Malaysia: The Continuing Rise Of Statutory Adjudication In 2019

The year 2019 witnessed a myriad of statutory adjudication disputes in Malaysia. The surge in the number of disputes involving the statutory adjudication mechanism in the Construction Industry Payment and Adjudication Act 2012 ("CIPAA") has also led to a significant number of consequential challenges to adjudication decisions in the courts. This article highlights the notable pronouncements by the Malaysian courts in 2019 and their effect on the future application of CIPAA.

A. PROSPECTIVE EFFECT OF CIPAA

Top of the charts, the noteworthy saga of appeals of Jack-In Pile (M) Sdn Bhd v Bauer (M) Sdn Bhd and another appeal [2020] 1 MLJ 174 ("Jack-In Pile") and Ireka Engineering & Construction Sdn Bhd v PWC Corp Sdn Bhd and other appeals [2020] 1 MLJ 311 ("Ireka") marked the beginning of a dramatic departure from the retrospective effect of CIPAA since its enactment in April 2014.

The case of Jack-In Pile concerned a construction contract entered into between the appellant (subcontractor) and the respondent (main contractor) in 2011, prior to the coming into force of CIPAA. The contract included a conditional payment clause, allowing the respondent to withhold payment from the appellant until and unless the respondent had received the related progress payments from the employer. It was undisputed that the parties had agreed and complied with the mode of payment under the conditional payment clause. Unfortunately, the employer spiralled into liquidation which brought payments between the respondent and the appellant to a standstill.

The appellant subsequently commenced adjudication proceedings against the respondent and an adjudication decision was delivered in favour of the appellant.

In 2016, the High Court, in deciding to enforce the adjudication decision on an application by the appellant, held that the conditional payment clause in the construction contract wherein payment from the respondent to the appellant is conditioned on the respondent having received payment from the employer, was prohibited by virtue of section 35 of CIPAA. In arriving at its decision, the High Court relied on the legal proposition in UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor and another case [2015] 11 MLJ 499 that CIPAA, including section 35, applied retrospectively to all construction contracts or disputes notwithstanding whether the construction contracts were made or the disputes arose before or after the enforcement date of CIPAA.

However, in 2018, the Court of Appeal found that there was no express provision in CIPAA excluding or including construction contracts made prior to the commencement of CIPAA. The Court of Appeal affirmed the trite legal position that unless there were clear words in the legislation to the contrary, any legislation affecting the substantive rights of parties must be given a prospective effect. In the same vein, the Court of Appeal found that CIPAA was a legislation relating to a substantive right.

The Federal Court, in affirming the Court of Appeal's decision, unanimously ruled that CIPAA operated prospectively as there is no express intention by Parliament that it was to be applied retrospectively. It was held that CIPAA was a piece of legislation which affected the substantive rights of parties as it provided an avenue for claimants to claim for contractual debts due and owing to them. In the context of section 35 of CIPAA, the prohibition on conditional payment clauses stipulated therein affected the substantive rights of the parties to enforce an agreed conditional payment clause. Therefore, the Federal Court concluded that section 35 of CIPAA could not apply retrospectively to deprive parties of those substantive rights without a clear legislative intention to that effect.

The case of Ireka was decided alongside Jack-In Pile. Similarly, the question of law for determination by the Federal Court in Ireka was whether CIPAA as a whole affected the substantive rights of parties and hence, was prospective in effect. In Ireka, the subcontracts between the appellant and the respondent were entered into prior to the enactment of CIPAA. These subcontracts allowed the appellant the right to set off against any claims made by the respondent. The appellant contended that its substantive right to raise any set-offs existed before CIPAA came into force and as such, CIPAA could not apply retrospectively to extinguish the appellant's substantive right.

The Federal Court in Ireka found that the clause in the construction contracts providing for the right to raise cross-contract set-offs was a substantive right which the parties had acquired pursuant to their agreement before CIPAA came into force. Therefore, CIPAA could not apply retrospectively to strip away the parties' substantive rights.

