doctrine of privity of contract in Malaysian construction industry and CIPAA 2012

ICP824 CONSTRUCTION PROCUREMENT AND CONTRACTS | FINAL ASSESSMENT

Narrated `Amr bin Al-`As: That he heard Allah's Messenger (‫ )ﷺ‬saying, "If a judge gives a verdict according to the best of his knowledge and his verdict is correct (i.e. agrees with Allah and His Apostle's verdict) he will receive a double reward, and if he gives a verdict according to the best of his knowledge and his verdict is wrong, (i.e. against that of Allah and His Apostle) even then he will get a reward (Sahih al-Bukhari 7352)

Ignorantia juris non excusat “Ignorance of the law is not an excuse” -Legal maxims

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Contents QUESTION 1 ACKNOWLEDGEMENT ........................................................................................................................3 QUESTION 1 ...........................................................................................................................................4 ANSWER FOR QUESTION 1 ...............................................................................................................5 1.0

Introduction ...............................................................................................................................5

2.0

Summary and analysis of the Case......................................................................................6 2.1 Doctrine of Privity of Contract ................................................................................................... 6 2.2 Established that the doctrine of privity applied in Malaysia ...................................... 7 2.3 The acceptance of consideration under the Common Law .......................................... 8 2.4 Element of contract in Malaysian Law ................................................................................... 8 2.5 Exceptions ........................................................................................................................................... 9

3.0

Current practice in regards to standard form of construction contract ...............9 3.1 Parties of the contract.................................................................................................................... 9 3.1.1 The rights of the third party as an Agent to the Principal ............................ 10 3.2 Party who certify and issue the certification for payment ........................................ 11 3.3 Default of payment by contractor in regards to construction contracts. ........... 12 3.4 Defect works and Retention sum (percentage of work value retained) ............ 13

4.0

Solution for this case and conclusion ............................................................................. 14 4.1 Tripartite agreement ................................................................................................................... 15 4.2 Assignment Gives Some Rights to a Third Party ............................................................ 15

QUESTION 2 ........................................................................................................................................ 17 ANSWER FOR QUESTION 2 ............................................................................................................ 18 1.0

Introduction ........................................................................................................................... 18

2.0

Overview CIPAA as new approach for dispute resolution .................................... 18

3.0

What was the nature of the payment disputes referred to adjudication? ...... 19

4.0

The purpose of having CIPAA in Malaysian Construction Industry................... 19

5.0

Pertinent Features of CIPAA ............................................................................................. 20 5.1

Prohibition the practice of “Pay-When-Paid” and “Conditional Payment” ... 20

5.2 Speedier recovery resolution of payment in construction industry ................ 22

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5.3

To prevent uncertainties in payment among all parties ..................................... 22

5.4 Binding and enforceable decision for the recovery of payment following a decision by the adjudicator .............................................................................................................. 23 5.5

Enable direct payment from the principles .................................................................. 23

6.0

Challenges and Dilemma of CIPAA provisions ............................................................ 23

7.0

Conclusion ................................................................................................................................ 24

LIST OF REFERENCES ...................................................................................................................... 25

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ACKNOWLEDGEMENT

First of all, praised to Allah S.W.T for giving me the strength and lessen the difficulty to understand and complete the task that given to me within the time. Special thanks to Associate Prof. Sr. Ts. Dr. Zulhabri Ismail for his guidance and knowledge on the subject of ICP 824 Construction Procurement and Contracts, may Allah gives him more rewards.

I would like to express my gratitude towards my class member of ICPM 2020 for their kind encouragement in sharing knowledge in completion on of this final assessment.

Last but not least, I would like to express my special gratitude towards my spouse and son for always understanding and giving me such attention and time whenever I need.

Thank you.

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ANSWER FOR QUESTION 1 1.0 Introduction “It takes less time to do things right, than to explain why you did it wrong” - Henry Wadsworth Longfellow1 Our construction industry has played an important role in developing our country with the involvement of many parties in the projects. It is necessary to have a good construction contract, that we shall further understand it and manage it wisely with authority and competency especially in terms of payment. The said Question 1 bought two main issues of disputes in the contract by the fact that the payment claimed from the Plaintiff was not been paid for balance amount duly certified by the Defendant for work done. The whole of the Plaintiff’s claim was dismissed after a full trial in regards to the payment certification was issued by a third party and the Plaintiff appealed. The second issue brought the attention of the assignment of third parties for the payment proceedings in the contract which are not parties of the contract. The issue became broader whether the Plaintiff’s dispute is against the Defendant or the third party.

“The presumption of innocence is the legal principle that one is considered innocent until proven guilty.”

2

-Universal Declaration of Human Rights, Article 11.

Under the Malaysian Contract Act 19503, in interpreting Section 2(d) which states about “…when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;..” consideration of the assignment could be indirectly a form of obligation of third party.

In order to come into a conclusion of whether third party is liable under the Contract due to payment dispute of the party of the Contract, we must first discuss how far the Court of Malaysia follow the application of the doctrine of privity of contract and what are the https://www.poetryfoundation.org/poets/henry-wadsworth-longfellow accessed on 10th July 2020 https://www.un.org/en/universal-declaration-human-rights/#:~:text=Article%2011.,guarantees%20necessary %20for%20his%20defence accessed on 10th July 2020 3 Laws Of Malaysia (2006), Contracts Act 1950 Act 136 1 2

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provisions under our major Standard Form of Construction Contracts, which we focus on discussing the PWD 203A REV (1/2010), PWD 203N Rev. (1/2010), PAM Contract 2018 (with quantities) and PAM Sub-Contract 2018.

