Friday, August 24, 2007
A COMPARATIVE STUDY ON THE STANDARD FORMS OF CONTRACT IN MALAYSIA AND JAPAN WITH SPECIFIC REFERENCE TO VARIATION PROCEDURES
Masamitsu Onishi1, Khairuddin Abdul Rashid2, Toshihiko Omoto3, Kiyoshi Kobayashi4
1 Doctoral Student, Kyoto University
2 Associate Professor, International Islamic University Malaysia
3 Arbitrator, Adjudicator, Consultant for Construction Management & Dispute Resolution
4 Professor, Kyoto University
This paper was presented at QS National Convention 2003, 18-19 August 2003 at Sheraton Hotels and Towers, Subang Jaya, Selangor, Malaysia.
In this paper, the rules on variation in the standard forms of contract in Malaysia and Japan are analyzed. The authors exclusively focus upon the PWD 203A (Rev. 10/83) form which is regarded as representative of the standard forms of contract for governmental works in Malaysia and the GCW form which is regarded as the same in Japan. The paper highlights the main differences in the variation rules between the two standard forms and concludes by summarizing the remaining research issues to be scrutinized in the future.
In this paper, the differences in variation procedure of the standard forms of contract for government works between Malaysia and Japan are analyzed. A contract is performed not only based on the explicit provisions in a contract but also based on the implicit philosophies or manners or relationships which have been historically formed. With increased globalization of the construction market, the parties to a contract from the different countries are often confronted with the difficulties in making use of a standard form of contract of the country because they are not familiar with each other party’s philosophies or manners or relationships which are practiced in the domestic business environment. Such lack of knowledge or understanding existing differences of perception between the parties generates disputes frequently which lead to inefficiency of construction projects. In order to make international construction projects more efficient, such unspecified factors must be taken into consideration by the contracting parties.
Particular standard forms of contract have been used for a long time in each country. This means that each standard form of contract has been utilized efficiently under each local philosophies or manners or relationships. Contracts are performed not only in accordance with explicit provisions but also in accordance with the local practices in the industry and the business relationship of the parties to a contract. The differences in explicit provisions in the standard forms of contract of different countries may be formed based on the implicit differences such as local philosophies or manners and the relation between explicit and implicit differences. In order to explore the differences which may affect the formation of contracts and the relation between explicit and implicit differences, it would be meaningful to investigate the differences in the explicit provisions and to identify significant characteristics in each contract.
In this paper, the authors investigate the differences in explicit provisions of ‘variation’ in the Conditions of Contract because dealing with unforeseen events is likely to require the implicit relationship between the parties. Especially, in order to focus on a contract for government works, GCW form (Standard form of Agreement and General Conditions of Government Contract for Works of Building and Civil Engineering Construction) which is used by the Japanese central government and local government is taken as the representative of the Japanese standard forms of contract. As the representative of the Malaysian standard forms of contract, the PWD Form 203A (Rev. 10/83) (Standard Form of Contract to be used where Bills of Quantities form part of the Contract) which is compulsory for works in the public sector is taken. The paper concludes by summarizing the findings and the remaining research issues to be scrutinized in the future.
2 Methodology and Overview
(1) The Standard Form of Contract for public works in both countries
In Malaysia, there are several standard forms of contracts which are applicable for construction depending on the categories of works and types of clients (see Table-1). Among the several standard forms of contract in Malaysia, use of the PWD Forms is compulsory for government works. There are two types of the PWD Forms, PWD Form 203A (Rev. 10/83) (Standard Form of Contract to be used where Bills of Quantities form part of the Contract)1) and PWD 203 (Rev. 10/83) (Standard Form of Contract to be used based on Drawings and Specifications without Bills of Quantities). In fact, PWD form 203A (Rev. 10/83) is used more often than PWD 203 (Rev. 10/83) form because Bills of Quantities are very often used in Malaysia. Therefore, PWD 203A (Rev. 10/83) is taken as the representative standard form of contract in Malaysia. The PWD forms are applied for all projects funded by the Malaysian public sector.
In Japan, there are two standard forms of contracts for construction works, “Standard form of Agreement and General Conditions of Government Contract for Works of Building and Civil Engineering Construction” (GCW) 2) which is used for government works and “General Conditions of Construction Contract” (GCCC) which is used for private civil engineering and building works.
