Federal Court: Construction Industry Payment and Adjudication Act 2012 is prospective
18 October 2019
On 16 October 2019, the Federal Court delivered a landmark ruling in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [Civil Appeal No.: 02(f)-58-07/2018(B)] where it clarified points of law on the retrospective application of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) and the application of Section 35 of CIPAA which governs the validity of pay-when-paid clauses in construction contracts.
Jack-In Pile was appointed by Bauer by way of a letter of award dated 16 March 2011 (“LOA”) as its subcontractor for a development project in Gombak (“the Project”). Clause 11.1 of the LOA stipulated that all payments to Jack-In Pile shall only be made within seven days from the date Bauer received their related progress payments from the employer of the Project. From 2011 to 2013, Bauer had reiterated its reliance on clause 11.1 of the LOA and as a result there was no obligation on Bauer to make any payments to Jack-In Pile until and unless it receives payment from the employer.
Payment disputes arose between the parties under the Project and after CIPAA came into force on 15 April 2014, Jack-In Pile initiated adjudication proceedings under CIPAA against Bauer. At the conclusion of the proceedings, the adjudicator decided that Bauer was to pay Jack-In Pile the sum of RM906,034.00. Jack-in Pile and Bauer then filed applications to enforce and set-aside the adjudication decision respectively.
The High Court, relying on the decision in UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor  11 MLJ 499 (“UDA Holdings”), held that CIPAA (including Section 35) applied retrospectively. It accordingly decided in favour of Jack-In Pile and dismissed the setting aside and granted the enforcement application. Bauer then appealed both matters to the Court of Appeal.
The Court of Appeal, having said that the applicability of Section 35 depended on whether CIPAA was intended to have retrospective application, found that there was no express provision in CIPAA excluding or including construction contracts made prior to the commencement of CIPAA. The Court went on to hold that it was trite that unless there were clear words in the legislation to the contrary, any legislation affecting substantive rights must be given a prospective effect. Section 35, according to the Court of Appeal, related to the substantive right of an individual which is the right to the freedom of contract. The Court of Appeal accordingly concluded that CIPAA was prospective in nature and allowed both appeals. Dissatisfied with the decision, Jack-In Pile then filed appeals on both matters to the Federal Court.
In dismissing both appeals, the Federal Court held that in the absence of express words to such effect, a statute, notwithstanding whether it is procedural or substantive, cannot be applied retrospectively to impair a substantive right. Section 35, which prohibits conditional payment clauses, impairs an individual’s right to freedom of contract where parties are entitled to regulate their business affairs. Any interpretation that CIPAA takes effect retrospectively would inhibit Bauer’s vested right in accordance with the bargain entered into between parties. As such, in the absence of any express intention by Parliament that CIPAA is to be applied retrospectively, it can only be said to be applied prospectively.
In reaching its decision, the Federal Court expressly disagreed with the High Court in UDA Holdings and found that the High Court in that case did not appear to appreciate fully the statutory provisions of the Interpretation Act 1948 and the common law position that in the absence of clear and express words to such effect, a statute, such as CIPAA, cannot be applied retrospectively.
The Federal Court’s decision that CIPAA does not have retrospective effect is far-reaching as contracts entered into and payment disputes which arose before the enforcement of CIPAA are now exempt from the application of that legislation.
It is to be noted that on the same day that the judgment in Jack-In Pile was issued, the Federal Court also issued its judgment in Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd and two other appeals [Civil Appeal No: 02(f)-124-12/2018(W), Civil Appeal No: 02(f)-125-12/2018(W) and Civil Appeal No: 02(f)-126-12/2018(W)] where it held on substantially similar grounds as in Jack-In Pile that CIPAA does not have retrospective effect.
Summary prepared by Tatvaruban Subramaniam, Senior Associate in the Construction and Engineering Practice of SKRINE.