be specified by the partlymalting it or his solicitor, then until those conditions are accepted, there is no final agreement such asthe court will enforce.A letter of intent would ordinarily have two characteristics, one, that it will express an intention to enterinto a contract in future and, two, it will itself create no liability in regard to that future contract.We would add that we have not overlooked the fact that the plaintiff had, after the receipt of the letterof 19 September 1984, conducted itself as if it considered that a contract binding in law had beenconcluded, as evidenced by the steps it had taken in that direction to which I've have referred.However, this does not really assist in deciding the question of construction of the letter of 19 September1984 for reasons we now give.

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Where the words in a letter of intent clearlyrefers to the execution of a contract being afuture event, or where the parties clearlyconduct themselves on the footing that nocontract has been concluded, the letter ofintent cannot be regarded as a contract.

On the other hand, where the letter of intentindicates that both parties intend that it shouldbe enforceable, and it does not refer to theexecution of a formal contract in the future,the letter of intent can constitute anagreement between the parties.

[[1994] 4 CLJ xxxviii, LETTERS OF INTENT: INTENDING THE UNINTENDED?, Pawancheek B Marican]

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Quantum MeruitWhen one party has performed services and/or works but there hasbeen no agreement on the price or payment terms. The Contractoroften commences the works on the basis of, among others, a letter ofintent.

Quantum Meruit means the amount he deserves or what the job isworth. It is a claim for a payment for the work executed where noprice has been agreed or quantified, and usually a claim beingassessed in a reasonable sum, reasonable remuneration, fairmarket rates, fair commercial rates or on similar terms. [What is aQuantum Meruit Claim?; The Entrusty Group]

Quantum Meruit is essentially in restitution for unjust enrichment

Cases: British Steel Corporation v Cleveland Bridge & Engineering CoLtd (1984) 1 All ER 504; Ban Hong Joo Engineering & Construction SdnBhd v Standard Quality Sdn Bhd (2011) 9 MLJ 117; Syarikat BinaanUtara Jaya v Koperasi Serbaguna Sungai Gelugor Bhd (2009) 1 CLJ786

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Claim for quantum meruit in restitution is usuallypresented as an alternative claim if indeed there is nocontract. It is a quasi-contractual claim under whichthe claimant merely seeks to be compensated for anamount representing the reasonable sum of the workwhich he has already completed.

Section 71 of the Contracts Act 1950 [Act 136]/Quantum Merit

Where a person lawfully does anything for anotherperson, or delivers anything to him, not intending todo so gratuitously, and such other person enjoys thebenefit thereof, the latter is bound to makecompensation to the former in respect of, or torestore, the thing so done or delivered.

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Section 71 of Act 136 is referred to should there be aclaim for any works done pursuant to LOI. However,such claim may only be awarded based on thefollowing conditions:

i. The works must be lawful;

ii. The works must be done for/ delivered to -the Government;

iii. Not intending to do so gratuitously; and

iv. The Government enjoys the benefitthereof.

[See New Kok Ann Realty Sdn. Bhd. v. D & CBank [1987] 2 MLJ 57]

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Even if both parties expect a formal contractto eventuate, but one party requests the otherto commence work, the work done is treatedas having been done under the expectedcontract, and if no contract is entered into,the party carrying out the work at the requestof the other, can claim payment of areasonable sum for work done under theprinciple of quantum meruit.

[[1994] 4 CLJ xxxviii, LETTERS OF INTENT: INTENDING THE UNINTENDED?, Pawancheek B Marican]

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Ayer Itam Tin Dredging Malaysia Berhad v. YCChin Enterprise Sdn. Bhd. [1994] 2 AMR 32:1631,the learned Judge, Edgar Joseph Jr SCJ referredto judgment of Judge Fay in Turriff ConstructionLtd. and Turriff Ltd. v. Regalia Knitting Mills Ltd.[1971] 9 BLR 20 (QBD).

In Ayer Itams case the Plaintiff has done somework for the Defendant and therefore wasentitled for quantum meruits claim.

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EXAMPLE

MJM: Tuntutan kos perbelanjaan oleh UEMGroup Berhad akibat penarikan balik tawarankonsesi projek jambatan Pulau Pinang Ke-2(2013)

Based on series of letters between GOM andUEM there is nowhere stated that UEM willexecute the Work stated in the LOI at theirown risk, cost and expense and that the GOMwill not be responsible. Therefore, AGC was ofthe view that section 71 CA 1950 (QM) isapplicable.

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4 conditions necessary to establish a claim under Section 71 Contract Act 1950:

a. The work was lawful;

b. The said work was done for another person (the employer)

c. He did not intend to do it gratuitously

d. His undertaking of the work was such that the other person (i.e the employer) enjoyed the benefit of the same

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Letter of award/Letter of Acceptance

What is Letter of Award/Letter of Acceptance (LOA)?

Written confirmation of an award of a contract by theGovernment to the contractor stating the acceptanceby the Government and the contract sum agreed. Ithas legal binding effect.

The format of the LOA is provided for in the SPP 5/2007.

a) It is to affirm the acceptance of the offer based ontender etc

b) It is important that the agreed terms and conditionsagreed must be spelt out clearly in the LOA.

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SAMPLE OF LOA SPP 5/2007

LETTER OF ACCEPTANCE OF TENDER

(WORKS)

CONTRACT NO.:

......................... 20.......

or the under-mentioned works entered into on theday of ...................... 20... by the undersignedparties, refers to this Letter of Acceptance ofTender which is and shall be read and construed aspart of the said Contract.

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KERAJAAN ..........................

