The document discusses the employer's right of set-off under a construction contract. It defines set-off as a deduction by the employer of debt owed by the contractor. There are two pre-conditions for a set-off: 1) the contractor commits a breach of obligation and 2) fails to rectify defects as instructed. The document outlines various contract clauses where set-off can be applied if the contractor fails to meet obligations, such as failure to comply with instructions or insure works. It provides the procedures for setting off amounts, including giving notice and allowing contractor objections to be resolved by adjudication or arbitration if needed. Set-off and liquidated damages are handled separately from interim payments.

1. Bachelor of Quantity Surveying (Honours)
PROFESSIONAL PRACTICE 2 (QSB60904)“P5 - Rights of Setting-off by Employer”
GROUP MEMBER : CHIN KHANG WEI (0320728)
LEE ZHI XIN (0324563)
LEE SHZE HWA (0320053)

2. What is a Set-Off?
- To deduct or to compensate or to counter-balance something for
something else.
- A deduction by the employer of debt owned.
- The Employer’s common law rights to claim for compensation.

3. What trigger a set-off entitlement by employer?
- 2 pre-conditions:
1. When the Contractor commits a breach of his obligation
2. When the Contractor fails or refuses to rectify the defects as
instructed.

4. Matters Subjects to Appropriate Set-Off
(Under Clause 30.4)
Clause 2.4
➝ Contractor fails to
comply with AI
➝ Employer can
employ another
contractor and
set-off the cost
Clause 4.4
➝ Contractor fails to
pay fees, levies or
charges
➝ Employer can pay
first and set-off
against the
Contractor
Clause 5.1
➝ Contractor fails to
set out correctly
➝ Employer may
agree but subject
to appropriate set
off

5. Clause 6.5(e)
➝ Contractor fails to
carry out work in
accordance with
contract
➝ Employer may agree
but subject to
appropriate set off
Clause 6.7
➝ Contractor fails to
comply with AI
regarding defective
work
➝ Employer may
engage other Person
to rectify and back
charge
Clause 14.4
➝ Contractor submits
false warranty of
title goods and
material
➝ Loss suffered by
Employer shall be
made good or shall
be set-off
Matters Subjects to Appropriate Set-Off
(Under Clause 30.4)

6. Clause 15.3(b)
➝ Contractor fails to
comply with his
undertaking to
rectify minor defects
➝ Employer may
engage other Person
to execute the works
and shall be set-off
Clause 15.3(c)
➝ Contractor fails to
rectify minor defects
➝ Employer can
accept the defects
but subject to an
appropriate set-off
Clause 15.4
➝ Contractor fails to
attend to the defects
during Defects
Liability Period
➝ Employer may
employ other Person
to rectify or leave the
defects and deduct an
appropriate sum
Matters Subjects to Appropriate Set-Off
(Under Clause 30.4)

7. Clause 15.5
➝ Contractor fails to
attend to the critical
defects which need
urgent rectification
➝ Employer may
appoint other
Person to rectify and
back charge
Clause 19.5
➝ Contractor fails to
insure or continue to
insure works for
public liability
➝ Employer may
insure against the
risk and shall be
set-off
Clause 20.A.3
➝ Contractor fails to
insure works for the
new building
➝ Employer may
insure against the
risk and shall be
set-off
Matters Subjects to Appropriate Set-Off
(Under Clause 30.4)

8. Pre-Conditions for Setting-off
● Architect/QS shall submit detailed assessment of such set-off to
Contractor.
● Architect/Employer shall give written notice to Contractor stating :
- Amount of set-off
- Ground & reasons on the set-off is made

9. Procedure OF Setting-Off (Clause 30.4)
● Employer shall give
written notice within 28
Days before deduction of
set-off.
● The written notice shall
be deliver by hand or
registered post.
Employer can recover the
set-off :
1. Directly from Contractor
as debt by cheque.
2. Deduct from any monies
due to Contractor
through Interim
Certificate.
3. Calling the sum of set-off
from the Performance
Bond.
If Contractor agreed
the set-off by
Employer

10. If Contractor disagreed with
the set-off :
1. Contractor shall refer
such disagreement within
21 Days of receipt written
notice from Employer.
2. State the reasons of
disagreement of such
setting out with
supporting document.
3. Delivery by hand or
registered post to
Employer.
Employer accept the
disagreement on the disputed
amount within 21 Days of receipt
written notice.
Procedure OF Setting-Off (Clause 30.4)
Both parties negotiate and
agreed on a set-off amount.
● Both parties unable to
agree.
● Either party may refer the
dispute to adjudication
(clause 34.1).

11. Referring the Dispute to Adjudication
● Employer can only set-off the amount decided by Adjudicator from
Contractor.
If any party dispute the
adjudication decision
● The decision must
still comply and be
bound until practical
completion.
● Enables the works
on site to proceed.
● The disputing party shall refer the disputed
decision by Adjudication to Arbitration
(clause 34.1).
● He shall give written notice to refer the dispute to
Arbitration to another party within 6 weeks from
the date of Adjudication decision.
If disputing party fails to do so, the Adjudication
decision shall be the final and binding.

12. Restriction on Set-Off
The restriction on Employers rights are:-
- Dispute before practical completion
- Must be within Clause 30.4
- Unable to set-off unless,
- agreed by contractor or adjudication decision
- Liquidated Damages and Set-Off to be resolve separately

13. PAM vs JKR
Procedure for Setting off
Clause 30.4
No clear procedure for Setting
off
12 clauses available to allow
for Setting off
8 clauses available to allow
for Setting off
Resolve Separately from
Interim Payment
Chargeable from
Interim Payment
Disputes on Setting off
Clause 34.1
No clear remedies during the
disputes on Setting off
Enable Employer to make Setting off from Performance Bond /
Retention Sum

14. Q1 : Can the employer set-off payments
unilaterally for defects not required 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.

