What Is The Difference Between Adjudication, Mediation, Arbitration and Litigation?

Litigation v Alternative Dispute Resolution

Litigation is the civil action initiated in courts and the outcome is decided by the Judge. It is typically complicated and involves high value matters and are brought before a Judge who draws on the depths of available legal knowledge and precedents, with the assistance of opposing lawyers, to make a decision within the rigid legal procedural structure. It is therefore easy to see why litigation is costly and of considerable length.

ADR was introduced to enable parties in a dispute to enlist a third party (mediator/adjudicator/arbitrator) to decide in a faster period and free (or freer) from the legal confines that is associated with litigation, to lower costs.

Here's an overview comparison of ADR

MEDIATION

• very informal
• high confidentiality
• lower cost than arbitration
• shortest period - may conclude within 1 -2 days

ADJUDICATION

• less formal than arbitration, rules of evidence do not apply
• Adjudicator controls content and outcome of proceeding (if any)
• lower cost than arbitration
• shorter than arbitration - in CIPAA 2012, Adjudicator has to decide within 45 days
• decision is interim as it may be appealed or stayed or overturned by arbitral award or Court
• monetary remedies only

ARBITRATION

• rules of evidence do not apply but procedural rules applicable
• remedies must be legal capable of being performed
• may take years to conclude
• costs may be higher than litigation because of thoroughness and expediency

Pay Now, Argue Later and CIPAA 2012

The Kuala Lumpur Regional Centre of Arbitration (KLRCA), has often summarised the core concept of the Construction Industry Payment & Adjudication Act 2012 (CIPAA 2012) to be "Pay Now, Argue Later". CIPAA 2012 was introduced in Malaysia with the sole aim of addressing the payment problem faced by sub-contractors, suppliers, agents, professional service providers, (collectively referred to "Claimant") etc in the construction industry, whose only remedy for payment disputes was costly and protracted litigation in either the court or arbitration. Now, payment disputes can be brought before KLRCA certified adjudicators for speedy and cost effective decision.

What happens when the Claimant/ himself does not come to the adjudicator with "clean hands"? What happens if the Claimant has been accused of defective work which has resulted in non-payment by the Respondent? Pay Now, Argue Later will have a bearing on the payment dispute as the adjudicator will be tasked in determining the extent of work done and decide the amount to be paid.

Defective Work In Construction Projects

The nature of defective work

The nature and type of defects in construction and engineering projects can vary, and not forgetting that the point at which the defects become apparent. On one end of the scale minor defects can easily be corrected before the building or plant is handed over to the employer, while at the other extreme major or significant defects may occur long after the original work has been completed and require extensive remedial works to fix.

Some of the defects can arise because the work was not carried out in a 'good and workmanlike manner' in accordance with good practice or a particular design, or because the wrong materials have been used – matters which would usually be the responsibility of the building contractor and its supply chain. 

Alternatively a particular design is not working in the manner that it should as the designer could be at fault. 

In the frequently used design and build scenario, the contractor would normally have primary liability for both types of failure – although it may have consequential claims against its designers and supply chain.

On one view identifying a defect should be easy: something has usually not been provided in the manner that it should have been, the foundations of a building could crack and subside, the air-conditioning units fail or the roof leak. However, in considering 'defects' as a matter of principle, work may be defective even if it has been carried out with all due skill and care but it fails to meet a particular specification. 

For example, brickwork may be erected correctly but the wrong type or colour of brick could have been used in breach of planning permission.

Potentially difficult arguments can arise where work has been carried out incorrectly by the contractor but the architect or engineer's design is also at fault. In these situations, the contractor may deny liability on the basis that even though the work was carried out defectively, it did not cause the damage complained of. An employer will not be as concerned as the contractor and architect to get to the bottom of exactly who is at fault for that as long as it can claim against one or both of the parties and both still exist.

It is often important to distinguish between patent and latent defects. A patent defect is one that is detectable either at or before apparent practical completion or during the defects liability period. In the past, the courts have held that patent defects must be apparent on inspection but need not necessarily have been seen by the people carrying out that inspection. By contract, a latent defect is one which has been concealed in the works and may not become apparent for many years.

Typical contractual provisions

The standard form construction contracts contain provisions dealing with the treatment of defective work during the course of construction, at completion and during the defects liability or rectification period. By way of illustration, the contract form may provide that the employer may issue instructions requiring the opening up for inspection of any work covered up or tests of materials or goods or executed work. The cost of opening up or testing is added to the contract sum, unless the inspection shows that the materials, goods, or work are not in accordance with the contract - the contractor then bears those costs.

The question of defects often arises in the context of practical completion (PC), and whether or not completion can be said to have occurred even though minor defects exist. In the absence of any definition, guidelines have been developed from case law which broadly state that:

• ·         at the date of practical completion the work should be complete and free from patent defects;
• ·         PC will be achieved notwithstanding the presence of latent defects, because such defects are by definition not apparent;
• ·         any defects which are not apparent at PC which do become evident during the defects liability period may be addressed in that period;
• ·         discretion usually exists to certify PC when minor work remains to be carried out, although it is possible to insist on completion of all snagging items before PC.

Rights and remedies

An issue which often arises in the context of construction projects is whether the contractor has a 'right to return' to the site to remedy defects. However, there is no such right unless one is specifically conferred upon the contractor by the defects liability provisions or otherwise in the contract. Where there is no express right for the contractor to return to the site to attend to remedial works, or the relevant period has passed, an employer is entitled to employ others to rectify defects. However, where a third party is appointed and that is thought to be unreasonable in the circumstances of the case then the employer may be criticised for failing to mitigate its loss.