LETTER OF ACCEPTANCE OF TENDER

Sir,

Tender For .................................................................... You are hereby informed thatyour Tender for the above-mentioned Works in the sum of Ringgit .................................. i.e RM................. is accepted subject to the terms, conditions and stipulation of the Documentsupon which the Tender is based and of this Letter.

2. You will be required to execute in due course a formal Contract Agreement. However,

until the formal Contract Agreement is executed your tender together with this Letter of

Acceptance shall constitute a binding Contract between yourselves and the Government.

3. You are required to choose a mode of Performance Bond from either one of thefollowing:

(i) Bank Guarantee/Islamic Bank/Bank Pembangunan Malaysia Berhad; or

(ii) Finance Companys Guarantee; or

(iii) Insurance Guarantee/Takaful; or

(iv) Retention Money {being a 10% deduction from every interim payment until it amounts to5% of the Contract Sum.

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4. The date for possession of the site, as referred to in the Condit ions of Contract, shall be.......................... However, you can only commence work after submission to the Government or theSuperintending Officer the following:

(a) Insurance Policy for Public Liability (i.e insurance against injury to persons and damage to property)of an insured value not less than RM .........................

(b)Works Insurance Policy: RM

(c) Registrat ion numbers of employees under the Social Security Scheme (SOCSO). However, for thepurpose of commencement of the Works and no other, you may provide to the Superintending Officerthe Cover Notes of the said insurance policies and the receipts of premium paid thereof. You arerequired to deposit the relevant insurance policies (if not already submitted) in accordance withparagraph 4 above, within thirty (30)days after the cover notes are provided.

5. If you choose the mode in paragraph 3(i) or 3(ii) or 3(iii), you have to provide the performance bondto the value RM . and if you fail to provide the Performance Bond as in Paragraph 3(i) or3(ii) or 3(iii), the Government shall automatically impose the Retention Money mode.

6. Failure to commence the Works within two (2) weeks from the date of possession of the site shallresult in termination of the Contract as st ipulated in Clause 51(b)(i) of the Contract terms.

7. Based on the Tender Complet ion Period of .......... days/weeks/months*, the Date of Complet ion forthe whole Works under this Contract is

8. This letter is sent to you in duplicate. Please return the original, duly signed and witness, whereindicated, to this office within seven days from the date of this letter.

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LETTER OF ACCEPTANCE OF TENDER(SUPPLY/SERVICE)

Dear Sir,...............................................................*1. (A) With reference to your tender for the above mentioned *Supply/Serv ices, the Governmentof Malaysia hereby is pleased to inform you that the Government has agreed to accept yourtender.

*1. (B) With reference to your tender for the above mentioned *Supply/Services, and negotiationsheld between the Government's representatives and yourselves on the .................. at................................. whereby it was agreed by both parties that the terms as contained in theAnnexure hereto be deemed to be part of the terms of tender and which terms of tender shall, tothe extent of incorporating the terms as contained in the Annexure, be modified, theGovernment of Malaysia hereby is pleased to inform your that the Government has agreed toaccept your tender as modified.

2. With the Government's acceptance of your tender you are advised that there is now a bindingContract between the Government and yourselves. A formal Contract will subsequently beexecuted incorporating all the terms of tender as modified. You will be notified by theGovernment when the Contract Documents are ready for your signature.

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3. Please be reminded that in accordance with the *Conditions of Tendering yourare required to do the following:

*3.1 to deposit with the Government, a Performance Bond in the form of anirrevocable Bank Guarantee/Finance Companys Guarantee/ InsuranceGuarantee from a Bank/Finance Company /Insurance Company established inMalaysia in the amount of ............................ being two and a half percent (2.5%)or five percent (5%) of the Tender Sum within fourteen (14) days from the date ofthis letter;

*3.2 to deposit with the Government, Insurance Policies and within............................. from the date of this letter and to produce for inspection ofreceipts for the premium paid;

*3.3 ........................................................................................... Any failure to complywith the requirements of paragraph 3 within the stipulated time, unless expresslywaived by the Government, will render this acceptance revoked andthenceforth the Government shall not be liable to you in any way whatsoever.

*4. The date for supply/services, as referred to in the Conditions of Contract, shallbe ...................... but no supply/services under this Contract shall commenceunless and until you have complied with the provision of paragraph 3 above.

*5. This letter is sent to your in *duplicate/triplicate. Please return *original/andsecond copies duly signed and witnessed where indicated to this office within.......... days from the date of this letter and retain one copy.

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Yours truly,................................(Signature of Officer)Name in Full : ..........................Designation : ..........................

The undersigned hereby acknowledges receipt of the above letter, a copy ofwhich has been retained and confirms that *no terms, conditions or stipulationsadditional to those contained in the Tender Table Documents have beenimposed by the issue of the said letter/the contents of paragraph 1(B) aboveconstitutes the totality of the undersigned's tender.

..................................... ...............................Signature Of Contractor Signature of WitnessName in Full : ............. Name in Full : ................Address : ............. Address : ............................. ............................. ............................. ................Contractors' seal or chopDate : ....................... Date : .......................*Delete/Modify/Add Wherever Necessary

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Issue: SPP 5/2007

WORKS - You will be required to execute in due course a formalContract Agreement. However, until the formal Contract Agreementis executed your tender together with this Letter of Acceptance shallconstitute a binding Contract between yourselves and theGovernment.

SUPPLY/SERVICE - With the Government's acceptance of your tenderyou are advised that there is now a binding Contract between theGovernment and yourselves. A formal Contract will subsequently beexecuted incorporating all the terms of tender as modified. You willbe notified by the Government when the Contract Documents areready for your signature.

Does it really necessary to have a written contract after theexecution of the contract pursuant to the above LOA?

Based on the above statement, the contract is concluded between the partiesand written contract becomes a formality.

