How does the construction industry and payment adjudication act 2012 impact your business?
Construction Industry Payment and Adjudication Act (“CIPAA 2012”) came into operation on 15 April 2014. The Malaysian Parliament enacted CIPAA 2012 with a declared intention to alleviate payment problems in the construction industry through the introduction of a statutory adjudication process.
The Act recognises that the cash flow of small contractors and subcontractors who are financially weak maybe disrupted by unjustified deductions or dishonest payment avoidance practices by employers or main contractors who have the upper hand in terms of bargaining and financial power which may in turn cause construction works to come to a halt and business failures.
The adjudication proceedings are to ensure that any payment dispute relating to construction work may be resolved in a speedy but interim manner and thereby facilitating the cash flow in the construction industry under the Act1. Parties to construction contracts will be subject to compulsory statutory adjudication under CIPAA 2012 and thus, parties cannot contract out of the Act and the Act applies retrospectively2.
This article aims to provide the reader with a general understanding of CIPAA 2012 especially if you are involved in construction related projects in Malaysia.
1. APPLICATION OF CIPAA 2012
CIPAA 2012 applies to written construction contracts relating to construction work carried out wholly or partly within the territory of Malaysia including a construction contract entered into by the Government3. CIPAA 2012 prohibits the inclusion of conditional payment clauses i.e. ‘pay when paid’ in construction contracts4.
CIPAA 2012 defines “construction contract” to mean “construction work contract” or “construction consultancy contract”. The former may include building works, infrastructure works, utilities amongst others including temporary and permanent works whereas the latter may cover consultancy contracts in building, infrastructure, oil and gas, petrochemical, telecommunication industries amongst others including project management. The Act generally encompasses all types of construction works5.
2. CLAIMING FOR PAYMENT SUMS WHICH IS DUE AND OWING UNDER A CONSTRUCTION CONTRACT
The “unpaid party” is the party who claims payment of a sum which has not been paid in whole or in
part which is due under a construction contract.The unpaid party has the right under CIPAA 2012 to serve a Payment Claim on the non-paying party6 .
The “non-paying party” is the party against whom a Payment Claim is made. The non-paying party may admit or dispute the amount claimed in a Payment Claim through a Payment Response7 .
3. INITIATION OF ADJUDICATION8
The adjudication process commences with the service of the Notice of Adjudication by the Claimant. In most cases, the Claimant is the unpaid party who is dissatisfied with the Payment Response and hence initiates the adjudication proceedings. The party against whom the Notice of Adjudication is served will become the respondent.
An adjudicator will need to be appointed to conduct the adjudication proceedings. The adjudicator may be appointed either by agreement of the parties or by the Director of Kuala Lumpur Regional Centre for Arbitration (“KLRCA”) if the parties could not reach an agreement on the appointment of the adjudicator.
Generally, the adjudication process will take approximately 90 days to complete from the issuance of a notice of adjudication to the delivery of adjudication decision by the adjudicator.
4. EFFECT OF ADJUDICATION DECISION9
From the above, it can be discerned that adjudication provides a quick determination of a dispute. As such, an adjudication decision is temporary binding in nature and it will cease to be binding on the parties where one of the followings occurs:
- (a) It is set aside by the High Court on any grounds referred to in section 15;
- (b) The subject matter of the decision is settled by a written agreement between the parties; or
- (c) The dispute is finally decided by arbitration or the court.
In addition, the High Court may grant a stay of an adjudication decision or make any decision that it deems fit10.
5. ENFORCEMENT OF ADJUDICATION DECISION11
Although the adjudication decision is on a “provisional interim basis”, it is readily enforceable once delivered by the adjudicator. The methods of enforcement provided under CIPAA 2012 which may be exercised concurrently are as follows:
- (a) The successful party may register the decision as a Court Judgment or Order and enforce the decision as if it is a judgment or order of the High Court.
