- The construction industry, in particular, the Construction Industry Development Board (CIDB) and Master Builders Association Malaysia (MBAM) and other related promoters have been instrumental in getting the government to enact this piece of legislation since 2003 to address the cash flow problems plagued by the industry.
- The primary objective of the Act is to address cash flow problems in the construction industry.
- It removes the pervasive and prevalent practice of conditional payment (‘pay when paid’, ‘pay if paid’ and ‘back to back’) and reduces payment default by establishing a cheaper and speedier system of dispute resolution in the form of adjudication.
- The Act also provides for the recovery of payment upon the conclusion of the adjudication process in addition to a host of other remedies such as a right to reduce the rate of work progress or to suspend work or even to secure direct payment from the principal.
- It further provides default payment terms in the absence of provisions to that effect in the construction contract.
What Is Statutory Adjudication?
- Adjudication is a summary procedure for resolution of disputes under a construction contract. It allows a party (“the claimant”) who is owed monies under a construction contract to have the disputes resolved with the non-paying party (“the respondent”) in a quick and cheap manner. Disputes which may be refered to adjudication under CIPAA relate to payment for work done and services rendered under the express terms of a construction contract.
- It is a mandatory statutory process that does not require the agreement of the parties’ to commence the process and prevails over any contractual agreements to the contrary between the parties.
- Statutory adjudication can be commenced at any time whether during or after project completion.
- It is conducted privately and ensures confidentiality.
- It offers a relatively simpler, cheaper and faster process compared to arbitration and/or court proceedings by virtue of express provisions prescribed by CIPAA.
- The adjudicator must decide the dispute and deliver his decision within forty five (45) working days from the date of service of adjudication response, or reply (whichever is later), or the period prescribed for the submission of adjudication response (if no adjudication response is received), unless this period is extended by mutual agreement of the parties. Should the adjudicator fail to comply with the specified period, his decision shall be regarded as void and the adjudicator will not be entitled to any fees or expenses relating to the adjudication.
- The decision is temporarily but immediately binding pending the final resolution of the subject disputes by arbitration, litigation or agreement between the parties. In the interim, the losing party is required to comply with the adjudicator’s decision and pay the adjudicated amount unless the decision has been stayed or set aside by the High Court.
- However, if there is no challenge to the decision taken, then it will achieve finality.
- Under CIPAA, an adjudication decision can only be set aside on limited grounds, namely, where the adjudication decision was improperly procured through fraud or bribery; there has been a denial of natural justice; the adjudicator has not acted independently or impartially; or the adjudicator has acted in excess of his jurisdiction.
Who Does It Affect?
- Only disputes relating to payment for work done and services rendered under the express terms of a construction contract may be refered to adjudication under CIPAA. However, the parties may agree after the appointment of the adjudicator to extend the jurisdiction of the adjudicator to decide on any other matter arising from the construction contract.
- Section 41 of CIPAA provides:
Nothing in this Act shall affect any proceedings relating to any payment dispute under a construction contract which had been commenced in any court or arbitration before the coming into operation of this Act.
- For the purposes of administration of adjudication cases by the KLRCA under CIPAA, including the appointment of an adjudicator under CIPAA, the KLRCA takes the position that CIPAA applies to a payment dispute which arose under a construction contract on or after 15.4.2014, regardless of whether the relevant construction contract was made before or after 15.4.2014. In this regard, a payment dispute under a construction contract is said to have arisen when the non-paying party has, in breach of the contract, failed to make payment by the contractual due date for payment.
- CIPAA is wide ranging and covers inter alia, the building industry, the oil and gas industry, the petrochemical industry, telecommunication, utilities, infrastructure, supply contracts and consultancy contracts.
- CIPAA applies to every ‘construction contract’ made in writing relating to construction work carried out wholly or partly in Malaysia, including a construction contract entered into by the Government. It applies to both local and international contracts, provided the subject construction work is carried out wholly or party in Malaysia..
- CIPAA defines ‘construction contract’ to include construction work contracts and consultancy services contracts.
- CIPAA only applies to contracts which are made “in writing”. However, no definition or elaboration is provided in CIPAA as to what constitutes construction contract made in writing. KLRCA considers that a construction contract must be wholly in writing, and that it is made in writing:-
- if the contract is made in writing (whether or not it is signed by the parties);
- if the contract is made by exchange of communications in writing; or
- if the contract is evidenced in writing.
- Where parties agree otherwise than in writing by reference to terms which are in writing, they make a contract in writing.
- A contract is evidenced in writing if a contract made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the contract.
(* Refer to KLRCA Circular on Construction Contract Made In Writing issued on 28th April 2014.)
- The Act applies equally to the Government of Malaysia as well as the Private Sector. However, pursuant to the Construction Industry Payment and Adjudication (Exemption) Order 2014, two categories of Government construction contracts are exempted. The first category of Government construction contracts are contained in the First Schedule of the Exemption order namely a contract for any construction works that involve emergency, unforeseen circumstances and that relate to national security or security related facilities.The second category of Government construction contracts are contained in the Second Schedule of the Exemption order namely construction contracts with the Government of the contract sum of twenty million ringgit (RM20,000,000) and below. With regards to this second category, the exemption order merely exempts these contracts from the application of subsections 6(3), 7(2), 10(1), 10 (2), 11(1) and 11(2) of CIPAA 2012, and relates to the timeline for submissions and replaced with a set of longer timelines for such submissions. It is also a temporary exemption from 15 April 2014 to 31 December 2015 for this second category. However, the exemption order does not extend to construction contracts to which the Government is not a party.
