Is A Lump Sum Contract A Feature Of A "Design And Build" Contract?

A case study of Goh Eng Lee Andy v Yeo Jin Kow [2016] SGHC 110

Overview

Is a lump sum contract a feature of a "design and build" contract? This was the central issue that the High Court had to decide in the recent case of Goh Eng Lee Andy v Yeo Jin Kow [2016] SGHC 110. After examining the features and reasons behind "design and build" contracts, Judicial Commissioner (JC) Kannan Ramesh unequivocally held that a "design and build" contract, in the absence of any terms to the contrary, necessarily incorporates a lump sum contract.

This case is noteworthy to both construction professionals and stakeholders in the building and construction industry as it illustrates the legal consequences of using the term "design and build" in a building contract and demonstrates the importance of having formal documentation in a commercial relationship.

Background

Goh (plaintiff) wanted to build a new house on a piece of land which he had purchased with his wife. He approached his friend Yeo (defendant), a building contractor, for this purpose. The defendant provided three quotations in total for the construction work, the last of which contained the term "design and build" in an acknowledgement section. The plaintiff accepted this last quotation, but refrained from executing it until the construction drawings were finalised. In this regard, the construction drawings were prepared by TAS Design Studio (TAS), an architectural firm engaged by the defendant, in collaboration with JAL Atelier (JAL). JAL was retained by TAS as the project architect. The total contract price for the second quotation was S$841,300 while the total contract price for the last quotation was S$934,500.

The salient terms and conditions in the last quotation were as follows:

"Terms and conditions:-

Work then commenced on the project in March 2012 and it was stated that the "estimated completion date" was March 2013. About 17 months later, in September 2013, the plaintiff took the view that the defendant had abandoned construction and, by a notice dated 11 October 2013, terminated the contract. Thereafter, the plaintiff appointed replacement contractors who completed the construction work.

The plaintiff then sued the defendant for breach of contract and the defendant counterclaimed for the cost of variation works supposedly undertaken by him. As the counterclaim was bifurcated, JC Kannan only had to address the issue of liability in this case.

The plaintiff's arguments

In support of his case, the plaintiff made the following arguments:

1. The contract was both a "design and build" contract as well as a lump sum contract which the defendant agreed to undertake for the sum of S$934,500;
2. There was no basis for the defendant's counterclaim for design services as additional or variation works carried out;
3. The delay in the completion of the works was solely attributable to the defendant;
4. The defendant's abandonment of the works entitled the plaintiff to terminate the contract.

The defendant's arguments

In response, the defendant made the following arguments:

1. The contract was not a "design and build" contract;
2. The defendant had to undertake substantial variation works which caused the time for completion of the contract to be set at large;
3. The plaintiff had not made prompt payment, which contributed to the delay in the completion of the works;
4. There was no abandonment or repudiation of the contract and therefore the plaintiff's termination of the contract was wrongful.

"Design and build" contracts

JC Kannan then examined the salient features of "design and build" contracts.

A "design and build" contract is a contract where the functions of design and construction are integrated and entrusted primarily to the contractor. The essential feature of such a contract is that the employer does not employ his or her own professional advisers to produce the complete or final design of the building or project which he or she requires.

In "design and build" contracts, since the contractor is in charge of both the design and the construction of the project, this may make the design and construction process more efficient, which generates costs savings. Also, as the contractor is the only point of contact for the delivery of the project, this creates convenience and accountability.

As the main dispute between the parties centred on whether the contract was a "design and build" contract as well as a lump sum contract, JC Kannan had the opportunity to examine the relationship between "design and build" contracts and lump sum contracts. In doing so, he made the following observations:

1. A lump sum contract is a contract to complete a whole work for a lump sum;
2. Both "design and build" contracts and lump sum contracts share the common feature that the contractor has to do all that is necessary to achieve the contractual scope of the works without an adjustment in price;
3. However, "design and build" contracts have the additional feature that the contractor is also responsible for formulating and implementing the design of the project and engaging professionals for this purpose;
4. Therefore, a "design and build" contract, in the absence of any terms to the contrary, necessarily incorporates a lump sum contract and is a subset of lump sum contracts.

JC Kannan concluded his observations by stating the following:

"In short, by entering into a "design and build" contract without more, the owner and the contractor have agreed on a lump sum payment by the former in return for the construction and delivery of a project by the latter that is in accordance with an agreed design which has been formulated by the contractor."

In light of the features of a "design and build" contract, and the relationship between "design and build" contracts and lump sum contracts, JC Kannan held that the implications of finding that the contract between the plaintiff and the defendant was a "design and build" contract were that:

1. The defendant had no basis to counterclaim for professional fees where these fees concerned the design of the property, unless this was specially provided for;
2. The defendant cannot claim for additional payment for variation work unless such work was extraneous to the work contemplated under the contract.

Was the contract a "design and build" contract?

Turning to the question of whether the contract between the parties was indeed a "design and build" contract, JC Kannan explained that this was a matter of contractual interpretation. He added that in interpreting the contract, the court will adopt a contextual approach and consider all of the objective evidence.

Importantly, JC Kannan explained that the term "design and build" is a legal term of art carrying a defined meaning in law. Thus, the inclusion of such a term in the contract is prima facie evidence that the parties intended to, and did enter into, a contract having the relevant rights and obligations under a "design and build" contract.

