Malaysia: Court Of Appeal Upholds Pre-CIPAA "Pay When Paid" Clause

Shannon Rajan highlights the recent Court of Appeal's decision on "pay when paid clauses".

INTRODUCTION

In the recent case of Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd (unreported), the Court of Appeal considered whether a "pay when paid" clause in a construction contract is void under the Construction Industry Payment and Adjudication Act 2012 ("CIPAA").

Unless otherwise stated, all references to sections in this article are to sections in CIPAA.

BRIEF BACKGROUND FACTS

There were two appeals before the Court of Appeal where the High Court judge dismissed the Appellant's application to set aside an adjudication decision and allowed the enforcement of the aforesaid adjudication decision by the Respondent. The said decision (reported in [2017] MLJU 1342) was premised on a finding that a "pay when paid" clause in a construction contract was void pursuant to section 35, which prohibits any conditional payment clauses in a construction contract.

Clause 11.1 of the construction contract, which according to the High Court judgment was dated 16 March 2011 (i.e. prior to the coming into force of CIPAA on 15 April 2014) provides as follows:

The main issue before the adjudicator was whether section 35 applied to construction contracts which existed prior to the coming into force of CIPAA. It was not disputed that prior to the adjudication, the parties had followed the mode of payment under clause 11 of the construction contract. Notwithstanding this, the adjudicator found that section 35 applied and consequently, ignored clause 11 and relied on the default provision entitling to progress payments under CIPAA to award a sum of RM 906,034.00 to the Respondent.

The High Court judge relied on UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor [2015] 5 CLJ 527, which held, amongst others, that CIPAA applies to all construction contracts regardless of when those contracts were made and accordingly, affirmed the adjudicator's decision.

THE COURT OF APPEAL'S DECISION

Regarding the applicability of section 35, the Court of Appeal found that there is no express provision under CIPAA excluding or including construction contracts made prior to the commencement of CIPAA. Hence, the Court of Appeal had to determine Parliament's intention through established principles of interpreting statutes. In this regard, the Court found that the applicable principle of law was that if the legislation does not take away any substantive rights of a citizen, then that legislation would be "procedural" in nature and can be interpreted as retrospective legislation unless there are clear words to the contrary.

In determining whether CIPAA gave rise to "substantive rights", the Court of Appeal observed that prior to CIPAA, the claimants in the construction industry could only resort to either the courts or arbitration to settle their disputes. However, with CIPAA, the claimants now have an additional avenue to make a claim for their contractual fees. As such, the Court of Appeal was of the view that access to justice is a substantive right and accordingly, found that CIPAA is a legislation relating to substantive rights. It further found that although there is a procedural regime under CIPAA dictating how claims are to be processed before the adjudicator, that regime was merely a by-product or the consequence of the substantive right created by CIPAA.

The Court of Appeal also viewed section 35 as a substantive right of an individual vis-à-vis the right to freedom of contract where the parties are entitled to regulate their business affairs subject to any prohibitions recognised by law. According to the Court, section 35 takes away the parties' right to have their payment regime regulated by a "pay when paid" mode. The Court of Appeal was also guided by the presumption when interpreting statutes that Parliament will not take away the entrenched right of an individual retrospectively unless there are clear words to such effect within the statute. As there were no such clear words in CIPAA, the Court of Appeal concluded that CIPAA, including section 35, is prospective in nature and clause 11 of the construction contract remained valid.

The Court of Appeal took a different view from UDA Holdings Bhd and found support in International Contractual and Statutory Adjudication where the learned author, Andrew Burr, expressed the view that CIPAA was not a "procedural legislation". The author premised his reasoning on section 36(1) which allows parties to contract out of the "progress payment" regime and such a right is not consistent with the spirit and intention of CIPAA. He opined that the phrase "unless otherwise agreed by parties" in section 36 ought to be deleted.

The Court of Appeal therefore concluded that the adjudicator had exceeded his jurisdiction in holding that clause 11 was void and allowed the two appeals and set aside the orders of the High Court and those of the adjudicator.

CONCLUSION

With the Court of Appeal's decision, the statutory adjudication practice in Malaysia which has been governed by the decision of UDA Holdings Bhd, has changed. A "pay when paid" clause under a construction contract existing prior to the commencement of CIPAA remains valid and enforceable and will not be affected by the introduction of section 35.

However, it is unclear whether the Court of Appeal's finding that "CIPAA 2012 is prospective in nature" is intended to apply to the whole of CIPAA or only to construction contracts entered between parties after the commencement of CIPAA. This case is presently pending an application for leave to appeal to the Federal Court.

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