< PreviousContractors are understandably worried regarding late deliveries especially due to the shortage of labour which our nation is experiencing at present. Of course, other than to mitigate losses, contractors would like to have more clarity on the limits of their liabilities, and if they are entitled to extra time for completion. MBJ talks to a number of experts on the subject to get their opinions. Legal Opinions on the Application of Extension of Time (EOT) Due to Labour Shortages Contract for Construction for Building and Engineering Works Designed by the Employer (“FIDIC Red Book”) on a contractor’s entitlement to an extension of time because of a shortage of labour. Sub-clause 8.4(d) Of particular relevance is sub-clause 8.4(d) of the FIDIC Red Book, which deals with a contractor’s right to an Extension of Time for Completion. It reads as follows: “The Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension of the Time for Completion if and to the extent that completion for the purposes of Sub- Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes: a. a Variation (unless an adjustment to the Time for Completion has been agreed under Sub-Clause 13.3 [Variation Procedure] or other substantial change in the quantity of an item of work included in the Contract, b. a cause of delay giving an entitlement to extension of time under a Sub- Can Labour Shortages be Grounds for Contractors to Apply for Extension-of-Time (EOT) Under a Contract Based on the FIDIC Red Book? By Karen Ng Yueh Ying, Partner of Yatiswara, Ng & Chan The construction industry in Malaysia has been facing labour shortages since the onset of the COVID-19 pandemic, a result of the measures implemented by the Government of Malaysia to combat the pandemic, including the suspension of the recruitment of foreign workers. Even though the Government lifted its COVID-19 suspension on the recruitment of foreign workers in February this year, the labour shortage situation did not improve, and continues to persist, and has been exacerbated when Indonesia decided to impose a temporary freeze on sending its workers to Malaysia. Contractors are one of the key players in the construction industry. They are severely affected by the shortage of labour, and as a consequence, face an increase in cost and time to complete the construction works they have been contracted to carry out. In some cases, they have also found it impossible to complete their construction works due to labour shortages. Contractors also face the risk of being liable to their employers for delay damages because of their inability to complete their works on time. For the purposes of this article, the writer will look at the FIDIC Red Book First Edition 1999 Conditions of 1 SPECIAL FEATURE 28 MASTER BUILDERS JOURNAL #125Clause of these Conditions, c. exceptionally adverse climatic conditions, d. Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions, or e. any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site. “If the Contractor considers himself to be entitled to an extension of the Time for Completion, the Contractor shall give notice to the Engineer in accordance with Sub-Clause 20.1 [Contractor’s Claims]. When determining each extension of time under Sub-Clause 20.1, the Engineer shall review previous determinations and may increase, but shall not decrease, the total extension of time.” The FIDIC Red Book defines “Contractor’s Personnel” as the Contractor’s Representative, and all personnel whom the contractor utilises on site. These personnel includes staff, labour and other employees of the contractor and of each of its subcontractors, and any other personnel assisting the contractor in the execution of the works. The word “personnel” used under sub-clause 8.4(d) is not capitalised. The writer is of the view that the word “personnel” as used in sub-clause 8.4(d) is wide enough to include the contractor’s labour, and possibly also its subcontractor’s labour used for the purpose of performing work for a construction project. In relation to the COVID-19 pandemic and the measures implemented by the Government of Malaysia to combat the pandemic, the writer envisages two possible scenarios that can arise. The first possible scenario: The contract entered into by the parties prior to the onset of the COVID-19 pandemic: The contractor may argue that parties could not have reasonably foreseen the onset of the COVID-19 pandemic and the extreme measures implemented by the Government, including the imposition of a nationwide lockdown via the Movement Control Orders (MCO) as well as the freeze on the recruitment of foreign workers. There is room for the contractor to argue in this scenario that they are entitled to an extension of time pursuant to sub-clause 8.4(d). The applicability of sub-clause 8.4(d) is, however, very fact dependent. The contractor must, at least, be able to show with empirical evidence that the COVID-19 pandemic or the measures implemented by the Government directly caused an unforeseeable shortage in the availability of its personnel. A sweeping argument that there is a generally recognised national shortage of labour in Malaysia will not suffice. The second possible scenario: The contract entered into by the parties during or after the onset of the COVID-19 pandemic: The Contractor may find it difficult to argue that it did not foresee the labour shortage problem at the time it entered into its contract in light of the fact that the Government had already imposed a freeze on the recruitment of foreign workers as part of the Government’s measures to combat the COVID-19 pandemic before the contract was concluded. Clause 19 Apart from sub-clause 8.4(d), clause 19 of FIDIC Red Book, a provision relating to Force Majeure, is also of relevance. Sub-clause 19.1 defines Force Majeure, as follows: “In this Clause, “Force Majeure” means an exceptional event or circumstance: a. which is beyond a Party’s control, b. which such party could not reasonably have provided against before entering into the Contract, c. which, having arisen, such Party could not reasonably have avoided or overcome, and d. which is not substantially attributable to the other Party. Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied: i. war, hostilities (whether war declared or not), invasion, act of foreign enemies, ii. rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war, iii. riot, commotion, disorder, strike or lockout by persons other than the Contactor’s Personnel and other employees of the Contractor and Sub-contractors, iv. munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio- activity, and v. natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.” A party who intends to claim that a force majeure event has happened must be able to satisfy all the conditions laid down in sub-clause 19.1(a) to (d), and must also show that the alleged event was “an exceptional event or circumstance”. It is otherwise a widely drafted clause that is not limited to the situations set out in (i) to (v) in the said Clause. A contractor may try to argue that the shortage of labour is beyond its control as it is a known fact that the construction industry has been relying on foreign workers all these years. It may attempt to argue that Indonesia’s temporary freeze imposed on all its workers entering Malaysia could be a force majeure event. However, on the other hand, the contractor’s employer may argue that the shortage of labour is not something beyond the contractor’s control, as the contractor could employ local workers by offering them competitive wages. An employer will argue that the difficulty of recruiting foreign workers is not a force majeure event as it is the responsibility of the contractor or subcontractor to provide labour, and the shortage of foreign labour will SPECIAL FEATURE 29 MASTER BUILDERS JOURNAL #125Time Implications in Sub-Contracts By Chu Ai Li of Azman Davidson & Co. 2 only mean that the contractor or the subcontractor will have to pay higher costs if they are to engage local labour. Any determination between the contesting arguments of the contractor and employer set out above will require an evaluation of the development of the labour shortage problem in Malaysia and its effects on the construction industry as a whole. FIDIC COVID-19 Guidance Memorandum Useful reference may be found in the FIDIC COVID-19 Guidance Memorandum to Users of FIDIC Standard Forms of Works Contract. It is stated in this Guidance Memorandum that in a scenario where a contractor who is facing difficulties in mobilising its personnel, for fear of their safety, although the government does not promulgate any new piece of legislation or regulation banning construction activity or works on site, may explore remedies under sub-clause 8.4. However, this sub-clause gives an entitlement to an extension of time only and makes no mention of any financial remedy. The financial remedy following an extension of time granted pursuant to sub-clause 8.4 will depend on the applicability of other provisions under the FIDIC Red Book, such as sub-clause 20.1. The said Guidance Memorandum also discusses the possibility of resorting to the Force Majeure provision (i.e. sub-clause 19.1 as discussed above) in the same scenario. It suggests that this scenario would likely fail the test of sub-clause 19.1, given that the contractor is most likely able to continue work on site, albeit with difficulty. If the contractor is able to continue working, albeit with greater difficulty or disruptions that do not stop its works entirely, it cannot claim that a Force Majeure event or an Exceptional Event (as the case may be) as defined under sub-clause 19.1 has arisen. Conclusion In conclusion, sub-clause 8.4(d) and sub-clause 19.1 of the FIDIC Red Book are provisions which may be of relevance to contractors in the context of the issue of shortage of labour presently faced by the construction industry in Malaysia. The labour shortage problem is not the only issue faced by the construction industry at present. Other than the labour shortage problem, the construction industry is also facing supply chain disruptions and a steep escalation in the costs for building materials. Perhaps government intervention and assistance are required to ease the burden of the construction industry in dealing with these problems as it may be difficult to address these problems by contractual avenues alone, except by a clear provision like sub-cluse 8.4(d) in the FIDIC Red Book. Even such a provision will only provide relief in so far as an extension of time as required by a contractor on account of an unforeseeable labour shortage caused by the COVID-19 pandemic, or government action. On its own, it will not provide any right to a contractor to claim any loss and expense it may have incurred as a result of the delay to its works caused by an unforeseeable labour shortage. Following on the heels of the declaration of COVID-19 as a pandemic by the World Health Organisation in March 2020, the Malaysian government imposed the movement control order (“MCO”) under the Prevention and Control of Infectious Diseases Act 1988. During the various phases of the MCO from March 2020 until March 2022, economic activities including those in the construction industry were restricted in varying degrees. The Malaysian government announced a freeze on the recruitment of foreign workers in June 2020 1 , and the freeze was only lifted almost two years later on 15 February 2022 2 . Despite the lifting of the freeze, there has not been any significant entry of foreign workers into the country. The Malaysian government’s negotiations with the governments of labour-exporting countries have been protracted, due in part to issues concerning workers’ rights 3 . There have been delays and complications in the recruitment process 4 , and the migrant labour shortages quickly reached a critical stage after the nation entered the endemic phase 5 in April 2022, as businesses were allowed to fully open and the demand for labour increased dramatically across major industries, fuelling competition between industries for the same pool of labour. The Malaysian construction industry relies heavily on human labour for almost all types of construction activities. The labour shortage problem affects all levels of contractors in the construction contract chain, from main contractors