Since the Federal Court's rulings on the prospective effect of CIPAA in Jack-In Pile and Ireka, the courts have readily set aside adjudication decisions primarily on the ground that the adjudicator has no jurisdiction in law to determine a dispute arising from construction contracts entered into before the enactment of CIPAA. This is illustrated in the High Court cases of Kiarafield Sdn Bhd v Pembinaan Perisai Hebat Sdn Bhd [2019] MLJU 1245 and Bond M&E (KL) Sdn Bhd v Prinsiptek (M) Sdn Bhd [2019] MLJU 1665 ("Bond").

In the case of Bond, the High Court dealt with the preliminary issue as to the date on which the parties entered into the construction contract. The complicating factor therein, as in most construction contracts, was that the construction contract was not made up of one document but consisted of a list of contract documents with the letter of award incorporating the terms of the chosen standard form being the first written confirmation of the award of the works between the parties issued on 27 July 2012 (before CIPAA came into force) followed by the execution of the concluded agreement on 19 December 2014 (after CIPAA came into force). In coming to its decision that the contract was entered into by the parties on 27 July 2012, the High Court examined the relevant documents and looked at the surrounding circumstances. It was found that, except for one inconsequential amendment, the terms of the letter of award were identical to the terms of the concluded agreement and the execution of the standard form was merely a formality. Hence, the contact was entered between the parties on 27 July 2012.

B. MANDATORY OBLIGATION ON PRINCIPAL TO PAY ADJUDICATED SUM

The recent Court of Appeal decision in CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75 confirms the statutory obligation of a principal to make direct payment to the subcontractor pursuant to section 30 of CIPAA, regardless of whether the main contractor was in liquidation. In this case, the subcontractor filed an action against the main contractor's principal pursuant to section 30 of CIPAA for direct payment of the adjudicated sum due and owing by the main contractor to the subcontractor, given the fact that the main contractor had been wound up.

The Court of Appeal held that the principal's obligation pursuant to section 30 of CIPAA is an independent statutory obligation that exists in parallel with the main contractor's obligation to pay the subcontractor under the adjudication decision. The Court of Appeal went on to clarify that the principal's liability to make payment to the subcontractor would not be from the assets of the main contractor. Once the adjudicated sum is paid by the principal to the subcontractor, it will be a debt due from the main contractor to the principal which the principal will have to recover from the main contractor pursuant to section 30(4) of CIPAA.

In addition, it was summarised by the High Court in the case of B Cor Geotechnics Sdn Bhd v Panzana Enterprise Sdn Bhd [2019] 1 LNS 1393 that the remedy under section 30 of CIPAA does not entail the need for a contractual relationship to exist between the successful party and the principal of the party against whom the adjudication decision was made. This reinforces that the principal's obligation under section 30 of CIPAA is one that is independent and statutorily enforceable, not to mention mandatory in nature.

C. NATIONAL SECURITY

In ENRA Engineering and Fabrication Sdn Bhd v Gemula Sdn Bhd & Another Case [2019] 10 CLJ 333, the disputes between the main contractor and the subcontractor arose during a project for the construction of garage facilities within a military camp. The main contractor applied to set aside an adjudication decision delivered in favour of the subcontractor. The main contractor contended, amongst others, that the subcontracts executed between the main contractor and the subcontractor ought to be exempted from the application of CIPAA as they were Government construction contracts and related to national security as specified in the First Schedule of the Construction Industry Payment and Adjudication (Exemption) Order 2014 ("Exemption Order"). On the other hand, the subcontractor argued that the subcontracts were not Government construction contracts plainly because the Government was not a party to the subcontracts.

At the outset, the learned Judge, relying on the obiter dicta in the earlier case of Mudajaya Corporation Bhd v Leighton Contractors (M) Sdn Bhd [2015] 5 CLJ 848 ("Mudajaya"), held in principle that in the event the first contract in the chain of contracts is exempted by reason that it falls within the First Schedule of the Exemption Order, the contracts down the chain would similarly qualify to enjoy the benefits of the exemption. Arguably, the subcontracts between the main contractor and the subcontractor could be exempted from the applicability of CIPAA if the proposition expressed in Mudajaya is accepted.

Interestingly, the learned Judge nonetheless concluded that there was no element of national security in the construction of a garage, albeit within a military camp, as it was nothing more than to store and park motor vehicles. On this reason, the learned Judge found that the subcontracts would not be exempted from the applicability of CIPAA under the Exemption Order.

