Case Update: Federal Court Finds that Adjudication Only Applies Prospectively to Construction Contracts

The Federal Court in its grounds of judgment dated 16 October 2019 in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd held that the Construction Industry Payment and Adjudication Act 2012 (CIPAA) applies only prospectively to construction contracts. CIPAA came into effect on 15 April 2014. Therefore, CIPAA only applies to construction contracts signed after this date.

Prior to this decision, there were High Court and Court of Appeal decisions holding that CIPAA could apply retrospectively to construction contracts. So if there were unpaid amounts arising from pre-15 April 2014 construction contracts, contracting parties could invoke CIPAA, had obtained adjudication decisions and had enforced payment.

It is now uncertain what will be the impact of this Federal Court decision on already decided adjudication matters based on pre-15 April 2014 construction contracts.

Background Facts

This appeal before the Federal Court were heard back-to-back with three other separate appeals. All the four appeals concerned the same issue on the prospective or retrospective application of CIPAA,

In this appeal, the construction contract in question was dated 16 March 2011 between a contractor and subcontractor. The contract contained, essentially, a pay-when-paid clause. The contractor would only pay the subcontractor when the contractor received its related progress payments from the employer of the project. From March 2011 onwards, the contractor exercised its right under this clause.

Eventually, in August 2016, the subcontractor issued a payment claim against the contractor under CIPAA. At the conclusion of the adjudication proceedings, the subcontractor was awarded more than RM900,000.

The subcontractor succeeded in enforcing the adjudication decision in the High Court. The High Court’s decision was that the pay-when-paid clause violated section 35 of CIPAA. This section 35 essentially states that conditional payment provisions are void. Pay-when-paid clauses would be such a conditional payment provision. The High Court held that CIPAA, including section 35, applied retrospectively.

The contractor appealed to the Court of Appeal. The Court of Appeal reversed the High Court decision. The Court of Appeal held that section 35 of CIPAA related to a substantive right. The Court of Appeal concluded that CIPAA was prospective in nature.

Questions of Law and Answers

There were two questions of law posed to the Federal Court. Essentially, they were:

1. Whether CIPAA applies to construction contracts entered into before the coming into operation of CIPAA i.e. 15 April 2014.

2. If the answer to question 1 is in the affirmative, does it follow that section 35 of CIPAA should also apply to construction contracts entered into before the coming into operation of CIPAA i.e. 15 April 2014.

Both questions would have been answered in the negative. The Federal Court decided that CIPAA only applies to construction contracts entered into after the coming into operation of CIPAA.

Findings

The Federal Court first set out that under common law and under various sections of the Interpretation Acts (sections 19(1), 43(a), and 2(1) and (3)), there is already a presumption that legislation is to only apply to the future. Retrospective operation is not allowed unless it is clearly intended by Parliament through express provisions.

Second, the Federal Court disagreed with the rationale in the High Court decision in UDA Holdings v Bisraya Construction [2015] 11 MLJ 499. This was the decision that had first decided that CIPAA was retrospective in its operation. Neither CIPAA nor the Hansard records expressly provide that the Act is to be applied retrospectively. It is the intention of Parliament to provide a speedy resolution to payment disputes in the construction industry. But that intention, without more, does not lead to the conclusion that Parliament intended for CIPAA to be applied retrospectively.

Third, there are provisions in CIPAA which affect the substantive rights of parties. Section 35 of CIPAA is one clear example. It prohibits conditional payment provisions in construction contracts. Such conditional payment provisions, like a pay-when-paid clause, affects parties’ freedom to contract. Applying CIPAA retrospectively would frustrate the bargain entered into b y the parties.

Likewise, section 5 of CIPAA only allows a claim on a single construction contract and not multiple construction contracts. Parties who have agreed to cross-contract set-offs based on multiple construction contracts are now prohibited from relying on such terms by virtue of section 5 of CIPAA. This affects substantive rights of parties if there is retrospective application.

The Federal Court also took note of the argument that the earlier Federal Court decision in View Esteem had referred to UDA Holdings. But this Federal Court concluded that the decision in View Esteem had merely mentioned UDA Holdings in passing and did not decide on the correctness of otherwise of UDA Holdings.

The Federal Court answered both questions of law in the negative. It held that the entire adjudication proceedings including the adjudication decision are rendered void. CIPAA can only be applied prospectively.

Commentary

This decision conclusively sets out the prospective effect of CIPAA. CIPAA only applies to construction contracts entered into after 15 April 2014.

For some of the adjudication decisions for pre-15 April 2014 construction contracts, I can anticipate at least five categories of claims that may be difficult to deal with. References below are to adjudication decisions based on such pre-15 April 2014 construction contracts.

First, the dispute on the unpaid amount may have already moved into litigation in the court or arbitration process. Adjudication decisions are only of temporary finality, and with the dispute subject to final determination in court or arbitration. Parties can therefore still wait for this final determination.

Second, the adjudication decision may have crystallised by way of enforcement into a Court judgment. A Court judgment is still valid unless set aside. Would the Court judgments have to be set aside through even more litigation now?

Third, the adjudication decision may have been enforced by way of a winding up of the debtor company. Can there now be a setting aside or termination of the winding up if the underlying debt based on an adjudication decision was void?

Fourth, there is now the finding that pay-when-paid clauses in construction contracts pre-15 April 2014 can continue to be upheld. Therefore, payments need not have been paid. But there may have been payments already then made out.

Fifth, adjudication decisions are not solely a matter between the contracting parties. Section 30 of CIPAA allows for the adjudication decisions to be enforced against the principal of the party (e.g. the employer of the construction project). Such payments may have also been paid.

These payments and issues are difficult to unwind, especially if any of the parties were insolvent or were wound up. There are then issues of undue preference, unwinding certain void payments, and whether other creditors’ rights have now been affected.

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