The recent Court of Appeal case of Lion Pacific Sdn Bhd v Pestech Technology Sdn Bhd [2022] MLJU 2109 has provided further guidance on issues regarding back-to-back contracts, conditional payment provisions and breach of natural justice in relation to statutory adjudication under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).
 
Facts
 
By way of a main contract dated 22 January 2013 (“Main Contract”), the Malaysian Government appointed Konsortium Skypark Link Sdn Bhd-Lion Pacific Sdn Bhd (“Consortium”) as the main contractor for a construction project.
 
Subsequently, the Consortium appointed Lion Pacific Sdn Bhd (“Appellant”) as a subcontractor for a certain portion of project. Thereafter, by way of a subcontract dated 24 November 2014 (“Subcontract”), the Appellant appointed Pestech Technology Sdn Bhd (“Respondent”) as its own subcontractor.
 
During the course of the works, the Respondent claimed that a sum of approximately RM25 million was due and owing from the Appellant. The Appellant disputed this claim on the basis that, amongst others, Clause 4.1 of the Subcontract stated that any payment from the Appellant to the Respondent would only become due upon the certification of the payment by the Ministry of Transport (“MOT”).
 
The Respondent referred its claim to adjudication under CIPAA wherein the learned adjudicator awarded a sum of approximately RM12.5 million to the Respondent (“Adjudication Decision”). The Appellant’s application to set aside or stay the enforcement of the Adjudication Decision was dismissed by the High Court.
 
Grounds of Appeal
 
On appeal to the Court of Appeal, the Appellant averred that the High Court ought to have set aside or stayed the Adjudication Decision based on three grounds which will be discussed below.
 
First Ground of Appeal: The adjudicator lacked jurisdiction because the Main Contract was entered into before CIPAA came into force
 
The Main Contract was entered into on 22 January 2013, which was before CIPAA came into force on 15 April 2014, while the Subcontract was entered into on 24 November 2014, which was after CIPAA came into force.
 
The Appellant submitted that Main Contract and Subcontract ought to be construed as one transaction given the back-to-back application of the Main Contract. As such, the Appellant averred that the adjudicator had lacked jurisdiction to determine the Respondent’s claim because the Main Contract was entered into before CIPAA came into force and the statute was strictly prospective in nature.
 
The Court of Appeal, in dismissing this ground of appeal, found that the adjudication proceedings were initiated under the Subcontract and not the Main Contract. Notwithstanding the nexus between the back-to-back contracts, the Court of Appeal determined that they were separate contracts and all the rights and obligations of the Appellant and Respondent had arisen solely from the Subcontract. Further, the mere fact that all of the provisions of the Main Contract had been incorporated into the Subcontract did not mean that the parties had entered into the Main Contract.
 
Second Ground of Appeal: The adjudicator had acted in excess of his jurisdiction by incorporating a new contractual term into the Subcontract
 
The adjudicator had found that Clause 4.1 of the Subcontract, which stated that any payment from the Appellant to the Respondent would only become due upon the certification by the MOT, was a in fact a “pay when paid” provision which was prohibited under Section 35 of CIPAA.
 
The Appellant submitted that the adjudicator has wrongly construed the nature of Clause 4.1 and, in doing so, had exceeded his jurisdiction by incorporating a new contractual term into the Subcontract.
 
The Court of Appeal agreed with the Appellant and found that the adjudicator had misconstrued Clause 4.1 as a “pay when paid” provision when it was actually a “pay when certified” provision. This fundamentally flawed misinterpretation had led to the incorporation by the adjudicator of a new contractual term into the Subcontract which the parties had not mutually agreed. On this basis, the Court of Appeal found that the adjudicator had indeed acted in excess of his jurisdiction.
 
Third Ground of Appeal: There were clear and manifest errors in the Adjudication Decision
 
The Appellant submitted that there had been a denial of natural justice due to the adjudicator’s failure to ask the Appellant to address the issue pertaining to the nature of Clause 4.1, even though this issue had been crucial to the adjudicator’s final decision. Further, the Appellant averred that the adjudicator had failed to give due consideration to its main substantive defence, which was that the Respondent was not entitled to its claim due to the lack of any payment certification by the MOT.
 
The Court of Appeal again agreed with the Appellant and found that the adjudicator had failed to carefully consider and appreciate the Appellant’s main substantive defence. The Court of Appeal stated that, had due consideration been given to this issue, it would have made a material difference to the Adjudication Decision.
 
It is understood that the case is currently pending an application for leave to appeal to the Federal Court.
 
This Alert is prepared by Eric Gabriel Gomez (Senior Associate) of the Construction and Engineering Practice Group of Skrine.