ICP824 CONTRACT

ICP824 CONSTRUCTION PROCUREMENT AND CONTRACT

FINAL ASSESSMENT Analyzing court case & Discussion regarding CIPAA 2012

Submission to: ASSOCIATE PROF. Sr. Ts. Dr. ZULHABRI ISMAIL PREPARED BY: AZZRI FAZRIL ROSMAN 2020916259 fazrilrosman@gmail.com

AZZRI FAZRIL ROSMAN | 2020916259

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Table of Contents

Table of Contents ............................................................................................................................... 1 Question 1: Court Case Analysis: Privity of Contract .......................................................... 2 1.0

Introduction ............................................................................................................................ 2

1.1

Doctrine of Privity ................................................................................................................. 2

1.2

Case Fact .................................................................................................................................. 3

1.3

Issue .......................................................................................................................................... 3

1.4

Discussion................................................................................................................................ 5 1.4.1 Case Discussion ..................................................................................................................... 5 1.4.2 Case Discussion regarding Standard Form of Contract ....................................... 6 1.4.3 Case Discussion regarding Common Law .................................................................. 8

1.5

Conclusion ............................................................................................................................... 9

Question 2: Construction Industry Payment and Adjudication Act 2012 ................. 10 2.0

Introduction .........................................................................................................................................10

2.1

CIPAA in Malaysian Construction Industry ............................................................................11 2.1.1 Applicability of CIPAA ......................................................................................................12 2.1.2 Purposed of CIPAA.............................................................................................................12 2.1.3 Process of CIPAA ................................................................................................................16 2.1.4 Pertinent features of CIPAA ...........................................................................................17

2.2

Rule of Court Amendment 2018. Order 69A, Rule 5(1) ....................................................20

2.3

Relation between CIPA 2012 and Rule of Court Amendment 2018 ............................20

2.4

Conclusion .............................................................................................................................................21

References ..........................................................................................................................................................22

FINAL ASSESSMENT | ICP824 CONSTRUCTION PROCUREMENTS AND CONTRACTS

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Question 1: Court Case Analysis: Privity of Contract 1.0

Introduction

Contract is an agreement between two or more parties that can be enforced by law. This is mentioned by Mohd Nazir (2008) in explaining the definition of contract where he said an agreement can be done either verbally, action or the most suggested one is through writing. The basic concept of contract are the related parties free to create any requirements subject to the law without any force and encouragement. However, not all the agreement is considered contract as mentioned by Amran (2017). He said that an agreement needs to have the elements of Offer, Acceptance, Consideration, Mutuality and Legality. Without all these elements, this agreement cannot be considered as an agreement that can be enforced by law as a contract.

1.1

Doctrine of Privity

Introduction to privity contract The doctrine privity of contract as define by Treitel (2005) are contract cannot as a general rule, confer rights or impose obligations arising under it, on any person except the parties on it. Hazlina Shaik (n.d.) & Mahadil (2012) mentioned that the privity doctrine consists of two rules where the first one is a third party cannot be subjected to a burden to which he is not a party of and the second one is person who is not a party to a contract could not sue upon the contract even though it has benefit over him. The first rule as mentioned by Mahadil (2012) are not controversial at all, but for the second rule that cause many problems and raised many issues according to Contract (Right of Third Parties) Act 1999 (hereinafter known as the 1999 Act). Another explanation by Mahadil (2012) regarding privity of contract is only a party to the contract is bound by the contract and only a party to the contract can enforce the contract.

Privity Contract in Malaysia In Malaysia, Contract Act 1950 did not clearly explain regarding the Doctrine Privity in this industry. This is explained by Hazlina Shaik (n.d.) that said Privity Contract had been received in Malaysia Law although not expressly provide in the act. It is also been said that the Doctrine Privity is now acknowledge as the most important foundation in the contract law in Malaysia. The closest act that similar to the rule of privity in contract are

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in Section 2(d) Malaysian Contract Act 1950. The detail of this act will be discussed on case discussion regarding the common law after this. The first case in Malaysian regarding the Privity Doctrine is Kepong Prospecting V Schmidr [1968]. The Privy Council held that the doctrine privity in Malaysia was applicable under Section 2(d) Malaysian Contract Act 1950.

1.2

Case Fact

City Cabinet Factory Sdn Bhd V Pembinaan Pasti Dinamik Sdn Bhd The case is between City Cabinet Factory Sdn Bhd (Plaintiff) and Pembinaan Pasti Dinamik Sdn Bhd (Defendant). The case had been referred on Session Court and after the judge had come out with decision, Plaintiff’s claim had dismissed and the lost party had appeal to the High Court. It was overruled in the High Court discussing the judgement given by Justice Lee Swee Seng in allowing the Plaintiff’s prayer. The contract that are disputed by them are the Renovation works in the clinic and ward of UiTM Campus Sungai Buloh, Hospital Sungai Buloh. Client for this project is UiTM Private Healthcare Sdn Bhd. SubContractor is the Plaintiff where the Defendant is the Main Contractor of this project.

