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21 December 2020
Prospective effect of CIPAA
Principals' mandatory obligation to pay adjudicated sums
Termination of contracts and final claims
Stay of adjudication decisions
Time to make payment
Error of law
Winding-up petitions pursuant to adjudication awards
Enforcement denied if there is a court judgment
Constitutionality of CIPAA
The year 2019 witnessed a myriad of statutory adjudication disputes in Malaysia. The surge in the number of disputes involving the statutory adjudication mechanism in the Construction Industry Payment and Adjudication Act (CIPAA) 2012 also led to a significant number of consequential challenges to adjudication decisions in the courts. This article highlights the notable decisions handed down by the Malaysian courts in 2019 and their effect on the future application of the CIPAA.
The following noteworthy appeals marked the beginning of a dramatic departure from the retrospective effect of the CIPAA observed since its enactment in April 2014:
This case concerned a construction contract entered into between the appellant (a subcontractor) and the respondent (the main contractor) in 2011, prior to the enactment of the CIPAA. The contract included a conditional payment clause, allowing the respondent to withhold payment from the appellant until the respondent received the related progress payments from the employer. It was undisputed that the parties had agreed and complied with the mode of payment under the conditional payment clause. Unfortunately, the employer spiralled into liquidation, which brought payments between the respondent and the appellant to a standstill.
The appellant subsequently commenced adjudication proceedings against the respondent and an adjudication decision was delivered in favour of the appellant.
In 2016 the high court, in deciding to enforce the adjudication decision on application by the appellant, held that the conditional payment clause in the construction contract – wherein payment from the respondent to the appellant was conditioned on the respondent having received payment from the employer – was prohibited by virtue of Section 35 of the CIPAA. In arriving at its decision, the high court relied on the legal proposition in UDA Holdings Bhd v Bisraya Construction Sdn Bhd ( 11 MLJ 499) that the CIPAA, including Section 35, applied retrospectively to all construction contracts or disputes regardless of whether the construction contracts were made or the disputes arose before or after the enforcement date of the CIPAA.
However, in 2018 the Court of Appeal found that there was no express provision in the CIPAA excluding or including construction contracts made prior to the commencement of the CIPAA. The Court of Appeal affirmed the trite legal position that unless there are clear words in the legislation to the contrary, any legislation affecting the substantive rights of parties must be given prospective effect. In the same vein, the Court of Appeal found that the CIPAA was a law relating to a substantive right.
The Federal Court, in affirming the Court of Appeal's decision, unanimously ruled that the CIPAA operated prospectively as there was no evidence that Parliament had expressly intended for it to be applied retrospectively. It was held that the CIPAA was a law which affected parties' substantive rights as it provided an avenue for claimants to claim for contractual debts due and owing to them. In the context of Section 35 of the CIPAA, the prohibition on conditional payment clauses stipulated therein affected parties' substantive rights to enforce an agreed conditional payment clause. Therefore, the Federal Court concluded that Section 35 of the CIPAA could not apply retrospectively to deprive parties of those substantive rights without a clear legislative intention to that effect.
This case was decided alongside Jack-In Pile. Similarly, the question of law for determination by the Federal Court was whether the CIPAA as a whole affected parties' substantive rights and hence was prospective in effect. In Ireka, the subcontracts between the appellant and the respondent had been entered into prior to the enactment of the CIPAA. Under these subcontracts, the appellant had the right to set off any claims made by the respondent. The appellant contended that its substantive right to raise any set-offs had existed before the CIPAA came into force and, as such, the CIPAA could not apply retrospectively to extinguish the appellant's substantive right.
The Federal Court found that the clause in the construction contracts providing for the right to raise cross-contract set-offs was a substantive right which the parties had acquired pursuant to their agreement before the CIPAA came into force. Therefore, the CIPAA could not apply retrospectively to strip away the parties' substantive rights.
Post-Jack-In-Pile and Ireka
Since the Federal Court's rulings on the prospective effect of the CIPAA in Jack-In Pile and Ireka, the courts have readily set aside adjudication decisions primarily on the ground that an adjudicator has no jurisdiction in law to determine a dispute arising from construction contracts entered into before the enactment of the CIPAA. This is illustrated in the high court cases:
In Bond the high court dealt with a preliminary issue concerning the date on which the parties had entered into the construction contract. The complicating factor therein, as in most construction contracts, was that the construction contract was not made up of one document but consisted of a list of contract documents. The letter of award incorporating the terms of the chosen standard form was the first written confirmation of the award of the works between the parties issued on 27 July 2012 (before the CIPAA came into force) followed by the execution of the concluded agreement on 19 December 2014 (after the CIPAA came into force). In coming to its decision that the parties had entered into the contract on 27 July 2012, the high court examined the relevant documents and looked at the surrounding circumstances. It found that, except for one inconsequential amendment, the terms of the letter of award were identical to the terms of the concluded agreement and the execution of the standard form was merely a formality. Hence, the parties had entered into the contract on 27 July 2012.
