Legal Insights Issue 1/2018, April 2018 – “DEVELOPMENTS IN STATUTORY ADJUDICATION IN 2017”

DEVELOPMENTS IN STATUTORY ADJUDICATION IN 2017

Jocelyn Lim examines the significant statutory adjudication cases of 2017


The year 2017 witnessed considerable development in case law on statutory adjudication in Malaysia. This is probably due to the increasing use of this form of dispute resolution mechanism by stakeholders in the construction industry since its inception in 2014. This article examines some of the significant decisions that have been handed down by the Malaysian courts in 2017 and their impact on statutory adjudication under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).

EXPANSION OF ADJUDICATOR’S JURISDICTION

The jurisdiction of an adjudicator which used to be limited to matters set out in the payment claim and payment response has now been significantly expanded by the Federal Court in View Esteem Sdn Bhd v Bina Puri Holdings Berhad [2017] 8 AMR 167 (“View Esteem”). Adjudicators are now not precluded from considering all defences raised by a respondent in an adjudication response even if such defences were not included in the payment response. On the contrary, an adjudicator who fails to consider the defences raised in the adjudication response could have acted in breach of natural justice and his decision may be set aside under section 15 of CIPAA. This landmark decision, which now obliges an adjudicator to consider all defences in the adjudication response will have a significant impact on the conduct of statutory adjudication proceedings.

CONDUCT OF ADJUDICATION PROCEEDINGS

In Permintex JSK Resources Sdn Bhd v Follitile (M) Sdn Bhd (and Another Originating Summons) [2018] 1 AMR 693, the respondent applied to set aside the adjudicator’s decision on various grounds, one of which was that there had been a breach of natural justice as the adjudicator had failed to invite the parties for a face-to-face preliminary meeting. The High Court in dismissing the respondent’s setting aside application, held that “CIPAA confers broad and vast powers on an adjudicator so that he may proceed with all speed and diligence in arriving at a decision within the tight time frame prescribed” and that “it is within the exercise of the broad discretion of the adjudicator to conduct a documents-only adjudication without the need to hear oral evidence.”

Similarly, the wide discretionary power of an adjudicator to order and to limit the filing of written submissions was endorsed in Tidalmarine Engineering Sdn Bhd v Conlay Construction Sdn Bhd (and Another Originating Summons) [2017] 8 AMR 75 (“Tidalmarine”). As held by the High Court: “There is thus no basis for arguing that there was a breach of natural justice merely because the adjudicator had not allowed the parties to file their written submissions on the issues raised …”

It is unquestionable that an adjudicator is the ‘master of the proceedings’ and is free to conduct the adjudication proceedings in the manner that he deems fit, so long as he complies with CIPAA, acts impartially and adheres to the rules of natural justice.

STAY OF ADJUDICATION DECISION

The “exceptional circumstances” test which in essence refers to the financial status of a party when granting a stay of an adjudication decision under section 16 of CIPAA as established in Subang Skypark Sdn Bhd v Arcradius Sdn Bhd [2015] 11 MLJ 818 has now been expanded in View Esteem. Section 16 is now given a liberal interpretation, allowing some degree of flexibility to the courts to stay an adjudication decision where there are clear errors, or to meet the justice of the individual case. This appears to be even wider than the “special circumstances” test where the paramount consideration is whether in granting a stay of execution, the appeal, if successful, would be rendered nugatory.

Although the test for granting a stay under section 16 of CIPAA appears to be wider as the financial status of the other party is not the only factor to be considered, therefore allowing more grounds to justify granting a stay, the Federal Court in View Esteem also emphasised that a stay of an adjudication decision ought not to be readily granted and caution must be exercised when doing so. Whether a stay should be granted under section 16 of CIPAA is to be determined on a case to case basis and the financial status of the other party is not the only factor to be considered.

EXCLUSION FROM CIPAA

Following the decision in View Esteem, a payment dispute that is referred to adjudication would fall within the exclusion under section 41 of CIPAA if it is found to be the subject matter of a dispute that had previously been commenced in court or arbitration. In View Esteem, there was a court proceeding relating to interim certificates no. 23 to 26R. The respondent initiated an adjudication claim in respect of progress claim no. 28. The Federal Court held that progress claim no. 28 fell within section 41 of CIPAA as a progress claim does not stand alone in a separate compartment but is cumulative in nature. Thus, the court found that the subject matter of both the court proceeding and the adjudication proceeding to be the same notwithstanding that the proceedings were based on separate progress claims.

