Introduction
The Malaysian Construction Industry has been plagued with serious and prevalent payment problems which has affected cash flow for contractors in the progress of their works under the construction contract. In 2014, Parliament introduced a new scheme of dispute resolution to hopefully help ensure that cash is pumped down the construction contract chain and the contractors who have done the work would be paid.
What is Statutory Adjudication?
Statutory Adjudication was introduced by virtue of the enactment of the Construction Industry Payment and Adjudication Act 2012 (CIPAA 2012) (“the Act”) which was passed by the Malaysian Parliament in March 2012 and received Royal Assent on 18th June 2012. The Act came into operation on the 15th April 2014 alongside the CIPAA Regulations, Exemption Orders and the KLRCA Adjudication Rules & Procedure.
CIPAA 2012 introduces a new forum for speedy resolution of payment disputes under a construction contract. It is a summary procedure for the resolution of payment disputes at any stage of a construction contract, without waiting for the final resolution through traditional forums of litigation or arbitration.
The Act’s main objective was to address cash flow problems which has been prevalent in the construction industry. The Act also aims to alleviate the pervasive and prevalent practice of delayed, non-payment and/or under-payment for works and/or services carried out under a construction contract.
With the introduction of the Act, conditional payment provisions such as “pay when paid”, “pay if paid” and “back to back payment” provisions which contributed to the delay in payments in the construction industry has been made void by virtue of Section 35 of the Act.
The Act also introduces default payment terms for the performance of works and/or services rendered under the construction contract in the event of a non-existence of payment terms in the construction contract.
Who benefits from the introduction of Statutory Adjudication?
A party in a construction contract with disputes relating to payment for work done and/or services rendered may refer the dispute to adjudication under the Act. Claims for damages arising out a breach of a contract and loss and expenses are not permitted to be brought to adjudication under the Act.
A construction contract as defined under Section 4 of the Act means a construction work contract or construction consultancy contract. The works under the contract must have been carried out wholly or partly within the territory of Malaysia (which also includes a construction contract entered into with the Government of Malaysia). The definition of construction work under the Act is wide ranging and includes inter alia construction, extension, installation, repair, maintenance, renewal, removal, alternation, dismantling or demolition works for buildings, roads, railways, water, gas, oil, telecommunication work as well as reclamation works[1].
What do you need to do file a Payment Claim?
If you have a claim for outstanding monies under a construction contract, you may initiate an adjudication proceeding by issuing a Payment Claim pursuant to Section 5 of the Act. You may engage a lawyer, claims consultant or even prepare it yourself by using the guideline provided by the Kuala Lumpur Regional Centre for Arbitration (KLRCA) in the KLRCA Adjudication Rules & Procedure.
It is advisable that in issuing a Payment Claim, it is important to take note of the following:-
a) That your claim documentations are in order i.e. the payment certificates and/or tax invoices. The period of honouring of the said payment certificates and/or tax invoices must have already passed before the Payment Claim is issued;
b) If you are claiming for works that have not been certified by the Architect/Quantity Surveyor, do ensure that the timeframe for certification of the works have passed before issuing the Payment Claim;
c) Identify the provisions in the construction contract that relates to payment terms;
d) State out clearly the outstanding amount which is due and payable by the non-paying party;
e) Identify clearly the works and/or services which have already been rendered;
What do I do if I received a Payment Claim?
If you have been served with a Payment Claim made under Section 5 of the Act, you are required to issue a Payment Response within 10 working days from the date of the receipt of the Payment Clam. It is important that this timeline is strictly adhered to so as to no compromise any of your defences.
In a Payment Response, you may dispute the whole claim, dispute a part of the claim or admit to the entire claim. If you have admitted to part or whole of the claim, payment must be made within the 10 working days, failing which, the unpaid party would still be able to commence adjudication against you. If you are disputing the claims made by the unpaid party, it is important to set out your defences against the claims clearly and the relevant set-offs which you may have against the claims such as back-charges, rectification costs and/or liquidated damages.
How do the Parties appoint the Adjudicator?
The adjudicator for the adjudication proceeding should only take place after the expiry of 10 working days after the filing of the Notice of Adjudication. Parties in an adjudication proceeding may agree to a particular competent and qualified person to be appointed as the adjudicator within 10 working days from the service of the Notice of Adjudication.