Defendant had appointed Plaintiff as the Sub-Contractor of this projects by Letter of Award dated 3 July 2015. Letter of Award for the contract had stated that the Contract Sum of the project is RM2,660,600.00. There is omission of work done by RM55,218.61 that make the value of work done is RM2,605,381.00.

1.3

Issue

The issue of this case is the contractual relationship between three parties that is Plaintiff which is Sub-Contractor of the project, Defendant the Main Contractor of the project and Metro Cabaran Sdn Bhd, a Project Manager Company that is the third party that have separate contractual agreement with the Defendant as a ‘Joint Venture company’ that agreed some percentage of profit sharing. Metro Cabaran Sdn Bhd did not have any contractual agreement with the Plaintiff. The things that make the case complicated are the statement highlighted in the Letter of Award for contract between Main Contractor and Sub-Contractor dated 3 July 2015 that mentioned that “All progress claim, valuation and payment shall be processed and handled by our Project Manager”. This was agreed

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between the Defendant and Metro Cabaran Sdn Bhd in their separate agreement in handling the payments to ensure the process of the construction project.

Proceeding in the Session Court In the Session Court, Plaintiff had claimed for the balance amount that had been already certified by the Defendant regarding the work done that had been completed by the Plaintiff. From the net Contract Sum that is RM2,605,381.00 after deducting with the omission part, the amount outstanding that did not pay by Metro Cabaran Sdn Bhd (on behalf of the Defendant) are RM914,467.39. Defendant had certified all the progress claim by the Sub-Contractor. This is the sum of Claim No 5, Claim No. 6, Claim No.7 and Claim No.8 that had not been paid fully to the Plaintiff. The last claim that is Claim No.9 that is not the work done by the Plaintiff but in the perspective of sub-contractor, it is the claim about the balance amount that not been paid to them. In Defendant side, it is the similar representative that had been certify for claim no.1-8 and final claim no.9 with the same template for certification and affixed with Defendant rubber stamp.

Session Court held Session Court Judge (“SCJ”) held that the payment to the Plaintiff had been made by Project Manager and it is the duty for the Plaintiff to sue the Metro Cabaran Sdn Bhd (not the Defendant) that did not pay the exact amount to the Plaintiff. Besides that, SCJ had held that the ‘certification’ of the amount on Interim Payment No.9 by the Defendant are an only an acknowledgement not a certification. They held that Plaintiff unable to prove the amount outstanding and dismissed the claim by the Plaintiff and they have to paid RM6,000.00.

Plaintiff Appeal the case to the High Court The Plaintiff had appealed the case to the High Court by given some judgement of the held by the SCJ. Plaintiff had highlighted that only the parties in the contract may sue the other parties for any breach of the contract where Metro Cabaran Sdn Bhd did not have any contractual agreement with them and they cannot sue this Project Manager company.

Besides that, Plaintiff highlighted that SCJ failed to use the evidence that the Interim Payment No.9 are similar template with the previous Interim Payment (IPC1-IPC8) that had been signed with a same person from the Defendant side where SCJ has held that the

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Claim no 9 that had been certified by Defendant are only an acknowledgement not a certification.

Proceeding in the High Court The proceeding in the high court had discussed about the held by SCJ. The doctrine of privity of contract stated that only parties in the contract can sue for breach of contract.

It is the contractual obligation of the Defendant to ensure the Metro Cabaran Sdn Bhd paid the payment to the Sub-contractor as clearly mention in the Letter of Award between Plaintiff and Defendant where progress claim, valuation, payment is by the Metro Cabaran Sdn Bhd. Defendant are still responsibility to the payment where highlighted that outsourcing the payment to the third party did not absolve their obligation to paid to the Sub-Contractors. It was considered breach of contract by Metro Cabaran Sdn Bhd for the joint venture contract between them and the Defendant of the case. Defendant could sue the Metro Cabaran Sdn Bhd due to this breach of contract that did not paid to the SubContractor. They may be a dispute for both of the parties of net profit sharing between them, but it is not the concern of the Plaintiff.

The amount that claimed by the Plaintiff are RM784,198.32 for the outstanding amount and additional RM130,269.07 for the retention sum. Due to this, Defendant highlight that there is nothing such as provision for retention sum in the Letter of award. Besides that, it is mentioned by Defendant that there are some minor defects on the projects that had been rectified by the Defendant by appointing third party for rectification purpose. The Defendant unable to show any evident to show the rectification cost but court had satisfied with the rectification works and held, RM5,000.00 need to deduct from the Plaintiff Claim. At the end of judgment, court has held that the Defendant have to paid the amount RM909,467.39 (after deducting with RM5,000 and 5% interest per annum) 1.4

Discussion

1.4.1 Case Discussion Privity of Contract In discussing regarding the privity of Contract, the court had referred to the case by Tweddle v. Atkinson [1861], Executor of Guy [Deceased] where the Plaintiff for this case

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was engaged to marry daughter of William Guy, died before paid the promise amount to them. Court held that, the Plaintiff cannot sue Atkinson, the Executive of Guy’s estate due to the Plaintiff is not the party to the agreement between his father (John Tweddle) and father in law (William Guy) even though the agreement are benefit to them but as a third party he is not entitle to the contract. Ruled by court mentioned that he was not entitled to enforce the contract mean that only the parties involve can sue each other.