- CIPAA does not apply to an individual owner i.e. resident, who erects a building not more than four-storeys high which is wholly intended for his own occupation.
- Statutory adjudication is compulsory in that any party to a construction contract who is neither excluded nor exempted under the Act has the right to resort to adjudication. No contracting out of the Act is permitted so as to defeat the application of its provisions and/or the objectives of the Act.
What Are The Main Steps Involved In Adjudication?
The adjudication process can be summarised as follows:
Step 1: Making & Responding to a Payment Claim
The unpaid party may serve a Payment Claim on the non-paying party. The non-paying party may then respond by making payment or by serving a Payment Response on the unpaid party in reply to the claim within 10 working days. If there is a failure to respond within this time, it is deemed that the entire payment claim is disputed. Either party may then refer the dispute to adjudication.
Step 2: Initiation of Adjudication
A reference to adjudication may be initiated by serving a written Notice of Adjudication on the other party. The referring party is called the Claimant, and the party served with the notice is called the Respondent.
Pursuant to Rule 2 of the KLRCA Adjudication Rules & Procedure, the Claimant shall no later than 7 days after serving a Notice of Adjudication register the adjudication matter at the KLRCA by serving a notice on the Director of KLRCA containing the particulars and documents prescribed therein. The notice must be accompanied with a non-refundable registration fee to the KLRCA in the amount as prescribed in Schedule III to the KLRCA Adjudication Rules & Procedure.
Step 3: Nomination of Adjudicator
Appointment of adjudicator should only take place after, and not before, a valid Notice of Adjudication has been effectively served on the Respondent by the Claimant. The parties may agree to a particular competent and qualified person being appointed as adjudicator within 10 working days from the service of the Notice of Adjudication. If the parties are unable to reach an agreement on an adjudicator, then either or both parties may make a written request to the Director of the KLRCA to appoint an adjudicator to adjudicate the dispute. The Director of the KLRCA shall has appoint an adjudicator within 5 working days from the date of receipt of the request, and notify the parties and adjudicator in writing.
Step 4: Appointment of Adjudicator
Upon being notified of the intended appointment, the selected adjudicator is free to either accept or refuse the appointment. If selected adjudicator accepts the appointment, he shall submit a written declaration in writing pursuant to section 24 of CIPAA to the Director of the KLRCA, and deliver a copy of his terms of appointment and fees to be paid by the parties.
Pursuant to Rule 9(2) of the KLRCA Adjudication Rules & Procedure, the adjudicator must within 14 days of his acceptance of the appointment issue a direction ordering the parties to deposit with the KLRCA the following fees and expenses in advance as security:
- the reasonable proportion of the adjudicator’s fees and expenses, and any taxes as may be imposed by the Government; and
- all administrative fee payable to the KLRCA as provided in Schedule III of the KLRCA Adjudication Rules & Procedure.
Step 5: Adjudication Claim & Response
The Claimant is required to serve an Adjudication Claim together with supporting documents on the Respondent and the adjudicator within 10 working days from the date of receipt of the acceptance of appointment by the adjudicator. Pursuant to Rule 4 of the KLRCA Adjudication Rules & Procedure, the Claimant shall within 7 working days after serving the Adjudication Claim deliver a copy of the Adjudication Claim to the KLRCA. Unless otherwise directed by the KLRCA, the Claimant is not required to deliver the supporting documents to the KLRCA.
Upon being served with the Adjudication Claim, Respondent is required to serve on the Claimant and the adjudicator a Adjudication Response within 10 working days answering the Adjudication Claim together with any supporting documents. Pursuant to Rule 5 of the KLRCA Adjudication Rules & Procedure, the Respondent shall within 7 working days after serving the Adjudication Response deliver a copy of the Adjudication Response to the KLRCA. Unless otherwise directed by the KLRCA, the Claimant is not required to deliver the supporting documents to the KLRCA.
Upon receipt of the Adjudication Response, the Claimant may then serve an Adjudication Reply within 5 working days. Similarly, a copy of the Adjudication Response must be served on the Director of KLRCA within 7 working days after serving the Adjudication Reply as required by Rule 6 of the KLRCA Adjudication Rules & Procedure.
Step 6: The Conduct of Adjudication Proceedings
An adjudicator has wide powers under CIPAA to conduct adjudication. He may call for meetings, require interrogatories to be answered by the parties, call for clarifications and further documents, if necessary to help him with his task. In doing so, the adjudicator has to abide by the rules of “natural justice” and the relevant provisions of CIPAA as well as the Adjudicator’s Code of Conduct under the KLRCA Adjudication Rules & Procedure.
Step 7: Adjudication Decision
The Adjudicator is required to decide on the dispute and deliver his decision to the parties and the KLRCA no later than 45 working days from the service of the Adjudication Response or Adjudication Reply, whichever is later, or 45 working days from the expiry of the period prescribed for the service of the Adjudication Response (if no Adjudication Response is received), or the extended period agreed by the parties. An adjudication decision which is not made within the specified period is void.
The decision must be in writing. It must also be reasoned decision unless otherwise agreed by the parties. The adjudicator must state in his decision the adjudicated amount, and the time and manner it is payable, and order the costs to follow the event. In relation to costs, he must fix the quantum to be paid. The costs should include, amongst others, the fees and expenses to the adjudicator, and the administrative fees paid to the KLRCA.
The adjudicator ought to ensure that payment of the fees and expenses have been deposited with the Director of KLRCA prior to the release of the adjudication decision to the parties.