Prospectivity Trumps Retrospectivity, and No, It’s Not Fake News!
31 December 2019
Ashok Kumar and Kalaiarasan Rasadurai examine two landmark decisions on statutory adjudication.
Prior to the decisions of the Federal Court (“FC”) in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd (and Another Appeal)
 7 AMR 348 (“Bauer”) and Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd (and 2 Other Appeals)
 7 AMR 309 (“Ireka”), there was a cloud of uncertainty arising from conflicting decisions as to whether the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) applies prospectively or retrospectively.
WHERE IT ALL BEGAN
The issue as to the prospective/retrospective application of CIPAA first came to light in UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor and Another Case
 5 CLJ 527 (“UDA Holdings”) where the High Court decided, inter alia
- adjudication is nothing more than a dispute resolution mechanism and CIPAA essentially provides a choice of forum and does not affect any existing rights conferred by any written law;
- it is a well-established principle that legislation providing for this change of forum in the form of an additional forum, i.e. statutory adjudication, operates retrospectively unless there is provision to the contrary;
- the laws adopting the statutory adjudication regime in several other jurisdictions (e.g. the United Kingdom, New Zealand, Singapore, New South Wales, Queensland and Northern Territory of Australia) expressly provide that their statutory adjudication regimes only apply to construction contracts made after their respective legislation have come into force; the Malaysian Parliament chose not to include a similar provision in CIPAA;
- in any event, a purposive interpretation of CIPAA warrants a retrospective application; and
- reading that CIPAA is available regardless of when the construction contract or payment dispute arose would do no harm or violence to the plain language of CIPAA.
The High Court’s decision in UDA Holdings was upheld by the Court of Appeal (although no grounds of judgment was delivered).
However, the Court of Appeal in Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd & Another Appeal  10 CLJ 293 (“Bauer CA”) departed from UDA Holdings, holding that CIPAA applies prospectively.
These conflicting decisions left stakeholders in the construction industry in a predicament as to whether the provisions of CIPAA would apply to construction contracts entered into before CIPAA came into operation on 15 April 2014.
In view of the conflicting decisions of the Court of Appeal in UDA Holdings and Bauer CA, leave to appeal was granted by the FC in Bauer and Ireka.
The two leave questions in Bauer may be summarised as follows –
- Whether CIPAA applies to construction contracts entered into before the date on which CIPAA come into operation; and
- If the answer to question (1) is affirmative, does it follow that section 35 of CIPAA should apply to construction contracts entered into before CIPAA came into operation.
In Ireka, the question of law posed to the FC was whether CIPAA gives rise to substantive rights and is consequently not retrospective in nature, making the adjudication decision in this case liable to be set aside.
Although framed differently, the leave questions in these appeals essentially required the FC to determine whether CIPAA operated retrospectively or prospectively.
On 16 October 2019, the FC issued separate decisions in Bauer and Ireka in which it unanimously held that CIPAA applies prospectively. We will now discuss the FC’s reasoning in these decisions.
The facts in Bauer
The appellant (Jack-In Pile) was appointed by the respondent (Bauer) as a sub-contractor to supply and install spun piles for a construction project under a letter of award dated 16 March 2011. Clause 11.1 (“clause 11.1”) thereof states that all payments to the appellant shall only be made within seven days from the date the respondent received the related progress payments from the employer of the project. The respondent had relied on clause 11.1 since the commencement of the project and asserted that it had no obligation to make payment to the appellant until and unless the respondent has received the related progress payment from the employer.
After CIPAA came into force, the appellant issued a payment claim on 3 August 2016 and subsequently, commenced adjudication proceedings for the unpaid amount of the claim. An adjudication decision was delivered on 23 November 2016 requiring the respondent to pay a sum of RM906,034.00 to the appellant. The appellant sought to enforce the adjudication decision whilst the respondent sought to set aside the same. The issue before the High Court was whether section 35 of CIPAA (which invalidates conditional payment clauses in a construction contract) applied. The respondent’s application to set aside the decision was dismissed by the High Court which held that clause 11.1 is a conditional payment provision and had been rendered void by section 35. Relying on UDA Holdings, the High Court held that CIPAA, including section 35 thereof, applied retrospectively.
