CIPAA: Adjudication Leading the Way?

The recent International Malaysia Law Conference 2018 was held on 14 to 17 August 2018. The conference featured an adjudication session titled ‘CIPAA: Adjudication Leading the Way?‘ A very enlightening, and somewhat troubling, discussion on how adjudication has developed in Malaysia over the last four years since its coming into force. Adjudication may not have achieved its aims of providing a swift resolution of disputes.

Image from http://www.engineersjournal.ie

 

The session featured three very experienced construction and adjudication practitioners. Ir Harbans Singh, a chartered engineer, arbitrator, adjudicator, mediator, and advocate and solicitor (non practicing). Rohan Arasoo, partner of Harold Lam Partnership. Belden Premaraj, principal partner of Belden.

The panel discussed whether adjudication was a success in Malaysia and whether it raised more hurdles for the construction industry players. The panel looked into the statistics of past adjudications and the case law that has developed.

The following is a report by Kelvin Seah who attended the interesting session.

Ir Harbans Singh

Harbans Singh was invited to discuss whether adjudication has achieved its purpose. The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) was enacted 6 years ago, and came into force 4 years ago. Its purpose was set out in the Preamble:

  • To facilitate regular and timely payment;
  • To provide a mechanism for speedy dispute resolution through adjudication; and
  • To provide remedies for the recovery of payment in the construction industry.

In recent years, the number of adjudication cases has grown substantially and this was not expected by Parliament.

Years No. of Registered Cases
2014 29
2015 181
2016 463
2017 711
2018 > 850

 

It was the speaker’s view that CIPAA has failed to do its job. There are several principal concerns troubling the industry:

  • Adjudication has become complicated – CIPAA was meant to assist lay persons so that they can self-represented in the adjudication proceedings. AIAC has came out with several templates for adjudication process which may be adopted by lay person. Nevertheless, this has been complicated with the direct involvement of legal practitioners.
  • Adjudication is not efficient – adjudication was meant to provide quick (yet rough) justice to the parties. However, the adjudication process is now lengthened because the decision is subjected to appeal all the way to the Federal Court.
  • CIPAA has lost its focus – Due to the complexity and lengthy process of adjudication, smaller industry players are no longer benefiting from the adjudication process. Smaller industry players are intimidated by the complicated process. This makes adjudication having little difference compared to litigation or arbitration.

From the perspective of an adjudicator, the speaker raised several concerns:

  • Courts seem to value legalities (i.e. legal arguments) more than the objective of CIPAA (i.e. payment and construction aspects). Courts have set aside cases where it was held that natural justice was not observed in adjudication process as it is a dispute resolution mechanism.
  • The risk of setting aside / non-enforcement of adjudication decision.
  • Lay adjudicators (e.g. non-legal background) cannot handle case referrals due to the complexity in legal arguments.
  • Fees are not commensurate with the work done.

Harbans Singh concluded by saying that adjudication has apparently gone somewhat “off track”. The initial purpose was to reduce backlog of cases in Courts, but this expectation was not achieved. He suggests the Court to revert to their earlier approach in fully supporting adjudication and the underlying objectives of CIPAA.

Rohan Arasoo Jeyabalah

Rohan was invited to speak on the recent development of case law in relation to CIPAA. Under the CIPAA regime, Courts deal with issues such as the jurisdiction of an adjudicator, the retrospective effect of the Act, the applicability of conditional payment provisions in a construction contract, the types of claims that can be referred to adjudication and circumstances when an adjudication decision can be set aside and/or stayed.

The following are a few recent cases decided by our Courts.

Cases Decisions
View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2017] 8 AMR 167, FC

 

This case concerned a dispute over the non-payment of an interim payment claim. The parties proceeded with the adjudication process and the Adjudicator decided in favour of the Claimant / Respondent. The Respondent applied in the High Court to enforce the adjudication decision whilst the Appellant applied to set aside the decision on the basis of the Adjudicator’s failure to consider defences raised and challenged the jurisdiction of the Adjudicator.

The High Court dismissed the Appellant’s application to set aside and enforced the adjudication decision. The Appellant’s appeal to the Court of Appeal was subsequently dismissed It was held that the Adjudicator was correct in law to not consider defences which were not in the payment response, pursuant to section 6 of CIPAA.

The Federal Court overruled the Court of Appeal decision. It held that a jurisdictional challenge could be made at any time as this goes to the core of an adjudication. It was further held that the Adjudicator was in breach of natural justice due to his failure to consider all defences raised by the Respondent.

Another legal point that was decided by the Federal Court is the power of courts under section 16 CIPAA (stay of adjudication decision). It was decided by the High Court that stay should only be allowed in exceptional circumstances relating to the financial aspects of payment or repayment. The Federal Court overruled this point and held that such a stringent test shall not be applicable in CIPAA.Financial considerations should not be the sole consideration by the court. It was held that section 16 would allow the court to stay the decision where there are clear errors, or to meet the justice of the individual case.

Bauer (M) Sdn Bhd v Jack-In Pile (M) Sdn Bhd and another appeal

[2018] 4 MLJ 640, CA

 

The Court of Appeal explained that any legislation affecting substantive rights must be given prospective effect. On the other hand, where alegislation was procedural in nature, that legislation must be given retrospective effect unless clear words are showed to the contrary. It was then held that section 35 of CIPAA relates to a substantive right of an individual and accordingly it should be prospective in nature.

The appeal was allowed, and the adjudicator had erred in exceeding his jurisdiction to void the “pay when pay clause” in the construction contract when he should not have done so.