2.0 Summary and analysis of the Case CITY CABINET FACTORY SDN BHD v PEMBINAAN PASTI DINAMIK SDN BHD The said case is referred to a project of renovation works in the clinic and ward of UiTM Campus Sungai Buloh Hospital, Sungai Buloh “The Works'' for UiTM Private Healthcare Sdn Bhd (Employer). The parties in the Letter of Award dated 3rd July 2015 was between City Cabinet Factory Sdn Bhd, “Sub-Contractor” (Plaintiff) and Pembinaan Pasti Dinamik Sdn Bhd, “Main Contractor'' (Defendant). The Project Manager is Metro Cabaran Sdn Bhd (Third party) was not part of the contract was assigned by the defendant to handle the payment, but has a Joint -Venture agreement between Project Manager and Defendant. The case was duly due to 5/9 claims has not been fully paid by the defendant to the plaintiff even though the defendant has certified all 9 claims using with rubber stamp attached to them. The plaintiff's claim for balance of RM 914,467. 39 confirmed by the defendant as work done. The Contract Sum is RM2,660,600.00.

Issues arising from this case of the said question 1 was whether the dispute in payment from the contract between Sub-Contractor of City Cabinet Factory Sdn Bhd and the Main Contractor Pembinaan Pasti Dinamik Sdn Bhd can transfer the liability to his Project Manager, Metro Cabaran Sdn. Bhd. who is not the party of the contract, but has a JV agreement with the MC, as the SCJ judgement that Plaintiff should sue the Project Manager. “The Sessions Court Judge (“SCJ”) had held that all the payments to the Plaintiff was made by the Project Manager and so the Plaintiff ought to look to and sue the Project Manager for non-payment of the balance sum due.”

2.1 Doctrine of Privity of Contract Following to the issue the plaintiff couldn’t sue the project manager for the outstanding payment as concluded by the SCJ due to the fact that project manager is not the party of the contract and subsequent to that, the plaintiff submitted an appeal with RM15,000 cost as the SCJ had erred in law in regards to the doctrine of privity of contract. The general rule of privity of contract states that third parties will not acquire neither a right nor any liabilities under FARHANA BINTI MOHAMMED ISA | 2019658866

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such contract. “No stranger to the consideration can take advantage of a contract, even if it is made for his benefit.”

SJC applies the exception in deciding the case following the common law under s.2 Contract Act 4 , in regards to consideration of contract element. Concluded that plaintiff should sue the Project Manager, thus, plaintiff could not recover his loss because project manager is not the party to the contract. Due to that reason, plaintiff appeal to High court in the view of doctrine of privity of contract, where plaintiff argue back the decision of SJC. 2.2 Established that the doctrine of privity applied in Malaysia In Malaysia, the privity rule is deeply established in the legal system. The Malaysian courts had applied the doctrine in a variety of cases involving a variety of situations (T.P. Meng, 2009).

In the recent case of Razshah Enterprise Sdn Bhd v Arab Malaysian Finance Bhd 5, Abdul Malik Ishak JCA6 in the Court of Appeal7 stated that : “Our Contracts Act 1950 (Act 136) has no express provision pertaining to the doctrine of privity of contract. In fact, Kepong Prospecting gives the gloom picture that the doctrine still applies in Malaysia. Indeed Mohamed Dzaiddin J (who later rose to be the Chief Justice of Malaysia) relied on Kepong Prospecting and aptly said in Fima Palmbulk Services Sdn Bhd v Suruhanjaya Pelabuhan Pulau Pinang & Anor [1988] 1 MLJ 269 at p 271.[17] It is clear that the English doctrine of privity of contract applies to our law of contract. For the Common Law Doctrines to flourish in the Malayan (now Malaysian) Legal System. It speaks of “Nothing herein contained shall affect any written law or any usage or custom of trade, or any incident of any contract, not inconsistent with this Act.”8 The Privy Council case of Kepong Prospecting Ltd & Ors v. Schmidt 9had established that the doctrine of privity applied in Malaysia. It strengthens the principle that a person who is not a party to a contract has no right to sue on the contract. This judgement also supports the view that the doctrine of privity of contract is well-defined from the rule that consideration must move from the promisee. Thus, even though consideration may move from a third party under s. 2(d) of the Contracts Act 1950, it is clear that the English doctrine of privity of contract applies in Malaysia law of contract.

4 5 6 7 8 9

Laws Of Malaysia (2006), Contracts Act 1950 Act 136, [2009] 2 MLJ 102 Judge Court of Appeal In Malaysia, the highest court is the Federal Court, followed by the Court of Appeal and the High Court CIMB Islamic Bank Berhad V Ravichantiran A/L Ganesan and Another Case [2020] MLJU 484 Kepong Prospecting Ltd & Ors V. Schmidt [1967] 1 LNS 67 [1968] 1 MLJ 170

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2.3 The acceptance of consideration under the Common Law In Malaysia, consideration may move from the promise to third party under S.2(d) of Act 136. However, the rule that consideration can move from persons other than the promisee is different from the doctrine of privity of contract. A person cannot sue on a contract if he is not a party to it, not if consideration has been provided by another person. Under PWDN, cl.3 considerations stated that they payment will be done by the Contractor to the Sub Contractor in consideration or promise that Sub Contractor execute and complete the works.

