A Repudiatory Breach in the Construction Industry - Non-Payment

A REPUDIATORY BREACH IN THE CONSTRUCTION INDUSTRY –

NON-PAYMENT

LEE SHIH YIN

UNIVERSITI TEKNOLOGI MALAYSIA

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To my beloved dad, mom, Kah Wei, Yong Sin and Jiih Kui

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ACKNOWLEDGEMENTS

A debt of gratitude is owed to many individuals who have given me the

benefit of their unconditional help, tolerance and knowledge in writing and

completing this master project. First of all, I would like to express my highest

gratitude to my supervisor, Encik Norazam Othman for his guidance, advice and

support in order to complete this master project.

Next, my special thanks are due to all the lecturers for the course of Master

of Science (Construction Contract Management), for their patient and kind advice

during the process of completing the master project.

Not forgetting my dearest parents, brother and sister, a token of appreciation

goes to them for giving full support. Lastly, I would like to express my special

thanks to my fellow classmates, who have in their own way helped me a great deal

throughout the preparation and production stages of this master project.

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ABSTRACT

Many complaints have been voiced about non-payments and it is causing

severe cash flow problems to contractors. The reaction of many contractors when

faced with non-payment is to consider stopping work on site. Whilst this is

understandable in many instances, it may amount to a repudiatory breach by the

contractor. The contractors are only entitled to terminate the contract when non-

payment is a repudiation of contract. But is the act of non-payment goes to the root

of the contract? Whether failure to pay amounts to repudiation will depend on the

circumstances of the case. Therefore, this study is to identify circumstances where

non-payment by an employer constitutes a repudiatory breach of contract. Findings

of this study will assist the contractor to understand his position before he takes

action when the employer fails to make payment. The approach adopted in this

research is case law based; only cases specifically centered on issue of non-payment

will be discussed in this study. The selection of sample court cases involved a depth

study rather than a random sample. A total number of 11 cases were studied, where 7

of them were involving construction contracts and 4 were contracts of sales of goods.

It is found that there are 2 circumstances in which non-payment constitutes to

repudiatory breach and 9 circumstances in which non-payment does not amount to

repudiation of the contract. As a conclusion, the result of the analysis seems to

suggest that, in most of the circumstances, non-payment is not a repudiatory breach

of contract by the employer. The contractors are not advised to stop work at the site

when the employer refused to make payments, or he himself would be guilty of a

breach of contract in failing to maintain regular and diligent progress. But, an

employer may be held to be in repudiatory breach of contract in failing to make

payment if his action shows an intention no longer to be bound by the contract and

his default goes to the root of the contract.

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ABSTRAK

Terdapat banyak kontraktor yang tidak dibayar dan mereka menghadapi

masalah kewangan yang serius. Apabila kontraktor tidak dibayar, mereka akan

memikir untuk meninggalkan kerja di tapak pembinaan. Walaupun ini dapat

difahami, ia mungkin merupakan pecah kontrak oleh kontraktor. Kontraktor hanya

boleh menamatkan kontrak apabila tindakan tidak bayar merupakan pecah kontrak

oleh majikan. Adakah tindakan tidak bayar merupakan repudiasi? Sama ada tindakan

tidak bayar merupakan repudiasi adalah bergantung kepada keadaan. Maka, kajian

ini adalah untuk mengenalpasti keadaan di mana tindakan tidak bayar merupakan

repudiasi pihak majikan. Hasil kajian akan membantu kontraktor memahami haknya

sebelum ia mengambil tindakan apabila majikan tidak membayar. Pendekatan yang

diguna dalam kajian ini adalah berdasarkan kes mahkamah, hanya kes yang berpusat

pada isu tidak bayar akan dibincang dalam kajian ini. Pemilihan kes adalah secara

mendalam, bukannya secara rawak. Sebanyak 11 kes dikaji, di mana 7 melibatkan

kontrak pembinaan dan 4 melibatkan kontrak jual beli. Didapati, hanya 2 daripada 11

kes menunjukkan keadaan di mana tidak bayar merupakan repudiasi majikan, dan 9

menunjukkan keadaan di mana tidak bayar tidak merupakan repudiasi majikan.

Sebagai kesimpulan, hasil kajian mencadangkan tidak bayar tidak merupakan

repudiasi oleh majikan dalam kebanyakan keadaan. Kontraktor adalah tidak

dicadangkan untuk meninggalkan kerja di tapak pembinaan apabila majikan tidak

bayar, supaya dia tidak didakwa pecah kontrak atas alasan gagal untuk melaksanakan

kerja dengan tekun. Tetapi, seseorang majikan akan didakwa repudiasi kerana gagal

membayar jika tindakannya menunjukkan dia tidak ingin diikat oleh kontrak, dan

tindakannya memecah asas kontrak.

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TABLE OF CONTENTS

CHAPTER TITLE PAGE

DECLARATION ii

DEDICATION iii

ACKNOWLEDGEMENTS iv

ABSTRACT v

ABSTRAK vi

TABLE OF CONTENTS vii

LIST OF TABLES xi

LIST OF ABBREVIATIONS xii

LIST OF CASES xiv

1.0 INTRODUCTION

1.1 Background Studies 1

1.2 Problem Statement 3

1.3 Objective of the Research 8

1.4 Scope of the Research 8

1.5 Importance of the Research 8

1.6 Research Methodology 9

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2.0 PAYMENTS IN THE CONSTRUCTION INDUSTRY

2.1 Introduction 10

2.2 The Right to Payment 11

2.2.1 Lump Sum Contract 12

2.2.1.1 Entire Contracts 13

2.2.1.2 Substantial Performance 15

2.2.1.3 Non-Completion 15

2.2.2 Contract other than for a Lump Sum Contract 16

2.2.3 Quantum Meruit 17

2.3 Arrangements for Interim Payment 18

2.4 Mode of Payment 19

2.4.1 Payment in Cash 19

2.4.2 Payment in Bills 19

2.4.3 Payment in Debentures or Shares 20

2.4.4 Payment in Land 20

2.5 Conclusion 21

3.0 REPUDIATORY BREACH IN CONSTRUCTION CONTRACT

3.1 Introduction 22

3.2 Common Law Termination 24

3.2.1 Discharged by Performance 25

3.2.2 Discharged by Agreement 26

3.2.3 Discharged by Frustration 27

3.2.4 Discharged by Repudiation 28

3.3 Contractual Termination 29

3.4 Repudiatory Breach 30

3.4.1 Repudiation 31

3.4.1.1 Intention to Repudiate 32

3.4.1.2 Misapprehension of Contract Obligations 33

3.4.2 Fundamental Breach 35

3.4.2.1 General Principles 35

3.4.2.2 Rule of Construction 37

3.4.2.3 Onus of Proof 39

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3.4.3 Breach of Fundamental Terms 39

3.4.3.1 By Statutory Implication 41

3.4.3.2 Because the Parties have explicitly made

it so 41

3.4.3.3 Because the Court so Construes it 41

3.4.4 Non-Fundamental Breaches after Notice 42

3.4.5 Erroneous Expression of View 43

3.4.6 Arbitration Agreements 44

3.5 Recourse for Repudiation and Fundamental Breach 44

3.5.1 Innocent Party Elects to Terminate the Contract 45

3.5.2 Innocent Party Elects to Treat the Contract

as Continuing 47

3.6 Grounds of Termination by the Contractor 47

3.6.1 Employer’s Refusal to be bound 48

3.6.2 Preventing Execution of Works 49

3.6.3 Failure to Give Possession of the Site 50

3.6.4 Failure to Pay 51

3.6.5 Under-Certification of Payments 53

3.6.6 No General Right to Suspend Work 54

3.6.7 Interference or Influence of Certifier 55

3.6.8 Other Breaches 55

3.7 Conclusion 56

4.0 CIRCUMSTANCES WHERE NON-PAYMENT IS / IS NOT A

REPUDIATORY BREACH BY THE EMPLOYER

4.1 Introduction 58

4.2 Circumstances Where Non-Payment by an Employer

Constituted a Repudiatory Breach of Contract 60

4.2.1 Circumstance 1 61


4.3 Circumstances Where Non-Payment by an Employer

Did not Constitute a Repudiatory Breach of Contract 67


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4.4 Conclusion 95

5.0 CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction 97

5.2 Summary of Research Findings 97

5.3 Problems Encountered during Research 103

5.4 Further Studies 104

REFERENCE 105

BIBLIOGRAPHY 107

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LIST OF TABLES

TABLE NO TITLE PAGE

5.1 Circumstances where non-payment constituted a repudiation

of contract by the employer 98

5.2 Circumstances where non-payment did not amount to

repudiation of contract by the employer / purchaser 99

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LIST OF ABBREVIATIONS

AC Law Reports Appeal Case

All ER All England Law Reports

ALJ Australian Law Journal

ALR Australian Law Reports

ALJR Australian Law Journal Reports

App Cas Appeal Cases

B Beavan

B & S Best and Smith’s Reports

Build LR Building Law Reports

CA Court of Appeal

CB Common Bench Reports

Ch Chancery

Ch App Chancery Appeal

Ch D The Law Reports, Chancery Division

CIDB Construction Industry Development Board

CLD Construction Law Digest

DC Divisional Court, England

Const LJ Construction Law Journal

Const LR Construction Law Reports

CP Law Reports, Common Pleas

CPD Law Reports, Common Pleas Division

DLR Dominion Law Reports

Exch Exchequer Reports

Eq Equity Case

EWHC High Court of England and Wales Decisions

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FC Federal Court

F & F Foster & Finlayson’s Reports

H & N Hurlstone & Norman’s Exchequer Reports

HL House of Lords

HKC Hong Kong Cases

HKLR Hong Kong Law Reports

IR Irish Reports

JKR Jabatan Kerja Raya

KB King Bench

LGR Local Government Reports

LJKB (QB) Law Journal Reports, King’s (Queen’s) Bench

Lloyd’s Rep Lloyd’s List Reports

LR Law Reports

LT Law Times Reports

JP Justice of the Peace / Justice of the Peace Reports

MLJ Malayan Law Journal

NZLR New Zealand Law Reports

PAM Pertubuhan Arkitek Malaysia

PWD Public Work Department

PD Probate, Divorce and Admiralty Division of High Court

QB Queen Bench

TCC Technology and Construction Court

SLR Singapore Law Reports

WLR Weekly Law Reports

WR Weekly Reports

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LIST OF CASES

CASES PAGE

AA Valibhoy & Sons Pte Ltd v. Banque Nationale de Paris

[1983] 2 MLJ 26 (CA) 39

Acrow (Automation) Ltd. v. Rex Chainbelt Inc. (1971) 1 WLR 1676 50

Afovos Shipping v. Pagnan [1983] 1 WLR195 31

Appleby v. Myers (1867) LR2CP 651 12, 13, 16

Architectural Installation Services v. James Gibbons (1989)

16 ConLR 68 30

Associated Pan Malaysian Cement Sdn Bhd v. Syarikat Teknikal

& Kejuruteraan Sdn Bhd (1990) 3 MLJ 287 82

Ban Hong Joo Mines Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83 61, 67, 95, 98

Bickerton (T.A.) & Sons Ltd v. N.W. Regional Hospital Board

[1970] 1 WLR 607 56

Bolton v. Mahadeva [1972] 1 WLR 1009 16

Bradley v. Newson [1919] AC 16 32

Brani Readymixed Pte Ltd v. Yee Hong Pte Ltd [1994] 2 SLR 552 68, 74, 95, 99

Bremer Vulkan v. South India Shipping Corporation [1981] AC 909 44

British Steel Corporation v. Cleveland Bridge and Engineering

[1984] 1 All ER 504 17

Bunge Corporation v. Tradax [1981] 1 WLR 711 40, 41

C J Elvin Building Services Ltd v. Noble and Another

[2003] EWHC 837 (TCC) 5, 64, 95, 98

Canterbury Pipe Lines v. Christchurch Drainage (1979) 16 BLR 76 43, 54, 59,

89, 95, 102

Carr v. A. J. Berriman (1953) 27 A.LJR 273 43, 51

xv

CASES PAGE

Cehave N.V. v. Bremer m.b.H. [1976] 1 QB 44 42

Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd

[1992] 2 All ER 609 5

Chilean Nitrate Sales v. Marine Transportation [1982] 1 Lloyd’s Rep. 570 31

Compagnie General Maritime v. Diakan Spirit [1982] 2 Lloyd’s Rep 574 40

Coombe v. Greene (1843) 11 M&W 480 55

Cornwall v. Henson [1900] 2 Ch 298 70, 86, 95, 101

Cort v. Ambergate Railway (1851) 17 QB 127 49

Cory Ltd v. City of London Corp [1951] 2 KB 476 (CA) 49

Croudace v. London Borough of Lambeth (1986) 33 BLR 20 (CA) 50

Ctr. Jones v. Cannock (1852) 3 HLC 700 55

Cutter v. Powell (1795) 6 TR 320 13, 15

Dakin v. Lee [1916] 1 KB 566 15

Davidson v. Gioyne (1810) 12 East 381 36

Davis Contractors Ltd. v. Fareham Urban Council (1956) [1956] AC 696 27

De Waal v. Adler (1886) 12 App. Cas. 141 20

Décor-Wall International SA v. Practitioners in Marketing Ltd

[1971] 2 All ER 216 36, 37, 59,

68, 70, 95, 99

Duncan v. Blundell (1820) 3 Stark 13

Earth & General Contractors Ltd v. Manchester Corp. (1958) 108 LJ 665 50

Ellis v. Hamlen (1810) 3 Taunt. 52 15

Farnsworth v. Garrard (1807) 1 Camp 38 15

Federal Commerce v. Molena Alpha [1979] AC 757 31, 34, 42

Felton v. Wharrie (1906) HBC (4th ed.), Vol. 2, P.398 (CA) 50

Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190 15

Frederick Leyland & Co. v. Panamena Europea Navigacion Cia

(1943) 76 Lloyd L.R. 113 54

Freeth v Burr (1873-74) 9 CP 208 62, 77, 78,

95, 100

Gaze Ltd. v. Port Talbot Corp. (1929) 93 JP 89 55

General Billposting Co. Ltd v. Atkinson [1909] AC118 31, 60

Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA) 17

xvi

CASES PAGE

H Dakin & Co. Ltd v. Lee [1916] 1 KB 566 14

Heyman v. Darwins [1942] AC 356 30, 37

Hiap Hong & Co. Pte. Ltd. v. Hong Huat Development Co. (Pte) Ltd.

[2001] 2 S.LR 458 (CA) 54

Hoare v. Rennie (1859) 5 H & N 19; 29 LJ Ex 73; 1 LT 104; 8 WR 80;

157 ER 1083; 39 Digest 572, 1766 77

Hochster v. De La Tour (1853) 2 E&B 678 31, 45, 48

Hoenig v. Issacs [1952] 2 All ER 176 5, 13, 14, 15

Holland Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80 17

Hong Kong Fir Shipping v. Kawasaki Kison Kaisha [1962] 2 QB 26 (CA) 37, 40, 42

Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1 31, 60

Hunt and Winterbotham Ltd v. BRS (Parcels) Ltd [1983] 2 MLJ 26 (CA) 39

Hunt v. Bishop (1853) 8 Ex. 675 55

Hunter Engineering Inc v. Syncrude Canada Ltd (1989) 57 DLR (4d) 321 38

Hutchinson v. Harris (1978) 10 BLR 19 15

Hyundai Industries Co. Ltd. v. Papadopoulos [1980] 1 WLR 1129 (HL) 46

James Shaffer Ltd. v. Findlay, Durham & Brodie [1953] 1 WLR106 (CA) 43

Jonassohn v. Young (1863) 4 B & S 296; 2 New Rep 390; 32 LJQB 385;

10 Jur NS 43; 11 WR 962; 122 ER 470; 39 Digest 652, 2459 79

Joseph Thorley Ltd v. Orchis Steamship Co [1907] 1 KB 660 36

Kah Seng Construction Sdn Bhd v. Selsin Development Sdn Bhd

Suit No 22-309 of 1992 77, 79, 95, 100

Karsales (Harrow) Ltd. v. Wallis [1956] 2 All E.R. 866 35

Keys v. Harwood (1846) 2 CB 905 21

King v. Allen & Sons Billposting Ltd. [1916] 2 AC 54 31

Kingdom v. Cox (1848) 5 CB 522 49

Lee Poh Choo v. Sea Housing Corporation Sdn Bhd [1982] 1 MLJ 324 92, 96, 102

Lilley v. Doubleday [1907] 1 KB 669 36

Lim Sew Lan v. Pembangunan Hysham Sdn Bhd [1995] 5 MLJ 670 37

Lombard v. Butterworth [1987] QB527 41

Low Kon Fatt v. Port Klang Golf Resort (M) Sdn Bhd [1998] 6 MLJ 448 37

Lubenham Fidelities & Investment Co. v. South Pembrokeshire

District Council and Wigley Fox Partnership (1986) 33 BLR 39 (CA) 4, 53, 54

xvii

CASES PAGE

Macintosh v. Midland Counties Railway (1845) 14 LJ Ex. 338 55

Marshall v. Mackintosh (1898) 78 LT 750 5

Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434 5, 31, 32, 43, 48,

52, 60, 63, 83,

95, 101, 103

Modern Engineering (Bristol) v. Gilbert-Ash [1974] AC 689 30

Munro v. Butt (1858) 8 EB 739 13

Levison v. Patent Steam Carpet Cleaning Co. Ltd [1983] 2 MLJ 26 (CA) 39

Needler v. Guest (1647) Aleyn 9 11

Newfoundland Government v. Newfoundland Ry.

(1888) 13 App. Cas. 199 (PC) 16

Panamena, etc. v. Frederick Leyland & Co. Ltd [1947] AC 428 53

Parker Distributors (Singapore) Pte Ltd v. Svenborg [1959] AC 576;

[1959] 3 All ER 182 (PC) 39

Percy Bilton v. Greater London Council [1982] 1 WLR 794 56

Perini Corporation v. Commonwealth of Australia (1969) 12 BLR 82 53, 54

Peter Dumenil v. James Ruddin [1953] 1 WLR 815 (CA) 43

Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827 38, 45, 46

Portman v. Middleton (1858) 4 CB (NS) 13

Re Aldborough Hotel Co., Simpson’s Case (1869) 4 Ch. App. 184 20

Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405 19

Rees v. Lines (1837) 8 C&P 126 51

Roberts v. Bury Commissioners (1870) LR4CP 755 50, 51

Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.

[1940] 3 All ER 60 31, 33, 43, 60

Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC 694 41

Schuler (L.) A.G. v. Wickman Machine Tool Sales [1974] AC 235 (HL) 42

Simpson v Crippin (1872-73) 8 QBD 14 62

Sinclair v. Bowles (1829) 9 B&C 92 13, 15

Smyth v. Bailey [1940] 2 All ER 60 32

Southern Foundaries v. Shirlaw [1940] AC 701 49

Spettabile v. Northumberland Shipbuilding Co. (1919) 121 LT 628 49

State Trading Corporation of India v. Golodetz [1989] 2 Lloyds’s Rep. 277 (CA) 41

xviii

CASES PAGE

Stegmann v. O’Connor (1899) 81 LT 627 (CA) 15

Stevens v. Taylor (1860) 2 F&F 419 55

Stirling v. Maitland (1864) 5 B&S 840, 852 49

Sumpter v. Hedges (1898) 1 QB 673 14

Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361 31, 37,

40, 44, 47, 60

Supamarl v. Federated Homes (1981) 9 ComLR 25 54

Sutcliffe v. Chippendale & Edmondson (1971) 18 BLR 149 30

Sutcliffe v. Thackrah [1974] AC 727 53

Sweatfield Ltd. v. Hathaway Roofing Ltd. [1997] CILL 1235 49

Sweet & Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 QB699 (CA) 43

Sze Hai Tong Bank v. Rambler Cycle Co [1959] AC 576;

[1959] 3 All ER 182 (PC) 38

Terry v. Duntze (1795) 2 Hy. Bl. 389 11

The Mihalis Angelos [1971] 1 QB 164 (CA) 31

Toepfer v. Cremer [1975] 2 Lloyd’s Rep.118 (CA) 43

Tramways Advertising Pty Ltd. v. Luna Park (NSW) Ltd.

