TIMELINE MILESTONE ISSUE
Massive overpayment is not justified where risk of non-completion has to be borne alone by employer
CONSTRUCTION gurus consistently advise construction industry players that payment to contractors should match the progress of work done in accordance with a work programme duly approved by the contract administrator (who is usually an architect, an engineer or a superintending officer).
To ensure that contractors get paid what they deserve (nothing more, nothing less), there must be an agreed mechanism for the progress of work done to be valued properly by an independent party (a certifier) from time to time. It is trite knowledge that non-payment or inadequate payment will have an adverse effect on the contractor’s performance, whilst over-payment brings great risk to the employer in the future.
In a recent case before the English courts, the crucial question was whether recovering an overpayment is possible if it was made knowingly or recklessly by the employer.
In Leslie v Farrar Construction Ltd [2016] EWCA Civ 1041, the English Court of Appeal had to consider whether a property developer (as employer) can recover an overpayment of £300,000 (RM1.59 million) to a contractor who carried out five completed projects.
The court stated that there is a distinction between uncompleted and completed projects. In the case of uncompleted projects (partially completed or abandoned), only interim payments are made and these can be routinely adjusted in the course of the project.
However, in the case of completed projects (as in the case), the developer had agreed on a final payment expressly to close the transactions. In the circumstances, the court held that by paying the contractor without bothering to check how much was really due, the developer had run the risk of making an overpayment. After reviewing the relevant case law, the court held that “in the absence of fraud or misrepresentation”, the overpaid sum cannot be recovered from the contractor.
Finance Minister Lim Guan Eng told the local media on June 6, that in the recent case of a RM9.41 billion pipeline project undertaken by Suria Strategic Energy Resources Sdn Bhd (SSER), RM8.3 billion (representing 88 per cent of the contract sum) had been paid to the contractor (China Petroleum Pipeline Bureau, CPPB) despite the fact that only 13 per cent of the work had been completed.
The project involved the construction of two pipelines — the Multi-Product Pipeline (MPP) and Trans-Sabah Gas Pipeline (TSGP). The former is a 600km gas pipeline from Melaka to Port Dickson, ending in Jitra, Kedah, whilst the latter is a gas pipeline from Kimanis to Sandakan and Tawau.
Approved by the cabinet on July 27, 2016, the projects were awarded to CPPB on Nov 1, 2016, during former prime minister Datuk Seri Najib Razak’s trip to China. Work commenced in April 2017 and payments started in the first week of May. All payments to CPPB (amounting to 88 per cent of the contract sum) were made over a period of less than 12 months from May 2017.
“We have discovered that the payment schedules for the above contracts are based almost entirely on timeline milestones, and not on progressive work completion milestones,” Lim said. He added that the contracts were negotiated directly by Najib’s office, and that the former prime minister had ignored red flags raised by the attorney-general’s office on both deals.
Najib maintains (in his Facebook postings) that there is nothing dubious about the two gas pipeline projects “as all relevant procedures were complied with during negotiations and executions”.
Echoing Najib, Datuk Lokman Noor Adam (Finance Ministry’s former director of communications) said that: “It is not unusual for turnkey construction projects to have payment schedules different from construction milestones.
This could be due to the government-to-government negotiations related to the soft loan given by the China government.”
Lim also said that based on information received from Treasury officials, SSER was an offshoot of SRC International, a former subsidiary of 1Malaysia Development Bhd (1MDB). He added that the president of SSER is a director of Putrajaya Perdana Sdn Bhd, a company directly linked to fugitive Jho Low.
A local newspaper reported that the terms of payment for SSER’s gas pipeline project “have several similarities with another controversial project in Malaysia — the East Coast Rail Link (ECRL)”. For the ECRL, RM19.70 billion had been paid out to the contractor after the first year, with another six years more to go for its completion.
The sum paid out represents 36 per cent of the value of the construction work.
One year’s work (out of a total of seven years) yielding more than one-third payment of the entire contract sum sounds a bit too good to me as a construction lawyer. Whilst payment to contractors based on a timeline milestone is not something new in the construction industry, that should not justify a massive overpayment where the risk of non-completion or abandonment has to be borne alone by the employer.
The best advice a lawyer can give to his client is, “whilst you hope for the best, always think of the worst case scenario”. A good construction contract should provide for that contingency.
Whilst payment to contractors based on a timeline milestone is not something new in the construction industry, that should not justify a massive overpayment where the risk of non-completion or abandonment has to be borne alone by the employer.
The writer formerly served the Attorney-General’s Chambers before he left for private practice, the corporate sector and academia