Discrepancies/inconsistencies between the LOA and the contractthe LOA .

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Memorandum of Understanding (MOU)

The term MOU by itself connotes that it is only amemorandum witnessing the mutualunderstanding or intention of the parties to doa certain act or to enter into a certainarrangement, usually upon the occurrence ofcertain other events.

It is usually a preparatory agreement forpreliminary arrangements and therefore it isgenerally not treated as a valid andenforceable contract that enjoys the bindingeffect under the law.

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A memorandum of understanding (MoU) is a documentdescribing a bilateral or multilateral agreement between twoor more parties. It expresses a convergence of will betweenthe parties, indicating an intended common line of action. It isoften used in cases where parties either do not imply a legalcommitment or in situations where the parties cannot createa legally enforceable agreement. It is a more formalalternative to a gentlemens agreement.

Whether or not a document constitutes a binding contractdepends only on the presence or absence of well-definedlegal elements in the text proper of the document (the so-called four corners). The required elements are: offer,consideration, intention (consensus ad idem), andacceptance.

It also depends on the intention of the parties at the time ofsigning it. The Court will apply the general rules of constructionto unveil the true intentions of the parties. Here, the Courtsduty is to construe the documents as a whole and todetermine from its language and any other admissibleevidence its true nature and purport.

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Sia Siew Hong v Lim Gim Chian (1995) 3 MLJ 141

Gopal Sri Ram JCA held that the label of thedocument chosen by the parties does not bindthe court. The court has to construe the natureand purport from its language and otheradmissible evidence to decide the relationshipbetween the parties.

Ismail Mohd Yunos v First Revenue Sdn Bhd (2000)5 MLJ 42 based on the construction of thedocument the court held that the MOU is binding.

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Abdul Rahim bin Syed Mohd v RamakrishnanKandasamy (Wan Ahmad Azlan bin Wan Majid &Anor, interveners) and another action [1966] 3MLJ 385 at pp 400-401 Visu Sinnadurai J, said:

It appears to me that considering thememorandum of understanding as a whole,and in particular, in considering the objectiveof the MOU, and particularly the 'genesis of theagreement', and the intention of the parties atthe time of the signing of the memorandum ofunderstanding, the memorandum ofunderstanding is not a legally bindingagreement. It is no more than an agreement tonegotiate, and as such, it is unenforceable.

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Lim Hong Liang & Anor v Tan Kim Lan @ Tan Kim Leng & Anor [1997] 5 MLJ 157

In this case the MOU could be div ided into two parts:

(i) it prescribed the introduction of profitable companies (the target companies) to be injected into UCM; and(ii) the intended sharing of benefits consequent to the injection.

The plaintiffs claimed that the MOU was a legally binding contract, and claimed from the defendant'scompensation in respect of breaches of the MOU committed by the defendants. On the other hand, thedefendants contended that the MOU was not a legally binding contract, and as such the plaintiffs hadno enforceable rights.

The MOU prescribed the nomination of the target companies by the defendants and to enter into bonafide negotiations in respect of the sale and purchase agreement with the target companies. This, thedefendants failed to do.

In a nutshell the Court held that:

1. The Courts duty is to construe the documents as a whole and to determine from its language and anyother admissible evidence its true nature and purport.

2. It would then be prudent to consider the terms of the MOU and see whether the parties intended toenter into a legally binding relationship, the breach of which would give rise to enforceable rights asclaimed by the plaintiffs. In other words, the court will have to determine from its language and anyother admissibly ev idence its true nature and purport. In this regard, the admissible evidence to beconsidered would be the CABD, which was agreed to by both parties for the purpose of determiningthe issue as framed.

3. MOU to be subject to a formal contract to be executed by both parties after the finalization of the termsand conditions. Until such time, the MOU is not intended to be legally binding on the parties. In thisrespect, the Supreme Court in Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprise Sdn Bhd [1994]2 MLJ 754 at p 765 said: But it is not well settled that when an arrangement is made 'subject tocontract'(see Rossdale v Denny [1992] 1 Ch 57; (1921) 90 LJ Ch 204) or 'subject to the preparation andapproval of a formal contract' (see Winn v Bull (1877) 7 Ch C 29) and similar expressions, it will generallybe construed to mean that the parties are still in a state of negotiation and do not intend to be boundunless, and until a formal contract is exchanged.

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CONTD

Crossley v Maycock (1874) 43 LJ Ch 379; (1874) LR 18 Eq 180 where Sir George Jessel MRsaid:

I f the agreement is made subject to certain condit ions then specified or to be specified by theparty making it or his solicitor, then until those condit ions are accepted, there is no final agreementsuch as the court will enforce.

It would seem clear from the various clauses referred to by me that the MOU was anagreement to contract or an agreement to negotiate. In this respect, Lord Denning MR inCourtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd & Anor [1975] 1 WLR 297 at p 302held:

. I think we must apply the general principle that when there is a fundamental matter leftundecided and to be the subject of negotiat ion, there is no contract.

In MN Guha Majumder v RE Donough [1974] 2 MLJ 114, the learned judge at p 116 said:

It is a well-established rule that the part ies must make their own contract, and this means thatthey must agree to its terms with sufficient certainty. If the terms are unsett led or indefinite, therewill be no contract (Chitty on Contract (23rd Ed) Vol 1 para 83).

Taking into consideration the totality of the terms and conditions set out in the MOU, theCourt in this case the parties did not intend to create a legally binding contract in view ofthe various approvals that needed to be obtained and the various uncertainties and theprocess off negotiations that needed to be carried out.

