What is Malaysian Construction Industry Payment and Adjudication Act 2012 (“CIPAA”)?
The Malaysian Construction Industry Payment and Adjudication Act 2012 (“CIPAA“) came into force on 15 April 2014. One of the objectives of CIPAA is to facilitate cash flow in the construction industry, as the new compulsory statutory adjudication regime allows parties to obtain a quick interim decision on payment disputes.
The adjudication process offers a relatively faster process compared to court proceedings since there are fixed timelines provided under CIPAA. Disputes which may be referred to adjudication are those relating to non-payment for work done and services rendered under a construction contract. Adjudication doesn’t apply to a construction contract entered into by a person for any construction work in respect of a building which is less than 4 storeys high and which is wholly intended for his occupation (ie: it generally does not apply to an individual owner of a residence).
Types of Contracts Applicable
The Act has a wide application to contracts for the carrying out of construction work, provision of consultancy services and the procurement of materials and labour.
The application is not limited to written contracts, as the definition of “made in writing” adopted by the Asian International Arbitration Centre (AIAC) includes contracts which are not signed, made by exchange of communications in writing or evidenced in writing.
The Construction Industry Payment & Adjudication (Exemption Order) 2014 exempts certain government contracts, including the construction power plants and water treatment plants from coming under the Act. However, the exemptions are read narrowly and only apply to contracts involving the federal and/or state governments. Contracts awarded by government-linked companies (GLCs) such as Tenaga National Bhd (TNB) are not exempt.
The dispute resolution mechanism under CIPAA Act is faster than litigation or arbitration. In theory, the adjudication process could take as little as 100 working days from commencement to decision.
Before an adjudication proceeding is commenced, an unpaid party must first issue a payment claim. A payment claim can be issued for unpaid interim payments, final payments and retention sums, as long as these sums are due under the terms of the construction contract. It may also be issued before certification of the claim. A claim for “payment” as de ned in the Act is limited to “payment for work done or services rendered under the express terms of a construction contract”.
A payment response is served within 10 working days from the receipt of the payment claim. In the payment response, the non-paying party may either admit or dispute the payment claim. If the non-paying party fails to respond to the payment claim, the entire payment claim is deemed disputed.
Thereafter, either the unpaid party or non-paying party may refer the dispute to adjudication. Upon registration with AIAC, parties have to agree on the choice of an adjudicator or request the director of the KLRCA to appoint one.
AIAC maintains a register of adjudicators from which it selects an adjudicator. Adjudicators empanelled with the AIAC must have been trained and certified by the KRLCA, hold a relevant degree or diploma and have at least 7 years of actual working experience, preferably in the building and construction industry. The Adjudicator’s fees are to be agreed by the parties, and may be based on the KLRCA Schedule of Fees. In the absence of agreement, the lower fees set out in the CIPA Regulations are to apply. Upon the adjudicator’s acceptance of his appointment, the adjudication process begins.
The pleadings start with the adjudication claim being served by the claimant within 10 working days after the acceptance of appointment. An adjudication claim is essentially an amplification of the payment claim, where the nature and description of the payment dispute is presented in greater detail and with supporting documents. The respondent has 10 working days to serve an adjudication response to answer the claim set out in the adjudication claim. The claimant has 5 working days to serve the adjudication reply. Thereafter, the adjudicator has 45 working days to deliver the adjudication decision. Oral hearings and the calling of witnesses are not required and are subject to the request of parties and discretion of the adjudicator.
Proceedings under CIPAA 2012 are essentially summary in nature, often decided based on documents, saving time and costs.
An adjudication decision is given in writing with reasons. It is binding unless set aside by the high court, settled in writing between parties or finally decided in arbitration or court. It is uniquely described as having “temporary finality”.
Adjudication decisions can be set aside if there are elements of fraud or bribery, when there is a denial of natural justice, when the adjudicator has not acted independently or when he has acted in excess of his jurisdiction.
Compliance and Execution
It is not uncommon for parties to promptly comply with an adjudication decision. However, in the case of non-compliance, the successful party has a few options:
(i) He may suspend or slow down work under section 29 of the Act. (ii) He is also able to demand for direct payment from the principal under section 30 of the Act. (iii) Given that the successful party may concurrently exercise the remedies available, he may also apply to court to enforce the adjudication decision and commence execution proceedings, including winding-up proceedings.
Section 20 of CIPA Act provides that adjudication proceedings shall be confidential, although with limitations and exceptions. The requirement of confidentiality applies to both the adjudicator and parties in the dispute, but not to others involved in the proceedings, such as witnesses.
In addition to providing a dispute resolution mechanism to resolve payment disputes, the CIPA Act also provides for 2 incidental but significant matters:
Under section 35 of CIPAA 2012, conditional payment or “pay when paid” or “pay if paid” provisions in a construction contract are void. Given the retrospective application of the Act, such provisions in all construction contracts are now unenforceable. Subcontractors can immediately demand for the payment of any outstanding amount from their main contractor.
Pursuant to section 36 of CIPAA 2012, in the absence of express payment terms, parties carrying out construction work or providing construction consultancy services have the right to receive progress payments according to fair and reasonable prices or rates prevailing in the construction industry at the time of the work or services rendered. For construction work, each progress payment is due 30 days from receipt of invoice, delivery of materials or from when services were rendered.