Case Update: Federal Court Decides on Final Payments Claimed in Adjudication

The Federal Court in its grounds of judgment dated 1 August 2019 in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd decided on important points of law on adjudication and final payments under a construction contract. The Federal Court had to decide whether the Construction Industry Payment and Adjudication Act 2012 (CIPAA) could apply. Further, it was also determined whether CIPAA could apply to payment disputes between an architect and client. The grounds of judgment were written by Justice Mohd Zawawi Salleh FCJ.

Background Facts

Martego is a private limited company carrying on the business in property investment. Architect Meor & Chew Sdn Bhd (the architect) is a private limited company providing architectural consultancy services.

In August 2014, Martego engaged the architect through a letter of appointment for a development project known as Cecil Central Residence. The project consisted deluxe residential units. The architect’s scope of services was for contract administration and included recommending the list of contractors and sub-contractors for tender and issuing progress claim certificates.

In August 2015, Martego terminated the architect’s service under the construction contract. The architect accepted the terminated. A dispute arose as to the amount of the professional fees for work done under the contract.

The architect initiated adjudication under CIPAA against Martego. The architect claimed for the sum of RM599,500.00 for the professional fees until the date of termination of the contract.

In April 2015, the adjudicator awarded the architect payment in the sum of RM258,550.00.

High Court proceedings were then initiated. Martego applied to set aside the adjudicator’s decision while the architect applied to enforce the adjudicator’s decision. The High Court dismissed the setting aside and allowed the enforcement.

On appeal, the Court of Appeal delivered a majority decision to dismiss the appeal and uphold the High Court decision. Justice Hamid Sultan Abu Backer JCA dissented.

The Federal Court allowed the leave to appeal to the Federal Court in January 2018 on questions of law. I next summarise the questions of law and answers.

Answers to the Questions of Law

Question 1: Whether an adjudicator acts within his jurisdiction in deciding on a matter referred to him under CIPAA when, at the time of service of the payment claim pursuant to section 5(1) of CIPAA, the construction contract had been terminated and the termination was accepted by both parties and the claim was for determination of sums finally due to the unpaid party.

  • Affirmative to this question.

Question 2: Whether CIPAA applies to final payments when the mischief which CIPAA intends to cure, based on its Explanatory Statement and Preamble, was the timely payment for work related to progress payments and not final accounts.

  • Affirmative to this question.

Question 3: Whether the rule laid down by this Honourable Court in Arkitek Tenggara Sdn Bhd v Mid Valley City Sdn Bhd [2007] 5 MLJ 697 that disputes between an architect and his client is to be resolved by the specific provision enacted for such purpose i.e. rule 21 of the Fourth Schedule to the Architects Rules 1973 (as amended in 1986) is still good law.

  • Negative to this question.

Question 4: If question 3 is answered in the affirmative, whether the object of CIPAA to ‘pay first and argue later’ applies to disputes between architects and clients, since adjudication under CIPAA in this regard: (a) dispenses with the rules of evidence, discovery and the trial process; (b) is contrary to natural justice where it concerns final payments; (c) may impinge adversely on the public purse as Federal and State entities may be affected as employers of construction contracts; (d) elevates the adjudicator nominated by the KLRCA as a supreme decision maker, without the possibility of supervision by the courts; and (e) on the basis of the common law principle “interest rei publicae ut sit finis litium” (in the interest of society as a whole, there must be an end to litigation).

  • As the answer was no to question 3, there was no necessity to answer question 4.

Findings by the Federal Court

The Federal Court ultimately affirmed the decision of the High Court and the majority decision of the Court of Appeal. Two key issues were argued before the Federal Court:

  1. Whether CIPAA is applicable to disputes pertaining to interim claims only or is it applicable to disputes relating to final claims.
  2. Whether CIPAA should prevail over the Architects Act 1973.

I focus on some of the key issues decided by the Federal Court.

Interim Claims vs Final Claims

The Federal Court had to first determine whether the adjudicator had jurisdiction to adjudicate when the payment claim was served after the construction contract had been terminated. Both parties accepted that the construction contract had been lawfully terminated.

The wording in the relevant clause in the construction contract contemplated that payment can be made after the termination of the contract. This is because the clause set out the mechanism for the parties to value works done up to the date of termination. The Court did not regard the absence of an express provision that a party is entitled to make a payment claim after the termination to warrant a different conclusion. The Court held that the right to payment under that construction contract survived termination. The architect had carried out works prior to the termination, and the past rights and obligations of Martego were not discharged due to termination.

The Federal Court agreed that the Australian State of Victoria’s Building and Constructions Industry Security of Payment Act 2002’s interpretation of a “right to progress claim” is not relevant to the interpretation of CIPAA. CIPAA is not modelled after the old Victorian Act. On the other hand, the purpose of the Singapore Building and Construction Industry Security of Payment Act is similar to CIPAA. The Federal Court referred to several Singapore Court decisions where the definition of progress payment under the Singapore Act was wide enough to include the final payment.

The Federal Court agreed with the Court of Appeal’s majority decision that as long as there are payment claims relating to a construction contract, CIPAA would apply. There did not seem to be any basis for Parliament to intend a bifurcated approach depending on whether the claim was an interim payment or final payment. If that was intended, CIPAA could have clearly included a proviso or provisions to that effect.

CIPAA vs Architects Act

This argument was based on fact that the Architects Act 1967 and the Architects Rules 1996 set out a specific dispute resolution mechanism of arbitration for architect fees.

The Federal Court held that there was nothing to stop CIPAA applying to the case at hand. The statutory adjudication process and the arbitration mechanism were not mutually exclusive to each other. The Federal Court agreed with the High Court Judge that adjudication operates independently on a separate fast track and will not run into collision with arbitration or litigation. Adjudication provides an additional dispute resolution mechanism of temporary finality that can be embarked upon before or concurrently with arbitration or litigation, as the case may be.

The Federal Court further held that adjudication is a mandatory procedure under CIPAA and the right to statutory adjudication should not be circumvented by any contract where parties have agreed to arbitrate.

 

 

2 thoughts on “Case Update: Federal Court Decides on Final Payments Claimed in Adjudication

  1. Avatar Choo August 13, 2019 / 10:07 am

    What was the basis of the Ajudicator’s valuation of the Final Fees if he did not follow the Architect’s schedule of fees on termination?

  2. Avatar Wendy Loh October 12, 2019 / 5:48 pm

    HI
    May i know any legal isues in adjudication in Malaysia.Support elaborations with cases.

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