15. Q1 : Can the employer set-off payments
unilaterally for defects not required 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.

16. Cannot.
Even though the contractor has committed a breach of
his obligation by failing to repair the the defects, the
employer cannot set-off payments without the consent of
the contractor under clause 30.4.

18. Q1 : Can the employer set-off payments
unilaterally for defects not required 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.

19. There are several remedies available to the employer:
1. Clause 6.5(c): The Employer can instruct the Architect to issue an AI
to ask the Contractor to rectify with no adjustment to
the Contract Sum.

20. 2. Clause 6.5(e) : Employer may accept such works as they are but
subject to an appropriate set off.

21. 3. Clause 6.7 : Employer can employ another contractor as third party
to rectify the works to comply with the AI and any loss
and expenses shall be back charged to the contractor.

22. 3. Clause 30.2 : The Architect can only certify the total value of the work
properly executed in interim certificate, so if the work
that is not compliance with BQ, the employer have the
right to not make such payment.

23. 5. Clause 30.4 : Given if the previous point are valid, the Employer seek
for set-off from Contractor through a debt or
deducting monies due through interim certificate or
calling the set-off amount from Performance Bond.

24. 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?

25. 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?

26. If the Contractor dissatisfied with the Adjudicator’s
decision on a set-off dispute,
● Contractor must still comply and be bound by the decision until
practical completion (Clause 34.4)
○ To proceed with the Works on site adhering to the temporary
decision
● Contractor can refer the disputed decision of adjudicator to an
arbitration (Clause 34.1)
○ Give written notice to refer the dispute to arbitration to other party
within 6 weeks from the date of adjudicator’s decision
○ If the disputing party fails to do so, the adjudicator’s decision shall
be the final and binding.

27. 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?

28. the conditions that trigger a set-off actions by the
Employer
● Architect/QS shall submit detailed assessment of such
set-off to contractor (Clause 30.4 (A))
● Architect/Employer shall give written notice to contractor
by stating the following (Clause 30.4 (B)):
- Employer intents to set-off the sum
- The ground and reasons on which the set-off is made.

29. Q3 : Why are set-off and Liquidated Damages
taken up by Employer separately and is not stated
in Interim Certificate? Can the Employer refer a
set-off dispute to arbitration during the
construction period?

30. Q3 : Why are set-off and Liquidated Damages
taken up by Employer separately and is not stated
in Interim Certificate? Can the Employer refer a
set-off dispute to arbitration during the
construction period?

31. Clause 30 - Certificates and Payment

32. Clause 30 - Certificates and Payment

33. Clause 30 - Certificates and Payment

34. Gilbert-Ash (Northern) Ltd
vs
Modern Engineering (Bristol) Ltd
[1974] AC 689
- Precedent for Contract Law
Lord Morris suggested that:-
“When parties enter into a detailed building contract there are, however, no
overriding rules or principles covering their contractual relationship beyond
those which generally apply to the construction of contracts .... Nor, if a contract
provides for the issuing of interim certificates, should it be supposed that debts
of a special class will come into existence, i.e. debts in relation to which there
cannot under any circumstances be any defence or set-off. “

35. Dataran Rentas Sdn Bhd
vs
BMC Constructions Sdn Bhd
[2008] 2 MLJ 856
- Adopting PAM Standard Form Building Contract 1969 (Without Quantities)
- The appellant failed to make payment to the respondent for amounts due
under four interim certificates because there were defective works for
set-off.
- Zulkefli JCA found that:-
“Relying on the dictum in Pembinaan Leow Tuck Chui that the right of set-off is
restricted to those expressly allowed under the contract. Hence, the appellant
had no right to set-off under the PAM contract against the certified sum.”

36. Clause 30 - Certificates and Payment

37. - Expressio Unius Est Exclusio Alterius law principle
- Disputable issues, certifier will not interfere
- could give rise to serious economic strains on a contractor’s cash
flow
Rationale Behind the Principle?

38. Q3 : Why are set-off and Liquidated Damages
taken up by Employer separately and is not stated
in Interim Certificate? Can the Employer refer a
set-off dispute to arbitration during the
construction period?

39. Clause 34.0 - Adjudication & Arbitration

40. Set-Off
Dispute
During
Construction
Practical
Completion
ArbitrationAdjudication
21 Days
Written Notice
Decision
Dispute
Resolve Resolve
6 Weeks
Written Notice

41. Adjudication is a contractual or statutory procedure for swift interim
dispute resolution. The decisions are binding unless and until they are
revised by arbitration or litigation.

42. QUESTIONS

43. QUESTION 1 :
When both parties unable to agree on the set-off amount, either party
shall refer the dispute to adjudication and such dispute shall be referred
to an adjudicator which agreed between both party. What should the
party do when another party disagree to the adjudicator appointed ?

44. QUESTION 1 - Answer
Clause 34.2
● When a party refer dispute under Clause 34.1, such dispute shall be
referred to an adjudicator which agreed between both party.
● If a party fails to agree on the appointment after 21 Days from the
date of written notice to concur the appointment of the adjudicator.
● The initiating party shall apply to the President of Pertubuhan Akitek
Malaysia (PAM) to appoint an adjudicator.
● Such Adjudicator deemed to be appointed with agreement of both
party.
● The adjudicator will usually provide his terms when accepting an
appointment. He is entitled to reasonable fees and expenses.

45. QUESTION 2:
Knowing the Employer are able to recover the set-off from the
Performance Bond, how is the deduction made to the Performance Bond?

46. Well Done!