I received a request for mediation from an architect friend whom project has reached a dead-lock. Apparently, the pandemic has more often than not, caused havoc to the construction industries. I am more welcome to mediate for the parties. What happened next, send shivers to my spine. As a practice, I always perform a pre-mediation meeting with the parties. Foremost, it allows me to set out from the onset the procedures and efforts in mitigating parties’ expectations of the mediation. Second, is to allow the mediator to understand the nature of the dispute more and to correlate information.

The parties informed me that, the project started on a good footing, but ended on a bad note of delay and non-payment. That is very common in most of the disputes, I encountered. I thought to myself that this matter is mediatable. The architect also informed that since the project has gone ‘sour’ the contractor has in fact made an official complaint to LAM on the basis of the architect failing to perform its role as a contract administrator. That matter, is another good story for another day. Notwithstanding the complaint, the contractor proceeded to mount a claim against the employer. But realizing that it is going to be an expensive affair, they decided to mediate their disputes.

Upon probing further, they disclosed that from the onset, the employer has requested the project to be procured based on two separated contracts. One is as per the tendered sum, [cheaper-version], we called contract-A, two, the employer’s request [manipulated version], we called contract-B. Contract-B was necessary because the Bank would only finance 80% of the contract sum. So, in order to finance 100%, the tender price will need to be increased another 20%, thus the manipulation. Problem arises is when the employer refused to pay and in retaliation, the contractor demanded that they had never agreed to contract-A and all these while they only agreed on contract-B.

So, what made me shiver is the legal question of whether contract-B being the manipulated version is a fraudulent misrepresentation to the bank? If so, being a fraud, the case is criminally laced, can mediation be proceeded on this account?

The law governing mediation holds, foremost, “this Act shall not apply to – (a) any dispute regarding matters specified in the Schedule [11. Any criminal matter]”[1]; second, “notwithstanding ss(1) [no person shall disclose any mediation communication], mediation communication may be disclosed if, (c) the disclosure is required under this Act for the purpose of […] criminal proceedings […]”[2]; third, “Any mediation communication is privileged […], (2) notwithstanding ss.(1) [privilege], the mediation communication is not privileged if – (d) it is used or intended to be used to plan a crime, […] to conceal a crime […]”[3]; and finally, “the mediator shall not be liable […] unless the act or omission is proved to have been fraudulent […]”[4].

The law governing fraudulent misrepresentation holds, that ‘misrepresentation’ is, being an unambiguous ‘false statement of facts’[5], addressed to the party misled[6], inducing the ‘victim’ into entering a contract.[7] However, the law[8] assumes that one commits fraudulent[9] misrepresentation, which is a criminal offence[10], and the burden of proof is vested upon the defendant[11]

The fact is the mediation is yet to commence; there is an attempt to fabricate the contract sum for the purpose of concealment and fraudulent misrepresentation may have elementally observed but has yet to be ascertained by the court. In application, the request of the employer on contract-B contains the element of fabrication, the contractor, consultant QS and architect are equally involved in such act. Matter turns complicated when the consultant QS who facilitate such arrangement had since passed away, leaving the architect to be potentially ‘grilled’ in the court of law.

Concluding, the mediation was not conducted owing to the element of crime. Parties were left to resolve their matters amicably. This is the sort of dispute that can never be mediated, arbitrated nor adjudicated. The only venue for recourse is the criminal court. Lesson learnt, it is a very common practice in the industries that a separate contract was kept for different purposes and this followed by issuance of certificates by the consultants. As contract administrator, we cannot guarantee that parties will keep to their end of the bargain, so, when matters are not within the controls anymore, hell break loose and consultants are trapped. Worth the risks?  

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[1] S.2(a) Mediation Act 2012 (‘MA2012’)
[2] S.15(2)(c)MA2012
[3] S.16(2)(d)MA2012
[4] S.19MA2012
[5] Kleinwort Benson v LincolnCC.[1999]2AC349
[6] Brennon v Bolt[2004]EXCACiv1017
[7] Renault v Fletpro[2007]EWCH2541
[8] Hedley Byrne v Heller[1964]AC465
[9] Derry v Peek(1889)14AppCas337
[10] Barclays Bank v O’Brien[1994]1AC180
[11] Esso v Mardon[1976]QB801

This article attempt to demonstrate how a scenario requiring a ‘legal advice’. The scenario given is fictional, but the application of law mirrored real event. Any resemblance of the character in this scenario, to anyone alive or dead or any institution existed or non-existent, is purely coincidental.
 