In this paper, the authors select PWD 203A (Rev. 10/83) form and GCW form to investigate the differences in the variation procedures provided in a contract for government works in Malaysia and Japan.
(2) The focus of the paper
Construction works, especially civil engineering works have such characteristics as dealing with nature, being large-scaled, complex and long-term. Thus, the construction contracts inevitably involve substantial uncertainty. The owners of projects, especially the governments may not want the contractor to take risk for these uncertainties because the contract price would be higher because of the contingencies for the risks which may or may not be realized. In order to cope with the realization of risks for uncertainty, for example, change of the design, quality, and quantity of the work, or the kind of materials, time for completion and so on, construction contracts provide for adjustments for such changes. For this reason, a project owner wants to have the power to make changes to a contract unilaterally and therefore it is necessary to provide a mechanism to enable him to do so without being in breach of contract.
In the PWD 203A (Rev. 10/83), such mechanism is provided as “variation” in the Condition of Contract. Clause 24(b) reads:
The term “variation” means the alternation or modification of the design, quality or quantity of the Works as shown upon the Contract Drawings, Bills of Quantities and/or Specification, and include the addition, omission or substitution of any work, the alternation of the kind or standard or any of the materials or goods to be used in the Works and the removal from the Site of any work, materials or goods executed or brought thereon by the Contractor for the purposes of the Works other than work, materials or goods which are not in accordance with this Contract.
The GCW also allow revision of a contract in the Article 19, which reads:
The Owner may, when the Owner deems necessary, make any changes to the Drawings and Specifications, subject to notifying the Contractor of the details of the changes.
In addition to the provisions on variation, both the standard forms of construction contract include provisions for the contractor to submit claim for expense and / or loss; and / or an extension of time where applicable. Such a demand by a contractor for an additional payment is referred to as a “claim”.
In a process of variation, the followings are important: 1) What is the procedure for variation? 2) How is a claim for an additional payment and / or an extension of time submitted by the contractor is to be settled? In the following sections, we will discuss the key similarities and differences between the PWD 203A (Rev. 10/83) and the GCW from these two viewpoints.
(3) The differences in the systems of contract administration between Malaysia and Japan
Administration of a contract is necessary to make it effective. Administration of a contract means to ensure that the contract is performed according to the articles of agreement and conditions of contract and within the framework of related laws and the practices of the construction industry. First of all, we can observe significant differences in the two systems of administration of the PWD 203A (Rev. 10/83) and GCW.
The PWD 203A (Rev. 10/83) obliges the Employer to appoint the Superintending Officer (hereinafter, the S.O.) who is responsible for administration of a contract. Fig-1 represents the contractual relationship of the parties in the PWD 203A (Rev. 10/83). The contract is made between the government and the contractor. But the government and the contractor are not allowed to make direct communication with each other. The government or the contractor must always communicate through the S.O. Thus, in reality, the communication relationships in a contract between the S.O. and the contractor and the S.O. and the consultants employed by the government can be shown in Fig-2. Throughout the contract, both parties’ intentions are supposed to be impartially judged by the S.O. The S.O., as an independent professional, is supposed to act impartially on both parties3).
But in the GCW, the administrator of a contract, the Project Manager (hereinafter PM) is apparently representing the government. The GCW Article 9.2 reads:
In addition to those powers specified elsewhere in this Contract Form, and to any powers vested to the Owner in accordance with this Contract Form that the Owner deems necessary to entrust to the Project Manager, the Project Manager shall have the following powers as stipulated in the Drawings and Specifications.
(i) Instructions, approvals, and consultations with the Contractor or the Superintendent of the Contractor regarding the execution of this Contract.
(ii) Preparation and delivery of detailed drawings, etc. for the execution of the Works based on the Drawings and Specifications, or approval of detailed drawings, etc. prepared by the Contractor.
(iii) In accordance with the Drawings and Specifications, management and observation of the process of the Works; inspection of the execution of the Construction Materials.
In GCW, the provision of the PM is not always compulsory as referred to in the clause 9 (6). In this case, all powers that are vested in the PM as stipulated in the Conditions of Contract belong to the Owner. From these provisions in GCW, the PM represents the Government (see, Fig-3). Thus, we can say that in the relationship between the Government and the Contractor, there is no third party. In the procedure of variation, it is only the Government who can judge or evaluate a variation from the structure of the contractual relationship.
