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09 September 2019
Retrospective or prospective?
Accrual of defence
Breach of natural justice
Harmonious interpretation with other laws
Injunctions in adjudication
Due date of payment
Refund of costs and expenses after trial
Loss and expense claim from delays
Prerequisite for enforcement
Special circumstances for stay
In 2018 Malaysia saw considerable developments in case law on statutory adjudication. Stakeholders' use of this form of dispute resolution mechanism continues to grow exponentially with no sign of abating. This article encapsulates and examines some of the significant decisions that were handed down by the Malaysian courts in 2018 and their impact on statutory adjudication under the Construction Industry Payment and Adjudication Act 2012 (CIPAA).
Notable among the 2018 case law is Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd ( 10 CLJ 293), in which the Court of Appeal adopted a different view to the rationale expressed in UDA Holdings Bhd v Bisraya Construction Sdn Bhd ( 11 MLJ 499) by holding that Section 35 of the CIPAA, which outlaws conditional payment clauses under the statutory adjudication regime, is prospective in nature.
In Jack-In Pile, the construction contract contained a 'pay-when-paid' clause, which stated that the appellant had no obligation to pay the respondent until the appellant received payment from its principal. Unfortunately, the appellant's principal was subsequently wound up. Consequently, payment to the respondent was stalled. The respondent then commenced adjudication proceedings against the appellant. During these proceedings, the appellant relied on the construction contract's pay-when-paid clause. On the other hand, the respondent contended that Section 35 rendered the pay-when-paid clause void. It was undisputed that before the adjudication proceedings, the parties had complied with the pay-when-paid clause in relation to payments under the construction contract.
In deciding whether Section 35 applied to the construction contract between the parties, which existed before the CIPAA came into force on 15 April 2014, the Court of Appeal found that "CIPAA 2012 is prospective in nature". The court then concluded that Section 35 relates to the contractual parties' substantive right and without clear wording in the statute, such substantive right must be given a prospective effect, thereby validating the pay-when-paid clause.
Notwithstanding the above, in addressing the same question of whether the CIPAA has a retrospective or prospective effect, the high court in Vistasik Sdn Bhd v BME Tenaga Arus Sdn Bhd ( 1 LNS 1278) found Jack-In Pile to be inconsistent with the Federal Court's decision in View Esteem Sdn Bhd v Bina Puri Holdings Berhad ( 8 AMR 167), which had impliedly accepted the decision in UDA Holdings that the CIPAA applies retrospectively. The high court in Vistasik arrived at its decision as it found that because the Federal Court in View Esteem did not expressly approve or disapprove UDA Holdings, it may arguably be said that the Federal Court in View Esteem had accepted the decision in UDA Holdings.
Similarly, in Iskandar Regional Development Authority v SJIC Bina Sdn Bhd ( 1 LNS 1194) the high court found that the Federal Court in View Esteem did not overrule the legal position on the retrospective application of the CIPAA that had been laid down in UDA Holdings. The high court further found that Jack-In Pile, which did not consider the Federal Court's decision in View Esteem, had not dealt with the general application of the CIPAA, but dealt specifically with Section 35 in relation to a conditional payment clause. The high court in RH Balingian Palm Oil Mill Sdn Bhd v Niko Bioenergy Sdn Bhd ( 1 LNS 1007) shared the same view in finding that Jack-In Pile had been decided under Section 35.
Whether the whole of the CIPAA applies retrospectively or prospectively remains to be decided by the Federal Court in Jack-In Pile, which is now pending appeal in Malaysia's apex court.
In Mecomb Malaysia Sdn Bhd v VST M&E Sdn Bhd ( 8 CLJ 380A) it was held that a defence raised by a respondent based on events that occurred after the issuance of a payment response or notice of adjudication cannot be raised in adjudication proceedings. This case was referred to in Emerald Capital (Ipoh) Sdn Bhd v Pasukhas Sdn Bhd ( 1 LNS 459). In the aforementioned cases, the defence of set-off raised by the respective respondents accrued only after the issuance of the payment response or notice of adjudication. In such circumstances, an adjudicator can decline considering the said defence as they may not have the necessary jurisdiction to do so.
The principle established by the Federal Court in View Esteem was distilled and followed by the Court of Appeal in Leap Modulation Sdn Bhd v PCP Construction Sdn Bhd ( 1 MLJ 334) – namely, that an adjudicator's failure to consider defences, although not set out in the payment response but in the adjudication response, amounts to a breach of natural justice which dictates that the adjudication decision be set aside. It is believed that the Federal Court has granted leave to appeal against the Court of Appeal's decision.