[SCENARIO]: ‘Sure-win’ and ‘Must-win’ enter into a contract issued by ‘Malu-Usia’ Society of Project-Managers (“MSPM”), hereinafter ‘MSPM-Form’. The form contains an exclusion clause fine-printed, “parties are held to rely on their judgement when using this form of contract and MSPM takes no liability whatsoever to anyone in connection with the usage of the form”. The dispute clause contained therein, state “Any dispute[1], arising out of or relating[2] to this contract, shall be finally determined[3] by arbitration, by applying to the President of Malu-Usia’ Society of Project-Managers (“MSPM”) to appoint an Arbitrator, in accordance with the MSPM Arbitration Rules in force at the time of the commencement of the arbitration.”
 
Parties went into dispute. Sure-win commence arbitration by an application to MSPM President, as they cannot agreed to one another on the candidate of the arbitrator. The parties foresee that an ‘institutionalize administered arbitration’ would be fair and just. An arbitrator was appointed and the proceeding went on as usual. The counsel of ‘Must-win’ found out that the constitution of incorporation of MSPM in accordance with the Society Act of Malu-Usia, does not contain any provision that MSPM can accord any services of alternative dispute resolution (‘ADR’). In fact, all statutes of Malu-Usia mirrored those of the Malaysian Law. The counsel pose a challenge that due to the alleged dysfunctional of the dispute clause, his client Sure-win’s position has now been prejudiced on the basis that he has been misled fraudulently by MSPM through the use of the MSPM-Form. ‘Sure-win’ is contemplating to sue MSPM.
 
You are appointed by MSPM. Discuss on the point of law, the legal implications of both your client and Sure-win.
 
To consider the legal implications of both Sure-win and MSPM, [THE ISSUES] are: foremost, whether MSPM has the jurisdiction to provide services beyond what has been incorporated in its object of incorporation in accordance to the law? If so, whether MSPM breaches the law? If so, whether the MSPM President has the power to appoint arbitrator for the parties as in accordance to the provision of the dispute clause? If so, whether the President is acting on its personal capacity in such an appointment or in the office of the MSPM President? If so, whether the President has acted in ‘ultra vires’ against the object of the society he represented? If so, whether the dispute clause is dysfunctional due to the illegality of the dispute clause itself on the context of the severe lack of inherent jurisdiction of the society to provide such services? Is it not an ad-hoc arbitration that the MSPM President is at liberty to choose who he wishes? If so, whether the party has been fraudulently misled? Ultimately, who is liable?
 
[THE LAW] holds that: foremost, a society cannot provide any means of services that is not prescribed in its objects of incorporation.[4] Further, the law also provided that, a President is an individual who acted in its capacity as representative of the society as an ‘office-bearer’ in accordance to the Act.[5] In addition, the law provides that ‘misrepresentation’ is, being an unambiguous ‘false statement of facts’[6], addressed to the party misled[7], inducing the ‘victim’ into entering a contract.[8] However, the law[9] assumes that one commits fraudulent[10] misrepresentation, which is a criminal offence[11], and the burden of proof is vested upon the defendant[12]. As for the ‘fine-prints’, the law allows that terms can be incorporated by notice, where it must be given before the time of concluding the contract[13], terms must be contained/referred in the document[14] i.e. contractual[15], reasonable steps be taken to bring the term[16] to the party’s attention[17] i.e. a ticket[18] must be explicit[19], with a clause not in-front of ticket (not incorporated)[20], reference to clause is obliterated (not incorporated)[21], reference to a website (incorporated)[22], and ‘more unusual and unreasonable’ is the clause, higher degree of notice is required[23]. Finally, the issue of illegality in contract law, it holds that illegality comes in different ‘sizes and shapes’ and it is difficult to categorise. Generally, it covers ‘commissioning of a legal wrong’ or ‘contracts against public policy’[24].[25] Illegality affect the contract in two ways, ab-intitio as to its formation[26] and ‘in the performance’[27], i.e. whether a party entitle to sue to recover losses despite the illegality[28], on such basis he was unaware of the illegality[29]? What if the party has knowledge about the illegality, he is unable to sue.[30] The subject of the contract is made illegal ab-intitio, i.e. against the law[31].
 
