THE DEVELOPMENT OF STATUTORY ADJUDICATION IN MALAYSIA

THE DEVELOPMENT OF STATUTORY ADJUDICATION IN MALAYSIA

Jocelyn Lim examines some significant local cases since the inception of statutory adjudication in Malaysia

The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into operation on 15 April 2014. Since then, the Malaysian courts have had the opportunity to consider various aspects of CIPAA on a number of occasions. This article examines some of the significant decisions that have been handed down by the courts in the past 2½ years and provides a ‘snippet’ on the legal principles laid down in these cases.

CIPAA APPLIES RETROSPECTIVELY

Prior to the coming into force of CIPAA, there was much discussion within the construction industry on the scope of its application. Questions as to whether CIPAA applies to construction contracts signed before its date of coming into force and whether payment disputes arising before the said date fall within the scope of CIPAA were foremost in the minds of industry players.

On 31 October 2014, Malaysia’s first judicial pronouncement on matters involving CIPAA was made in UDA Holdings Berhad v Bisraya Construction Sdn Bhd & Anor & another case [2015] 11 MLJ 499. The 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 CIPAA. Her Ladyship’s decision, which was subsequently upheld by the Court of Appeal (unreported), gave retrospective effect to CIPAA.

This means that all payment disputes under any construction contract, other than those which fell within the statutory exceptions in sections 3, 40 and 41 of CIPAA, can be referred for adjudication under the Act regardless of when the construction contract was executed or when the payment disputes arose.

EXPANSIVE vs 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 (“2014 Exemption Order”). Questions arose as to whether the expression encompasses construction contracts entered 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 CIPAA.

This question was dealt with in Mudajaya Corporation Bhd v Leighton Contractors (M) Sdn Bhd [2015] 5 CLJ 848, where 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

The case of Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Case [ 2017] 1 CLJ 101 (“Martego”) considered an interesting question: whether an architect rendering purely architectural services with respect to a construction project may claim his outstanding fees from his client under CIPAA.

The learned High Court Judge disagreed with the claimant’s argument that “construction consultancy contract”, as defined under section 4 of CIPAA, did not apply to contracts which provide purely consultancy services. His Lordship found that the word “includes” used 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 meant that CIPAA applies to consultancy contracts which provide purely consultancy services.

 

EXEMPTION FROM CIPAA

Although CIPAA’s scope of application is intended to be wide and extensive, it is not without exceptions.

Section 41 provides that CIPAA shall not affect any proceedings relating to any payment dispute under a construction contract which had been commenced in any court or arbitration before CIPAA came into force. According to View Esteem Sdn Bhd v Bina Puri Holdings Sdn Bhd [2015] MLJU 695 (“View Esteem”), this means that the payment dispute referred to adjudication must be the same as the one that is pending in court or arbitration. If not, the particular payment dispute will fall within the ambit of CIPAA. The intention behind section 41 is to preserve the law on payment disputes which are already pending in court or arbitration when CIPAA came into force. For identical disputes which are already pending in court or arbitration, the law prior to 15 April 2014 will apply.

The other exemptions under CIPAA are contained in section 3 (buildings of less than four storeys intended for self-occupation) and section 40 (exemptions pursuant to Ministerial order, such as the 2014 Exemption Order) but these fall outside the scope of this article.

CONTRACTING OUT OF CIPAA?

The application of the statutory adjudication regime under CIPAA 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 and Another Case [2015] 1 LNS 1435. It was held that a reading of the terms of CIPAA as a whole prohibits the parties from contracting out of its application, notwithstanding that there is no express term to such effect in the statute. Specific contractual arrangement for dispute resolution by the parties would not exclude the application of CIPAA which is meant to cater 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 CIPAA. It merely means that the parties have chosen arbitration as final resolution of their dispute.

 

IS CLAUSE 25.4(d) OF PAM CONTRACT 2006 VOID?

The practice of having a conditional payment clause, be it a “pay-when-paid” or “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 is due and payable.

Section 35(1) of CIPAA prohibits conditional payment terms and provides that a conditional payment provision in a construction contract is void. Section 35(2) expressly declares that “for the purposes of section 35(1)”, each of the following to be a conditional payment provision:

(a)      when the obligation of one party to make payment is conditional upon that party having received payment from a third party; or

(b)      when the obligation of one party to make payment is conditional upon 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 notwithstanding that section 35(2) suggests that it is to be limited to the two situations set out in that section of CIPAA.  

BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd [2016] AMEJ 1858 (“BM City”) concerned the impact of section 35(1) on clause 25.4(d) of PAM Contract 2006. The plaintiff in its application to set aside an adjudication decision argued that it was not bound to make any further payment to the defendant until a final account is determined upon 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 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 judgement in Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd & Another Case [2016] 5 CLJ 882 (“Econpile”) and held that “the terms of s35(1) CIPAA 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 has taken 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 PAM Contract 2006 is void as it has the effect of postponing payment until final accounts are concluded thereby defeating the purpose of CIPAA.