This case is now pending before the Federal Court which has granted the leave to appeal on two questions of law.

Leap Modulation Sdn Bhd v PCP Construction Sdn Bhd

[2018] MLJU 773, CA

 

In this case, the High Court agreed with the adjudicator and held that it is correct not to consider claims which were not properly pleaded as set off. On appeal, that decision was overruled. The Court of Appeal relied on a subsequent Federal Court decision of View Esteem Sdn Bhd v Bina Puri Holdings Berhad and held that the adjudicator had erred in not considering all defences raised and this amounted to a breach of natural justice. Accordingly, the award of the Adjudicator was set aside.
Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal
[2016] MLJU 1827, CA
It was held, by majority decision, that the Court takes judicial notice of the fact that final payment claims are not excluded by CIPAA. It is not the intention of our Parliament to exclude the same, or otherwise appropriate wordings would have been added to section 3 of the CIPAA. The dissenting judgment can be found here.

 

Bumimetro Construction Sdn Bhd v Mayland Universal Sdn Bhd and another case
[2017] MLJU 1993, HC 
An adjudication decision was given in favour of Bumimetro Construction Sdn Bhd (“BCSB”). Subsequently, Mayland filed an application for stay of the adjudication decision pending disposal of the arbitration commenced by Mayland to BCSB. Counsel for BCSB summarised the principles governing a stay application under Section 16 CIPAA that a stay of adjudication decision should only be granted in exception circumstances and this must necessarily refer to the financial status of the other party.

The High Court dismissed the stay application, by relying on the Federal Court decision in View Esteem which held that “the correct approach for the High Court under section 16 of CIPAA would be to evaluate each case on its merits without the fetter of a pre-determined test not found in the section itself namely the financial capacity of the contractor to repay. It could be a factor but not the only factor.”

 

As can be seen from the cases above, the Courts are now more stringent towards an adjudication award. Adjudication proceedings are subject to closer scrutiny by the Courts.

Belden Premaraj

Belden was invited to express his view as to whether CIPAA is working. Statistics have shown that 54% of adjudication decisions are leading to arbitration or litigation. This high rate of re-litigation shows that adjudication is no longer an alternative form of dispute resolution. It is merely another hurdle that a claimant might face.

On the other hand, despite having a high rate of cases ended up in arbitration or litigation, it could be said that CIPAA is actually working. Statistics show that adjudication claim ranges from RM 3,000 to RM 224 million, with an average claim of about RM 2 million. This illustrates the applicability of CIPAA to wide range of claim, including small industry player. In additional, we now have 467 domestic adjudicators and 77 international adjudicators. This would cater for the increasing number of adjudication cases.

Why is it working for Claimants?

In the adjudication regime, claimants are mainly subcontractor (60%), followed by main contractor (32%) and lastly supplier and consultant (4% each). There is about 88% success rate for a claimant in his adjudication claim. Among that, there are slightly more than 50% of successful claimants with their entire claimed sum allowed and about 75% of successful claimants with more than half claimed sum allowed. It is a high rate of success which can lead to ahigh payment amount to a claimant. Therefore, there seems to be no doubt that CIPAA is meeting its objectives for claimants.

What are the problems that we face?

However, CIPAA is not free from any issues such as:

(a)      No finality in litigation

Adjudication is commonly known as a form of alternative dispute resolution. Although it is a temporary measure, it should encourage finality in litigation. In reality, this is not the case. As pointed out earlier, 54.35% of adjudication decisions are re-arbitrated or re-litigated. No one would be benefit from having 2 tiers of dispute resolution procedure. Almost half of the adjudication decisions are referred to the High Court for a setting aside order. However, only 4.35% of the cases are set aside on jurisdictional issues. Adjudication ought to lead to a more palatable decision for both parties, and this is clearly not fully achieved.

(b)      Claims are too complex and too large for parties to accept rough justice.

Due to the complexity of claim, most adjudication decisions may not be accepted by the losing party. Adjudication claims are usually interim payment claims (34%), final account claims (22%), variation claims (14%) and overall post termination claims (less than 30%).

Another contributing factor is the choice of adjudicator. In most of the instances (about 97.4%), parties failed to appoint a jointly agreed adjudicator. This resulted in resorting toappointment by the AIAC. If the parties are unsatisfied with the adjudicator, then the matter is likely to be re-litigated in court.

It has been agreed that adjudication is only able to achieve rough justice. This is due to the short time frame given to an adjudicator and yet, with the expectation on him to resolve a complex matter. More often than not, an adjudicator decides a matter before him purely based on documentary evidence and only 6.94% of all matters were resolved through oral or inquisitorial hearings.

(c)     Involvement of Legal Representatives

Statistics illustrated that in all cases, at least one party is represented. Further, in about 78% of all cases, both parties are represented during adjudication. Adjudication has become more combative due to unsettled law, ambiguity of contractual terms, competing facts and views, differing analysis of evidence, etc. This is no longer a mechanism for lay persons to resolve their disputes. Instead, it becomes an informal courtroom for lawyers.

Conclusion

All the speakers agreed that adjudication is a rough justice and ought to be improved so that its purpose may be achieved.

Kelvin Seah is completing his pupillage and will soon be commencing practice as a litigator. He is a graduate of the University of London.

2 thoughts on “CIPAA: Adjudication Leading the Way?

    • Lee Shih Lee Shih September 8, 2018 / 1:13 pm

      Thanks! Updated the URL link.

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