After much anticipation, the Federal Court has finally addressed one of the most controversial questions in Malaysian construction disputes: does the Construction Industry Payment and Adjudication Act 2012 (CIPAA) apply retrospectively or prospectively to construction contracts.
In Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd(1) and Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd,(2) the Federal Court unanimously held that the CIPAA applies prospectively to construction contracts signed after the act took effect on 15 April 2014.
In Jack-In Pile, the Federal Court addressed the following questions of law:
- Does the CIPAA apply to construction contracts which were entered into before the act took effect?
- If the answer to the above question is yes, does Section 35 of the CIPAA also apply to construction contracts which were entered into before the act took effect?(3)
Further, in Ireka Engineering, the Federal Court addressed the following questions of law:
- Does the CIPAA give rise to substantive rights, thereby rendering it non-retrospective in nature and the adjudication decision in question liable to be set aside?
- Did the CIPAA apply retrospectively to a subcontract that was signed and dated before the act came into force or did it render the entire adjudication proceedings, including the adjudication decision, void?(4)
On 16 October 2019 the Federal Court unanimously held in both cases that the CIPAA does not apply to construction contracts which were entered into before the act took effect. In other words, the CIPAA applies prospectively in the construction industry.
Jack-In Pile
The contract in question in Jack-In Pile was dated 16 March 2011. The dispute stemmed from Clause 11.1, which provided for a pay-when-paid model for the related progress claims.
At first instance, the high court held that as Clause 11.1 was a conditional payment provision, it was rendered void by Section 35 of the CIPAA. The high court stated that the CIPAA applies to all construction contracts and disputes regardless of whether the contract was made or the dispute arose before or after the act's enforcement date.
On appeal, the Court of Appeal found that Section 35 relates to and affects contractual parties' substantive rights as it removes their right to rely on a pay-when-paid clause which has been agreed in the contract. Thus, the court concluded that Section 35 applies only to contracts entered into after the act came into force (ie, it is prospective in nature).
Ireka Engineering & Construction
The agreement in question in Ireka Engineering was entered into on 15 September 2009. The appellant sought to apply the cross-contractual set-off provisions under Clause 13.1.
By virtue of the expression "a construction contract" in Section 5(1) of the CIPAA, both the Court of Appeal and the high court held that the CIPAA does not allow cross-contractual set-offs and denied the appellant's right to rely on Clause 13.1 for that purpose.
The Federal Court stated that, in common law, there is a prima facie rule in the construction industry that a statute should not be interpreted retrospectively so as to impair a party's existing substantive right or obligation unless the legislation clearly intends otherwise.(5)
The Federal Court stressed that the CIPAA cannot apply retrospectively as it would prejudicially affect the parties' vested rights or the legality of the transaction under the contract.(6)
The Federal Court referred to Sections 19(1), 43(a), 2(1) and 2(3) of the Interpretation Acts 1948 and 1967 and held that if Parliament had intended for the CIPAA to be applied retrospectively, given its full awareness of the industry's cash flow problems, it would have expressly included a provision to that effect.(7)
The CIPAA contains no provisions which expressly relate to the issue of its retrospective or prospective application. Thus, in the absence of a clearly worded provision to the contrary, the Federal Court affirmed that the CIPAA does not apply retrospectively in any circumstance. This principle is entrenched in the Article 66(5) of the Federal Constitution.(8)
The Federal Court has confirmed that the CIPAA applies only to construction contracts which were entered into after 15 April 2014 (and not before). Thus, payment disputes which arise from construction contracts entered into before 15 April 2014 must be resolved through the usual course of arbitration or litigation. Hence, any adjudication proceedings based on a claim arising from a construction contract which was entered into before 15 April 2014, including adjudication decisions, are null and void.(9)
However, some ambiguity remains, as the Federal Court did not address the following questions:
- Where an adjudication decision has been enforced as a court judgment, can the aggrieved party apply under Section 15 of the CIPAA to have the decision (and consequently the court judgment) set aside?
- Can an aggrieved party (including an employer that has made a payment pursuant to Section 30 of the CIPAA) demand a refund of the monies paid in accordance with an adjudication decision which is void?
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Endnotes
(1) Civil Appeal 02(f)-58-07/2018(B).
(2) Civil Appeal 02(f)-124-12/2018(W).
(3) Jack-In Pile at Paragraph 4.
(4) Ireka Engineering & Construction at Paragraph 4.
(5) Jack-In Pile at Paragraph 14 and Ireka Engineering & Construction at Paragraph 43.
(6) Ibid at Paragraphs 59 and 85, respectively.
(7) Ibid at Paragraphs 25 and 52, respectively.