The standard forms use different terminology for the defects rectification period, including 'rectification period', 'maintenance period' and 'defects correction period'. The nature and scope of such periods depend on the mechanism adopted in the particular contract, and they are typically seen as applying to the whole of the works, the relevant part or section. The length of the period will be negotiated by the parties and the nature of the works to be undertaken.

In circumstances where defective work is present, several legal remedies may exist. Starting with remedies in contract, where defective work is present as a consequence of a breach of contract then a claiming party is entitled to be put into the position it would have been if the work had been correctly carried out. This is achieved by a monetary award. The claiming party's losses may be assessed on the basis of:

• ·         the reasonable cost of repair of the defect work;
• ·         the difference in value or loss of amenity of the relevant work.

In strict legal terms the date for assessment of the loss is when the defect is noticed, but when considering the cost of repair the date of assessment is usually taken as when it is reasonable in the circumstances to undertake the relevant works. A party seeking to bring an action for breach of contract in relation to defective works has six years to do so if the contract is executed under hand (signed by a single, authorised representative) or 12 years if the contract is executed by deed. Those periods run from the date of the breach of contract. In the case of patent defects this should be obvious, as it is the date when the defective work is carried out, but for latent defects the date of cause in action is usually taken as being the date on which PC is certified or given. Similar considerations would arise in relation to allegations of defective design. 

Betterment

Where repair works result in a better or newer building, a deduction in damages will not usually be made if the claiming party had no reasonable choice but to undertake the works in that way. However, if a party chooses to rebuild to a higher standard than was strictly necessary it may only be entitled to recover the cost of those works less a credit for the betterment element of it. While each case will turn on its own facts, if works are said to be unnecessarily expensive the test to be applied is whether the claiming party acted reasonably in proceeding in that way. If not, it may struggle to recover the additional costs.

Pure Economic Loss

Defects in buildings can also pose significant problems for subsequent owners who take on responsibility for a building without having procured the relevant work. This is because there would be no claim in contract, unless separate rights or a warranty had been conferred on that new owner. If this situation arises and the subsequent owner has no remedy in contract it raises the question over whether the owner can recover its costs and losses in any other way, for example in tort. The general rule is that damage to a building which is attributable to a defect in the structure of that building is not recoverable – such damage is known as 'pure economic loss' as the only loss sustained is the fact that the new owner has paid too much for the property. 

In 2011 the Court of Appeal clarified that, ordinarily, contractors will not owe duties not to cause pure economic loss. Therefore they will not owe such duties to subsequent owners.

Limited exceptions may apply if the new owner is able to show that the contractor had assumed responsibility for that loss through the provision of skilled advice or services or at least some design responsibility, and that the owner had relied on that advice or services or design. Such situations have been held to arise, for example, where a specialist subcontractor provides services to the contractor who employed it and where a civil engineer provided design services. However, such situations are complicated and the preferable route would always be to ensure that any new owner had the appropriate contractual protection to try and guard against its losses.

Set off, abatement and withholding

Defective work also raises issues relating to certain 'self help' remedies, including common law set off or abatement and equitable set off.

Common law set off or abatement: A summary of the legal principles :-

• ·         in a contract for labour and materials where performance has been defective the employer is entitled to maintain a defence of abatement;
• ·         the measure of the abatement is the amount by which the product of the contractor's endeavours has been diminished in value as a result of the defective performance;
• ·         depending on the facts, this difference may be determined by comparing the market value of what has been constructed with what ought to have been built, or by reference to the cost of remedial works (but not the cost of the remedial works themselves);
• ·         the measure of abatement can never exceed the sum which would otherwise be due to the contractor as payment;
• ·         abatement is not available as a defence to a claim in respect of professional services;
• ·         claims for delay, disruption or damage caused to anything other than that which the contractor has constructed cannot feature in a defence of abatement.

Equitable set-off

This is permitted where a party has a cross-claim which it would be unjust not to take into account. This is a wide test and will cover any cross-claim 'closely connected' with the claim being made.

The issues surrounding set off and abatement lead us to the restrictions on those rights under CIPAA 2012. The Act provides that a party to a construction contract may not withhold payment after the final due date. Period. Unlike similar statute in the UK which provides that a party may not withhold payment after it becomes due unless it gives an effective notice of its intention to withhold payment including its grounds for doing so to the other party. This is to stop contractors abusing their position to wrongfully withhold sums due to subcontractors who typically have no quick or cheap means to challenge the withholding. 

The "Pay Now, Argue Later" principle of CIPAA 2012 may result in prolonged litigation. The losing party of the adjudication decision will seek to appeal the decision in court and stay the execution of the decision. This will certainly defeat the noble aim of CIPAA 2012 to resolve payment disputes quickly and cost effectively.

Practical issues

As a starting point, it is worth thinking about how defects and completion issues should be addressed at procurement stage. Whether something is defective will often depend not so much on whether it is completed competently from a workmanship perspective but on the precise standard and specification to be met. Similarly, if specific tests are to be passed these will need to be provided for contractually, and consideration given to whether general or liquidated damages should apply in the event of failure. The precise standard and level of completion required for PC is something which can often cause arguments, so careful consideration should be given to whether the completion requirements are clear and what risks they may hold.

It goes without saying that those passing their obligations down a supply chain should seek the same assumption of responsibility in relation to defects.

