The Construction Industry Payment and Adjudication Act 2012 came into effect on April 15 2014. Since then, the Malaysian courts have had the opportunity to consider various aspects of the act on numerous occasions. This update examines some of the significant decisions that have been handed down by the courts in the past two-and-a-half years and provides an overview of the legal principles laid down in these cases.
Before the act came into force, there was much discussion within the construction industry on the scope of its application. Questions as to whether the act would apply to construction contracts signed before its entry into force and whether payment disputes arising before the said date would fall within its scope were foremost in the minds of industry players.
On October 31 2014 Malaysia's first judicial pronouncement on matters involving the act was made in UDA Holdings Berhad v Bisraya Construction Sdn Bhd.(1) High court judge Dato' Mary Lim (as she then was) had the opportunity to deal with the above questions, which centred on the issue of the retrospective application of the act. Lim's decision, which was subsequently upheld by the Court of Appeal (unreported), gave retrospective effect to the act.
This means that all payment disputes under any construction contract, other than those which fall within the statutory exceptions in Sections 3, 40 and 41 of the act, can be referred to adjudication under the act, regardless of when the construction contract was executed or when the payment disputes arose.
Expansive versus restrictive interpretation
Government construction contract Similarly, there was much discussion as to what constitutes a 'government construction contract', a term used but not defined in the Construction Industry Payment & Adjudication (Exemption) Order 2014. Questions arose as to whether the expression encompasses construction contracts entered into by statutory bodies and government-linked companies; or is it to be limited to contracts entered into by the 'government', as defined in Section 4 of the act.
This question was dealt with in Mudajaya Corporation Bhd v Leighton Contractors (M) Sdn Bhd,(2) wherein the court held that for a construction contract to fall within the meaning of a 'government construction contract', it must be one where the government, be it the federal or a state government, is a party to it.
Construction consultancy contract Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd(3) considered an interesting question: whether an architect rendering purely architectural services with respect to a construction project may claim his or her outstanding fees from his or her client under the act.
The high court judge disagreed with the claimant's argument that a 'construction consultancy contract', as defined under Section 4 of the act, did not apply to contracts which provide purely consultancy services. The judge found that the word 'includes' in the definition was designed to give an expansive meaning and not an exhaustive one – the matters stated in the definition are more by way of examples, leaving the scope and ambit of the defined word open ended. This means that the act applies to consultancy contracts which provide purely consultancy services.
Although the act's scope of application is intended to be wide and extensive, it is not without exceptions.
Section 41 provides that the act will not apply to court or arbitral proceedings regarding a payment dispute under a construction contract that had commenced before the act came into force. According to View Esteem Sdn Bhd v Bina Puri Holdings Sdn Bhd,(4) this means that a payment dispute referred to adjudication must be the same as the one that is pending in court or before an arbitral tribunal. If not, the particular payment dispute will fall within the ambit of the act. The intention behind Section 41 is to preserve the law on payment disputes that are already pending in court or before an arbitral tribunal when the act came into force. For identical disputes that are already pending in court or arbitration, the law in force before April 15 2014 will apply.
The other exemptions under the act are contained in Section 3 (buildings of fewer than four storeys intended for self-occupation) and Section 40 (exemptions pursuant to a ministerial order, such as the 2014 Exemption Order), but these fall outside the scope of this update.
The application of the CIPPA's statutory adjudication regime to every written construction contract where the construction work envisaged under such contract is to be carried out either wholly or partly in Malaysia was considered in Ranhill E&C Sdn Bhd v Tioxide (Malaysia) Sdn Bhd.(5) It was held that a reading of the terms of the act as a whole prohibits the parties from contracting out of its application, notwithstanding the fact that there is no express term to such effect in the statute. Specific contractual arrangements for dispute resolution by the parties would not exclude the application of the act, which is meant to provide for an interim or provisional resolution of a payment dispute. As such, an agreement by the parties to arbitrate does not exclude the application of the act. It merely means that the parties have chosen arbitration as the final resolution for their dispute.
Is Clause 25.4(d) of the PAM Contract 2006 void?
The practice of having a conditional payment clause, be it a pay-when-paid, pay-if-paid or back-to-back clause, was pervasive and prevalent in the construction industry. It was a way for the main contractor to pass down the contractual chain the risk of not receiving payment from the employer when it was due and payable.