(1938) 38 S.R. (NSW) 632 36

Trollope & Colls v. Singer (1913) HBC (4th ed.) 55

Turriff v. Richards & Wallington (1981) 18 BLR 19 44

UGS Finance v. National Mortgage Bank of Greece [1964] 1 Lloyd’s Rep. 446 38

Valpy v. Oakeley (1851) 16 QB 941 19

Vigers v. Cook [1919] 2 KB 475 (CA) 13, 15

Wates Ltd. v. Greater London Council (1983) 28

Wells v. Army & Navy Co-op Society (1902) 86 LT 764 55

Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA) 15

Withers v. Reynolds (1831) 109 ER 1370 52, 79

Wong Poh Oi v. Guok Gertrude & Anor [1965-1968] 1 SLR 455 68, 95, 99

Woodar v. Wimpey [1980] 1 WLR 277 31, 32, 33, 43, 60

CHAPTER 1

INTRODUCTION

1.1 Background Studies

The practice of efficient and timely payment in construction projects is a

major factor leading to a project’s success. Payment has been referred to as the

lifeblood of the construction industry due to latter’s inherent nature that takes

relatively long durations and large amounts of money to complete.1 The primary

obligation upon the employer is to give the contractor the sum of money which

forms the consideration for the contract.2 Furthermore, the contractor has a right to

be paid on time.3 The contractor’s right to payment depends upon the wording of the

contract. Within the limits of legality parties can make what arrangements they

please.4

1 Construction Industry Development Board, “A Report of a Questionnaire Survey on Late and

Non-Payment Issues in the Malaysian Construction Industry.” (Kuala Lumpur: CIDB, 2006), p.i. 2 John Murdoch and Will Hughes, “Construction Contracts: Law and Management.” Third Edition.

(London: Spon Press, 2000), p.197. 3 Sundra Rajoo, “The Malaysian Standard Form of Building Contract (The PAM 1998 Form).”

Second Edition. (Kuala Lumpur: Malayan Law Journal, 1999), p.295. 4 Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:

Sweet & Maxwell, 1991), p.69.

2

In the construction industry contractors and subcontractors have become

accustomed to regular monthly payments. It is this facility which has enabled many

businesses to commence with a low capital base. Monthly payment does not result

from a basic legal entitlement. The opposite is the case in that, at common law,

payment is due following completion of the work. The entitlement to monthly

payment comes about from the express provisions in the contract.5 One of the main

purposes of this is to reduce the need for the contractor to fund the development of

the project. This is because the total value of each contract forms a large proportion

of a contractor’s annual turnover. Payment by instalments should eliminate the need

for the contractor to borrow money pending final payment.6 The amount of money

due in each instalment is recorded by the contract administrator in an ‘interim

certificate’. The issue of such a certificate by the contract administrator imposes

upon the employer a strict obligation to make payment.7

In the local scene, many complaints have been voiced about the events of late

and non-payments but the information has been mainly in the form of hearsays. A

research conducted by the Master Builders Association of Malaysia (MBAM) has

demonstrated that the issue of late and non-payment has persisted in the Malaysian

construction industry for quite some time now, but have yet to be fully resolved.8

According to the Works Minister Datuk Seri S. Samy Vellu9:

“More than 18,000 contractors and sub-contractors were either paid

late or have yet to receive payment for completed work totaling

RM23.7billion since 2000. This is a very huge sum, about 14% of the

allocation for development projects under the 9th Malaysia Plan. The

Construction Industry Development Board (CIDB) had carried out a

5 Rodney Martin, “52 Contractual Issues Relevant to Malaysia and Their Resolution.” (Kuala

Lumpur: James R Knowles Sdn Bhd, 2005), p.19. 6 Supra note 2. 7 Supra note 2. 8 Supra note 1. 9 The Star, “18,000 Contractors and Sub-Contractors Paid Late.” (Kuala Lumpur: The Star, 22

August 2006).

3

six-month survey on 330 contractors, in which 273 cases of payment

problems involving RM877.8mil were reported.”

This shows that Malaysian construction industry now is prone to late and

non-payment culture. Such a problem is felt not only in a fast developing economy,

as in the case of Malaysia, but also in developed countries, such as the United

Kingdom and Singapore. Late and/or non-payment will cause severe cash flow

problems especially to contractors, and this would have a devastating knock-on

effect down the contractual payment chain.10

Malaysia has set its vision to be a fully developed nation by 2020. The

construction industry has set its own vision to be ‘among the best in the world’ by

2015. One cannot have a ‘world class construction industry’ if even ‘mundane’

things like payment is not being honoured – whether in a timely manner or at all!

Malaysia too must not under-estimate the potential disastrous consequences of

persistent payment default across the industry and the economy.11

1.2 Problem Statement

There is a chronic problem of delayed and non-payment in the Malaysian

construction industry affecting the entire delivery chain.12 Contractors faced with an

employer who simply does not pay are in serious difficulties. This can be a very

10 Supra note 1. 11 Noushad Ali Naseem Ameer Ali, “A “Construction Industry Payment and Adjudication Act”:

Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.” (Kuala Lumpur: Master Builder, 2006), p.1.

12 Ibid.

4

serious matter for the contractor who may not be able to fund continuation of the

project in the face of the employer’s breach.13

The reaction of many contractors when faced with non-payment is to

consider stopping work on site.14 Some contractors who were complaining of late

payment retaliated by withdrawing their labour and most of their plant from the site

and thus slowed down progress considerably.15 Whilst this is understandable in

many instances such action could prove fatal.16 A contractor who suspended work on

the ground of not having been paid would be guilty of a breach of contract in failing

to maintain regular and diligent progress.17 The contractor has no right at common

law to stop work just because he has not been paid what he considers to be the

correct amount.18

Whether or not such a right exists is generally a complex matter and

contractors are well advised to be extremely cautious and to examine all the potential

pitfalls. A contractor may himself be in breach if the correct procedures as may be

stipulated in the contract are not followed when attempting suspension /

termination.19 It sometimes happens that one contracting party (‘A’) is in breach of

contract and the other party (‘B’) treats this as a repudiatory breach, but it is later

held that A’s breach was not sufficiently serious to justify this. The question which

then arises is whether this mistake means that B, who clearly intended no longer to

be bound by the contract, is now guilty of a repudiatory breach, so that A is entitled

to terminate the contract!20 But, can the employer gain profit by his own wrong? The

13 David Chappell and Vincent Powell-Smith, “The JCT Design and Build Contract.” Second

Edition. (London: Blackwell, 1999), p.154. 14 Lim Chong Fong, “The Malaysian PWD Form of Construction Contract.” (Kuala Lumpur: Sweet

& Maxwell Asia, 2004), p.108. 15 Supra note 2, p.328. 16 Supra note 5. 17 Supra note 2, p.328. 18 Lubenham Fidelities & Investment Co. v. South Pembrokeshire District Council and Wigley Fox

Partnership (1986) 33 BLR 39 (CA). 19 Supra note 14. 20 Supra note 2, p.323.

5

employer cannot rely upon its own breach to justify a contention that the contractor

was itself in repudiatory breach.21

At common law, one contracting party (A) had no right to suspend

performance of contractual obligations on a temporary basis, on the ground that the

other party (B) was in breach of contract.22 Unless B’s breach was sufficiently

serious to justify A in terminating the contractor altogether, A’s only remedy was to

claim damages, in the meantime continuing with the contract. The absolute refusal to

carry out the work or abandonment of the work before it is practically completed

without any lawful excuse is a repudiation by the contractor.23 Abandonment of the

work or refusal to carry on is plainly a breach which goes to the roof of the

contract.24

Therefore, the absolute refusal to carry out the work is a repudiation by the

contractor. The issue arises then is, is the contractor still liable for repudiation if the

employer failed to make payment at the first place? Clearly, the employer is in

breach of contract when they refuse to make payment, but is the act of non-payment

goes to the root of the contract?

An employer’s obligation to pay the contractor is determined by the payment

arrangement envisaged in the terms of the underlying contract.25 This cannot be a

repudiation if there is no contractual duty to pay them. Where there is such a duty it

is a question in each case whether failure to pay is a repudiation.26

21 C J Elvin Building Services Ltd v. Noble and Another [2003] EWHC 837 (TCC). 22 Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1992] 2 All ER 609. 23 Supra note 3, p.251. 24 Mersey Steel & Iron Co Ltd v. Naylor (1884) 9 App Cas 434; Marshall v. Mackintosh (1898) 78

LT 750; Hoenig v. Issacs [1952] 2 All ER 176 (CA). 25 Chow Kok Fong, “Law and Practice of Construction Contracts.” (Singapore: Sweet & Maxwell

Asia, 2004), p.335. 26 Supra note 4.

6

Generally, there is no common law right for any party to treat a contract as

repudiated simply because the other party is in breach of his obligation to pay.27

Failure to pay one instalment out of many due under the terms of the contract is not

ordinarily sufficient to amount to a repudiation.28 In addition, a simple delay of a few

days in payment, even if persistently repeated, would probably not amount to

repudiation.29

Under common law, it is probably insufficient to sustain an allegation that

the employer has repudiated a contract, unless he has fallen behind in honouring a

series of progress payment over a period of time.30 However, persistent delay in

payment can no doubt amount to repudiation, if sufficiently serious. 31 So a clear

indication of refusal or inability to pay future instalments will be a repudiation, as

also a repeated failure to pay on time in response to warnings, if raising the inference

of an intention to pay late habitually so as to derive financial advantage, it is

submitted.32

What does “repudiation” actually mean? The word “repudiation” is

ambiguous and has several meanings, but it is the most convenient term to describe

circumstances where “one party so acts or so express himself as to show that he does

not mean to accept the obligations of a contract any further. To amount to

repudiation a breach must go to the root of the contract. Repudiation is a drastic

conclusion which should only be held to arise in clear cases of a refusal, in a matter

going to the root of the contract, to perform contractual obligations. Repudiation by

one party standing alone does not terminate the contract. It takes two to end it, by

repudiation on the one side, and acceptance of the repudiation on the other.33

27 Supra note 13, p.268. 28 Supra note 4. 29 Supra note 3, p. 295. 30 Supra note 25. 31 Supra note 29. 32 Duncan Wallace, “Hudson’s Building and Engineering Contracts.” Eleventh Edition. (London:

Sweet & Maxwell, 1995), p.623. 33 Supra note 4.

7

Various acts by the employer can result in a repudiatory breach and thus

entitle the contractor to terminate the contract.34 A party contemplating to terminate

a contract following a breach by the other party must necessarily consider the nature

and magnitude of the breach.35 The remedy for non-payment if it constitutes

repudiation is to terminate the contract pursuant to express termination provisions in

the contract, or rescission at common law for a breach going to the root of the

contract, or suing for interim payments or requiring arbitration where that is

provided. If the contractor chooses not to rescind or terminate, his own obligations

continue and he is bound to go on with the work.36

In a nutshell, the contractor alleges that his cash flow is seriously disturbed

when the employer fails to make payment. As a consequence, he treats this as a

repudiatory breach by the employer and chooses to stop his work at the site because

he is not able to fund the project without the employer paying for his works.

However, it is later held that the employer’s breach is not sufficiently serious to

justify the contractor in stopping his work. This mistake means that the contractor is

now guilty of a repudiatory breach, and the employer is entitled to terminate the

contract. Therefore, the issue arises is, is non-payment by the employer sufficiently

enough to be considered as a repudiatory breach?

From the above discussion, whether the failure to pay amounts to repudiation

will depend on the circumstances of the case. Therefore, this study is to identify

circumstances where non-payment by an employer constitutes a repudiatory breach

of contract. Findings of this study will assist the contractor to understand his position

before he takes action when the employer fails to make payment. The contractors

need to know that whether they are entitled to terminate the contract when faced

with non-payment by the employer.

34 Supra note 2, p.197. 35 Supra note 25. 36 Supra note 5.

8

1.3 Objective of the Research

To identify circumstances where non-payment by an employer constitutes a

repudiatory breach of contract.

1.4 Scope of the Research

Given the legalistic nature of this study, the approach adopted in this research

is case law based. Only cases specifically centered on issue of non-payment will be

discussed in this study. Types of contract involved include construction contracts

(between employer and main contractor, and between main contractor and

subcontractor) and contracts of sales of goods and land.

1.5 Importance of the Research

The purpose of this study is to give an insight into the non-payment issue. It

is hoped that the findings of this study will assist the contractors to understand their

rights in the non-payment issue without making mistake in terminating the contract.

It will also help the players in the construction industry to understand their positions

in this issue.

9

1.6 Research Methodology

Careful thought and planning in the preparation of the research methods, data

collection techniques and measurements is very important for conducting research.

Initially, a literature review was undertaken to study and understand the problems of

non-payment in construction industry and review the contractual provisions in

relation to payment in building contract. It was carried out using published journals,

textbooks and standard form of building contracts.

In order to meet the goals and objectives, the primary data collection was

based on the Malaysia Law Journal (MLJ) court cases. It was carried out using the

university’s library online e-database37 via the Lexis-Nexis website38. The selection

of sample court cases involved a depth study rather than a random sample.

37 http://www.psz.utm.my 38 http://www.lexisnexis.com

CHAPTER II

PAYMENTS IN THE CONSTRUCTION INDUSTRY

2.1 Introduction

Money must be paid promptly and fully unless there are specific reasons for

withholding it.1 Payment in any industry has generally been an issue of concern. In

the construction industry payment is an issue of major concern. This is because2:

1. Unlike many other industries, the durations of construction projects are

relatively long;

2. The size of each construction project is relatively large and each progress

payment sum involved are often relatively large; and

3. Payment terms are usually on credit rather than payment on delivery

1 John Murdoch and Will Hughes, “Construction Contracts: Law and Management.” Third Edition.

(London: Spon Press, 2000), p.197. 2 Noushad Ali Naseem Ameer Ali, “A “Construction Industry Payment and Adjudication Act”:

Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.” (Malaysia: Master Builder, 2006), p.5.

11

2.2 The Right to Payment

An employer’s obligation to pay the contractor is determined by the payment

arrangement envisaged in the terms of the underlying contract. The situation of a

construction contract for a small project is comparable with that of a sale of goods

transaction. The contractor in such a contract, like the seller of goods, is normally

paid the contract price in a single sum on the completion of the works, under what is

known as a lump sum or an entire contract. In larger and more complex projects, the

more common payment arrangement, however, is one where work is certified and

paid progressively according to the value of work completed through a series of

“interim payment” or “progress payments”. Alternatively, the contract may prescribe

for work to be paid at predetermined stages in the progress of the works, an

arrangement termed in the industry as “stage payment”. Other arrangements which

have been encountered from time to time in the industry include an instalment

payment structure and, in the case of residential developments, developers with

limited financing means may agree with contractors to adopt payment arrangement

premised on the sale of the residential units.3

Whichever method is agreed upon as that in accordance with which payment

is to be made, nothing becomes due to the contractor until he has done anything to

entitle him to receive payment.4 Where the contract does not make completion a

condition precedent to payment, there may be an implied stipulation on the part of

the employer to pay from time to time reasonable instalments of the whole cost to

the contractor during progress of the work.5

3 Chow Kok Fong. “Law and Practice of Construction Contracts”. Third Edition. (Singapore:

Sweet & Maxwell Asia, 2004), p.335. 4 Needler v. Guest (1647) Aleyn 9. 5 Terry v. Duntze (1795) 2 Hy. Bl. 389.

12

The contractor’s right to payment depends upon the wording of the contract.6

Within the limits of legality parties can make what arrangement they please, but

there are three broad heads under which the right can arise:-

2.2.1 Lump Sum Contract

A lump sum contract is a contract to complete a whole work for a lump sum,

e.g. to build a house for £60,000. If the house is completed in every detail required

by the contract the contractor is entitled to £60,000, and if extra work was carried out

he may be able to recover further payment. If he does not complete the house,

detailed clauses may provide what amount, if any, he is to receive. But parties

entering into a contract do not always contemplated its breach, and in the absence of

such clauses, and even to some extent when they are present, a difficult problem may

arise as to what payment, if any, the contractor can recover.7

If a contractor agrees to do a whole work according to a specification which

consists of 40 items for a lump sum of £5,000 and fails to carry out 20 of the items, it

is obvious that he is not entitled to recover the whole of the £5,000 and that the

employer may have an action against him for damages. But is the contractor entitled

to recover any of the £5,000? Can the employer say to him, “You agreed to complete

the whole and to be paid when the whole was completed?8 The work is incomplete,

therefore you are entitled to nothing?” and can the employer rely on the same

argument where only two out of the 40 items are omitted? These problems, which

have greatly exercised the courts, require discussion of entire contracts and

substantial performance.9

6 Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:

Sweet & Maxwell, 1991), p.69. 7 Ibid. 8 See Appleby v. Myers (1867) LR2CP 651. 9 Supra note 6.

13

2.2.1.1 Entire Contracts

An entire contract is one where entire performance by one party is a

condition precedent to the liability of the other party10 and where therefore the

contractor’s right to payment depends on entire performance on his part. An entire

contract is an indivisible contract, one where the entire fulfillment of the promise by

either party is a condition precedent to the right to call for the fulfillment of any part

of the promise by the other. Whether a contract is an entire one is a matter of

construction.11

Clear words are needed to bring an entire contract into existence.12 The type

of contract which may be entire is that where the contractor undertakes some simple

clear obligation such as to put some broken article or part of a house in working

order and completely fails to do so. In such a case he may be entitled to nothing

although he has expended much work and labour, for the main purpose of the

contract is that the article or part of the house shall work and there is no scope in the

contract for terms collateral to the main purpose.13

It is perhaps academically debatable whether or not a lump sum contract is by

definition an entire contract. It is submitted that, subject to provisions for

instalments14:

1. Most lump sum contracts are entire contracts in the sense that “the builder

can recover nothing on the contract if he stops work before the work is

10 Cutter v. Powell (1795) 6 TR 320; Munro v. Butt (1858) 8 EB 739; Appleby case, supra note 8;

Hoenig v. Isaac [1952] 2 All ER 176 (CA). 11 Hoenig case, supra note 10. 12 Appleby case, supra note 8; Hoenig case, supra note 10. 13 Duncan v. Blundell (1820) 3 Stark; Sinclair v. Bowles (1829) 9 B&C 92; Portman v. Middleton

(1858) 4 CB (NS); Hoenig case, supra note 10; Vigers v. Cook [1919] 2 KB 475 (CA). 14 Supra note 6, p.71.

14

completed in the ordinary sense – in other words abandons the contract”15;

but

2. Most lump sum contracts are not entire contracts in the sense that they are

construed as excluding the principle of substantial performance.

The traditional position in these situations is to regard these contracts as

entire contracts so that a contractor has to necessarily complete the whole of the

works in scrupulous compliance with the prescribed requirements of the underlying

contract before he is entitled to any payment. This position has, through the years,

been gradually modified, so that in the mid 1950s, the English courts were prepared

to rule that a contractor may sue on the lump sum if the contractor has substantially

completed his works, although the building owner may bring a cross-claim for

defects and outstanding works or, alternatively, set these claims in diminution of the

price.16 In Hoenig v. Isaacs17, Lord Denning MR in delivering his judgment of the

English Court of Appeal in that case stated the position as follows:

“Where a contract provides for a specified sum to be paid on

completion of specified work, the courts lean against a construction of

the contract which would deprive the contractor of any payment at all

simply because there are some defects or omissions.”

Thus, in an early case, it has been held that where a contractor did work on a

house under a lump sum contract, he was entitled to receive payment for his work,

notwithstanding that he has departed from the terms of the contract.18 However, this

entitlement to be paid is extinguished where the works were incomplete because the

contractor abandoned the works.19 A contractor also forfeited his entitlement to be

15 Hoenig case, supra note 10. 16 Supra note 3. 17 [1952] 2 All E.R. 176 (CA). 18 H Dakin & Co. Ltd v. Lee [1916] 1 KB 566. 19 Sumpter v. Hedges (1898) 1 QB 673.

15

paid where there was a total failure of consideration, as where the works delivered

conferred no benefit whatsoever to the building owner20 and where the work

undertaken was different from which he has contracted to deliver.21

2.2.1.2 Substantial Performance

In the ordinary lump sum contract the employer cannot refuse to pay the

contractor merely because there are a few defects and omissions, if there is

substantial completion he must pay the contract price subject to a deduction by way

of set-off or counterclaim for the defects.22

2.2.1.3 Non-Completion

This may occur by express or implied agreement, because the employer

prevents completion, because the contractor in breach of contract fails to complete or

because the contract is frustrated. If the contractor fails to complete in breach of

contract, his breach will normally amount to repudiation. Prevention by the employer

may amount to repudiation.

