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26 January 2021
Every construction project has at least one consultant appointed by a developer (also known as an 'employer' of the project). While the types of consultant and their respective roles may differ from project to project, a consultant's role generally includes the certification of work and progress. In most instances, this also requires the consultant to certify the amount payable for work done and the amount payable by the employer to the main contractor. A payment certificate will be issued thereafter.
As cashflow is crucial for main contractors in any ongoing construction project, prompt and expeditious payments by the employer are often expected. However, if the main contractor is dissatisfied with the payment certificate, can the main contractor sue the consultant for negligence? The Court of Appeal addressed this question in a recent case commenced by PCP Construction Sdn Bhd against L3 Architects Sdn Bhd.(1) In its decision, the Court of Appeal unanimously upheld the decision of the high court in dismissing PCP Construction's claim against L3 Architects.(2)
The developer, Leap Modulation Sdn Bhd, appointed PCP Construction and L3 Architects as the main contractor and consultant, respectively, in a construction project. The project was regulated by the Agreement and Conditions of Building Contract (Private Edition with Quantities) 1998 with amendments (PAM Contract).
A dispute arose between PCP Construction and Leap Modulation concerning the non-payment of Interim Payment Certificates (IPCs) 17R and 18, which PCP Construction sought to resolve by way of adjudication under the Construction Payment and Adjudication Act 2012. The adjudicator found in favour of PCP Construction.
However, when the adjudication decision was heard at the high court, the court set aside part of the adjudication decision as the adjudicator had failed to consider Leap Modulations' set off (which included, among other things, IPC 19, wherein L3 Architects had allowed a deduction of RM750,000 for the costs of non-compliance works) on the basis that they were not set out in the payment response.(3)
Thereafter, PCP Construction commenced a negligence action against L3 Architects which stemmed from IPC 19. PCP Construction argued that because of L3 Architects' negligence, it now had to pay a sum of RM351,646.68 to Leap Modulation (ie, the set off).
At all material times, it was not disputed that there was no contractual relationship between PCP Construction and L3 Architects and both had their respective contracts with Leap Modulation.
It is trite law that in an action for negligence three elements must be proved – namely, whether:
Without a contractual relationship between the parties, did L3 Architects owe a duty of care towards PCP Construction? The sessions court found that there was a duty of care and gave judgment against L3 Architects.
Dissatisfied, L3 Architects appealed to the high court. The court allowed the appeal and set aside the judgment against L3 Architects, mainly on the basis that L3 Architects did not owe a duty of care to PCP Construction as the main contractor. In any event, PCP Construction had suffered no loss or damage as a result of IPC 19.
Duty of care by a consultant to a main contractor
PCP Construction relied on the UK House of Lords' decision in Arenson v Casson Beckman Rutley & Co(4) in both the sessions court and the high court. In Arenson, the question before the House of Lords, as framed by Lord Simon of Glaisdale, was:
whether an accountant/auditor of a private company who on request values shares in the company in the knowledge that his valuation is to determine the price to be paid for the shares under a contract for their sale is liable to be sued if he makes his valuation negligently.
In Arenson, the House of Lords found that there was no reason of public policy to treat the respondent valuers' task of evaluating the shares as an exception to the general rule of liability for negligence whereby immunity is granted to judges and arbitrators. In the course of its judgment, the House of Lords made obiter observations on a duty of care owed by a consultant to the main contractor, drawing on its decision in Sutcliffe v Thackrah.(5) In this decision, the House of Lords had held that in general, any architect or valuer is liable to the party which employed them if they caused loss by reason of their negligence. However, as an exception to that rule, immunity would be accorded to the architect or valuer if they could show that, by agreement, they had been appointed to act as an arbitrator or quasi-arbitrator.
The UK Court of Appeal considered Arenson in Pacific Associates Inc v Baxter(6) but decided against following it, given the absence of a contract between the parties (ie, a contractor and an engineer) and the availability of a contractual remedy between the contractor and employer. It was held that, among other things, the courts should be slow to superimpose an added duty of care upon a party when the relevant rights come under a contractual framework that provides for the same.
The Singapore Court of Appeal found the salient facts in Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency(9) to be materially the same as those in Pacific Associates and set out a two-stage test of proximity and policy considerations with a preliminary requirement of factual foreseeability for the purposes of determining a duty of care. Applying said test, the court held that it was foreseeable that any negligence by the superintending officer in its certification would deprive the contractor of monies to which it would have been entitled. However, in light of the arbitration clause in the contract which allowed the contractor to claim under-certified amounts and any interest in relation thereto in arbitration proceedings against the employer, the requirement of proximity was not satisfied.