CONDITIONAL PAYMENT CLAUSES

In Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [2017] MLJU 1342 (“Jack-In Pile”), the High Court held that section 35 of CIPAA applies retrospectively and any conditional payment provision in a construction contract will be void, irrespective whether the parties had relied on such a provision prior to the coming into force of CIPAA. This appears to be consistent with the earlier decisions of Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd & Another Case [2016] 5 CLJ 882 (“Econpile”), BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd [2016] AMEJ 1858 and Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd (and Another Originating Summons) [2017] 7 AMR 887.

The High Court decision in Jack-In Pile has recently been overturned in 2018 by the Court of Appeal which held that a conditional payment clause under a construction contract relied by parties prior to the commencement of CIPAA remains valid and is not affected by section 35 (Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd [Civil Appeal No: B-02(C)(A)-1187-06/2017]). It is believed that an application is being made to the Federal Court for leave to appeal against the Court of Appeal’s decision.

COMPETENCY STANDARD AND CRITERIA

In considering whether an adjudicator has met the competency standards and criteria under Regulation 4 of the Construction Industry Payment and Adjudication Regulations 2014, the High Court in Gazzriz Sdn Bhd v Hasrat Gemilang Sdn Bhd [2017] AMEJ 1630 adopted the approach in WRP Asia Pacific Sdn Bhd v NS Bluescope Lysaght Malaysia Sdn Bhd (formerly known as Bluescope Lysaght (Malaysia) Sdn Bhd)(and Another Originating Summons) [2016] 1 AMR 379 whereby the courts will leave the matter to be determined by the Kuala Lumpur Regional Centre for Arbitration (now renamed the Asian International Arbitration Centre (Malaysia)), which is responsible for setting the standard and criteria under section 32 of CIPAA.

APPEAL AGAINST ADJUDICATION DECISION

In VVO Construction Sdn Bhd v Bina MYK Sdn Bhd (and Another Originating Summons) [2017] 2 AMR 502, the respondent in addition to its application to set aside the adjudication decision, appealed against the adjudication decision under Order 55A rule 1 of the Rules of Court 2012. The High Court in dismissing the respondent’s purported appeal, adopted the decision in Bina Puri Construction Sdn Bhd v Hing Nyit Enterprise Sdn Bhd [2015] 8 CLJ 728 that under CIPAA, there is no provision for appeal and therefore there is no right of appeal against an adjudicator’s decision. This is understandably the legal position because if parties are allowed to appeal against an adjudicator’s decision, the adjudicator’s findings of fact may be disturbed and this contravenes the principle of rough justice under CIPAA, the main feature that underpins the statutory adjudication process.

While the legal position is that parties are not allowed to appeal against an adjudicator’s decision, there appears to be a growing trend for aggrieved parties who were unsuccessful in an adjudication to resubmit the same unsuccessful claim in a subsequent adjudication before another adjudicator. In other jurisdictions, it is regarded as an abuse of process for a party to engage in ‘adjudicator shopping’ by resubmitting the same claim repeatedly until it obtains a favourable decision. Presently, there are a few such cases pending in the High Courts on this issue.

INTERIM AND FINAL CLAIMS

The majority in the Court of Appeal case of Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Appeal [2018] 2 CLJ 163 (“Martego”) held that CIPAA applies not only to interim claims but also to final account claims. The Court of Appeal took judicial notice that final claim payments had been lodged and adjudicated without any fanfare and the courts and legal practitioners are to be careful in creating an issue when it is settled among the construction industry players that there is in fact no issue as to whether CIPAA applies to final payment claims. The dissenting judge in Martego however expressed concern that the inclusion of final payment claims under CIPAA may lead to abuse of process. This is because statutory adjudication does not dispense with the trial process and to enforce a final payment by summary adjudication process will be abhorrent to the notion of justice and fair play.

The High Court in Tidalmarine rejected the respondent’s contention that CIPAA only applies to a final progress claim (which is issued before defects and rectification works are completed) and not a final account claim (which is issued after defects and rectification works are completed). The Judge held that CIPAA which allows final payment claim would be equally applicable to a claim based on final account as such a claim is still a claim for work done or services rendered under the express terms of a construction contract.

