Rights of Setting Off by Employer

Professional Practice II

Ee Hui Teng
Vivian Tay Huey Shuen
Set-off
- Deduct/ compensate/ counter-balance something for something else
- Deduction by the Employer of debt owed by the contractor arising from some
breach of his obligations
- Employer’s common law rights to claim for compensation for certain breach such
as defective works
- Triggered when Contractor commits a breach of his obligations and fails/ refuses
to rectify the defects as instructed
Matters subject to an appropriate set-off (Clause 30.4)
- Clause 2.4: Failure to comply with AI
- Clause 4.4: Failure to pay fees, levies or charges
- Clause 5.1: Failure to set out correctly
- Clause 6.5: Failure to carry out works in accordance with contract
- Clause 6.7: Failure to comply with AI regarding defective work and materials not
in accordance with contract
- Clause 14.4: Submission of false warranty of title of goods and material which are
not free from encumbrances and of which are already been paid under the interim
certification
Matters subject to an appropriate set-off (Clause 30.4)
- Clause 15.3(b): Failure to comply with his undertaking to rectify minor defects
and employ other Person to execute
- Clause 15.3(c): Failure to comply with his undertaking to rectify minor defects and
accept defects
- Clause 15.4: Failure to attend to defects during DLP
- Clause 15.5: Failure to attend critical defects which needs urgent rectification
within reasonable time during DLP
- Clause 19.5: Failure to insure/ continue to insure works for public liability
- Clause 20.A.3: Failure to insure works for new building under Contractor All Risk
Pre-conditions for setting-off
1. Architect/ QS submit detailed assessment of such set-off to contractor
2. Architect/ Employer shall give written notice within 28 days by hand/ register
post to contractor stating:
- Employer’s intention to set-off
- Grounds & reasons of set-off
3. Employer is not entitled to set off unless amount has been agreed by the
Contractor/ adjudicator
Setting off Procedure
1. Employer shall give a written notice to the contractor within 28 days before any
set off can be deducted.
2. Deliver written notice by hand or registered post. (For Malaysia- normally by
hand)
3. Set-off can be deducted the latest by final certificate.
4. Not entitled to set off UNLESS amount is agreed by contractor/adjudicator.
Setting-off Conditions
1. No time frame in the conditions to submit assessment of Set-off.

2. Clause 30.4(b) states that : when employer want to set off an amount, a written notice must
be given to the contractor within 28 days. We can only DDT actual amount after that 28
days. However, we can reduce this period in other contract documents like preliminaries
and Letter of Award.

3. MANDATORY feature to set-off: Comply with timing, mode of setting off.

4. Clause 30.4(a) states that: AR or QS must submit complete details of assessment of any set
off. Must define and explain: Or else, will lack clarity and open opportunity for dispute by
contractor!
How contractor can recover from Set-off?
3 WAYS to recover:

1. Directly issue cheque to the employer: Pay debt.

2. Deduct through Interim Certificate
3. Call the bank to release performance bond (only exact value of set off)
Rights of Contractor vs Rights of Employer
Rights of Contractor: Rights of Employer:

1. Accept amount stated in the written When receive contractor’s notice of dispute,
notice within 28 days. employer can:
2. Carry out dispute within 21 days of
getting the set off notice. 1. Accept the disagreement and go with
- State why he disagree disputed amount within 21 days of
- Give his own evaluation (supporting notice.
documents and calculations. 2. Both parties agree on an amount.
3. If unable to agree: Seek adjudicator
(Clause 34.1)
Dispute to Adjudication (Clause 34.1)
1. If either parties have disputes regarding set-off, they can refer to adjudication.
2. Adjudicator will decide set off amount, not the employer.
3. Adjudication is a rough justice: If decision by adjudicator is disputed, parties still must
comply with the adjudicator’s decision (bound by practical completion). This ‘pay now,
argue later’ concept is so that work can be proceeded with the temporary decision.
4. If disputed parties want to dispute adjudicator’s decision to arbitration (second chance),
they must give a written notice to the other party to refer to ‘dispute to arbitration’ within 6
weeks from the adjudicator’s decision.
5. If disputing party fail to refer to ‘dispute to arbitration’ within 6 weeks from the
adjudicator’s decision, HIS decision will be final & binding!
What is restricting the employer rights from setting off?
RESTRICTION: CANNOT SET OFF UNLESS:

1. Dispute must be arised before practical 1. Contractor agreed to the amount

completion date
(Set off must be done before final 2. Dispute has gone to adjudication and the
certificate) adjudicator had issued his decision

2. Dispute must be within CLAUSE 30.4

ONLY.
Liquidated Damages are not subjected to set off procedure.
1. LD is not stated in in Clause 30.4 and 22.1, therefore, not subjected to set-off procedure.

2. LD is the ONLY item not subjected to set-off procedure. But, the contract doesn’t define
meaning of set-off, so we can interpret it widely.

