Developments in Statutory Adjudication in 2018

Jocelyn Lim examines the significant statutory adjudication cases of 2018.
The year 2018 marks another year of considerable development in case law on statutory adjudication in Malaysia. The use of this form of dispute resolution mechanism by stakeholders continues to grow exponentially with no sign of abating. This article encapsulates and examines some of the significant decisions that have been handed down by the Malaysian courts in 2018 and their impact on statutory adjudication under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).
Notable among the case law in 2018 is Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd & Another Appeal [2018] 10 CLJ 293 (“Jack-In Pile”) whereby the Court of Appeal adopted a different view to the rationale expressed in UDA Holdings Bhd v Bisraya Construction Sdn Bhd & Anor and another case [2015] 11 MLJ 499 (“UDA Holdings”) by holding that section 35 of CIPAA, which outlaws conditional payment clauses under the statutory adjudication regime, is prospective in nature.
In Jack-In Pile, the construction contract contained a classic ‘pay-when-paid’ clause which states that the appellant has no obligation to pay the respondent until the appellant has received payment from its principal. Unfortunately, the appellant’s principal was subsequently wound-up. Consequently, payment to the respondent was stalled in view of the predicament of the appellant’s principal. The respondent then commenced adjudication proceedings against the appellant. During these proceedings, the appellant relied on the ‘pay-when-paid’ clause in the construction contract. On the other hand, the respondent contended that the ‘pay-when-paid’ clause was rendered void by section 35. It was undisputed that prior to the adjudication proceedings, the parties had complied with the ‘pay-when-paid’ clause in relation to payments under the construction contract.
In deciding the question of the applicability of section 35 to the construction contract between the parties which had existed prior to CIPAA coming into force on 15 April 2014, the Court of Appeal found that “CIPAA 2012 is prospective in nature”. It then came to the conclusion that section 35 relates to the substantive right of the contractual parties and in the absence of clear words in the statute, such substantive right must be given a prospective effect thereby validating the ‘pay-when-paid’ clause in the construction contract between the parties.
Notwithstanding the above, the High Court in Vistasik Sdn Bhd v BME Tenaga Arus Sdn Bhd & another case [2018] 1 LNS 1278 in addressing the same question as to whether CIPAA has retrospective or prospective effect, found Jack-In Pile to be inconsistent with the Federal Court’s decision in View Esteem Sdn Bhd v Bina Puri Holdings Berhad [2017] 8 AMR 167 (“View Esteem”) which had impliedly accepted the decision in UDA Holdings that CIPAA applies retrospectively. The High Court arrived at the aforesaid finding as it found that the Federal Court in View Esteem did not expressly approve or disapprove UDA Holdings, and this may arguably be said that the Federal Court in View Esteem had accepted the decision in UDA Holdings
Similarly, in Iskandar Regional Development Authority v SJIC Bina Sdn Bhd [2018] 1 LNS 1194, the High Court found that the Federal Court in View Esteem did not overrule the legal position on the retrospective application of CIPAA that was laid down in UDA Holdings. The High Court further found that Jack-In Pile, which did not consider the Federal Court’s decision in View Esteem, had not dealt with the general application of CIPAA but dealt specifically with section 35 in relation to a conditional payment clause. The High Court in RH Balingian Palm Oil Mill Sdn Bhd v Niko Bioenergy Sdn Bhd [2018] 1 LNS 1007 shared the same view in finding that Jack-In Pile was decided in the context of section 35.
Whether the whole of CIPAA applies retrospectively or prospectively remains to be decided by the Federal Court in Jack-In Pile which is now pending appeal in our apex court.
A defence raised by a respondent based on events that occurred after the issuance of a payment response or notice of adjudication has been held to be not a defence that can be raised in the adjudication proceedings in Mecomb Malaysia Sdn Bhd v VST M&E Sdn Bhd [2018] 8 CLJ 380 (“Mecomb”), which case was referred to in Emerald Capital (Ipoh) Sdn Bhd v Pasukhas Sdn Bhd & Another Case [2018] 1 LNS 459. In the aforesaid cases, the defence of set-off raised by the respective respondents only accrued after the issuance of the payment response or notice of adjudication. In such circumstances, it appears justified for an adjudicator to decline considering the said defence for he may not have the necessary jurisdiction to do so.
The principle established in the Federal Court’s decision in View Esteem was distilled and followed by the Court of Appeal in Leap Modulation Sdn Bhd v PCP Construction Sdn Bhd and another appeal [2019] 1 MLJ 334, namely that a failure by an adjudicator to consider defences, though not set out in the payment response but in the adjudication response, amounts to a breach of natural justice which dictates that the adjudication decision be set aside. It is believed that leave to appeal against the Court of Appeal’s decision has been granted by the Federal Court.