The concept of privity of contract can be seen on this case. As highlight before the rules of privity of contract are third party cannot be subjected to a burden to which he is not a party of and the second one is person who is not a party to a contract could not sue upon the contract even though it has benefit over him. The second rule had been imposed in this case study where the Metro Cabaran Sdn Bhd that did not officially involve in the agreement, but act only as a third party cannot be sued by the person in the contract even though the contract have benefit towards him.

1.4.2 Case Discussion regarding Standard Form of Contract In the Lexis Advance did not mentioned the type of standard form of contract that had been used for the agreement between City Cabinet Factory Sdn Bhd and Pembinaan Pasti Dinamik Sdn Bhd. However, considering the client of this project is UiTM Private Healthcare Sdn Bhd and the project is UiTM Sungai Campus Sungai Buloh Hospital Sungai Buloh, there are a big possibility the standard form of contract used are PWD203A. It is not an issue if a private client uses the PWD contract because they have wider options including the using of PAM2018. Besides that, the case analysis mentioned that the subcontractor had receive the payment from the Main Contractor side and this strengthen the evidence that the standard form that had been used is main contract PWD203A Rev.1/2010 between Main Contractor with Domestic Sub-Contractor (with amendment).

Usually company have their own standard form of contract for the agreement between Main Contractor and Domestic Sub-Contractor. However, this discussion for this part will focus on the effect of the Standard form PWD203A Rev.1 /2010 toward the case.

Defects after completion The court held that the Plaintiff that is the Sub-Contractor need to pay to the Main Contractor amounting RM5,000.00 due to the rectification defect that had been done by

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the Main Contractor by engaging third parties. This is in line with the Clause 48.0 Defects Liability Period where stated that “…during Defects Liability Period… the S.O shall issue written instruction to the contractor to make goods such defects… at Contractors’ own cost…” (Clause 48.1(a)). If the sub-contractor did not comply with this instruction, Clause 48.2 stated that “…if the contractor shall fail to comply… shall be deducted from any money due or become due. (Clause 48.2). The sub-contractor is responsible in making good defects which appear in the Defect Liability Period and if the sub-contractor does not making good defects as specified, the clause stated that, the works may be done by the Main Contractor by given the another person to do and the main contractor can recover the expenses from any money by the Sub-Contractor and the Main Contractor also entitle for the on cost charge for the cost of remedying works as stated in the Appendix Condition of Contract. The case study shows that, due to the Defendant able to prove the defects to the court, court has come out with held by referring to the clause that the Defendant are entitle for the claim towards the Sub-Contractor.

Retention Sum The figure that claimed by the Sub-Contractors are including the Retention Sum amounting RM784,198.32 and RM130,269.07. However, Defendant highlighted that there is no provision in the contract regarding the retention sum. Looking at the standard form of contract PWD203A, did not mention any clause for retention sum as in PAM2018 that discussed regarding this. Clause 30.5 and Clause 30.6 for PAM2018 stated “The employer may retain the percentage of the total value of works…” (Clause 30.6). However, as mentioned in the case summary that Sub-Contractor had request for release of retention sum. It is questionable where the standard form that had been used by them may be contained clause Performance Bond under Clause 13.0 or performance guarantee sum in the similar clause. The performance bond can be release on the Certificate Making good defects (CMGD) as per mention by Clause 13.5 or for performance guarantee sum, can be release 12 months after the Expiry of the Defect Liability Period (DLP) or issuance of CMGD whichever is earlier. If the sub-contractor realizes there are deduction from their payment where they thought that it was the normal deduction for retention sum/ performance guarantee sum, but the Main Contractor said that there are no provision of retention sum in the contract, assuming there are percentage that had been cut from the payment to the benefit of the Metro Cabaran Sdn Bhd.

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Payment Clause 28.6 PWD203A stated that “Within a number of days as stated in Appendix (or if none stated, then within thirty (30) days of the issue of any interim certificate), the government shall make a payment to the contractor as follow…”. The clause clearly mentioned that the payment needs to be done by the Employer within 30days from the date of the issuance of interim certificate. In this case, the Main Contractor that have contractual agreement with the Sub-Contractor must ensure the payment have to be done within 30days of the issuance of Interim Certificate. Although this Letter of Award had rename Metro Cabaran Sdn Bhd as the one that will be process and handled all progress claim, valuation and payment, but the High court has held that it is the obligation of the Main Contractor to ensure the Plaintiff receive the payment within the period honoring certificate as per certified earlier due to Plaintiff did not have Contractual Agreement with the Project Manager.