The recent Court of Appeal decision in CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd ( 1 CLJ 75) confirms a principal's statutory obligation to make direct payment to a subcontractor pursuant to Section 30 of the CIPAA, regardless of whether the main contractor is in liquidation. In this case, the subcontractor had filed an action against the main contractor's principal pursuant to Section 30 of the CIPAA for direct payment of the adjudicated sum due and owing by the main contractor to the subcontractor as the main contractor had been wound up.
The Court of Appeal held that a principal's obligation pursuant to Section 30 of the CIPAA is an independent statutory obligation that exists in parallel with a main contractor's obligation to pay a subcontractor under the adjudication decision. The Court of Appeal went on to clarify that a principal's liability to pay a subcontractor would not be from the main contractor's assets. Once a principal pays the adjudicated sum to a subcontractor, it will be a debt due from the main contractor to the principal which the principal will have to recover from the main contractor pursuant to Section 30(4) of the CIPAA.
In addition, in B Cor Geotechnics Sdn Bhd v Panzana Enterprise Sdn Bhd ( 1 LNS 1393), the high court summarised that the remedy under Section 30 of the CIPAA does not entail the need for a contractual relationship to exist between the successful party and the principal of the party against which an adjudication decision is made. This reinforces that a principal's obligation under Section 30 of the CIPAA is independent, statutorily enforceable and mandatory in nature.
In ENRA Engineering and Fabrication Sdn Bhd v Gemula Sdn Bhd ( 10 CLJ 333), the disputes between the main contractor and the subcontractor arose during a project for the construction of garage facilities within a military camp. The main contractor applied to set aside an adjudication decision delivered in favour of the subcontractor. The main contractor contended, among other things, that the subcontracts executed between the main contractor and the subcontractor should be exempt from the application of the CIPAA as they were government construction contracts and related to national security, as specified in the First Schedule of the Construction Industry Payment and Adjudication (Exemption) Order 2014 (Exemption Order). On the other hand, the sub-contractor argued that the subcontracts were not government construction contracts because the government was not a party thereto.
At the outset, the judge, relying on the obiter cta in the case of Mudajaya Corporation Bhd v Leighton Contractors (M) Sdn Bhd ( 5 CLJ 848), held in principle that if the first contract in a chain of contracts is exempt because it falls within the Exemption Order, the contracts down the chain will similarly enjoy the benefits of that exemption. Arguably, the subcontracts between the main contractor and the subcontractor in the case at hand could be exempted from the applicability of the CIPAA if the proposition expressed in Mudajaya was accepted.
Nonetheless, the judge concluded that there was no element of national security involved in the construction of the garage, despite being located within a military camp, as its purpose was merely to store motor vehicles. For this reason, the judge found that the subcontracts were not exempt from the applicability of the CIPAA under the Exemption Order.
The Federal Court's decision in Martego Sdn Bhd v Arkitek Meor ( 8 CLJ 433) concerned the applicability of the CIPAA after the termination of the construction contract in question and final claims arising therefrom. In this case, the respondent, a firm of architects, resorted to bringing an action under the CIPAA against the appellant to recover its professional fees for works and services rendered to the appellant. When the payment claim was served by the respondent, the construction contract between the parties had been terminated. The appellant challenged the adjudication decision delivered in favour of the respondent.
The appellant argued that as the contract had been terminated, there was no longer a construction contract for the purpose of the CIPAA; hence, the dispute arising from the terminated contract was not amenable to the CIPAA. On the facts, the Federal Court found that the construction contract between the appellant and the respondent expressly contemplated payment being made after said contract has been terminated. Even so, the Federal Court held that the absence of such a provision does not deprive a party of its entitlement to make a payment claim after the construction contract has been terminated.
The Federal Court also discussed the issue as to whether the CIPAA should apply to interim or final claims given that the appellant had argued that the CIPAA should not cover claims for final accounts or sums finally due to the unpaid party unless the contractual mechanism for the payment of the final accounts (if provided under the contract) has been engaged. As originally conceived, the CIPAA is intended to facilitate timely and regular payments and to alleviate cash-flow problems endured by stakeholders in the construction industry. Premised on this objective, the Federal Court did not find it logical to confine the applicability of the CIPAA to interim claims. If the claims are payment claims relating to a construction contract as defined in Section 4 of the CIPAA, the act may come into play regardless of whether the payment claims are interim or final claims after termination.