It is prudent to actively pursue a breach of natural justice argument under a setting aside application pursuant to section 15 of CIPAA than to passively raise such argument in defending a stay application under section 16 of CIPAA. As held by the High Court in Mecomb, “if the complaint is breach of natural justice for wrongful refusal of the adjudicator to assume jurisdiction, then the complainant such as the defendant here must make the active challenge under s.15 of the CIPAA against the error. It is insufficient in my opinion merely to rely on a passive challenge in aid of a stay as done herein in this application.”
In CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2018] 1 LNS 380, the High Court in interpreting the right under section 30 of CIPAA of a successful party in an adjudication decision to require the principal of a losing party that has been wound up to make direct payment to the successful party, took into consideration the prohibition against undue preference under the insolvency regime. It was held that any direct payment by a principal to a successful party from monies payable to a losing party which has been wound up would be tantamount to undue preference as the successful party would be given priority over the other unsecured creditors of the losing party and fall foul of the pari passu principle under the insolvency rules. 
In Sazean Engineering & Construction Sdn Bhd v Bumi Bersatu Resources Sdn Bhd [2019] 1 MLJ 495, the appellant appealed against the High Court’s decision that dismissed, among others, its application to set aside three adjudication decisions made in favour of the respondent. At the time when the respondent commenced the adjudication proceedings, the number of directors on its board of directors had been reduced below the statutory minimum of two directors required under the Companies Act 1965 then in force and rendered the respondent to be incapacitated and dysfunctional and lacking the necessary locus standi to commence adjudication proceedings. It was against this background that the Court of Appeal set aside the three adjudication decisions.
In Kerajaan Malaysia v Shimizu Corporation & Ors [2018] 1 LNS 202, the plaintiff Government applied to set aside an adjudication decision on the grounds that the adjudicator had acted in excess of jurisdiction by reason that the contract, which provided for the construction of a water transfer tunnel from Pahang to Selangor, is exempted from the application of CIPAA pursuant to Order 2(1) and the First Schedule of the Construction Industry Payment and Adjudication (Exemption) Order 2014 (“Exemption Order”). In deciding whether the contract falls within the Exemption Order, the learned Judge held that the burden of proof is on the Government to show that “a properly authorised person acting pursuant to a legitimate source of executive power has declared the contract to be one relating to national security or that it involves a national security facility.”
In Euroland & Development Sdn Bhd v Tack Yap Construction (M) Sdn Bhd [2018] 1 LNS 896, the High Court in deciding whether it could intervene in adjudication proceedings by granting an injunction to restrain on-going adjudication proceedings considered the intention of Parliament under section 27(3) of CIPAA which allows an adjudicator to proceed with adjudication proceedings as if he has jurisdiction notwithstanding that a jurisdictional objection is raised. The High Court declined to intervene and to grant the injunction. Lee Swee Seng, J found that it was not plain and obvious in the payment claim that the adjudicator has no jurisdiction but rather a question as to whether the adjudicator has exceeded his jurisdiction, which is a question of fact to be determined by looking into the factual circumstances of the case. His Lordship held, per obiter, that in cases where there is no jurisdiction to begin with, the Court is perfectly positioned and has the power to intervene and grant an injunction to stay the adjudication proceedings.
Presumably, injunctions to stay ongoing adjudication proceedings will only be granted in limited circumstances, for example, when the relevant contract is not a construction contract as defined under CIPAA or when the relevant contract falls within the scope of the Exemption Order or possibly, when there is an abuse of the adjudication proceedings.
In MRCB Builders Sdn Bhd v Southern Builders (J) Sdn Bhd [2018] 1 LNS 1508, the appellant main contractor applied to set aside the adjudication decision on the grounds that the adjudicator lacked jurisdiction as there is no dispute given that the appellant had paid all monies as certified in the payment certificate. The Court of Appeal unanimously held that the respondent’s claims of under-certification fell within the ambit of CIPAA notwithstanding that the appellant had made full payment of the certified sum. It was found that the dispute between the parties relates to the difference in the amount claimed and the amount certified, and that the payment is not for the full sum claimed. Thus, CIPAA extends to claims for payment which arise due to under-certification, and is not confined to non-payment of certified amounts.