When entire completion is a condition precedent to payment, the contractor

cannot recover anything either under the contract or on a quantum meruit if he has

failed to complete in every detail.23 For an ordinary lump sum contract, the

contractor cannot recover anything either under the contract or on a quantum meruit

unless he shows substantial completion.

20 Farnsworth v. Garrard (1807) 1 Camp 38. 21 Forman & Co Pty Ltd v. The Liddlesdale [1900] AC190. 22 Hoenig case, supra note 10; Williams v. Roffey Brothers [1990] 2 WLR 1153 (CA); Hutchinson

v. Harris (1978) 10 BLR 19. 23 Cutter case, supra note 10; Sinclair case, supra note 13; Ellis v. Hamlen (1810) 3 Taunt. 52;

Dakin v. Lee [1916] 1 KB 566; Stegmann v. O’Connor (1899) 81 LT 627 (CA); Vigers case, supra note 13.

16

It has been said that the rule that a contractor who has not substantially

completed cannot recover payment does not work hardly upon him if only he is

prepared to remedy the defects before seeking to resort to litigation to recover the

lump sum.24 It seems to follow that ordinarily there is an implied duty upon an

employer to give a willing contractor an opportunity to remedy defects, breach of

which duty amounts to prevention. Such duty does not, it is submitted, arise if the

defects are so grave as to show that the contractor is unable to perform the contract.

2.2.2 Contract other than for a Lump Sum Contract

The manner of payment can be arranged in a variety of ways and it is

impossible to attempt any exhaustive classification. A contract to do a whole work in

consideration of the payment of different sums for different parts of the work is

prima facie subject to the same rules about completion as an ordinary lump sum

contract.25 A contract to do a whole work with a provision for payment of each

completed part of the whole may be a divisible contract in the sense that if the whole

is not completed through the default of the contractor, he may be entitled to payment

under the contract for those part he has completed subject to the employer’s right to

counterclaim for non-completion of the whole.26

24 Bolton v. Mahadeva [1972] 1 WLR 1009. 25 Appleby case, supra note 8. 26 Newfoundland Government v. Newfoundland Ry. (1888) 13 App. Cas. 199 (PC).

17

2.2.3 Quantum Meruit

The expression quantum meruit means “the amount he deserves” or “what

the job is worth” and in most instances denotes a claim for a reasonable sum. It is

used to refer to various circumstances where the courts award a money payment

whose amount at least is not determined by a contract. In some instances, the basis

for the payment also is less than contractual.27

“A quantum meruit claim (like the old actions for money has and

received and for money paid) straddles the boundaries of what we now

call contract and reinstitution; so the mere framing of a claim as a

quantum meruit claim, or a claim for a reasonable sum, does not assist

in classifying the claim as contractual or quasi-contractual.”28

A claim on a quantum meruit cannot arise is an existing contract between the

parties to pay an agreed sum.29 But there may be a quantum meruit claim where

there is:30

1. An express agreement to pay a reasonable sum

2. No price fixed

3. A quasi-contract

4. Work outside a contract

5. Work under a void contract

27 Supra note 6, p.78. 28 British Steel Corporation v. Cleveland Bridge and Engineering [1984] 1 All ER 504; Holland

Hannen & Cubitts v. W.H.T.S.O. (1981) 18 BLR 80. 29 Gilbert & Partners v. Knight [1968] 2 All ER 248 (CA). 30 Supra note 27.

18

2.3 Arrangements for Interim Payment

Where a contract provides for a contractor to be paid by way of interim

payments, an arrangement is usually provided for the works to be valued and

certified at prescribed intervals throughout the contract. In what are normally termed

“measurement and value contracts”, this takes the form of designating a particular

person to ascertain the value of work, completed up to a particular point of time and

thereupon, to certify this value as the amount which is due to the contractor. The

contractor’s entitlement to be paid is then conditioned on the presentation of the

payment certificate issued by the designated certifier. 31

The certifier designated in the contract forms used in the public sector is

normally referred to as the “Superintending Officer”. This is usually a senior public

building professional – frequently the Director of a Department, the Chief Architect

or Chief Engineer who is responsible for the administration of the construction

works department in a public agency.32

Several issues are frequently encountered in the operation of these

arrangements and these may be briefly mentioned:

a. The conditions which have to be fulfilled before the certifier are obliged to

issue an interim payment certificate.

b. The nature of the certification function – how does the certifier exercise this

function independently, given that he is usually an appointee of the employer

(owner)?

c. The extent to which certificates operate as a condition precedent to payments.

31 Supra note 3, p.337. 32 Ibid.

19

d. Circumstances under which a certificate may be challenged.

2.4 Mode of Payment

2.4.1 Payment in Cash

Where a contractor does not make special provision as to payment, the

contractor is entitled to be paid in cash; in some contracts, however, special

provisions are contained stipulating that payment may be made either in whole or in

part in bills of exchange, debentures, shares, land or Lloyd’s bonds.33

2.4.2 Payment in Bills

If a contractor takes bills which are dishonoured, he, the contractor, unless he

has accepted them in complete satisfaction of his debt, may either treat them as a

nullity and sue on the contract, or he may elect to sue upon the dishonoured bills.

The holders in due course of such bills do not acquire any charge over or lien on the

subject matter of the contract even when it is, as in the case of a ship, not being

construed on the land of the employer.34

33 William Gill, “Emden and Gill’s Building Contracts and Practice”. Seventh Edition. (London:

Butterworth, 1969), p.235. 34 Re Lindsay, Ex parte Lambton (1875) 10 Ch. App. 405; Valpy v. Oakeley (1851) 16 QB941.

20

2.4.3 Payment in Debentures or Shares

If payment is to be by way debentures or shares either party can insist on the

prescribed mode of payment though the price of the debentures or shares may have

increased or decreased since the contract was made.35 If a builder agrees to take

shares in a company in consideration of being employed as a contractor to execute

works for the company, this is a conditional contract, and if he is not given the

contract he need not take the shares and is entitled to be struck off the list of

contributories.36

For example: a contractor was to be paid a large proportion of his contract

price in shares to be issued to him upon certificate of the chief engineer, except

works to the value of £10,000 to form a retention fund. In the course of the works

delay was caused by the refusal of the resident engineer to approve certain materials

and the consequent suspension of operations until the chief engineer in London had

been consulted. During the delay certain Argentine stocks in which retention moneys

were not responsible for the mistakes of the engineer under the contract, the loss in

respect of the securities could not be cast upon them.37

2.4.4 Payment in Land

If the payment is to be made in land the contractor will, it seems, be entitled

to claim specific performance of the contractor if he has performed every condition

precedent to his right of payment, or he may treat the contract as at an end and bring

an action for quantum meruit for the work done, or he may bring action for breach of

35 De Waal v. Adler (1886) 12 App. Cas. 141. 36 Re Aldborough Hotel Co., Simpson’s Case (1869) 4 Ch. App. 184. 37 Supra note 35.

21

contract, in which case it is suggested the damages recoverable will be limited to the

value of the land.38

For example: H agreed to pay K a weekly sum for board and lodging which

was to be satisfied by certain furniture at a fixed valuation. After the agreement the

furniture was seized under a judgment by a creditor of H. it was held that the effect

was the same as if H had himself taken away the furniture and sold it, and K was,

therefore, entitled to recover the value of the board and lodging by an ordinary action

of debt as if the special contract had never existed.39

2.5 Conclusion

The primary obligation upon the employer is to give the contractor the sum

of money which forms the consideration for the contract. An employer’s obligation

to pay the contractor is determined by the payment arrangement envisaged in the

terms of the underlying contract. Within the limits of legality parties can make what

arrangement they please, but there are three broad heads under which the right can

arise which are: entire contract, contractor other than for a lump sum contract and

quantum meruit. Next, arrangement for interim payment and mode of payment are

elaborated in a detail in the chapter.

38 Supra note 33, p.236. 39 Keys v. Harwood (1846) 2 CB 905.

CHAPTER III

REPUDIATORY BREACH IN CONSTRUCTION CONTRACT

3.1 Introduction

Contracts rest on the agreement of the parties: as it is their agreement which

binds them, so by their agreement they may be discharged.1 Contractual obligations

may come to an end in a number of ways. In the ordinary course of things this will

most commonly be brought about by the parties performing all their contractual

obligations or promises.2

A very varied terminology has been used both judicially and in commerce to

describe the process by which a party, unilaterally and by his own action, brings a

contract to an end before it has been fully performed either by himself or the other

party. Thus, forfeiture, determination, termination, renunciation, rescission (and even

repudiation when applied to the action of the innocent party in ending the contract),

have been variously used in the cases and elsewhere. In context the different

1 Guest, “Anson’s Law of Contract.” Twenty-Forth Edition. (Oxford: Clarendon Press, 1975),

p.464. 2 Neil Jones and David Bergman, “A Commentary on the JCT Intermediate Form of Building

Contracts.” (London: Collins, 1985), p.266.

23

descriptions should generally be regarded as synonymous, with no significant

differences of consequential effect.3

The common law right to terminate or “repudiate” a contract can arise in

either of two situations. First, one party can make clear that it has no intention of

performing its side of the bargain. Secondly, that party may be guilty of such a

serious breach of contract that it will be treated as having no intention of performing.

A breach of this kind is known as a “repudiatory breach”. In both cases, the innocent

party has a choice; either to “affirm” the contract and hold the other party to its

obligations (while claiming damages as appropriate for the breach), or to bring the

contract to an end. If repudiation is opted for, then both parties are released from any

further contractual obligation to perform.4

Not all breaches are equal, nor do the contracting parties necessarily have the

same rights and remedies for the different breaches. Although the breach can take

various forms, there is a dividing line between a material, or substantial, breach and

an immaterial breach, or minor, breach. A material breach will give rise to certain

remedies, whereas an immaterial breach may well have other remedies. The

distinction between the two is a matter of degree, often left to the judge’s discretion.5

Many contracts specifically provide and list various forms of breach which may be

deemed material; one cannot assume that a material breach in one contract will

automatically be a material breach in another contract. The distinction and awareness

that a difference exists is of utmost importance because if the contractor should

employ the remedies for the material breach, e.g., throwing a subcontractor off the

job, when in fact only an immaterial breach exists, the contractor might find out the

hard way that it reacted unreasonably and used unreasonable force and remedies, and

it might be declared the one in default.6

3 Duncan Wallace, “Hudson’s Building and Engineering Contracts”. Eleventh Edition. (London:

Sweet & Maxwell, 1995), p.1243. 4 John Murdoch and Will Hughes, “Construction Contracts Law and Management.” Third Edition.

(London: Spon Press, 1992), p.324. 5 Micheal S. Simon, “Construction Contracts and Claims.” (London: McGraw-Hill Book

Company, 1979), p.95. 6 Ibid.

24

3.2 Common Law Termination

It is probably trite to state that the rights of a party to terminate a contract and

the consequences of the termination itself are governed both by common law

principles and the provisions of the subject contract. Nevertheless, it should be

appreciated that the absence of any express provision on termination will, in most

cases, simply preserve the parties’ position under common law and this perspective

should not be lost in the enthusiasm of negotiations leading to the conclusion of a

contract.7

This will be by operation of law, and will occur where the guilty party has

committed a fundamental breach and the innocent party has then by word or action

elected to accept the repudiation and terminate the contract. This total process, often

described in this book and elsewhere to distinguish it from contractual

determinations as “rescission”, does not depend on any express contractual provision,

except insofar as the contract may have chosen by its terms to indicate such

importance or gravity to a particular contractual obligation that any breach of which

will justify a common law determination.8

The effect of such a common law determinations is to release both parties

from further performance and to entitle the innocent party most importantly to

damages for breach of the contract, including those resulting from the loss or

abandonment of the contract itself, though with certain alternatives or supplementary

remedies also available. Provided that the determining party acts reasonably within

the rules of mitigation of damage, however, there will be no particular course of

action required of him, so that a construction owner rescinding the contract at

common law, for example, will no, provided he acts reasonably, necessarily be

7 Chow Kok Fong, “Law and Practice of Construction Contracts.” Third Edition. (Singapore:

Sweet & Maxwell Asia, 2004), p.555. 8 Supra note 3, pp.1243-1244.

25

obliged to complete the project, but may abandon it and compute his resulting

damages accordingly.9

While a common law determination will provide a high degree of freedom

and flexibility of remedy to the determining party, therefore, he must assume the

burden of establishing that the breach of contract was, either intrinsically or on the

particular facts, sufficiently fundamental to justify the determination in law.10

Most contract provisions on termination either add or to subtract from the

grounds of termination which are normally afforded under common law. They also

typically focus on providing some scheme of procedural regulation as where these

provisions stipulate that a party should be afforded sufficient notice whenever

termination is being seriously contemplated. The termination regime will also

provide, in most cases, a basis for loss and expense arising from the termination to

be allocated between the parties.11

3.2.1 Discharged by Performance

This is the ideal way of bringing a contract to an end when both parties have

carried out their obligations under the contract and nothing further remains to be

done, At that point, the purpose for which they entered into the contract has been

accomplished and the contractual relationship ceases.12

9 Ibid. 10 Ibid. 11 Supra Note 7. 12 David Chappell and Vincent Powell-Smith, “The JCT Design and Build Contract.” Second

Edition. (London: Blackwell, 1999), p.267.

26

Parties to a contract are bound by an obligation and they must “either

perform, or offer to perform, their respective promises, unless the performance is

dispensed with or excused” under the law. When the parties have carried out exactly

what they have undertaken to do, there is a complete discharge but if only one party

performs his part of the bargain, he alone will be discharged. As a general rule,

performance must be strictly in accordance with the terms of the contract unless the

parties have agreed otherwise.13

3.2.2 Discharged by Agreement

If the parties to a contract so wish, they may agree to bring the contract to an

end, what they are actually doing is entering into another contract whose sole

purpose is to end the first contract. In most cases, when a contract is ended by

mutual agreement it is because the parties gain something from so doing, thus

satisfying the requirement for consideration as an essential element of the contract.

However, it is prudent for the parties to execute the second contract as a deed, thus

avoiding any question of consideration arising.14

A contract that is created by consent can be extinguished by consent,

expressed or implied. The consent of all parties to the contract is necessary.

Expressed consent may be given at the time of the contract or subsequently. For

instance, the parties may agree at the time of making the contract that on the

occurrence of an event, one or more parties will be discharged. Consent given

subsequent to the contract may be a waiver, release, novation, remission or

rescission. Novation is the substitution of a new contract for an earlier one,

particularly a contract between a creditor, a debtor and a third party whereby they

13 Beatrix Vohrah and Wu Min Aun, “The Commercial Law of Malaysia.” (Kuala Lumpur:

Longman, 2004), p.151. 14 Supra note 12.

27

agree to substitute a third party for the debtor or creditor under the original contract

which will be discharged.15

3.2.3 Discharged by Frustration

Most legal systems make provision for the discharge of a contract where,

subsequent to its formation, a change of circumstances renders the contract legally or

physically impossible of performance. In English law, such a situation is provided

for by the doctrine of Frustration. Originally, this term was confined to the discharge

of maritime contracts by the “frustration of the adventure”, but it has now been

extended to cover all cases where an agreement has been terminated by supervening

events beyond the control of either party. This development is no mere linguistic

accident, for it is not strictly necessary that performance should have become

literally impossible, provided that it cannot be properly demanded in the

fundamentally different situation which has unexpectedly occurred.16

A useful definition of frustration was given by Lord Radcliffe in Davis

Contractors Ltd. v. Fareham Urban Council (1956)17:

“It occurs wherever the law recognizes that without default of either

party a contractual obligation has become incapable of being

performed because the circumstances in which performance is called

for would render it a thing radically different from that which was

undertaken by the contract.”

15 Supra note 13, p.163. 16 Supra note 1. 17 [1956] AC 696.

28

A straightforward example of a contract being frustrated is if a painting

contractor entered into a contract to repaint the external woodwork of a house and

before he could commence work, the house was destroyed by fire which was neither

the responsibility of the building owner nor the painter. There are other cases where

it will be a question of degree whether the contract is frustrated. The fact that a

contractor experiences greater difficulty in carrying out the contract or that it costs

him far more than he could reasonably have expected is not sufficient ground for

frustration. Neither will a contract be frustrated by the occurrence of some event

which the contract itself contemplated and for which it made provision.18 In practice,

it is very rare for a contract to be frustrated.19

3.2.4 Discharged by Repudiation

If one of two parties to a contract breaks the obligation which the contract

imposes, a new obligation will in every case arise – a right of action conferred upon

the party injured by the breach. Besides this, there are circumstances under which the

breach not only gives rise to a right of action but will also discharge the injured party

from such performance as may still be due from him. However, not every breach of

contract operates as a discharge. In order to have this effect the breach must be such

as to constitute a repudiation by the party in default of his obligations under the

contract.20

Further explanation regarding repudiatory breach will be discussed under the

topic of “repudiatory breach”.

18 Wates Ltd. v. Greater London Council (1983). 19 Supra note 12, p.268. 20 Supra note 13, p.173.

29

3.3 Contractual Termination

The second way in which a party may lawfully determine the contract will be

exercising powers to that effect expressly provided for in a contractual termination

clause. Such a termination will be different from a common law determination in

two vital respects. In the first place, it will not be necessary to establish that the

breach or event on which the clause is expressly conditioned is of the fundamental

repudiatory character required for a common law determination. It will be sufficient

that it has been contractually defined or nominated as a ground for contractual

determination.21

On the other hand, however, a contractual termination will provide no

remedies to the rescinding party beyond those expressly conferred by the termination

clause itself. As will be seen, the draftsmanship of termination clauses in

construction contracts has been traditionally inept, not frequently stipulating

financial consequences or seizures of property which could not be justified on a

common law determination or by the ordinary rules governing the measure of

damage, so that they may be unenforceable as penalties, while on the other hand

unduly circumscribing a determining owner’s damages or remedies on the

assumption that he will always wish or be in a position to complete the project.22

Moreover, exact and meticulous compliance by the determining party with

any formal or procedural requirements laid down in the termination clause, for

example, as to notice or time limits, will usually be required if a contractual

termination is to be successful, whereas the formal requirements for a successful

common law determination are much more broadly based and require little more

than a clear and unequivocal indication of his intentions by the determining party.23

21 Supra note 3. 22 Ibid. 23 Ibid.

30

A party who purports to operate a contractual determination clause when he

is not entitled to do so either factually or legally is likely to repudiate the contract.24

This is because a party who acts upon a contractual determination clause usually

refuses or ceases to perform his own obligations. If this is not in accordance with the

contract, he will usually himself be in fundamental breach.25

Contractual determination clauses do not exclude common law remedies

available upon repudiation unless the agreement expressly provides that the

contractual rights are to be the exclusive remedy for the breaches in question.26 It is

theoretically possible that such exclusion might also arise by implication, but it is

thought that in practice this is unlikely.27

3.4 Repudiatory Breach

The word “repudiation” is ambiguous and has several meanings, but it is the

most convenient term to describe circumstances where “one party so acts or so

expresses himself as to show that he does not mean to accept the obligations of a

contract any further.” Such a repudiation if accepted by the innocent party releases

the innocent party from further performance.28

24 Architectural Installation Services v. James Gibbons (1989) 16 ConLR 68. 25 Furst, S. and Ramsey, V., “Keating on Building Contracts”. 7th ed. London: Sweet & Maxwell,

2001, pp.153. 26 Modern Engineering (Bristol) v. Gilbert-Ash [1974] AC689; Architectural Installation Services

case, supra note 24; Sutcliffe v. Chippendale & Edmondson (1971) 18 BLR 149. 27 Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:

Sweet & Maxwell, 1991), p.153. 28 Heyman v. Darwins [1942] AC 356.

31

The following will dwell in various serious breaches of contract which are

repudiatory and entitle the innocent party to regard himself as discharged from any

further performance of his contractual obligations.