2.4 Element of contract in Malaysian Law Every contract requires an offer, acceptance, and consideration. Consideration is the exchange of benefit and detriment (e.g., the making of a promise in exchange for an act).

If

a party voluntarily acts and then the other party makes a promise, the act is said to be “past consideration” (since the act was already performed and not made in exchange for the promise). Consideration is usually described as being something which represents either some benefit to the person making a promise, or doing something to the person to whom the promise is made, or both by referring to Section 2(d) Contract Act 1950 Act 136 ”…when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does orabstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;” In the said case, it is mentioned in the Letter of Award that the payment need to be made by the Project Manager or his company. However, the Contractor must ensure that the the Sub-Contractor well received the payment from Project Manager. Application of consideration has been accepted by the past cases namely as per below, Kepong Prospecting Ltd & Ors v. Schmidt 10 “.….it could be said that the Malaysian law as to contracts differs in so important a respect from English law. It is true that s. 2(d) of the Contracts (Malay States) Ordinance gives a wider definition of "consideration" than that which applies in England particularly in that it enables consideration to move from another person than the promises, but the appellant was unable to show how this affected the law as to enforcement of contracts by third parties, and it was not possible to point to any other provision having this effect.”

10

Kepong Prospecting Ltd & Ors V. Schmidt [1967] 1 LNS 67 [1968] 1 MLJ 170

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Dae Hanguru Infra Sdn Bhd v Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd & Anor 11 “... with the mechanics involved in and the principles regulating the formation, performance, continuance and discharge of the parties individually created obligations. The essential elements of any contract are:- i) Offer; ii) acceptance; iii) consideration (not required for contracts under seal);…”

2.5 Exceptions Exceptions have been created to help reduce the difficulties faced by third parties arising from the doctrine of privity of contract. These exceptions are where third parties to the contract can sue or be sued. Some of the exceptions to the Common Law doctrine of privity of contract allow rights to third parties and some impositions of obligations such as Collateral Contracts 12 (between the third party and one of the contracting parties), Trusts (the beneficiary of a trust may sue the trustee to carry out the contract), Tort (Under Tort law there are monstrous exceptions to the rule of privity), Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighbouring land), Agency and the assignment of contractual rights are permitted, Third-party insurance where a third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums, and Contracts for the benefit of a group, where a contract to supply a service is made in one person’s name but is intended to sue at common law if the contract is breached; there is no privity of contract between them and the supplier of the service ( Justice Peter Gibson et.all, 1992). 13 3.0 Current practice in regards to standard form of construction contract 3.1 Parties of the contract As refer to the case, the parties in the contract are between the Sub contractor and the Contractor. Nevertheless, there is different party that certify the payment. Similar to PWD Form 203N (revised 1/2010) for nominated Sub-Contractor where the Main Contract is based upon PWD Form 203 or 203A and PAM Sub Contract 2018 where the Main Contract is based upon PAM Contract 2018 (with quantities or without quantities), it is sub-contract agreement

DAE HANGURU INFRA SDN BHD v BALDAH TOYYIBAH (PRASARANA) KELANTAN SDN BHD & ANOR [2017] MLJU 538 The Law Commission Consultation Paper No. 121 (1992), Privity of Contract: Contracts for the Benefit of Third Parties, London, United Kingdom 11 12

Manu (2011), Doctrine of privity of contract and privity of consideration in India and British contaxt, Chaudhary Charan Singh University, India, https://shodhganga.inflibnet.ac.in/handle/10603/27361 accessed on 18th July 2020 13

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between the Contractor (MC) and Nominated Sub-Contractor (NSC) to execute the parts of the Main Contract Works in pursuant to the agreement between Contractor and Employer.

In PWD Form 203N, there is third party assigned as Contract’s administrator which is the Superintending officer, in similar with PAM Sub Contract 2018 where Architect is person who is appointed. Both contract has no role of project manager (PM), but we can relate with the third party involvement in the contract. Some of the developer may appointed PM to administer the contract, as an agent or client representative under the Contract. Even so, there is no specific implied task, in defining the role of PM and his responsibilities in construction contract. The most describe is providing the services as management consultant in delivering task assigned by the Client by using specific tools and skills.

According to The Chartered Institute of Building, (CIOB) (2008 ) 14:“The Project Manager, both acting on behalf of, and representing, the client, has the duty of providing a cost-effective and independent service, selecting, correlating, integrating and managing different disciplines and expertise, to satisfy the objectives and provisions of the project brief from inception to completion. The service provided must be to the client’s satisfaction, safeguard his interests at all times, and, where possible, give consideration to the needs of the eventual user of the facility.”

In Malaysia, our law is governing by contract law which is refers to the contract acts, and in construction industry, some statues applied. PM is not a profession that govern under any act or statue. Due to that, PM have no implied liability under statutory and tort, but he has liability under contract that he embarks into. Some rule in doctrine of privity, the third party may be sued under Act 136, where he is appointed as an agent to the principal to perform a specific task.

