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26 October 2020
The Court of Appeal in IRDK Venture Sdn Bhd v Econpile (M) Sdn Bhd(1) and Justice Lee Swee Seng (as he then was) at the High Court in Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd(2) decided on, among of things, the issue of whether an adjudicator has the jurisdiction to decide on a payment claim when the contract has been terminated and whether the contractor is entitled to commence an adjudication proceeding under the Construction Industry Payment and Adjudication Act (CIPAA) 2012 after the contract had been terminated.
Several other High Court cases decided by Justice Lee Swee Seng and Justice Lim Chong Fong have addressed the same issues and provide a more comprehensive perspective of the Malaysian jurisprudence in this area.
IRDK Ventures Sdn Bhd (the employer and respondent in the adjudication proceedings) had awarded Econpile (M) Sdn Bhd (the contractor and claimant) a construction contract. Econpile claimed payment for works done under the contract by serving a payment claim on IRDK for RM4,035,381.87, which was the sum total of two payment claims – Payment Certificate 5R1 amounting to RM1,805,866.65 and Progress Claim 6 amounting to RM2,229,515.22.
IRDK refuted the payment claims on the grounds that Econpile's employment had been terminated by the architect. In the circumstances, IRDK argued that it was under no obligation to make any payment to Econpile pursuant to Clause 25.4(d) of the PAM Conditions of Contract 2006.(3) Consequently, Econpile filed an adjudication claim against IRDK in accordance with the procedure laid down in the CIPAA. IRDK filed its adjudication response disputing the whole of the adjudication claim. The adjudicator allowed Econpile's claim under the payment certificate, but dismissed the uncertified progress claim because it was premature.
High Court proceedings
Econpile then applied to enforce the adjudicator's decision while IRDK applied to set aside the adjudicator's decision in relation to the payment certificate. With the consent of both parties, these two applications were heard together. IRDK's setting-aside application was heard first.
In support of its setting-aside application, IRDK contended, among other things, that it should not be bound to make any further payment to Econpile until a final account is determined on completion of the works, as the contract had been terminated by the architect. This was initially argued as a jurisdictional point, but IRDK's counsel later varied his submission to argue that if a cause of action on a payment claim has not yet arisen on the termination of a construction contract, the adjudicator has no jurisdiction to hear the claim and the adjudicator should have dismissed the payment claim. Following the change in IRDK's position, Justice Lee Swee Seng held that the issue in contention was no longer a question of jurisdiction, but rather a question of contract construction with which the court would generally not interfere, even if the court was minded to arrive at a different interpretation.
Justice Lee Swee Seng went on to state that, even if IRDK had framed the issue as a jurisdictional point, the adjudicator was still entitled to adjudicate the matter for the following reasons (among others):
Court of Appeal
Dissatisfied with the High Court's decision, IRDK appealed against the decision to the Court of Appeal by reverting to the position that the adjudicator has no jurisdiction to decide on the payment claims when the contract has been terminated.
However, the Court of Appeal did not concur with IRDK and agreed with the High Court's decision that the courts must favour an interpretation of the CIPAA that would best promote the purpose and object of the act over an interpretation that would not promote it.(6) The Court of Appeal was of the view that a condition such as Clause 25.4(d) would defeat the purpose of the CIPAA to alleviate cash-flow problems for the unpaid party. In the circumstances, the Court of Appeal unanimously found no merit in IRDK's appeal and dismissed it.
In dealing with the issue of whether an adjudicator has the jurisdiction to decide on a payment claim when the contract has been terminated where Clause 25.4(d) applies to the parties, Justice Lee Swee Seng in BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd(7) and Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd(8) dismissed the respondents' applications to set aside the respective adjudication decisions on the same basis as his earlier grounds in Econpile.
In Genting Malaysia Berhad v PLM Interiors Sdn Bhd(9) Justice Lim Chong Fong agreed with Lee Swee Seng J's decisions in all three of the High Court cases, holding that Clause 25.4(d) is a conditional payment term which is prohibited by Section 35 of the CIPAA.
Notwithstanding the courts' position that Clause 25.4(d) is a conditional payment term that is prohibited by Section 35 of the CIPAA, it is imperative that one appreciates the rationale behind the application of Clause 25.4(d). Clause 25.4(d) is a mechanism worked into a construction contract with a view to relieve the employer from making further payments and the provision acts as security for the employer to offset any amounts due to the contractor in the final account. This measure operates until all claims by the employer are offset, after which any amount still due and owing to the contractor is reflected in the final certificate. In that sense, there exists a school of thought which takes the view that the approach taken by the courts – in interpreting Clause 25.4(d) as having the effect of making the employer's payment obligation conditional – is a departure from the description of a conditional payment provision under Section 35(2) of the CIPAA.
Given the reasoning of the decisions in the abovementioned cases, it appears that the courts may still not be prepared to favour the employer's financial interests over the need to uphold the purpose of the CIPAA to alleviate the cash-flow problems that might be faced by the unpaid party. Therefore, the application of Clause 25.4(d) as it stands (which is also included in the PAM Conditions of Contract 2018) is redundant in principle in adjudication proceedings under the CIPAA.
It is interesting to note that the ratio in Lee Swee Seng J's decision in Econpile also recognises the application of Clause 25.4(d) as a question of contract construction which lies wholly with the adjudicator in adjudication proceedings. In this regard, there may be an arguable proposition that if the adjudicator decides to construe Clause 25.4(d) as not being a conditional payment term under the CIPAA, then in such a situation the court may take the view that it cannot interfere with that decision.
The courts' reasoning in the abovementioned decisions has essentially opened the door for judges to go beyond the realm of pay-when-paid clauses to void payment-related clauses in adjudication proceedings under the guise of conditional payment terms. In this respect, it is important for the courts to interpret Section 35 of the CIPAA bearing in mind their obligation to strike a balance between the entrenched substantive rights of the parties in a standard form contract and the abovementioned objectives of the CIPAA.
At the time of writing, it is understood that an application for leave to appeal to the Federal Court is pending.
For further information on this topic please contact Ashok Kumar Mahadev Ranai or Hong Kiat Chong at SKRINE by telephone (+60 3 2081 3999) or email (firstname.lastname@example.org or email@example.com). The SKRINE website can be accessed at www.skrine.com.
(3) The part of Clause 25.4(d) of the PAM Conditions of Contract 2006 that is in contention states: "Until after the completion of the Works under Clause 25.4(a), the Employer shall not be bound by any provision in the Contract to make any further payment to the Contractor, including payments which have been certified but not yet paid when the employment of the Contractor was determined."
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