1.4.3 Case Discussion regarding Common Law Consideration as the element of Contract One of the elements under contract is ‘Consideration’. Amran (2017) in his book explained that this element is a requirement for contractual agreement to ensure it is enforced under law. Section 2(d) Contract Act 1950 provided that “when, at the desire of the promisor, the promise 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”. This clause explained that both party that give promise and receive the promise to do something or avoiding doing something are called ‘consideration’. In relating to the case City Cabinet Factory Sdn Bhd V Pembinaan Pasti Dinamik Sdn Bhd it is clear that, in the Letter of Award mentioned that the payment needs to be made by the Metro Cabaran Sdn Bhd. Defendant should be the one that ensure the Plaintiff receive the payment as stated in the Letter of Award for the work done that have been completed by them.

Paymaster need to have a strong financial background In order to invest in a project, it is important for a company to have strong a financial background and enough capital. If not, a lot of consequences that will be happen and give effect on the supply chain of the construction. This is discussed by Amran (2017) on the

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effect when a company did not paid debt. Law of Malaysia Companies Act 1950 (Act 218) stated that with a minimum debt RM500, it gives provision for the unpaid party to conduct petition on winding up the company to the court. This can be seen to the case Syarikat Mohd Noor Yusof Sdn Bhd Vs Polibina Sdn Bhd. Plaintiff had filed a petition when Defendant failed to pay three Interim Payment and Final Account. The Court held the decision regarding the ‘paid up capital’ and any financial capabilities of the company. It is important for the party to ensure their company to have a strong financial background as mentioned by Amran (2017) in avoiding other party filed petition to wind up their company.

1.5

Conclusion

The concept of privity of contract are the key issue in discussing this court case. Although in Malaysia did not have specific act that mentioned this privity of contract, but in judgement of the first case in Malaysia, Section 2(d) Malaysian Contract Act 1950 that stated the requirement of consideration in the contract had been applied. The first case in Malaysia regarding the privity of contract that is Kepong Prospecting V Schmidr [1968].

For the case study of City Cabinet Factory Sdn Bhd v Pembinaan Pasti Dinamik Sdn Bhd, the rule of privity can be seen on the process of judgement. Although the Plaintiff have been lost in the SCJ but after appealing on the High Court they able to prove to the judgement that they concept of privity of contract in the cases. The Project Manager act as a third party that did not have any contractual obligation with the Plaintiff. The concept of consideration in the Malaysian Contract Act 1950 had been applied in the privity of Contract.

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Question 2: Construction Industry Payment and Adjudication Act 2012 2.0

Introduction

Malaysian Construction Industry are one of the industries that has had a long history of lengthy payment times as mentioned by Professor Datuk Sundra Rajoo (2016). This is due to the construction industry that usually take a longer time. The issue of payment in the industry had been discussed by Azman et al. (n.d) that mentioned ten factors that contributed to the late or non-payment in construction industry are paymaster’s poor financial management, paymaster withholding of payment, conflict among parties involve, Concept “Pay-when-paid” clause in sub-contractor, local culture, shorten of current year project, delay in certification, disagree on the valuation done, contractual provision and technical problems.

Standard construction contract in Malaysia had provide provision regarding the period of honoring certificate in order to ensure the paymaster follow the condition of the contract. In PWD203A (Rev. 1/2010) stated that “Within a number of days as stated in Appendix (or if none stated then, within thirty (30) days of the issue of any such interim certificate the government shall made payment to the contractor….” (Clause 28.6) and, PAM 2018 highlighted “… the Employer shall thereafter pay the amount of the amount certified to the Contractor within the Period of Honoring certificate...” (Clause 30.1). Each of standard form of contract had mentioned the period of honoring certificate where for PWD203A is 30 days from the issuance of Interim Certificate and 21 days for PAM 2018 as stated in the Appendix Condition of Contract.

Although the period of honoring certificate in clearly stated in this both standard form of contract, however the issue of non-payment is very crucial in Malaysia Construction Industry where Azman et al. (n.d.) said it is already an old issue in the industry. The unpaid parties have an option to terminate their own employment under PAM 2018 that stated “The contractor may determine his employment… If the employer fails or neglects to pay the contractor amount due to any certificate…” (Clause 26.1). Meanwhile, PWD 203A did not mentioned clearly the entitlement of contractor to terminate their own employment due to the payment issue by the government.

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CIPAA in Malaysian Construction Industry

The first payment acts in Malaysian Construction Industry that is Construction Industry Payment and Adjudication Act (CIPAA) had been passed by Royal Assent on 18th June 2012 and published into gazette as Act 746 in Law Malaysia and finally come operation in recent 15th April 2014 (Keng & Sio, 2018). Before the act had been come into effect on 15 April 2014, CIPAA Malaysia (2020) stated in their official website that the player in the industry that have issue regarding the payment will go through the process of arbitration or litigation where these process as highlighted by Azman et al. (n.d.) are more time consuming and costly. They also mentioned that the process of arbitration or court proceedings is relatively complicated, expensive, and slower.

