What is “Procedural Ultra Vires” and how it can be used to win in Construction Disputes & Claims.
One of the more important skills that Contract Managers must have is to know by heart would be the rule of law known as “Procedural Ultra Vires” .
It is a very powerful principles and have been used in the courts to invalidate Engineer’s Determinations made under the FIDIC various Clauses.
In fact it should in my opinion be known by heart by CEOs. COOs, GMs, Project Directors & Managers and Senior operation guys of Construction Companies.
Before I proceed to the topic of the day, it would be important to ask :
1. What is Procedural Ultra Vires?
2. Why is it important in Construction Disputes ?
What is it ?
Ultra vires is Latin for “beyond powers.” Procedural ultra vires is when established procedures are not followed strictly resulting in the subsequent action void and of no legal effect.
In a nutshell it simply means that when procedures are set, these procedures must be strictly followed. If they are not followed to the letter such that there are lapses or even a lapse in the procedures, the resulting administrative action will be void and of no legal effect — in short, null and void.
A simple example would be the “Miranda Warning” procedures which is present under the criminal laws of most (if not all) countries. The “Miranda Warning” ?
This is the warning that all police officers must recite to those detained before an arrest is made i.e the famous and well known words
“You have the right to remain silent and anything you say can be used against you blah blah blah…….”
If the miranda warning is not recited as required under the criminal law procedures, the arrest would be ruled illegal and those detained would be freed by virtue of procedural ultra vires.
Why is it important in Construction Disputes ?
It is important because it is not confined to only criminal laws but can also be applied to commercial and civil laws. That would include construction disputes and has been used in numerous case laws involving extension of time, imposition of LAD’s, and terminations apart from numerous other issues. As long as procedures are set and expressed, it would be important to take note of Procedural Ultra Vires.
Before we proceed further, readers must also be aware of judicial thinking.
What is judicial thinking ?
Judicial thinking is how judges think and makes judgement. It might be important to know this as Judges think on a much higher and different level from the common man in the street. They look at things differently and a lot of times from a perspective that a lot of us does not look from.
For example how many of us would ever fathom that the best way to determine whether a oral contract has come into existence would be the receipt of the 1st payment ?
The best way to get a good idea of judicial thinking is to read a lot of case laws and after careful analysis of the written judgements, a common thread could emerge on a particular matter. I have done that for 2 landmark cases on procedural ultra vires and the final judgement made was in my opinion not foreseeable as it came from a perspective that I would not have looked from.
Examples of Procedural Ultra Vires that have been used in Landmark Case Laws
Case No:1 Engineering Construction Pte Ltd v. Attorney General & Anor [1993] 1 SLR 390
This is a singapore case and in this case the plaintiffs, Engineering Construction Pte Ltd (“EC”), entered into a contract with the Government of Singapore, for reconstruction road works. Liquidated & ascertained damages (“LAD”) were to be payable for delay beyond the completion date at the rate of $3,000 per day. The second defendant, Mott MacDonald (Singapore) Pte Ltd (“MM”) were appointed the superintending officer (“SO”) under the contract. The government wrote 2 letters to EC. One was for extending the date of completion for 5 days (“the extension of time letter”). The other was to inform EC that as a result of the works being uncompleted by the extended date, EC would have to pay the government LAD at $3000 per day for the period of delay (“the LAD letter”). Thereafter LAD was imposed.
Subsequently the court reviewed the facts and circumstances and made a ruling that the LAD letter was defective and as such did not meet the requirements of the procedures set out in the contract leading to the imposition of LAD as procedural ultra vires. Let look at the facts :-
The relevant contract clause which set the procedure:
LAD as stated will be imposed in the event that :-
(a) the contractor had failed to complete the works by the contracted completion date or within any extended time under cl 32, and
(b) the SO had certified in writing under cl 31(a) that in his opinion the Works ought reasonably to have been completed.
The LAD letter issued purportedly in compliance with the set procedure :
You have failed to complete the Works on the Date of Completion xx.x.XXXX, hereby you are informed that L.A.D. of RM 3,000 a day will be imposed for every day of delay until completion. Such L.A.D. will be deducted by the Employer from any payment due to you.
Looking at the facts, how would you as a laymen think ? Was the procedure followed. ? Where was the error ?
On the surface it appears that everything was in order. A letter of default was issued as required under the procedures. Can you see the judicial thinking behind the ruling that the LAD letter was defective ?
Kindly take note that I mentioned before that the procedures must be followed strictly and to the letter. On close examination, please take note of the words under sub clause (b) above requires the SO to certify that in his opinion the works ought reasonably to have been completed and that was clearly not done in the purported LAD letter.
The purported LAD letter should have stated that as follows :
I hereby certify that it is in my opinion that you failed to complete the Works on the Date of Completion xx.x.20xx when you reasonably ought to have completed. Hereby you are informed that L.A.D. of RM 3,000 a day will be imposed for every day of delay until completion. Such L.A.D. will be deducted by the Employer from any payment due to you.