The High Court’s decision was overturned by the Court of Appeal. David Wong Dak Wah, JCA (as his Lordship then was) found that there was no express provision in CIPAA excluding or including construction contracts made prior to the commencement of CIPAA. His Lordship stated that unless there are clear words in the legislation to the contrary, any legislation affecting substantive rights must be given a prospective effect. Similarly, if the legislation is procedural in nature, that legislation must be given a retrospective effect unless clear words in the same show to the contrary. The learned judge then determined that CIPAA is a legislation relating to a substantive right as it provides a new avenue of access to justice in the construction industry. Although a procedural regime exists within CIPAA, the procedural regime is a consequence of the substantive right created by CIPAA. Accordingly, CIPAA was held to be prospective in nature and the Court of Appeal thereby departed from UDA Holdings.
The facts in Ireka
The appellant (Ireka) awarded three subcontracts to the respondent (PWC) before CIPAA came into force. The subcontracts contained an equipollent clause (“clause 13.1”) which conferred a right on the appellant to set-off any money due to the respondent with any sum the respondent was liable to pay under any other contract between the parties.
The respondent commenced adjudication proceedings against the appellant in respect of a sum of RM134,869.25 due to the respondent under one of the subcontracts. The appellant did not dispute the amount claimed by the respondent but relied on the cross-contract set-off right in clause 13.1 to set-off the said sum against the amounts which it claimed were owed to it by the respondent under the other two subcontracts.
The adjudicator issued an adjudication decision in favour of the respondent. In coming to his decision, the adjudicator declined to exercise jurisdiction on the disputes arising out of the other two subcontracts which were the subject of separate adjudications before other adjudicators. According to the adjudicator, section 5 of CIPAA only allows an adjudicator to decide on a single construction contract. The High Court and Court of Appeal agreed that the adjudicator was not empowered to decide on multiple construction contracts. The issue of retrospective application of CIPAA was raised in the Court of Appeal but was held to be not a material consideration for the case.
The FC’s decisions
The FC relied on substantially the same reasoning to come to its decision in both appeals.
According to the Tan Sri Idrus Harun FCJ (who delivered the judgment of the FC in both appeals), it is a trite legal principle that “… a statute should not be interpreted retrospectively to impair an existing right or obligation, unless such a result is unavoidable by reason of the language used in the statute.” This rule of interpretation is in consonance with the long line of common law authorities which have been adopted in Malaysian jurisprudence. The FC cited several Malaysian cases that have applied this rule, including the Privy Council’s decision of Yew Bon Tew & Anor v Kenderaan Bas Mara  1 MLJ 1 and the FC’s decision in Tenaga Nasional Bhd v Kamarstone Sdn Bhd  2 MLJ 749.
The FC also referred to Sim Seoh Beng & Anor v Koperasi Tunas Muda Sungai Ara Bhd  1 MLJ 292 where the Court of Appeal stated that the correct approach to be adopted in order to decide whether a statute has retrospective effect is to avoid categorising the statute as procedural or substantive but to decide whether the statute if applied retrospectively, would impair existing rights and obligations.
The FC then proceeded to consider sections 19(1), 43(a), 2(1) and 2(3) of the Interpretation Acts 1948 and 1967, which according to their Lordships, are a manifestation of the common law. Read together, these provisions provide that as a general rule, the commencement date of an Act, including CIPAA, cannot be retroactive unless it is clearly intended by Parliament and such intention is evinced by express provisions in the Act itself. The FC noted that there is no express provision in CIPAA from which it can safely infer that Parliament has manifestly intended CIPAA to operate retrospectively.
Despite commending the comprehensive judgment of the High Court in UDA Holdings, the FC disagreed with the High Court, stating that the High Court did not appear to appreciate fully the provisions of the Interpretation Acts 1948 and 1967 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 FC added that the absence of clear provisions providing a prospective application of CIPAA, as compared to the legislation of other jurisdictions which expressly provide for it, does not automatically lead to a retrospective interpretation, as it is not supported by clear evidence. The FC added that to the contrary, CIPAA is not silent as to its commencement date. Based on well-established rules of interpretation, in the absence of express provision to the contrary, it is plain that Parliament intended that statutory adjudication under CIPAA should apply prospectively. It therefore necessarily follows that any construction contract entered into before the commencement date of CIPAA and any payment disputes arising out of such construction contract are not governed by CIPAA.