Asian International Arbitration Centre (AIAC) that is formerly known as Kuala Lumpur regional Arbitration Centre had taken initiative to introduce a new standard form of contract to address the issue of payment in more explicit manner. Previously construction player had referred to the clause in PWD203A (Rev.1/2010) and PAM 2018 by referring to mediation and arbitration for any disputes happened (Mustaffa et al., 2019). Professor Datuk Sundra Rajoo (2016), in his message in CIPAA 2012 Handbook highlighted that this act that had been enacted are timeously due to the increasing numbers of launch projects under National Key Economic Areas (NKEA) listed in the Economic Transformation Plan (ETP) the approximately contribute RM144 billions to gross national income and demand for Construction Service.

Nik Din & Ismail (2014) highlighted in their research that construction industry is optimist that CIPAA will be the best platform in order to resolve the payment default issues. The implementation of CIPAA 2012 acts as a Statutory Adjudication that are targeting for a better financial management in Malaysian Construction Industry (Muhammad Nasir et al., 2018) and to improve the payment problem in the construction (Mustaffa et al., 2019). Construction Industry Payment & Adjudication Act 2012 handbook version 2016 explained regarding the Statutory Adjudication, “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 parties”. The act automatically enforce as long it comply with the requirement under CIPAA like Section 2 CIPAA stated that “This act applies to every construction

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contract made in writing relating to construction works…” and on Section 3 CIPAA highlight “This act does not apply to every construction contract entered into by a natural person for any construction works…”. The requirement of the cases that suitable to referred clearly explain in the clause on Act 746 CIPAA.

2.1.1 Applicability of CIPAA The applicability of CIPAA in this industry had been shown by the increasing number of cases referred to CIPAA from year 2014 as per Table 1 below. The latest report on AIAC Sharing Solution (2018) below shows that CIPAA had been a great platform for the contractor, sub-contractor or any parties to resolve late payment and non-payment issue in the industry.

Fiscal year

15/4/2014-

16/4/2015 –

16/4/2016 –

16/4/2017 –

15/4/2015

15/4/2016

15/4/2017

15/4/2018

Registered Matters (Numbers)

84

207

547

765

Unregistered Matters (Numbers)

0

19

15

14

Table 1 Matters by fiscal year. Adoption from AIAC Sharing Solution (2018)

2.1.2 Purposed of CIPAA i.

Resolve cash flow issues

Payment had been said as the life-blood of the construction industry (Ameer Ali, 2006).

Nik Din & Ismail (2014) said that payment issue still a dilemma that are lingered among the contractors and some other parties. They are trying to minimize this issue in every construction project. Ameer Ali (2006) in his article said that cash flow in this industry is critical as the period are long where if the deviation occur halfway, it will more difficult to recover. Late payment which is one of the issues that have been faced by numbers of Construction Industry ‘s players nowadays are had been discussed on many researches.

In accordance to that Azman et al. (2014) mentioned that this situation will affect the performance of the contractor. Some of them unable to complete the work on time and tends to cause delay in the construction due to unable to come out with positive cashflow.

Azman et al. (2014) said that the failure of the contractor in getting regular and based on the agreed timely payment will give bad effect to them like project delay, reduced profitability and in extreme cases will lead to the liquidation or bankruptcy. They also

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highlighted that this situation not only affect the contractor itself but also result in entire project value chain where if the employer did not pay to the Main Contractor, it will involve the payment towards the sub-contractors, suppliers, hirers and all the parties involve. Besides that, Azman et al. (n.d.) in their research had group up several researcher points regarding the impact of the late or non-payment that include creating negative chain effect on the other parties, result in delay in construction period, leads to bankruptcy, project delay, affect contractor reputation, and affect the profitability of the project.

Most of the parties in the supply chain will be affected by this issue but Mustaffa et al.

(2019) highlighted that small medium enterprise company (SME) like sub-contractors are the most affected as they will be facing cash flow problems and their financial will be weak and they are struggling to survive if not receive their payment from the client. This issue had been highlighted in the Construction Industry Payment & Adjudication Act 2012 handbook version 2016 that in targeting to address the cash flow problems in the industry ‘it aims to alleviate the pervasive and prevalent practice of delayed, non-payment and/ or under-payment for works or services carried out under a construction contract.�.

This is supported by Keng & Sio (2018) that highlight the prevalent payment problems that arise in the construction industry will give a big effect to the downstream player (such as Contractors and sub-contractors) and they will be the victim of this bad payment practice in this country.

Azman et al. (2014) said that CIPAA is a CIDB and industry collaboration to address a cash flow problem in the industry. In the same vein, Nik Din & Ismail (2014) highlighted in their research that construction industry is optimist that CIPAA will be the best platform in order to resolve the payment default issues. CIPAA is an effective dispute resolution as conclude by Keng & Sio (2018) to minimize the cash flow problems because it is speedy contemporaneously and provides extensive remedies for the payment recovery. This is supported by Azman et al. (n.d.) that the primary objective of CIPAA are to address the cashflow problems in the construction industry. A statuary right had been created under CIPAA to request for the payment of the work that have to be done.