Turning to the execution phase of the contract, the practical issues tend to focus around evidence and notices. Defects are most likely to be picked up on site if there is regular monitoring and testing. It will be a commercial judgement for employers and contractors as to how much they wish to spend monitoring and testing the works, but what is crucially important is that if defects are identified that are likely to have implications for the project then comprehensive records will need to be taken. Similarly, if it is intended to reduce a payment or advance a claim as a result of a defect, then consideration should very rapidly be given to the basis of the claim. It is also not uncommon for issues to arise as to whether an employer waived or agreed to allow a defect to remain. Again, evidence of agreement or waiver should be obtained.

Post completion, if a defect occurs within a defects liability period under a contract then in all probability the employer will be entitled to require the contractor to correct the defect. In some forms this is the case even if it is not clear that the defect is the contractor's responsibility, although the contractor will be entitled to payment if it is proved the defect is not one for which is it responsible.

Clearly, early consideration should be given to the contractual procedures and relevant notices. Even if the defects liability period has ended the contractor will in the vast majority of cases remain liable in damages.

If you are an end user who did not employ the contractor or design team then you will want to consider whether you have the benefit of any assignment of the relevant building contract or professional appointments, or alternatively whether you have collateral warranties or third party rights.

YONG MOK HIN v. UNITED MALAY STATES SUGAR INDUSTRIES LTD

[1964] 1 LNS 230

DW3, a civil and structural engineer, who inspected the work at the end of the same year also testified about the defective work as enumerated in para. 7 of the statement of defence. The plaintiff sought to argue that the architect had supervised the work and had issued the certificate Exh. P2, had signed in the plaintiff's pass book, and lastly the defendant company had by their letter stated that the work was satisfactory. In my judgment such certificate or letter only represents the approximate value of the work done or materials used. It is not conclusive on the parties as an expression of satisfaction with the quality of the work or materials. That is subject to readjustment upon the issue of the final certificate. Having considered the evidence, I am satisfied that the work was defective and was due to bad workmanship.

The defendant company opted to accept repudiation and sue for damages for incomplete and defective work. The law with regard to the measure of damages is adequately stated at p. 442 of the 9th Edn. of Hudson on "Building and Engineering Contracts".

... the direct measure of damage will be the difference between the reasonable cost to the employer of repairing the defects or completing the work, together with any sums paid by or due from him under the contract, and the sums which would have been payable by him under the contract if it had been properly carried out. (Where the former does not exceed the latter, only nominal damages would be recoverable). Such damages are clearly recoverable within the first branch of the in Hadley v. Baxendale [1854] 9 Ex 341 as likely to arise in the usual course of things from the breach".

The editor cited several authorities and I think it would be sufficient if I only cite the case of Hirt v. Hahn [1876] 61 Missouri 496.

B agreed to erect a house for the plaintiff according to plans by a certain day. The defendants were B's sureties. After partly completing, B ceased work, and the plaintiff, after giving notice to the sureties, entered and completed and sued the sureties. Held, that the measure of damage was what it cost the plaintiff to complete the house substantially as it was originally intended, and in a reasonable manner, less any amount that would have been due and payable to B by the plaintiff had B completed the house at the time agreed by the terms of his contract".

That is an American case but the principle enunciated was approved by the Court of Appeal in Mertens v. Home Freeholds Co [1921] 2 KB 526 at p. 535 where Lord Sterndale said:

It is true that that is an American case. Though I cannot put my finger on them for the moment I feel satisfied that there are English cases which fix the same measure of damages. At any rate for the purpose of this case it is sufficient to say we all consider that the proper measures of damages for the breach of a building contract such as this".

However, the cost of completion means the cost of completing the contract work, but not different work. Thus in Milwaukee City v. Shailer [1898] 84 Fed Rep 106 another American case, Shailer contracted to construct a tunnel for the city. The contract provided that in case of default, the city should be entitled to complete the work at Shailer's expense. On Shailer's default the city constructed a tunnel which was essentially different in plan and cost of construction from that contemplated by the contract. It was held that the city was not entitled to recover damages from Shailer.

Mr McDonald, a quantity surveyor, testified that a total sum of $377,221.92 would be the cost of remedying defective work and completing the project from where the plaintiff had left it. He based his valuation on the current and appropriate building rates for this quality of work pertaining to this part of Malaysia. It must be borne in mind that the original contract price was $187,500, and the figure quoted by DW6 would therefore include the cost for the variation and remedying defective work. The cost of putting right defective work, he stated, was $21,095.75. Therefore, arithmetically, $168,720 would be the cost of the extra work. In this connection the cost of extra work must be considered in the light of all the surrounding circumstances. Thus an employer may have deliberately chosen a small-time contractor with limited resources of capital, plant and labour to do the work in the hope of getting a cheaper job. The plaintiff is a class 'E' PWD contractor with a ceiling of $50,000. As no fixed amount was agreed upon in respect of extra work, and considering that work was to be done by a contractor of the same class as the plaintiff, and in view of the principle enunciated in Milwaukee City v. Shailer, supra, I would consider a sum of $126,540 (750f $168,720) as reasonable. In the circumstances, the amount that would cost the defendant company to complete the work and remedy defects would be $335,135.75.

As against that amount must be deducted the contract price as varied that would represent the costs which the plaintiff would have expended on the whole project as varied. I assess that figure in the following manner:

Original contract price $187,500

Extra work 74,000

;$261,500.00 ($74,000 is made up of $24,000, the cost of alteration from zinc walls to 9" brick walls; $40,000 for a third store; and $10,000 for labour and miscellaneous expenses). From the amount of $261,500 must be deducted the sum of $36,000 as representing the fifth progress payment. Therefore the amount which would be due to the plaintiff would be $225,500.

