MALAYSIA-BACK TO BACK PAYMENT CLAUSE

In the Federal Court case of Globe Engineering Sdn Bhd v Bina Jati Sdn Bhd [2014] 5 MLJ 145, it was held that:-

"...[32] Time to honour payment to the appellant was contingent upon the time that the respondent would receive payment from the employer. That which was contingent was time for payment. But the fact that time for payment was so contingent could not reasonably extend to mean that even liability of the respondent was contingent, in the sense that the respondent would walk free MP the employer defaulted on the contract. For such a construction, there must be clear and unambiguous provisions to the effect that the liability of the respondent to pay the appellant, as opposed to time for payment, was contingent upon receipt of payment by the respondent from the employer. It must be universal truth that it need not even be said between contracting parties, that goods and services will naturally be paid by the receiving party. That is self-evident. So when one is concerned with a building contract one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law, including the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract. To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract ( Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at p 718 per Lord Diplock). The burden is on the party who proposes otherwise, to show that payment was on an NP basis. Hence, the burden was on the respondent to show that liability for payment was contingent. Since there were no such provisions to that effect or from which that could be so construed, it could not be so read into the subcontract where it was silent, that the liability of the respondent was contingent. Time for payment of the certificates was contingent. But under para 14 and cl 11(b), the liability of the respondent was not contingent. The respondent was liable even MP the employer defaulted on the contract (for an analogy, see Scobie & Mcintosh Ltd v Clayton Bowmore Ltd (1990) 23 ConLR 78, where it was held that with repudiation of the subcontract by the main contractor and which was accepted by the subcontractor, the primary obligations of the party in default which remained unperformed was substituted by a secondary obligation to compensate the subcontractor for loss sustained in consequence of the non-performance of the primary obligations).

[33] That liability was contingent was also impliedly refuted by cl 19 in the subcontract. It should not be lost that the purpose of an interim certificate is to provide by payments on account a cash-flow to enable the contractor to finance the work Crown House Engineering Ltd v Amec Projects Ltd (1989) 6 Const LJ 141, per Slade LJ), to enable interim payments to be made to the contractor as the Works progress ( Tameside Metropolitan Borough Council v Barlow Securities (Group Services) Limited (2001) 75 ConLR 112; [2001] EWCA Civ 1). The primary purpose of the interim certificates in this kind of contract is to ensure that the contractor will receive regular stage payments as his work progresses ( London Borough of Camden v Thomas McInerney & Sons Ltd (1986) 9 ConLR 99; see also Rohcon Ltd v SIAC Architectural Ltd [2003] IEHC 1133S 01) so that the subcontractor can have the money in hand to get on with his work and the further work he has to do ( Dawnays Ltd v F G Minter Ltd and another [1971] 2 All ER 1389 per Lord Denning MR, which dictum was adopted by the Federal Court in Bandar Raya Developments Bhd v Woon Hoe Kan & Sons Sdn Bhd [1972] 1 MLJ 75).   the purpose of interim certificates is to see that the contractor is in sufficient funds to carry on the construction as it progresses ( Unpaid Interim Payment Certificates by Vinayak Pradhan [1997] 2 MLJ xv). But with termination of the subcontract, the work thereunder would not progress any further. Given that work under the subcontract would not progress any further, there was no further purpose for stage payments to finance work that had ceased and would not progress further, such that the purpose of para 14 and cl 11(b), indeed all provisions to do with interim certificates, had no further application, as the facts on the ground had moved beyond the purview of those provisions, which were spent and passe, to the stage of cl 19. If the liability of the respondent were contingent, cl 19 would reflect that. Contingent liability was not reflected. Clause 19 merely provided that upon termination of the appellants employment, the appellant would be paid the value of the subcontracted works completed at the date of termination. Effect must be given thereto.

[34] Accordingly, our answers to the leave questions are as follows:

Answer to question [1]: upon its proper construction, the instant so called pay-when-paid clause was a provision that merely fixed time for payment but did not absolve the Respondent of liability to pay the amount certified and attributable to the work executed by the Appellant.

Answer to question [2]: upon termination of the subcontract, all rights and liabilities were governed by clause 19.

Answer to question [3]: upon termination of the subcontract, the entitlement of the Appellant to be paid in accordance with clause 19 was not contingent upon actual receipt by the Respondent of such payment from the employer."

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