3. Reason of exemption: Because LD is to be separately agreed between contractor and

employer because it always subject to dispute (due to delay caused by contractor) and it is
the employer’s decision to impose LD on contractor.
JKR Form- Rights of Setting-off
1. No procedure for setting off, however, Clause 33 allows Government to deduct money owed
by contractor.
2. Cost can be recovered by Performance bond or debt.

3. Some other clauses that permit deductions are:

- Clause 17.3: Contractor are defaulted to pay SOCSO- Government/ S.O. can pay first then set
off against them.
- Clause 23.5: where contractor are defaulted to pay EPF of any workmen employed by him,
his sub-contractor, or NSC- government/S.O. may pay first then set off against contractor.
- Clause 40.2: recovery of LD upon issuance of Cert of non-completion
Q1. Can the Employer set-off
payments unilaterally for defects not
repaired by the Contractor? If the
Contractor installed a window that is
not in compliance with the contract
specifications, what are the remedies
available to the Employer? Please
support with the relevant clauses.
Q1. Can the Employer set-off payments unilaterally
for defects not repaired by the Contractor? (Part 1)
Employer cannot set off payments unilaterally. It is a set-off procedure that the employer is not entitled
to exercise any set-off unless the amount has been agreed by the contractor or the adjudicator has
issued his decision (Clause 34.1)

Clause 30.4 states that employer will be entitled to remedies in terms of set-off if contractor are
in breach of:

❖ Clause 15.3(b): where failure to comply with his undertaking to rectify minor defects, employer can
engage other Person to execute the works to give effect to the contractor’s said undertaking. All cost
including loss and expense shall be set-off by the employer.

❖ Clause 15.3(c): where contractor fails to rectify minor defects, employer can accept the defects as it is but
subject to an appropriate set-off against the contractor.
If the Contractor installed a window that is not in compliance with the
contract specifications, what are the remedies available to the Employer?
(Part 2)
Clause 30.4 states that employer will be entitled to remedies in terms of set-off if contractor are in breach of:

❖ Clause 6.5(e), where contractor fails to carry out work in accordance with the contract, employer may
accept such works as they are but subject to an appropriate set off by employer and the contractor
remain liable for the same.

❖ Clause 6.7, where contractor refuse or fails to comply with AI regarding defective work and materials
not in accordance with contract, then employer may engage other Person to rectify the defect to
comply with the AI and any loss and expense shall be set-off by the employer.

Remedies include:

Clause 6.5(b): demolish and reconstruct such work to comply with the contract

Clause 6.5(c): to rectify such work as instructed by the Architect with no adjustment to the Contract Sum
Q2. What are the remedies available
to the Contractor if he is dissatisfied
with the Adjudicator’s decision on a
set-off dispute? What are the
conditions that trigger a set-off
actions by the Employer?
Remedies available if Contractor is dissatisfied with
Adjudicator’s decision
- ‘Pay now argue later’: Decision of adjudicator must be complied until practical
completion
- Contractor can refer dispute to arbitration by giving written notice to Employer
within 6 weeks from the adjudicator’s decision
Conditions that trigger a set-off action by the Employer
- When the contractor commits a breach of his obligation
- When the contractor fails/ refuses to rectify defects as instructed
Q3. Why are set-off and Liquidated
Damages taken up by the Employer
separately and is not stated in the
Interim Certificate? Can the Employer
refer a set-off dispute to arbitration
during the construction period?
Q3. Why are set-off and Liquidated Damages taken up by
the Employer separately and is not stated in the Interim
Certificate? (Part 1)
❖ LD is not stated in in Clause 30.4 and 22.1, therefore, not subjected to set-off procedure.

❖ LD is the ONLY item not subjected to set-off procedure. However, the contract doesn’t
define meaning of set-off, so we can interpret it widely.

❖ LD is to be separately agreed between contractor and employer because it is always

subject to dispute (due to delay caused by contractor) and it is the employer’s decision to
impose LD on contractor.
Can the Employer refer a set-off dispute to arbitration
during the construction period? (Part 2)
❖ Yes, the employer can refer to set off dispute to arbitration.
❖ Clause 34.1 states that parties can refer to adjudication to resolve set-off dispute.
❖ If both the employer and the contractor do not agree with the set-off amount decided by the
arbitrator, they can refer further to ‘dispute to arbitration’. (second chance)
❖ The procedure is that the disputing party must give a written notice to the other party to refer to
‘dispute to arbitration’ within 6 weeks from the adjudicator’s decision.
❖ If disputing party fail to refer to ‘dispute to arbitration’ within 6 weeks from the adjudicator’s
decision, HIS decision will be final & binding!
Q4. What is the difference
between Clause 15.3 and
Clause 15.4 where both is
in regard of rectifying
defects?
Q5. How can set-off be
recovered from the
contractor?
Q6.Why do you think this is
included as an entitlement
to set-off?
‘Clause 19.5: where contractor fails to insure or
continue to insure works for public liability’, Employer
may insure (but not obligated to) against the risk and
any cost incurred or paid by the employer shall be
set-off against the contractor.