On the facts, JC Kannan held that the parties intended to, and did enter into, a "design and build" contract.

He provided the following reasons:

1. The term "design and build" was expressly referred to in the last quotation, which establishes the prima facie position that the parties intended a "design and build" contract;
2. The plaintiff deliberately refrained from accepting the last quotation until he was satisfied with the construction drawings, which showed that he intended to enter into a contract where both design and construction were handled by the contractor;
3. The defendant entered into a contract directly with TAS and this contract stated that the defendant would be responsible for all direct coordination with the plaintiff, which was consistent with the defendant being the sole point of contact, a key feature of "design and build" contracts;
4. The defendant dealt with other professionals such as structural consultants and soil investigators in preparing to execute the design and construction of the property, even agreeing that the plaintiff would not have recourse for defective work against them. This was a hallmark of a "design and build" contract;
5. The prices for the individual items in the last quotation such as the construction of the swimming pool and the lift were marked-up when compared to the second quotation, which suggested that the parties had taken into account the defendant's responsibility as a "design and build" contractor.

Breach of the contract

Having established that the contract was a "design and build" contract, JC Kannan held that the defendant had breached the contract by failing to complete the works by 31 March 2013 notwithstanding that this date was stated in the last quotation to be a mere "estimated completion date". This was because the evidence showed that both the plaintiff and the defendant had intended for 31 March 2013 to be the completion date for the construction works. One of the progress claims stated that the completion date was March 2013, and the defendant had also arranged for, inter alia, insurance, noise monitoring and pest control on the basis that the works would be completed by March 2013.

JC Kannan added that even if the parties did not intend for 31 March 2013 to be the exact completion date, the term "estimated" would have given the defendant leeway for at most a 6- to 7-month delay, given that the contract period itself was only 12 months long. Since the works were not completed even by September 2013, the defendant was clearly in breach of the contract.

Although the defendant had argued both that the time for completion was set at large because of the variation works which he had to carry out and that the plaintiff had breached the contract by failing to make timeous payments, JC Kannan rejected these arguments easily as they were premised on the contract not being of the "design and build" variety. Since the JC had earlier found that the contract was a "design and build" contract, there was simply no basis for these arguments. In any case, the evidence showed that no variation works were carried out and that the plaintiff had made prompt payment.

Finally, JC Kannan examined the evidence, which showed that the defendant was principally responsible for the delay in the completion of the construction, and that he had abandoned the works in October 2013. The JC then held that this abandonment was a clear repudiation of the contract, which entitled the plaintiff to validly terminate the defendant's services.

Defendant's counterclaims

With regard to the defendant's counterclaims, JC Kannan held that:

1. The defendant could not claim for additional payment for variation work as none of these counterclaims for variation work were extraneous to, or deviated from, the work contemplated under the "design and build" contract;
2. The defendant could not claim for "profit and attendance" fees as such fees were part of the contract price in a "design and build" contract;
3. The defendant could not claim for his expenses in travelling to China to secure construction materials as this was part of his responsibility under a "design and build" contract;
4. The defendant was allowed to claim for the installation of a gate at the plaintiff sister's house since this work did not fall within the scope of the contract.

Quantification of damages

Having dealt with the liability of the defendant and his counterclaims, JC Kannan moved on to the quantification of contractual damages. He reiterated the following basic principles:

1. Contractual damages are generally intended to place the party who sustained the loss in the same situation as if the contract had been performed;
2. An innocent party to a breach of contract is required in law to mitigate his losses;
3. The burden of proof is on the defaulting party to show that the innocent party failed to mitigate and this burden is an onerous one;
4. The defaulting party must specifically plead that the innocent party had failed to mitigate.

He then allowed the plaintiff's claims for the costs of paying the replacement contractors, the cost of storing the construction materials, and the cost of renting accommodation after the intended completion date. However, the JC did not allow the plaintiff to claim for the cost of appointing an independent quantity surveyor since the surveyor's report did not play a role in the formulation of the scope of works for the replacement contractors.

Conclusion

The writer notes that the essence of the dispute was whether the defendant could claim extra payment for providing design services. It was not in dispute that the design was provided by the defendant (or more accurately, design professionals who had been engaged by the defendant). Therefore, in truth, there was no disagreement that the contract in this case was ultimately a "design and build contract". The dispute was whether the contract price agreed by the parties initially was for both design and construction or just for construction (such that design services could be claimed as a variation). The defendant sought to say it was excluded because the makeup of the prices in the final quotation that was accepted by the plaintiff did not specify design services (in contrast to an earlier quotation which did). However, the use of the phrase "design and build" in the final quotation was a key factor which persuaded the court to find that the contract price included provision of design services.

The High Court's decision is welcomed as it provides clarity on "design and build" contracts. This decision is probably the clearest statement by the Singapore courts on what "design and build" contracts are where hitherto, lawyers had to resort to textbook definitions and descriptions. The term "design and build" has been clearly recognised as a legal term of art carrying a defined meaning in law. In turn, this meant that certain consequences would flow if the term "design and build" were included in a contract. The inclusion of such a term in a building contract would establish a prima facie position that the parties intended a contract which required the contractor to provide both design and construction services for a fixed price.

The author acknowledges and thanks Ng Jun Chong for his contribution in the writing of this article.

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