and their sub-contractors and suppliers to those sub-contractors and suppliers further down the contract chain. One of the ways the labour shortage problem impacts sub-contractors is in relation to time. Sub-contractors who do not have sufficient skilled workers and who are unable to hire more skilled workers would likely find themselves not being able to achieve the required work progress to complete within the time they have SPECIAL FEATURE 30 MASTER BUILDERS JOURNAL #125committed to in their sub-contracts. In relation to the time-related impact of the labour shortage problem, the contractual implications that arise are also time-related. If the sub- contractors fail to complete their construction work by the completion date in their sub-contracts as a result of labour shortage, the sub-contractors would risk having to pay liquidated damages or loss and expenses to their main contractor for their delay. The liquidated damages provisions in sub-contracts usually provide for the sub-contractor to pay to the main contractor agreed liquidated damages at a specified rate 6 . An alternative form of provision is one allowing the main contractor a right to claim or set off from the sub-contractor the liquidated damages imposed on the main contractor under the main contract. Certain standard form sub-contracts provide for the main contractor’s right to set off the loss and expense suffered or incurred by the main contractor 7 or an apportionment of such loss and expense 8 . Sub-contractors may be able to avoid the obligation to pay liquidated damages or loss and expenses if there are contract provisions entitling the sub-contractors to extend the completion date, if the delay to their work is caused by reasons that are related to labour shortages. The sub-contractors would have to examine the Extension-of-Time (EOT) provision in their sub-contracts to see if there is any provision that allows for extensions caused by reasons related to labour shortages. If there is a provision in the sub-contract EOT clause that incorporates the reasons for which the main contractor can obtain extension of time under the main contract 9 , the sub-contractor would have to examine the EOT provision in the main contract as well. The reasons commonly found in EOT provisions that may be relied on by the sub-contractors to apply for EOT for completion based on delays arising from labour shortage can be grouped into three categories. The first category comprises the reasons that directly relate to labour shortages. It is not common for sub-contract EOT provisions to specifically include labour shortages as a reason for EOT to be allowed to sub-contractors. Among the common standard form sub-contracts, only PWD Form 203N (Revised 1/2010) contains provisions that directly relate to labour shortages. The first provision in PWD Form 203N is the first part of Clause 30.2(a) (i) which refers to “any of the matter specified in clause 19”. It may be possible for the sub-contractor to rely on the matter stated in Clause 19(a), namely the sentence “the Nominated Sub-Contractor shall employ and shall cause his sub-contractors to employ … labourers on the Sub-Contract Works as are thoroughly efficient and of good character”, for any inability of the sub- contractor to employ such labourers due to the current labour shortage in the industry. The sub-contractor would have to provide evidence of its inability to employ the labourers as described in Clause 19(a) despite having made reasonable efforts to do so. The second provision is PWD Form 203N Clause 30.2(a)(ii) which incorporates the relevant EOT provision in the main contract (PWD Form 203A). There is no specific word “labour” or “workers” in clause 43.1(i) of the PWD Form 203A (Rev. 1/2010) 10 , only the word “services” which meaning would have to be strained to include services provided by workers 11 . The EOT provision in the PWD Form 203A may only be relied on if the sub-contractor’s inability to secure “services” could not have reasonably been foreseen at the date of the closing of tender of the main contract. If the main contract tender closing occurred during the period of the government freeze on recruitment of foreign workers, it may be difficult for the sub-contractor to say that the current labour shortage could not have been reasonably foreseen. The second category comprises the reasons that refer to government action or changes in laws. There are provisions found in the standard form sub-contracts that allow a sub-contractor to apply for EOT for delay to completion caused by an action of government authority 12 . There are also provisions found in the standard form sub-contracts that allow a sub-contractor to apply for EOT for delay caused by compliance with changes to law 13 . All of these provisions do not specifically refer to labour. However, if the current labour shortage in the construction industry was caused by government action or by change in the law, would it be possible for a sub-contractor to apply for EOT relying on this second category of reasons based on the ground that it was the Malaysian government’s action or change in law 14 in relation to the freezing the recruitment of foreign workers for almost two years that led to the labour shortage, which in turn led to delay in completion of the construction work? The EOT provisions in the standard form sub-contracts anticipate the delay event to have directly caused the completion of the sub-contract work to be delayed. As such, the sub-contractors will face a hurdle in that it is not the government’s action or the sub-contractors’ compliance with a change in law that directly caused the completion of the work to be delayed but it is the sub- contractors not being able to employ sufficient numbers of skilled labour due to the current labour shortage that could have resulted from the government’s two-year freeze on the recruitment of foreign workers that caused the completion of the work to be delayed. In addition, it is debatable whether the government’s freeze on the recruitment of foreign workers is the sole or main cause for the current labour shortage in the construction industry. Malaysia has experienced