3.4.1 Repudiation

Repudiation is a drastic conclusion which should only be held to arise in

clear cases of a refusal, in a matter going to the root of the contract, to perform

contractual obligations.29 It may consist of a renunciation, an absolute refusal to

perform the contract30, or it may arise as the result of a breach, or breaches of

contract such that ‘the acts and conduct of the party evince an intention no longer to

be bound by the contract.’31 Repudiation before performance is due is termed an

anticipatory breach.32

A party repudiates a contract when he intimates by words or conduct that he

does not intend to honour his obligations as and when they fall due.33 In other words,

he has decided to unilaterally “put an end to the contract”. In Hochster v. De La

Tour34, Lord Campbell cited the case of a man who contracts to sell and deliver

certain goods on a specified date, but before that day, he sells and delivers them to

another, the repudiation here is implicit, but remains clearly operative and the

defaulting seller is liable. Again, in King v. Allen & Sons Billposting Ltd.35, the

owner of a billposting site who, having granted a license to post bills on the site,

29 Woodar v. Wimpey [1980] 1 WLR 277; Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.

[1940] 3 All ER 60. 30 Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361; Mersey Steel & Iron

Co. Ltd v. Naylor (1884) 9 App. Cas. 434. 31 General Billposting Co. Ltd v. Atkinson [1909] AC118. 32 The Mihalis Angelos [1971] 1 QB 164 (CA); Federal Commerce v. Molena Alpha [1979] AC

757; Afovos Shipping v. Pagnan [1983] 1 WLR195; Chilean Nitrate Sales v. Marine Transportation [1982] 1 Lloyd’s Rep. 570.

33 Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1. 34 (1853) 2 E&B 678. 35 [1916] 2 AC 54.

32

subsequently alienated the site without making any arrangement regarding the

licensing contract. He was held to have repudiated on the licensing contract.

A mirror of this in a building contract situation may be the case where an

employer who, having employed a contractor to construct a building, subsequently

sold the land on which the building was to be sited to a third party without arranging

to assign the building contract. It is open, of course, to the building contractor to

accept the assignment, but in the absence of any such arrangement, it is clear that the

employer has placed himself in a position where he can no longer perform his

obligations under the original contract.36

3.4.1.1 Intention to Repudiate

The sentiments expressed by the authorities are best summed up by Lord

Wrenbury’s observation that a breach which amounts to a repudiation is a “serious

matter not to be lightly found or inferred”.37 The plaintiff must show that the

defendant has made his intention to repudiate abundantly clear. Thus, repudiation

has been described as “a drastic conclusion which should only be held to arise in

clear cases of a refusal, in matter going to the root of the contract, to perform

contractual obligations.”38 Lord Selborne in Mersey Steel and Iron Co v. Naylor

Benzon & Co.39 described the approach to be taken by the courts as follows:

“You must look at the actual circumstances of the case in order to see

whether the one party to the contract is relieved from its future

performance by the conduct of the other; you must examine what that

36 Supra note 7, p.557. 37 Bradley v. Newson [1919] AC 16. 38 Woodar case, supra note 29; Smyth v. Bailey [1940] 2 All ER 60. 39 (1884) 9 App. Cas. 434.

33

conduct is so as to see whether it amounts to a renunciation, to an

absolute refusal to perform the contract … and whether the other

party may accept it as a reason for not performing his part.”

3.4.1.2 Misapprehension of Contract Obligations

There is some support for the proposition that a party who refuses to proceed

with the contract because of a bona fide misapprehension of his obligations under a

contract will not held to have repudiated the contract. This is provided that he is able

to demonstrate his readiness to perform the contract according to its terms, and

would have so performed if not for the misconstruction of the contract. Lord Wright

in Ross Smyth & Co v. Bailey, Son & Co40 stated the position as follows:

“A mere honest misapprehension, especially if open to correction, will

not justify a charge of repudiation.”

The case frequently cited on this subject is the House of Lords decision in

Woodar Investment Development Ltd v. Wimpey Construction United Kingdom

Ltd..41. A contract was executed under which Woodar agreed to sell certain land to

Wimpey. The parties had agreed that the transaction was to be completed within two

months from the date when outline planning permission was granted and at any rate

not later then 21 February 1980. Subsequently, because of adverse changes in the

property market, Wimpey sought to exercise a provision in the contract to extricate

them from the transaction, although the factual circumstances which entitled them to

exercise this right did not exist, Wimpey was able to show that they honestly

believed that they were entitled so to act. The House of Lords held that Wimpey’s

conduct did not, therefore, amount to a repudiatory breach.42

40 (1940) 3 All E.R. 60. 41 [1980] 1 W.L.R. 277; [1980] 1 All E.R. 571. 42 Supra note 7, p.563.

34

With respect, it is not easy to reconcile this decision with that reached by the

House in another case decided a year earlier. In Federal Commerce and Navigation

Co. Ltd. v. Molena Alpha Inc., 43 following a series of disputes between the

characters of certain ships and the ships’ owners, the chatterers proceeded to deduct

claims against their hire payments. In turn, the owners, after seeking legal advice,

stopped the issue of freight pre-paid bills of lading and arranged for the bills of

lading to be endorsed with the charter party terms. These actions had the effect of

making it impossible for the chatterers to operate the ships. It was accepted that

despite their coercive acts towards the chatterers, the ship owners honestly believed

that they were entitled to act in this manner. The House of Lords ruled that the

owners had wrongfully repudiated the contract despite the fact that the owners were

genuine in their misapprehension of their rights. Professor Michael Furmston, in

attempt to reconcile the two decisions, wrote:

“In the Woodar case, there was no call for the plaintiffs to take

immediate action and they could, for instance, have taken out a

construction summons to test the correctness of their view of the

contract’s meaning. Again, the time for completion was some way off.

It would seem that Wimpeys had actually refused to complete on this

ground that would have been a repudiatory breach. In the Federal

Commerce case, although the breach was probably anticipatory, the

gap between repudiation and performance was fairly short and the

pressure on the chatterers correspondingly great.”

Nevertheless, this distinction is a very fine one. With respect, it is quite

speculative that their lordships in both cases could have addressed themselves in

these terms. The better view must be that the position is still largely unsettled.44

43 (1979) A.C. 757. 44 Supra note 7, p.564.

35

3.4.2 Fundamental Breach

Fundamental breach occurs when the defaulting party has committed a

fundamental breach, that is, a breach which undermines the very foundation on

which the contract was transacted.45

3.4.2.1 General Principles

An aggrieved party is entitled to treat the contract as coming to an end is

where the defaulting party, either explicitly or implicitly, commits a fundamental

breach of contract.46 The characteristic situation envisaged is that as exemplified by

Karsales (Harrow) Ltd. v. Wallis47. In that case, the seller of a car had sought to

deliver an empty car body, relying on an exemption clause purporting to exclude any

warranty of road worthiness or fitness of purpose. The English Court of Appeal

found for the buyer because it held that what was actually delivered was not the

object contracted for. The exemption clause could not operate as there was a

fundamental breach of the contract.48

Undoubtedly, the fact in the Karsales case represents an extreme situation. As

a general principle, in deciding whether a fundamental breach has been committed,

the authorities appear to have regard to both the importance that the parties are

presumed to have attached to the particular term of the contract which has been

breached and the gravity of the consequences arising from that breach. Furthermore,

both the importance of the term breached and the gravity of the consequences must

be quite apparent to the party who is held to account for the performance of the

45 Supra note 7, p.557. 46 Supra note 44. 47 [1956] 2 All E.R. 866. 48 Supra note 44.

36

contract. A common expression used in the judgments to describe this approach is

whether the breach “goes to the root of the contract”.49 The test was perhaps most

clearly enunciated by Jordan CJ in the leading Australian case of Tramways

Advertising Pty Ltd. v. Luna Park (NSW) Ltd.50:

“The test… is whether it appears from the general nature of the

contract considered as a whole, or from some particular term or terms,

that the promise is of such importance to the promise that he would

not have entered into the contract unless he had been assured of a

strict or substantial performance of the promise, as the case may be,

and that this ought to have been apparent to the promisor.”

The concept of fundamental breach is perhaps most frequently encountered

in contracts for the carriage of goods and particularly, to deviations of shipping

voyages. In Joseph Thorley Ltd v. Orchis Steamship Co51, a cargo was contracted for

shipment on a vessel “bound for London”. However, instead of proceeding straight

for London, the ship called at ports in Asia Minor, Palestine and Malta. On reaching

London, the cargo was damaged through the negligence of stevedores. It was held

that although the deviation was not the direct cause of the damage, it was

nonetheless so serious a breach as to change the character of the contemplated

voyage. Accordingly, the ship owners had in the circumstances committed a

fundamental breach of contract. Similarly, in Lilley v. Doubleday52, where the

defendant had agreed under a contract to store the plaintiff’s goods in a repository,

but in fact stored them in warehouse, where they were subsequently destroyed by

fire, the court has no difficulty in holding that the defendant had “stepped out of his

contract” and thereby committed a fundamental breach.53

49 This metaphor was first used by Lord Ellenborough in Davidson v. Gioyne (1810) 12 East 381. A

recent judgment which resorted to his metaphor is that of Sachs LJ in Décor-Wall International SA v. Practitioners in Marketing Ltd [1971] 2 All ER 216.

50 (1938) 38 SR (NSW) 632. 51 [1907] 1 KB 660. 52 [1907] 1 KB 669. 53 Supra note 7, p.565.

37

Other tests have been to ask whether the breach is total54 or fundamental55 or

whether the effect of the breach is such that it would be unfair to leave the injured

party to a remedy in damages.56 In commercial contracts, in particular those relating

to shipping, a prime test seems to be whether the commercial purpose of the

enterprise is frustrated.57 It is submitted that, in relation to building contracts, to ask

whether the breach goes to the root of the contract is often more helpful. The

deliberate character of a breach makes it easier for, but does not compel the court to

find that it was fundamental.58

3.4.2.2 Rule of Construction

It is now settled in both England and Singapore that the concept of a

fundamental breach is not a rule of law, but a rule of construction.59 The rule is

raised primarily to justify rescission as well as to defeat an exemption clause. In

Suisse Atlantique Societe d’Armement Maritime SA v. NV Rotterdamsche Kolen

Centrale60, the plaintiff ship owners chartered to the defendants a ship for two years

to transport coal between Europe and the United States. The defendant agreed to

load and unload cargoes at specified rates and to pay demurrage for any delay in so

doing. As it turned out, delays in loading and unloading in fact occurred. Instead of

restricting their claims to the demurrage, the plaintiff argued that the defendants’

delays were such as to amount to a repudiation of the contract and that the

demurrage clause was thus inoperative. The House of Lords rejected the plaintiffs’

arguments and held that on the facts there was no fundamental breach which would

have rendered the demurrage clause inoperative. In the course of their judgment,

54 Heyman case, supra note 28. 55 Suisse Atlantique case, supra note 30. 56 Decro-Wall International S.A. case, supra note 49. 57 Hong Kong Fir Shipping v. Kawasaki Kison Kaisha [1962] 2 QB 26 (CA). 58 Suisse Atlantique case, supra note 30. 59 The position in Malaysia is not clear at present. There are some Malaysian authorities suggesting

that fundamental breach should operate as a rule of law. These include the comparatively recent decisions of the Malaysian High Court in Low Kon Fatt v. Port Klang Golf Resort (M) Sdn Bhd [1998] 6 MLJ 448 and Lim Sew Lan v. Pembangunan Hysham Sdn Bhd [1995] 5 MLJ 670.

60 [1967] 1 A.C. 361; [1967] 2 All E.R. 61.

38

their Lordships approved the following statement of law by Pearson LJ in UGS

Finance v. National Mortgage Bank of Greece61:

“… I think there is a rule of construction that normally an exception

or exclusive provision or similar provision in a contract should be

construed as not applying to a situation created by a fundamental

breach of contract. This is not an independent rule of law imposed by

the courts on the parties willy-nilly in disregard of their contractual

intention. On the contrary, it is a rule of construction based on the

presumed intention of the parties.”

This proposition was reaffirmed by the House more recently in Photo

Production Ltd v. Securicor Transport Ltd62. In his judgment in that case, Lord

Wilberforce noted:63

“I have no second thoughts as to the main proposition that the

question whether, and to what extent, exclusion clause is to be applied

to a fundamental breach, or a breach of a fundamental term, or indeed

to any breach of contract, is a matter of construction of the contract.”

This approach was adopted by Dickson CJC of the Canadian Supreme Court

in Hunter Engineering Inc v. Syncrude Canada Ltd64. It must also be taken to be the

present position in Singapore. This is notwithstanding the Privy Council decision in

Sze Hai Tong Bank v. Rambler Cycle Co65, which adopted the rule of law approach.

In more recent years, the courts here have cited and applied the principles in Photo

Production. These cases include the Court of Appeal decision in Parker Distributors

61 [1964] 1 Lloyd’s Rep. 446. 62 [1980] AC 827. 63 Supra note 7, p.566. 64 (1989) 57 DLR (4d) 321. 65 [1959] AC 576; [1959] 3 All ER 182 (PC).

39

(Singapore) Pte Ltd v. Svenborg66 and the High Court decision in AA Valibhoy &

Sons Pte Ltd v. Banque Nationale de Paris67.

3.4.2.3 Onus of Proof

A difficulty which may surface on this subject concerns the party who should

shoulder the onus of proof.68 It would have been thought that the onus should fall on

the party alleging fundamental breach. In Hunt and Winterbotham Ltd v. BRS

(Parcels) Ltd69, the defendants contracted to deliver fifteen parcels of woolen goods

to Machester, but only managed to deliver twelve. The court held that the onus was

on the plaintiffs to prove that the defendants had committed a fundamental breach of

contract and that until this was accomplished, the defendants were entitled to rely on

an exemption clause limiting liability for loss. However, a different result was

reached in Levison v. Patent Steam Carpet Cleaning Co. Ltd.70. In that case, the

defendants were entrusted with the cleaning of a carpet. The carpet disappeared in

circumstances which could not be explained by the defendants. The Court of Appeal

ruled that the onus lies on the defendants to prove that the loss of the carpet arose

from some cause which did not constitute a fundamental breach.

3.4.3 Breach of Fundamental Terms

Where there has been a breach of a fundamental term, that is, a term which

the parties have agreed expressly or by implication to be so important that its breach

66 [1983] 2 MLJ 26 (CA). 67 [1994] 2 SLR 772. 68 Supra note 7, p.567. 69 [1962] 1 QB 617. 70 [1978] QB 69; [1977] 3 All ER 498.

40

should entitle the innocent party to treat himself as discharged from further

performance.71

Where the parties indicate expressly by the contractual language that a single

breach of a particular contractual obligation is to have the same consequences as a

fundamental breach entitling the innocent party to rescind the contract, even though

it would not otherwise be treated as a fundamental breach justifying immediate

termination. This is frequently brought about by “legal jargon” involving the use of

express words such as “condition” or “condition precedent” or “of the essence” in

regard to a particular contract obligation. However, the mere use of these

expressions, and particularly the simple word “condition”, will not by itself be

conclusive. The contract as a whole will be examined to see that it is consistent with

this intention.72

Contractual terms can be classified as “conditions”, “warranties” and

“intermediate or innominate” terms.73 A condition in this context is a contractual

term breach of which entitles the other party to operate the election referred to above

irrespective of the nature or seriousness of the breach.74 Whether a contractual term

is a condition is a question of construction. A term may be a condition:

71 Supra note 7, p.557. 72 Supra note 3, p.617. 73 Hong Kong Fir Shipping case, supra note 57; Bunge Corporation v. Tradax [1981] 1 WLR 711;

Compagnie General Maritime v. Diakan Spirit [1982] 2 Lloyd’s Rep 574. 74 Suisse Atlantique case, supra note 30.

41

3.4.3.1 By Statutory Implication

3.4.3.2 Because the Parties have explicitly made it so

It is open to the parties to agree that, as regards any particular obligation, any

breach shall entitle the party not in default to treat the contract as repudiated,75 i.e. to

make the term a condition, even if it would not be so in the absence of such a

provision.76 The parties may use language which explicitly says that a contractual

term is to be so regarded. The actual use of the word “condition” is not required.

“Any term or terms of the contract, which, fairly read, have the effect indicated are

sufficient.”77 A common instance is where it is stipulated that “time is of the

essence.”78

3.4.3.3 Because the Court so Construes it

Although the parties may not have explicitly agreed that a contractual term is

a condition, the court may find that it is.79 If the parties have not expressly ascribed a

degree of importance to the consequences of breach, the court asks what

consequences ought to be attached to it having regard to the contract as a whole.80

This must inevitably involve a value judgment about the commercial significance of

the term in question.81 The court does not here consider the breach actually

committed since parties to commercial transactions should be entitled to know their

rights at once and should not, when possible, be required to wait upon event before

those rights can be determined.82 The court will not be over ready, unless required by

75 Bunge Corporation case, supra note 73; Scandinavian Trading v. Flota Ecuatoriana [1983] 2 AC

694. 76 Lombard v. Butterworth [1987] QB527. 77 Bunge Corporation case, supra note 73. 78 Scandinavian Trading case, supra note 75. 79 Supra note 27, p.148. 80 Bunge Corporation case, supra note 73. 81 State Trading Corporation of India v. Golodetz [1989] 2 Lloyds’s Rep. 277 (CA). 82 Bunge Corporation case, supra note 73.

42

statute or previous authority, to construe a term in a contract as a condition,83 and

will be unlikely to do so where the effect of some breaches of the term is trivial.84

“Warranties” are terms whose breach sounds in damages but does not

terminate or entitle the other party to terminate the contract. The use of the word

“warranty” to describe a term is not conclusive that that term is not a condition. In

insurance law, breach of warranty is treated as breach of condition and it may well

be that in a building contract the parties intend an express “warranty” of performance

or as to the result or use of the works to have the effect of a condition.85

Whereas, intermediate terms are terms capable of operating as conditions or

warranties according to the gravity of the breach86 and it is thought that, in building

contracts, most terms which are not conditions are intermediate. There is thus

fundamental breach when the gravity of the breach of an intermediate term has the

effect of depriving the other party of substantially the whole benefit which it was the

intention of the parties that he should obtain from the contract. To amount to

repudiation a breach must go on to the root of the contract.87

3.4.4 Non-Fundamental Breaches after Notice

Breaches of terms not in themselves fundamental may evince an intention not

to be bound if persisted in for long periods, or after receipt of notice, or it willful or

deliberate in character. Where there is a breach of term which, while not by itself

sufficient serious, maybe so protracted or repeated, despite protest or notice by the 83 Cehave N.V. v. Bremer m.b.H. [1976] 1 QB 44. 84 Cehave N.V. case, supra note 83; Hong Kong Fir Shipping case, supra note 57; Schuler (L.) A.G.

v. Wickman Machine Tool Sales [1974] AC 235 (HL). 85 Supra note 79. 86 Hong Kong Fir Shipping case, supra note 57; Bunge Corporation case, supra note 73. 87 Federal Commerce case, supra note 43; Cehave N.V. case, supra note 83.

43

innocent party, that it either evinces a subjective intention not to be bound by the

contract, as in the case of deliberate and continued breaches (however minor), or

simply an objective involuntary inability to perform the contract properly.88 Notice

calling on the party to perform, while not always strictly necessary if the facts speak

for themselves, is highly desirable from the evidentiary point of view to establish

both the seriousness of the continued breach and the unwillingness or inability of the

guilty party to perform, as well as to dispel any defence based on alleged waiver of

the breach.89

3.4.5 Erroneous Expression of View

There can be repudiation where a party intends to fulfill a contract, but “is

determined to do so only in a manner substantially inconsistent with his obligations

and not in any other way.”90 But it is not repudiation merely to put forward in good

faith an interpretation of the contract which is wrong,91 the more especially if it is

put forward in such a was as show that it is open to correction.92 A party who bona

fide relies upon an express stipulation in a contract in order to rescind or terminate

the contract is not, by that fact alone, treated as having repudiated his contractual

obligations if he turns out to be mistaken as to his rights.93 It is necessary to pay

proper regard to the impact of the party’s conduct operates contractual determination

machinery upon a mistaken, albeit bona fide, view of the facts or his legal rights, that

will normally be repudiation. The impact of such conduct on the other party suggests

no other conclusion.94

88 Carr v. A. J. Berriman (1953) 27 ALJR 273. 89 Supra note 3, p.613. 90 Ross T. Smith & Co. Ltd case, supra note 40. 91 Mersey Steel & Iron Co. Ltd case, supra note 39; James Shaffer Ltd. v. Findlay, Durham &

Brodie [1953] 1 WLR106 (CA); Peter Dumenil v. James Ruddin [1953] 1 WLR 815 (CA); Sweet & Maxwell Ltd. v. Universal News Service Ltd. [1964] 2 QB699 (CA); Toepfer v. Cremer [1975] 2 Lloyd’s Rep.118 (CA).