The measure of damages would be the difference between the reasonable costs of completing the work as varied and the amount that would have been due to the plaintiff had he completed the work as varied, and that is $109,635.75.

Can You Refuse To Pay Contractors Costs?

What are the terms of the contract?

This question can be answered by looking at the express provisions in the contract.

Unless there is an express provision in the contract that states the contractor will only be paid when the client pays “pay when paid”), the client should still pay on time, or the provisions of the late payment legislation will apply.

It has been the norm for construction contracts to contain such provision, which means that even if the contractor completes the job, payment is still subject to the client himself getting paid.

Such pay when paid clause will become void when the Construction Industry & Payment Adjudication Act 2012 (“CIPPA 2012”) comes into force, and a default payment clause will be activated and it may be reasonable to imply payment terms of 30 days or sooner.

If there is no provision for payment terms in the contract, then arguably payment may be due on presentation of the invoice. Should the invoice not be paid promptly, then CIPAA 2012 provides a quick and less expensive method for contractors to recover payment.

Do I Need a Lawyer To Handle Payment Disputes In CIPAA 2012?

Lets face it. The professional relationship with a lawyer is best described by U2... "I can't live, with or without you".

Like it or not, if a payment dispute in a construction contract is brought to adjudication within the ambit of Construction Industry Payment & Adjudication Act 2012 ("CIPAA 2012"), the services of lawyers will be inevitable, ultimately.

CIPAA 2012 enables an unpaid party to make a "Payment Claim" for work done or goods / services supplied under a written contract for construction works carried out wholly or partly in Malaysia. If the claim remains unpaid by the non-paying party, the unpaid party can then proceed to submit an "Adjudication Claim" lodged with the KLRCA, and thereon proceed with the appointment of the adjudicator, whose job will be to come up with the adjudication decision which has to be delivered within 45 days of either the Adjudication Response or Adjudication Reply, whichever is the later.

A Two-Tier Involvement

A two-tier involvement can be anticipated for lawyers in payment disputes brought for adjudication in CIPAA 2012, i.e. - pre-adjudication decision and post-adjudication decision.

Pre-Adjudication Decision.

CIPAA 2012 does not impose any specific format on parties for filing of various documents to bring or to defend a claim to be adjudicated by an adjudicator certified by Kuala Lumpur Regional Centre For Arbitration ("KLRCA") at this moment. This is quite unlike an action in the Courts whereby the format and filing of cause papers is determined by various statutes and therefore requires the services of a lawyer if one is to avoid the pitfalls of Do-It-Yourself litigation. 

The scope of involvement of lawyers at initial stages of the Payment Claim and Payment Response may not be required by parties, especially where the disputed amount is not substantial, and the payment dispute does not involve complicated facts and issues. The preparation of documents required for "Payment Claim" by the unpaid party and "Payment Response" by the non-paying party, and subsequently the "Adjudication Claim" and "Adjudication Response" can very well be handled by non-lawyers. It can be ably be dealt with by persons within the company with sufficient legal exposure, but with detailed personal knowledge as to the details of the dispute at hand. The key contribution a lawyer can provide at this stage is to provide compilation expertise to prepare relevant submissions in what may turn out to be invaluable when the adjudication decision is disputed in Court or arbitration.

If a lawyer is involved in the preparation of all documents and communications between parties and the appointed adjudicator prior to the adjudication decision, he / she will be able to provide valuable input in such preparation, including being able to keep an eye open to look out for issues which may result in improperly procured adjudication decision, such as denial of natural justice and bias, fraud, bribery, etc which can then be used to contest the adjudication decision and get it set aside by the Courts.

The growth and penetration of CIPAA 2012 will largely depend on KLRCA, as the adjudication authority, who can be expected to introduce rules, policies and guidelines to regulate adjudication claims, including standardization of the format of cause papers and its administration. As this evolves, the level of expertise required to adhere to such rules will follow naturally and resulting in it becoming a specialized area for claim consultants which is likely to consist mostly of lawyers, or at the very least those who are legally trained.  

Post-Adjudication Decision

Both the winning and the aggrieved party can be expected to turn to the Courts., either to enforce the adjudication decision or to set aside and/or stay the execution of the same. So then, it follows that both parties will have to engage services of their lawyer as such applications are highly technical in nature with specific formats and procedures to adhere to.

The options available to the aggrieved party includes:

1. apply to the High Court to set aside the adjudication decision on grounds that it was improperly procured    through :
  a. fraud or bribery;
  b. there has been a denial of natural justice;
  c. the adjudicator has not acted independently or impartiality; or
  d. the adjudicator has acted in access of his jurisdiction.

2. apply to the High Court for a stay of the adjudication decision.

If a lawyer had been involved during the pre-adjudication decision, then he / she would have been able to identify the grounds on which the adjudication decision may be set aside.

One thing is certain. The way documents are filed and kept will be of utmost importance in enabling the payment dispute to progress smoothly. Whether lawyers are involved or not, the success or failure in such payment disputes will rest on parties' ability to compile its documents quickly, given the short time frames accorded to the parties for filing of relevant cause papers under CIPAA 2012.

How To Enforce An Adjudication Decision In CIPAA 2012 Malaysia

The success of Construction Industry Payment & Adjudication Act 2012 ("CIPAA 2012") as a legal mechanism for unpaid parties in a construction contract for works carried out wholly or partly in Malaysia to settle payment disputes will be largely determined by the "bite" which enables the successful party to enforce the adjudication decision.