labour challenges over the last few decades due to myriad factors within 15 and without 16 Malaysia. The construction industry is but one of the industries affected by these labour challenges. The recent factors such as the exodus of foreign workers from Malaysia during the MCO17 as well as the move of workers from the construction to the plantation industry SPECIAL FEATURE 31 MASTER BUILDERS JOURNAL #125due to pull of higher wages 18 have contributed to the criticality of labour shortage in the construction industry. The third category comprises the reasons that are usually broadly-worded as events or circumstances beyond the control of the sub-contractor that are sometimes encapsulated in the definition of “force majeure” 19 in the sub-contracts. The sub-contractors may rely on these provisions to apply for EOT if they can satisfy the conditions stated in these EOT provisions 20 , which may include a condition that the sub- contractor could not have reasonably foreseen or avoided the relevant event or circumstances, which in this case is the sub-contractor’s inability to hire sufficient skilled workers due to current labour shortage in the industry. The sub-contractors may be asked to show that they did not contribute to the problem by any action on their part, such as the laying off of their workers during the MCO or not paying their workers during the MCO. In conclusion, there are time implications in sub-contracts that may arise from the current labour shortage in the construction industry. The sub-contractors who are negatively impacted by the current labour shortage and hampered in their ability to progress and complete work will find themselves at risk of being subject to the contractual penalties for delayed completion because they will likely encounter challenges in their applications for extension of time for completion of their sub-contract work. Footnotes 1 The Star (2020). No intake of foreign workers till year end. 23 June 2020 https://www.thestar.com. my/news/nation/2020/06/23/no-new-intake-of- foreign-workers-till-year-end 2 Malaysian Employers Federation Media Release (2022) Urgent Need To Address Shortage of Foreign Workers. 5 April 2022 https://www.mef. org.my/news/pr_article.aspx?@ID=158 3 Reuters (2022). Malaysia firms turn down orders as migrant labor shortage hits. 13 June 2022 https:// www.reuters.com/world/asia-pacific/malaysia- firms-turn-down-orders-migrant-labour-shortage- hits-2022-06-13/ 4 The Business Standard (2022). Malaysia hit by migrant labour shortage for slow hiring process. 28 July 2022 https://www.tbsnews.net/economy/ malaysia-hit-migrant-labour-shortage-slow-hiring- process-439258 5 See https://www.motac.gov.my/images/ attachstore/pkp/endemik/PC_27_April_-_Media_ Statement_translated_version.pdf 6 An example is AIAC Sub-Contract Form (2019) Clause 15.1: “If the Sub-Contractor fails to complete the Sub-Contract Works (or any Section of the Sub-Contract Works) by the stipulated Date for Completion or by the date as mutually agreed to by the Parties, the Contractor/C.R. shall issue a Certificate of Non-Completion stating that in its opinion the same ought reasonably so to have been completed by such date(s). Upon such issuance, the Sub-Contractor shall pay or allow to the Contractor a sum calculated at the rate stated in Appendix II as Liquidated Damages for the period from the Date for Completion, or any extended date where applicable, to the Date of Practical Completion, provided always that the total amount of Liquidated Damages due and retained under this Clause shall not exceed the amount stated in Appendix II as the limit of Liquidated Damages. The Contractor may recover such sum as a debt or may deduct such sum from any monies due or to become due to the Sub- Contractor under the Sub-Contract or may recover such sum from the Performance Security.” 7 An example is Clause 31(a) of the PWD Form 203N (Revised 1/2010) which provides as follows: “If the Nominated Sub-Contractor fails to complete the Sub-Contract Works or any section thereof within the period or periods specified in Part II of the Appendix hereto or any extended period or periods as may be granted pursuant to clause 29 hereof, he shall pay to the Contractor a sum equivalent to any loss or damage suffered or incurred by the Contractor and caused by the failure of the Nominated Sub-Contractor as aforesaid.” 8 An example is PAM Sub-Contract Form (2018) Clause 16.1: “If the Sub-Contractor fails to complete the Sub-Contract Works by the Sub-Contract Completion Date(s), the Contractor shall issue a Certificate of Non-Completion … stating that in his opinion, the Sub-Contract Works (or any section of the Sub-Contract Works) ought reasonably to so have been completed. The Contractor shall then be entitled to set-off a sum for any loss and/or expense suffered or incurred to the Contractor, after taking into consideration the apportioning of liability where the delays may also be caused by the Contractor and other Nominated Sub-Contractors. …” 9 An example of a provision incorporating the EOT reasons found in the main contract is the PWD Form 203N (Revised 1/2010) Clause 30.2(a)(ii): “(ii) for any reason (provided and to the extent that the delay is not due to any act, negligence, default or breach of the Sub-Contract by the Nominated Sub-Contractor) for which the Contractor could obtain an extension of time under the Main Contract.” 10 PWD Form 203A (Rev. 1/2010) Clause 43.1(i) states as follows: “the Contractor’s inability for reason beyond his control and which he could not reasonably have foreseen at the date of closing of tender of this Contract to secure such goods, materials and/or services as are essential to the proper carrying out of the Works.” 11 There is published opinion that such contract provision is not applicable to labour shortage. Refer to Lim Chong Fong (2011). The Malaysian PWD Form of Construction Contract (2nd ed.) published by Sweet & Maxwell Asia, page 110. 12 An example is CIDB Model Terms of Sub-Contract (2007) clause 3.6.4(iv): “an action of government authority, provided the action is not done as a result of any breach of contract or breach of the law by the Subcontractor”. 