Construing Conditional Payment Terms Beyond Pay-When-Paid Clauses under the Construction Industry Payment and Adjudication Act

The Court of Appeal in IRDK Venture Sdn Bhd v Econpile (M) Sdn Bhd [2020] 5 AMR 865 and Lee Swee Seng J (as he then was) at the High Court in Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd and another case [2017] 7 MLJ 732 decided on, inter alia, the issue of whether an adjudicator has the jurisdiction to decide on payment claim when the contract has been terminated and/or whether the contractor was entitled to commence an adjudication proceeding under Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) after the contract had been terminated.
In this commentary, we also briefly discuss on several other cases decided by Lee Swee Seng J (e.g. BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd and anor [2016] MLJU 1567 and Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd and anor [2017] MLJU 242) and Lim Chong Fong J (e.g. Genting Malaysia Berhad v PLM Interiors Sdn Bhd and anor [2020] MLJU 344) at the High Court in relation to the same issues as mentioned above with a view to provide the reader a more comprehensive perspective of the jurisprudence in Malaysia in relation to this issue.
The Adjudication Proceedings
IRDK Ventures Sdn Bhd (“IRDK”) (the Employer / the Respondent in the adjudication proceedings) had awarded Econpile (M) Sdn Bhd (“Econpile”) (the Contractor / the Claimant in the adjudication proceedings) a construction contract. Econpile claimed payment for works done under the contract by serving a payment claim for RM4,035,381.87, which was the sum total of two payment claims, namely payment certificate No. 5R1 (“Payment Certificate”) amounting to RM1,805,866.65 and progress claim No. 6 (“Progress Claim”) amounting to RM2,229,515.22, on IRDK.
IRDK refuted the payment claims on the grounds that Econpile’s employment had been terminated by the architect. In the circumstances, IRDK argued that it was not under any obligation to make any payment to Econpile pursuant to Clause 25.4(d) of the PAM Conditions of Contract 2006.1 Consequently, Econpile filed an adjudication claim against IRDK in accordance with the procedure laid down in the CIPAA. IRDK filed its adjudication response disputing the whole of the adjudication claim. The adjudicator allowed Econpile’s claim under the Payment Certificate but dismissed the uncertified Progress Claim because it was premature.
The High Court Proceedings
Econpile then applied to enforce the adjudicator’s decision while IRDK applied to set aside the adjudicator’s decision in relation to the Payment Certificate. By consent of the parties, these two applications were heard together with IRDK’s setting aside application being heard first.
In support of its setting aside application, IRDK, inter alia, contended that it should not be bound to make any further payment to Econpile until a final account is determined upon completion of the works as the contract has been terminated by the architect. This was initially argued as a jurisdictional point but IRDK’s counsel later varied his submission to this - that if a cause of action on a payment claim has not arisen yet upon the termination of a construction contract, then the adjudicator has no jurisdiction to hear the claim and the adjudicator ought to have dismissed the payment claim. Following the change in IRDK’s position, Lee Swee Seng J held that the issue in contention is no longer a question of jurisdiction but a question of construction of the contract which the court would generally not interfere even if the court was minded to arrive at a different interpretation.
Lee Swee Seng J then went on to state that, even if IRDK had framed the issue as a jurisdictional point, the adjudicator was still entitled to proceed in adjudicating the matter for, inter alia, the following reasons:
  1. Section 27(3) of the CIPAA allows the adjudicator to proceed and complete the adjudication proceedings, notwithstanding a jurisdictional challenge by the parties. As such, an adjudicator is entitled to decide on a jurisdictionally challenged issue if he finds such issue pertinent to be considered for the adjudication decision to be made;
  1. The purposes of the CIPAA as set out in its long title include to facilitate regular and timely payment in the construction industry, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters. If the CIPAA’s application is being excluded once the construction contract has been terminated, then the CIPAA’s intention to alleviate cash flow problems in the construction industry for the unpaid party would be defeated because it would allow unscrupulous employers or main contractors to terminate the construction contract to avoid paying the contractors for work done.2 Since Clause 25.4(d) has the effect, upon the termination of the contract, of postponing payment until the final accounts are concluded and the works completed, it would be defeating the purposes of the CIPAA. In this regard, Clause 25.4(d), being a conditional payment term that inhibits cash flow, is void and unenforceable pursuant to Section 35 of the CIPAA; and
  1. Even if the contract had been terminated, the matters referred to the adjudicator remain disputes under the contract. Where there is a contract to which the CIPAA applies, and there are disputes arising out of the contract to be adjudicated, the adjudication provisions clearly remain operative just as much as an arbitration clause would remain operative.3
IRDK’s Appeal to the Court of Appeal
Dissatisfied with the High Court’s decision, IRDK filed an appeal against the decision to the Court of Appeal by reverting to the position that the adjudicator has no jurisdiction to decide on the payment claims when the contract has been terminated.
