Construction Claim & Dispute Resolution-4

Chapter 4: Breach of Contract & General Damages

If any party to a contract fails to stick to its part of the bargain, there is a breach. A breach of contract occurs when:

1. One party to a contract makes it impossible for the other parties to the contract to perform;
2. A party to the contract does something against the intent of the contract; or
3. A party absolutely refuses to perform the contract.

Breach by the contractor

Breaches of contract by the contractor are numerous, and it may broadly be divided into three categories, namely:

1. Abandonment of project or total failure to complete,
2. Delay in completion, and
3. Defective works or incomplete work.

Not all breaches of contract are necessarily "contract killers" which would end up in a lawsuit. Much would depend on whether the breach is "material" or "immaterial" and who the parties are. What makes sense for you will depend on the facts. Where the matter is substantial, the advice of an attorney can help you.

The contract may have its provisions as to the measure of damages in the event of a breach, such as determination of the contract, liquidated damages for delay in completion and the direct loss and/or expenses.

In the event of abandonment of project or a total failure to complete, the employer can elect to determine the contract. In the event of delay in completion due to inexcusable reasons, liquidated damages will be treated as an employer’s pre-estimate of all his damages arising from delay in completion.

In the case of defective works, the measure of damages recoverable by the employer is the difference between the contract price of the work and the cost of making good in conformance to the contract.

Breach by the employer

Section 74 of the Contracts Act 1950 states that, "when a contract has been broken, the party who suffers by the breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him and that such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default as if the person had contracted to discharge it and had broken his contract."

It is obvious that a contractor works for a profit, and apart from his entitlement to the contract price, the damages to the contractor caused by any breach of contract by the employer will need to be assessed in the light of its impact upon the contractor’s profit. A distinction may need to be made between the employer’s breach which have the effect of bringing the work to an end, or preventing it from starting, in both case which the contract may deprive the contractor of profits on work never actually carried out and on the other hand, which merely reduces his profits on completed work.

Clause 24.2(viii) of the PAM98 Form refers to any act of prevention or breach of contract by the employer and the same matter may also give rise to an extension of time under clause 23.7(xi)

General Damages

Any breach of contract will give the aggrieved party a right to damages at common law, unless expressly agreed (e.g. a liquidated damages clause).

The general rule on recoverability of damages will be what the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [see: Hadley v. Baxendale 1854 & Victoria Laundry (Windsor) Ltd. V. Newman Industries Ltd. 1949].

In principle, most loss, which flows as a consequence from the breach, is recoverable unless it is not considered to have been within the reasonable contemplation of the parties.

It must be emphasized that the purpose of an award of damages is to put the plaintiff in the position he would have been had the breach of contract or duty not occurred.

So far as money is concerned, the party that sustains a loss by reason of a breach of contract is to be placed in the same situation as if the contract had been performed.

The key factor in an action for general damages is the need to be able to support the claim with evidence of the loss suffered as a result of the breach. Vague allegations of loss suffered are unlikely to be recognized in law [see: Skyt. Tan Kim Beng and Rakan-Rakan v. Pulai Jaya Sdn. Bhd. 1992, Digest 140].

As for the interest charges, in the absence of a contractual agreement to pay interest, it may not be payable [see: Wong Chong Chow v. Pan-Malaysian cement Works 1980 Digest 161].

Financial charges are recoverable under usual contractual provisions (e.g. under Direct Loss and/or Expense claim).

TO BE CONTINUED IN CHAPTER 5 .....