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Kam Mah Theatre Sdn Bhd v Tan Lay Soon [1994] 1 MLJ 108 (SC)

The Supreme Court allowed the appeal and held that:

(1) There was no contract at all, because the said document was dependent onthe signing of a formal contract to be further negotiated and approved by bothparties. The prov iso in the said document was very similar to the phrase or formulaof 'subject to contract'. There need not be the very words of the said formula inorder to have the usual effect arising from the use of such formula.(2) The words 'usual terms and conditions' failed to reveal certainty and were tooambiguous. What would be the usual terms and conditions remained largely amatter of conjecture, thus the words would create uncertainty unless a contractcontaining these agreed 'usual terms and conditions' had been signed by theparties.(3) It is settled that the formula of 'subject to contract' gives rise to a strongpresumption of the necessity of a further formal contract and it requires cogentev idence to displace this strong presumption. On the facts of this case, there wascogent ev idence to show that negotiations were still ongoing between theparties, including: (i) the prov ision of the return of the deposit on the failure of theparties signing the contract by 18 March 1989; (ii) the agreement which wassigned by the plaintiff only, containing two more conditions; (iii) there could havebeen a further amended draft of the ultimate agreement to take account ofwithdrawal of the compulsory acquisition over part of] the land; and (iv ) thecorrespondence after the date of the said document.

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Kheamhuat Holdings Sdn Bhd v The Indian Association, Penang

[2006] MLJU 183 COA

In this case Recital 2 and 3 of the MoU provide:

2. And whereas the Association had decided to develop the said land by selling part of it with the priorapproval of the General body at an E.G.M together with the consent of the High Court on termsmentioned herein (hereinafter reffered to as the said proposal)

3. And whereas it is the intention of the parties herein to enter into this Memorandum of Understandingsubject to:

(a) Obtaining the consent of the General body to the said proposal;

(b) Thereafter the consent of the High Court;

(c) A final Agreement being concluded between the parties after their lawyers have studied andadvised on the matter; and

(d) To any amendments that may be made by the Association to the Building plans submitted bythe said Company.

The MoU envisage an agreement to be concluded between the parties and that agreement to be binding onthe parties and not the MoU. Perusing the MoU as a whole, the Court held that the MoU itself subject to a formalagreement which was to be negotiated, prepared and agreed by the parties through their respective solicitors.Therefore, the MoU is not a contract and not legally binding. I t was only and agreement to negotiate.

As long as substantial terms and conditions remained to be agreed and fulfilled then there cannot be aconcluded or enforceable contract as stated in the case of Kam Mah Thetyre Sdn Bhd v Tan Lay Soon (1994) 1MLJ 108 (SC) and Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprises Sdn Bhd (1994) 2 MLJ 754 (FC) (inAyer Hitams case and the present case both the LOI and MoU require certain conditions to be fulfilled andone of the conditions is to execute formal agreement. Thus, the court in both cases concluded that the LOI andMoU are nothing more than a basis for negotiations and the parties do not intend to be bound by the them untila formal agreement is executed).

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Contract Implementation (CI) - Duration

Contract must be for a definite period. However,its duration varies from one contract to another.

Nevertheless, it must for a reasonable periodtaking into consideration, among others, thenature of the contract, implementation period,amount of investment spend by the parties as wellas return of investment expected at the end ofthe contract period.

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Extension of time

GR: The company (the contractor) is under a strict dutyto complete the works on time unless he is prevented orhindered from doing so by the Government (theemployer) (e.g. delay in giving site possession). Failure tocomplete the work within the stipulated time will exposethe contractor to action taken by the employer against thecontractor such as LAD and/or common law damages or ifthe breach is serious enough the contract may beterminated.

However, if the employer agrees to extend time forcompletion, the employer effectively fixes a new or reviseddate for completion and in the process preserves thecontractors obligation to complete the works under thecontract by the said date.

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Basic principle: extension of time can be given only ifthere is an express provision which permits theemployer to do so.

Example of contracts that provide clause on extensionof time are: clause 23.0 PAM Contract (WithQuantities), JKR Forms 203 and 203A (Rev 1/2010),clause 49.0 of the PWD Form DB (Rev 1/2010), clause44 of the IEM.CE 2011 Form and clause 24 of the CIDBForm (2000 edn).

In summary, these contracts provide for matters suchas, the extent of the contract administrators power toextend time, the relevant events for which extension oftime may be given, the procedures applicable,assessment and granting of extension of time etc

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Issue:

What if there is no express provision thatallows EOT to be given?

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Treasury has issued Surat Arahan Perbendaharaan (SAP)dated 16 Mei 2007 which does not allow extension of time tobe given to the contractor.

Nevertheless, an exception is given only in cases whereby thedelay is caused by something which is beyond the control ofthe contractor such as:

a) Force Majeure

b) Keburukan cuaca luar biasa;c) Kelewatan/kerosakan yang disebabkan oleh mana-mana

perkara luar jangka yang disebut dalam kontrak;

d) Arahan yang diberikan oleh Pegawai Penguasa yangmengakibatkan penangguhan projek;

e) Kelewatan disebabkan oleh Pegawai Penguasa berpuncadaripada arahan, lukisan, penamaan subkontraktor/pembekalyang diperuntukkan dalam kontrak atau kelewatan yangdisebabkan oleh Kerajan dalam melaksanakan kerja kemahiranyang tidak menjadi sebahagian daripada kontrak;

f) Kelewatan memberi milik tapak bina mengikut kontrak;g) Apa-apa tindakan berpunca dari penyatuan pekerja-pekerja

setempat atau mogok atau tutup pintu; atau

h) Kontraktor tidak berupaya kerana sebab-sebab yang tidakdapat dikawal dan diramal olehnya dengan munasabah.

