ZHONGXIANG CONSTRUCTION SDN BHD v CRCC MALAYSIA BERHAD

Case Significance

A worked example of a defective-works counterclaim defeating a sub-contractor's final payment claim, with rectification backcharges recovered as reasonably foreseeable losses under the Victoria Laundry principle.

This High Court decision in the Construction Division at Kuala Lumpur concerns a sub-contractor's claim for work done and the counterparty's counterclaim for the cost of rectifying defective works on a rail-infrastructure project. The defendant, CRCC Malaysia Berhad, had been engaged as sub-contractor for guideway, station and associated works under Package GS06 of the Light Rail Transit Line 3 (LRT 3) between Bandar Utama and Johan Setia, and by a letter of acceptance appointed the plaintiff, Zhongxiang Construction Sdn Bhd, as its sub-contractor to carry out bore piling works for a sub-contract sum of RM13,439,398.77, comprising the construction of 685 bored piles. The plaintiff claimed payment under its Final Claim for work done, while the defendant counterclaimed for backcharges representing the cost of rectifying defective bore piles. The court examined the quality of the plaintiff's piling works and the recoverability of the rectification costs, applying the measure of damages for breach of contract and the foreseeability principle in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd, under which compensation is recoverable for loss arising naturally from the breach or within the parties' contemplation, but not for remote or indirect loss. It held that the defendant was entitled to claim backcharges for the entire rectification costs because the losses were reasonably foreseeable and flowed from the plaintiff's breach of the sub-contract and its failure to ensure the quality of the bore piles, the defects having required the defendant to redesign and relocate the affected piles. The court concluded that the plaintiff was not entitled to its Final Claim and was liable for the rectification costs of RM1,096,745.73, and granted the defendant a declaration that it was entitled to set off or backcharge that sum. The judgment is a useful worked example of a defective-works counterclaim defeating a sub-contractor's final payment claim.