Enforcement Through the High Court of Malaysia

If the unpaid party / claimant obtains an adjudication decision in his favour, s.28 CIPAA 2012 empowers him to enforce it by applying to the High Court for an order as if it were a judgment or order of the High Court. This means that the whole gamut of enforcement via the Court including writ of seizure and sale, winding-up proceeding, bankruptcy, debtor summons and likely garnishee order, is available by the winning unpaid party to enforce the decision obtained at adjudication.

The key proviso is that the adjudication decision has not been stayed or set aside or overruled by arbitration or the Court. However,as enforcement through the mechanisms of the Court will be costly and maybe time consuming, it is envisaged that it will be a disincentive in cases where the claim amount does not justify it.

Other than enforcement of the adjudication decision through the Court, CIPAA 2012 offers a rather more effective method of enforcing the said decision, i.e:

1. suspend the performance or reduce the rate of progress of performance in the construction contract in which the payment dispute arose;

2. obtain payment of the adjudicated decision direct from the principal of the construction contract.

1. Suspend or Slow Work Performance

If the proper procedure of providing written notice of intention to do so to the other party if the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice. S.29 of CIPAA 2012 affords protection to the party who exercises his right to suspend or "go-slow" without having to repudiate or terminate the on-going construction contract, and also being able to be entitled to recover any loss and expenses incurred as a result of the suspension or "go-slow" from the Respondent of the adjudicated decision.

2. Direct Payment From Principal

The other option open to the unpaid party of the adjudication decision, pursuant to s.30 CIPAA 2012 is to attempt to to get the principal of the party against whom the adjudication decision is made.

This will only be effective if money is due or payable by the principal to the party against Respondent of the said decision, at the time the request was received from the unpaid party.

If the said Respondent or losing party fails to show proof of payment to the unpaid party, the principal shall pay the adjudicated amount to the party who obtained the adjudication decision in his favour.

Within CIPAA 2012, the principal referred to does not necessarily mean the ultimate Employer / Developer / Owner in the construction contract between the unpaid party Claimant and the non-paying party Respondent.  The "principal" means the party one level above the said Respondent and in many cases may turn out to be the Main Contractor or even a sub-contractor as the construction industry in Malaysia tends to have a long chain in the construction process consisting of  a chain of sub contractors, manpower providers, tools and machinery providers, outsourced maintenance contractors and services providers, consultancy services, hardware and building material suppliers, etc.

It is anticipated after CIPAA 2012 comes into force, many principal / employers consisting  owners, developers, main contractors and possibly large sub-contractors in the construction industry in Malaysia will be surprised to one day receive a notice demanding payment for the adjudicated amount for work done or goods supplied by a sub-contractor or supplier 2 levels below the principal. Are you ready Malaysia?

Construction Industry & Payment Adjudication Act 2012 - An Overview

CIPAA 2012 - Are you ready Malaysia?

The construction industry in Malaysia is headed for a seismic upheaval in 2013, if industry players embrace the new payment regime imposed by CIPAA 2012. The Act will regulate payment disputes in the construction industry for construction works undertaken wholly or partly in Malaysia for buildings, telecommunication, oil & gas, infrastructure, maintenance, exterior and interior design, and shall be extended to consultancy services such as architectural services, engineering, surveyors, planning & feasibility studies, project management, and procurement. The scope of CIPAA 2012 is extensive and extends to "services" and "supply".

An Overview

Payment disputes are the concern of this Act and can be brought to an adjudicator certified by Kuala Lumpur Regional Centre of Arbitration (KLRCA) as an alternative form of dispute resolution. It is believed to be cheaper and faster than litigation through the Courts. This Act gives wide powers to the adjudicator with a view to enable a decision to be made within 45 days upon the close of pleadings. As such, the underlying approach for justice of this Act is "Pay Now, Argue Later". This rough justice approach lays in stark contrast to the fine justice approach adopted by the Courts.

The adjudicator's decision is final and can be enforced in court, unless set aside or stayed or brought to arbitration or appealed in court. Other avenues opened to the winning claimant if payment not settled by losing respondent within the time stipulated in the decision, is to slow work rate, stop work (without having to repudiate the contract) or make a payment claim directly to the employer (a level directly above the respondent/losing party in the construction chain).

This Act is expected to shake up the payment malaise currently afflicting the construction industry and related consultancy service providers. Conditional payment terms such as "Back-to-back" and "financial draw down" payment terms is prohibited and shall be deemed to be void pursuant to s. 35 CIPAA 2012. Payment shall be based on actual work done or goods delivered, if contract terms does not contain specific clauses governing payment or by operation of s.35 deemed void, reference to s.36 CIPAA 2012 shall be necessary. S. 36 provides for "the right to progress payment at a value calculated by reference" to the contract price, variation order or a reasonable cost of carrying remedial work or dimunition of value. Reference to prescribed fees by relevant regulatory board shall be made in the event there is no agreed or stipulated fees or price in the contract.

The frequency of progress payment is monthly for construction work or construction consultancy services, and in cases of supply of construction materials, equipment or workers, payment shall be upon delivery of such. The due date for payment is 30 calendar days from the receipt of the invoice.

This means that employers (not necessarily limited to developers / main contractors only, and may include the sub-contractor who purchases material or rents equipment) can no longer make reference to conditional payment terms in the contract or purchase order or work order to put off paying for work done or goods/materials, equipment or workers supplied to delay making payment in Malaysia anymore. The impact of CIPAA 2012, I believe, will be felt most within this scenario, which is likely to see suppliers or sub-sub contractors bringing payment disputes to the adjudicator upon after the invoice becoming due and unpaid.

 However, work done outside the scope of the contract, i.e quantum meruit, is not expected to be covered by this Act, unless a variation order in writing can be proved.