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Contract Administrator should pay heed to therule set that that in the absence of clear words tothe contrary, the extension of time should only begranted in respect of events which appear likelyto cause a delay in the completion or actuallydelay completion, and not for those which merelydisrupt the works.

Hounslow London Borough Council v TwickenhamGarden Developments Ltd (1971) Ch 233 at 263

Syarikat Tan Kim Beng & Rakan-Rakan v PulaiJaya Sdn Bhd (1992) 1 MLJ 42

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The onus is on the contractor to substantiate hisclaim, it is necessary for the application to be ascomprehensive as possible by including details suchas, the cause(s) of the delay, the appropriatecontract reference, the details of the effect of thedelay on the work programme and the progress ofthe delay, the estimated length of the delay, thesteps taken by the contractor to minimise or mitigatethe delay and an estimated of the extension of timerequired.

This should be supported by documents,contemporaneous records, details etc to makethe application complete, accurate andcomprehensive so as to enable the contractadministrator to undertake a proper assessment anddecide on the said application.

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DELAY One of the contractors primary obligations is to complete the works under the

said contract by the date for completion stipulated therein (or any rev iseddate).

Should the contractor fail to do so and he is not contractually entitled to anyextension thereto, he is regarded to be in culpable delay and consequently inbreach of contract.

The contractor may face claims for damages from the employer in regard to theloss and/or expense caused to him consequent from the said delay. Theemployer may recover such damages:

(a) pursuant to any express contractual term; or

Express prov ision of the contract: Liquidated Ascertained Damagesand Section 75 CA 1950

(b) under the law (statutory prov ision and common law)

Express prov ision of the law/common law Contract Act 1950: Section74 CA 1950

Termination of contract may also be one of the consequences if the delay is aserious repudiatory breach.

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LIQUIDATED ASCERTAINED DAMAGES

Based on Surat Arahan Perbendaharaandated 18 Mac 2011, Liquidated AscertainedDamages will be imposed to all contractor(including Bumiputera contractors).

Financial contractual remedy: The general ruleis that the financial contractual remedy canbe recovered only if there is an express clausein the contract permitting the same. The sumclaimed must be genuine pre-estimate of theloss and/or expense and no more.

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Procedure under JKR Contract 2010

Project Director (PD) can issue Certificate ofNon Completion (CNC) immediately when PDis of the opinion that the Works ought to havebeen completed and the Contractor failed tocomplete the Work;

Upon issuance of CNC, LAD can be imposedwithout the need for PD to issue prior notice.LAD can be imposed when the PD issues CNC.Issuance of CNC constitutes sufficient noticeunder section 56(3) of Contract Act 1950. This isin line with the Courts decision in the case ofHock Huat Iron Foundry v Naga Tembaga SdnBhd (1999) 1 CLJ 89

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Section 75 Contract Act 1950

When a contract has been broken, if a sum isnamed in the contract as the amount to be paidin case of such breach, or if the contract containsany other stipulation by way of penalty, the partycomplaining of the breach is entitled, whether ornot actual damage or loss is proved to have beencaused thereby, to receive from the party whohas broken the contract reasonablecompensation not exceeding the amount sonamed or, as the case may be, the penaltystipulated for.

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SS Maniam v The State of Perak (1957) MLJ 75; Wearne Brothers (M) Ltd vJackson (1966) 2 MLJ 155; Linggi Plantations Ltd v Jagatheesan (1972) 1 MLJ89

The effect of section 75 CA 1950 is that the Plaintiff is disentitled fromrecovering simpliciter the sum fixed in the contract whether as penalty orliquidated damages and must prove the damages suffered by himunless the sum is a genuine pre-estimate.

The above interpretation of section 75 CA 1950 was confirmed by FederalCourt in the case of Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy(1995) 2 MLJ 817 and Johor Coastal Development Sdn Bhd v ConstrajayaSdn Bhd (2009) 6 AMR 733.

The court in the Selva Kumars case further added that where the courtfinds it difficult to assess damages for the actual damage as there is noknown measure of damages, and yet the evidence clearly shows somereal loss inherently not too remote, the words in section 75 in question(i.e. whether or not actual damage or loss is proved to have beencaused thereby)will apply. In any event the damages awarded must notexceed the sum named in the contractual provision.

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The above cited cases are not applicable forconstruction contract involving housing which isgoverned under Housing Development (Controland Licensing Act) 1966 (Act 118).

In such cases, the right to be paid liquidated andascertained damages stipulated in theagreement arise automatically once the failureto hand over possession by the developer andthere is no obligation on the part of thepurchaser to give notice to the former the same.

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Due to the decision of the Federal Court, there is a trend todraft and incorporate into the contracts, express provisionsmeant to overcome the effects of the said decision which isinimical to the employer.

E.g.: Clause 45.3 of the PWD Form DB (Rev 1/2010)

The Liquidated and Ascertained Damages stated in Appendix 1 shall be deemed to be areasonable amount of loss which the Government will suffer in the event that the Contractor is inbreach of this clause. The Contractor by entering into this Contract agrees to pay theGovernment the said amount(s) if the same become due without the need of the Governmentto prove his actual damage or loss.

It is worth to take note that although such provisions are valid iffreely entered into by the parties (see Phillips Hong Kong Ltd vAttorney General of Hong Kong (1993) 61 BLR 41), these arehowever strictly interpreted by the courts with the probableuse of the contra proferentem rule of constructions.

In Johor Coastals case, the majority decision left the possibilitythat the parties may contract out of section 75 CA 1950 byusingclear provision to this effect.