3.1.1 The rights of the third party as an Agent to the Principal Referring to case Mega Amethyst Sdn Bhd v AP Land Development Sdn Bhd & Anor 15 raises an important issue not uncommonly faced by parties in the construction industry, namely the doctrine of privity of contract where the rights and liabilities of a third party is considered. As in the case, the doctrine of privity of contract is not invariable and is subjected to limited exceptions (Chan Yew Hoong, 2015) 16 . The exceptions accepted by the learned

The Chartered Institute of Building, (CIOB) (2008) Code of Practice for Project Management for Construction and Development, published by Blackwell Publishing (3rd Edition) 15 [2016] 1 CIDB-CLR 116, CIDB Construction Law Report 2015 16 Chan Yew Hoong,(2015)The Rights and Liabilities of a Third Party in case [2016] 1 CIDB-CLR 116.

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Judge in this case were, the principle of agent which defined in s.135 Act 136 17 “….as “An “agent” is a person employed to do any act for another orto represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”….”and trust as referred to case ESPL(M) Sdn Bhd v Radio & General Engineering Sdn Bhd18, “...The beneficiaries to a trust can sue the party contracting with the trustee who entered into the contract on behalf of the beneficiary…”

And following to the English Court of Appeal’s decision in Beswick v Beswick19, “… Where a contract is made for the benefit of a third person, the third person may enforce it in the name of the contracting party or his executor or personal representative, or jointly with him, or, if he refuses to sue, by adding him as a defendant.”

3.2 Party who certify and issue the certification for payment The issue in the said Question 1, by referring to paragraph [1] of the said case, “All progress claims, valuation and payment shall be processed and handled by our Project Manager.”

Following the statement above, generally the defendant transfers his liability to project manager as third party. The first session, the judge followed the exceptions in doctrine in privity, where he transferred contractual rights from the assignor to a third party, the assignee. The facts that the payment of proceeding from a third party, the Project manager was not involved in the contract between Plaintiff and defendant, and therefore, SJC had erred in law and plaintiff should have had no excuse for action against the defendant in the contract.

PWD Form 203N, cl. 35.0 Payment to NSC & PAM Sub Contract2018 cl. 26.0 In PWD Form 203N, under Cl. 35.0 Payment to NSC the party who certify the payment is S.O. under Cl. 28.0 PWD form 203 / 203A for the work done as per Contract. However, the Government of Malaysia is the party who will make the payment direct to the NSC. In contrast with PAM Sub Contract, architect is the party who certify NSC’s work done under cl. 26.0 and payment is made by the Contractor.

17

Laws Of Malaysia (2006), Contracts Act 1950 Act 136

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[2004] 4 CLJ 674 [1966] Ch 538

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3.3 Default of payment by contractor in regards to construction contracts.

There is condition in PAM, where Employer may directly make payment to NSC subject no payment has been made before to MC or NSC under cl. 26.5, if default of payment by Contractor, and Contractor failed to discharge his obligation under the contract as stated, “…Where the Contractor fails to discharge his payment obligation and where requested by the sub-contractor, the Architect in accordance to cl. 27.6 of the Main Contract Condition issue a certification stating the amount in respect of which the Contractor has failed to provide such proof. Where the Architect has so certified, the Employer may (but not obliged to) pay such amount directly to Sub-Contractor and deduct the same from any sums due or to become due to the Contractor…”

The same goes to PWD FORM 203N revised 2010 cl 35.0 payment to nominated subcontractor stated that, “…. subject to cl 37.0 hereof, the amount certified as due to NSC in any interim certificate issued by S.O in accordance with the relevant provisions in the Main Contract shall within the period of honouring payment certificates stipulated in the Main Contract be paid by the Government direct to NSC.” Referring to Cl. 26.3 Sub Contract Sub Contractor’s Payment and Contractor’s Entitlement to Set-off, “…When issuing any payment certificate under Clause 30.1 of the Main Contract Condition, the Architect shall also indicate separately any amount due to the Sub-Contractor under the Sub-Contract. The payment by the Contractor to the Sub-Contractor shall be made within seven (7) days after the Period of Honouring Certificate, less any Retention Fund which may be retained by the Contractor in accordance with the Main Contract Conditions, and less the amounts previously certified under the Sub-Contract Conditions. The Contractor shall be entitled to separately withhold and/or deduct from any payment due to the Sub-Contractor any set-off which the Contractor is expressly entitled to make under the Sub-Contract…”

In relation to PAM Sub-Contract cl. 22.5 Breach of Sub-Contract - Sub-Contractor's claim mentioned, “Where the regular progress of the Sub-Contract Works has been or is likely to be disrupted by any negligence, omission, default and/or breach of contract by the Contractor, and the Sub-Contractor had incurred or is likely to incur loss and/or expense,the Sub-Contractor shall be entitled to recover such loss and/or expense from the Contractor as a debt. If the Contractor has any dispute with the Sub-Contractor's claim, he shall send to the SubContractor a written notice setting out the reasons and particulars for FARHANA BINTI MOHAMMED ISA | 2019658866

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such disagreement. If the parties unable to agree on the dispute within a further twenty-one (21) after the receipt of the Sub-Contractor's response, the parties shall refer the dispute to adjudication under Clause 28.1. The SubContractor shall be entitled to be paid the loss and/or expense within twentyone (21) Days after the amount has been agreed by the Contractor or the adjudicator has issued his decision.”