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Section 29(1) CIPAA stated that “A party may suspend performance or reduce the rate of progress performance… if the adjudicated amount pursuant to an adjudication decision had not been paid wholly or partially…”. This is regarding the suspension or reduction of rate of progress of performance where Keng & Sio (2018) explained that after the adjudication had been determined, it provides the right for the claimant to suspend or reduce the work progress. Ameer Ali (2006) in his article mentioned that this act contains the right of the party that did not have been paid to suspend the works. Act 746 Section 29(3) “The party who exercises his right under subsection (3) – (a) is not in breach of contract;” clearly explained that the contractor that suspend or reduce the progress of performance due to the issued highlighted in the clause are not considered breach of contract. All the procedure that had been stated in this act may help in solving all the payments disputes among the construction industry player. (Mustaffa et al., 2019). ii.

Facilitate payment

In addressing the issue of the payment in the industry, Ameer Ali (2006) mentioned that CIPAA had include the method for regular payment were there are no ‘condition payment’ in the contract and prohibition of ‘pay-when-paid’ and ‘pay-if-paid’ clause. CIDB (2014) highlighted this ‘pay-when-paid’ clause that been included in the contract had tend the construction works to be insolvency and abandon when there is non-payment issue. Due to that, Keng & Sio (2018) said that CIPAA had been enacted as a statuary adjudication act to remove this bad payment practice that is pervasive conditional practice which mostly happened to the Nominated Sub-Contractor in this industry. This issue had been raised during the case of Pernas Otis Elevator CO Sdn Bhd v Syarikat Pembinaan Yeoh Tiong Lay Sdn Bhd & Anor [2014] as highlighted by Keng & Sio (2018) where due to the ‘paywhen-paid’ clause that had been inserted in the sub-agreement lead to the non-payment by the Main Contractor due to they did not receive the payment from the employer.

However, due to this ‘condition payment’ the court held that the Nominated SubContractor only to been paid when Main Contractor receive payment from the Employer.

Keng & Sio (2018) explained further that the enactment of CIPAA had reversed the judicial decision for the case. CIPAA Section 30(1) stated that “… the party who obtained the adjudication decision in his favors may make a written request for payment of the adjudicated amount direct from principal…”. This is clearly explained by Keng & Sio

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(2018) where the claimant that is in favor of the adjudication has the right to obtain the direct payment from the principal in the event non-payment made by the losing party under Section 30 CIPAA. Azman et al. (n.d.) also mentioned that the purpose of CIPAA are to remove the pervasive and prevalent practice of conditional payment of ‘pay-when-paid’ and ‘pay-if-paid’. In CIPAA Clause 35 stated that “… Any conditional payment provision in a construction contract in relation to the payment under the construction contract is void”. Regarding to this Keng & Sio (2018) said that “Prohibition of Conditional Payment” that had been set out under this clause are very effective for the sub-contractor to ensure they are not burdened by the ‘conditional payment’. The research by Keng & Sio (2018) in aiming to study the effectiveness of the prohibition of conditional payment term in CIPAA show that mean of the result show this clause are ‘effective’ to be used. Besides that, Mustaffa et al.

(2019) that study the respondent agreement on the direct payment highlight that this direct payment would be able to assists in reducing and eliminating the payment issues including the issue affected by the conditional payment. iii.

Expedite the dispute resolution

CIPAA offer a simpler, cheaper, and faster process of compared to the arbitration and legislation (Azman et al, n.d.). This is explained further by Azman et al. (n.d.) that said the timeline of CIPAA is forty-five (45) working days from the completion of the reference by parties where if the timeline exceeds the adjudicator decision, it is considered voids and they cannot entitle to recover their payments. This is stated clearly in CIPAA “… the adjudicator shall decide the dispute and deliver the adjudication within – (a) forty five working days from the service of adjudication reply to the adjudication response, whichever is later;, (b) forty-five working days from the expiry of the period prescribed for the services of the adjudication response… (c) such further time as agreed to by the parties.” (Section 12(2)) Keng & Sio (2018) in their research mentioned that, due to the prevalent payment problems in this industry, CIPAA had play an important role in remedying the payment issue that one of the functions is in providing the speedier and faster dispute resolution and remedies available to the unpaid parties. The increasing number of cases that

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registered and highlighted by AIAC Sharing Solution (2018) show that the payment disputes can be resolve as quickly as possible through fast and uncomplicated proceedings as explained by Mazani et al. (2019). During that time, AIAC had predicted the number of cases is increasing to 882 numbers on year 2018.

Mustaffa et al. (2019) mentioned that before the CIPAA is enacted, standard form of contract like Public work Department (PWD) and PAM (Pertubuhan Arkitek Malaysia) had been used. Both of the standard form of contract requires parties to go to the mediation and arbitration if the disputes cannot be solved. Disputes can be solved using Alternative Dispute Resolution (ADR) such as mediation, adjudication and arbitration which aim to achieve resolution in a shorter time, fewer cost and without involving court as explain by Mazani et al. (2019). However, the timeline for the mediation and arbitration are not fit the requirement of the contractor to be solve as soon as possible.

In comparing the timeline for other dispute resolution method, Ameer Ali (2006) highlighted that other dispute resolutions are time consuming where he gives example that arbitration can only started after the construction woks is completed, or the contract is terminated while for legislation only can be initiated if the arbitration award had been challenged.