By virtue of judicial thinking, the judge in the above case ruled that the procedures set was nor followed, resulting is a defective “LAD Letter” and as such the deduction of LAD was illegal and voided.
Case No: 2 Future Heritage Sdn Bhd (Contractor) Vs Intelek Timur Sdn Bhd (Developer) — Contract terminated in Dec 1997.
This is a Malaysian Case. In this case, the Contractor was terminated on alleged grounds of termination of Works. This is a interesting case as it went through the whole rigor more of due procces. Was referred to Arbitration, Challenged in the High Court, Appealed made in the Appeal Court and finally resolved at the Federal Court, which is the highest court in Malaysia. Summary of the action pursued :=
1. Future Heritage Sdn Bhd Vs Intelek Timur Sdn Bhd (Arbitration — Award published on 16 June 2000).
2. Intelek Timur Sdn Bhd Vs Future Heritage Sdn Bhd (High Court Usul Pemula No: R2–25–67–00) . Judgement made on 26 Feb 2001
3. Future Heritage Sdn Bhd Vs Intelek Timur Sdn Bhd (Appeal Court Rayaun Sivil No: W-02–202–2001). Judgement made On 1 Nov 2002
4. Intelek Timur Sdb Bhd Vs Future Heritage Sdn Bhd (Federal Court Rayaun Sivil No : 02–6–2003(W). Judgement made on 19 Jan 2004
Facts Of The Case
Future Heritage issued a notice of termination due to nonpayment of progress payment and stopped work on 18.12.97.
Intelek through the Architect issue a notice of termination to Future Heritage pursuant to Clause 25(a) and /or (b) based on the abandonment of works since 18.12.97.
Both parties contend that their action of termination is rightful.
i) Future Heritage alleged that they rightfully terminated under Clause 26.1 (a) which is the default clause for payment.
ii) Intelek alleged that they rightfully terminated under Clause 25 (a) and or (b) which is the default clause for ceasing work without valid reason.
The relevant clause pertaining to Termination
(a) the Employer does not pay the Contractor the amount due on any certificate within the Period for Honouring Certificates named in the appendix to these Conditions and continues such default for seven (7) days after receipt by registered post or recorded delivery of a notice from the Contractor stating that notice of determination under this Condition will be served if payment is not made within seven days from receipt thereof;
then the Contractor may thereupon by notice by registered post or recorded delivery to the Employer or the Architect, forthwith determine the employment of the Contractor under this Contract; provided that such notice shall not be given unreasonably or vexatiously.
Summary Of The Various Judgements.
Arbitration — Held that the determination by Future Heritage was rightfully done and awarded damages to Future Heritage
High Court — Held that the Arbitrator misconducted himself and set aside the award of the Arbitrator.
Court Of Appeal — Held that the Arbitrator did not misconduct himself and reinstated the Award of the Arbitrator
Federal Court — Held that the Arbitrator misconducted himself and set aside the award of the Arbitrator.
What is important is the final verdict of the Federal Court as being the highest court in Malaysia, there is no more appeal.
Verdict of the Federal Court
The verdict was based on the wordings of Clause 26(1)(a) which is reproduced in part:-
“…… then the Contractor may thereupon by notice by registered post or recorded delivery to the Employer or architect forthwith determine the employment of the Contractor under this Contract; provided that such notice shall not be given unreasonably or vexatiously.”
As the crux of the whole matter lies in the interpretation of Clause 26(1)(a), It was held that Arbitrator must not misconstrue the provisions of a contract on principles of construction which the law does not support/approve. He has a duty to consider a whole clause in its entirety when construing the provisions.
In reviewing the case, it was found that the Arbitrator “did not direct his mind to the proviso as to whether the notice had been issued unreasonably or vexatiously. He did not subject himself to the crucial question as to Future Heritage’s conduct in sending the notice and in so doing, had on the principles of construction, erroneously construed the provisions of Clause 26(1)(a).”
This was an error of law on the part of the Arbitrator and accordingly found that the Arbitrator has misconducted himself. To explain simply in lay men terms, the requirement that the notice must not be given unreasonably or vexatiously is a crucial set of procedure and must be compiled to the letter.
Case No: 3
I am unable to cite this case as I came across it long ago. Nevertheless it is a very common occurrence and as such I am sure that there are many such cases in your country and should be able to find it after some research on google.
Whenever any notices need to be send (from both sides of the divide), it is very very important to check and see if the contract provisions had specified an address for service of such notices. Why is this important ?
Because if it is, then it will form part of the set of procedures and failure to comply by sending it to another unspecified address is a breach of procedures that will result in procedural ultra vires. And your notice will be ruled null and void.
I hope you find my observation of the above 3 case laws interesting and helpful in understanding the importance of procedural ultra vires and coupled with judicial thinking could be the solution to help save the day.
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