13 An example is AIAC Sub-Contract Form (2019) Clause 19.6(n): “compliance with any Unforeseeable changes to any law, regulations. By-law or terms and conditions of any Appropriate Authority and/or Service Provider”. 14 There does not appear to be any change in legislation or delegated legislation in respect of the freeze on recruitment of foreign labour. The recruitment of foreign labour in Malaysian appears to be governed by government policy decided by the Cabinet or Cabinet Committee and the soft law following such policy. Such change to government policy or soft law would not fall within the EOT provisions limit the changes to change in statute law or delegated legislation, but would fall within provisions that are worded to include changes in “requirements” or “terms and conditions” of authorities. 15 The internal factors that have contributed to Malaysia’s labour challenges and reliance on foreign labour are complex and span over the last few decades. The factors include the economic growth in Malaysia and the Malaysian government policies to spur growth in export- oriented industries. In addition, labour shortage is contributed by the reluctance of local workers to take up certain jobs - employers in Malaysia have always faced difficulty in hiring local workers due to issues such as level of wages and lack of interest in dangerous, dirty and difficult (3D) jobs. 16 The external factors that have contributed to Malaysia’s labour challenges from time to time include the policies of foreign governments in respect of the sending of workers to Malaysia and the socio-economic conditions in those countries. Recent examples of external factors include the following: (i) In July 2022 the Indonesian government announced a temporary freeze in the sending of workers to Malaysia - refer to Free Malaysia Today (2022). Indonesia to lift migrant worker freeze on Aug 1. 28 July 2022 https://www.freemalaysiatoday.com/category/ nation/2022/07/28/indonesia-to-lift-migrant- worker-freeze-on-aug-1/, and (ii) There is a recent decrease in the interest of Indonesian workers to work in Malaysia as there are better employment opportunities at home – refer to Borneo Bulletin (2022). Resolve foreign labour shortage, say Malaysian stakeholders 19 July 2022 https:// borneobulletin.com.bn/resolve-foreign-labour- shortage-say-malaysian-stakeholders/. 17 The reasons for the exodus are varied and include the fear created by the government crackdown on undocumented migrants during the MCO and the uncertainties faced by foreign workers in respect of their work permits and their employment status during the MCO. Many construction companies that could not operate or could not operate fully during the MCO were cautious about continuing with the employment of their foreign workers. 18 theVibes.com (2022). Rising palm oil prices cause of construction labour shortage: minister. 10 June 2022 https://www.thevibes.com/articles/ news/63012/rising-palm-oil-prices-cause-of- construction-labour-shortage-minister 19 Examples of broad provisions of force majeure for purposes of extension of time are AIAC Sub- Contract Form (2019) Clause 19.6(a) read with Article 9.28 and PAM Sub-Contract Form (2018) Clause 21.4(a) read with Article 7(t). In contrast, the definition of force majeure is very limited in PWD Form 203A (Rev. 1/2010) Clause 58.2, and the events or circumstances relating to the current labour shortage do not fall within the provision. 20 An example of such conditions is found in AIAC Sub-Contract Form (2019) Article 9.28: “Force Majeure means an exceptional event or circumstance which: (a) is beyond a Party’s control; (b) such Party could not reasonably have provided against before entering into the Sub- Contract; (c) having arisen, such Party could not reasonably have avoided or overcome; and (d) is not substantially attributable to the other Party.” SPECIAL FEATURE 32 MASTER BUILDERS JOURNAL #125Entitlement to Time and Costs for Contractors Under the PAM Form By Chan Kheng Hoe of Chong + Kheng Hoe Advocates 3 Malaysia is reportedly lacking at least 1.2 million workers across its manufacturing, plantation, and construction sectors. Out of these numbers, 550,000 is said be from the construction sector alone. The labour shortage is so acute that companies are reportedly declining jobs and foregoing sales due to anticipated inability to deliver. The bulk of the complaints on the labour shortage issue is directed at the processes put in place for recruiting foreign labour. Reuters report that in April, out of 475,000 migrant workers applied for, only 2,065 were approved. That is less than 1% approval rate. In fact, it translates to a meagre 0.4% only. The shortage is acutely felt in the construction industry being a traditionally labour-intensive sector, particularly on foreign labour. This is due to construction work being considered 3D – Dirty, Dangerous and Difficult – resulting in a lack of local labourers willing to undertake the job. Hence, even the chief executive of the Construction Industry Development Board (CIDB), Datuk Ahmad ‘Asri Abdul Hamid, had urged for the Government to allow the hiring of foreign labourers due to the acute labour shortage in order to facilitate the delivery of projects. Meanwhile, Master Builders Association of Malaysia (MBAM) president Oliver HC Wee had attributed the lack of labour as one of the reasons forcing industry players to close shop. Simply put, there is no way construction companies can continue to accept jobs if they do not have the capacity to deliver the same, as a failure to deliver the job on a timely basis would inevitably lead to dire consequences in terms of delay damages and escalated costs – matters which would eventually land up in the courts or arbitration tribunals. General Contractual Principles on Time It is common practice that construction contracts would specify the time in which the construction works are to be completed. Where such time is stipulated, then the contractor is expected to complete its works by the date of completion unless prevented by force majeure, operation of law, unlawful conduct and acts of prevention by the employer, or in some cases due to lawful