The Malaysian Federal Court thoroughly discussed Spandeck Engineering in Lok Kok Beng v Loh Chiak Eong,(10) wherein the apex court propounded a more restricted approach for cases of pure economic loss and held as follows:
 The most difficult ingredient to prove in establishing a duty of care is the requirement of sufficient proximity between the claimant and the defendant. The court would have to look at the closeness of the relationship between the parties and other factors to determine sufficient proximity based on the facts and circumstances of each case. These factors are likely to vary in different categories of cases. The fact that damages sought by the claimant is pure economic loss not flowing from personal injury or damage to the property is also a factor to be considered. As has often been acknowledged, a more restricted approach is preferable for cases of pure economic loss. As such, the concepts of voluntary assumption of responsibility and reliance are seen as important factors to be established for purposes of fulfilling the proximity requirement. The reason for a more stringent approach taken in the claims involving pure economic loss is because such loss might lead to an indeterminate liability being imposed on a particular class of defendants, thus leading to policy issues.
Having analysed the various cases and authorities submitted, the high court in PCP Construction was of the view that the approach taken in Pacific Associates should be followed. Among others, Aliza Sulaiman JC (now a high court judge) noted that the issues, subject matter and relationship of the parties in Sutcliffe and Arenson were different from the present case. In Sutcliffe, the architect had been sued by its employer (not a contractor), while Arenson concerned the evaluation of shares and was not a construction dispute.
The high court held that the arbitration clause in the PAM Contract (ie, Clause 34) served as an adequate basis for PCP Construction to pursue its grievances against Leap Modulation for issues such as wrongful certification. As such, it would not be reasonable to impose a duty of care on L3 Architects given the factual matrix of the case as this would be inconsistent with the structure of the relationships as governed by the contracts between Leap Modulation and PCP Construction, and Leap Modulation and L3 Architects.
It was thus held that architects (in this case, L3 Architects) should not be liable for claims for pure economic loss in negligence where a contractual matrix exists between the employer and main contractor by way of a PAM Contract, which clearly defines the rights and liabilities of each party. As held in Lok Kok Beng, there is a need to adhere to the agreed contractual terms.
When this case was brought before the high court, the entire adjudication decision between PCP Construction and Leap Modulation had been set aside for failure to consider the set offs raised by Leap Modulation,(11) consistent with the Federal Court case of View Esteem Sdn Bhd v Bina Puri Holdings Bhd.(12)
As such, even if a duty of care existed, PCP Construction had not suffered any losses as adjudication decisions are only of temporary finality, as propounded in Martego Sdn Bhd v Arkitek Meor.(13) Accordingly, PCP Construction is not prevented from pursuing its claim in a final dispute resolution forum (eg, in court or via arbitration).
The high court further held that unless and until such a claim is pursued and dismissed in a final dispute resolution forum on the ground that there was a wrongful under-certification by L3 Architects, PCP Construction has not suffered a loss.
It should be noted that IPC 19 was also an interim certificate.
Saga Fire Engineering Sdn Bhd v IR Lee Yee Seng
The high court case of Saga Fire Engineering v IR Lee Yee Seng(14) (affirmed on appeal) was raised by PCP Construction during the appeal and is of significance.
In Saga Fire Engineering, the plaintiff contractor faced a variety of problems that arose from the defendant engineer's professional negligence. The plaintiff commenced a claim in adjudication against the owner of the project, obtained an adjudication decision in its favour and later resolved its dispute with the owner by way of a settlement agreement.
The plaintiff's contention was that as a result of the defendant's negligence in certification, the plaintiff had suffered losses. The court found that the architects owed a duty of care to the contractor and were liable for the losses suffered.
Saga Fire Engineering is arguably distinguishable as the plaintiff and the owner resolved their disputes by way of an adjudication decision and later, a settlement agreement. There was a crystallisation of the loss. Accordingly, the only remaining avenue for the plaintiff was against the defendant for negligence.
Despite PCP Construction's attempts to rely on Saga Fire, the Court of Appeal unanimously agreed with the findings of Aliza Sulaiman JC and affirmed the high court's decision.
For further information on this topic please contact Foo Joon Liang or Tasha Lim Yi Chien at Gan Partnership by telephone (+603 7931 7060) or email (firstname.lastname@example.org or email@example.com). The Gan Partnership website can be accessed at www.ganlaw.my.
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