3 Comparison of Variation procedures
(1) Detailed variation procedures
Fig-4 shows the procedure of the variation under the PWD 203A (Rev. 10/83) starts from the recognition by the S.O. as to the need for a variation to the works. Variations originate from instructions issued by the S.O. (to the contractor) who is expressly empowered to do so by the provisions of the Conditions of Contract. All instructions requiring work to be varied must be in writing. While the provisions of the Conditions of Contract expressly empower the S.O. to order work to be varied, he must comply with the requirements of the Treasury’s Instruction No.202 which stipulates that prior approval of the relevant authority must be obtained before an instruction requiring work to be varied may be issued (Clause 3 (a) (ii)). The contractor must comply with the S.O.’s instructions, but the contractor may give notice in writing of his intention to claim for loss and / or expense arising from compliance with the S.O.’s instructions. Varied works executed by the contractor are measured and evaluated in accordance with the rules described in Clause 25. Varied works are paid in interim payments or in the Final Certificate.
Fig-4 The procedure of variation in PWD 203A (Rev. 10/83)
On the other hand, the procedure of variation in GCW is represented as Fig-5. The flow of the procedure from recognition of variation by S.O. to payment for varied works is relatively similar to PWD 203A (Rev. 10/83). The contractor must execute variations ordered by the government. The contract is not varied even in the case that some quantities differ from Statement of Items of Contract Sum. The contract is varied only by the government order. The government determines whether the Contract Sum should be changed or not. If the government wishes to change the Contract Sum, new Contract Sum is fixed by negotiation between the Government and the Contractor.
There are several key differences in the detailed procedures or expressed provisions. Firstly, the PWD 203A (Rev. 10/83) requires the S.O. to comply with Treasury’s
Fig-5 The procedure of variation in GCW
Instruction No.202 which requires an approval of the relevant authorities in the Government for variation of works whose value is beyond the financial limits specified beforehand. Secondly, the PWD 203A (Rev. 10/83) provides thorough rule to measure and to evaluate a varied work in Clause 25, whilst GCW Clause 24 (which deals the rule to change to the contract sum) does not provide any details rule as PWD 203A (Rev. 10/83).
(2) The authority to determine variation
Onishi et al. 4) discussed that a variation should be admitted if a variation increases the social benefits. It is called variation principle. There is no explicit criterion to objectively determine a variation both in the PWD 203A (Rev. 10/83) and the GCW. Alternatively, the authority to determine a variation is set. PWD 203A (Rev. 10/83) clause 5 (a) provides the authority to determine a variation as follows:
The S.O. may in his absolute discretion and from time to time issue further drawings, details, and/or written instructions in regard to: the variation as referred to in Clause 24 hereof…
The GCW Article 19 provides for the authority as follows:
The Owner may, when the Owner deems necessary, make any changes to the Drawings and Specifications, subject to notifying the Contractor of the details of the changes.
And we can observe the substantial difference between the PWD 203A (Rev. 10/83) and the GCW. The PWD 203A (Rev. 10/83) form grants the authority to determine a variation to the S.O., whilst the GCW grants it to the government, the Employer himself.
The variation should not be admitted just at the government’s convenience according to variation principle. Classical liberalism supposes that the parties to a contract take opportunistic behaviors. Thus, it is natural that the S.O. as the impartial third party has the authority to determine a variation because if not, the both parties’ strategic behaviors may lead to unfair settlement. But in Japan it is strange that the government who is one of the parties to a contract has the authority to determine a variation. It is apparently unfair for the contractor. Kobayashi et al.5) theoretically gives the reason why such an authority structure has been sustained. In Japan, the government is supposed to have the ability to verify that a variation brings social benefit, and the contractor also believes the government’s ability.
By the way, impartiality of the S.O. is not always guaranteed3). Under the present system in Malaysia the S.O. (in almost all cases) is appointed based on public post but not based on expertise and experience3). Moreover, the S.O is a civil servant. In such conditions, the S.O is likely to have a heavy burden to play a dual role to act on behalf of the Government and to act impartially.
But in reality, the force which makes the S.O. impartial may be controlled by his/her professionalism and religious belief. The contractor’s reaction to the S.O.’s impartiality may also function to make the S.O. impartial, because the S.O.’s decisions would make the contractor generate many disputes which might finally be followed by to a great amount of dispute cost.