instruction to carry out additional works. Other difficulties encountered in performing the contract, including shortage of labour, will not be a valid excuse for the contractor to delay in its performance. After all, the law stipulates that pacta sunt servanda, i.e. “agreements must be respected”. The only exception would be if the contract itself contains provisions which excuse the contractor from performance. Usually, these would be contained within the extension of time or suspension of work clauses, allowing for time to be extended and/or disregarded under various stipulated circumstances. Even when a contract does not specify a completion date or fails to specify a completion date in a precise manner rendering there to be no effective completion date, the law nevertheless requires the contractor to complete the works within a reasonable time. Failure on the part of the contractor to complete the works within the contracted period will ordinarily attract liquidated damages stipulated in the contract. When there is a liquidated damages clause, then the Court would apply the said clause unless the contractor is able to demonstrate that the clause was unreasonable. Even when there is no liquidated damages provision or no proper completion date specified, a contractor who is delayed in its works will still be liable for delay damages arising from its breach of the contract to complete the works within a reasonable time. General Contractual Principles on Additional Costs The most significant impact of the shortage of skilled labour on construction projects would be in terms of increased project costs, delays and reduced construction quality. However, all the additional costs related to such increase would ordinarily fall on the contractor to bear. This is because the employer is not in fact at fault for the labour shortage scenario. Therefore, it is inconceivable based on general contractual principles to hold the employer responsible for a situation which was not caused by the employer in any way. The employer would only be liable for the contractor’s costs arising naturally out of a breach of contract by the employer or which could reasonably be foreseen to arise naturally out of such a breach. In other words, there must be some breach on the part of the employer to justify a claim for loss or damages by the contractor. Therefore, the risk of labour shortage falls on the party who has contracted to provide such labour, which in most circumstance would be the contractor. Of course, the express terms of the contract can provide for a re-balancing of such risks. Hence, a contractor may claim for loss and/or expense arising from the shortage of labour if the terms of the contract has provided for such a scenario, as parties are free to extend SPECIAL FEATURE 33 MASTER BUILDERS JOURNAL #125the scope of compensation beyond that available under the common law. Provisions of the PAM Form – Extension of Time The PAM Form contains express provisions with regard to extension of time and claim for loss and expenses. For purposes of this article, reference will be made to the PAM Contract 2018 (Without Quantities) (“PAM Form”). Under the PAM Form, an extension of time is only available to the contractor in the event of the happening of a Relevant Event. Relevant Events are defined in Clause 23.8. It is an extensive list comprising of 25 Relevant Events. Of these 25 Relevant Events, the following may potentially be related to issues concerning labour: Clause 23.8(a) a. Clause 23.8(a) provides for Force Majeure to be a Relevant Event. Force Majeure is defined in Article 7 to mean “any circumstances beyond the control of the Contractor caused by terrorist acts, governmental or regulatory action, epidemics and natural disasters”. The contractor would have to make the argument that the current shortage of labour arises due to governmental or regulatory action in limiting foreign labour resulting in a nationwide labour shortage crisis. Clause 23.8(d) b. Clause 23.8(d) deals with “civil commotion, strikes or lockout affecting any of the trades employed upon the Works”. However, it is unlikely to be applicable because the clause deals with a situation whereby labour is available but unwilling or unable to work. The labour shortage scenario relates to a situation whereby labour is simply unavailable. Clause 23.8(k) c. Clause 23.8(k) allows an extension of time where delay is caused by “craftsmen, tradesmen or other contractors employed or engaged by the Employer in executing work not forming part of the Contract or the failure to execute such work”. Hence if any labour is provided by the Employer or if there are parts of the works to be carried out by other contractors (who will also similarly face labour shortage issues), such delay can allow the contractor to apply for an extension of time. In other words, delay caused by labour shortage of the contractor itself is not eligible for additional time, but delay caused by labour shortage of the employer or other contractors causing a delay of the work is an entitlement for additional time. Clause 23.8(q) d. Clause 23.8(q) allows for additional time due to “compliance with any changes to any law, regulations, by-law or terms and conditions of any Appropriate Authority”. An “Appropriate Authority” is defined in Article 7 to mean “any statutory authority having jurisdiction over the Works”. “Works”, on the other hand, means “the works described in the Articles of Agreement and referred to in the Contract Documents”. In order to succeed in claiming for extension of time under this clause, the contractor will have to demonstrate that: i. the Ministry of Human Resources constitutes an Appropriate Authority (which is arguable); ii. there has been a change to the regulations set by the Ministry of Human Resources in respect of the importation of foreign labour at the time the contract was entered into compared to the present moment of acute labour shortage. Clause 23.8(r) e. Clause 23.8(r) allows for an extension of time when there is “delay caused by any Appropriate Authority… in carrying out or failure to carry out their work which affects the Contractor’s work progress, provided