2.1.3 Process of CIPAA Construction Industry Payment & Adjudication Act 2012 handbook version 2016 had summarized the process flow for the main steps involved in the adjudication to 7 steps which is making Respondent to a payment claim, Initiation to adjudication, Nomination of adjudicator, Appointment of adjudicator, Adjudication claim and response, The conduct of adjudication proceedings and adjudication decision. The overall process is related to the discussion on purpose of CIPAA regarding a speed process where on this handbook also mentioned that the adjudicator needs to deliver their decision to the dispute parties and AIAC within forty-five days from the Adjudication response or Adjudication Reply whichever is late. The timeline for the Adjudicator is compulsory to be followed to ensure the decision is not considered void.

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2.1.4 Pertinent features of CIPAA Hadi et al. (2018) and Nik Din & Ismail (2014) in their research had grouped four pertinent features of CIPAA that is outlawing the practice of Pay-when-paid and conditional payments, streamlining payment procedures, establishing the cheaper speedier, contemporaries, binding, Statutory-Enables, Adjudication mechanism, and providing security and remedies for the payment. i.

Outlawing the practice of ‘Pay-when-paid’ and conditional payments

One of the features of CIPAA that stated in CIPAA 2012 handbook (2016) are they expressly outlaw conditional payment like ‘pay-when-paid’, ‘pay-if paid’ and ‘back to back’ payment that had been commonly practice in this construction industry. The prohibition of conditional payment had been stated in Clause 35(1) that said, “Any conditional payment provision in construction contract in relation to payment under the construction contract is void”. In relation to the ‘conditional payment’, and Clause 35.2(b) highlight ‘”the obligation of one party to make payment is conditional upon the availability of funds or drawdown of financing facilities of that party.

The actioned by the government in

gazettes this CIPAA 2012 help to fix the issues in this construction industry.

This was discussed before in the case Pernas Otis Elevator CO Sdn Bhd v Syarikat Pembinaan Yeoh Tiong Lay Sdn Bhd & Anor [2014] where in CIPAA, they had reversed the decision of the Court of Appeal. The reason why this ‘pay when paid’ clause had been practices in this industry is to protect their risk and transfer the risk to the subcontractor. This conditional payment in the agreement is often happened for contractual between Main Contractors and Nominated Sub-Contractors where the payment is from the client to the Nominated Sub-Contractor through the Main Contractor’s Interim Payment. Through this, the payment from the Main Contractor will not release to subcontractor when Employer did not pay to the Main Contractor. The enactment of this act helps the contractors in seeking justice for the conditional payment that have to be faced by them.

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Streamlining payment procedures

The next features that offered by CIPAA 2012 are streamlining the payment procedures.

In discussing to this, there is some contractual agreement in this current construction industry that not clearly mentioned regarding the payment procedures in the contract.

This will cause uncertainties among the parties in the contract (Keng & Sio, 2018). CIPAA act as a ‘statutory adjudication’ that act as a platform for dispute resolution where the adjudication process as prescribed in this act as a platform for the dispute resolution as explained by (Lim, 2015). He added that this statutory act will apply to any construction contract even it does not provide the provision in this contract. This mean that any uncertainties regarding the payments in the contract can be refer to CIPAA for the adjudication purpose.

Besides that, this is also regarding the default provision in the absence of term of payment. Harbans (n.d.) in explaining the Clause 36(1) “Unless otherwise agreed by the parties, a party who has agreed to carry out construction works or provide construction consultancy services under a construction contract has the right to progress payment a value by reference to…” mentioned the purpose of CIPAA are for the absence of express payment provisions in the construction contract also to provide default payment terms.

The existence of this section in this CIPAA effectively takes away the contractual right of the paying party to pay only upon the satisfaction of certain conditions and replaced the same with a default payment provision under section 36 CIPAA (Christoper & Lee, 2018) iii.

Establishing the cheaper and speedier mechanism

The other features that consider important in CIPAA 2012 compare to another regime is the act itself that provide a cheaper and speedier mechanism. Clause 12(2) CIPAA 2012 had highlighted that the adjudicator must make decision within 45days working days that show this clause will give a speedy resolution. Besides that, the adjudication process can be started at anytime when the disputes regarding payment happens. This is mentioned

by Hadi et al. (2008) that even though the project is still running, the claimant party may refer to CIPAA without need to wait for the completion of the project for the dispute resolution and after that file the dispute in the arbitration or legislation.

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They also add the advantages of CIPAA itself as cited Rajoo (2012) that CIPAA expected to provide lowered cost due to the short time frame by comparing to the arbitration or legislation. The importance of the speedier and cheaper features in CIPAA had encourage the increasing numbers of cases as stated the increasing numbers of matters in AIAC Sharing Solution (2018) from 2014 to first quarter 2018. This is maybe due to the understanding of the concept of CIPAA that provide the speedier and for a small contractor, the CIPAA itself give a better option for them to fight their right within their ability. The adjudication fees that are relatively lower in cost had been stated in the Construction Industry Payment and Adjudication Act 2012 Handbook (2016). In this industry, some standard form like PWD 203A (Clause 66) and PAM2018 (Clause 37) had contained arbitration clause. However, compare to Adjudication method, Lim (2018) said that arbitration is less favor due to the excessively formal procedure, high cost and time consuming. iv.