92 Ross T. Smith & Co. Ltd case, supra note 40; Sweet & Maxwell Ltd. case, supra note 91. 93 Woodar case, supra note 41. 94 Canterbury Pipe Lines v. Christchurch Drainage (1979) 16 BLR 76.

44

3.4.6 Arbitration Agreements

In certain limited circumstances, one party to an arbitration agreement may

treat the other party as guilty of repudiatory breach of that agreement.95

3.5 Recourse for Repudiation and Fundamental Breach

Where one party has repudiated a contract or committed a fundamental

breach, on the principles laid down by Lord Upjohn in the Suisse Atlantique v. N. V.

Rotterham Kolen Centrale96, the innocent party is presented with two course of

action. He can elect either to affirm the contract by treating it as remaining in force

or he may treat the contract as having been finally and conclusively discharged.97

One party to a contract may, by reason of the other party’s breach, be entitled

to treat himself as discharged from any obligations to further perform his contractual

premises under the contract, and may instead be entitled to accept that other party’s

breach as being a repudiation by him of his contractual obligations. The innocent

party will additionally have a right to claim damages consequent on the breach.98

The innocent party may, if he wishes, treat the contract as continuing if this is

still a possibility, despite the existence of repudiatory conduct. This will not prevent

95 Bremer Vulkan v. South India Shipping Corporation [1981] AC 909; Turriff v. Richards &

Wallington (1981) 18 BLR 19. 96 [1967] 1 AC 361; [1967] 2 All ER 61. 97 Supra note 7, p.569. 98 Supra note 2, p.269.

45

him from claiming damages while at the same time continuing with his contractual

obligations.99

It is essential that the innocent party establishes clearly the legal basis for this

course of action. More importantly, it should be appreciated that the aggrieved party

is always entitled to seek recourse for a particular breach through an action in

damages. The act of terminating a contract should, thus, be a remedy of last resort,

where any probable quantum of compensation in the form of an award for damages

is estimated to be insufficient to justify the continuance of the subject contract.100

3.5.1 Innocent Party Elects to Terminate the Contract

Operation of the election to put an end to all remaining primary obligations

of both parties is variously referred to as the “determination” or “rescission” of the

contract or as “treating the contract as repudiated” or “accepting the repudiation” of

the contract breaker.101

Once a repudiation has been accepted by the innocent party, both parties are

excused from further performance of their primary obligations under the contract.

Instead, secondary obligations are imposed on the guilty party, namely to pay

monetary compensation for non-performance.102In choosing this course, he can

institute proceedings immediately for damages, notwithstanding that the time for the

performance of his obligations has still not arisen.103

99 Supra note 2, p.270. 100 Supra note 7. 101 Supra note 27, p.147. 102 Photo Production case, supra note 62. 103 Hochster case, supra note 34.

46

A contract is only terminated as regards future rights and obligations; the

rights and obligations which have accrued prior to the repudiation remain alive.

Furthermore, parties may provide in a contract for certain obligations to survive

termination of the main incidents of a contract. Thus, in Hyundai Industries Co. Ltd.

v. Papadopoulos104, it was held that acceptance of repudiation by the employer did

not affect a contractor’s accrued rights to the payment of instalments of the contract.

One notion is that termination effectively substitutes the original primary obligations

of the defaulting party for the loss suffered. This proposition was advances by Lord

Diplock in Photo Production Ltd. v. Securior Transport Ltd.105:

“There is substituted by implication of law for the primary obligations

of the party in default which remain unperformed a secondary

obligation to pay money compensation to the other party for the loss

sustained by him in consequence of their non-performance…”

The innocent party must make it plain that “in view of the wrongful act of the

party who has repudiated he claims to treat the contract as at an end.” By doing this

he is usually said to rescind the contract.106 There will be no successful rescission,

whatever the nature or extent of the guilty party’s breach, unless there has been a

clear and unequivocal acceptance of the breach by word or action on the part of the

innocent party.107 Once made it cannot be withdrawn.108

If the breach is of a “one-off” character, however serious, failure to elect to

accept a known breach within a reasonable time will lose the right to rescind, though

it will not affect the right to damages. If the breach is a continuing one and

104 [1980] 1 WLR 1129 (HL). 105 [1980] AC 827. 106 Hyundai Industries case, supra note 104. 107 Supra note 3, p.617. 108 Supra note 2, p.270.

47

sufficiently fundamental, however, the innocent party will be able to rescind later (as,

for example, in a case of a sustained failure to proceed with due diligence).109

If one party mistakenly treats an event as amounting to a repudiation by the

other party and purports to accept it as such, this will in itself create a repudiation

which the wrongly accused party will very often be forced to accept. Indeed, in

practice it is not unusual for both sides to argue that they have accepted a repudiation

by the other.110

3.5.2 Innocent Party Elects to Treat the Contract as Continuing

Where the innocent party intimates that, with full awareness of the facts and

circumstances, he intends to keep the contract alive, what happens is that essentially

the status quo is preserved. He remains entitled, therefore, to exercise the original

rights and obligations under the contract.111 The breach will nevertheless in principle

sustain a claim for damages.112

3.6 Grounds of Termination by the Contractor

As a general observation, standard forms of construction contract add very

little to the rights of a contractor under common law to terminate a contract for

breach. The majority of those standard forms which expressly provide for the

109 Supra note 107. 110 Supra note 2, p.270. 111 Suisse Atlantique case, supra note 30. 112 Supra note 27, p.147.

48

contractor’s right to terminate, in reality, afford nothing more than first, a re-

statement of these rights and secondly, the prescription of a procedure to ensure that

there could be no doubt as to the intention to terminate when the termination process

is triggered.

Nevertheless, there is one area which a contractor must rely on specific

provisions in the contract to address. This is the possibility that the owner or

employer may become financially insolvent and this is a problem which has in recent

years been accentuated by the tendency for construction projects to be funded by

highly leveraged schemes. Common law does not afford any recourse where an

owner or employer who, while falling inexorably down a financial abyss, manages to

still maintain the appearance of an on-going business concern.113

For the purpose of the research conducted, only grounds of termination by

the contractor are discussed.

3.6.1 Employer’s Refusal to be bound

An absolute refusal by the employer to carry out his part of the contract,

whether made before the works commences or while they are being carried out is a

repudiation of the contract.114 Like any party to a contract, an employer repudiates

the contract when he intimates a refusal to discharge his obligations under the

contract. In Mersey Steel & Iron Co. Ltd. v. Naylor Benzon & Co.115, Lord

Blackburn described the principle as follows:

113 Supra note 7, p.571. 114 Hochster case, supra note 34; Mersey Steel & Iron Co. Ltd case, supra note 39. 115 (1884) 9 App. Cas. 434.

49

“If one of the parties had said to the other in effect “if you go and

perform your side of the contract I will not perform mine”, that, in

effect, amounts to saying “I will not perform the contract.” In that

case the other party may say, “You have given me distinct notice that

you will not perform the contract. I will not wait until you have broken

it, but I will treat you as having put an end to the contract, and if

necessary I will sue you for damages, but at all events I will not go on

with the contract.”

An employer may demonstrate his refusal to be bound by simply ordering the

contractor not to complete the works without any clear justification116 or, where an

employer failed to provide necessary drawings as required by the contract117 and

where an employer, concerned that work was falling behind schedule, employed

other workmen to carry out part of the contractor’s work,118 or the employer may

deliberately disable himself from performing his obligations by disposing of the land

on which the building is to be sited before the contractor could proceed with the

works. The important feature is that a refusal to be bound must be clearly

demonstrated, whether by deed or word: “it must be shown that the party to the

contract made quite plain his own intention not to be bound by it”.119

3.6.2 Preventing Execution of Works

It is, in general, a repudiation if the employer wrongfully by his own acts,

and without lawful excuse120, renders completion impossible.121 If the employer

116 Cort v. Ambergate Railway (1851) 17 QB 127. 117 Kingdom v. Cox (1848) 5 CB 522. 118 Sweatfield Ltd. v. Hathaway Roofing Ltd. [1997] CILL 1235. 119 Spettabile v. Northumberland Shipbuilding Co. (1919) 121 LT 628. 120 Cory Ltd v. City of London Corp [1951] 2 KB 476 (CA). 121 Stirling v. Maitland (1864) 5 B&S 840, 852; Roberts v. Bury Commissioners (1870) LR4CP 755;

Southern Foundaries v. Shirlaw [1940] AC 701.

50

unjustifiably interferes in the supply of materials necessary for the contract, he

commits a breach of this implied term in his contractual relationship with the

contractor, notwithstanding the absence of any direct contract between the supplier

and the contractor.122

An act of prevention can also be one of omission. Thus, in Croudace v.

London Borough of Lambeth123, the terms of a building contract provided that a

contractor’s claim for loss and expense had to be certified by an architect. The

original architect retired, but no replacement was appointed, the English Court of

Appeal held that, in the circumstances, the employer’s failure to appoint a

replacement architect amounted to an act of prevention and rendered them liable to

the contractor for breach of contract.124

3.6.3 Failure to Give Possession of the Site

The employer repudiates the contract if he fails to give possession of the site

at all, or without lawful excuse ejects the contractor from the site before

completion.125 While the minor interference by the employer with the contractor’s

possession of the site is not a repudiatory breach,126 an outright refusal to give

possession in the first place will be so. Similarly, wrongful ejection of the contractor

from the site is such a breach.127

122 Acrow (Automation) Ltd. v. Rex Chainbelt Inc. (1971) 1 WLR 1676. 123 (1986) 33 BLR 20 (CA). 124 Supra note 7, p.574. 125 Felton v. Wharrie (1906) HBC (4th ed.), Vol. 2, P.398 (CA); Earth & General Contractors Ltd v.

Manchester Corp. (1958) 108 LJ 665. 126 Earth & General Contracts Ltd. case, supra note 125. 127 Roberts case, supra note 121.

51

As to mere delay in giving possession, the crucial question (and it is one of

degree) is whether the employer’s conduct indicates an intention no longer to be

bound by the contract. For example, where an employer delayed giving possession

of the site for two months despite repeated requests from the contractor, and also

announced that part of the contract work was to be omitted and given to another

contractor, it was held that these two breaches, taken together, amounted to a

repudiatory breach of contract.128 However, most modern construction contracts

contain express provisions regulating situations under which site possession may be

delayed.129

3.6.4 Failure to Pay

Prompt payment of certified amounts is essential to the contractor’s cash

flow.130 This cannot be a repudiation if there is no contractual duty to pay them.131

Where there is such a duty it is a question in each case whether failure to pay is a

repudiation.

As a general principle of law, failure to pay on time what is due under a

contract will not normally be treated as a sufficient breach to justify the other party

in terminating the contract.132 Not every failure to pay a certified amount will

amount to a repudiatory breach.133

128 Carr case, supra note 88. 129 Supra note 7, p.571. 130 Sundra Rajoo, “The Malaysian Standard Form of Building Contract (The PAM 1998 Form).”

Second Edition. (Kuala Lumpur: Malayan Law Journal Sdn Bhd, 1999), p.264. 131 Rees v. Lines (1837) 8 C&P 126. 132 Mersey Steel & Iron Co. case, supra note 39. 133 Supra note 130.

52

In some cases, an employer who does not pay the sum certified on the

presentation of a certificate may be held to have committed a breach which strikes at

the root of the contract. The contractor is entitled, in the circumstances, to treat the

breach as a repudiation of the contract. However, it is considered that such a drastic

set of consequences only arise where the non-payment is part of some persistent

conduct or is otherwise of such a serious character as to threaten the fundamental

premise on which the contract was founded in the first place.134

An employer may have an arguable defence where his failure to pay arises

from his belief that the amount due to the contractor can be set off against the

contractor’s liability for liquidated damages or defective work. There is, however, a

distinction between this situation and one where non-payment amounts to an

intimation by the employer not to be bound by the payment terms of the contract

regardless of how well the contractor fulfilled his obligations under the contract.135

To determine this, the courts may be expected to consider the likelihood of the

repetition of the breach and the fact that in most construction contracts, the time for

payment may not be of the essence of the contract.136

If the employer makes any deduction, the contractor must seriously consider

whether such deduction is justified before launching into the determination

procedure. But if the contractor is in error in determining, he could be held to be in

repudiatory breach of contract by his actions although much will depend on the

extent to which the contractor has honestly relied on the contract provision, even

though he may do so mistakenly.137 Whether the failure to pay amounts to

repudiation will depend on the circumstances of the case. Therefore, this study is to

identify circumstances where non-payment by an employer constitutes a sufficient

breach of contract. Findings of this study will assist the contractor to understand his

position before he takes action when the employer fails to make payment. Court

134 Supra note 7, pp.575-576. 135 Ibid. 136 Felton case, supra note 125; Mersey Steel & Iron Co. case, supra note 39; Withers v. Reynolds

(1831) 109 ER 1370. 137 Supra note 12, p.268.

53

cases will be analyzed to determine circumstances of non-payment that entitle the

contractor to terminate the contract. Results of analysis will be discussed further in

chapter four to achieve the objective of the study.

3.6.5 Under-Certification of Payments

Can an employer who pays certificates issued by the architect be guilty of

repudiation if those certificates are substantially too low? These are difficulties in

saying that he can because prima facie he is doing what the contract requires of him.

But it has now been settled that the architect is the employer’s agent when giving his

certificate.138 It has been held that an employer cannot stand by and take advantage

of his architect applying a wrong principle in certifying.139 It has been more recently

held that, where there was a wide arbitration clause and where the employer was not

obliged to pay more than the amount stated on the certificate. The contractor’s

simple remedy was to go to arbitration and have the certificates corrected.140

There is thus a narrow dividing line between cases where an employer who

has paid certified amounts may be in breach of contract and cases where he may not.

In principle, if there are circumstances in which he may be in breach, he could also

in extreme cases be in repudiatory breach. But it seems that this would at least

require both clean knowledge by the employer that the architect was persistently

under certifying and a contract without a relevant arbitration clause.141

138 Sutcliffe v. Thackrah [1974] AC 727. 139 Panamena, etc. v. Frederick Leyland & Co. Ltd [1947] AC 428; Perini Corporation v.

Commonwealth of Australia (1969) 12 BLR 82. 140 Ludenham Fidelities v. South Pembrokeshire District Council (1986) 33 BLR 39 (CA). 141 Supra note 27, p.157.

54

The general position under common law used to be that the employer may be

answerable for the defaults of a certifier of progress payments only if he is aware of

these defaults and did nothing to rectify them.142 In Ludenham Fidelities v. South

Pembrokeshire District Council143, the English Court of Appeal decided that where

the only problem was that the architect exercised his judgment wrongly, then given

the presence of a wide arbitration clause, there was no need or scope for the

implication of any further term into the contract which seeks to attach liability to an

owner for an architect’s exercise of his certifying powers. A simple remedy was

available to the contractors to fog or arbitration and to have the interim certificates

corrected. The Court of Appeal in Singapore has affirmed this position in Hiap Hong

& Co. Pte. Ltd. v. Hong Huat Development Co. (Pte) Ltd.144 Accordingly, in the light

of Hiap Hong, the principal expectation of an architect or any certifier is that he

must act fairly and independently in respect of his certification duties and that in

discharging these duties, he should not be regarded as an agent of the client.145

3.6.6 No General Right to Suspend Work

Although particular contracts may give the contractor express rights if

certificates are not paid, there is no general right to suspend work if payment is

wrongly withheld.146 This is consistent with the principle that, except where there is

a breach of condition or fundamental breach of contract, breach of contract by one

party does not discharge the other party from performance of his unperformed

obligations.147

142 Frederick Leyland & Co. v. Panamena Europea Navigacion Cia (1943) 76 Lloyd L.R. 113 and

Perini Corporation case, supra note 139. 143 (1986) 33 BLR 39 (CA). 144 [2001] 2 S.LR 458 (CA). 145 Supra note 7, p.575. 146 Ludenham Fidelities case, supra note 143; Canterbury Pipe Lines case, supra note 94; Supamarl

v. Federated Homes (1981) 9 ComLR 25. 147 Supra note 27, p.157.

55

3.6.7 Interference or Influence of Certifier

Interference or obstruction by the employer in relation to the issue of any

certificate by the architect is a very serious matter indeed. It is certainly a serious

breach of contract and may well be seen as undermining the independence of the

architect in certain circumstances.148

If the employer interferes with the architect in the performance of those

functions where he has to act fairly between the employer and the contractor it is, it

is submitted, a question in each case depending both upon the nature of the

employer’s acts and their effect whether such interference amounts to a

repudiation.149

3.6.8 Other Breaches

It depends upon the construction of the contract and the circumstances

whether the acts and conduct of the employer show that he no longer intends to be

bound by the contract. Thus, assuming there is a breach, it may or may not be a

repudiation if the employer fails to appoint an architect,150 or to supply plans151 or

materials,152 or to make a fresh nomination of a sub-contractor.153

148 Supra note 2. 149 Supra note 27, p.158. 150 Coombe v. Greene (1843) 11 M&W 480; Hunt v. Bishop (1853) 8 Ex. 675; Ctr. Jones v. Cannock

(1852) 3 HLC 700. 151 Wells v. Army & Navy Co-op Society (1902) 86 LT 764; Trollope & Colls v. Singer (1913) HBC

(4th ed.), Vol. 1, p.849; Stevens v. Taylor (1860) 2 F&F 419. 152 Macintosh v. Midland Counties Railway (1845) 14 LJ Ex. 338; Gaze Ltd. v. Port Talbot Corp.

(1929) 93 JP 89. 153 Bickerton (T.A.) & Sons Ltd v. N.W. Regional Hospital Board [1970] 1 WLR 607; Percy Bilton v.

Greater London Council [1982] 1 WLR 794.

56

Whether in each case the breach is sufficiently serious to warrant the

contractor treating it as a repudiation of the contract depends on the circumstances,

including the provisions of the contract and the conduct of the parties. Thus, in one

instance, a particular breach may justify termination, while in another context, the

same breach may not warrant this action.154

3.7 Conclusion

A contracting party may find it necessary to terminate a building contract in a

number of situations, and are governed both by common law principles and the

provisions of the subject contract. Under the principles of common law, contractual

obligations may be discharged by way of performance, agreement, frustration or

repudiation.

This chapter also dwells in detail about repudiatory breach. Situations that

warrant termination are emphasized as the objective of the research if to determine

whether non-payment by the employer (breach by employer) is sufficient to allow

the contractor to regard himself as discharged from further performance of his

contractual obligations.

Besides, grounds of termination by the contractor are discussed in detail.

Grounds of termination by the employer are not discussed as it is out of the scope of

the research.

154 Supra note 7, p.575.

57

In conclusion, where one party has repudiated a contract, the innocent party

is entitled to affirm the contract by treating it as remaining in force or he may treat

the contract as having been fully discharged. But it will be no successful rescission,

unless there has been a clear and unequivocal acceptance of the breach by the

innocent party. While any breach of contract can give rise to a claim for damages, it

is not every breach of contract which will entitle the innocent party to a discharge

from further liability to perform his own contractual promises. The default must be

of a particularly serious or fundamental nature.155

155 Supra note 2, p.269.

CHAPTER IV

CIRCUMSTANCES WHERE NON-PAYMENT IS / IS NOT A

REPUDIATORY BREACH BY THE EMPLOYER

4.1 Introduction

The preceding chapter discussed in detail about the topic of repudiatory

breach. Situations that warrant termination were emphasized due to the objective of

the research is to determine whether non-payment by the employer is sufficient to

allow the contractor to regard himself as discharged from further performance of his

contractual obligations. Besides, grounds of termination by the contractor was

discussed in detail to give the readers an insight where types of breaches of contract

by the employer that entitle the contractor to terminate the contract.

This chapter is done in order to achieve the objective of this research. It

discusses the circumstances where non-payment by an employer constitutes a

repudiatory breach of contract. It is a question whether failure to pay is a

repudiation.1 There may be some cases in which the contractor can treat the stoppage

1 Stephen Furst and Vivian Ramsey, “Keating on Building Contracts.” Fifth Edition. (London:

Sweet & Maxwell, 1991), p.156.