Section 35(1) of the act prohibits conditional payment terms and provides that a conditional payment provision in a construction contract will be considered void. Section 35(2) expressly declares that "for the purposes of section 35(1)", each of the following is considered a conditional payment provision:
- when the obligation of one party to make a payment is conditional on that party having received payment from a third party; or
- when the obligation of one party to make a payment is conditional on the availability of funds or drawdown of financing facilities of that party.
Interestingly, what constitutes a conditional payment for the purposes of Section 35(1) has been put to the test, despite the fact that Section 35(2) suggests that it is to be limited to the two situations set out therein.
BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd(6) concerned the impact of Section 35(1) on Clause 25.4(d) of the Pertubuhan Akitek Malaysia (PAM) Contract 2006. In its application to set aside an adjudication decision, the plaintiff argued that it was not bound to make any further payment to the defendant until a final account was determined on completion of the works, as the contract had been terminated by the plaintiff. To support its contention, the plaintiff relied on Clause 25.4(d) of the PAM Contract 2006, which reads as follows:
"Until after the completion of the Works under cl. 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…"
In dismissing the plaintiff's application, the high court judge quoted his judgment in Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd(7) and held that:
"the terms of s35(1) act are clear in that it casts a wide net to cover 'Any conditional payment provision in a construction contract in relation to payment under the construction contract' and it expressly declared it to be 'void'."
By giving an expansive meaning to 'conditional payment', the high court took the view that the instances of conditional payment set out in Section 35(2) are not exhaustive. The decision suggests that Clause 25.4(d) of the PAM Contract 2006 is void as it has the effect of postponing payment until final accounts are concluded, thereby defeating the purpose of the act.
The Econpile appeal to the Court of Appeal was dismissed on the basis that it was within the adjudicator's jurisdiction to decide on the applicability of Clause 25.4(d), and the courts are not competent to review the correctness of that decision. The BM City appeal is pending in the Court of Appeal. It is still unclear whether Clause 25.4(d) is void under the act.
Nullifying unpaid party's claim
In Tenaga Poly Sdn Bhd v Crest Builder Sdn Bhd (unreported) the court essentially declared that a successful defence based on liquidated and ascertained damages (LAD) by a non-paying party will operate to nullify an unpaid party's claim, but will not result in the unpaid party being ordered to pay the non-paying party. The judge in this case also declared that an LAD claim is not a 'payment claim' within the meaning of Sections 4 and 5 of the act. It seems to suggest that a party cannot initiate adjudication proceedings under the act to recover LAD against another party. The full judgment has yet to be published.
Lack of progress or interim certification
In Bina Puri Construction Sdn Bhd v Hing Nyit Enterprise Sdn Bhd(8) the applicant sought to set aside the adjudication decision. One of the arguments raised by the applicant was that the payment claim was premature, as the interim claims by the respondent were not certified.
The judge rejected the argument and held that the "lack of certification of progress or interim claim is not a bar to the adjudication process. Section 5 does not require the existence of certified progress or interim claim before a payment claim can be issued".
The judge concluded that the adjudicator's powers under Sections 25(n) and 25(m) of the act – which entitled him to "decide or declare on any matter notwithstanding no certificate has been issued" and "review and revise any certificate issued or to be issued" respectively – simply mean that even if the contractual agreement between the parties provides for the issuance of a certified interim or progress claim, the absence of certification cannot deprive the unpaid party from availing the adjudication process.
Setting aside of adjudication decision
Section 15 of the act provides limited grounds on which an adjudication decision may be set aside, namely:
- the adjudication decision was improperly procured through fraud or bribery;
- there has been a denial of natural justice;
- the adjudicator has not acted independently or impartially; and
- the adjudicator has acted in excess of his or her jurisdiction.
The adjudication decision in Bina Puri was challenged on grounds of breach of natural justice and excess of jurisdiction. The court held that the criticism of the adjudication decision by the applicant must "clearly point to a breach of natural justice or a jurisdictional error in the adjudication process".
In ACFM Engineering & Construction Sdn Bhd v Esstar Vision Sdn Bhd,(9) the court considered the principles set out in Balfour Beatty Engineering Services (HY) Ltd v Shepherd Construction Ltd.(10) Essentially, not any breach will allow for the setting aside of the adjudication decision. The breach must be "either decisive or of considerable potential importance to the outcome and not peripheral or irrelevant"; it must be a material breach which significantly affects the decision.
In WRP Asia Pacific Sdn Bhd v NS Bluescope Lysaght Malaysia Sdn Bhd(11) the unilateral communication of the adjudicator was found to be a material breach of natural justice. It is paramount that any communication be made known to the parties to the adjudication so as to allow the parties a chance to respond. The adjudicator's duty to make known to the parties his or her communication with the other party is likely to ensure impartiality by giving each party a fair opportunity to present its case.