- (b) In the event that the adjudicated amount has not been paid wholly or partly after receipt of the adjudicated amount, the unpaid contractor may suspend or reduce the progress of performance of any construction work or services.
- (c) The successful claimant may make a written request for payment of the adjudicated amount directly from the principal of the losing party but this is only possible if there is money payable by the principal to the losing party.
IMPACT OF CIPAA 2012 ON CONSTRUCTION INDUSTRY
CIPAA 2012 changes the payment culture in the construction industry. CIPAA 2012 compels mandatory payment of an amount due to the contractor as the Act intends to provide a fairer allocation of risk between the employers and the contractors.
With the implementation of CIPAA 2012, it is imperative to have a good system of concurrent record keeping as this will be helpful in the event that a party needs to pursue adjudication or even to defend a claim. In addition, parties are advised to have the payment terms in the construction contract stipulated in a clear and workable manner as the lack of such payment terms will trigger the operation of the default payment provisions under CIPAA 2012.
IS ADJUDICATION A SUITABLE RECOURSE FOR YOU?
The question of whether to commence the adjudication proceedings under CIPAA 2012 depends very much on the claims in amount and the issue in dispute.
The ability of the unpaid contractor to suspend work or to reduce the rate of progress of performance is an important feature of CIPAA 2012. It is a powerful leverage to secure payment by the successful claimant.
The table below summarizes the advantages and disadvantages of CIPAA 2012 and the general costs and fees involved.
| ADVANTAGES OF CIPAA 2012 | DISADVANTAGES OF CIPAA 2012 |
|---|---|
| Speedy dispute resolution for the recovery of payment in the construction industry | CIPAA 2012 only confines to payment disputes in relation to construction contracts falls under s4 of CIPAA 2012. |
| Provides binding and enforceable decision on payment dispute. The Adjudicator’s decision can be enforced as judgment. | The decision made by the Adjudicator is interim in nature as it is subjected to arbitration and litigation13 |
| High level of enforcement. It allows suspension of works or reduce rate of progress | The Adjudicator will decide the course and direction of the proceedings. Parties has little room to negotiate. |
| Enables direct payment from principal | |
| Laughing Bacchus Winecellars | |
| Parties can choose their own adjudicator | |
| Adjudicator has the relevant expertise in specific field | |
| Informal procedures | |
| Private and confidential12 | |
| COSTS AND FEESCosts of Adjudication Proceedings14Adjudicator’s fees, expenses, etc 15 |
1 See Bina Puri Construction Sdn Bhd v Hing Nyit style Enterprise Sdn Bhd (No.1) (2015).
2 See Uda Holdings Bhd v Bisraya Construction Sdn Bhd (24C-6-09/2014) and Capitol Avenue Development Sdn Bhd v Bauer (M) Sdn Bhd (24C-5-09/2014).
3 CIPAA 2012 does not apply to government construction contract for works which relates to disaster, emergency, unforeseen circumstances and national security or security related facilities. See Construction Industry Payment and Adjudication (Exemption) Order 2014.
4See CIPAA 2012, section 35.
5It should be noted that CIPAA 2012 does not apply to construction contracts entered into by a natural person for any construction work in respect of any building in which is less than four storeys high and which is wholly intended for his occupation.
6See CIPAA 2012, section 5.
7See CIPAA 2012, section 6.
8See CIPAA 2012, section 8 to section 12.
9See CIPAA 2012, section 13.
10See CIPAA 2012, section 16.
11See CIPAA 2012, section 28 to section 31.
12See CIPAA 2012, section 20.
13See CIPAA 2012, section 37. The parties’ right to concurrently arbitrate or litigate is maintained under CIPAA 2012. The adjudication proceedings will not be stayed if the same subject matter between the parties is commenced in court or arbitration.
14See CIPAA 2012, section 18. CIPAA 2012 requires the adjudicator to order that costs of the adjudication to follow the event.
15See CIPAA 2012, section 19.