(3) Administrative provisions in the PWD 203A (Rev. 10/83)
We have discussed that the S.O. is supposed to be impartial and a variation should be determined fairly from the point of social benefits. But it is interesting to see that the PWD 203A (Rev. 10/83) has the administrative provisions by the upper authorities. Such administrative provisions limit the S.O.’s absolute power to determine a variation. While the provisions of the Conditions of Contract expressly empower the S.O. to order work to be varied, he must comply with the requirements of Treasury Instruction No.202 which stipulates that prior approval of the relevant authority of the Government must be obtained before an instruction requiring work to be varied may be issued (Clause 3 (a) (ii)). The relevant authorities designate that the State Director of Public Works, the Deputy Director General of Public Works, the Director General of Public Works, or the Chief Secretary of the Ministry of Finance. The higher the Contract Sum and / or the value of the Variation, the higher the level of the approving authority are required.
However, a variation that results in reduction of the Contract Sum is exempted from the need for prior approval. A large amount of additional payments may have a great impact on the budget of the Government. Due to this administrative provision, the fair judgment of the variation made by S.O. may be rejected or modified at the Government’s discretion.
In the PWD 203A (Rev. 10/83), the S.O.’s impartiality is a consistent concept throughout the procedure of variation. However, although the S.O. is supposed to act impartially and free from any influence from the client, Clause 3 (a) (ii) clearly allows the client to have an effect on variations. In such a situation that S.O.’s instructions are subject to the governmental approval, the S.O.’s instruction may not be impartial. In this sense, Clause 3 (a) (ii) which refers to the requirement of the Treasury’s Instruction No.202 is inconsistent to the concept of S.O’s impartiality.
In the public works in any country, we can observe that the S.O. or the Engineer, who are supposed to be impartial, is often in practice required to refer to the Government when he or she makes a significant variation. However, it is a significant feature of the PWD 203A (Rev. 10/83) that a provision which expressly entitles the Government to intervene in the S.O.’s discretion.
(4) Description of the rule of changing contract sum
Both the PWD 203A (Rev. 10/83) and the GCW allow an additional payment or an extension of time (see clause 5 (d) and 43 (e)) respectively. Clause 5 (d) of the PWD 203A (Rev. 10/83) contains the criteria as follows:
If in compliance with the S.O.’s instruction as aforesaid involves expense or loss beyond that reasonably contemplated by the Contractor for which the Contractor would not be reimbursed by a payment made under other provision in this Contract, then unless the same were issued owing to some breach of this Contract by the Contractor, the Contractor shall within one month of receipt of such instruction, give notice in writing of his intention to claim for such expense or loss to the S.O. together with an estimate of the amount of such expense and/or loss, subject always to Clause 48 (a) hereof.
The GCW contains the criteria as follows:
the Owner shall adjust the Construction Period or the Contract Price, if necessary, and shall bear damages incurred by the Contractor, if any.
The critical difference between PWD203A (Rev. 10/83) and GCW is found in the descriptions of the procedure of measurement and valuation of variation. In PWD 203A (Rev. 10/83), clause 25 (b) refers to the measurement and valuation of variation.
(i) The rates in the Bills of Quantities after adjustment if necessary as provided in Clause 26 (d) hereof, shall determine the valuation of work of similar character and executed under similar conditions as work priced therein:
(ii) The said rates, where work is not of similar character or executed similar conditions as aforesaid, shall be the basis of rates for the same, so far as may be reasonable, failing which a fair valuation thereof shall be made by the S.O.;
(iii) The rates in the Bills of Quantities shall determine the valuation of items omitted, provided that if the omission substantially vary the conditions under which any remaining items of work are carried out, the rates of such remaining items shall be valued under rule (ii) of this clause.
Clause 24 in GCW form provides the procedures for adjustment of the Contract Price in very simple manner:
Adjustment of the Contract Price shall be determined through consultations between the Owner and the Contractor. However, if an agreement on adjustment to the Contract Price is not reached between the Owner and the Contractor within ( ) days of initiating consultations, the Owner shall determine the adjustment of the Contract Price, and the Owner shall notify the Contractor of the adjustment.
We observe that there is no detailed procedure to settle the contractor’s claim of additional payment in GCW, whilst the PWD 203A (Rev. 10/83) provides the detailed procedure in which the contractor has to give the notice of his intention of claim and is given time to submit full particulars of all claims until 3 months after practical completion of the Work.