always that such delay Is not due to any negligence, omission, default and/or breach of contract by the Contractor and/or Nominated Sub-Contractors.” Once again, the contractor will have to establish that the Ministry of Human Resources constitute an Appropriate Authority and despite full compliance to all policies and requirements, the contractor has been unable to import foreign labour simply due to the Appropriate Authority failing to carry out their work. If all the above grounds seem to merely border on being arguable at best, it is because they precisely are of such character, seeing that the PAM Form has not provided expressly for a situation of labour shortage. Furthermore, the current labour shortage issue is extraordinary, and under normal circumstances, it would be expected for the contractor to provide all labour required. The present scenario, however, is one in which a contractor may be willing to provide such labour yet still be unable to do so simply because no labour is available. Provisions of the PAM Form – Claim for Loss and/or Expense Compensable events in the PAM Form which justify a claim for loss and/or expense are limited by Clause 24.1 to the matters set out in Clause 24.3. The compensable events list in Clause 24.3 is shorter than the Relevant Events list in Clause 23.8 simply because it is anticipated that a contractor will have extension of time for neutral and employer-risk events but can only claim for loss and/or expense for contractor- risk events. The only potential compensable event which may be linked to the labour shortage issue would be Clause 24.3(e). Clause 24.3(e) renders any delay on the part of “craftsmen, tradesmen or other contractors employed or engaged by the Employer” to be a compensable event. Similar to Clause 23.8(k), it would be the delay due to shortage of labour suffered SPECIAL FEATURE 34 MASTER BUILDERS JOURNAL #125IEM Form of Contract for Civil Engineering Works and PWD Form 203A By Joon Liang Foo of Gan Partnership 4 by the Employer or its other contractors that will entitle the contractor to claim for any resulting loss and/or expense. The contractor cannot make such a claim for its own labour shortage issues. Is the Labour Shortage Situation a Variation? Clause 11.1 of the PAM Form defines what constitutes a “Variation”. In order to qualify as a variation, there must be some “alteration or modification of the design, quality or quantity of the Works”. A shortage of labour situation does not seem to fall squarely into such a definition. Hence, it is unlikely that any argument that the labour shortage situation constitutes a variation to the contract would be sustainable. Summary of Observation The contractor may have some leeway, under the right circumstances, to argue that the shortage of labour entitles it to some extension of time. Even then, the contractor’s position is at best arguable. There is, however, much less room to justify any additional claim for loss and/or expense under the PAM Form. Hence, any delay costs resulting from the lack of labour, a neutral event at best, will likely be the contractor’s sole responsibility. Whilst there may be some justification for such dichotomy of approach towards time and costs, one is left to wonder: why is it that the Employer who has undertaken the risk of the project for potential profits is not saddled with the risk of costs for neutral events? Such an approach may be legally sound from a contractual basis, but it does not make commercial sense. This article addresses the contractual issues which confront the contract in in a situation of a widespread shortage of labour, under the PWD Form 203A. (Rev. 1/2010) (PWD Contract) and IEM Form of Contract for Civil Engineering Works, Third Edition, January 2017 (IEM Contract), and the avenues available to the contractors for time and cost. The Core of the Matter The relationship of the contractor with the employer is contractual. The terms of that contract thus governs the rights and obligations of the contractor to progress with its works and, in the event that it is not possible, the rights and consequences of the inability to progress the works accordingly. Contractual Obligations of the Contractor Typically, contractors may have been required during the course of their tender submissions to outline the number of gangs of workers that will be committed to the project, and their work flow. These will be read in light of the work programme that will be submitted before work commences, and will be a benchmark against which the contractor’s resources and progress are assessed. To give context to the contractor’s entitlement to time and money, we will look at some contractual provisions which govern the contractor’s key obligations on site relevant to its labour resources. PWD Contract PWD Clause 10(g) obliges the contractor to provide and maintain throughout the contract period such number, categories of qualified and compete personnel necessary to perform their works. Understood in the context of the contractor’s continuous obligation to mitigate delays on site, the Clause 10(g) obligation would also extend to providing such necessary additional personnel for catch-up works. PWD Clause 21.0 requires, broadly speaking, compliance with prevailing laws. This would include changes in law after the work is awarded to the contractor. The COVID-19 pandemic brought to the fore a facet to this requirement not previously experienced. Construction sites were shut down at the height of COVID-19 as part of the protective measures by our government. Then, manpower on site was reduced when sites reopened, but incidents of site shut downs were still experienced where COVID-19 cases occurred. All these events are a result of laws, orders or directives implemented by the authorities. In this connection, PWD Clause 23.0 governs the “workmen” that may be employed by a contractor. IEM Contract IEM Clause 8.1(2) obliges the contractor to provide, amongst others, labour to carry out and complete its works. In this connection, IEM Clause 14.1 requires that the contractor submits a general method statement and a forecast of the labour requirements. The general method