D. TERMINATION OF CONTRACT AND FINAL CLAIMS

The Federal Court's decision in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Appeal [2019] 8 CLJ 433 concerned the applicability of CIPAA after the termination of the construction contract in question and final claims arising therefrom. In this case, the respondent, a firm of architects, resorted to bringing an action under CIPAA against the appellant to recover its professional fees for works and services rendered to the appellant. At the time the payment claim was served by the respondent, the construction contract between the parties had been terminated. The adjudication decision which was delivered in favour of the respondent was challenged by the appellant.

The appellant argued that as the contract had been terminated, there was no longer a "construction contract" for the purpose of CIPAA and hence, the dispute arising from the terminated contract was not amenable to CIPAA. On the facts, the Federal Court found that the construction contract between the appellant and the respondent expressly contemplates payment being made after the said contract has been terminated. Even so, the Federal Court held that the absence of such a provision does not deprive a party of its entitlement to make a payment claim after the construction contract has been terminated.

The Federal Court also discussed the issue as to whether CIPAA ought to apply to interim or final claims given that the appellant had argued that CIPAA ought not to cover claims for final accounts or sums finally due to the unpaid party unless the contractual mechanism for the payment of the final accounts (if provided under the contract) had been engaged. As originally conceived, the scheme of CIPAA is intended to facilitate timely and regular payments and to alleviate cashflow problems endured by stakeholders in the construction industry. Premised on this objective, the Federal Court did not find it logical to confine the applicability of CIPAA only to interim claims. As long as the claims are payment claims relating to a construction contract as defined in section 4 of CIPAA, then CIPAA may come into play regardless whether the payment claims were interim or final claims after termination.

E. STAY OF ADJUDICATION DECISION

In Punj Lloyd Sdn Bhd v Ramo Industries Sdn Bhd & Anor and another case [2019] 11 MLJ 574, the respondent in an adjudication proceeding applied to stay the adjudication decision delivered in favour of the claimant pending the outcome of a continuing arbitration in India between the respondent's holding company and the claimant's joint-venture partner. Although the respondent was not a party to that arbitration, the High Court held that the respondent nevertheless was entitled to apply for a stay of the adjudication decision because the subject matter of the adjudication is the same as the subject matter of the arbitration in India. Following from that, it was held that the threshold condition to apply for a stay of an adjudication decision pursuant to section 16(1)(b) of CIPAA had been fulfilled.

In adopting a liberal reading of section 16 of CIPAA, as taken in the Federal Court case of View Esteem Sdn Bhd v Bina Puri Holdings Berhad [2017] 8 AMR 167, the High Court in Genbina Sdn Bhd v Bina Puri Construction Sdn Bhd and another appeal [2019] MLJU 1933 deliberated as to whether a stay of the adjudication decision ought to be granted to meet the justice of the case, notwithstanding that there was no clear and unequivocal error in the adjudication decision which would have justified a stay under section 16 of CIPAA. The High Court found that the factual matrix of this case, which included the fact that the successful party of the adjudication proceeding was in receivership and in liquidation, was an apt case to order the adjudicated sum to be deposited with the director of the Asian International Arbitration Centre pending the final determination of the arbitration between the parties. In essence, the court has the discretionary power to grant a stay of an adjudication decision under section 16 of CIPAA, conditional or otherwise, subject to the fulfillment of the threshold condition, and the applicant bears the burden to show how and why the discretion ought to be exercised in its favour.

F. RES JUDICATA

In Samsung C & T Corporation & Anor v Bauer (Malaysia) Sdn Bhd and another summon [2019] MLJU 1690, the applicant succeeded in its application to set aside the adjudication decision delivered in favour of the respondent in 2018. Amongst other challenges mounted against the adjudication decision, the applicant claimed that the adjudicator had acted in excess of his jurisdiction as the issues raised in the respondent's payment claim had been decided in an earlier adjudication decision delivered sometime in 2017.

Pursuant to section 13 of CIPAA, the High Court held that the 2017 adjudication decision is binding on the parties as it has neither been set aside by the High Court, settled by a written agreement between the parties nor finally decided by arbitration or the courts. As the previously adjudicated sums in 2017 were res judicata, the High Court found that the adjudicator had acted in excess of his jurisdiction when he reconsidered the aforesaid sums in the 2018 adjudication proceedings.