AGGRIEVED PARTY

Section 15 of CIPAA allows an ‘aggrieved party’ to apply to the High Court to set aside an adjudication decision. Normally, the ‘aggrieved party’ is the respondent who is required to make payment to the claimant. In Syarikat Bina Darul Aman Berhad & Anor (collectively referred to as BDB-Kery (joint venture)) v Government of Malaysia [2017] 4 AMR 477 (“SBDAB”), the claimant whose claim had been dismissed peculiarly filed a setting aside application in the High Court even though it was not required to pay any sum to the respondent. Nonetheless, the claimant was held to be an ‘aggrieved party’ within the context of CIPAA as the expression ‘aggrieved party’ is given its plain and ordinary meaning, that is to say, a party is aggrieved so long as it has been adversely affected or wrongfully deprived of its right to have its entitlement validly and justly decided pursuant to CIPAA.

In Wong Huat Construction Co v Ireka Engineering & Construction Sdn Bhd [2018] 1 CLJ 536 (“Wong Huat Construction”), the claimant, who was dissatisfied with the paltry sum of RM29,791.73 that was adjudged in his favour out of the sum of RM231,277.17 claimed, was also held to be an ‘aggrieved party’ within CIPAA as the term is given an expansive reading to include a person who has received an adjudication decision in his favour but is aggrieved as he should have received more.

CONSTRUCTION WORK

In 2016, it was established by the High Court in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Case [2017] 1 CLJ 101 that consultancy agreements fell within the ambit of CIPAA. This year, in MIR Valve Sdn Bhd v TH Heavy Engineering Berhad & Other Cases [2017] 8 CLJ 208, the High Court had to decide an interesting point as to whether works done on a ship to convert it into a Floating Production Storage and Offloading (“FPSO”) vessel constitutes construction work within the meaning of a ‘construction contract’ under CIPAA. MIR Valve Sdn Bhd was appointed by TH Heavy Engineering Sdn Bhd to supply valves to be installed onto the FPSO vessel for the production and processing of gas condensate and crude oil. In determining the aforementioned point, the learned judge considered the functional purpose of the vessel. Notwithstanding that the vessel could still move around, it was no longer a ship in the sense of transporting people or goods from one place to another as the predominant purpose of the vessel was now to serve the gas, oil and petrochemical industry. On this basis, the judge concluded that the vessel which is being converted for the oil and gas industry, falls neatly within the definition of ‘construction work’ which includes any ‘gas, oil and petrochemical work’.

It is interesting to note that the learned High Court Judge observed per obiter that a ‘ship building’ contract is excluded from CIPAA as it does not come within the ambit of structures (which are mainly buildings constructed above or below ground level) or infrastructure (such as roads, harbour works, railways, cableways, canals or aerodromes). The same sentiment was expressed in YTK Engineering Services Sdn Bhd v Towards Green Sdn Bhd (and 3 Other Originating Summons) [2017] 5 AMR 76 (“YTK Engineering”) whereby the High Court observed, per obiter, that a shipping contract or a mining contract does not fall within the meaning of “construction work” under section 4 and hence is not a “construction contract” under sections 2 and 4 of CIPAA.

OBJECTION TO ADJUDICATOR’S APPOINTMENT

In Zana Bina Sdn Bhd v Cosmic Master Development Sdn Bhd and another case [2017] MLJU 146, the High Court held that a party who participated fully in an adjudication proceeding without raising any objection as to the validity of the adjudicator’s appointment during the proceeding was estopped from raising the objection subsequently in its setting aside application. It is to be noted that an objection to the validity of an adjudicator’s appointment is to be distinguished from an objection to an adjudicator’s jurisdiction, the latter of which can be raised at any point of time and at any stage of the proceeding.

EXTENSION OF TIME FOR PAYMENT RESPONSE

The issue as to whether there was a breach of natural justice when an adjudicator refused to allow the respondent’s application for extension of time to submit a payment response was considered in Binastra Ablebuild Sdn Bhd v JPS Holdings Sdn Bhd & Another Case [2018] 2 CLJ 223 (“Binastra”). The High Court found that it is not a breach of natural justice merely because an adjudicator refused to allow the respondent’s application for extension of time. All natural justice requires is that an adjudicator hears both sides and comes to a determination on the issue.