[THE EVIDENCE] shows that: MSPM’s object of incorporation, does not contain any provision that MSPM can accord any ADR services. If so, whether the President is acting on its personal capacity in such an appointment or in the office of the MSPM President? By the act of the MSPM President, he in his capacity as an office-bearer, not representing himself, but the society[32] and has acted ‘ultra-vires’ against the object of the society[33]. Thus, whether MSPM has the jurisdiction to provide services beyond what has been incorporated in its object of incorporation in accordance to the law? The short answer is, ‘no’ as the law forbade it. [34] If so, whether MSPM breaches the law? MSPM has not only crossed the law, the society is tantamount to be deregistered.
 
If so, whether the MSPM President has the power to appoint arbitrator for the parties as in accordance to the provision of the dispute clause? Although the dispute clause require the President to appoint arbitrator, it is evidence that MSPM itself has no provision to accord ADR services. As such an illegal act cannot be contracted. [35]
 
If so, whether the President has acted in ‘ultra vires’ against the object of the society he represented? The President of MSPM has taken unto his own hand to perform an illegal act, on behalves of the society, knowing well that he has not accorded with the jurisdiction to do so. The powers [jurisdiction] has to be laid down from the constitution to the office-bearer.[36] In its absent, where is the power to act?
 
If so, whether the dispute clause is dysfunctional due to the illegality of the dispute clause itself on the context of the severe lack of inherent jurisdiction of the society to provide such services? The original intent and purpose of the dispute clause is not dysfunctional. But arising from the illegality of performance by the President of MSPM, in breaching the very fundamental Act of the incorporation of the society, the dispute-clause, which is by itself a formal contract. The question of is severability[37] in this case is irrelevant. Thus the object of a contract [dispute resolution services] cannot be illegal. Such consistent with the recent ruling that holds the dispute clause is governed by the law of contract, not the seat.[38] Thus, the question how can such dispute clause, drafted so carefully to avoid any ‘pathological defects’ can be dysfunctional? The short answer, is the ‘act of appointing the arbitrator’ itself is made illegal, given this context.     
 
Is it not an ad-hoc arbitration that the MSPM President is at liberty to choose who he wishes? The evidence shows that foremost, parties cannot agreed to one another on the candidate of the arbitrator, so they went to MSPM for institution administered arbitration. The parties foresee that an ‘institutionalize administered arbitration’ would be fair and just. This consideration, in itself, is res ipsa loquitur[39] that arbitration is to be held as an instruction administered arbitration, not ad-hoc.
 
The evidence shows that the constitution of incorporation of MSPM does not accord any ADR services to be rendered. This lead to the next question, if so, whether the party has been fraudulently misled? It is undoubtedly, a contract exist between the user of the form and MSPM. The law holds that ‘misrepresentation’ is, being an unambiguous ‘false statement of facts’[40], addressed to the party misled[41] and the law[42] assumes that one commits fraudulent[43] misrepresentation, which is a criminal offence[44], and the burden of proof is vested upon the defendant[45]. Has the President aware of such false statement? Has he not aware of the constitution of the society he holds as office-bearer? Obviously, he has committed a crime.
 
Ultimately, who is liable? The evidence shows that ‘Sure-win’ position has now been prejudiced on the basis that he has been misled fraudulently by MSPM by virtue of the MSPM-Form. In the said form, it was fine-printed, “parties are held to rely on their judgement when using this form of contract and MSPM takes no liability whatsoever to anyone in connection with the usage of the form”. Can this be said to be an ‘exclusion clause’ for liabilities against MSPM? The law holds that terms can be incorporated by notice, where it must be given before the time of concluding the contract[46] and ‘more unusual and unreasonable’ is the clause, higher degree of notice is required[47]. Since the exclusion term is incorporated in the document[48], although as a fine print, it is legible and constitute a valid exclusion clause. In other words, contract advisors who does not strike out the dispute clause and replace with another more legitimate arbitrator appointing institution, had the greater chances to be liable. Notwithstanding such the MSPM with its entire retinue of office-bearer are criminally liable as to the effect of the breaches to the Act. Criminal offences cannot be contracted out.
 