59

of payment as a repudiation. Much will depend on the facts.2 A principle laid down

by Salmon LJ in Decro-Wall International S. A. v. Practitioners in Marketing Ltd3:

“A breach of contract may be of such a nature as to amount to

repudiation and give the innocent party the right (if he desires to

exercise it) to be relieved from any further performance of the contract

or the breach may entitle the innocent party only to damages. How is

the legal consequence of a breach to be ascertained? Primarily from

the terms of the contract itself. The contract may state expressly or by

necessary implication that the breach of one of its terms will go to the

root of the contract and accordingly amount to repudiation. Where it

does not do so, the courts must look at the practical results of the

breach in order to decide whether or not it does go to the root of the

contract.”

The circumstances are illustrated based on court cases. The decisions of the

cases will be discussed in order to understand the solution made for each case. The

relevant court cases are limited to those available in the database of Lexis Nexis

website4 through its own search engine5.

A total number of 11 cases centered on issue of non-payment were studied,

where 7 of them were involving construction contracts and the remaining were

contracts of sales of goods and contract of sale of land.

2 Canterbury Pipe Lines Ltd v. Christchurch Drainage Board [1979] 2 NZLR 347; 1979 NZLR

LEXIS 405. 3 [1971] 2 All ER 216, [1971] 1 WLR 361. 4 http://www.lexisnexis.com. 5 The relevant court cases are collected by browsing the keyword of “building contract, non-

payment, repudiation, repudiatory breach.”

60

4.2 Circumstances Where Non-Payment by an Employer Constituted a

Repudiatory Breach of Contract

Repudiation is a drastic conclusion which should only be held to arise in

clear cases of a refusal, in a matter going to the root of the contract, to perform

contractual obligations.6 It may consist of a renunciation, an absolute refusal to

perform the contract7, or it may arise as the result of a breach, or breaches of contract

such that ‘the acts and conduct of the party evince an intention no longer to be bound

by the contract.’8 A party repudiates a contract when he intimates by words or

conduct that he does not intend to honour his obligations as and when they fall due.9

In other words, he has decided to unilaterally “put an end to the contract”. It is very

crucial for the contractor to understand whether non-payment is a repudiation of

contract and in what conditions, non-payment is capable to be considered as an act to

put an end to the contract.

Out of the 11 cases chosen, only 2 of them gave illustrations where non-

payment by an employer constitutes a repudiatory breach of contract. The cases will

be discussed in detail in order to give a better understanding to the readers that, the

principle lying behind that drove the judge to come to a judgment that non-payment

was a repudiatory breach of contract. The following are the circumstances illustrated

in the cases where non-payment by an employer constitutes a repudiatory breach of

contract.

6 Woodar v. Wimpey [1980] 1 WLR 277; Ross T. Smyth & Co. Ltd v. T.D. Bailey, Son & Co.

[1940] 3 All ER 60. 7 Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361; Mersey Steel & Iron

Co. Ltd v. Naylor (1884) 9 App. Cas. 434. 8 General Billposting Co. Ltd v. Atkinson [1909] AC118. 9 Hua Khian Co (Pte) Ltd v. Lee Eng Kiat [1996] 3 SLR 1.

61

4.2.1 Circumstance 1

Where an employer’s deliberate and unjustified refusal to pay what was

already due coupled with his unjustified order to the contractor to stop work

Prompt payment of certified amounts is essential to the contractor’s cash

flow, and in some cases the employer may be held to have repudiated the contract by

his failure to pay instalments when due. This was well defined in the case of Ban

Hong Joo Mines Ltd v. Chen & Yap Ltd10.

In this case, the plaintiff and defendant entered into an agreement for earth

excavation in May, 1963. The preamble to and clause 1 of the agreement provided

for the removal by the plaintiffs of earth to a depth of 25 feet from an area of

approximately 9 acres of land situate at Timor to be pointed out by the defendants.

They were to complete excavation work on an area of not less than 3 acres within a

period of four months. Under clause 4 of the agreement the defendants were to pay

to the plaintiffs a sum of fifty cents per cubic yard of earth so removed by the

plaintiffs, seventy per cent of the amount due for the work done being payable once

in every two weeks.

The defendants made the first progress payment of $ 1,500 on 11th June,

1963. The second progress payment of $ 1,600 was made on 16th July, 1963 by

which date the plaintiffs had removed 10,6551/2 cubic yards of earth which had been

excavated to a depth of 17 or 18 feet over a part of the area of 3 acres which was to

be excavated first. This was the first phase of the work. Before making the two

progress payments the defendants did not complain about the earth not having been

dug to a depth of 25 feet.

10 [1969] 2 MLJ 83.

62

The plaintiffs next moved to the second phase of their work but no progress

payments were made in spite of demands for them. Work was carried on until 9th

September when the plaintiff was told by the defendant company to stop work. It

was agreed that during the second phase the plaintiffs removed a total of 16,940

cubic yards of earth and that the average depth of the earth dug was only 7 feet.

The issue arose in the case was, whether the defendant was in repudiation of

contract when they failed to make payment. However, there were a few contentions

put forward by the defendant in their defence. The main point taken by the

defendants in denying the plaintiffs' claim was that on a true construction of clause 4

of the agreement, when read in conjunction with the recitals and clause 3, the

plaintiffs were not entitled to any payment until and unless they had excavated the

earth to a depth of 25 feet. That was also their major ground of appeal.

It was argued that the non-payment by them of the sum of $ 1,800 did not,

ipso facto, amount, in law, to repudiation of the contract and did not, in law, entitle

the respondents to rescind the contract and to sue to recover a sum of money in

respect of work done. In support of this argument the defendant cited a number of

authorities, the first three of which relate to contracts for the sale of goods. In

Simpson v Crippin11, the goods were to be delivered in monthly quantities. It was

held that the breach by the plaintiffs in taking less than the stipulated quantity during

the first month did not entitle the defendants to rescind the contract. In Freeth v

Burr12, there was to be a delivery of goods in parcels at different times. It was held

that the mere refusal to pay for the first parcel did not, under the circumstances,

warrant the defendant in treating the contract as abandoned and refusing to deliver

the remainder, and that the plaintiffs were entitled to damages for the breach.

11 (1872-73) 8 QBD 14. 12 (1873-74) 9 CP 208.

63

In Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co13, the goods were to

be delivered by instalments. Affirming the decision of the Court of Appeal, the

House of Lords held that, upon a true construction of the contract, payment for a

previous delivery was not a condition precedent to the right to claim the next

delivery, and that the respondents had not, by postponing payment under erroneous

advice, acted so as to show an intention to repudiate the contract, or so as to release

the company from further performance.

However, the learned trial judge held that the plaintiffs' right to the

fortnightly progress payments for work done in digging and removing the earth is

not dependant on their digging down to the agreed depth of 25 feet. It is to be

observed that the contract was not a lump sum payment contract. It is also to be

observed that the first progress payment was, in fact, made at the end of or not long

after the first fortnight from the date of commencement of the excavation work.

Therefore, there was no merit in this major ground of appeal either.

It is abundantly clear that the defendants had at all times been in breach of

their obligation to make periodic payments and the plaintiffs would have been

completely justified, if they were not in fact told to stop work, in treating be

defendants' breach as repudiation of the agreement on the part of the defendants and

in suing for payment on the basis of quantum meruit.

In conclusion, the appellants were in breach of their obligation to make

fortnightly payments. Their deliberate refusal to pay what was already due by way of

fortnightly payments was an important element on the question of their repudiation

of the contract. Furthermore, they ordered the respondents to stop work. This

stoppage of work by them clearly went to the root of the contract. In this

circumstance, the respondents had no option but to treat the contract as at an end and

to sue for payment for the work which they had already done. They were entitled to

13 (1884) 9 App Cas 434, [1881-5] All ER Rep 365

64

recover the amount claimed either on the basis of work done by them at the

appellants' request or by way of damages on the basis of quantum meruit.


Where the employer was in breach of what to the contractor was a most

important term of the contract, namely that reasonable sum due should be paid

at reasonable intervals. Financial difficulties were not a valid excuse for the

employer to put forward as an excuse not to pay. Moreover, they were

threatening not to pay any further sums until the works were completed.

In the case of C J Elvin Building Services Limited v. Noble and another14, it

provides another circumstance where non-payment by the employer constitutes a

repudiatory breach of contract. It was a contract that related to extensive

refurbishment and alteration works carried out at sums were paid to the claimant.

The claimant effectively suspended work in October 2001 and, although the

parties and their solicitors communicated Stortford Lodge, 25 Clarence Road, St

Albans, Hertfordshire. The claimant was and is builders with considerable

experience. The defendants, Mr and Mrs Noble, were the owners of Stortford Lodge

which they had purchased several years before the claimant was involved. The

claimant was engaged by the defendants in late 2000 to carry out extensive works at

Stortford Lodge. The claimant carried out such work until about August 2001 at

which time disputes surfaced between the parties. Although some further work was

done thereafter, no further thereafter, proceedings were commenced by the claimant

on 31 January 2002.

14 [2003] EWHC 837 (TCC).

65

The principle disputes in this case revolve around the following two areas of

issue:

(i) Did the defendant repudiate the contract by withholding payment?

(ii) Whether the claimant was entitled to suspend work.

It is to be noted that it is only the defendants who are alleging that the

claimant repudiated the contract. It is not the claimant who is alleging that the

defendants repudiated the contract.

It was held that the defendant repudiated the contract by withholding

payment. It was not a valid excuse for the defendants to put forward, as they did, as

an excuse not to pay, financial difficulties. Those financial difficulties were not in

any way of the claimant's making; they had arisen because the defendants were

unable to raise appropriate levels of cash in liquid form. This was attributed to the

fact that following the events of September 2001 in the USA, their holdings in the

Stock Market had "plummeted". Whilst one sympathises with the defendants'

predicament, the risk of reasonably prompt payment of interim invoices rests with

the paying employer.

It became clear by the end of October 2001 that the defendants were simply

not prepared, whether sums were available or not, to make any further interim

payment. By their letter of 28 October 2001 to the claimant, the defendants proposed

four significant alterations to the simple contractual arrangements which they had,

namely:

(a) Any sum outstanding to the claimant would not be paid immediately, but

would be paid on total completion of the works; in the meanwhile it was to

be held by the defendants' solicitors;

66

(b) Completion should be no later than 30 November 2001;

(c) There should be a penalty or liquidated damages for delay beyond that date at

the rate of £ 250.00 per day; and

(d) An independent surveyor was to be appointed to value the work and confirm

that the work was completed.

None of these proposals were acceptable to the claimant who was entitled to

reject them. They all involved significant changes in the contractual relationship, the

most important one being that the claimant was not to be paid any further sums on

account.

It was held that the defendants were in breach of what to the claimant was a

most important term of the contract, namely that reasonable sum due should be paid

at reasonable intervals. Not only were the defendants in breach of contract by late

October 2001 for not paying, they were threatening (in breach of contract) not to pay

any further sums until the works were completed.

Although the claimant was financially able to complete the works, it is

undoubtedly the case that the claimant's suspension was brought about directly as a

result of the defendants' breach of contract in failing to pay. In those circumstances,

the claimant was entitled to suspend the work. The claimant was not willing to

continue with the work and complete it unless further sums due were paid.

A very important rule laid down by the court in making judgment was that

the defendant cannot rely upon its own breach to justify a contention that the

claimant was itself in repudiatory breach.

67

In a nutshell, only 2 cases out of 11 cases gave illustrations where non-

payment was a repudiatory breach. An important principle laid down by Gill FJ in

Ban Hong Joo Mines Ltd v. Chen & Yap Ltd15

“The real matter for consideration is whether the acts or conduct of

the one do or do not amount to an intimation of an intention to

abandon and altogether to refuse the performance of the contract”

4.3 Circumstances Where Non-Payment by an Employer Did not Constitute

a Repudiatory Breach of Contract

The reaction of many contractors when faced with non-payment is to

consider stopping work on site.16 Whilst this is understandable in many instances

such action could prove fatal.17 It sometimes happens that one contracting party (‘A’)

is in breach of contract and the other party (‘B’) treats this as a repudiatory breach,

but it is later held that A’s breach was not sufficiently serious to justify this.18 A

contractor who suspended work on the ground of not having been paid would be

guilty of a breach of contract in failing to maintain regular and diligent progress.19

Therefore, a contractor needs to ensure that non-payment by the employer was a

repudiatory breach of contract before he terminates the contract. Non-payment which

is not a repudiation does not give a right of termination to the contractor; it only

entitles him to sue for damages.

15 [1969] 2 MLJ 83. 16 Lim Chong Fong, “The Malaysian PWD Form of Construction Contract.” (Kuala Lumpur: Sweet

& Maxwell Asia, 2004), p.108. 17 Rodney Martin, “52 Contractual Issues Relevant to Malaysia and Their Resolution.” (Kuala

Lumpur: James R Knowles Sdn Bhd, 2005), p.19. 18 John Murdoch and Will Hughes, “Construction Contracts Law and Management.” Third Edition.

(London: Spon Press, 1992), p.323. 19 Ibid, p.328.

68

Out of the 11 cases chosen, 9 of them gave illustrations where non-payment

by an employer does not constitute a repudiatory breach of contract. The cases will

be discussed in detail especially the principle taken into consideration by the judge to

decide that non-payment was not a repudiation of contract. The following are the

circumstances illustrated in the cases where non-payment by an employer does not

constitute a repudiatory breach of contract.


Time was not intended to be of the essence of the contract

If time is not of the essence, a default by the employer in making payment at

the time specified in the contract will not entitle the contractor to treat himself as

discharged from further liability. Unless the employer’s neglect or refusal to pay the

price makes it plain that he is unwilling or unable to perform the contract. This

circumstance were well illustrated in the cases of Wong Poh Oi v. Guok Gertrude &

Anor20, Decro-Wall International SA v. Practitioners in Marketing Ltd21 and Brani

Readymixed Pte Ltd v. Yee Hong Pte Ltd22.

a. The delay and refusal of the purchaser to pay for the extras could not be

regarded as showing an intention no longer to be bound by the contract

In Wong Poh Oi v. Guok Gertrude & Anor23, it arose out of the repudiation

by the defendants of their agreement to build a house for the plaintiff. The facts were

20 [1965-1968] 1 SLR 455. 21 [1971] 2 All ER 216, [1971] 1 WLR 361. 22 [1994] 2 SLR 552. 23 Supra, note 20.

69

that the firm of Phoenix Building Enterprise, of which the two defendants were

partners, was the developer of a housing estate at Holland Heights. Their modus

operandi was to sell the land and the building to prospective purchasers by two

agreements -- one for the sale of the land and the other for the sale of the building. In

the present case the plaintiff agreed to purchase the land under the sale of land

agreement for $ 6,000 and the building under the building agreement for $ 31,900.

The plaintiff paid the $ 6,000 for the land and also made certain progress

payments in accordance with the progress of the building operations as set out in the

schedule to the building agreement amounting to $ 9,900. The sum together with the

$ 6,000 paid for the land represented a total of $ 15,900 actually paid by the plaintiff

leaving a balance of $ 22,000 to be raised on mortgage. Reference is made to this

amount to be raised on mortgage in cl 3(a) of the sale of land agreement.

In addition there were certain extras ordered by the plaintiff under a works

order dated 15 October 1962, amounting to $ 4,913. These extras were not in dispute

and were admitted by the plaintiff. What was in dispute was the time of payment for

them.

It was held that the time of payment was not of the essence of the contract.

Although cl 3 of the building agreement states that as regards the date fixed for

payment of the final instalment time shall be deemed to be of the essence of the

contract, cl 5 thereof clearly indicates that deferred payments were contemplated and

could be made on payment of 15% interest. Both cl 5 and cl 6 appeared to show

clearly that time was not intended to be of the essence of the contract.

By assuming for a moment that the plaintiff was wrong in refusing to pay

these two sums of $ 4,913 and $ 1,460 then payment of them was not, a condition

precedent to the assignment nor did failure to pay constitute such a breach of a

fundamental term of the agreement as would justify a repudiation. It is not every

70

breach of a stipulation by one party that entitles the other to repudiate. Mere non

payment of an instalment unattended by any other act on the part of the purchaser

does not put an end to the contract.24

b. The time for payment had been extended with the consent of seller on

occasions. The seller never doubted that the bills would be paid albeit

late

In the case of Decro-Wall International S. A. v. Practitioners in Marketing

Ltd25, the terms of the contract relating to time of payment of the bills cannot

properly be regarded as of the essence of the contract, or, to put it the other way,

there is nothing expressed in or to be implied from the contract to suggest that a

failure punctually to pay the bills goes to the root of the contract and thereby

amounts to a repudiation. Moreover, the correspondence shows that the changes

made from time to time in the terms of payment, and at the other changes which

came under discussion, it seems plain that terms as to payment were at all times

negotiable.

In the present case, by an oral agreement made in March 1967 the plaintiffs,

a French manufacturing company, undertook:

(i) Not to sell their goods in the United Kingdom to anyone other than the

defendants;

(ii) To ship goods with reasonable dispatch on receipt of the defendants' orders

and;

(iii) To supply the defendants on demand with certain advertising material;

24 Cornwall v. Henson [1900] 2 Ch 298. 25 [1971] 2 All ER 216, [1971] 1 WLR 361.

71

The defendants undertook:

(i) Not to sell goods competing with the plaintiffs' goods,

(ii) To pay for the goods which they bought by bills of exchange due 90 days

from the date of the invoice, and;

(iii) To use their best endeavours to create a market for the plaintiffs' goods in the

United Kingdom and to develop it to its maximum potentiality.

The agreement was terminable by reasonable notice on either side.

The defendants incurred heavy expenses in promoting the plaintiffs' products

in the United Kingdom, but as a result of their efforts the sales of those products

increased very substantially each year and by April 1970 accounted for 83 per cent

of the defendants' business. The defendants were however consistently late in

meeting the bills of exchange. They were, as the plaintiffs knew before entering into

the contract, short of working capital and they had to rely on money received from

customers to meet the bills. The delays in payment varied from two to 20 days. The

plaintiffs never doubted that the bills would be paid albeit late. On occasions the

time for payment had been extended with their consent. The financial detriment to

the plaintiffs of the delay in payment was in the area of £ 20 on each bill (being the

interest on loans from their bank). This loss could have been but was not debited to

the defendants.

At the beginning of April 1970, without a word to the defendants, the

plaintiffs arranged for another company to be appointed their sole concessionaires in

the United Kingdom. On 9th April the plaintiffs wrote to the defendants in effect

alleging that the defendants had wrongfully repudiated the agreement by failing to

pay the bills on time and purporting to accept the repudiation and bring the

agreement to an end.

72

In an action by the plaintiffs claiming the amount of the bills accepted and

unpaid, sums for goods sold and delivered and a declaration that the defendants had

ceased to be from 10th April 1970 their sole concessionaires in the UK, the trial

judge gave judgment for the plaintiffs in respect of the dishonoured bills and the

goods sold and delivered, and for the defendants on their counterclaim for a

declaration that they remained the plaintiffs' sole concessionaires in the United

Kingdom. He further held that the agreement was only terminable by 12 months'

notice by either party and ordered the plaintiffs to pay the defendants damages for

their own breach of contract. The plaintiffs undertook (a) to continue supplying the

defendants with their products until the expiry of 12 months' notice to terminate the

agreement, (b) not to appoint any other persons as concessionaires for their products

in the United Kingdom until that date and (c) not themselves to sell or distribute such

products in the United Kingdom until that date. They subsequently served a notice to

determine the agreement on the defendants.

The issue arose was, whether the defendants, by failing punctually to pay the

bills of exchange prior to 9th April 1970, repudiated the agreement made in March

1967.

The Court has come to the conclusion that the learned judge was plainly right

in holding that there had been no repudiation by the defendants. The failure to pay

the bills of exchange promptly and the likelihood of similar delays in the future did

not constitute a repudiation of the agreement by the defendants; such a breach could

only amount to a repudiation which the plaintiffs would be entitled to accept as a

cancellation of the contract if the breach went to the root of the contract, since

nothing expressed or implied in the agreement suggested that the terms relating to

time of payment were of the essence of the contract, the inference drawn from the

practical consequences of the defendants' conduct was that the breaches did not go to

the root of the contract.

73

Section 10 (1) of the Sale of Goods Act 1893 provides:

“Unless a different intention appears from the terms of the contract,

stipulations as to time of payment are not deemed to be of the essence

of a contract of sale...”

The terms of the contract relating to time of payment of the bills cannot

properly be regarded as of the essence of the contract, or, to put it the other way, there

is nothing expressed in or to be implied from the contract to suggest that a failure

punctually to pay the bills goes to the root of the contract and thereby amounts to a

repudiation.