So ready or not Malaysia, this Act will come into force upon execution by the Minister of Works.   

Can The Main Contractor Impose Liquidated Damages Fixed Under The Main Contract On A Subcontractor Who Finishes Late?

Presumption : Subcontractor has contractual obligation to finish within a timescale and is in breach of the obligation if he completes late.

Where a subcontractor is in breach he will have a liability to pay damages to the main contractor.

The injured party is entitled to recover any loss likely to arise in the usual course of things from the breach, plus such other loss as was in the contemplation of the parties at the time the contract was made and which is likely to result from the breach.

The main contractor, as injured party, is entitled to levy a claim for damages against a subcontractor who completes late. These damages will include any liability the main contractor has to pay liquidated damages to the employer which result from the delay. This will apply irrespective of the value of the subcontract work.

It is open to the subcontractor to argue, if the main contract liquidated damages are extremely high, that the sum involved was outside his contemplation at the time the contract was entered into. To forestall this type of argument main contractors, usually with the tender enquiry documents will set out details of the main contract (including the sum included for liquidated damages).

Where the subcontractor is nominated and the main contract provides for an extension of time where work is  delayed by the subcontractor no claim from the employer for liquidated damages will arise provided that the contractor has properly claimed the extension of time.

Relevant cases:
1. Hadley v. Baxendale (1854)
2. Victoria Laundry (Windsor) Ltd v. Newman Industries (1949)
3. M.J. Gleeson plc v. taylor Woodrow Construction Ltd (1989)

Basics of Construction Contracts In Malaysia

Construction projects typically involve several different parties – owners, designers, prime contractors, subcontractors, architects, consultants, suppliers – with different interests.  Due to the many variables, construction projects have its associated risks.  Therefore, the purpose of the construction contract is to:

(1) allocate the duties between the parties; 
(2) recognize and allocate the risk to the different parties; and
(3) reduce the uncertainty surrounding the project and allow the parties to plan for the project and the future as best as possible.

In Malaysia, the introduction of Construction Industry Payment & Adjudication Act 2012 ("CIPAA 2012") is envisioned to regulate payment disputes which currently afflicts the construction industry. The scope of CIPAA 2012 is expected to include the oil & gas industry, petrochemical, telecommunication, utilities, infrastructure supply contracts, project and management, in addition to typical building construction projects.

Construction work must be carried out wholly or partly in Malaysia, and any payment dispute arising from a written contract may be referred to an adjudicator registered with the KL Regional Centre for Arbitration. The approach of such process is "PAY NOW, ARGUE LATER".

Is a verbal agreement enforceable?

Construction contracts may be verbal.  However, it is recommended that construction contracts be in writing in order to bring any payment dispute to be adjudicated within the ambit of CIPAA 2012.  A written contract presents a clear record of the parties’ agreement, whereas and oral agreement is subject to the parties’ recollection of the terms.  

When entering into a written contract, the parties should make certain that the writing accurately reflects the agreement between the parties.  The parole evidence rule may prohibit evidence of contract terms differing from those in the written agreement.  The integration clause of a contract also prohibits evidence of other terms or negotiations.

It must be emphasized that CIPAA 2012 only recognizes written contracts and not verbal or oral contracts, to be adjudicated by a Kuala Lumpur Regional Centre of Arbitration (KLRCA) certified adjudicator.

Stipulated value or lump sum contracts?

This is the typical contract with a negotiated lump sum price.  This type of contract is preferred by owners for the following reasons:

            •           owners can utilize a competitive bidding process

            •           all risks are placed on the general contractor 

            •           the general contractor must control costs and perform efficiently

Before entering into this type of contract, the owner must have detailed plans and specifications for the project, and the general contractor must have clear and specific instructions and scope of work.

What is a cost plus contracts with a management fee?

A cost plus contract is often used in the absence of detailed plans and specifications.  The general contractor is paid for all costs incurred.  The general contractor is also normally paid a fee for overhead and profit, plus a fee for general conditions.  The owner assumes all risks of excessive costs.  Frequently, an incentive provision is used to encourage cost savings by the general contractor.

What is a GMP?

Similar to a cost-plus contract, but with some protection for the owner, utilizing a GMP (guaranteed maximum price) as a cap for project.  The GMP is typically adjusted with each change order, just as a lump sum contract price is adjusted.  This type of contract is amenable to the design build situation, where the general contractor also serves as a designer.  The GMP is arrived at after the project has been completed to the design development stage.

What are the contract documents?

In most contracts, the contract documents are "incorporated by reference."  Contract documents usually include plans and specifications, the “prime contract” between the owner and all prime contractors, including the general contractor, addenda, building codes and regulations, and modifications to the plans and specifications after execution of the contract.

It is important for a contractor to review all contract documents incorporated by reference, as the terms of those documents may be binding on the contractor.  For instance, if a prime contract (between the owner and a general contractor) contains an arbitration provisions, courts will typically enforce the arbitration requirement against a subcontractor in contract with the general contractor. It is not necessary, however, that contracts provide for adjudication before payment disputes are brought for adjudication within CIPAA 2012.

On a smaller scale, a written contract may be referenced within documents used in the supply of goods and/or services, such as work order, purchase order, invoice, delivery order, etc. 

What is the scope of work?

Disputes regarding scope of work are often the basis of construction claims.  Scope of work is defined as the extent of a contractor's responsibility to perform certain contract work.  To determine the scope of work, the contractor may have to look to other contract documents –  plans and specifications, contracts with others – and to industry standards (building codes, etc.)