[Concluding]: The fundamental breach is where the office-bearer, has been contracted to act illegally against the Act. The legal impacts are not only the dispute clause made dysfunctional, but include therein criminal offences and contractual liabilities to the contract advisors, namely Project Managers, Architects and QSes. Thus, caveat emptor.[49]
 
POSTSCRIPT: Upon reading this article, Contract Advisors will have a field day of striking off and amending the dispute clauses, by making sure the institutionalize arbitrations are legitimate in accordance to the law, while lawyers with adverse award, will be lining up in court to set aside due to unenforceability and the police will start knocking at the door of the ‘illegal society’.

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[1] Asia International Arbitration (‘AIAC’) model dispute-clause: ‘any dispute, controversy, difference or claim arising […], including the performance, breach, termination or invalidity thereof, as well as any non-contractual claims’
[2] International Commercial Court (‘ICC’) model dispute-clause: ‘or in connection with’
[3] ICC model dispute-clause: ‘settled’
[4] S. 13.(1)(c)(iii) Societies Act 1966 (‘SA1966’): ‘[the Registrar] may, in the following cases, cancel the registration of any society registered […] (c) if the Registrar is satisfied – (iii) that the society is pursuing objects other than the objects with which the society is registered;’
[5] S.2 SA1966: ‘office-bearer: means any person who is the president […]’
[6] Kleinwort Benson v LincolnCC.[1999]2AC349
[7] Brennon v Bolt[2004]EXCACiv1017
[8] Renault v Fletpro[2007]EWCH2541
[9] Hedley Byrne v Heller[1964]AC465
[10] Derry v Peek(1889)14AppCas337
[11] Barclays Bank v O’Brien[1994]1AC180
[12] Esso v Mardon[1976]QB801
[13] Olley v Marlborough Cort[1949]1KB532
[14] Chapleton v BarryUDC[1940]1KB532
[15] Taylor v GlasgowCorp.(1952)SC440.21
[16] Wilkes v Jessop(2007)CLY795
[17] Parker v SE.Railway(1877)2CPD461; Thompson v LMS. Railway[1930]1KB41:exclusion clause incorporated even if claimant was illiterate; Richardson,Spence v Rowntree[1894]AC217:in contrast if defendant knows claimant is illiterate
[18] Thompson v LMS.Railway[1930]1KB41 and Thornton v ShoeLane Parking[1971]2QB163:not given notice, not incorporated.
[19] Interfoto v Stiletto[1988]QB433
[20] Handerson v Stevenson(1875)LR2Sc&Div470
[21] Sugar v LMS Railway[1941]1AllER172
[22] Impala Warehouse v Wanxiang[2015]EWHC25(Comm)
[23] J.Spurling v Bradshaw[1956]1WLR461
[24] Johnson v Driefontein[1902]AC484
[25] Treitel(2015)
[26] Re Mahmoud and Ispahani[1921]2KB716
[27] St.John Shipping v Joseph Rank[1957]1QB267
[28] Shaw v Groom[1970]2QB504
[29] Marles v Philip Trant[1954]1QB29
[30] Asmore Benson v AV.Dawson[1973]1WLR828
[31] St.John Shipping v Joseph Rank(1957)1QB267
[32] S.2 SA1966
[33] S. 13.(1)(c)(iii) SA1966
[34] Ibid
[35] Re Mahmoud and Ispahani[1921]2KB716
[36] S.49 SA1966
[37] Arbitration agreement is severable from the contract in which it is contained. Any challenge relating to the validity of the underlying contract will generally not affect the validity of the arbitration agreement.
[38] Enka v Chubb [2020] UKSC 38
[39] Latin for "the thing speaks for itself."
[40] Kleinwort Benson v LincolnCC.[1999]2AC349
[41] Brennon v Bolt[2004]EXCACiv1017
[42] Hedley Byrne v Heller[1964]AC465
[43] Derry v Peek(1889)14AppCas337
[44] Barclays Bank v O’Brien[1994]1AC180
[45] Esso v Mardon[1976]QB801
[46] Olley v Marlborough Cort[1949]1KB532
[47] J.Spurling v Bradshaw[1956]1WLR461
[48] Chapleton v BarryUDC[1940]1KB532
[49] Let the buyer beware