At the time of writing, the appeal in Econpile to the Court of Appeal has been 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 presently pending in the Court of Appeal. It remains a moot point as to whether clause 25.4(d) of PAM Contract 2006 is void under CIPAA.

ZERORISING AN UNPAID PARTY’S CLAIM

The Court in Tenaga Poly Sdn Bhd v Crest Builder Sdn Bhd (unreported) essentially declared that a successful defence based on liquidated and ascertained damages (“LAD”) by a non-paying party will operate to zerorise an unpaid party’s claim, but will not result in the unpaid party being ordered to pay the non-paying party. The learned Judge in this case also declared that an LAD claim is not a “payment claim” within the meaning of sections 4 and 5 of CIPAA. It seems to suggest that a party cannot initiate adjudication proceedings under CIPAA to recover LAD against another party. At the time of writing, 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 [2015] 8 CLJ 728 (“Bina Puri”), 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 CIPAA which entitle him to “decide or declare on any matter notwithstanding no certificate has been issued” and to “review and revise any certificate issued or to be issued” respectively simply means that even if the contractual agreement between the parties provides for 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 CIPAA provides limited grounds on which an adjudication decision may be set aside, namely:

(a)      The adjudication decision was improperly procured through fraud or bribery;

(b)      There has been a denial of natural justice;

(c)       The adjudicator has not acted independently or impartially; or

(d)      The adjudicator has acted in excess of his 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 & Another Case [2015] 1 LNS 756, the Court found support and assistance in the principles set out in Balfour Beatty Engineering Services (HY) Ltd v Shepherd Construction Ltd [2009] EWHC 2218. Essentially, not any breach will allow for a 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 [2016] 1 AMR 379, the unilateral communication of the adjudicator was found to be a material breach of natural justice. It is important that any communication must 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 communication to the other party is perhaps to ensure impartiality of the adjudicator by giving parties a fair opportunity to present its case. 

The refusal to conduct oral hearing however does not necessarily amount to a breach of natural justice. It was held in Martego that an adjudicator is entitled to decide on the mode of hearing even if this is by way of documents and submissions only without the need to call witness.

STAY OF ADJUDICATION DECISION

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 [2015] 11 MLJ 818 (“Subang Skypark”). 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 CIPAA 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 of repayment of the adjudicated sum that may follow from concurrent court or arbitration proceedings. According to the learned Judge, the merits of the case before the arbitration 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 CIPAA, 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 retains the discretion as to whether or not to grant a stay.

PRE-QUALIFICATION FOR STAY

According to the Court in Foster Wheeler E & C (Malaysia) Sdn Bhd v Arkema Thiochemicals Sdn Bhd & Another Case [2015] 1 LNS 632, 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 CIPAA, requires the parties to have already commenced arbitration or court proceedings. In that case, the contract provided for a multi-tiered dispute resolution. At the material time, 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 prior to 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 in the High Court in View Esteem where the Judge held that such limitation is prescribed in section 27(1) of CIPAA. The process that take 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 containing greater details of the claim, response, or reply, as the case may be, of the payment claim and payment response.

Similarly, in Bina Puri, the High Court Judge in considering the argument raised by the applicant that the adjudicator had committed an error in holding that he had no jurisdiction under CIPAA to decide on the applicant’s counterclaim which was raised in its adjudication response but not in its payment response, concluded that section 27 of CIPAA clearly circumscribes the jurisdiction of the adjudicator which is limited to the disputes raised under sections 5 and 6 of CIPAA i.e. the payment claim and payment response. Any extension of the adjudicator’s jurisdiction beyond matters in the payment claim and payment response will have to be by way of a written agreement pursuant to section 27(2) of CIPAA. 

However, it is interesting to note that the Court of Appeal in View Esteem Sdn Bhd v Bina Puri Holdings Sdn Bhd [2016] 6 MLJ 717 seems to suggest that the adjudicator’s jurisdiction in relation to matters not raised in a payment response can be regularised pursuant to section 26 of CIPAA, 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. This however is not consistent with section 27(2) and the position in this regard remains uncertain.

PRINCIPAL TO MAKE DIRECT PAYMENT

As long as the necessary written request required under section 30 of CIPAA is issued to the principal, the principal is obliged to make payment to the party who obtained the adjudication decision in its favour. It is irrelevant if the principal is not a party to the adjudication proceedings or does not have knowledge of the adjudication proceedings. This was decided in Murni Environmental Engineering Sdn Bhd v Eminent Ventures Sdn Bhd & Anor and Other Suits [2016] MLJU 691.  

CONCLUSION

Although statutory adjudication in Malaysia is still very much 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 provisions of CIPAA.

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SUBJECT MATTER: STATUTORY ADJUDICATION

WRITER'S NAME: JOCELYN LIM

WRITER'S PROFILE:

Jocelyn is a Senior Associate in the Dispute Resolution Division of SKRINE. Her main areas of practice are statutory adjudication, construction disputes and drafting of construction-related contracts. She is also an accredited adjudicator with KLRCA.

 
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