The Court of Appeal however did not concur with IRDK and agreed with the High Court’s decision that the Courts must favour an interpretation of the CIPAA that would best promote the purpose and object of the Act than that which would not promote it.4 The Court of Appeal was of the view that a condition such as Clause 25.4(d) would defeat the purpose of the CIPAA to alleviate cash flow problem for the unpaid party. In the circumstances, the Court of Appeal unanimously found no merits in IRDK’s appeal and dismissed the same.
In dealing with the issue of whether an adjudicator has the jurisdiction to decide on a payment claim when the contract has been terminated where Clause 25.4(d) applies to the parties, Lee Swee Seng J in BM City Realty and Terminal Perintis, dismissed the respondents’ applications to set aside the respective adjudication decisions and adopted his earlier grounds in Econpile as his basis.
In Genting Malaysia, Lim Chong Fong J also agreed with Lee Swee Seng J’s decisions in all three of the High Court cases in enunciating that Clause 25.4(d) is a conditional payment term which is prohibited by Section 35 of the CIPAA.
Notwithstanding the Courts’ position that Clause 25.4(d) is a conditional payment term which is prohibited by Section 35 of the CIPAA, it is imperative that one appreciates the rationale behind the application of Clause 25.4(d). Clause 25.4(d) is a mechanism worked into a construction contract with a view to relieve the employer from making further payments and the provision acts as a security for the employer to set off any amounts due to the contractor in the final account. This is a measure which operates until all claims by the employer are set off after which any amount still due and owing to the contractor is reflected in the final certificate. In that sense, there exists a school of thought which takes the view that the approach taken by the Courts, in interpreting Clause 25.4(d) as having the effect of making the employer’s payment obligation conditional, is a departure from the description of a conditional payment provision under Section 35(2) of the CIPAA .
Given the reasoning of the decisions of the abovementioned cases, it appears that the Courts may still not prepared to favour the employer’s financial interests over the need to uphold the purpose of the CIPAA to alleviate the cash flow problem that might be faced by the unpaid party. Therefore, the application of Clause 25.4(d) at it stands (which is also in the PAM Conditions of Contract 2018) is redundant in principle in adjudication proceedings under the CIPAA.
It is interesting to note that the ratio in Lee Swee Seng J’s decision in Econpile also recognises the application of Clause 25.4(d) as a question of construction of contract of which the interpretation of the same in an adjudication proceeding lies wholly with the adjudicator. In this regard, there may be an arguable proposition that if the adjudicator decides to construe Clause 25.4(d) as being not a conditional payment term under the CIPAA, then in such a situation the Court may take the view that it cannot interfere with that decision.
Further to the above, the Courts’ reasoning for the decisions of the abovementioned cases has essentially opened the door for judges to go beyond the realm of pay-when-paid clauses to void payment-related clauses in adjudication proceedings under the guise of conditional payment terms. In this respect, it is important for the Courts to interpret Section 35 of the CIPAA bearing in mind that there is an obligation to weigh between the entrenched substantive rights of the  parties in a standard form contract and the objectives of the CIPAA as mentioned above.
At the time of writing this commentary, the writers understand that there is a pending application for leave to appeal to the Federal Court.
Case commentary by Ashok Kumar Mahadev Ranai (Partner) and Chong Hong Kiat (Associate) of the Construction and Engineering Practice of Skrine.

1 The part of Clause 25.4(d) of the PAM Conditions of Contract 2006 which is in contention is as follows: “…Until after the completion of the Works under Clause 25.4(a), the Employer shall not be bound by any provision in the Contract to make any further payment to the Contractor, including payments which have been certified but not yet paid when the employment of the Contractor was determined.”
2 AU v AV [2006] SGSOP 9, at [13], Philip Jeyaretnam SC.
3 A&D Maintenance and Construction Ltd v Pagehurst Construction Services Ltd [1999] Lexis Citation 3443; [2000] 16 Const LK 199 QBD (TCC), at [18], Wilcox J.
4 This is in consistent with the requirement of Section 17A of the Interpretation Acts 1948 and 1967.