Moreover, looking at the correspondence as a whole, at the changes in fact

made from time to time in the terms of payment, and at the other changes which

came under discussion, it seems plain that terms as to payment were at all times

negotiable. The plaintiffs incidentally never gave notice that if the defaults continued

they would terminate the contract.

The plaintiffs showed themselves to be willing on numerous occasions to

negotiate extension of bills of exchange and to extend the defendants' credit beyond

the 90 days' limit, having regard to the defendants' financial difficulties and to the

supervening of devaluation in this country and the imposition of the import quota

scheme. The evidence does not establish that the plaintiffs have suffered any grave

loss as the result of the defendants' failure to honour the bills punctually, and in

many instances the delay in payment was not of long duration. The history of the

whole matter indicates that punctual payment was a matter of much less importance

to the plaintiffs than other aspects of the contract. The learned judge was justified in

concluding, as he did, that the defendants' conduct did not amount to repudiation.

74

The case would have been quite different if the defendants' breaches had

been such as reasonably to shatter the plaintiffs' confidence in the defendants' ability

to pay for the goods with which the plaintiffs supplied them.

The defendant in his evidence plainly stated that the plaintiffs never doubted

that, if they went on supplying the defendants with goods, the defendants would

meet the bills. They would, however, in all probability, meet them some days late, as

they had done throughout the whole course of the dealings between the parties. For

these reasons, the defendants' breaches did not amount to a repudiation of the

contract; they were not fundamental breaches going to the root of the contract. They

certainly gave the plaintiffs no right to treat the contract as at an end.

c. Failure of the purchaser to supply the supplier the schedule was not a

breach which amounted to repudiation of contract

In Brani Readymixed Pte Ltd v. Yee Hong Pte Ltd.26, it was also held that

stipulations as to time of payment are not of the essence of a contract of sale

according to s 10(1) of the Sale of Goods Act 1979.

In this case, the plaintiffs were suppliers of ready mixed concrete and the

defendants were building contractors. In or about July 1990, the defendants were

awarded a contract by the Port of Singapore Authority to build the Service Complex

at the Brani Terminal, Pulau Brani. The defendants entered into a contract with the

plaintiffs for the supply of ready mixed concrete required for the project. Several

amendments to the contract were then agreed to. The material amendment was to cl

13 which stated that the contractor was required to provide a casting schedule for the

whole project and 24 hours advance notice must be given prior to each supply

required. In the event that the supplier failed to supply due notice having being given,

26 [1994] 2 SLR 552.

75

the contractor shall have the right to source for its concrete requirements from an

alternative supplier and any cost difference is recoverable from the supplier.

The supply from the plaintiffs appeared to be unsatisfactory from the initial

stages of the contract. There were short and irregular supplies and even non-delivery

at times. On 18 April 1991, the defendants entered into an agreement with Rite-mix

for the supply of the remaining quantity of concrete. Rite-mix was a company in

which the main shareholders of the defendants had the majority interest. The two

companies also had common directors. The defendants' complaints about the

unsatisfactory supply from the plaintiffs culminated in their letter to the plaintiffs of

7 May 1991. Relying on cl 13 the defendants sought an alternative supplier, which

was Rite-mix. On 9 May 1991 the plaintiffs replied refuting the defendants'

allegations and rejecting the applicability of cl 13.

From 11 May 1991 onwards no orders were placed by the defendants for the

supply of concrete which clearly evinced an intention on the part of the defendants to

put an end to their contract with the plaintiffs. Notwithstanding that, however, the

plaintiffs did not accept this repudiation. By letter dated 30 May 1991 the plaintiffs

requested for a proper casting schedule and payment of the outstanding invoices to

be made within three days. On 7 June 1991 the plaintiffs followed up with another

letter stating that the defendants' failure to give them a proper casting schedule and

failure to make payment of the outstanding invoices amounted to a repudiation of the

contract and this repudiation was accepted by them.

No payment was made by the defendants in compliance with the plaintiff’s

demand. The plaintiffs commenced these proceedings for recovery of the total sum

of $ 278,969 due to them and damages by way of loss of profits. The defendants

counterclaimed for $ 253,598.08 being the additional cost incurred in procuring

supplies from Rite-mix. The plaintiffs' claim was based on breaches of contract on

the part of the defendants in failing to make payments of the amounts due and failure

to furnish the casting schedule.

76

The issue arose was, is the failure of the defendant in making payment and

furnishing the casting schedule entitle the plaintiff to treat him as discharged from

further liability?

The judge held that unless a different intention appears from the terms of the

contract, stipulations as to time of payment are not of the essence of a contract of

sale according to s 10(1) of the Sale of Goods Act 1979. Thus if time is not of the

essence, a default by the buyer in making payment at the time specified in the

contract will not entitle the seller to treat himself as discharged from further

liability ... unless the buyer's neglect or refusal to pay the price makes it plain that he

is unwilling or unable to perform the contract. Therefore, by cl 12 of the contract the

remedy available to the plaintiff was the right to withhold further supply until after

payment of the outstanding had been made but it did not discharge the plaintiff from

further performance of the contract.

In addition, the defendants' failure to give the plaintiffs a casting schedule

was not a breach which amounted to repudiation of the contract, as the plaintiffs had

been able to supply according to the defendants' orders without the casting schedule

and they never alleged that their inability was in any way due to lack of the casting

schedule. In any case, if there was repudiation, the plaintiffs had not accepted it.

Therefore, the plaintiffs were not discharged from further performance of their

contract and their letters of 30 May and 7 June 1991 constituted wrongful

repudiation of the agreement on their part. The default by the defendant in making

payment did not entitle the plaintiff to treat him as discharged from further liability.

When the parties indicate expressly by the contractual language that a single

breach of a particular contractual obligation is to have the same consequences as a

fundamental breach entitling the innocent party to rescind the contract, this is

frequently brought about by “legal jargon” involving the use of express words such

as “condition” or “condition precedent” or “of the essence” in regard to a particular

contract obligation. Therefore, if time of payment was intended to be of the essence

77

of the contract, employer will be in repudiatory breach of contract if he fails to make

payment that gives the right to the contractor to terminate the contract.

In Hoare v Rennie27, the principle laid down was that where time was of the

essence of the contract, and there had been a failure to deliver part of the goods and

the whole object of the contract was frustrated, the non-delivery under the

circumstances was an act by which the party renounced all intention to perform his

part of the contract, and thereby set free the other party.


Single act of refusing to pay was not an act that put an end to the contract

Non-payment of one certificate is not a repudiatory breach. A contractor can

only terminate his contract with his employer if he shows a repudiatory breach by

the employer in the sense that the employer has evinced an absolute refusal not to

perform his side of the contract. This was well illustrated in the case of Freeth and

another v. Burr and another28 and Kah Seng Construction Sdn Bhd v. Selsin

Development Sdn Bhd29. An important principle laid down by the judge in Freeth v.

Burr, Lord Coleridge, CJ:

“I think it will be found that the true principle running through all is

this: Is the act to be relied on as rescission an act which on the part of

27 (1859) 5 H & N 19; 29 LJ Ex 73; 1 LT 104; 8 WR 80; 157 ER 1083; 39 Digest 572, 1766. 28 [1874-1880] All ER Rep 751; [1874-80] All ER Rep 751. 29 Suit No 22-309 of 1992.

78

the person doing it amounts to an abandonment, or refusal by him to

perform his part of the contract?”

a. Non-payment by the purchaser for the first parcel was not such an

abandonment or refusal to perform their part of the contract. In

addition, there was no evidence of any inability on their part to perform

In the case of Freeth and another v. Burr and another30, the plaintiff and the

defendant entered into a contract dated 28 November 1871, where the plaintiff

agreed to buy 250 tons of iron from the defendants. By the terms of the bought note

the iron was to be delivered to the plaintiffs in two instalments, the delivery of the

first 125 tons to take place in two weeks from the date of the contract and that of the

second 125 tons in four weeks. No iron was delivered within the periods specified,

but the time was extended by arrangement, and a quantity of iron was delivered on

different days between 19 February and 18 May 1872, under constant pressure from

the plaintiffs for a continuous delivery. On the last-mentioned day the delivery of the

first parcel of 125 tons was completed, and fourteen days afterwards the defendants

demanded payment for that parcel.

No such payment was however made, but about 18 June 1872, an application

was made by the plaintiffs for a continuous delivery of the residue of the iron,

whereupon there was an absolute refusal on the part of the defendants to deliver any

more, and the plaintiffs accordingly brought an action for the non-delivery of the

second parcel, the defendants having first sued the plaintiffs and obtained payment

for the first parcel.

The issue arose was: whether the undoubted fact of the refusal to pay what

was due for 125 tons on May 18 was such an abandonment or refusal to comply with

30 [1874-1880] All ER Rep 751; [1874-80] All ER Rep 751.

79

such part of the contract as lay on the plaintiff, to perform, as to set free the

defendants, and entitle the latter to treat the contract as non-existent and to decline to

perform it.

It was held that, the non-payment by the plaintiffs for the first parcel was not

such an abandonment or refusal to perform their part of the contract as to free the

defendants from their liability to deliver the rest of the iron. This single act of

refusing to pay was not an act which, by itself, and unattended by other

circumstances, to put another quality upon it, amounted to more than a refusal to do

one particular thing, held that it did not put an end to the contract. Furthermore, there

were no evidence whatever of any inability on their part to perform.

The breach was one which frustrated the whole contract, and released the

other party.31 In Withers v Reynolds32 a case where the non-delivery of a particular

portion of a quantity of hay had put an end to the contract. It is because as Patteson, J,

says, non-payment for the particular contract was, under the circumstances, an

intimation: "It is no use for you to go on, because I tell you that I do not mean to

keep to the contract"; and, therefore, was an act which justified the other party in

considering the contract to be at an end.

b. Non-payment of one certificate and partial non-payment of the employer

did not evinced an absolute refusal not to perform his side of the

contract

Whereas, in the case of Kah Seng Construction Sdn Bhd v. Selsin

Development Sdn Bhd33, it was a claim by the plaintiff against the defendant for a

sum of RM 114,623.87, two retention sums of RM 40,000.00 and RM 40,522.69

31 Jonassohn v. Young (1863) 4 B & S 296; 2 New Rep 390; 32 LJQB 385; 10 Jur NS 43; 11 WR

962; 122 ER 470; 39 Digest 652, 2459. 32 (1831) 2 B & Ald 882; 1 LJKB 30; 109 ER 1370; 39 Digest 570, 1755. 33 Suit No 22-309 of 1992.

80

respectively, general damages and interest, arising out of certain contractual works.

There was also a counterclaim by the defendant for damages, interest and costs

against the plaintiff.

There was no formal contract entered into between the plaintiff and the

defendant. The plaintiff was invited to give a quotation on the basis of drawings or

plans prepared by the defendant's architect and engineering consultants. A letter of

acceptance of tender signed by both the plaintiff and the defendant and annexed to

the minutes of the second site meeting held on 2nd January 1991 was sent to the

plaintiff. The date of site possession and the completion date were, by subsequent

agreement between the plaintiff and the defendant, changed to 8 January 1991 and 8

November 1991 respectively.

The plaintiff's progress was such that as the completion date approached, the

works were far from complete, due to:

(a) A lack of construction and resource planning;

(b) No competent site supervisory staff until at least 50% of the contract

period has passed; and

(c) Material shortages as the plaintiff did not pay the suppliers on time.

The engineer issued various interim certificates, most of which were paid

although the contract documents did not provide for payments on an interim basis.

The certificates were based on a valuation of the works carried out, and took no

account of the defects or the cost of rectifying them. By the time certificates 10 and

11 were issued on 21 December 1991 and 21 January 1992 respectively, the

amended completion date of 8 November 1991 had already passed and the Plaintiff

was liable for agreed liquidated damages, at RM 328.00 per day.

81

On the basis of the estimated cost of rectifying the defects and the agreed

liquidated damage of the plaintiff already incurred and increasing daily, the

defendant exercised its rights of set-off and withheld payment for part of the sum

certified in interim certificate No.10 amounting to RM 21,273.20 and all the sums

certified in interim certificate No.11 amounting to RM 93,350.67.

The plaintiff then proceeded to demand for payment of the sums withheld,

and despite being informed of the defendant's position as to the disputed sum,

suspended works. After giving notice to resume works through its solicitors, the

defendant terminated the contract with the plaintiff.

Against the above background, it is common ground that the following issues

arise for determination by the court:

1. Whether the defendant was entitled to exercise a right of set-off in respect of

rectification of defective works and agreed liquidated damages for delay on

the part of the plaintiff in completing the works?

2. Even if the defendant was not entitled to the right of set-off, whether the

plaintiff was entitled to suspend works on the grounds that part of

certificate No. 10 and the whole of certificate No. 11 were unpaid?

It was held that, since there is no formal express provision in the contract for

the defendant to be bound to pay certified sums to the plaintiff, there is no

contractual obligation to pay any certified sums until the works are completed, as the

contract is an entire contract. In any event, the defendant is entitled at common law

to set off against these certified sums all sums necessary to rectify the serious

defective works and agreed liquidated damages for delay. There was indeed no

express or implied term negativing this common law right in the contract.

82

The plaintiff contends that it was entitled to suspend works because of non-

payment of one certificate and partial non-payment of another. Learned counsel for

the plaintiff cites the decision in Associated Pan Malaysian Cement Sdn Bhd v.

Syarikat Teknikal & Kejuruteraan Sdn Bhd34 as authority for this proposition.

However, it was held that the Associated Pan Malaysian Cement Sdn Bhd v. Syarikat

Teknikal & Kejuruteraan Sdn Bhd35 case is not authority for the proposition

advanced by him. Upon a careful reading of the judgment in that case, the judge is of

the view that it reaffirms, inter alia, the following established rules of contract:

(a) Whether time is of the essence of the contract depends on the terms of

the contract and its surrounding circumstances;

(b) Whether a term is intended to be a condition of a contract depends on the

intention of the parties;

(c) If the parties to a contract expressly set out therein the consequences of a

breach of contract, a court will give effect to the contract's express words.

In the absence of a specific provision in the contract, a contractor has no

automatic right to suspend works simply because one or two of his certificates have

not been paid. It was held that, it is trite law that a contractor can only terminate his

contract with his employer (at common law, as opposed to the exercise of an express

termination clause) if he shows, inter alia, a repudiatory breach by the employer in

the sense that the employer has evinced an absolute refusal not to perform his side of

the contract.

Although in this contract there was no contractual determination clause, the

plaintiff's conduct in refusing to be bound by the contract, and in particular by failing

to carry out its primary or fundamental obligations to work was repudiatory in nature

34 (1990) 3 MLJ 287. 35 Ibid.

83

and entitled the defendant to terminate the contract between the parties, as the

defendant was left with no other option. The defendant's termination of the contract

on 3 July 1992 was therefore justified in law.

Based on this two cases, it can be concluded, single act of refusing to pay

was not an act that put an end to the contract. It is trite law that a contractor can only

terminate his contract with his employer if he shows a repudiatory breach by the

employer in the sense that the employer has evinced an absolute refusal not to

perform his side of the contract.


The purchaser had not, by postponing payment under the erroneous advice of

their solicitor, so shown an intention no longer to be bound by the contract

As a general principle of law, failure to pay on time what is due under a

contract will not normally be treated as a sufficient breach to justify the other party

in terminating the contract, but a stated intention not to pay in any event clearly

would. In the case of Mersey Steel and Iron Company v. Naylor, Benzon, & Co.36,

Bowen, L.J explained:

“The test was whether the conduct of one party to the contract was

really inconsistent with an intention to be bound any longer by the

contract.”

36 (1884) 9 App Cas 434.

84

In the present case, the defendants agreed to purchase from the M. Co. a large

quantity of steel to be delivered on board ship in five monthly instalments,

commencing with January, 1881, payment to be made within three days after receipt

of the shipping documents. In January, 1881, the company delivered about half the

first instalment, but before the payment became due a petition was presented on the

2nd of February to wind up the company. The defendants were advised by their

solicitor that they could not without leave of the Court safely pay the company

pending the petition, and asked the company to obtain an order of the Court to

sanction their doing so.

On the 10th of February the company replied that they should treat the

refusal to pay as releasing the company from and further obligation to carry out the

contract. On the 15th of February a winding-up order was made. The defendants'

solicitor, on the 17th of February, wrote to the liquidator that the defendants claimed

damages for non-delivery in January, and were prepared to accept and pay for all

further deliveries without deducting damages if the payments were carried to a

separate account subject to their claims for damages. He further suggested that the

defendants would probably be willing to accept the January instalments and waive

damages. The liquidator refused to make any further deliveries and commenced an

action to recover the price of what had been delivered. The defendants set up a

counter-claim for damages.

It was held that, by reversing the decision of Lord Coleridge, C.J., that the

defendants had not, by postponing payment under the erroneous advice of their

solicitor, so shown an intention no longer to be bound by the contract as to release

the plaintiffs from further performance of it, and that the plaintiffs were liable for

damages for non-delivery.

85

The judge, Jessel, M.R further elaborated his reasons for giving judgment to

the defendant:

“That being so, the only point we have to consider is, whether the

evidence in this case ought to lead us to the conclusion that the

buyers refused to go on with the contract? I think the evidence is very

strong, that the buyers were both ready and willing to pay if it had

not been for the unlucky circumstance that induced them to refuse to

pay under a mistake of law.”

Furthermore, it is not suggested for a moment that this well-known firm were

in any pecuniary difficulty, or wished to delay payment because it was not

convenient to pay. There is nothing from the correspondence, which can be fairly

construed into a refusal by the purchasers to comply with the terms of the contract.

The true inference to be drawn from the correspondence is that they were ready

enough to pay, but felt embarrassed, and did not know how to pay.

86


Failure by the purchaser to pay the last instalment (relatively small amount)

did not amount to a repudiation on his part of the contract

Mere breach of a payment obligation does not constitute a common law

repudiation. A failure to pay is less likely to be a repudiation if it occurs towards the

end of a contract. This is well illustrated in the case of Cornwall v. Henson37.

In 1892, the defendant agreed in writing to sell and the plaintiff to purchase a

certain plot of land for £ 150, the plaintiff paying £ 40 on account (but not by way of

deposit), and the balance by instalments. In case default was made for thirty days in

payment of any one instalment, the whole of the remaining instalments were to

become due and payable, and, if not paid within thirty days, the defendant was to be

at liberty to resell the land and apply the net proceeds in payment of the amount due.

The plaintiff took possession of the land, and by August 1895 had paid all but

the last instalment. Much correspondence took place between the plaintiff and the

defendant between the date on which the last instalment became due and 23 October

1896. Finally, on 23 October 1896, the plaintiff wrote a long letter to the defendant,

asking him to reply to a particular address in Jamaica Road, Bermondsey. Shortly

after that date the plaintiff disappeared, and letters addressed by the defendant to him

at Jamaica Road were returned through the Dead Letter Office. Inquiries made by

the defendant at former addresses and from his relations led to no result.

Under these circumstances, the defendant took possession and agreed to let

the property to a Mr Burns for a term of three years from 25 March 1898, with

37 [1900-3] All ER Rep Ext 1734, Also reported: [1900] 2 Ch 298; 69 LJ Ch 581; 82 LT 735; 49

WR 42; 16 TLR 422; 44 Sol Jo 514.

87

liberty to erect a house on it and with the option to purchase at any time during the

said term. Burns accordingly erected a house, and was actually in possession.

The plaintiff meanwhile reappeared upon the scene, and desired to pay the

final instalment and obtain a conveyance free from the lease. The defendant declined

to grant it.

The issue arose was whether the conduct of the plaintiff in failing to pay the

last instalment amount to a repudiation on his part of the contract.

It was held that failure by the purchaser to pay the last instalment did not

amount to a repudiation on his part of the contract. The payment for this land was to

be made by a number of small instalments spread over a considerable lapse of time,

and all of these instalments, except the last, had been actually paid, and the plaintiff

had been for some years in actual possession. During that period there had been, in

connection with this land, some considerable out-of-pocket expenses, such as taxes,

tithe, rent-charge, and the like, for example, and the plaintiff had been treated, in the

matter of paying these expenses, as the owner of the property.

The contract had been performed by the plaintiff except for the non-payment

of about £ 10 out of a total of £ 150. There was no declaration of any incapacity on

the plaintiff's part to make this payment; and there are letters showing that the

defendant was not likely to insist on immediate payment. It is true, of course, that the

defendant had done what he had no right to do; but there is nothing to show that he

ever had the intention of treating the contract as dead.

