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The 'If' And 'When' of A 'Pay-When-Paid' Clause

A commentary on Globe Engineering Sdn Bhd v Bina Jati Sdn Bhd by Janice Tay

The decision in Globe Engineering Sdn Bhd v Bina Jati Sdn Bhd [2014] 5 MLJ 145 provides guidance on the approach adopted by the Federal Court in construing 'pay when paid' or 'back to back' clauses in Malaysia.

BACKGROUND FACTS

Bina Jati Sdn Bhd ("Bina Jati"), a sub-contractor, entered into a sub-contract with Globe Engineering Sdn Bhd ("Globe"), the main contractor, to supply and install fire protection works for a construction project ("Sub-Contract"). Globe subsequently terminated the Main Contract on the ground that the employer had not paid their claims and the Sub-Contract also came to an end.

THE LEGAL ISSUES

Disputes arose on the construction of certain provisions in the documents which governed payment and the effect of these provisions on the termination of the Sub-Contract. The relevant parts of these provisions are as follows:

  1. Clause 11(b) of the Sub-Contract which reads, "Within seven (7) days of receipt by (Globe) from the Employer of the amounts included under on (sic) Architect's Certificate ... (Globe) shall notify and pay to (Bina Jati) the total value certified therein ..." ("Clause 11(b)");
  2. Paragraph 14 of the Letter of Award which reads, "Payments - Back to back basis. Within seven (7) days upon (Globe) receiving from the (Employer) ..." ("Paragraph 14"); and
  3. Clause 19 of the Sub-Contract which reads, "If for any reason (Globe's) employment under the Main Contract is determined (whether by (Globe) or the Employer ...), then, the employment of (Bina Jati) under this Sub-Contract shall thereupon also be determined ..." The clause then sets out Bina Jati's entitlement to be paid for services and materials supplied up to the date of termination of the Sub-Contract ("Clause 19").

On appeal by Bina Jati, three questions were posed to the Federal Court, namely:

  1. Whether Clause 11(b) and Paragraph 14 are 'pay-when-paid' or 'paid-if-paid' clauses? The former merely fix the time for payment, whereas the latter make payment subject to, or conditional upon, actual receipt of such moneys by Globe from the employer;
  2. Whether the payment obligations in Clause 11(b) read together with Paragraph 14 are discharged or come to an end upon termination of the Sub-Contract pursuant to Clause 19?; and
  3. Upon the termination of the Sub-Contract, whether Bina Jati's entitlement to payment under Clause 19 is subject to, or conditional upon, actual receipt of such payment by Globe from the employer?

DECISIONS OF THE HIGH COURT AND COURT OF APPEAL

The High Court decided that Clause 11(b) and Paragraph 14 were 'pay-when-paid' clauses. The Court took into account that there was no express provision in those clauses which restricted Bina Jati's rights to pursue its claim against Globe such that Bina Jati would not be paid if Globe was not paid.

The High Court's decision was overturned by the Court of Appeal. Their Lordships were unanimous in their view that the provisions were clearly and unambiguously 'pay-if-paid' clauses which precluded Bina Jati from being paid if Globe had not been paid by someone higher up the chain.

THE DECISION OF THE FEDERAL COURT

It was common ground that Clause 11(b) and Paragraph 14 could be construed only in two different ways, as 'pay-when-paid' or 'pay-if-paid' clauses. What was not common ground was how the standard of proof is to be satisfied.

Having said that, the task was rendered more difficult in view of the conflicting decisions by the Court of Appeal in Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd [2010] 3 MLJ 7 and Antah Schindler Sdn Bhd v Ssangyong Engineering & Construction Co Ltd [2008] 3 MLJ 204.

Both Antah Schindler and Asiapools concerned the interpretation of provisions which were similar to Clause 11(b). The Court of Appeal in Antah Schindler decided that the clause in contention was a 'pay-when-paid' clause but held in Asiapools that the relevant clause was a 'pay-if-paid' clause.