It is interesting to note that in considering the issue, the learned judge commented in passing that it is doubtful whether an adjudicator has the power to extend the time for service of a payment response as such response is a matter to be complied with and served before his appointment as adjudicator. While it is arguable that an adjudicator has the power under section 25(p) of CIPAA to “extend any time limit imposed on the parties under this Act as reasonably required”, the issue may not be of significant importance in light of View Esteem which now requires an adjudicator to consider all defences raised in an adjudication response notwithstanding the absence of a payment response.

EFFECT OF SETTING ASIDE

In Wong Huat Construction, it was held that the setting aside of an adjudication decision will restore all parties to their original positions as though the adjudication did not take place. Thus, a party is not barred from subsequently initiating a fresh adjudication proceeding, arbitration or litigation in respect of the claim.

Notwithstanding the findings in Wong Huat Construction, the Court may exercise its inherent jurisdiction and decide on the claim itself. In Bina Puri Construction Sdn Bhd v Syarikat Kapasi Sdn Bhd [2017] 5 AMR 750, the High Court in exercising its inherent jurisdiction to ensure convenience and fairness in legal proceedings, allowed the applicant’s claim in whole and ordered the respondent to pay the applicant the amount claimed in its adjudication proceedings.

LOSS AND EXPENSE CLAIMS

In SBDAB, the High Court Judge held that an adjudicator who had erroneously decided that he had no jurisdiction to decide on loss and expense claims was in breach of natural justice. His Lordship found that such claims came within the ambit of CIPAA as they were due to the delay in completion of works and therefore payable as part of the amount claimable for the additional costs incurred for work done under the relevant contract. However, the Court recognised that not all loss and expense claims are within the purview of CIPAA as there may be instances where a claim for special damages arises out of a breach by the employer. It appears that whether a loss and expense claim falls within the ambit of CIPAA depends on whether the claim is one which inevitably arises from the carrying out of the work and whether the construction contract provides for the party to be paid the amount claimed in consideration for its performance of construction work.

It is interesting to note that a claim for bonus payment has been expressed in YTK Engineering to be within the purview of CIPAA. A bonus payment differs entirely from profit or loss sharing. The former is an incentive payment paid to a contractor who manages to save cost for the employer or complete the project earlier. The contractor will still be paid the agreed consideration for work done or services rendered except that he would be paid additionally an incentive or bonus payment for his exemplary work in completing the project earlier or in saving costs. It is a further sum that is agreed to be paid to the contractor based on his performance and that will be certified by the certifying officer and added to the contract sum as a bonus or incentive payment. Such a claim would be upheld under CIPAA.

TERMINATED CONTRACT

Binastra once again confirmed the High Court’s decision of Econpile where it was decided that an adjudicator has jurisdiction to decide the dispute even though the construction contract has been terminated.

REGISTRATION OF DECISION IN PART

In Harmony Teamwork Construction Sdn Bhd v Vital Talent Sdn Bhd [2017] 10 MLJ 726, the defendant contended that the order for enforcement ought not be the same terms as the adjudication decision but for a reduced amount as the defendant had made part payment. It was held that whilst section 28(2) of CIPAA allows the High Court to make an order for enforcement of an adjudication decision ‘either wholly or partly’, an order for enforcement in part is only applicable where part of an adjudication decision has been set aside pursuant to section 15 of CIPAA. Thus, an order for enforcement will be registered in the terms of the adjudication decision unless a part of such decision has been set aside.

PRE-AWARD INTEREST

Unlike the Arbitration Act 2005 which precludes an arbitrator from awarding pre-award interest unless provided in an arbitration agreement (see Far East Holdings Bhd v Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals [2018] 1 MLJ 1, the decision in Milsonland Development Sdn Bhd v Macro Resources Sdn Bhd and another case [2017] 8 MLJ 708 appears to confirm that an adjudicator has the power to grant pre-award interest pursuant to section 25(o) of CIPAA.

CONCLUSION

As it can be seen from the above review, the law on statutory adjudication in Malaysia is developing rapidly. This stream of cases on statutory adjudication will undoubtedly assist in the interpretation of the provisions of CIPAA and in filling the gaps in the statute.


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SUBJECT MATTER: STATUTORY ADJUDICATION


WRITER'S NAME: JOCELYN LIM


WRITER'S PROFILE:

Jocelyn is a Partner in the Dispute Resolution Division of SKRINE. Her main areas of practice are statutory adjudication and construction disputes. She is also an accredited adjudicator with the Asian International Arbitration Centre (Malaysia).

 

 
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