In Punj Lloyd Sdn Bhd v Ramo Industries Sdn Bhd ( 11 MLJ 574), the respondent in an adjudication proceeding applied to stay the decision delivered in favour of the claimant pending the outcome of a continuing arbitration in India between the respondent's holding company and the claimant's joint-venture partner. Although the respondent was not a party to that arbitration, the high court held that it was nonetheless entitled to apply for a stay of the adjudication decision because the subject matter of the adjudication was the same as that of the arbitration in India. Following that, it was held that the threshold condition to apply for a stay of an adjudication decision pursuant to Section 16(1)(b) of the CIPAA had been fulfilled.
In adopting a liberal reading of Section 16 of the CIPAA, as taken in the Federal Court case View Esteem Sdn Bhd v Bina Puri Holdings Berhad ( 8 AMR 167), the high court in Genbina Sdn Bhd v Bina Puri Construction Sdn Bhd ( MLJU 1933) deliberated whether the adjudication decision should be stayed to achieve justice in the case, even though there was no clear and unequivocal error in the adjudication decision which would justify such a stay under Section 16 of the CIPAA. The high court found that the facts of this case, including the fact that the successful party to the adjudication proceeding was in receivership and liquidation, were sufficient to order the adjudicated sum to be deposited with the director of the Asian International Arbitration Centre pending the final determination of the arbitration between the parties. In essence:
In Samsung C & T Corporation v Bauer (Malaysia) Sdn Bhd ( MLJU 1690), the applicant succeeded in its application to set aside the adjudication decision delivered in favour of the respondent in 2018. Among other challenges mounted against the adjudication decision, the applicant claimed that the adjudicator had acted in excess of his jurisdiction as the issues raised in the respondent's payment claim had been decided in an earlier adjudication decision delivered in 2017.
Pursuant to Section 13 of the CIPAA, the high court held that the 2017 adjudication decision was binding on the parties as it had not been:
As the sums adjudicated in 2017 were res judicata, the high court found that the adjudicator had acted in excess of his jurisdiction when he reconsidered the aforesaid sums in the 2018 adjudication proceedings.
While the doctrine of res judicata generally applies to adjudication proceedings commenced under the CIPAA, to bar claims from being readjudicated, said doctrine does not apply to jurisdiction challenges in adjudication proceedings or adjudication decisions. This principle, an important obiter dictum in the high court case Ahmad Zaki Sdn Bhd v Swaja Fascade Sdn Bhd ( 1 LNS 1774), is consistent with the earlier case Zana Bina Sdn Bhd v Cosmic Master Development Sdn Bhd ( MLJU 146). Hence, the courts had unfettered powers to investigate the jurisdiction challenge afresh, even though the same jurisdictional issue had already been raised before the adjudicator during the adjudication proceedings.
More often in practice, when a jurisdiction issue is raised, adjudicators will proceed and complete the adjudication proceedings in accordance with Section 27(3) of the CIPAA, invariably deciding their jurisdiction within their reasoned decision. This has set the trend for the challenger, if unsuccessful, to repeat the jurisdictional issue in court during an application to set aside the adjudication decision. It remains to be seen whether this trend will continue unabated. Instead of going through the entire adjudication proceedings only to have the adjudication decision set aside on the relitigation of a jurisdictional issue, an adjudicator, with the parties' agreement, may consider adjourning the adjudication proceedings pending a resolution by the court declaring their jurisdiction, as happened in the English case of ABB Zantingh Ltd v Zedal Building Services Ltd ( BLR 66).
The importance of adjudicators upholding the two primary principles of natural justice (ie, the rule against bias and the right to be heard) has never been more greatly emphasised than in the high court case Desaru Peace Holdings Club Sdn Bhd v Malaysian Resources Corporation Berhad ( 1 LNS 1034). In this case, the adjudicator limited the adjudication reply to 10 pages. The respondent raised an objection when the claimant exceeded the 10-page limit. The adjudicator allowed the adjudication reply in its entirety on the ground that the claimant should be given the opportunity to be heard. Unfortunately, the adjudication decision was set aside for breach of natural justice as the adjudicator was found to be biased and to have acted in favour of one party by allowing only one party to not comply with the procedural rules that he had set and ignoring the objections of the other party to the proceedings. This case serves as a useful pointer to adjudicators to uphold all of the rules of natural justice in safeguarding their decisions against a challenge for breach of the principles of natural justice.
The right to be heard includes a fair opportunity to present evidence and arguments before a tribunal makes its decision. In Guangxi Dev v Sycal Bhd ( 1 CLJ 592), the Court of Appeal relied on the Federal Court case View Esteem and found that the adjudicator had violated the principles of natural justice when they had rejected the appellant's application to call three expert witnesses, as that had deprived the appellant of the opportunity to present a complete defence. The Court of Appeal recognised that the change in law by the Federal Court in View Esteem came later than the adjudication decision.