In determining the first question, the Federal Court held that upon its proper construction, Clauses 11(b) and Paragraph 14 were 'pay-when-paid' clauses that merely fixed time for payment and not 'pay-if-paid' clauses. As such, Globe was not absolved from its liability to pay the amount certified and attributable to the work executed by Bina Jati.

After analysing the different approaches in construing similar clauses in the United States, the United Kingdom, Hong Kong and Singapore, the apex court of Malaysia concluded that the standard of proof to determine whether a provision is a 'pay-when-paid' clause or a 'pay-if-paid' clause is a matter of construction. The Court gave three reasons in support of this conclusion.

First, the provisions in the Sub-Contract as to the time for payment of an interim certificate are relevant. These provisions provided that an interim certificate would be issued monthly to Globe and the employer had 30 days to pay the sum certified to Globe. In the opinion of the Court, Clause 11(b) could only have been so crafted to address the contingency of delay in payment by the employer to Globe.

Second, the Court, in laying down the guiding principles, said that one must start on the premise that it must be a 'universal truth' that, as between contracting parties, goods and services supplied must be paid for. To rebut this presumption, there must be clear unequivocal provisions in a contract which show that liability was contingent. The Court also opined that the burden of proof rests on the party who alleges that payment is on an 'if' basis. As the Sub-Contract did not contain such provisions, the Court held that the liability of Globe could not be contingent.

The Court further held that contingent liability was impliedly refuted by Clause 19 which expressly provided that Bina Jati would be paid the value of the sub-contract work completed up to the date of termination.

Further, the Federal Court observed, per obiter dicta, that if, upon a proper construction, it is clear and unambiguous that a 'pay-when-paid' clause is in fact a 'pay-if-paid' clause, then the 'pay-when-paid' clause is enforceable as a 'pay-if-paid' clause.

In view of the finding that Clause 11(b) (read together with Paragraph 14) was not a 'pay-if-paid' clause, the Federal Court held, in respect of the second question, that all rights and liabilities were governed by Clause 19 upon termination of the Sub-Contract.

As regards the third question, the Federal Court took the view that upon termination of the Sub-Contract, Bina Jati's entitlement to be paid in accordance with Clause 19 was not contingent upon actual receipt by Globe of such payment from the employer and therefore, effect had to be given thereto.

Accordingly, the Federal Court allowed Bina Jati's appeal. The orders of the Court of Appeal were set aside and orders of the High Court restored.

ANALYSIS

The Federal Court's decision in Globe Engineering is helpful as it provides guidance as to the standard of proof that applies in determining whether a contractual provision is a 'pay-when-paid' clause or a 'pay-if-paid' clause.

From a practical perspective, the coming into operation of the Construction Industry Payment and Adjudication Act 2012 ("CIPAA") has given rise to some uncertainty as to the extent to which this decision remains instructive as section 35(1) of the Act renders void any 'conditional payment provision' (including one where a party's obligation to make payment is conditional upon that party having received payment from a third party) under a construction contract.

In view of section 35(1) of CIPAA, it is clear that the Federal Court's decision will not be relevant to construction contracts made after 15 April 2014, i.e. the date on which CIPAA came into operation. However, it remains a moot point as to whether section 35(1) will apply to construction contracts that were entered into before CIPAA came into operation.

Notwithstanding the above, the decision remains relevant for the interpretation of 'pay-when-paid' and 'pay-if-paid' clauses in construction contracts that are exempted from the operation of CIPAA under the Construction Industry Payment and Adjudication (Exemption) Order 2014. Examples of such contracts are Government contracts for work to be carried out urgently due to natural disasters and other emergencies and unforeseen circumstances, and those that relate to national security.

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SUBJECT MATTER: CASE COMMENTARY

WRITER'S NAME: JANICE TAY HWEE HOON

WRITER'S PROFILE:

Janice is a Senior Associate with the Dispute Resolution Division of SKRINE. Her main practice areas are construction and engineering litigation and arbitration.

 
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