CHAPTER 4

ASSOC. PROF. Ts. Dr. AZEANITA SURATKON

BFC 31602
 Construction law – definition, legal sources
and categories
 Contract law – definition and source
 Elements of contract
 Discharge of contract
 Remedies for breach of contract
 “The written and unwritten body of rules largely derived from custom and formal
enactment which are recognized as binding among those person who constitute
a community or state, so that they will be imposed upon and enforced among
those persons by appropriate sanctions...” (Curzon, A Dictionary of Law)

 “… a command set by superior being to an inferior being and enforced by

sanction (punishments)…” (John Austin).

 From the definitions above, the following characteristics form the “law”:
 a body of rules or commands set by a Superior being (i.e. the State) to govern
an inferior being (i.e. an individual);
 the rules or commands can be in written or unwritten form;
 the sources of rules or commands are essentially custom and legislation;
 the rules or commands are binding on the members of the community or
state; and
 enforcement is through appropriate sanctions, i.e. fines, imprisonment, etc.
 “Construction Law is neither a legal term of art nor a technical one. It is used to
cover the whole field of law which in one way another, affects the construction
industry”…

 It is used interchangeably with “building law” and “engineering law”. However,

construction law appears to be the correct term to adopt due to its general
acceptance in the industry and its wider scope encompassing the “building law”
and “engineering law”.
 Construction law – definition, legal sources
and categories
 Contract law – definition and source
 Elements of contract
 Termination/discharge of contract
 Remedies for breach of contract
 Basic law that governs & relates to most aspects of human life, e.g.
marriage, sell or transfer property, services, rights, etc.

 The Contracts Act 1950 governs the law of contract in Malaysia

Before Now
(Simple situation) (Complex situation)
Mutual Trust
Mutual Trust +
+ Self respect
Self respect
Legal contract

Evolution of contract (mode/degree) over time

 “O believers! Do not eat up your property among yourselves unjustly;
except it be a trade amongst you, by mutual consent. And do not kill
yourselves [or one another]. Indeed, Allah is to you ever Merciful”. (Al-
Maidah (4) :29).

 Rasulullah SAW said: “Muslims are bound by the conditions they made;
except a condition that legalises impermissible act or invalidates
permissible act.” (Narrated by Tarmidzi).
 Construction law – definition, legal sources
and categories
 Contract law – definition and source
 Elements of contract
 Termination/discharge of contract
 Remedies for breach of contract
 OFFER
INTENTION TO CREATE
LEGAL RELATIONS
ACCEPTANCE
CAPACITY TO
CONTRACT
CERTAINTY OF
TERMS
FREE CONSENT
CONSIDERATIONS
& LAWFUL OBJECT
 OFFER ACCEPTANCE

 An expression made by the contracting parties to declare

their inner will to undertake a contract and thereafter be
bound by certain obligations.

 The basis of the formation of a contract is its capability of

giving a clear reflection of the willingness of both
contracting parties to undertake a contract.
 OFFER

 An expression of a willingness to enter into a contract, and it must be

definite and certain as to the major elements of the proposed contract.
 A preliminary negotiation does not rise to the level of an offer but is
merely an attempt to open negotiations.
 An offer can be terminated or withdrawn at any time prior to acceptance.
 An offer is terminated by counteroffer.
 An offer is terminated by rejection of the offer by a reasonable time.
 In the construction industry, a bid is considered an offer. Upon acceptance
of the bid or offer and assuming that no problems with any of the other
elements listed above exist, the contract is formed.
 ACCEPTANCE

 An acceptance must mirror the offer and if any of the terms vary, a
counteroffer is formed, not an acceptance.
 A counteroffer terminates the offer it has encountered.
 Counteroffers can be exchanged until the parties agree on the terms; at
that point, the contract is formed.
 If the subcontractor submits a bid to the contractor, and the contractor
sends back a contract to the subcontractor with different terms, the
contractor has not accepted the bid but instead has submitted a
counteroffer. No contract is formed.
 Use of a subcontractors’ bid is not an acceptance of the bid, and no
contract is formed at that point or even after award of the prime contract.
The contractor can use the subcontractor’s bid in its bid to the prime, but
the contractor is not obligated to hire the subcontractor once the
contractor is awarded the prime contract.
 CONSIDERATIONS

 Consideration exists if each party gives up something of value and receives

something of value.
 If only one of the parties in the transaction is to obtain something of value, no
considerations exists, and no contract is formed.
 EXAMPLE:
A homeowner and a contractor enter into a contract for remodeling a bathroom.
While the contractor is working, the homeowner asks the contractor to repaint
the kitchen. The contractor agrees.
Later, the contractor gives the owner an invoice for the estimated cost of painting
the kitchen, but the owner says he should not have to pay because the contractor
agreed to paint the kitchen and the owner thought that would be included in the
price of the bathroom remodel.
The contractor is not obligated to paint the kitchen, because even though there
was an offer and acceptance, the contractor has received nothing of value in
exchange for his promise to paint the kitchen. Consideration does not exist, so no
contract to paint the kitchen has been formed.
 LEGAL PURPOSE AND CAPACITY TO CONTRACT

 The law will only uphold contracts for legal acts.

 Parties must have the capacity to form a contract; that is they must be
over 18 years old and of sufficient mental capacity to understand what
they are doing.

