CHAPTER 4

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, The Province of Independence
Determined).

 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”.
 LEGAL SOURCES OF
CONSTRUCTION LAW

WRITTEN LAW UNWRITTEN LAW

SUBSIDIARY/ JUDICIAL APPLICABLE

LEGISLATION DELEGATED DECISIONS ENGLISH LAW
LEGISLATION

TRADE CUSTOM/
USAGE
WRITTEN LAW:

 LEGISLATION
 ACTS OF PARLIMEN
▪ STATUTES
▪ SUBSIDIARY/ DELEGATED LEGISLATION
 STATE LAWS
▪ ORDINANCES
▪ ENACMENTS

 SUBSIDIARY/ DELEGATED LEGISLATION

 DELEGATED BY ACTS OF PARLIAMENT
 E.G., UNIFORM BUILDING BY LAWS, ETC.
UNWRITTEN LAW:

 JUDICIAL DECISIONS
 LOCAL CASE LAW
 DOCTRINE OF STARE DECISIS/ JUDICIAL PRECEDENT

 TRADE CUSTOM/ USAGE

 PARTICULAR TO THE ENGINEERING/ CPNSTRUCTION INDUSTRY
 FOR IMPLICATION/ INTERPRETATION OF TERMS
UNWRITTEN LAW:

 APPLICABLE ENGLISH LAW

 COMMON LAW
▪ COMMON LAW PRINCIPLES
▪ CASE LAW
▪ SUBJECT TO S3 & S5 OF THE CIVIL LAW ACT 1956

 EQUITABLE PRINCIPLES
▪ AS PERMITTED UNDER S3 OF THE CIVIL LAW ACT 1956

 STATUTES
▪ UNDER S3 & S5 OF CIVIL LAW ACT 1956
▪ STATUTES OF GENERAL APPLICATION, COMMERCIAL LAW, ETC.
 COMMON CATEGORIES OF
CONSTRUCTION LAW

LAW OF CONTRACT LAW OF TORT

PUBLIC OF LAW COMMERCIAL LAW

CIVIL 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”. (An-
Nisa (4) :29).
 Do not revert to illegal ways and means to acquire money.

 Rasulullah SAW said: “When two men conduct a transaction, they

retain their (right to change their mind) as long as they have not
parted.” (Narrated by Al-Bukhari).
 The option to buy or sell before parting is part of “mutual consent” in
trading.
 Mutual agreement in various transaction is attained when both parties
have the right to uphold or dissolve the agreement before they part.
 SOURCES OF CONTRACT LAW

WRITTEN LAW UNWRITTEN LAW

LEGISLATION JUDICIAL APPLICABLE ENGLISH

DECISIONS LAW

COMMON
CUSTOMARY LAW LAW
EQUITABLE
PRINCIPLES
STATUTES OF
GENERAL
APPLICATION
 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 ACCEPTANCE

LAWFUL OBJECT
& CONSIDERATION

CERTAINTY OF INTENTION TO CREATE

TERMS LEGAL RELATIONS

LEGAL CAPACITY TO
FREE CONSENT
CONTRACT
 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 (lapse
of 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.
 OFFER

 An offer can of two types:

 Bilateral offer – made to a specific person or group of persons.

 Unilateral offer – made to the world at large

 Case: Carlill v. The Carbolic Smoke Ball Company

 An example of unilateral contract
 Defendant alleged that their smoke balls cured many illnesses and
made it impossible to catch flue.
 Advertisement: whoever used the balls according to prescription yet
still caught flu would be compensated GBP100.
 Plaintiff claimed for GBP100 as she bought the balls and used it
according to the prescription and still caught the flu.
 OFFER

 Invitation to treat

 Is merely an invitation to negotiate or bargain. Hence, acceptance to

a mere invitation to treat is the offer.
 Examples of act would be considered as mere invitation to treat:
 Display of goods in shops
 Advertisements and other notices
 Auctions
 Tenders
 OFFER

 Invitation to treat – display of goods in shops

 Case: Fisher v. Bell

 The defendant was not found guilty of the criminal offence of
offering the knife for sale merely by displaying a flick knife in his
shop window.
 Judge: “… the display of an article with a price on it in a shop
window is merely and invitation to treat. It is in no sense an offer
for the sale the acceptance of which constitutes a contract.
 When any goods are displayed in the shop or by the shop
window, such act of displaying the goods is just a mere invitation
to treat. It is not an offer.
 OFFER

 Communication and Revocation 0f Offer

 Example of situation:
 In response to a tender invitation, a contractor (A) on 1 January
20o1 offers/proposes by way of a letter to undertake renovations
to an employer’s (B) bungalow at certain price.
 B receives the letter on 7 January 2001.
 The communication of the offer is complete when B receives the
letter on 7 January 2001.
 B accepts the offer by a letter sent to A by post on January 2001
at 12 noon.
 A may revoke his offer at any time before or at the moment B
post his letter of acceptance, i.e. before or at 12 noon on January
2001, but not afterwards.
 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.
 ACCEPTANCE

 Silence is not an acceptance. Hence the offeror cannot unilaterally impose

the condition that the offeree is bound by the agreement upon his failure
to act or accept the offer.