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Express provision of the law (Contract Act 1950) Section 74 Contract Act 1950

(1) When a contract has been broken, the party who suffers by the breach isentitled to receive, from the party who has broken the contract, compensationfor any loss or damage caused to him thereby, which naturally arose in theusual course of things from the breach, or which the parties knew, when theymade the contract, to be likely to result from the breach of it.

(2) Such compensation is not to be given for any remote and indirect loss ordamage sustained by reason of the breach. Compensation for failure todischarge obligation resembling those created by contract

(3) When an obligation resembling those created by contract has beenincurred and has not been discharged, any person injured by the failure todischarge it is entitled to receive the same compensation from the party indefault as if the person had contracted to discharge it and had broken hiscontract.

Illustration:

(f) A contracts to repair Bs house in a certain manner, and receives payment inadvance. A repairs the house, but not according to contract. B is entitled torecover from A the cost of making the repairs conform to the contract.

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Main obligation of the parties

Employers Obligations

Types:

Express Obligations as provided expresslyby the contract

Implied Obligations

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IMPLIED OBLIGATIONS Full co-operation with contractor

This necessitates the employer discharging his obligations intime as prescribed in the contract (if stated), or within areasonable time (if time not stated). E.g. acquisition of land,obtaining planning permission/other statutory consents,giving site possession and access, furnishing necessaryinformation, details or plan, the issuing of relevantinstructions, approvals or consents etc to the contractor.

Non-hindrance of the contractor

The employer should not hinder the contractorsperformance under the contract. E.g. of hindrances includeordering of additional variation works, failing to giveconsents or approval in time, delay or failure to effectpayment, failure to appoint contract administrator.

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Obligations of appointment and nominations

It is generally implied that in a construction contract, theworks thereunder will be supervised by a qualifiedperson; the breach of this obligation is a statutoryoffence (by-laws 5 and 28 Uniform Building By-Laws 1984).

Should the contract administrator so appointed ceases toact or becomes incapable to act, it is the obligation ofthe employer to appoint a replacement forthwith.

In the event that the contract administrator on recordfails to perform satisfactorily and this has a materialimpact on the execution of the contract, the employerhas an obligation to timeously dismiss and appoint asuitable replacement.

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Site possession and access

The employer is obliged to give the contractorpossession and sufficient access to the site.

In giving the contractor site possession, the employer isregarded to have given the contractor what amounts inlaw to be a contractual licence to occupy the site forthe purposes of the contract and no more and subjectto the terms of the contract.

Being a mere contractual licence, it can be revoked bythe employer following the contractors breach of itsterms or upon its lapse.

Otherwise, any interference by the employer with thecontractors possession will be a breach of contractwhich entitling the contractor to the applicableremedies (Tan Hock Chan v Kho Teck Seng (1980) 1 MLJ308)

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The licence given by the employer should be free fromany encumbrances which would affect the contractorsexecution of the works under the contract. The employermust give the contractor sufficient possession of site toallow him to perform his work as envisaged in asatisfactory manner and unimpeded by others.

If there is any restrictions to the said licence, these shouldbe expressly spelt out.

The failure of employer to give effective site possessionentitles the contractor to rescind the contract and claimfor damages (see Federal Court decision in Tan HockChan v Kho Teck Seng (1980) 1 MLJ 308 squatters areregarded as encumbrances).

Alternatively, the contractor can accept late possession,i.e. he affirms the contract but is still entitle to additionaltime and costs claims (subject to any express provisions inregard thereto in the contract).

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Piecemeal site possession?

Whittal Builders Co Ltd v Chester le Street DC (1987)40 BLR 82 held that the contractor must be givenpossession of the whole site.

Exception: The contract stipulates expressly to thecontrary (e.g. clause 21.3 PAM Contract 2006 (WithQuantities) OR the parties so agree mutually.

Access

The contractor has an implied right of access to thesite in so far as access is controlled by the employeri.e. the employer is obliged to allow full andunrestricted access to the site via an appropriateroute.

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Handover of documents

The employer is under obligation to prepare andhand over to the contractor a number ofdocuments to enable him to commence hisworks under the contract.

E.g. : letter of delegation of power, dulyexecuted and stamped contract documents, aset of construction drawings (other than designand build) etc

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IMPLIED OBLIGATIONS OF CONTRACTOR

To undertake all work which is indispensably necessary for thecompletion of what is expressly stipulated (Williams v Fitzmaurice(1858) 3 H & N 844).

To execute all his work under the contract in a proper andworkmanlike manner using reasonable skill and care (Hancockv BW Brazier (Averley) Ltd (1966) 2 All ER 901)

If the contractor undertakes to design, it must be fit for theirpurpose (M High Mark (M) Sdn Bhd v Patco Malaysia Sdn Bhd(1985) 28 BLR 129).

Even where the contractor merely undertakes works designedby the employer he is also under an implied obligation to warnthe latter of any defects or shortcomings in the design of whichhe becomes aware (Brunswick Construction Ltd v Nowlan(1974) 21 BLR 27).

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IMPLIED OBLIGATIONS OF CONTRACTOR

Implied liability to the employer in respect ofthe works of subcontractors and suppliers

Implied obligation to carry out the works byemploying safe working methods (Lim SeowWah & Anor v Housing & Development Board &Anor (1991) 1 MLJ 386)

To warn the employer of any breaches or non-conformances with the applicable laws orregulations that he becomes aware of.

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VARIATIONS

Owing to the inherent nature of a constructioncontract, the precise scope that needs to beundertaken by the contractor may not becapable of being ascertained prior to the awardof the contract and therefore not provided for inthe contract.

There may be a further necessity for extra ordifferent type of work to be executed by himduring the currency of the contract when therequirement for the same becomes apparent.

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NATURE & SCOPES Variation is generally defined to mean any change to the works as

specified originally in the contract.