88

Webster MR further gave explanation of his judgment:

“When we remember that the payment of the purchase money was

originally spread over a period of five years, it would be pressing the

law very harshly to say that the contract was gone because of the

neglect of 18 months.”

Collins LJ in arriving his judgment that non-payment by the plaintiff was not

a repudiation:

“Here about £ 10 only owed, and to say that the plaintiff refused to

carry out the contract is a conclusion at which I cannot arrive.”

Therefore, it was held that the plaintiff had lost his right to specific

performance by reason of his delay, yet his conduct did not amount to a repudiation

on his part of the contract, and that he was entitled to damages by reason of the

breach of the contract by the defendant.

89


The withholding of money had only a temporary quality because the employer

intended to resume payments when the contractor's men returned to work and

rectified their mistake.

In the case of Canterbury Pipe Lines Ltd v. Christchurch Drainage Board38,

it was clear that the defendant would resume payments as soon as position regarding

the question of road restoration was covered. The withholding of the certificate for

the progress payment was not justified by the contract, but it was not in the way in

which it was done and the manner in which the intimation of it was passed to the

contractor in any sense an indication that the defendant did not propose to make any

further payments.

In April 1960 the Board accepted the tender of the contractor for the laying

of certain sewer pipes and incidental work. The contract price was $ 29,228.

Completion date was 27 January 1961. As regards progress payments the general

conditions stated that no sum should be considered due to the contractor until the

Board's engineer had given a certificate. Any sum so certified was not to be

considered to be payable until the expiration of 14 days after presentation of the

certificate by the contractor to the Board, "nor shall any omission to pay the amount

of such certificate at the time the same shall be held payable be deemed or held to be

a breach or vitiate the contract". All disputes were to be referred to the engineer. The

contractor was given, in a limited class of matters, the right if aggrieved by the

engineer's decision to serve notice requiring arbitration under the Arbitration Act,

but work was to continue during the arbitration proceedings if deemed by the

engineer reasonably possible.

38 [1979] 2 NZLR 347; [1979] NZLR LEXIS 405

90

Work commenced in July 1960 and was carried on until September when,

with the acquiescence of the Board, there was a delay pending delivery to the

contractor of new machinery. After five months the contractor resumed work with

the new machinery and progress was quite rapid until mid-April. By then progress

payments made to the contractor totaled $ 22,690.

Then the Board's engineer took the view that an amount of some $ 926

allowed by the contractor in its tender for restoration of the road surface was

inadequate; and conversely he maintained that other items had been treated by the

contractor too generously in arriving at the total tendered price. The engineer though

that $ 3,200 was likely to be needed for the restoration. A difference of opinion arose

between the engineer and the governing director of the contracting company, Mr

Bloemen, as to the extent of the company's responsibility in the matter. The amount

of restoration needed appears to have been much in excess of anything contemplated

on either side at the time of the tender. Against that immediate background and

certain difficulties that had arisen between the two men regarding other contracts

being carried out by the company for the Board, the engineer decided that the $

3,200 should be built up in effect in the Board's hands before any further monthly

progress payments were made to the contractor. Normally the next progress payment

would have been made in May and would have been for about $ 1,600; but for the

reason just mentioned the engineer did not certify for it.

As well as objecting to the withholding of progress payments the contractor

claimed payment for certain extras at other than schedule rates and also for extra

backfilling caused by the new machinery. The contractor elected not to rescind the

contract but suspended all work under the contract.

On 14 June 1961 the engineer wrote to the contractor formally notifying it

that it had failed to make such progress with the works as the engineer deemed

sufficient to ensure their completion within the time specified, and had failed to

employ a sufficient number of men on the works. When the contractor failed to

91

resume work, the Board took the work out of the contractor's hands in reliance on a

forfeiture clause in the contract. The Board sued the contractor for extra expense

incurred in having the work completed by other contractors. The contractor

counterclaimed for, inter alia, damages for loss of the contract or on the basis of

quantum meruit. In the Supreme Court the Judge gave judgment for the Board on the

claim and counterclaim and awarded the Board $ 13,140 with interest totaling $

13,925. The contractor appealed.

It was held that although the contractor had valid grounds for complaint, the

express terms of the contract did not give him the right to suspend the work.

In certifying or acting under the forfeiture clause the engineer, though not

bound to act judicially in the ordinary sense, was bound to act fairly and impartially.

Viewed objectively the engineer had not acted fairly in not certifying progress

payments and calling upon the contractor to complete within the specified time

which had already passed. Accordingly, the employer was in the wrong in purporting

to act under the clause by taking the work out of the contractor's hands and reletting

to other contractors.

The contractor should recover payment at the contract rates for work actually

done and should also recover its deposit and retention moneys; but not damages for

loss of profits or on a quantum meruit. In the result the appeal was allowed and the

contractor was awarded $ 9,405 without interest.

It is concluded that although the withholding of the certificate for the

progress payment was not justified by the contract and accordingly was a breach by

the Board of a serious kind, it was not "in the way in which it was done and the

manner in which the intimation of it was passed to the contractor in any sense an

indication that the Board did not propose to make any further payments". The judge

considered that it was clear that the Board would resume payments as soon as the

92

position regarding the question of road restoration was covered; he held that this was

not a repudiation by the Board of the contract. The withholding of money had only a

temporary quality because the Board intended to resume payments when the

appellant's men returned to work.


Where the employer set-off the amount she was entitled to as liquidated

damages against the balance of the purchase price due to the contractor

In the case of Lee Poh Choo v. Sea Housing Corporation Sdn Bhd39 the

plaintiff sued for damages for breach of contract and for delivery of documents of

title relating to land and house in Petaling Jaya. The plaintiff had agreed to purchase

the property from the defendant and it was a term of the agreement that the building

on the said property should be completed within a period of eighteen months from

the date of the agreement. The building was only completed some twenty three

months after that date. The defendants claimed that the non-fulfillment was caused

by circumstances beyond their control.

On January 2, 1974 by a written agreement the plaintiff agreed to purchase

from the defendant the said property (a three-storey shop house plus mezzanine floor

in phase 5 for SEA Park, Petaling Jaya, Kuala Lumpur) at the purchase price of

$ 175,000. Under the said agreement the defendant was to complete the said building

on the said property within a period of 18 months from the date of the said

agreement, i.e. on or before July 1, 1975. In the meantime the plaintiff continued to

pay the purchase price progressively and there was a balance of 10% being the last

39 [1982] 1 MLJ 324.

93

payment due and payable by her to the defendant upon the issue of the Certificate of

Fitness. It is a fact that the said building was not completed within the period

stipulated in the agreement. It is a term of the said agreement that the defendant

should pay liquidated damages at the rate of 8% per annum on the purchase price for

any delay in the completion of the said building up to the date of actual completion

and delivery of possession.

By a letter dated June 16, 1977 the defendant wrote to the plaintiff notifying

her that the said building has been completed and the Certificate of Fitness were

ready for collection. The defendant demanded from the plaintiff payment of the

balance amounting to $ 17,500 being the final instalment of the purchase price and

$ 407.20 being the quit rent for a period of 4 years.

Upon receipt of the abovementioned letter, the plaintiff replied and pointed

out to the defendant that under Clause 17 of the Purchase Agreement the building

was to be completed within 18 months from the date thereof and yet the said

building was only completed on June 16, 1977. Further, the plaintiff alleged that she

was entitled to liquidated damages at 8% per annum on the purchase price which

according to her calculation amounted to $ 27,826.66, i.e. from July 2, 1975 to June

1, 1977.

The plaintiff further stated in the said letter that the balance of $ 17,907.20

which was payable by her being the final balance of the purchase price was far

below the amount which she would be entitled as liquidated damages. Therefore she

suggested the defendant should hand over the keys together with the payment of

$ 9,919.46.

94

The issues arose were:

1. Can the plaintiff set off the last payment of the purchase price

against liquidated damages?

2. Was the plaintiff in breach for non-payment of the last instalment of

the purchase price?

It was held that the defendants have failed to prove that the delay was due to

circumstances beyond their control. Therefore, the plaintiff is entitled to damages

calculated at the rate of 8% per annum on the purchase price from July 2, 1975 to

June 1, 1977 for $ 27,826.66.

The defendant has argued that the plaintiff was in breach of the said

agreement due to her failure to comply with the demand of the defendant to pay the

balance of the purchase price for $ 17,907.20. This is pleaded in paragraph 12 of the

defence. And under Clause 21 of the said agreement, if the purchaser shall fail to pay

any instalment of the total purchase price or any part thereof, or any interest, then it

shall be lawful for the vendor at any time thereafter to annul the sale and forthwith

terminate the agreement.

It is found that the failure on the part of the plaintiff to pay the balance does

not amount to a repudiation of the contract. The reply by her to the defendant's letter

of demand cannot be construed as her intention to repudiate. What she wanted to do

was merely to set-off the amount she was entitled to as liquidated damages against

the balance of the purchase price due to the defendant. At any rate, the defendant has

not pleaded that the plaintiff has repudiated the contract or that the defendant has

accepted the repudiation. "The act and conduct of the defaulting party relied on as

amounting to a repudiation of the contract should be clearly pleaded and it is

necessary to plead and prove that the repudiation was accepted."

95

4.4 Conclusion

In a nutshell, out of the 11 cases studied, only 2 cases provided circumstances

where non-payment was a repudiatory breach of contract by the employer which

entitled the contractor to have the right to terminate the contract. The non-payment

by the employer simply showed an intention no longer to be bound by the contract

when he deliberately refused to pay the contractor what was already due40 and were

not prepared to make any further payment due to financial difficulties which are not

the responsibility of the contractor.41

However, in most of the circumstances, it has been decided by the courts that

non-payment is not a repudiatory breach of contract by the employer. It happened

especially when the courts construed time of payment was not of the essence of the

contract.42 On occasions, time for payment had been extended with the consent of

the seller and the seller never doubted that the bills would be paid albeit late.43

Besides, single act of refusing to pay was not an act that put an end to the contract.44

There was no evidence whatever of any inability on the purchaser to perform.45 The

purchaser had not, by postponing payment under the erroneous advice of their

solicitor, so shown an intention no longer to be bound by the contract.46 Failure by

the purchaser to pay the last instalment (relatively small amount) did not amount to a

repudiation on his part of the contract.47 The withholding of money had only a

temporary quality because the employer intended to resume payments when the

contractor's men returned to work and rectified their mistake.48 Lastly, where the

40 Ban Hong Joo Mines Ltd case, supra note 10. 41 CJ Elvin Building Services Ltd case, supra note 14. 42 Wong Poh Oi case, supra note 20; Decro-Wall International SA case, supra note 21; Brani

Readymixed Pte Ltd case, supra note 22. 43 Decro-Wall International SA case, supra note 22. 44 Freeth case, supra note 12; Kah Seng Construction case, supra note 29. 45 Freeth case, supra note 12. 46 Mersey Steel and Iron Company case, supra note 13. 47 Cornwall case, supra note 37. 48 Canterbury Pipe Lines Ltd case, supra note 38.

96

employer set-off the amount she was entitled to as liquidated damages against the

balance of the purchase price due to the contractor49

However, an important principle laid down by Salmon LJ in Decro-Wall

International SA v. Practitioners in Marketing Ltd50:

“The case would have been quite different if the defendants' breaches

had been such as reasonably to shatter the plaintiffs' confidence in the

defendants' ability to pay for the goods with which the plaintiffs

supplied them.”

Therefore, non-payment would be a repudiatory breach if it shatters the

contractor’s confidence in receiving payments.

As a conclusion, the result of the analysis seems to suggest that, in most of the

circumstances, non-payment is not a repudiatory breach of contract by the employer.

The contractors are not advised to stop work at the site when the employer refused to

make payments, or he himself would be guilty of a breach of contract in failing to

maintain regular and diligent progress. Therefore, an employer may be held to be in

repudiatory breach of contract in failing to make payment if his action shows an

intention no longer to be bound by the contract and his default goes to the root of the

contract. The employer cannot rely upon its own breach to justify a contention that

the contractor was itself in repudiatory breach.

49 Lee Poh Choo case, supra note 39. 50 2 All ER 216, [1971] 1 WLR 361.

CHAPTER V

CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter is the last chapter that summarizes the finding of the research

according to the research objective. It also contains the problems encountered during

the research as well as the recommendations for future researches.

5.2 Summary of Research Findings

A total number of 11 cases centered on issue of non-payment were studied,

where 7 of them were involving construction contracts and the remaining were

contracts of sales of goods. Table 5.1 shows the circumstances where non-payment

constitutes a repudiation of contract by the employer. Table 5.2 shows the

circumstances where non-payment does not amount to repudiation of contract by the

employer / purchaser.

Table 5.1: Circumstances where non-payment constituted a repudiation of contract by the employer

No

Cases

Circumstances and Remarks

Type of Contract/ Contractual Relationship

1 Ban Hong Joo Mines Ltd v. Chen & Yap Ltd [1969] 2 MLJ 83

- Where the defendant’s deliberate and unjustified refusal to pay what was already due coupled with his unjustified order to the plaintiff to stop work constituted a repudiation of contract.

- Plaintiffs' right to the fortnightly progress payments for work done in digging and removing the earth is not dependant on their digging down to the agreed depth of 25 feet.

- Defendants had at all times been in breach of their obligation to make periodic payments

- The defendants ordered to the plaintiffs to stop work and this stoppage of work by them clearly went to the root of the contract.

Construction Contract/

Employer and Contractor

2 C J Elvin Building Services Ltd v Noble and Another [2003] EWHC 837 (TCC)

- The defendant was in breach of what to the claimant was a most important term of the contract, namely that reasonable sum due should be paid at reasonable intervals.

- It was not a valid excuse for the defendant to put forward financial difficulties as an excuse not to pay.

- The defendants were simply not prepared, whether sums were available or not, to make any further interim payment.

- The defendants proposed four significant alterations to the simple contractual arrangements which they had which were threatening not to pay any further sum until the works were completed.

- Therefore, the claimant was entitled to suspend the work - The defendant cannot rely upon its own breach to justify a contention

that the claimant was itself in repudiatory breach.



Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser

No

Cases

Circumstances / Judicial Decisions


1 Wong Poh Oi v. Guok Gertrude and Another [1965-1968] 1 SLR 455

Time of payment was not of the essence of the contract. - Both cl 5 and cl 6 appeared to show clearly that time

was not intended to be of the essence of the contract.

- The delay or refusal of the plaintiff to pay for the extras could not be regarded as showing an intention no longer to be bound by the contract.



2 Decro-Wall International SA v. Practitioners in Marketing Ltd [1971] 2 All ER 216, [1971] 1 WLR 361

Time of payment was not of the essence of the contract. - The time for payment had been extended with the consent of seller

on occasions. The correspondence shows that the changes made from time to time in the terms of payment, and at the other changes which came under discussion, it seems plain that terms as to payment were at all times negotiable.

- The seller never doubted that the bills would be paid albeit late - The failure to pay the bills of exchange promptly and the likelihood

of similar delays in the future did not constitute a repudiation of the agreement by the defendants.

Contract of Sale of Goods/ Seller and

Purchaser

3 Brani Readymixed Ptd Ltd v. Yee Hong Pte Ltd [1994] 2 SLR 552

Time of payment was not of the essence of the contract. - Failure of the purchaser to supply the supplier the schedule was not a

breach which amounted to repudiation of contract - Therefore, the supplier were not discharged from further performance

of the contract.


Contractor and Supplier

Table 5.2: Circumstances where non-payment did not amount to repudiation of contract by the employer / purchaser (cont’d)

No

Cases



4 Freeth & Another v Burr & Another [1874-1880] All ER Rep 751; [1874-80] All ER Rep 751

Single act of refusing to pay was not an act that put an end to the contract. - Non-payment by the purchaser for the first parcel was not such an

abandonment or refusal to perform their part of the contract. - In addition, there was no evidence of any inability on their part to

perform.

Contract of Sales involving 250 tons of iron/ Seller and

Purchaser

5 Kah Seng Construction v Selsin Development Suit No 22-309 of 1992

Single act of refusing to pay was not an act that put an end to the contract. - Non-payment of one certificate and partial non-payment of the

employer did not evinced an absolute refusal not to perform his side of the contract

- It is trite law that a contractor can only terminate his contract with his employer if he shows, inter alia, a repudiatory breach by the employer in the sense that the employer has evinced an absolute refusal not to perform his side of the contract.




No

Cases



6 Mersey Steel and Iron Company v. Naylor, Benzon, & Co. (1884) 9 App Cas 434.

- The buyers had not, by postponing payment under the erroneous advice of their solicitor, so shown an intention no longer to be bound by the contract.

- The buyers were both ready and willing to pay if it had not been for the unlucky circumstance that induced them to refuse to pay under a mistake of law.

- Therefore, the buyers did not show an intention no longer to be bound by the contract to release the seller from further performance.

- It is not suggested for a moment that the buyers were in any pecuniary difficulty, or wished to delay payment because it was not convenient to pay.

- There is nothing from the correspondence, which can be fairly construed into a refusal by the buyers to comply with the terms of the contract.

Contract of Sales involving large

quantity of steel/ Seller and Purchaser

7 Cornwall v Henson [1900-3] All ER Rep Ext 1734

- Failure by the purchaser to pay the last instalment (relatively small amount) did not amount to a repudiation on his part of the contract.

- Purchaser paid the deposit and agreed that balance to be paid by instalments.

- All other instalments were paid and the purchaser had been in actual possession for some years but he failed to pay final instalment.

- It did not amount to a repudiation on his part of the contract. - It cannot be said that the plaintiff refuse to carry out contract as only

£ 10 (relatively small amount) was owed.

Contract of Sale of Land/ Seller and

Purchaser


No

Cases



8 Canterbury Pipe Lines Ltd v Christchurch Drainage Board [1979] 2 NZLR 347; [1979] NZLR LEXIS 405

- The withholding of money had only a temporary quality because the employer intended to resume payments when the contractor’s men returned to work and rectified their mistake.

- The withholding of the certificate for the progress payment was not justified by the contract, but it was not in the way in which it was done and the manner in which the intimation of it was passed to the contractor in any sense an indication that the defendant did not propose to make any further payments.



9 Lee Poh Choo v Sea Housing Corporation Sdn Bhd [1982] 1 MLJ 324

- The employer set-off the amount she was entitled to as liquidated damages against the balance of the purchase price due to the contractor is not a repudiation of contract.


Developer and Contractor

As a conclusion, the result of the analysis seems to suggest that, in most of

the circumstances, non-payment1 is not a repudiatory breach of contract by the

employer. The contractors are not advised to stop work at the site when the employer

refused to make payments, or he himself would be guilty of a breach of contract in

failing to maintain regular and diligent progress. However, as per Earl of Selborne

L.C. in Mersey Steel & Iron Co Ltd v. Naylor, Benzon & Co2:

“You must look at the actual circumstances of the case in order to see

whether the one party to the contract is relieved from its future

performance by the conduct of the other, you must examine what that

conduct is, so as to see whether it amounts to a renunciation, to an

absolute refusal to perform the contract, such as would amount to a

rescission if he had the power to rescind, and whether the other party

may accept it as a reason for not performing his part.”

Therefore, an employer may be held to be in repudiatory breach of contract in

failing to make payment if his action shows an intention no longer to be bound by the

contract and his default goes to the root of the contract. The employer cannot rely

upon its own breach to justify a contention that the contractor was itself in

repudiatory breach.

5.3 Problem Encountered During Research

Constraint and insufficiency of time was the main and only problem encountered

in completing this research. Only eight (8) weeks’ time was available for this research

1 Inclusive of delayed payment and where the amount paid by the employer is fewer than the

amount claimed by the contractor. 2 (1884) 9 App Cas 434.

and hence every process has been carried out in a very fast manner, especially during the

data collection process, which involved collecting and sorting court cases from different

law journals. This limitation led to less cases being found to support the findings. If

there were more time given, the study can be done in more comprehensive and thorough

way.

5.4 Further Studies

The followings are some recommendations for future researches: -

i. To look into repudiatory breaches (other than non-payment) by the employer

that entitles the contractor to terminate the contract.

ii. To look into repudiatory breaches by the contractor that entitles the employer

to terminate the contract.

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A Repudiatory Breach in the Construction Industry - Non-Payment