The End of Cash Flow Woes

Shannon Rajan provides an overview of the Construction Industry Payment and Adjudication Bill 2011

INTRODUCTION

The Construction Industry Payment and Adjudication Bill 2011 ("CIPA Bill"), which is being presented to the Dewan Rakyat and the Dewan Negara of the Malaysian Parliament during its present session, introduces an interim dispute resolution process, described as 'adjudication', to resolve payment disputes arising from construction contracts and provides remedies for the recovery of payment upon the conclusion of adjudication.

The CIPA Bill is designed to facilitate regular and timely payment in respect of construction contracts with the aim to alleviating cash flow problems that presently plague the construction industry.


WHAT IS ADJUDICATION?

Generally, adjudication is a process that involves a neutral third party either appointed by the parties to a dispute or by an independent institution clothed with the authority to make a provisional interim but enforceable decision on disputes referred to him.

The decision of the adjudicator is binding and is to be complied with until and unless the subject disputes of the decision is finally resolved by arbitration, litigation or agreement in writing (Section 13), or is otherwise set aside by the Court (Section 15).


STRUCTURE OF THE CIPA BILL

The CIPA Bill is divided into 7 parts:

  • Part I deals with preliminary matters;

  • Part II deals with the procedures on the adjudication of payment disputes;

  • Part III deals with the provisions relating to the adjudicator;

  • Part IV deals with the enforcement of adjudicator’s decision;

  • Part V deals with the designation of the adjudication authority;

  • Part VI deals with the general provisions; and

  • Part VII deals with the miscellaneous provisions

 

PRELIMINARY MATTERS

Section 2 provides that the provisions of the CIPA Bill apply to every construction contract made in writing relating to construction works carried out wholly or partly within the territory of Malaysia, including construction contract entered into by the Government.

A construction contract is defined in Section 4 as a construction work contract or construction consultancy contract. The scope of ‘construction work’ is wide and includes oil, gas and petrochemical work. Consultancy services include planning and feasibility study, architectural work, engineering, surveying, exterior and interior decoration, landscaping and project management services.

However, the CIPA Bill does not apply to a construction contract entered into by a natural person for any construction works in respect of any building which is less than 4 storeys high and which is wholly intended for his occupation (Section 3).


PAYMENT ISSUES AND PROCEDURES

Any party to a construction contract who claims payment of a sum has not been paid in whole or in part under a construction contract may serve a payment claim on a non-paying party. ‘Payment’ is defined by Section 4 of the CIPA Bill to mean ‘a payment for work done and services rendered under the express terms of a construction contract’.

The CIPA Bill gives the parties the freedom to agree on the manner of evaluation, frequency and due date of payment but in the absence of such agreement between the parties in the construction contract, the default provisions in Section 36 will apply. Section 35 expressly outlaws “pay-when-paid” and other conditional payment provisions in construction contracts and declares such provisions to be null and void.

A brief outline of the adjudication process is set out below.

  • Upon receipt of a payment claim from the unpaid party, the non-paying party may serve a payment response in writing within 10 working days, disputing the whole or a part of the claim. A non-paying party who does not serve a payment response is deemed to have disputed the entire payment claim (Section 6(4));

  • After the expiry of the payment response period, the unpaid party or the non-paying party may refer any dispute arising from the payment claim to adjudication by serving a written notice of adjudication (Section 7(2));

  • Upon the receipt of the notice of adjudication from the unpaid party, an adjudicator may be appointed by agreement of the parties within 10 working days, or failing such agreement, by the Director of the Kuala Lumpur Regional Centre for Arbitration upon request by either or both of the parties (Sections 8(2) and 21);

  • After an adjudicator is appointed, the claimant is required to serve its written adjudication claim containing the nature and description of the dispute and the remedy sought together with any supporting documents on the respondent and the adjudicator within 10 working days from the receipt of the acceptance of the appointment by the adjudicator (Section 9);

  • The respondent is then required to serve its written adjudication response within 10 working days from the receipt of the adjudication claim (Section 10). If the respondent fails to serve any adjudication response within the stipulated 10 working days period, the claimant may proceed with the adjudication;

  • Upon receipt of the adjudication response, the claimant may serve its adjudication reply within 5 working days thereof (Section 11); and

  • The adjudicator will then be required to decide the dispute and deliver his adjudication decision within 45 working days from the service of the adjudication response or reply, whichever is later, or 45 days from the expiry of the period prescribed for the service of the adjudication response if no adjudication response is received. The prescribed time-frames may be extended by agreement of the parties. If the adjudication decision is not delivered within the prescribed time, that decision will be deemed void (Section 12).

The whole process from the initiation of adjudication process up to the delivery of the adjudicator’s decision will take approximately around 95 to 100 working days.

 

THE COURT’S ROLE

Section 15 provides that an aggrieved party may apply to the High Court to set aside an adjudication decision on the ground that (a) the adjudication decision was improperly procured through fraud or bribery, or (b) there was a denial of natural justice, or (c) the adjudicator had not acted independently or impartially, or (d) the adjudicator had acted in excess of his jurisdiction.

Either party may also apply to the High Court for a stay of the adjudication pursuant to Section 16 provided that an application to set aside the adjudication decision has been made, or the subject matter of the adjudication decision is pending final determination by arbitration or the court. The granting of such a stay is within the discretion of the High Court. However, the High Court may, if it sees fit, order the adjudicated amount or part of it to be deposited with the Director of the Kuala Lumpur Regional Centre for Arbitration.


ENFORCEMENT OF THE ADJUDICATION DECISION

Section 28 provides that a party may apply to the High Court to enforce an adjudication decision as if it is a judgment of the Court.

A party may suspend performance or reduce the rate of progress of performance of any work or services under a construction contract if the adjudicated amount pursuant to the adjudication decision has not been settled by the other party (Section 29).


GAZING INTO THE CRYSTAL BALL

The CIPA Bill was introduced to protect the subcontractors in the construction industry by ensuring regular and timely payments of progress claims to them and providing speedy resolution of disputes.

Sceptics have argued that statutory adjudication is superfluous as the same objective can be achieved through the expedited arbitration process.

The statistics from other jurisdictions which have adopted statutory adjudication, such as the United Kingdom and Singapore, have revealed that stakeholders in the construction industry would generally accept the adjudication decisions, and would not pursue the matter further either in court or in arbitration. As a result, the number of litigation and arbitration proceedings relating to construction disputes have been substantially reduced since the introduction of statutory adjudication.

If statutory adjudication under the CIPA Bill receives a similar level of receptiveness in Malaysia, then construction-related litigation and arbitration proceedings will similarly be reduced. Perhaps the CIPA Bill will achieve its objective of ending the cashflow woes of subcontractors in the Malaysian construction industry.



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