Providing security and remedies for the payment

CIPAA features that able to provide security and remedies for the payment was the reasons that CIPAA had been the choice over the other regime. For example, Section 29 CIPAA stated “A party may suspend performance or reduce the rate of progress performance of any construction works…”. This clause had provided the unpaid party to suspend performance or reduce rate of the performance. The existence of this provision to suspend or ‘go slower’ in CIPAA able to help the unpaid party regarding their cashflow.

This is all discussed by Keng & Sio (2018) that explained the features that CIPAA offer the construction player without repudiate the contract.

Besides that, in recovering the payment, CIPAA had provide the Direct payment from the principal. The term ‘principal’ in CIPAA Act Section 4 defined as “… a party who has contracted with and is liable to make payment to another party…”. This is stated in the CIPAA Clause 30 regarding the direct payment from the principal. Keng & Sio (2018) said the claimant in favor of the decision of the adjudication have the right to obtain direct payment. This method is considered an effective remedy for the unpaid sub-contractor to secure the payment and assist the Sub-contractor to minimize the impact of cash flow problems due to the issue of non-payment.

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Rule of Court Amendment 2018. Order 69A, Rule 5(1)

Application to set aside an award are mentioned in the Federal Government Gazette, Rule of Court 2018. The clause stated that “An application for permission to enforce an adjudication decision, either wholly or partly, in the same manner as a judgement or an order of the High Court under Section 28 of the Act may be by originating summons in Form 5” [Order 69A, Rule 5(1)]. This order explained by Christopher & Lee (2018) court may give permission to serve an application to enforce, set aside or stay a CIPAA adjudication decision out of the jurisdiction. It needs to originate summons with a concise statement of the remedy claimed and supported with affidavit of written evidence any question which the applicant is seeking the decision of the court.

2.3

Relation between CIPA 2012 and Rule of Court Amendment 2018

A study by Mazani et al. (2019) show that the distribution of CIPAA provision referred to the court on year 2014 to 2018 where it involves Application (Section 2), Fraud or bribery (Section 15(a)), Denial or natural justice (Section 15(b)), Not acted independently or impartially (Section 15(c)), Excess of jurisdiction (Section 15(d)), Stay of adjudication decision (Section 16), Jurisdiction of Adjudicator (Section 27), Enforcement of Adjudication as Judgement (Section 28), Prohibition of Conditional Payment (Section 35), and Exemption (Section 40). The distribution show that the most provision referred to court are Excess of Jurisdiction (44 cases), Denial of natural justice (41 cases) and Enforcement of adjudication as judgement (39 cases) for the period of 5 years.

In relating to the distribution that explained by the mentioned authors, Section 15 that comes out with highest number of cases where it stated that “An Aggrieved party may apply to the High Court to set aside an adjudication decision …” (Section 15). The section had included of 4 grounds. Arzlee Hassan et al. (2018) added that the allowance to set aside the decision are to find the retribution due to the possible mistake by the adjudicator. Besides that, Keng & Sio (2018) in their research mentioned that the winning party may enforce the decision of adjudication by applying to High Court for an order for securing the recovery payment under CIPAA. This is stated in the act that “A party may enforce adjudication decision by applying to the high court for an order to enforce the adjudication decision as if it is a judgement of the High Court” (Section 28(1)). The enforce of adjudication decision also discussed by Mazani et al. (2019) where they said that

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winning party may apply for the high court if it was a judgement or order from the high court.

2.4

Conclusion

From the discussion above it can be said that the objective of CIPAA to address cash flow problems in the industry as mentioned in CIPAA Handbook (2016) achieved. This is due to the numbers of matters registered are increase throughout the year since the operation of CIPAA on April 2014 as per discussed in Applicability of the CIPAA. The purposed of CIPAA as discussed are regarding the resolving the cash flow problems, facilitate payment and expediate the process of dispute resolution. All this issue discussed considered the main points why CIPAA are really suited to implement in this construction industry. The general process of CIPAA as stated in the CIPAA Handbook also explained generally above to show how CIPAA can speed up the process of the adjudication. Besides that, the reasons why the CIPAA is pertinent to be used compare to another regime also had been elaborate. Lastly, in relating to the CIPAA and Rule of Court Amendment 2018 had been discussed where there are numbers of provision to refer the adjudication to the court as explained in the Act 746.

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Sundra, R. (2016). CIPAA 2012 Handbook - Director Message (pp. 8-11). Kuala Lumpur; Kuala Lumpur Regional Centre of arbitration. Retrieved 20 July 2020 Treitel, GH. (2015). An outline of the law of contract. Oxford University Press Tweddle v Atkinson | [1861] EWHC QB J57 | England and Wales High Court (Queen's Bench Division) | Judgment | Law | CaseMine. Casemine.com. (2020). Retrieved 21 July 2020, from https://www.casemine.com/judgement

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