Every construction project has at least one consultant appointed by a developer, also known as the employer of the project (“Employer”). While the types of consultants and their respective roles may differ from project to project, a consultant’s roles generally include certification of work and progress. This, in most instances, also requires the consultant to certify the amount payable for work done and payable by the Employer to a Main Contractor, after which a payment certificate is issued.
As cashflow is the lifeline of Main Contractors for any ongoing construction project, prompt and expeditious payment by the Employer is often expected. However, if the Main Contractor is dissatisfied with the payment certificate, can the Main Contractor sue the Consultant for negligence? This issue was addressed by the Court of Appeal in a recent appeal commenced by PCP Construction Sdn Bhd (“PCP Construction”) against L3 Architects Sdn Bhd (“L3 Architects”)(1), where the Court of Appeal unanimously upheld the decision of the High Court in dismissing PCP Construction’s claim against L3 Architects.(2)
Brief Background
PCP Construction and L3 Architects were respectively appointed by the developer, Leap Modulation Sdn Bhd (“Leap Modulation”), as the main contractor and consultant in a construction project (“Project”). The Project was governed by the Agreement and Conditions of Building Contract (Private Edition with Quantities) 1998, as amended (“PAM Contract”).
A dispute arose between PCP Construction and Leap Modulation concerning the non-payment of interim payment certificates (“IPC”) No. 17R and 18, which PCP Construction sought to resolve via adjudication under the Construction Payment and Adjudication Act 2012 (“CIPAA”). The Adjudicator found in favour of PCP Construction (“Adjudication Decision”).
However, when the Adjudication Decision was reviewed by the High Court, part of the decision was set aside, as the Adjudicator had failed to consider Leap Modulation’s set-off (including IPC No. 19, wherein L3 Architects had allowed a deduction of RM750,000.00 for non-compliance works) because they were not set out in the payment response.(3)
Subsequently, PCP Construction commenced a negligence action against L3 Architects stemming from IPC No. 19, arguing that due to L3 Architects’ negligence, they now had to pay RM351,646.68 to Leap Modulation.
It is important to note that there was no contractual relationship between PCP Construction and L3 Architects; each had their respective contracts with Leap Modulation.
A Case of Negligence?
In an action for negligence, the following three elements must be established:
- Whether the Defendant owed a duty of care to the Plaintiff;
- Whether the Defendant breached that duty; and
- Whether the breach caused the Plaintiff to suffer losses.
Without a contractual relationship between the parties, can L3 Architects owe a duty of care to PCP Construction? The Sessions Court found that there was a duty of care and gave judgment against L3 Architects.
Appeal to the High Court
Dissatisfied, L3 Architects appealed to the High Court. The High Court allowed the appeal and set aside the judgment against L3 Architects, holding that L3 Architects did not owe a duty of care to PCP Construction as the main contractor. Furthermore, PCP Construction suffered no loss or damage as a result of IPC No. 19.
Duty of Care by a Consultant to a Main Contractor?
The law in England
In Sutcliffe v. Thackrah and others(4), the House of Lords held that, in general, any architect or valuer would be liable to the person who employed them if they caused loss due to negligence. An exception exists if, by agreement, they were appointed to act as an arbitrator or quasi-arbitrator. In Sutcliffe, architects were found not to be immune from liability for negligent over-certification.
In Arenson v. Casson Beckman Rutley & Co.(5), referred to by PCP Construction, the House of Lords considered whether valuers could be sued for negligent valuation of shares. The Court held there was no reason to grant immunity from negligence, drawing from Sutcliffe. Both cases focused on the immunity of the professional.
The case of Pacific Associates
In Pacific Associates Inc v. Baxter and others(6), the Court of Appeal declined to follow Arenson, citing the absence of a contract between contractor and engineer, and the availability of a contractual remedy through the employer. The Court held:
“Where an engineer was employed by a person to oversee a contractor’s work and was liable to the employer if sued for negligence, but there was no direct contractual relationship or assumption of responsibility to the contractor, the engineer owed no duty of care directly to the contractor.”