Furthermore, PWD Form 203N cl. 35.0 Dispute as to payment mentioned that NSC may sue Employer who he is not party of the Sub Contract, and may use Contractor’s name to claim, “…if the NSC is not satisfied with the amount certified by the S.O for payment or by his failure to certify, then subject to the NSC giving to the contractor such indemnity and security as the Contractor shall reasonably require, the Contractor shall allow the NSC to use the Contractor’s name and if necessary will join the NSC as claimant in any arbitration proceedings by the NSC in respect of the said matters complained by the NSC.” 3.4 Defect works and Retention sum (percentage of work value retained) “[25] The issue becomes clearer when the question is asked as to who may sue the Plaintiff as in this case where the Defendant is alleging that the Works were not properly done and that there were defects that needed rectification. The list of defects were given by the Defendant to the Plaintiff with a deadline given to them to complete the rectification as can be seen in the letter dated 25.5.2016 at page 22 of the Record of Appeal Volume 2. Presumably the Defendant would be the one to raise the Defence of set-off or a Counterclaim though here they merely by paragraphs 9-10 of their Defence merely stated that the Plaintiff’s claim is not correct and accurate.

[61] I found no inconsistency in the Plaintiff’s claim as the Interim Claim No.9 at page 130 of the Record of Appeal Volume 1 certified by the Defendant is the one upon which the Plaintiff made its claim in the Statement of Claim except that now the Plaintiff is also asking for release of the retention sum of RM130,269.07.

There is no provision in the Letter of Award for the retention sum to be retained.”

The defendant claimed that they had retained the payment due to the defect works that had not been done by plaintiff as referred to paragraph 25 and 61 above of the said case.

Nonetheless, defendant had not adduced any evidence to show it had incurred the rectification costs and retained any amount of money from the plaintiff for the defect works. No clauses in the contract stated that defendant can retained some of money due to the defect works and defendant also fail to provide final account showing all the deduction for the money due to defects. In short, in the absence of proof, the Court being satisfied that there was some minor rectification works that had to be done, would allow a nominal sum of RM5,000.00 to be reduced and deducted from the Plaintiff’s claim. In the upshot, the court of appeal had allowed FARHANA BINTI MOHAMMED ISA | 2019658866

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the appeal and set aside the order of the learned SCJ. The court decides the Plaintiff for the sum of RM909,467.39 (RM914,467.39 -RM5,000.00) and interest at 5% per annum from date of judgment of. After hearing parties on costs the Court awarded costs of RM15,000.00 including of costs below and subject to allocatur being paid.

PWD 203A Cl. 36.0(b) (ii) and PAM Contract 2018 cl. 30.5 & cl.30.6 PWD Cl. 36.0(b) (ii) mentioned that the amount certified in the final certificate issued by SO, “…. final payment shall not be made until NSC given undertaking making good any defects or any warranty of the sub contract works which contractor required by Government under main contract terms…” The Main Contractor also stated the fear of double payment to plaintiff from himself and the project manager. This is totally rejected by the court where if he proofs that payment has been received by Project manager, or otherwise, the plaintiff does not have any privity of contract with Project Manager, and the transaction between the Defendant and Project Manager is none of the plaintiff business.

In view of PAM and PWD Form, PAM has both provisions of performance bond and retention sum for any defects work or set-off, where as in PWD, there is only provision for performance bond or performance guarantee sum. PWD provide the performance bond provision of 5% in the form of insurance guarantee or banker draft. The defendant act of retained the retention sum is breach of contract, and plaintiff entitled for full payment for the work done. Furthermore, PAM contract provision on percentage of work value retained, under cl. 30.5 and rules of retention sum cl 30.6 which includes MC, NSC and NS. The rules regarding the retention fund is that the employer shall retained the amount and may invest upon it. Upon issuance of CPC, the architect shall issue certificate to release half of the retention sum and upon issuance of CMGD, architect shall issue certificate to release the other half of the retention fund.

4.0 Solution for this case and conclusion The court suggested that if defendant wanted to be relieved his contractual obligation he must sign a contract involving three parties which are the plaintiff, defendant and project manager. The third party of the contract should not have liabilities to the contract following to the doctrine of privity.

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4.1 Tripartite agreement Firstly, from the suggestion and decision of the Court, a tripartite agreement is discussed.

Tripartite agreement is a contract between three separate parties, often apply during the construction phase, sales purchase agreement between purchaser, developer and financing institution. In some cases, tri-party agreements can cover the property owner, the architect or designer, and the building contractor. Such agreements are essentially “no-fault” arrangements in which all parties agree to remedy their own mistakes or negligence, and not to hold other parties liable for any good-faith omissions or errors. To avoid errors and delays, they often include a detailed quality plan and spell out when and where regular meetings between the parties will take place.20 In the preceding years, tripartite agreement was always intended for straightforward situations such as the payment of a debt, insolvency of a party, a corporate restructuring or some other circumstances. This sort of situation where novation in the classic sense may occur in the construction industry is where an employer transfers its interest in the project to another company in an arm’s-length transaction.

4.2 Assignment Gives Some Rights to a Third Party Secondly, assignment gives some rights to a third party. In any type contracts generally, it contains both rights and obligations. Rights are known as ‘benefits’ and obligations are known as ‘burdens’. The rights under the contract are the legal rights and in effect amount to the right to sue for any breach of contract. Rights under the contracts can be transferred by ‘assignment’ without the consent of the other party to the contract unless there is any prohibition stated against such assignment in the contract itself (N.Sahil, 2008).