Item specifically provided for in the contract are not variations and thecontractor cannot recover extra payment for these although he may nothave thought at the time of contracting that it would be necessary for thecompletion of the contract.

In deciding whether an item of work constitutes a variation or not, the vitalquestion to ask is whether or not the parties intended at the time ofentering the contract for the item in question to be part of the contractscope of works and the contract price.

In Russell v Viscount Sa Da Bandeira (1862) 13 CBNS 149, the works whichare indispensably necessary to give effect to the parties intention at thetime of contracting are generally not considered to be strictly variations.

Thus, it is trite that whether any change made to the works constitutes alegally valid and enforceable one has to be established in relation to theparticular contract provisions and the applicable common law principles.

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Categorisation of variation based on legal basis:

Common law extra-contractual; variations crystallise outside the ambitof the particular contract but under the general corpus of the law e.g.quantum meruit under section 71 Contract Act 1950

Contractual arises under specific express provision

Categorisation of variation based on nature

Additions Omission Hybrid (additions + omission)

Categorisation of variation based on consequences and effects

Financial Effect Time Implication Hybrid (Financial + Time)

Categorisation of variation based on identity of the initiator/source

Employer Contractor

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CONTRACTUAL VARIATION For a variation to be tenable in law it must be

contractually valid. The consequences of a valid variationare that the duty of the contractor to comply with it.

Court in R v Peto (1826) 1 Y & J 37 held that neither theemployer nor the contract administrator (as the agent ofthe employer) had an implied right or authority to ordervariations or to alter the contract in any way (StockportMetropolitan Borough Council v OReilly (1978) 1 LloydsRep 595; Tan Eng Hoe v Liang Hooi Kiang (1961) MLJ 119).

Where such an order is given and acted upon by thecontractor, the employer is contractually not liable to payfor the works done unless he authorised or ratified hiscontract administrators act or unless a promise to paycan otherwise be implied (Rusell v Viscount Sa daBandeira (1862) 13 CB (NS) 149; section 135 CA 1950).

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For a variation to be valid, it must meet both theprocedural and legalities requirements.Procedurally, the usual requirement is the ordermust be in the form of instruction issued by anauthorised person (Taverner & Co Ltd vGlamorgan CC (1941) 57 TLR 243; Antara ElektrikSdn Bhd Sdn Bhd v Bell & Order Bhd (2002) 3 MLJ321). Preferably the order for variation is in writtenform. The authorised person is empowered eitherunder the contract or through formal letter ofdelegation of power issued by the employer afterthe award of the contract.

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ISSUE

What if VO was given without authorisation by the Government?

How to remedy the situation?

Ratify the contract administrators act or byconduct (e.g. a promise to pay)

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Any changes ordered must not render the varied worksmaterially and substantially different from the workscontracted for (Scope of Work). Otherwise, it can beconsidered as cardinal changes. Such cardinal changescan be in the form of financial changes, physical changes,or a combination of the two (Wegan Constructions Pty Ltd vWodonga Sewerage Authority (1978) VR 69; Yong Mok Hin vUnited Malay States Sugar Industries Ltd (1967) 2 MLJ 9).

It is pertinent to note that since a cardinal change isinvalid by law, there is no duty of compliance on thecontractor. Should the contractor nevertheless carry outsuch works, the contractual rates governing the same arenot applicable and the contractor has a right to new rates(Ettridge v Vermin Board of District of Murat Bay (1928) SASR124; Sir Lindsay Parkinson & Co v Commissioners of Works &Public Buildings (1950) 1 All ER 208).

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To comply with Arahan Perbendaharaan (AP)which provide for extend of variation to beallowed and its procedures.

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Should the variation fall under thecontractual scope of variations and theissue of a valid variation order has beenmade to the contractor, contractor isobliged to comply with the order unless thecontractor challenges the variation orderor officially registers his objection to it.

Failing to comply amounts to breach ofcontract and the employer may determinethe contract should the contractorpersistently refuse to comply with the order.

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Properly ordered variations which have been carried outby the contractor as instructed have to be measured andvalued by the contract administrator before thecommensurate payment is disbursed to the former.

The valuation made is either based on a specific formulaexpressly stipulated in the contract; mutually agreed onspecific formula or based on the common law principlesfor the valuation of the varied work (Thorn v LondonCorporation (1876) 1 App Cas 120).

The court in case of Canterbury Pipelines v ChristchurchDrainage Board (1979) 16 BLR 76 held that for varied workwhich falls within the ambit of the contract, this must bevalued using the formula/rules stipulated in the contract,there being no right of refusal or election by neither part.However, should such a formula or rule be expresslyabsent or inapplicable the contractor must be paid areasonable sum established by negotiations, agreementetc).

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ISSUE

What if the contractor alleged that there isvariation when the Government has neverissued the VO?

Contract Administrator needs to carefullyscrutinise the details of the allegation madebefore authorising the VO and subsequentlymaking payment pursuant to VO.