However, the refusal to conduct oral hearings does not necessarily amount to a breach of natural justice. It was held in Martego that an adjudicator can decide on the mode of hearing even if this is by way of documents and submissions only, without the need to call witnesses.
The principles for an application for the stay of an adjudication decision were considered in detail in Subang Skypark Sdn Bhd v Arcradius Sdn Bhd.(12) After considering a number of cases from other jurisdictions, it was held that the test for a stay to be granted under Section 16 of the act is whether there are exceptional circumstances, and such circumstances must necessarily refer to the financial status of the other party. Cogent or credible evidence must be presented to show the probable inability to repay the adjudicated sum that may follow from concurrent court or arbitration proceedings. According to the judge, the merits of the case before the arbitral tribunal or the court and the chances of success in setting aside the adjudication decision are not relevant considerations.
The court in Subang Skypark emphasised that the grant of any stay must also be weighed against the primary object of the act, which is to ensure speedy resolution of payment disputes and to inject much-needed cash flow into the contractual arrangements between the parties. At all times, the court has discretion to grant a stay.
According to the court in Foster Wheeler E & C (Malaysia) Sdn Bhd v Arkema Thiochemicals Sdn Bhd,(13) the expression "pending final determination by arbitration or the court", which is a condition for a stay of an adjudication decision under Section 16(1)(b) of the act, requires the parties to have already commenced arbitration or court proceedings. In the case at hand, the contract provided for multi-tiered dispute resolution. At all material time, the parties were at the first stage of dispute resolution, whereby negotiations were on-going but notice of arbitration had yet to be issued. In fact, any issuance of notice of arbitration made before the completion of the negotiations would be regarded as pre-mature. In the circumstances, the court held that there was no pending arbitration and that the applicant had failed to satisfy the requirements for a stay under Section 16(1)(b). This decision will have an adverse impact on multi-tiered dispute resolution clauses.
Limit of adjudicator's jurisdiction
An adjudicator's jurisdiction has been held to be limited only to matters referred to in the payment claim and payment response. This was decided by the high court in View Esteem, wherein the judge held that such limitation is prescribed in Section 27(1) of the act. The process that takes place after the payment claim and payment response – including the filing of the adjudication claim, adjudication response and adjudication reply – are substantially formal manifestations of the dispute and contain greater details of the claim, response or reply (as the case may be) of the payment claim and payment response.
Similarly, in Bina Puri, in considering the argument raised by the applicant that the adjudicator had committed an error in holding that he had no jurisdiction under the act to decide on the applicant's counterclaim, which was raised in its adjudication response but not in its payment response, the high court judge concluded that Section 27 of the act clearly circumscribes the jurisdiction of the adjudicator, which is limited to disputes raised under Sections 5 and 6 of the act (ie, the payment claim and payment response). Any extension of the adjudicator's jurisdiction beyond matters in the payment claim and payment response must be made by way of a written agreement pursuant to Section 27(2) of the act.
However, in View Esteem Sdn Bhd v Bina Puri Holdings Sdn Bhd(14) the Court of Appeal seemed to suggest that the adjudicator's jurisdiction in relation to matters not raised in a payment response could be regularised pursuant to Section 26 of the act, notwithstanding that there is no express agreement between the parties under Section 27(2). This could mean that a party could avail itself of Section 26 and raise new claims or defences in its adjudication claim or adjudication response by formally moving the adjudicator to invoke Section 26. However, this is inconsistent with Section 27(2) and the position in this regard remains uncertain.
Principal to make direct payment
As long as the written request required under Section 30 of the act is issued to the principal, it must make payment to the party that obtained the adjudication decision in its favour. It is irrelevant whether the principal is a party to the adjudication proceedings or has no knowledge of the adjudication proceedings. This was decided in Murni Environmental Engineering Sdn Bhd v Eminent Ventures Sdn Bhd.(15)
Although statutory adjudication in Malaysia is still in its infancy, it is evident from the cases highlighted above that a body of local decisions is steadily being built up to assist in the interpretation of the act.
For further information on this topic please contact Jocelyn Yean Tse Lim at Skrine by telephone (+60 3 2081 3999) or email ([email protected]). The Skrine website can be accessed at www.skrine.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
Endnotes
An earlier version of this update first appeared in Skrine's Legal Insights (Issue 4/2016).
