Substance-Over-Form: Court Of Appeal Redefines Condition Precedent

Employers have long imposed notice requirements as a condition precedent meant to not only ensure transparency but also to strike down otherwise valid claims. This condition precedent, over time, risked contractors having to lose their rights to extensions of time or related payment claims not because their claim lacks merit, but because a letter was sent a day late or lacked a specific phrase.

The Court of Appeal decision in PSI Incontrol Sdn Bhd v Ircon International Ltd [2022] MLJU 239 marked a clear shift in how Malaysian courts treat such “condition precedents” in construction contracts, moving away from rigid technical compliance towards a more practical, substance-over-form approach to conditions precedent.

Background Facts

The dispute involved a Design and Build Contract PWD Form DB (Rev. 2007) (“Contract”). The subcontractor (PSI Incontrol Sdn Bhd) applied for an extension of time (“EOT”) pursuant to Clause 49.1 of the Contract and indicated in the cover letter of its intention to claim for loss and expense for the delay caused by the late issuance of Master Implementation Plan by the main contractor.

Clause 49.1 of the Contract provides the pre-conditions to be fulfilled when submitting for claims which are as follows:-

The delay to the progress of the work must be reasonably apparent;
The contractor must give written notice as to the causes of delay and relevant information with supporting documents;
The information and supporting documents furnished must enable the officer (the Project Director in the present case) to form an opinion as to the cause and length of delay;
The officer must form an opinion whether the cause of delay falls within the delay events set out in the clause; and
The officer may grant the EOT as soon as he is able to estimate the length of the delay by issuing certificate of delay and EOT.

Clause 49.2 of the Contract further provides that the contractor’s entitlement is limited to the delay event set out in Clauses 49.1 (b), (d), (e), (h) and (j). This is to be read together with Clause 50 of the Contract which further provides that the following condition precedent have to be fulfilled:-

The contractor must give written notice to the Project Director of its intention to claim within 60 days of the occurrence of such event;
The contractor must submit full particulars and supporting documents of such claim to the Project Director;
The Project Director must determine the claims based on the documents submitted.

In this case, upon receiving the subcontractor’s submission of notice of delay and its application for EOT, the Project Director granted a 606-day EOT to the subcontractor and simultaneously rejected the subcontractor’s claim for loss and expense based on the purported technical non-compliance of the pre-conditions of Clauses 49 and 50 of the Contract.

High Court’s Findings

The High Court affirmed the Project Director’s determination in granting the EOT to the subcontractors but dismissed the subcontractor’s claims for loss and expense on, inter alia, the ground that the subcontractor has failed to fulfil the requirements for the claims pursuant to Clause 49 of the Contract.

Being dissatisfied with the decision, the subcontractor appealed to the Court of Appeal.

Court of Appeal’s Findings – The Substance Over Form Shift

The Court of Appeal allowed the subcontractor’s claims for EOT as well as loss and expense evidencing a more practical, substance-over-form approach to these disputes.

This appears to be a departure from previous decisions where the Malaysian Courts have consistently treated non-compliances with contractual prerequisites as being fatal as illustrated in the Court of Appeal decision in Yuk Tung Construction Sdn Bhd v Daya CMT Sdn Bhd [2020] MLJU 1084.

The Court of Appeal’s findings in PSI Incontrol Sdn Bhd can be summarised as follows:-

Sufficiency of Notice in Construction Claims for EOT and Loss and Expense

The notice of delay submitted by the subcontractor fulfilled the pre-condition under Clause 49.1 that a written notice upon the delay becomes reasonable apparent. This was also established by the fact that the Project Director granted the extension of time to the subcontractors, which means that the Project Director must have been satisfied that all pre-conditions have been fulfilled.

In the same notice, the subcontractor’s statement that “We will be submitting our claim for EOT covering all direct and indirect cost” was also deemed a valid notice of intention to claim loss and expense thereby satisfying the requirement under Clause 50.1. Subsequently, the subcontractor duly submitted particulars of its claims and supporting documents, which the Court finds that the pre-requisite under Clause 50.2 have been fulfilled. Interestingly, the Court also finds that the Project Director did not make any determination on the claims had led to the subcontractor’s claims remained unchallenged and eventually the Court allowed the subcontractor’s claims in full.

Importantly, the Court of Appeal clarified that a claim is only barred when the contractor fails to give both the notice of intention and the supporting particulars.

Burden of Classifying Delay Events in EOT Claims

The burden does not lie with the subcontractor to identify which delay event it relied on for its claims for EOT. Instead, it is the responsibility of the Project Director to determine which specific “limb” of the contract applies when granting an EOT. When the Project Director determined and granted EOT to the subcontractor, it is deemed that the subcontractor’s application for EOT fulfils the limb under the Contract, even if the Project Director did not specify which limb is applicable.

Consequently, the subcontractor is also entitled to claim for loss and expense which the Contract permits under Clauses 49.1 (b), (d), (e), (h) and (j), in view that the Project Director did not expressly state that the delay event relied on by the subcontractor did not fall within such limbs.

Projected Losses are Recoverable

The express provision of “the Contractor has incurred or is likely to incur direct loss and/or expense” under Clause 49.2 of the Contract must necessarily include projected costs or losses.

This appears to be a significant shift in the court ruling where anticipated, projected or forecasted losses or costs are now recoverable, and not limited to only actual costs incurred by the subcontractor.

While one could argue the case is narrow or fact sensitive because it hinges on the Project Director’s specific actions, the case marks a clear departure from the rigid “all-or-nothing” approach seen in earlier decided cases. This seems to suggest that while compliance remains mandatory, employers and main contractors can no longer rely on “technical objections” to defeat a claim after they have already validated the delay by granting an EOT. This marks a favourable shift for contractors, emphasising the actual conduct of the parties over rigid procedural technicalities.

Practical Implications for Employers/Contract Administrators and Contractors

The employer and/or the contract administrator must now exercise greater care in assessing the claims for EOT and loss and expense as the burden now lies with them to ensure proper assessment and determination were made. A blanket or unexplained refusal no longer offers effective protection to the employer, especially where delay has already been recognised through the grant of EOT. Any rejection of such claims must therefore be supported by clear and reasoned grounds, failing which it may expose employer to the risk of claims being allowed in full.

As for the contractor, it is still important to keep in mind of the necessity to comply with the condition precedent provided for under the Contract. PSI Incontrol Sdn Bhd’s decision does not relax the contractor’s obligation in submitting requisite written notice within the prescribed timeline and subsequently furnishing full particulars and supporting documents. While the courts appear to now adopt a more practical approach to technical compliance, any non-compliance of the pre-conditions is likely to bar the contractor’s claims at the very outset.

Co-written by

Raja Kumar Raja Kandan,Partner
(Construction Dispute Resolution)
rajakumar@azmandavidson.com.my

Koh Yi Ting, Partner
(Construction Dispute Resolution)
koh.yiting@azmandavidson.com.my

Bernard Noel, Pupil
Azman Davidson & Co