Post-Pacific Associates
Since Pacific Associates, courts in Hong Kong(7), Singapore(8), and Malaysia(9) have applied a similar approach. In Singapore, Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency(10) established a two-stage test for duty of care: proximity and policy considerations, with factual foreseeability.
The Court found that although negligence by a superintending officer was foreseeable, the contractual arbitration clause meant the proximity requirement was not satisfied.
The position in Malaysia
In Lok Kok Beng & Ors v. Loh Chiak Eong & Anor(11), the Federal Court adopted a more restricted approach for pure economic loss, emphasizing proximity, voluntary assumption of responsibility, and reliance. This limits indeterminate liability and ensures policy considerations are accounted for.
The High Court’s Decision
The High Court, following Pacific Associates, held that the arbitration clause in the PAM Contract served as an adequate mechanism for PCP Construction to address grievances. Imposing a duty of care on L3 Architects would have conflicted with the contractual framework.
It was therefore held that architects should not be liable for claims of pure economic loss in negligence where a contractual matrix exists between the Employer and the Main Contractor, as clearly defined in the PAM Contract.
Was there a Loss Suffered?
At the time the case was heard, the Adjudication Decision had been set aside(12), consistent with View Esteem Sdn Bhd v. Bina Puri Holdings Bhd(13). Even if a duty of care existed, PCP Construction had not suffered any loss, as adjudication decisions are of temporary finality(Martego Sdn Bhd v. Arkitek Meor & Chew Sdn Bhd & Another Appeal)(14).
IPC No. 19 was also an interim certificate. Therefore, PCP Construction had not suffered a crystallized loss.
The case of Saga Fire Engineering Sdn Bhd v IR Lee Yee Seng
PCP Construction relied on Saga Fire Engineering v IR Lee Yee Seng(15), where the Plaintiff Contractor successfully claimed losses caused by an engineer’s negligence, having crystallized losses after a settlement.
Saga Fire is distinguishable because PCP Construction had not resolved its dispute with Leap Modulation, and the loss was not yet crystallized.
The Court of Appeal’s Decision
The Court of Appeal agreed with the High Court, affirming that no duty of care was owed by L3 Architects to PCP Construction.
This article is authored by:
Foo Joon Liang FCIArb, FSIArb, FHKIArb
Partner, Gan Partnership
E: joonliang@ganlaw.my
Tasha Lim Yi Chien
Associate, Gan Partnership
E: tasha@ganlaw.my
Endnotes
- W-04(C)(W)-347-06/2019
- L3 Architects Sdn Bhd v PCP Construction Sdn Bhd [2019] 1 LNS 1321
- PCP Construction Sdn Bhd v Leap Modulation Sdn Bhd [2017] MLJU 905
- [1974] 1 All ER 859
- [1977] A.C. 405
- [1989] 2 All ER 159
- Leon Engineering & Construction Co Ltd (in liquidation) v KA Duk Investment Co Ltd [1989] 2 HKC 318
- Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2008] 4 LRC 61
- Credit Guarantee Corp Malaysia Bhd v SSN Medical Products Sdn Bhd [2017] 2 MLJ 629; Bodibasixs Manufacturing Sdn Bhd v Entogenex Industries Sdn Bhd [2018] 9 MLJ 417
- [2008] 4 LRC 61
- [2015] 7 CLJ 1008
- Leap Modulation Sdn Bhd v PCP Construction Sdn Bhd [2019] 1 MLJ 334
- [2019] 5 CLJ 479; [2017] 1 LNS 1378; [2018] 2 MLJ 22
- [2018] 2 CLJ 163
- Shah Alam High Court Civil Suit No. BA-22C-10-02/2017
DISCLAIMER: This article is for general information only and should not be relied upon as legal advice. The position stated herein is as at 28 December 2020. For enquiries, contact Foo Joon Liang (joonliang@ganlaw.my).