 Case: Felthouse v. Bindley

 The court rejected the argument that there was acceptance when the
nephew failed to make further correspondence to his uncle’s proposal
to buy his black horse at stipulated price.
 The court held that silence could not be implied as acceptance.

 There are exception to this rule, in cases where/when:

 The offeree has voluntarily assumed the duty to do positive act to
reject the offer.
 The offeror has waived the need of acceptance communication
 Contract made based on previous course of dealing.
Activity/ Event Legal Status Effects/ Remarks
Invitation to Tender Invitation to Treat No Legal Effect
Tender Submitted Offer Must be clear
Issue of Letter of Intent Present intention of No Legal Effect
possibly awarding
contract in future
Issue of Letter of Acceptance Acceptance Contract comes into
(with no material conditions/ existence/ legal
qualifications) by Employer rights and obligations
accrue on date of
issue
Signing Letter of Acceptance by Communication of Acknowledgement of
Contractor acceptance complete receipt of Letter of
Acceptance
Activity/ Event Legal Status Effects/ Remarks
Issue of Letter of Acceptance Counter -offer Destroys original
(with material conditions/ offer
qualifications) by Employer
Signing of Letter of Acceptance by Acceptance of Contract comes into
Contractor Counter -offer existence/ legal
rights and obligations
accrue on the date of
signing
Receipt of duly signed Letter of Communication of Acknowledgement of
Acceptance by the Employer Acceptance of receipt of the
Counter-Offer Contractor’s
acceptance of
Employer’s counter-
offer
 CERTAINTY OF TERMS

 Any agreements, the meaning of which is not certain, or capable of being

made certain, are void.
 A contract with duration to last ‘for as long as he likes’ which carries
uncertain definition can be declared as void.
 There may be situation where both parties have agreed to bind one
another but the terms that determine the nature of their obligation
towards one another is not clear for want of certainty. Both parties may
have his own understanding about the agreement that may not
correspond to the understanding of his counterpart.
 When some terms are so vague the contract as a whole is rendered
unenforceable.
 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.
INTENTION TO CREATE LEGAL RELATIONS

 What is the nature of the agreement?

 If it is a social /domestic arrangements the presumption is: there is no
intention to create legal relations.
 If it is commercial agreement, it is presumed that the parties
intended to bind one another legally.

 Is there any evidence to rebut the above presumption?

 If the answer is ‘no’, then the presumption shall stand.
 If there is any evidence to show the contrary, the presumption is
rebutted and the result shall be contrary to the presumption.
CAPACITY TO CONTRACT

 Two factors: age factor and soundness of mind.

 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.
 Scholarship or loan agreement entered by a minor and a government is
valid.
 Soundness of mind: the capability of a person to understand and to form
a rational judgement as to the effect of the contract upon his interest at
the time he makes a contract.
 If a person is usually of unsound mind but occasionally of sound mind, he
can make a contract when he is of sound mind.
 If a person is usually of sound mind but occasionally of unsound mind, he
cannot make any contract when he is of unsound mind.
 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 (end) 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
 Timing of the breach:
 Before performance is due (also called anticipatory breach)
▪ Occur before the actual time of performance arrives.

 At the time performance is due

▪ Occur when the performance under a contract is due, the promisor fails to carry
out the promise.

 During the performance of the contract

▪ The promisor has started performing his promise but fails to complete the
performance.
 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.

 Contract Act 1950 stipulates compensation related to breach of contract

under Section 74, 75 & 76.
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 (the damages calculation is
shown in detail to the loss occurred).
 E.g. loss of profit, interest on money, etc.
DAMAGES

 Nominal damages:
 Awarded where there is a technical breach but no loss (a party can prove
its right but not the actual loss).
 Always a derisory (small) sum
 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.
 For loss actually sustained (but the compensation amount can be greater)
 Most common form of compensation
DAMAGES

 Exemplary damages:
 Vindictive or punitive in nature (to punish a defaulting party)
 Far greater than actual loss suffered by the innocent party
 Criminal offences related to moral element: 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 (penalty)