As refer to s135 act 136, where an agent is authorized to represent his principal in his dealings with a third party a, it is the legal relationship between an agent and a principal is an agency. For instance, in dealing to sell a sub sales house, there are three parties involved which are Principal (vendor), agent (real estate agent) and third party (purchaser). The principal and agent are in an employment contract where the terms of appointment and authority have been set out. The agent is employed to sell the principal’s house. The agent made an agreement with the third party to sell the house at a certain price. The agreement made by the agent binds the third party and the principal. The contract is enforceable by and against the principal. The contract has the same consequences as though the principal made it.

20

https://www.investopedia.com/terms/t/tri-party-agreement.asp retrieved on 18th July 2020

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Nevertheless, for obligations or burdens or liabilities under the contracts, the only way that it can be assigned is with the consent of the other contracting party. This is because the concept of the transfer the obligation is in a similar condition to the transfer of risk and any failure by the original party to perform the obligation under the contract will impulsively transfer the greater risk. Unless there is such an agreement, neither parties can rid themselves of any obligation which they owe to the other under the contract. This is commonly expressed in the proposition that the burden of a contract cannot be assigned, unilaterally.

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ANSWER FOR QUESTION 2 1.0 Introduction “The establishment of the two specialised construction courts allows for a more comprehensive, effective and efficient judicial system for disputes in the construction industry.

With this, we now have the complete judicial process of (i) statutory construction adjudication, (ii) construction arbitration, and (iii) litigation through specialist construction courts which will enable all disputes to be resolved systematically.”

- Yang Berhormat Datuk Haji Fadillah Bin Haji Yusof, Ministry of Work Malaysia, 2013-2018, 2020-present Construction industry is unique and volatile which require the aspects of responsibilities in regards to professional, contractual, legal and moral. Thus, construction is bound to have conflicts when incompatible or irresponsible action happen due disagreement or misunderstanding between two parties or more which mostly related to money and time in a particular project. There are many tools or remedies to resolve disputes and one of them is adjudication.

2.0 Overview CIPAA as new approach for dispute resolution Construction Industry Payment and Adjudication Act 2012 (CIPAA) became effective on 15th April 2014 as it was gazetted by the Malaysian Parliament on 22 June 2012. The cases of disputes entitled to the enforcement of CIPAA was referred to the letter of award signed after the date of which it has become effective. “Law doesn’t apply retrospectively”. In the case of Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd 21 where the disputes happen in between and after the CIPAA enforcement, CIPAA is not enforceable pursuant to a letter of award dated 16 March 2011.

Act 746 interpret CIPAA as to “facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters.” (S. Rajoo, 2014). Following the Rules of Court 2012, Order 69A, Rule 5(1) stated that the application for the enforcement of an adjudication decision, “An application for permission to enforce an adjudication decision, either wholly or partly, in the same manner as a judgment or an order of the High Court under section 28 of the Act may be made by originating summons in Form 5.”

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BAUER (MALAYSIA) SDN BHD v JACK-IN PILE (M) SDN BHD [2018] MLJU 401

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The rules defined that adjudication as the means of resolving payment dispute under construction contract for project carried out in Malaysia (wholly or partly). CIPAA purposes to facilitate timely and regular payment, to provide mechanism for speedy dispute resolution through adjudication, and provide remedies for recovery of payment in construction industry.

In short, CIPAA is a fast track dispute resolution procedure for engineering and construction dispute, by the judgement and decision of an adjudicator appointed through mutual agreement of parties in dispute. Compared to litigation and arbitration, adjudication is less time consuming and uses lower expenses (Q. A. Mazani et. All, 2019).

Referring to KLCRA, 2017 statistics, Majority of claimants are Sub-Contractors for every fiscal year(48%) and others are among Main Contractor, consultants, supplier and employer.22 The number of cases that has been using CIPAA23 as referred to CIPAA Statistical Report (2018) arise shows that parties trusting CIPAA as mechanism to resolve such payment disputes in comparison with litigation or arbitration.

3.0 What was the nature of the payment disputes referred to adjudication?

According to CIPAA conference 2015, it revealed an interesting and unpredicted trend in the statistics showing the nature of the payment disputes referred to the adjudication. Of the 99 cases registered with the Kuala Lumpur Regional Centre of Arbitration (KLRCA), 42 cases were related to interim payments, 28 cases were related to final account values, and others were related to payment of professional fees, contract terms, variations, witholding monies and extension of time ( R. Martin, 2015). “Payment in CIPAA 2012's context refers to any payment for construction work done and consultancy services rendered arising under the express terms of a construction contract. Therefore, an adjudicator's decision is binding and has to be complied to until and unless the subject disputed is resolved through arbitration, litigation, agreement in writing, or is otherwise set aside by the Court under Section 15� (Q.A.Mazani et.all, 2019).

4.0 The purpose of having CIPAA in Malaysian Construction Industry The most fundamental issues that brought a bright potential on the purpose of having CIPAA enforced is eliminating payment issues between parties (M.F. Ishak et.all, 2014) and change the payment culture in the Malaysian construction industry (B.L.Choon, 2020), as

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Kuala Lumpur Regional Centre for Arbitration, 2017 CIPAA Statistical report 2018 , AIAC, https://www.aiac.world/Publications- accessed on 20th July 2020

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stated, “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.”