 FREE CONSENT (No Fraud, Duress, Unconscionable, Onerous)

 Contracts based upon fraud or duress are unconscionable or onerous and

are not enforced by the law.
 If the contract is based upon a fraud, often called “fraud in the
inducement to enter a contract,” the victim has two options: affirm the
contract and sue for the damages from the fraud or breach, or promptly
rescind the contract and sue in tort for fraud.
 EXAMPLE:
The roof on a certain building leaked into the living areas. The owners got
a bid to replace the roof, but since they were selling the house, anyway,
they decided to just repaint the ceiling and not tell anyone about the leak.
The house sold, and the new owners found out about the leak and the bid.
They sued the original owners for fraud and were entitled to damages. In
this situation, alternatively, the new owners could void the sale.
 Construction law – definition, legal sources
and categories
 Contract law – definition and source
 Elements of contract
 Termination/discharge of contract
 Remedies for breach of contract
 Consent/agreement
Performance
between parties

A contract can be
terminated by

Breach of contract Impossibility

of performance
By performance

 When a party to a contract has performed his obligation under the

contract, he is discharged from the contract and is free from further
obligation that may arise from the contract.
 The parties to contract must perform their part of obligation personally
(if contract is dependent on personal skill).
 When a contract is not dependent on personal skill, such party has the
liberty to engage another to perform such party’s part of obligation
under the contract.
 If the other party has agreed to accept performance by a third party, he
cannot afterwards enforce it against the original party.
By performance
 In engineering/ construction contracts, a contract is considered to be
discharged by performance when:
 The contractor has carried out all his obligation under the contract ,
i.e. undertaken the construction, installation, etc, rectified all defects,
conducted the servicing and maintenance, done all necessary training,
supplied all ‘as-built’ and maintenance records per the contract; and
 The employer has discharged his obligations by making all payments
due, issued all necessary certificates, incl. the Final Certificate.
 Should defects become apparent after the issue of the Final Certificate,
it does not absolve the contractor from liability as he has failed to
discharge the contract fully. He remains liable for such defects during
certain limitation period and also under direct warranties/guarantees he
might have furnished to the employer.
 Consent/agreement between parties
 S 63, Contract Act 1950:
“ If the parties to a contract agree to substitute a new contract for it, or to
rescind or alter it, the original contract need not be performed.

 S 64, Contract Act 1950:

“every promise may dispense with or remit, wholly or in part, the
performance of the promise made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he thinks
fit”.
Impossibility of performance (frustration)
 Parties may enter into a contract with a fervent (strong-willed) hope of
fulfilling their respective bargains by carrying out their reciprocal promises.
 However, when the time for performance is actually due, owing to a change
of circumstances or the occurrence of unforeseen conditions, the parties
may find it not possible to physically or legally discharge their obligations
under the contract.
 A contract is terminated when performance of the contract has become
impossible.
 Few grounds that may cause performance of a contract become impossible:
destruction of contract subject matter, death, or personal incapacity of the
parties.
 Breach of contract

 “the refusal or failure by a party to a contract to fulfil an obligation imposed

on him under that contract….”
 “an unjustified failure to perform all or any part of what is promised in a
contract.”
 It may happen that in certain instances, either one or both of the contracting
parties, without sufficient excuse or justification, fails to perform the
contract in accordance with the terms of agreement.
 Timing of the breach:
 Before performance is due (also called anticipatory breach)
 At the time performance is due
 During the performance of the contract
 Breach of contract

 A breach of the contract does not necessarily justify a party in discontinuing

performance. In the construction industry, a party must continue to perform
under the contract unless the breach is so major (material /significant
breach) that it justifies termination of the contract.
 When a party commits a material breach of a contract, the non-breaching
party is discharged or excused from any obligation to perform and may sue
the breaching party for the benefit of the bargain.
 Failing to make a progress payment is generally considered a material
breach and grounds for terminating a contract. Most contracts contain this
as a provision in the contract.
 Construction law – definition, legal sources
and categories
 Contract law – definition and source
 Elements of contract
 Termination/discharge of contract
 Remedies for breach of contract
 When there is a breach of contract, the innocent party, is entitled to one or
more of the following remedies:
 Damages: Remedies claimed by an innocent party for the damage, loss or
injury he has suffered for breach of contract.
 Specific performance: A court order to force the defaulting party to
perform what he has promised to do in the contract (normally when the
remedy of damages is not adequate to compensate the innocent party).
 Injunction: An order of the court directing a person to refrain from doing
or continuing to do an act complained of, or restraining him from
continuing an omission.
DAMAGES

 General damages:
 Not specifically pleaded
 Assessed and awarded by court
 E.g. for pain, inconvenience, disappointment

 Special damages:
 Must be specifically pleaded and proved
 E.g. loss of profit, interest, etc.
DAMAGES

 Nominal damages:
 Awarded where there is a technical breach but no loss
 Always a derisory (small) sum
 A very small amount of damages awarded to a plaintiff by the court when
there has been a wrong done to the plaintiff but the loss or injury is very
minor or not proved.
 E.g. trespass, failure of claimant to mitigate loss, or where the plaintiff is
better off (away from) as a result of the breach.

 Substantial damages:
 Pecuniary compensation to put the innocent party in the position he
would have enjoyed had the contract been performed. (money that is
given for a loss or injury which has been suffered; damages)
 For loss actually sustained
 Most common form of compensation
DAMAGES

 Exemplary damages:
 Vindictive or punitive in nature
 Far greater than actual loss sustained
 E.g. defamation, degrading someone, breach of promise (e.g. to marry),
etc.

 Unliquidated damages:
 Unascertained damages that need to be proved.
 Dependent on circumstances of the case
DAMAGES

 Liquidated damages:
 Agreed and ascertained at time of contracting (pre-calculated damages –
usually calculated per day of delay)
 Expressly stipulated in contract
 Governed by S75, Contracts Act 1950