Statutory Adjudication – a More Level Playing Field

Shannon Rajan highlights a recent Federal Court decision on the Construction Industry Payment and Adjudication Act 2012.

In the recent case of View Esteem Sdn Bhd v Bina Puri Holdings Berhad [2017] 1 LNS 1378, the Federal Court dealt with three broad issues pertaining to the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”), namely: (a) jurisdictional challenge under section 41; (b) the adjudicator’s right to exclude defences; and (c) setting aside and stay of an adjudication decision under sections 15 and 16.
Unless otherwise stated, all references to sections in this article are to sections in CIPAA.
The appeal before the Federal Court involved three applications arising from the same adjudication claim, which were consolidated and heard together in the High Court. The Appellant filed an application to challenge the adjudicator’s jurisdiction under section 41 and another application to set aside and/or stay the adjudication decision under sections 15 and 16, whilst the Respondent filed an application to register and enforce the adjudication decision as a judgment of the court pursuant to section 28. The High Court dismissed both the Appellant’s applications and allowed the Respondent’s application. The Court of Appeal affirmed all three decisions of the High Court.
Jurisdictional challenge under section 41
Regarding the first issue, the Federal Court observed that the High Court fully considered section 41 on its merits but the Court of Appeal’s decision was a procedural one whereby it decided that the section 41 application ought to be dismissed outright because it was brought as a separate application and not as an application under section 15. The Federal Court was of the view that the Court of Appeal erred in failing to distinguish between the present case where CIPAA did not apply at all because of section 41 with a case where CIPAA applied but the adjudicator had exceeded his jurisdiction under section 15. The Federal Court found that the Appellant had correctly not invoked section 15 because it could not on one hand, complain that CIPAA did not apply to the case and yet on the other hand, invoke a provision of CIPAA to seek relief.
The Federal Court then dealt with the question as to whether CIPAA applies to the present case by considering the words in section 41, i.e. a “payment dispute … commenced in any court or arbitration before the coming into operation of the Act”. The Federal Court observed that the High Court in UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor [2015] 11 MLJ 499, had decided that CIPAA applies retrospectively to construction contracts made and payment disputes arising before CIPAA came into force. Thus in transitional cases, such as the present case, a determination must be made as to whether the section 41 exclusion applies.
The Federal Court held that it would be sufficient to establish a right of exclusion under section 41 if the paying party demonstrated that a claim covering the present claim had been previously commenced in court or arbitration and that there was no requirement for the earlier claim to be “pending”. The Federal Court accepted the Appellant’s case that the progress claim no. 28 (i.e. cumulative of earlier progress claims contained in interim certificates no. 23 to 26R), which is the subject matter of the present payment dispute fell within the exclusion under section 41 as a claim based on interim certificates no. 23 to 26R had been commenced in court in May 2013. Therefore, the Respondent’s claim was excluded from CIPAA.
Exclusion of defences by adjudicator
The next issue was whether the adjudicator had the right to exclude the Appellant’s defences. The adjudicator relied on section 27 to exclude the Appellant’s defences because they were not stated in the payment response under section 6 albeit pleaded in the adjudication response under section 10. The High Court agreed with the adjudicator and held that sections 5 (payment claim) and 6 (payment response) were determinative of jurisdiction and that the adjudicator’s jurisdiction did not extend to matters in the adjudication claim, adjudication response and adjudication reply found in sections 9 to 11. The High Court’s conclusion was based on the finding that sections 9 to 11 were mere “formal manifestations” of the dispute.
The Federal Court disagreed with the High Court’s reasoning. It found that the payment response under section 6(2) requires the non-paying party to merely state “amount disputed and the reason for dispute” whilst the adjudication response under section 10 requires the respondent to “answer the adjudication claim”. It was the Federal Court’s view that the latter is a legal response with the obligation to “answer” imposed by statute. A similar view was taken with regard to the payment claim under section 5 and adjudication claim under section 9.
The Federal Court also placed significance on the fact that an unpaid party and a non-paying party were referred to as the claimant and respondent respectively after the “initiation of adjudication” under section 8, which signifies the commencement of the adjudication process. The two-stage process under CIPAA did not warrant giving a reduced importance to the adjudication pleadings under sections 9 to 11 and greater significance to the initial documents under sections 5 and 6.
The Federal Court then determined the scope of the jurisdictional limitation under section 27(1). First, it stated that section 27(1) refers to the subject matter of the claim under section 5, which is the “cause of action” identified by the claimant by reference to the applicable clause of the construction contract. Thus, if the payment claim relates to progress claim no. 28, the jurisdiction of the adjudicator is limited to this progress claim and nothing else. The payment response is likewise limited to an answer to progress claim no. 28. Section 27(1) had nothing to do with the grounds of the claim or the reasons for opposing the claim. The Federal Court held that in the absence of prohibitory clauses, such as those found in section 15(3) of the Building and Construction Industry Security of Payment Act 2006 of Singapore and section 20(2B) of the New South Wales Building and Construction Industry Security of Payment Act 1999, there is no impediment for the adjudicator to consider all the grounds of claim in an adjudication claim under section 9 and all the grounds of defence in an adjudication response under section 10.
The Federal Court went on to determine the impact of section 6(4), which provides that if a non-paying party fails to respond to the payment claim, that party is deemed to have disputed the entire payment claim.” The Federal Court found that the High Court had wrongfully reduced the significance of the “deeming” effect where the respondent is only entitled to dispute the claim as it stands and not raise any positive defences. Accordingly, the Federal Court held that the adjudicator had acted in breach of natural justice in excluding and refusing to consider certain defences raised by the Appellant.
Setting aside and stay of adjudication decision
The last issue was the interplay between sections 15 (setting aside) and 16 (stay of adjudication decision). The High Court held that an application under section 16 can only be allowed in exceptional circumstances, for example, if there was “overwhelming evidence” that a contractor would be unable to meet its contractual and financial obligations to the employer. The Federal Court held that such a stringent test is not justified under CIPAA as section 16 itself contains no such limiting requirement or intent. The Federal Court adopted a more liberal reading of section 16, where the courts can stay the award where there are clear errors or to meet the justice of the individual case.
The Federal Court also dealt with the procedural aspect of section 16. It concluded that the Court of Appeal had erred in holding that a stay application under section 16 could only be made after the filing of an application under section 15. The Federal Court observed that section 16(1)(a) provides that the parties may apply for a stay once an application to set aside an award under section 15 has been made but it does not go on to say that the said application must be made separately. It is wholly appropriate for a stay under section 16 be filed together with an application to set aside an award under section 15 as a matter of practical utility for the High Court to make the appropriate order in a joint consideration of both.
The Federal Court’s decision on the last two issues have wide repercussions on statutory adjudications in Malaysia. The Federal Court’s decision to allow a respondent to raise additional defences in the adjudication response that were not pleaded in the payment response is a complete reversal of the previous position. This decision mitigates the harshness of the previous position where the respondent had to set out in the payment response, all possible defences available to it within ten working days from the receipt of the payment claim. Now, the respondent has until the adjudication response to put forward all its defences and the pressure is shifted to the claimant who would have only five working days to deal with these defences, some of which may be raised for the very first time in the adjudication process.
The Federal Court has also made it easier for a losing party to obtain a stay of the adjudication decision, which specifically includes “clear errors or to meet the justice of the individual case”. This decision means that there is a greater onus on the adjudicators to arrive at a correct decision within the tight timelines as material errors could lead to a stay of the adjudication decision, which would in effect nullify the whole adjudication process.