As was held by the high court in Mecomb, it is prudent to actively pursue a breach of natural justice argument under a setting aside application pursuant to Section 15 of the CIPAA, rather than passively raising such argument in defending a stay application under Section 16 of the CIPAA:
if the complaint is breach of natural justice for wrongful refusal of the adjudicator to assume jurisdiction, then the complainant such as the defendant here must make the active challenge under s.15 of the CIPAA against the error. It is insufficient in my opinion merely to rely on a passive challenge in aid of a stay as done herein in this application.
In CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd ( 1 LNS 380) the high court, in interpreting the right under Section 30 of the CIPAA of a successful party in an adjudication decision to require the principal of a losing party that has been wound up to make direct payment to the successful party, considered the prohibition against undue preference under the insolvency regime. It was held that any direct payment by a principal to a successful party from monies payable to a losing party which has been wound up would be tantamount to undue preference, as the successful party would be given priority over the other unsecured creditors of the losing party and fall foul of the pari passu principle under the insolvency rules.
In Sazean Engineering & Construction Sdn Bhd v Bumi Bersatu Resources Sdn Bhd ( 1 MLJ 495) the appellant appealed against the high court's decision that dismissed, among other things, its application to set aside three adjudication decisions made in the respondent's favour. When the respondent commenced the adjudication proceedings, the number of directors on its board had been reduced below the statutory minimum of two directors required under the Companies Act 1965 (then in force) and thus rendered the respondent incapacitated, dysfunctional and lacking the necessary locus standi to commence adjudication proceedings. It was against this background that the Court of Appeal set aside the three adjudication decisions.
In Kerajaan Malaysia v Shimizu Corporation ( 1 LNS 202) the plaintiff's government applied to set aside an adjudication decision on the grounds that the adjudicator had acted in excess of jurisdiction by reason that the contract, which provided for the construction of a water transfer tunnel from Pahang to Selangor, was exempted from application of the CIPAA pursuant to Order 2(1) and the First Schedule of the Construction Industry Payment and Adjudication (Exemption) Order 2014. In deciding whether the contract fell within the exemption order, the judge held that the government must prove that:
a properly authorised person acting pursuant to a legitimate source of executive power has declared the contract to be one relating to national security or that it involves a national security facility.
In Euroland & Development Sdn Bhd v Tack Yap Construction (M) Sdn Bhd ( 1 LNS 896), in deciding whether it could intervene in adjudication proceedings by granting an injunction to restrain ongoing adjudication proceedings, the high court considered Parliament's intention under Section 27(3) of the CIPAA. Section 27(3) allows an adjudicator to proceed with adjudication proceedings as if they have jurisdiction notwithstanding that a jurisdictional objection has been raised. The high court declined to intervene or grant the injunction. Justice Lee Swee Seng found that it was not plain and obvious in the payment claim that the adjudicator had no jurisdiction but rather a question as to whether the adjudicator had exceeded his jurisdiction, which is a question of fact to be determined by looking into the factual circumstances of the case. The high court held, per obiter, that in cases where there is no jurisdiction to begin with, the court is perfectly positioned and has the power to intervene and grant an injunction to stay the adjudication proceedings.
Presumably, injunctions to stay ongoing adjudication proceedings will be granted in only limited circumstances – for example, when:
In MRCB Builders Sdn Bhd v Southern Builders (J) Sdn Bhd ( 1 LNS 1508) the appellant's main contractor applied to set aside the adjudication decision on the grounds that the adjudicator lacked jurisdiction as there was no dispute given that the appellant had paid all monies as certified in the payment certificate. The Court of Appeal unanimously held that the respondent's claims of under-certification fell within the ambit of the CIPAA notwithstanding that the appellant had made full payment of the certified sum. It was found that the dispute between the parties related to the difference in the amount claimed and the amount certified, and that the payment was not for the full sum claimed. Thus, the CIPAA extends to claims for payment which arise due to under-certification and is not confined to non-payment of certified amounts.