In the event that parties are unable to agree or reach an agreement on the appointment of an adjudicator, either or both parties may make a written request to the Director of the Kuala Lumpur Regional Centre for Arbitration (KLRCA) to appoint a suitable adjudicator to determine the dispute between both parties. Pursuant to Section 23(1) of the Act, the Director of KLRCA has to appoint the adjudicator from the KLRCA panel of adjudicators which consists of professionals such as lawyers, architects, quantity surveyors, engineers and claim consultants within 5 working days from the receipt of the written request from parties.
Who bears the cost in an Adjudication Proceeding?
The adjudicator in his/her determination of the dispute will also decide on the party who will bear the costs of the adjudication proceeding and the costs shall follow the event – Section 18(1) of the Act. A losing party will have to bear the entire costs of the adjudication proceeding.
What are the options available to me if I am successful in the adjudication?
A valid adjudication decision delivered by an adjudicator in the adjudication proceeding must conform to the strict requirements of Section 12 of the Act. An adjudication decision must be delivered within 45 working days from the service of the adjudication response or adjudication reply or such further time as may be agreed by parties in the proceeding. An adjudication decision delivered outside the period specified shall be void and the adjudicator will not be entitled to his/her fees.
Pursuant to Section 13 of the Act, the adjudication decision delivered is binding on parties of the proceeding unless it is set aside by the High Court (Section 15 of CIPAA 2012), subject matter of dispute is settled by written agreement between parties or dispute is resolved by way of arbitration or court proceeding.
A winning party in an adjudication proceeding can choose toenforce the adjudication decision as if it is a court order/judgment and upon obtaining the enforcement order of the adjudication decision, may execute the court order/judgment with the rules on execution of the orders or judgment – Section 28 of CIPAA 2012.
Besides enforcing the adjudication decision as an order/judgment of the High Court, a winning party may also suspend or reduce the rate of progress of works at the project site and the act of reducing the rate of progress of works will not be in breach of the contract, entitled to a fair and reasonable extension of time to complete the works as well as entitled to recover any loss and expenses incurred due to the reduction of rate of progress of works – Section 29 of CIPAA 2012
In the event the losing party in an adjudication decision refuses to make payment of the adjudicated amount, the winning party pursuant to Section 30 of CIPAA 2012 may make a written request for the payment of the adjudicated amount from the principal of the losing party provided that there are monies that are due or payable by the principal of the losing party to the losing party.
Enforcement of the Adjudication Decision as a Court Order/Judgment
(Section 28 of CIPAA 2012)
Direct Payment from Principal
(Section 30 of CIPAA 2012)
Suspension or Reduction of Rate of Progress of Performance
(Section 29 of CIPAA 2012)
What are my remedies if I am the unsuccessful party in the adjudication? Is there an appeal process?
A party that is dissatisfied with an adjudication decision does not have the right to appeal or review of the adjudication decision. However, an adjudication decision can be set aside by way of an application to the High Court under Section 15 of CIPAA 2012.
An Adjudication Decision can only be set aside on the following grounds:-
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.
It is important to note that errors of law or incorrect finding of facts by an adjudicator cannot be raised as grounds to set aside an adjudication decision. As long as the adjudicator has acted within the jurisdiction conferred on him/her by virtue of Section 27(1) of the Act and has answered the right questions referred to him/her, even if he/she has answered the questions wrongly, the High Court will not interfere with the findings of the adjudicator[2].
A dissatisfied party may also initiate an arbitration proceeding or court action in respect of the same subject matter which has been adjudicated if the said party is not satisfied with the adjudication decision.
In addition, a dissatisfied party may also file a stay of the adjudication decision under Section 16 of the Act to avoid having to comply with the determination of the adjudicator. A stay of an adjudication decision is only granted in special circumstances where the dissatisfied party must firstly show that an application to set aside the adjudicate decision has been made or there is concurrent proceedings on the subject matter in court or arbitration. Secondly, the dissatisfied party will need to prove to the satisfaction of the High Court of the other party’s financial status i.e. probable inability of repaying the adjudicated amount[3]
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