When an adjudication decision is silent on when the losing party must pay the adjudicated sum – but imposes late payment interest that commences from a pre-decision date until full settlement and a separate timeline for payment of costs – it can be assumed that payment of the adjudicated sum is to be made forthwith. This was the conclusion arrived at by the high court in Pasukhas Sdn Bhd v Empire Multiple Sdn Bhd ( 1 LNS 757) when the judge eventually dismissed the setting-aside application.
In SKS Pavillion Sdn Bhd v Tasoon Injection Pile Sdn Bhd ( MLJU 1051), the plaintiff sought to set aside an adjudication decision on several grounds, one of which was that the adjudicator had made an error of law which had had a potentially significant effect on the adjudication decision.
The adjudicator decided that the plaintiff was not entitled to impose liquidated ascertained damages on the ground that it had failed to prove actual loss, as held in Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy ( 1 MLJ 817). The plaintiff contended that as at the date of the adjudication decision, the principle in Selva Kumar regarding strict proof of actual loss had already been restated by the Federal Court in Cubic Electronics Sdn Bhd (In Liquidation) v MARS Telecommunications Sdn Bhd ( 2 CLJ 723). Therefore, the plaintiff argued that the adjudicator should have highlighted the change in the law to enable the parties to address the point.
Although it appears that Cubic Electronics was decided before the adjudication decision was delivered, it was only after the defendant's adjudication reply was submitted. Notwithstanding this, the high court held that the plaintiff could have alerted the adjudicator of the change in the law, which it did not do at that time despite having the opportunity to do so.
The high court dismissed the plaintiff's application to set aside the adjudication decision. Fundamentally, the high court held that it is not in a position to review the facts or law behind an adjudicator's findings unless this goes towards their jurisdiction. In the event that a correction is to be made as to the legal propositions relied on by the adjudicator, this can be done only in arbitration.
In Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd ( 3 MLJ 244), the Court of Appeal unanimously held that it is not a mandatory requirement for an adjudication decision to be registered with the high court pursuant to Section 28 of the CIPAA for the purpose of issuing a notice to wind up a company under the Companies Act 2016. In arriving at its conclusion, the Court of Appeal expressed the view that the language in Section 28 of the CIPAA does not convey that an adjudicator's decision must be registered with the high court before a statutory notice under Sections 465(1)(e) to (h) of the Companies Act 2016 could be issued. The law is such that prima facie, an unpaid creditor has a right to file a petition to wind up a debtor company.
The Court of Appeal also took the view that a successful party can invoke Section 31 of the CIPAA, which states that the remedies provided by the CIPAA are without prejudice to other remedies available in a construction contract or any written law.
Losing parties sometimes file a Fortuna Injunction, an injunctive relief which arose from the Australian case Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia ( VR 83), is sometimes filed by a losing party to restrain the winning party from presenting a winding-up petition based on an adjudication decision. There have been instances where a Fortuna injunction has been denied, such as in MRCB Builders Sdn Bhd v Southern Builders (J) Sdn Bhd ( 1 LNS 365), where the high court held that it would, in the circumstances, be unjust to deprive a winning party of the fruits of its litigation – bearing in mind that the purpose of the CIPAA is to facilitate regular and timely payment.
On the other hand, the high court in Must Ehsan Development Sdn Bhd v Bumimetro Construction Sdn Bhd ( 1 LNS 744), granted a Fortuna injunction as there was a disputed debt mainly because the adjudication decision had been set aside. In ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd ( MLJU 282), the high court granted a Fortuna injunction as it was satisfied that the existence of serious counterclaims or set-offs in the arbitration commenced in parallel with the adjudication proceedings gave rise to a genuine dispute as to the adjudication sum.
Enforcement of an adjudication decision will generally be refused if there is a court order or arbitration decision on the same dispute. In the peculiar high court case Prestij Mega Construction Sdn Bhd v Keller (M) Sdn Bhd ( 1 LNS 1612), the application to enforce the adjudication decision was dismissed given that there was already a court judgment, albeit a judgment in default, on the same disputed amount. The court's judgment in default was held to be the final determination of the dispute between the parties in accordance with Section 13 of the CIPAA.
The high court in Mega Sasa Sdn Bhd v Kinta Bakti Sdn Bhd ( 4 CLJ 201) held that the CIPAA is not in violation of Articles 4, 8 and 121 of the Federal Constitution. The court reasoned that statutory adjudication under the CIPAA is a judicial function just like the Tribunal for Homebuyer Claims or other inferior tribunals and is not a replacement of the courts envisaged in Article 121. Judicial power is vested in only the courts; hence, they have a monopoly in this respect.
As the statutory mechanism of the CIPAA continues to meet the demands of stakeholders in the construction industry for the speedy and efficient resolution of disputes, the courts are inevitably called upon to play a pivotal role in developing and interpreting the law on statutory adjudications.
For further information on this topic please contact Jocelyn Yean Tse Lim or Joanna Tan Li Pheng 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.
An earlier version of this article was published in Skrine's Insights.
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