In SKS Pavillion Sdn Bhd v Tasoon Injection Pile Sdn Bhd ( 2 CLJ 704) the plaintiff successfully set aside the adjudication decision made in the defendant's favour on the grounds that the adjudicator did not have jurisdiction, as the payment claim – which failed to set out the due date for payment of the amount claimed – was void for failing to comply with a basic and essential requirement of Section 5 of the CIPAA. Judicial Commissioner Ahmad Kamal Md Shahid was of the view that the due date for payment was essential to a cause of action, as it is only if the due date has passed that the defendant has an accrued cause of action. The judicial commissioner also found that an irregularity in a payment claim cannot be cured under Section 26 of the CIPAA as the adjudicator does not have the competence or jurisdiction to do so without a valid payment claim. In other words, non-compliance with the statutory requirements with respect to a payment claim is a fatal defect.
In Gaya Analisa Sdn Bhd v Oceanergy Gases Sdn Bhd ( 1 LNS 1016) the plaintiff successfully proved its claim against the defendant after a full trial. This resulted in the adjudication decision (found in the defendant's favour), which had an interim binding effect, in favour of the defendant to be superseded by the high court's judgment. Consequently, the money that the plaintiff had paid to the defendant pursuant to the adjudication decision had to be returned. However, in determining whether such refund included the costs, fees and administrative charges relating to the statutory adjudication proceedings (the amounts of which were ordered to be paid by the adjudicator), the high court held that such costs and expenses "shall not be taken into account", as there was nothing wrong with the adjudication decision because it was not set aside under Section 15, but rather being enforced under Section 28 of the CIPAA.
There appears to be a difference in the treatment between a claimant's claim and a respondent's claim for loss and expense arising from delays in the completion of work.
On one hand, SKS Pavillion echoed the high court's finding in Syarikat Bina Darul Aman Berhad (collectively referred to as BDB-Kery (joint venture)) v Government of Malaysia ( 4 AMR 477) that the claimant's loss and expenses claim arising from delays in the completion of work falls within the scope of the CIPAA.
On the other hand, liquidated and ascertained damages arising from late completion of works, which are usually raised by a respondent in its payment response as a counterclaim, was found in Transmission Technology Sdn Bhd v PESB Engineering Sdn Bhd ( 7 CLJ 516) to be "too contentious for an adjudicator to be able to deal with during adjudication proceedings" and that:
any refusal by an adjudicator to deal with the issue of LAD [liquidated and ascertained damages] especially by way of set-off against a payment claim, by itself, does not amount to a denial of natural justice.
However, in PESB it does not appear that the Federal Court's decision in View Esteem was referred to, even though the high court's decision in View Esteem was cited. The present legal position, as established by the Federal Court in View Esteem, is that an adjudicator may be found to be in breach of natural justice if they fail to deal with the defences raised in a payment response. Notably, in Cubic Electronics Sdn Bhd (in Liquidation) v Mars Telecommunications Sdn Bhd ( 2 CLJ 723), the Federal Court changed the law relating to liquidated and ascertained damages; thus, allowing, in appropriate circumstances, for reasonable compensation to be awarded for liquidated and ascertained damages without requiring a party to prove the actual loss it suffers. Yet, it remains to be seen how the change in law will affect a liquidated and ascertained damages claim made under the CIPAA.
The high court in Tan Eng Han Construction Sdn Bhd v Sistem Duta Sdn Bhd ( 1 LNS 428) appears to have held that enforcement of an adjudication decision, even if it remains unchallenged by the losing party, would be prohibited if it were found that the adjudicator lacked the jurisdiction to decide the dispute or that there was patent non-compliance with Section 12 of the CIPAA, for instance, where the adjudication decision:
Following View Esteem, the courts have been given some degree of flexibility to evaluate each case on its merits without the fetter of a predetermined test when granting a stay under Section 16. It appears that the 'special circumstances' test, which is the test applied in granting a stay of execution of court judgments, may be considered when determining whether to grant a stay of the adjudication decision under Section 16 of the CIPAA. In Ireka Engineering and Construction Sdn Bhd v PWC Corporation Sdn Bhd ( 1 LNS 51), in considering the said test, the Court of Appeal appears to have adopted a liberal interpretation of Section 16, as established in View Esteem. In short, the criterion for a stay under Section 16 is no longer limited to a party's financial status.
While Malaysia's case law on statutory adjudication continues to develop and the scale and complexity of disputes referred under the CIPAA increases, the interpretation of the CIPPA established under the growing body of case law must remain consistent to ensure that the statutory adjudication system continues to enjoy the confidence it has now earned.
For further information on this topic please contact Jocelyn Yean Tse Lim at SKRINE by telephone (+60 3 2081 3999) or email (firstname.lastname@example.org). The SKRINE website can be accessed at www.skrine.com.
An earlier version of this update was published in Skrine's Legal Insights (Issue 2/2019).
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