The FC highlighted several other provisions of CIPAA that would adversely affect the substantive rights of the parties to construction contracts if the Act were to operate retrospectively. Section 5 which restricts the adjudicator’s power of determination to a single construction contract as opposed to multiple construction contracts would mean that parties are prohibited from relying on cross-contract set-offs pursuant to multiple construction contracts such as those in Ireka. Further, section 28 (enforcement of adjudication decision as if it is a High Court judgment), section 29 (right to suspend or reduce rate of performance of construction contract when any part of an adjudicated sum is unpaid) and section 30 (right of sub-contractor to seek direct payment from principal of party who fails to pay the adjudicated amount) of CIPAA will have profound impact and adversely affect the substantive rights of parties if CIPAA is applied retrospectively.
The FC also rejected the contention in both appeals that CIPAA ought to be given retrospective effect by reason that it is a social legislation. According to the FC, CIPAA applies only to the construction industry and is not for the benefit of society at large.
In light of the foregoing reasons, the FC opined that the application of section 35 of CIPAA to the facts in Bauer would exclude and impair the respondent’s express right under its agreement to pay the appellant only after it had received the related progress payment from the employer. Thus, any construction that section 35 applies to clause 11.1 would inflict a detriment on the respondent and alter the construction contract, in particular clause 11.1, in that an act allowed at the time of doing it is now prohibited by a new statute, namely CIPAA. Thus, the FC concluded that clause 11.1 must prevail over any provision in CIPAA. Accordingly, the FC answered both questions of law in Bauer in the negative and dismissed the appeal. The FC also held that the whole of CIPAA should be applied prospectively.
Applying the same reasoning, the FC reached a similar conclusion in the Ireka appeal. The FC took the view that clause 13.1, which provides rights for cross-contract set-offs, concerns substantive rights which had in this case existed before CIPAA was enacted. Section 5 of CIPAA which prohibits the appellant in Ireka from relying on the cross-contract set-off provisions in the construction contracts would undoubtedly have a significant impact as it takes away the substantive rights of the parties. Hence, section 5 cannot be applied retrospectively in the absence of plain legislative intention of the same expressed with clarity of language therein.
The FC answered the leave question in Ireka in the affirmative and held that CIPAA gives rise to substantive rights and is consequently not retrospective in nature. The FC then ordered the decisions of the High Court and the Court of Appeal to be set aside and allowed the appellant’s application to set aside the adjudication decision.
The categorical pronouncements by the FC in Bauer and Ireka that CIPAA operates prospectively in its entirety appear to resolve one of the main dilemmas faced by stakeholders in the construction industry. Based on these two decisions of our apex court, it is clear that CIPAA does not apply to construction contracts made before CIPAA came into operation on 15 April 2014 and that parties to such contracts are not entitled to resort to statutory adjudication proceedings to resolve payment disputes.
The construction industry had barely come to terms with the implications of the judgments in Bauer and Ireka that were delivered on 16 October 2019 when the FC reignited the debate on the following day by granting leave to appeal on a similar question as to the prospective application of CIPAA in an unrelated case. While it may seem that the game is not quite over, it remains to be seen whether the FC will overturn the decisions of Tan Sri Idrus Harun FCJ in Bauer and Ireka which appear to be grounded on cogent reasoning and well-established principles of statutory interpretation.
Two issues that will arise from the FC’s decisions in Bauer and Ireka in relation to construction contracts made before 15 April 2014 are as follows -
- Whether adjudication decisions relating to pre-CIPAA construction contracts which have been enforced and payments made may be set aside and payments returned.
This issue could have been resolved if the FC had applied the doctrine of prospective ruling to its decisions in Bauer and Ireka, as it recently did in Semenyih Jaya Sdn Bhd v Pentadbir Tanah Daerah Hulu Langat & Another Case  5 CLJ 526 and Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd  7 CLJ 584. We understand that some of the litigants affected by the decisions in Bauer and Ireka have commenced proceedings to challenge the existing decisions. It will be interesting to see how the Courts will rule on this issue.
- In the event that such adjudication proceedings are discontinued, whether the party who initiated the proceedings is to bear the costs incurred in the proceedings.
According to section 17(1) of CIPAA and Rules 9(5A) and 9(11) of the Asian International Arbitration Centre Adjudication Rules & Procedure, a claimant who withdraws an adjudication claim or the party who requested an adjudication which it was not entitled to do, will have to bear the costs unless otherwise ordered. In light of these provisions, the FC’s decisions in Bauer and Ireka may have inadvertently caused financial hardship to claimants who commenced adjudication proceedings in respect of pre-CIPAA construction contracts in reliance on the High Court’s decision in UDA Holdings that CIPAA operates retrospectively.