Whilst the doctrine of res judicata generally applies to adjudication proceedings commenced under CIPAA, to bar claims from being re-adjudicated, the said doctrine does not apply to jurisdiction challenges in adjudication proceedings or adjudication decisions. This principle, an important obiter dicta in the High Court case of Ahmad Zaki Sdn Bhd v Swaja Fascade Sdn Bhd & Anor and another case 2019] 1 LNS 1774, is consistent with the earlier case of Zana Bina Sdn Bhd v Cosmic Master Development Sdn Bhd and another case [2017] MLJU 146. Hence, the courts have unfettered powers to investigate the jurisdiction challenge afresh, even though the same jurisdictional issue had already been raised before the adjudicator during the adjudication proceedings.

More often in practice, when jurisdiction issue is raised, adjudicators will proceed and complete the adjudication proceedings in accordance with section 27(3) of CIPAA, invariably deciding his jurisdiction within his reasoned decision. This has set the trend for the challenger, if unsuccessful, to repeat the jurisdictional issue in court during an application to set aside the adjudication decision. It remains to be seen if this trend will continue unabated. Instead of going through the entire adjudication proceedings, only to have the adjudication decision set aside on the re-litigation of a jurisdictional issue, an adjudicator, with the parties' agreement, may consider adjourning the adjudication proceedings pending resolution by the court of a declaration of his jurisdiction, as had happened in the English case of ABB Zantingh Ltd v Zedal Building Services Ltd [2001] BLR 66.

G. NATURAL JUSTICE

The importance of adjudicators upholding the two primary principles of natural justice - the rule against bias and the right to be heard, has never been more greatly emphasised than in the High Court case of Desaru Peace Holdings Club Sdn Bhd v Malaysian Resources Corporation Berhad [2019] 1 LNS 1034. In that case, the adjudicator had limited the adjudication reply to 10 pages. Objection was raised by the respondent when the claimant exceeded the 10-page limit. The adjudicator allowed the adjudication reply in its entirety on the ground that the claimant ought to be given the opportunity to be heard. Unfortunately, the adjudication decision was set aside for breach of natural justice as the adjudicator was found to be biased and acted in favour of one party, by allowing only one party to the proceedings to not comply with the procedural rules he had set and ignoring the objections of the other party to the proceedings. This case serves as a useful pointer to adjudicators to uphold all the rules of natural justice in safeguarding their decisions against a challenge for breach of the principles of natural justice.

The right to be heard includes a fair opportunity to present evidence and arguments before a tribunal makes its decision. In Guangxi Dev & Cap Sdn Bhd v Sycal Bhd & Another Appeal [2019] 1 CLJ 592, the Court of Appeal relied on the Federal Court case of View Esteem and found that there was a violation of the principles of natural justice when the adjudicator rejected the appellant's application to call three expert witnesses as that had deprived the appellant an opportunity to present a complete defence. The Court of Appeal did recognised that the change in law by the Federal Court in View Esteem came later than the adjudication decision.

H. TIME TO MAKE PAYMENT

When an adjudication decision is silent on the time for the losing party to make payment of the adjudicated sum, but imposes late payment interest commencing from a pre-decision date until full settlement and a separate timeline for payment of costs, it can be interpreted that the payment of the adjudicated sum is to be made forthwith. Such was the conclusion arrived at in the High Court case of Pasukhas Sdn Bhd v Empire Multiple Sdn Bhd & Another Case [2019] 1 LNS 757 when the High Court judge eventually dismissed the setting aside application.

I. ERROR OF LAW

In SKS Pavillion Sdn Bhd v Tasoon Injection Pile Sdn Bhd [2019] MLJU 1051, the plaintiff sought to set aside an adjudication decision on several grounds, one of which was that the adjudicator had made an error of law which had a potentially significant effect on the adjudication decision.

The adjudicator had decided that the plaintiff was not entitled to impose liquidated ascertained damages on the ground that it had failed to prove actual loss as held in the case of Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817 ("Selva Kumar"). The plaintiff contended that at the date of the adjudication decision, the principle in Selva Kumar regarding strict proof of actual loss had already been restated by the Federal Court in Cubic Electronics Sdn Bhd (In Liquidation) v MARS Telecommunications Sdn Bhd [2019] 2 CLJ 723 ("Cubic Electronics"). The plaintiff therefore argued that the adjudicator ought to have highlighted the change in the law, to enable parties to address the point.