The primary objective for all the construction players of having CIPAA is facilitate regular and timely payment in the construction projects and to improve cash flow. According to Q.A.Mazani et.all (2019), there are six impacts of CIPAA enforcement towards payment problem in Malaysian construction industry identified as follows, i)relief provisions to unpaid claimant for work done, ii) any withholding of payment needs to be settled within (30) days from the receipt of invoice unless otherwise agreed, iii) confidential settlement of conflict among dispute parties, iv) prohibition of conditional payments, v) allowance of direct payment from the principal, vi) local culture or the attitude of late payment at the mercy of clients. Furthermore, “the unpaid party may serve a payment claim on a non-paying party for payment pursuant to a construction contract” to commence the process under S.5 of the CIPAA. 5.0

Pertinent Features of CIPAA

5.1

Prohibition the practice of “Pay-When-Paid” and “Conditional Payment” Conditional payment practice is always a major issue that gives rise to the intense cash

flow problem to the Sub-Contractors and brings adverse impact to the construction industry (T.Z.Keng et. all, 2018). CIPAA establishment outlawing the clauses related to “Pay-When-Paid” and “Conditional Payment” from the construction contract due to the fact that this practise may disrupt the business supply and chain and further affect other party that are involved in the contracts (Judi, M. Sabli, 2010). CIPAA requires payment to be made for all work done that is practically accepted. In the event disputes of payment happens at any stage of construction, the relevant parties must resolve it themselves and not transferring to third parties (A. Habib, A. Rashid, 2006).

In the case of Pernas Otis Elevator CO Sdn Bhd v Syarikat Pembinaan Yeoh Tiong Lay Sdn Bhd & Anor24, the Sub-Contractor (plaintiff) who was has completed the supply,delivery and installation of lifts and escalators including all accessories and incidental works as specified for the proposed International Class Luxury Hotel known as Hotel Istana within the stipulated timeframe. However, the claim has been rejected due to excessive harmonic distortion caused by the lift installation not for the work done as inspected by the Engineer’s appointed.

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[2004] 5 CLJ 34

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“...There is no dispute that the Plaintiff has completed the works as stipulated under the Subcontract. However, Ranhill Bersekutu as the Mechanical and Electrical Consultant for the Project appointed by the Employer, complained that the lifts installed by the Plaintiff has caused excessive harmonic distortions which as affected the electric flow system in the Project. On that ground, Ranhill Bersekutu instructed Juruukur Bahan Malaysia, the Consultant Quality Surveyors for the Project appointed by the Employer, not to release the last 2 1/2% of the retention sum amounting RM300,000.00 to the Plaintiff. Consequently, Daya Bina Arkitect, the Architect for the Project, also appointed by the Employer, deducted the said sum of RM300,000.00 from the amount to be paid to the Plaintiff…”

According to the contract, the conditional payment term of “pay-when-paid clause” was included in the sub-contract agreement, which allows Main Contractor(defendant) to hold the payment as they have not received payment from the employer. The plaintiff application was dismissed as Sub-Contractor is only entitled to the payment when the Main Contractor has received the payment from Employer. Furthermore, the enactment of CIPAA has reversed the judicial decision in the above case as well as Asiapools (M) Sdn Bhd v IJM Construction Sdn Bhd & Ors25, which was also dealing with the conditional payment issue. The central dispute before the learned Adjudicator was the applicability of section 35 of CIPAA 2012 versus of clause 11.1 of the construction contract in regards to “pay-when-paid” where the defendant had no obligation to pay the plaintiff until payment received from employer. Clause 11.1 of the construction contract reads as follows: “11.0 Progress Payment 11.1 All payments shall be made within 7 days from the date the Specialist Contractor received their related progress payment and subjected to 5% retention. The Sub-Contractor shall submit his claims with measurement records of work done including demarcated sketches and/or delivery orders (where applicable), duly endorsed by the Specialist/Main Contractor’s and Consultants authorised site staff. The cut-off date for the progress claim shall be on 20th day of each calendar month.”

The provision of CIPAA outlawing the pay-when-paid referred to section 35 which reads as follows, “35. Prohibition of Conditional Payment 1)Any conditional payment provision in a construction contract in relation to payment under the construction contract is void.

2)For the purposes of this section, it is a conditional payment provision when: a) The obligation of one party to make payment is conditional upon that party having received payment from a third party; or 25

[2010] 3 MLJ 7

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b) The obligation of one party to make payment is conditional upon the availability of funds of drawdown of financing facilities of that party.

5.2 Speedier recovery resolution of payment in construction industry Second pertinent features of CIPAA is speedier and cheaper as compare to litigation or arbitration as referred to Cl.12(2), Part II of CIPAA. The adjudicator must make decision on the disputes within 45 days read as follow, “12.(2) Subject to subsection 19(5), the adjudicator shall decide the dispute and deliver the adjudication decision within— a) Forty-five working days from the service of the adjudication response or reply to the adjudication response, whichever is later; b) Forty-five working days from the expiry of the period prescribed for the service of the adjudication response if no adjudication response is received; or c) Such further time as agreed to by the parties.”