The scope of work issues between the owner and the general contractor differ from the scope of work issues between the general contractor and subcontractors.  The general contractor must be sure that all of the scope of work is contracted to subcontractors, and that there are no overlapping scope of work issues.   

Questions regarding scope of work should be resolved in the written contract.  Scope of work references should be detailed in the contract.  If detailed specifications are available, refer to the specifications in designating scope of work.

It must be pointed out that the scope of CIPAA 2012 is limited to payment disputes.

What is the contract sum?

The price in the contract will either be lump sum, unit price, or time and material.  The contract should include a definite price, or a definite method of determining price.  Absent price, an otherwise valid contract will be interpreted as requiring payment of a fair value (quantum meruit).

What are the methods for payment of the contract sum?

Progress payments are periodic payments constituting partial payment of the contract sum.  The contract should include a specific provision for time and method of payment and calculation of amount.

A schedule of values should be prepared by the contractor and approved by the owner and architect.  The schedule should accurately break down the scope of work into component parts, and assign a value to each component part.

Applications for payment should be measured against the schedule of values.  The application typically includes the amount of work in place, the cost of materials stored on site, the costs of labor to date, less an amount for retainage and previous payments.  The application is usually certified by the architect or owner and the payment is due thereafter.

It must be noted that CIPAA 2012 prohibits conditional payment terms such as "Pay When Paid", "Back to Back" or " Pay If Paid".

Pay when paid, or pay if paid provisions

One of the greatest concerns and risks on a construction project is payment by the owner, or main contractor or employer.  Once the contract work has been fully performed, everyone wants to be, and should be, fully paid.  One of the risks of nonpayment is the owner's or main contractor's or employer's potential inability to pay.  Throughout the work chain of contractors, sub contractors, sub-sub contractors and suppliers there is a need to agree on who bears the risk of nonpayment – the general contractor or the subcontractor, etc  

Contractors routinely try to shift the burden of nonpayment to subcontractors.  "Pay when paid" and "pay if paid" and "pay upon financial drawdown"  provisions are popular and widely used. Such conditional payment terms only serve to delay the time for payment to the subcontractor even in situations where the contracted work has been completed and complied with.

Typical pay when paid clauses provide something like:

"The total price paid to [subcontractor] shall be [contract price], no part of which shall be paid until 5 days after payment is received from owner."

or

". . . the Contractor shall pay the Subcontractor each progress payment and final payment . . . within three working days after he receives payment from the Owner . . . ."

In Thos. J. Dyer v. Bishop International Engineering Co., the Sixth Circuit U.S. Court of Appeals refused to enforce a pay when paid clause.  In Dyer, a general contractor was not paid on a project after the owner declared bankruptcy.  The general contractor, in turn, did not pay its subcontractor for the work it performed.

The introduction of CIPAA 2012 deems that such conditional payment are void and unenforceable. This, I believe, is where the impact of CIPAA 2012 will be keenly felt by players in the construction industry in Malaysia.

Typical schedule provisions

The schedule for completion of the contract work is an essential component of the contract, and a frequent focus of construction litigation.  In a perfect world, the contract will incorporate a detailed computer generated completion schedule, with milestone dates for the essential tasks, and the schedule will be updated periodically to reflect changes in the schedule to reflect changes and progress.

At a minimum, the prime contracts should include a date of commencement of the work, a project duration (the time that the prime contractor agrees to reach substantial completion of its scope of work), and a definition of substantial completion.  

The date of commencement is subject to change, based on several factors.  The most common factors affecting the date of commencement influenced by the owner are owner funding, the delivery of final plans and specifications, the availability of the building permit.  Changes in the date of commencement change the date of substantial completion.

The project duration is measure either in calendar days or working days, and is based on the number of days that the parties predict it will need to complete the project.  Project duration is subject to lengthen based on several factors: changes directed by the owner, unforseen conditions, force majeure, weather, contractor issues.

Natural Justice As The Basis To Set Aside An Adjudication Decision - Section 15 (b) Construction Industry Payment & Adjudication Act 2012 of Malaysia

When can an adjudication decision be set aside? 

Section 15 Construction Industry Payment & Adjudication Act 2012 of Malaysia("CIPAA 2012") provides that:-
"An aggrieved party may apply to the High Court to set aside an adjudication decision on one or more of the following grounds:

(a) The adjudication decision was improperly procured through fraud or bribery;

(b) there has been a denial of natural justice;

(c) the adjudicator has not acted independently or impartially; or

(d) the adjudicator has acted in excess of his jurisdiction."

This post seeks to explore the concept of natural justice.

What Is Natural Justice?

It is a term that denotes specific procedural rights in the English legal system. There are two rules that natural justice is concerned with - the rule against bias and the right to a fair hearing.

1. Rule Against Bias

This basic concept of impartiality where a person is barred from deciding any case in which he may be, or suspected to be biased, applies to courts of law, tribunals, arbitrators and all those having the duty to act judicially, including adjudicators.

Bias may be actual, imputed or apparent. Actual bias is established where it is actually established that a decision-maker was prejudiced in favour of or against a party, which is in practice, very hard to prove.

One form of imputed bias is biased on the decision-maker being a party to a suit, or having a pecuniary or proprietary interest in the outcome of the decision. Once this fact has been established, the bias is irrebuttable and disqualification is automatic - the decision-maker will be barred from adjudicating the matter without the need for any investigation into the likelihood or suspicion of bias.

In certain limited situations, bias can also be imputed when the decision-maker's interest in the decision is not pecuniary but personal.

