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23 March 2021
When a contractor takes over its subcontractor's works, can the contractor make a claim in adjudication against the subcontractor? Scenarios such as this are not uncommon as contractors may be obliged to take over their subcontractor's works when the subcontractor can no longer proceed therewith, refuses to carry out rectification works or, worse, abandons the project altogether.
Contractors which find themselves in such circumstances and wish to make a claim against the subcontractor by way of adjudication under the Construction Industry Payment and Adjudication Act (CIPAA) 2012 should be wary of the recent high court case Hiform (M) Sdn Bhd v Pembinaan Bukit Timah Sdn Bhd and another case ( MLJU 2452).
Pembinaan Bukit Timah Sdn Bhd (PBT) was appointed by the main contractor to carry out a construction project in Putrajaya. Thereafter, PBT appointed Hiform (M) Sdn Bhd by a letter of award dated 8 January 2015 (the contract) as its subcontractor to supply labour, materials and all machinery, equipment and tools for the execution and completion of reinforced concrete works for the project (the works).
However, disputes arose between the parties in respect of the project's progress, which in turn led to Hiform withdrawing from the project and PBT taking over its execution until completion.
On 7 October 2019 PBT issued its payment claim pursuant to the CIPAA but received no payment response from Hiform. On 24 December 2019 PBT commenced adjudication proceedings against Hiform. In its adjudication claim, PBT claimed:
After reviewing the parties' respective submissions, the adjudicator determined that she had jurisdiction to determine the dispute before her and that Hiform was to pay PBT RM14,990,503.60, which consisted of liquidated damages and additional costs. Dissatisfied with the adjudication decision, Hiform applied to the high court to have the decision set aside. By reason of non-payment of the adjudicated sum, PBT also applied to enforce the decision.
At the high court, Hiform contended that PBT's claims did not fall within the definition of 'payment' under the CIPAA as they were for rectification and completion of the project, as well as liquidated damages which essentially flowed from Hiform's breach of the contract.
However, PBT argued that its claims were contractual claims which were expressly provided for in the contract. Further, PBT contended that:
Having analysed the various case authorities and abiding by the principles of statutory interpretation, the high court, in setting aside the adjudication decision, held that the source of a claim is what determines whether it is covered under the CIPAA and that the construction pyramidal contracting structure does not matter.
While debt for unpaid work done or services rendered under the express terms of a construction contract which form part and parcel of the consideration (see Section 2(d) of the Contracts Act 1950) payable thereunder would be covered under Sections 4 and 5 of the CIPAA, unpaid debt or damages which arise from a breach of the contract are not.
As PBT's claims arose from Hiform's alleged repudiatory breach of contract, the claims did not form part of the consideration of the contract to carry out the works for the project.
The high court further clarified that:
The High Court has given further clarity that the CIPAA is not the proper avenue for claims for damages arising from a breach of contract. However, parties can raise such claims as a cross-claim of defence or set off against a claimant's claim.
For further information on this topic please contact Foo Joon Liang or Tasha Lim Yi Chien at Gan Partnership by telephone (+603 7931 7060) or email (firstname.lastname@example.org or email@example.com). The Gan Partnership website can be accessed at www.ganlaw.my.
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