Although it appears that Cubic Electronics was decided before the adjudication decision was delivered, it was only after the defendant's adjudication reply was submitted. Notwithstanding the aforesaid, the High Court held that the plaintiff could have alerted the adjudicator of the change in the law, which the plaintiff did not do at that time despite having the opportunity to do so.

The High Court dismissed the plaintiff's application to set aside the adjudication decision. Fundamentally, the High Court held that it was not in a position to review the facts or law on the adjudicator's findings unless it goes towards his jurisdiction. In the event a correction is to be made on the legal propositions relied on by the adjudicator, the same can be done in an arbitration.

J. WINDING UP PETITION PURSUANT TO AN ADJUDICATION AWARD

In Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244, the Court of Appeal by a unanimous decision held that it is not a mandatory requirement for an adjudication decision to be registered with the High Court pursuant to section 28 of CIPAA for the purpose of issuing a notice to wind up a company under the Companies Act 2016. In arriving at its conclusion, the Court of Appeal expressed the view that the language in section 28 of CIPAA does not convey that a decision of the adjudicator must be registered with the High Court before a statutory notice under paragraphs (e) and (h) of sub-section 465(1) of the Companies Act 2016 could be issued. The law is such that prima facie, a creditor who is not paid, has a right to file a petition to wind up the debtor company.

The Court of Appeal also took the view that section 31 of CIPAA which states that the remedies provided by CIPAA are without prejudice to other remedies available in the construction contract or any written law, can be invoked by a successful party.

The Fortuna Injunction, an injunctive relief which arose from the Australian case of Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83, is sometimes filed by a losing party to restrain the winning party from presenting a winding-up petition based on an adjudication decision. There have been instances where a Fortuna Injunction has been denied, such as in MRCB Builders Sdn Bhd v Southern Builders (J) Sdn Bhd [2019] 1 LNS 365 where the High Court held that it would, in the circumstances, be unjust to deprive a winning party of the fruits of its litigation bearing in mind that the very purpose of CIPAA is to facilitate regular and timely payment.

On the other hand, the High Court in Must Ehsan Development Sdn Bhd v Bumimetro Construction Sdn Bhd [2019] 1 LNS 744, granted a Fortuna Injunction as there was a disputed debt mainly because the adjudication decision had been set aside. In ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd [2020] MLJU 282, the High Court granted a Fortuna injunction as it was satisfied that the existence of serious counterclaims/set-offs in the arbitration commenced in parallel with the adjudication proceedings gave rise to a genuine dispute to the adjudication sum.

K. ENFORCEMENT DENIED IF THERE IS A COURT JUDGMENT

Enforcement of an adjudication decision will generally be refused if there is a court order or an arbitration decision on the same dispute. In the peculiar High Court case of Prestij Mega Construction Sdn Bhd v Keller (M) Sdn Bhd & Other Cases [2019] 1 LNS 1612, the application to enforce the adjudication decision was dismissed given that there was already a court judgment, albeit a judgment in default, on the same disputed amount. The Court's judgment in default was held to be the final determination of the dispute between the parties in accordance with section 13 of CIPAA.

L. CONSTITUTIONALITY OF CIPAA

With regards to the constitutionality of CIPAA, the High Court in Mega Sasa Sdn Bhd v Kinta Bakti Sdn Bhd & Ors [2020] 4 CLJ 201 held that CIPAA is not in violation of Articles 4, 8 and 121 of the Federal Constitution. The Court reasoned that statutory adjudication under CIPAA is a judicial function just like the Tribunal for Homebuyer Claims or other inferior tribunals and is not a replacement of the courts envisaged in Article 121. Only judicial power is vested upon the courts and hence the monopoly of the courts.

COMMENT

As the statutory mechanism of CIPAA continues to meet the demands of stakeholders in the construction industry to provide a speedy and efficient resolution of disputes, the Malaysian courts are inevitably called upon to play a pivotal role in developing and interpreting the law on statutory adjudications.

Originally published 30 October 2020

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