It is a normal practice that the process of adjudication would only take around 100 working days from commencement while the process of litigation and trial is lengthier as the commercial court has to entertain not only the construction industry but other cases as well.

In regards to payment prior any litigation proceeding, both parties must hire own lawyer with fees in comparison with CIPAA, both parties separate the bills as 50-50 to the set-out fees of adjudicator.

5.3

To prevent uncertainties in payment among all parties CIPAA is aimed to prevent uncertainties in payment among all parties in the construction

contract (Karib, Shaffii, and Nor, 2008). CIPAA will provide platform to responsse on payment claims and streamline timeframes and payment process for construction contract as based on cl. 6 of Part II, the non-paying party may respond in several options to claimant depending on the case may be; “6. Payment Response 1) A non-paying party who admits to the payment claim served on him shall serve a payment response on the unpaid party together with the whole amount claimed or any amount as admitted by him.

2) A non-paying party who disputes the amount claimed in the payment claim, either wholly or partly, shall serve a payment response in writing on the unpaid party stating the amount disputed and the reason for the dispute.

3) A payment response issued under subsection (1) or (2) shall be served on the unpaid party within ten working days of the receipt of the payment claim.

4) A non-paying party who fails to respond to a payment claim in the manner provided under this section is deemed to have disputed the entire payment claim.”

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5.4

Binding and enforceable decision for the recovery of payment following a decision by the adjudicator According to Part I of CIPAA - the decision of adjudication can be enforced as judgement,

it provides security and remedies for the recovery of payment. Furthermore, CIPAA allows suspension of work on reduce rate of progress for the successful aggrieved party to avoid incurring further future vulnerability and recover past debts (Hasmori, Ismail and Said, 2012).

5.5

Enable direct payment from the principles CIPAA create statue where the obligation of the principal (factional know as Employer) to

make payment awarded by the adjudicator decision to the sub-contractor in the event the contractor failure to do so (contractor is in liquidation). provided that the employer do owe that amount of money to main contractor (F.Y.Liang, 2019). Which stated under s.30 of the act, “30(1) If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.�

Among those five pertinent features, there are other salient point why CIPAA is the best remedies for payment dispute which are CIPAA provides high level of enforcement, parties can choose their own adjudicator, the procedures are way more informal than litigation and its private and confidential process.

6.0 Challenges and Dilemma of CIPAA provisions Section 3 provides that CIPAA 2012 shall not apply to a construction contract entered into by a natural person for any construction work in respect of any building which is less than four storeys high and which is wholly intended for his occupation (S. Rajoo, 2014). In other words, CIPAA is not apply to the whole construction industry and project where there is exceptions.

For an instance, the housing development of 500 unit of 2-storey semi-detached worth RM 250million is not applicable to enter CIPAA in comparison with four storey flat of 4 unit which only worth the contract sum of RM 200,000.

The effectiveness of CIPAA in assisting the construction industry in Malaysia is proven.

However, there are many challenges and dilemma in CIPAA provision that gives a opportunity for improvement. Among the challenges are the cost of adjudication fee and the temporary binding decision which may subjected to arbitration and litigation, the adjudicator will decide

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the course and direction of the proceedings where parties have little room to negotiate and CIPAA is critically dependent on the competency and integrity of the adjudicators. Under s.28(1) of the act, “A party may enforce an adjudication decision by applying to the High Court for an order to enforce the adjudication decision as if it is a judgment or order of the High Court” stated that the main purpose of CIPAA might be disappointed if the adjudication decision is being challenged by High Court (T.Z Keng, 2018). Based on the case “Wrp Asia Pacific Sdn Bhd v Ns Bluescope Lysaght Malaysia Sdn Bhd

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the adjudication decision was set aside due to

incompetence of adjudicator, the reason stated in the case as follow; “On 12.3.2015, the Adjudicator issued his adjudication decision dated 9.3.2015. The Adjudicator allowed Bluescope’s claim, ordering the payment sum of RM3,495,268.84 together with other orders on interests and costs.WRP was not happy with the decision. It sought clarification with the Adjudicator but it was refused. WRP then applied to set aside the adjudication decision under section 15 of CIPAA. REASONS FOR SETTING ASIDE [17] WRP originally relied on the following grounds to set aside the adjudication decision; that: i. there was a breach of natural justice in that WRP was not given an opportunity to respond to Bluescope’s Adjudication Reply and that there was unilateral communication between Bluescope and the Adjudicator; ii. the said Adjudicator did not give any reasons; and iii. the said Adjudicator does not possess the experience and qualification and is therefore incompetent.”

Furthermore, adjudication is not part of PWD Form of Contract where the most used and referred construction contract in Malaysia. PWD only stated the arbitration clause referred cl. 66.0 in the contract. In addition, PAM Contract also stated under cl.36.1 the implementation of adjudication does not apply after the date certificate of practically completion. After that date, parties may refer to arbitration under cl. 37.0 of PAM Contract 2018. this shows the limitation of CIPAA implementation and the awareness is still low.

7.0 Conclusion As referred to above discussion discovering and analyzing “the purpose of having CIPAA and why the enforcement of CIPAA is pertinent in this regime”, it can be concluded that we have answering the said Question 2. Ultimately, construction industry as a whole must strive for excellence performing contract obligations with competency and integrity.

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[2015] MLJU 1125

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