As to the settlement of an extension of time, the PWD 203A (Rev. 10/83) Clause 43 provides, “the S.O. shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair reasonable extension of time for completion of the Work…” The GCW Article 23 provides that “Any adjustment of the Construction Period shall be determined through consultations between the Owner and the Contractor.”
In short, PWD 203A (Rev. 10/83) provides detailed rule of change or claim in the Conditions of Contract. On the contrary, GCW does not provide the procedure of change or claim. It seems that there is a large extent of flexibility of the procedure in GCW, whilst flexibility of the procedure is limited in PWD 203A (Rev. 10/83).
In Japan, the Government and the Contractor often have opportunities to enter a contract again and again. In such a business environment, the both parties acknowledge the business practice to reach an agreement of Change of Contract Sum which is not mentioned in the Conditions explicitly. In practice, more often than not, the Government plays a leading role in changing the Contract Sum. As has been described previously, the PM is the representative of the Government. There is no third party in contractual relationship in GCW. In such a case, people may think that there would be many disputes because the government or PM would be likely to make a decision always favorable to the government. But the mutual-trust has been historically formed between the Government and the Contractor. In other words, the Contractor believe that all the Government’s decisions should be made not on the basis of the Government’s own benefit or the Contractor’s benefit but on the basis of social benefits, and that the Government has the ability to make correct decisions. On the other hand, the Government believes that the Contractor meekly obeys the Government decisions. It has been believed that this mutual-trust relationship is always guaranteed by the long-term business relationship between the Government and the Contractor in the domestic construction market. As far as such a relationship exists, GCW form can be said to be efficient. But, the question of transparency should be asked as to validity of variations.
Having said as above, however, it is not to say that there exists no mutual-trust relationship in Malaysia. Negotiations are held in PDW 203A (Rev. 10/83) when new prices or rates must be fixed in case of the situation mentioned in Clause 25 (b) (ii) and (iii). To reach an agreement by negotiations, the mutual-trust relationship between the parties is necessary.
This paper identified the specific characteristics of PWD 203A (Rev. 10/83) in Malaysia and GCW in Japan by comparing the procedures of variation. Standard forms of Contract are usually revised so as to suit for the domestic specific situation at times. The significant characteristic of PWD 203A (Rev. 10/83) is the administrative provisions. While it is often the case with public works that the government interferes the decision of the S.O. or Superintendent or the Engineer, a standard form of contract seldom provides explicitly the government’s right to interfere or to limit the S.O.’s power. The authors point out that this aspect may have impact on the S.O.’s ability to practice the concept of impartiality. On the other hand, a characteristic of GCW is that the provisions are very simple and the flexibility of procedure of fixing the measurement and valuation of varied work is extremely large.
In this paper, differences of only variation procedure are investigated. The real purpose of the comparative study of the standard forms of contract is to explore the substantial difference in philosophy or business practice in each country which is not mentioned in the forms of contracts. In the future, through comparative studies in other aspects, the reason why each characteristic of a contract form has been formed must be proven from the viewpoints of history, culture and business practices.
1) Standard Form of Contract to Be Used where Bills of Quantities Form Part of the Contract P.W.D. Form 203A (Rev. 10/83).
2) The Central Construction Industry Council of Japan: The Standard Form of Agreement and General Conditions of Government Contract for Works of Building and Civil Engineering Construction (in Japanese), 1995.
3) Khairuddin Abdul Rashid: Construction Procurement in Malaysia, Processes and Systems, International Islamic University Malaysia, 2002.
4) Masamitsu Onishi, Toshihiko Omoto, Kiyoshi Kobayashi: Risk Sharing in Project Contracts, IEEE Systems, Man, and Cybernetics Conference, 2002.
5) Kiyoshi Kobayashi, Toshihiko Omoto, Muneta Yokomatsu, Takatoshi Wako: The Contractual Structure and Social Efficiency of Construction Works, Journal of Japanese Society of Civil Engineering, No.688/IV-53, pp.89-100, 2001. (In Japanese)
6) Jabatan Kerja Raya (JKR) Malaysia: Guide on the Administration of Public Works Contracts, 1988.
7) Toshihiko Omoto: A Comparative Study of The British and Japanese Construction Contracts, Thesis Report for MSc/Diploma Course in Construction Law and Arbitration, King’s College University of London, 1992.