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EXAMPLE OF VARIATION CLAUSE The more popular method of undertaking variations is

through the inclusion of a contractual mechanism in theform of a variation or change clause in the constructioncontract itself. To be effective, such a clause shouldspell out clearly the relevant substantive and proceduralmatters inclusive of the precise scope of the provision.Generally, these provisions are structured in terms of theextent of the work that can be varied, the party orparties entitled to change, the party or partiesempowered to order the variation, the procedurepertaining to the implementation of the change, thestatus and effect of valid and invalid variation orders,the scheme for the valuation and payment for thevariations ordered, the recovery of consequential costsand time entitlements (Blue Circle Industries Plc vHolland Dredging Co (UK) Ltd (1987) 38 BLR 40; SimplexConcrete Piles Ltd v St Pancras Borough Council (1958)14 BLR 80). Any shortcoming or deficiency in the above-mentioned provision may compromise its effectivenessand enforceability

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Standard Form of Design and Build Contract PWD Form DB(Rev1/2010)

Clause 23 (Variations)Clause 24 (Valuation of Variations)

Standard Form Of Contract To Be Used Where Drawings AndSpecifications Form Part Of The Contract P.W.D Form 203(Rev1/2010)

Clause 24 (Variations)Clause 25 (Valuation of Variation)

Standard Form of Contract To Be Used Where Bills OfQuantities Form Part Of The Contract P.W.D. Form 203A (Rev1/2010)

Clause 24 (Variations)Clause 25 (Valuation of Variation)

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PAM Contract 2006 (With/Without Quantities)

Clause 11 Variations, Provisional and Prime Cost Sums

Conditions of Contract for Construction for Buildingand Engineering Works Designed by the Employer Multilateral Development Bank HarmonisedEdition June 2010 General Conditions (FIDICAgreement)

Clause 13 Variations and Adjustments

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Land Swap - Privatisation Agreement

Clause 12.5 Variation and Modification to theDevelopment

12.5.1 Notwithstanding anything herein contained in thisAgreement, in the event that any changes to theDevelopment are required by virtue of any requirement ofthe Relevant Authority beyond the control of the Developerand Datuk Bandar, the Parties shall re-negotiate in goodfaith with the view of agreeing to the amendments,modifications, variations or adjustments to the Parcels of theDevelopment, the Construction Period or Datuk BandarsConsideration, failing which either party may refer this matterto the Dispute Resolution Committee as stipulated in Clause19.

12.5.2 The Parties hereby agree that all costs incurred fromsuch changes shall and form part of the Gross DevelopmentCosts. [Valuation of Variation Clause]

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Privatisation Agreement - in Respect of Building Maintenance SupportServices for Government Building

Clause 4.2 Alteration/Variations

(1) The Government may alter or vary any part of the Contract Building or theInstalled Facility may result in substantial change to the scope of the Services orany of the TRPI, Provided that the Government shall give written notice to theConcession Company of any such alteration and provide such information asthe Concession Company may reasonably require to enable the ConcessionCompany to evaluate the variations to the Services, the revised operation of aContract Building affected thereby to comply with the Concession Companysobligation under this Agreement.

(2) Within thirty (30) days of receipt of a notice pursuant to Clause 4.1 theConcession Company shall prepare proposal at its own cost and expensesetting out:

(a) the scope of the Revised Services; and

(a) the adjustments to the Fees, if any, to reflect theincreased/decreased costs to the Concession Company in providingthe Revised Services and furnishing the justification of suchadjustments together with the supporting documentation thereof;

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(3) As soon as practicable following receipt by theGovernment of the Concession Companys proposal pursuantto Clause 4.2(2) the Government and the ConcessionCompany shall negotiate on the Revised Services and the costthereof and the Concession Company shall supply to theGovernment such further or other information as theGovernment may require. [Valuation of Variation Clause]

(4) If the Parties are unable to reach agreement pursuant toClause 4.2(3) within thirty (30) days of receipt by theGovernment of the Concession Companys proposal pursuantto Clause 4.2(2), the matter shall be referred for resolution tothe Dispute Resolution Company pursuant to Clause 13.1.

(5) Upon approval by the Government or the resolution of theDispute Resolution Committee is passed pursuant to Clause13.1 of the Agreement, the Parties shall comply with thedecisions pursuant to Clause 4.2(3) or Clause 4.2(4) as the casemay be.

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SECURITY OF IMPLEMENTATION

As a means of mitigating the risk of the contractorsfailure to perform the contract as envisaged,employers frequently require the contractor toprovide as a condition precedent to thecommencement of work under the contract, securityfor due performance of his said obligations.

Various other securities against the contractorsparticular failures in obligation such as guaranteesand bonds covering the performance, design,maintenance, retention sum, labour and materials

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Performance bonds remain the most preferredchoice.

Performance bond whenever used are mainly in the form ofbank guarantees although insurance guarantees may beacceptableto some employers.

It is an instrument guaranteeing the employer the financialviability of the contractor and his ability to perform hisobligations under the contract.

2 types of Performance Bond:I. ConditionalII. Unconditional

Synonymous with a default bond, conditional bond the suretyonly becomes liable upon the proof of a default or breach ofthe principal contract and the employer as the beneficiarysustaininga loss as a consequences thereof

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Unconditional bond also known as on demandbond. In essence, it is a covenant by the surety toindemnify the beneficiary (the employer) merely whena demand or call is made on him by the latter whetheror not there has been a default under the principalcontract (Ho Hup Construction Co Bhd v Governmentof Madagascar and Another Appeal (2011) 3 MLJ 694.

However, the mere labelling of the instrument is notconclusive of its form, categorisation or effect. It ismuch depends on how it is construed by the courts(Mitsubishi Corp & Ors v Sapangar Bay Power Corp SdnBhd & Ors (2009) 9 MLJ 121; Konajaya Sdn Bhd vPerbadanan Urus Air Selangor Bhd (2009) 5 MLJ 263.)

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SPP 5/2007 Form of Performance Bond

Unconditional Bond i.e. to be paid on demandnotwithstanding any contestation or protest bythe contractor or guarantor (bank) or by anythird party and without proof or condition.

Wholly or partially

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Contractors failure to obtain the stipulatedperformance security amounts to a repudiatorybreach of contract with its consequentialramifications.

Accepting the fact that such instruments are noteasily procurable, there is a tendency for mostemployers to expressly permit an alternativ