In SKS Pavillion Sdn Bhd v Tasoon Injection Pile Sdn Bhd [2019] 2 CLJ 704 (“SKS Pavillion”), the plaintiff successfully set aside the adjudication decision made in favour of the defendant on the grounds that the adjudicator did not have the jurisdiction as the payment claim, which failed to set out the due date for payment of the amount claimed, was void for failing to comply with a basic and essential requirement of section 5 of CIPAA. Ahmad Kamal Md Shahid JC was of the view that the due date for payment was essential to a cause of action, as it is only if the due date has passed that the defendant has an accrued cause of action. The learned Judicial Commissioner also found that an irregularity in a payment claim cannot be cured under section 26 of CIPAA as the adjudicator does not have the competence or jurisdiction to do that in the absence of a valid payment claim. In other words, non-compliance with the statutory requirements with respect to a payment claim is a fatal defect.
In Gaya Analisa Sdn Bhd v Oceanergy Gases Sdn Bhd [2018] 1 LNS 1016, the plaintiff successfully proved its claim against the defendant after full trial. This resulted in the adjudication decision, which had an interim binding effect, in favour of the defendant to be superseded by the judgment of the High Court. Consequently, money that was paid by the plaintiff to the defendant pursuant to the adjudication decision had to be returned. However, in determining whether such refund includes the costs, fees and administrative charges relating to the statutory adjudication proceedings which amounts were ordered to be paid by the adjudicator, the High Court held that such costs and expenses “shall not be taken into account” for in this case, there was nothing wrong with the adjudication decision as it was not set aside under section 15, but was being enforced under section 28 of CIPAA
There appears to be a difference in the treatment between a claimant’s claim and a respondent’s claim for loss and expense arising from delays in completion of work.
On one hand, SKS Pavillion echoed the High Court’s finding in Syarikat Bina Darul Aman Berhad & Anor (collectively referred to as BDB-Kery (joint venture)) v Government of Malaysia [2017] 4 AMR 477 that the claimant’s loss and expenses claim arising from delays in completion of work falls within the scope of CIPAA.
On the other hand, liquidated and ascertained damages (“LAD”) arising from late completion of works which are usually raised by a respondent in its payment response as a counterclaim was found in Transmission Technology Sdn Bhd v PESB Engineering Sdn Bhd & Another Case [2018] 7 CLJ 516 (“PESB”) to be “too contentious for an adjudicator to be able to deal with during adjudication proceedings” and “any refusal by an adjudicator to deal with the issue of LAD especially by way of set-off against a payment claim, by itself, does not amount to a denial of natural justice.”
However, in PESB, it does not appear that the Federal Court’s decision in View Esteem was referred to, even though the High Court’s decision in View Esteem was cited. The present legal position, as established by the Federal Court in View Esteem, is that an adjudicator may be found to be in breach of natural justice if he fails to deal with the defences raised in a payment response. It is also interesting to note that the law relating to LAD has since been changed by the Federal Court in Cubic Electronics Sdn Bhd (in Liquidation) v Mars Telecommunications Sdn Bhd [2019] 2 CLJ 723 thus allowing, in appropriate circumstances, for reasonable compensation to be awarded for LAD without the requirement for a party to prove the actual loss it suffers. Yet, it remains to be seen how the change in law will affect a LAD claim made under CIPAA.  
The High Court in Tan Eng Han Construction Sdn Bhd v Sistem Duta Sdn Bhd [2018] 1 LNS 428 appears to hold that enforcement of an adjudication decision, even if it remains unchallenged by the losing party, would not be allowed if it was found that the adjudicator lacks the jurisdiction to decide the dispute or that there is patent non-compliance with section 12 of CIPAA, for instance, where the adjudication decision: (a) is void for being made outside the period stipulated in section 12(2), or (b) is not in writing or does not contain reasons as per section 12(4), or (c) has not determined the adjudicated amount or the time and manner the adjudicated amount is payable as per section 12(5).
Following View Esteem, courts have been given some degree of flexibility to evaluate each case on its merits without the fetter of a predetermined test when granting a stay under section 16. It appears that the ‘special circumstances’ test, which is the test applied in granting a stay of execution of court judgments, may be considered when determining whether to grant a stay of the adjudication decision under section 16 of CIPAA. In Ireka Engineering and Construction Sdn Bhd v PWC Corporation Sdn Bhd & Another Appeal [2019] 1 LNS 51, the Court of Appeal in considering the said test appears to have adopted a liberal interpretation of section 16 established in View Esteem and the criterion for a stay under section 16 is no longer limited to the financial status of the party.
Whilst the case law on statutory adjudication in Malaysia continues to develop and the scale and complexity of disputes referred under the regime of CIPAA increases, it has become all the more necessary that the interpretation of the provisions of CIPAA established under the growing body of case law be consistent so that the statutory adjudication system continues to enjoy the confidence it now has earned.
You may view the full issue of Skrine’s Legal Insights Issue 2/2019 here.