statement must indicate the manpower to be employed by the contractor to construct and complete the works (IEM Clause 14.3), whilst the labour forecast must indicate the category and number of the various staff and labour (skilled, semi-skilled and un-skilled) required for the construction and completion of the works (IEM Clause 14.7). These submissions must be revised and updated as the works progress. With these provisions, the Engineer designated under the IEM SPECIAL FEATURE 35 MASTER BUILDERS JOURNAL #125Contract would have a view on the manpower requirements of the contractor, and would thus be able to monitor its sufficiency as the project progresses (see also IEM Clause 28.2 in this regard). This also allows for a check and balance of the progress of works against the number of manpower at site. Liquidated and Ascertained Damages (LAD)? Both these contracts provide for liquidated and ascertained damages (LAD) where the contractor delays in completing its works under the contract. From a legal standpoint, the obligation is on the contractor to prove that the LAD imposed by the employer is unreasonable. Failing that, the contractor would be obliged to pay. A Variation? The PWD Contract does not view an alternation of manpower resources by reason of law or government directive as a Variation (see PWD Clause 24.0). Further, unlike some other often used standard form contracts, the reduction in working hours on site is also not considered a variation. The implications of a variation or an order for a variation, on the contract, is therefore not relevant to the present discussion. By contrast, under IEM Clause 24.3, any change in written laws, regulations, orders and bylaws which results in a variation of the works, may trigger a variation under IEM Clause 51. Extension of Time? The employer’s entitlement to LAD will be displaced if the contractor is entitled to an extension of the contract completion date. PWD Contract PWD Clause 43.0 provides for the scenarios which would allow for an entitlement to more time, and the mechanism for the contractor to apply for such additional time. It is only for the specific events spelt out in PWD Clause 43.0 that an extension to the completion date may be given. An application for an extension of time does not guarantee an entitlement to extension of time. Additionally, it must be understood that the law requires strict compliance with the contractual pre-requisites including notification requirements by this clause before the contractor may be entitled to an extension of time. Assuming these have been met, there are several avenues to seek an extension of the completion date by reason of a shortage of labour. These are discussed in the following paragraphs. a. Suspension of works under PWD Clause 50 PWD Clause 43.1(c) allows for an extension of the completion date where a suspension of works by the superintending officer (SO) delays the completion date. PWD Clause 50 sets out the wide powers of the SO to suspend works. It would be rare that the SO would suspend works by reason of a labour shortage. There are other provisions within the PWD Con- tract that cater for such a situation. If such a suspension is never- theless instructed by the SO, there would be additional monetary im- plications under PWD Clause 44.0. b. SO’s Instructions issued under PWD Clause 5 PWD Clause 43.1(e) allows for an extension of the completion date where an instruction issued by the SO under PWD Clause 5 delays the completion date, provided such an instruction is not due to any act, negligence, default or breach by the contractor or its subcontractors. The powers of the SO to issue instructions under PWD Clause 5 are wide. For example, the SO may issue instructions with regard to any matter which is necessary and incidental to the carrying out and completion of the contractor’s works. There were instances during the height of the COVID-19 pandem- ic where the SO may have issued instructions with stricter standard operating procedures (SOPs) on health and safety on site. If similar SOPs are issued by the SO’s instructions today which requires manpower on site to be limited, PWD Clause 43.1(e) would be available to the contractor. There would additional be monetary implications under PWD Clause 44.0. c. Delays of persons engaged by the employer with regard to works outside the contractor’s scope Delays to works of other parties engaged by the employer by reason of labour shortage, would allow a contractor to claim an extension of time under PWD Clause 43.1(h) if an adverse time impact to its own works is established. There would additional be monetary implications under PWD Clause 44.0. d. The contractor’s inability for reasons beyond his control which he could not reasonable have foreseen at the date of closing of tender PWD Clause 43.1(i) allows the contractor an extension of time if its inability to secure, amongst others, services essential to the proper carrying out of its works, could not reasonably have been foreseen at the date of closing of the tender. The situation that immediately comes to mind is the present labour shortage, which could not reasonably have been foreseen at the time of tender or its closing. This, therefore, is the most direct provision applicable to the present circumstances which may entitle the contactor to an exten- sion of the completion date. There is a huge caveat though. An ex- tension granted pursuant to PWD Clause 43.1(i) does not entitle the contractor to a claim for loss and expense under PWD Clause 44.0. This is also the reason the other PWD Clause 43.1 events above are discussed. In summary, there are 4 events under PWD Clause 43.1 which may be considered for an extension of the completion date in the present circumstance of a nationwide labour shortage. The contractor SPECIAL FEATURE 36 MASTER BUILDERS JOURNAL #125N O W AVAILABL E N O W AVAILABL E O NL I NE ! O NL I NE ! MASTER BUILDERS JOURNAL www.mbam.org.my Master Builders Journal is now available online and in print at the same time! Visit MBAM website at mbam.org.my and click Publications to read the latest Master Builders Journal For advertising enquiries, please contact Mr Mohd HanifNext >