Apparent bias is present where a judge or other decision-maker is not  party to a matter and does not have an interest in its outcome, but through his conduct or behaviour gives rise to a suspicion that he is not impartial.

Exceptions to the rule against bias includes Necessity and Waiver.

Necessity is where a disqualified adjudicator cannot be replaced. as no one else is authorized to act. Waiver of the right to object, and proceedings are allowed to continue if no objection is raised as soon as the prejudiced party has knowledge of the bias.

The effect of a finding of bias - judgment not void but voidable. This advice is not wrong in the context of a judicial act under review, where the judgment will be held valid unless reversed on appeal.

2. Right To A Fair Hearing (Audi Alteram Partem)

The aspects of a fair hearing includes:

i. Prior notice of hearing - the right to adequate notification of the date, time, place of the hearing as well as detailed notification of the case to be met.

ii. Opportunity to be heard - the right to have a hearing and be allowed to present his own case. However, this requirement does not necessarily mean the decision-maker has to meet the complainant face to face.

iii. Conduct of the hearing - the adjudicator has to ask whether the person charged has a proper opportunity to consider, challenge or contradict any evidence, and whether the person is also fullly aware of the nature of the allegations against him.

iv. Right to legal representation

Summary of Cases

1. Costain Ltd v. Strathclyde Builders Ltd [2003]

The adjudicator issued a decision that the defender should repay the full amount withheld as liquidated and ascertained damages. The pursuer now raised proceedings to recover the sums found due by the adjudicator by means of court proceedings via a motion for summary decree. The only defence advanced was that the adjudicator's decision is vitiated by a breach of the principles of natural justice,  due to the fact that the adjudicator had requested for to grant an extension of four days as he wished to "discuss one point in particular with [his] appointed legal adviser". The result of the discussions with the legal adviser was not made known to the parties, nor was either party told of the terms of the discussions that had taken place, or to see their result. Neither party was invited by the adjudicator to comment or make submissions upon the advice tendered, and neither party requested any opportunity to do so.

Held : 

1. It is important that confidence in the adjudication process should be maintained. For such confidence to be maintained, it is important that adjudicators should be clearly seen to give parties a fair opportunity to present their arguments by fulfilling the principle of audi alteram partem.

2. The mere possibility of injustice is sufficient for a challenge to an adjudicator's decision for the reasons set out in para 1. above. The parties do not know the content of the legal advice obtained by the adjudicator. It could have been crucial. Indeed, because the adjudicator asked for advice on a particular matter, it is reasonable inference that he thought that it was important. I do not think that the possibility of injustice can be excluded.

3. I conclude that the defender has stated a relevant defence to the pursuer's claim to enforce the adjudicator's decision. It follows that the pursuer has not satisfied the test for summary decree, namely that the question of law that arises as to the relevancy of the defender's averments admits of a clear and obvious answer in the pursuer's favour. Pursuer's motion for summary decree is refused.

2. Discain Project Services Ltd v Opecprime Development Ltd [2001]

If an adjudicator's decision was to be challenged on account of a breach of the principles of natural justice, the breach must be substantial and relevant.

3. Inland Revenue v Barrs [1961]

Lord Reid  - this is at least clear : no tribunal, however informal, can be entitled to reach a decision against any person without giving to him some proper opportunity to put forward his case.

4. Barrs v British Wool Marketing Board [1957]

This is a case involving a statutory tribunal that determined the valuation of wool.

Lord President Clyde - "Although quasi-judicial bodies such as this tribunal are not Courts of law in the full sense, it has been the law of Scotland that they must conform to certain standards of fair play, and their failure to do so entitles a Court of law to reduce their decisions. Were it not so, such tribunals would soon fall into public disrepute, and confidence in them would evaporate. Fair and equal opportunity afforded to all interests before the tribunal is the fundamental basis upon which the tribunal must operate, and, in the absence of such fair play to all, it is right and proper that a Court of law should reduce the tribunal's decision...

The test is not 'Has an unjust result been reached?' But 'Was there an opportunity afforded for injustice to be done?' If there was such an opportunity, the decision cannot stand".

5. Balfour Beatty Construction Ltd v London Borough of Lambeth [2002]

It was accepted that the principles of natural justice were applicable to adjudication proceedings. It was further accepted that if an adjudicator obtains material from sources other than the parties, including his own knowledge and experience, he must give the parties a reasonable opportunity to comment on that material.

6. RSL (South West) Ltd v Stansell Ltd [2003]

In this case, the adjudicator had indicated to the parties' representatives that he wanted to obtain assistance on programming issues from a specialist in that area. The plaintiff's representative agreed without qualification, but the defendant;s representative agreed subject to a request that he be allowed to see any report prepared by the specialist and that he be given reasonable time to comment upon any such report.

It was held that it is elementary that the rules of natural justice require that a party to a dispute resolution procedure should know what is the case against him and should have an opportunity to meet it... It is essential, in my judgment, for an adjudicator, if he is to observe the rules of natural justice, to give the parties to the adjudication the chance to comment upon any material, from whatever source, including the knowledge or experience of the adjudicator is minded to attribute significance in reaching his decision."

Unilateral Contract - Carlill v Carbolic Smoke Ball Co [1892]

What is a unilateral contract? It is an enforceable contract created by an offer that can only be accepted by performance. In unilateral contracts, communication of acceptance is not expected or necessary. Therefore, if  there is an offer to the world at large, and that offer does not expressly or impliedly require notification of performance, then performance of the specified condition in the offer will constitute acceptance of the offer and consideration for the promise.

In Carlill v Carbolic Smoke Ball Co, statements that were made in an advertisement may be a mere “puff” and not intended to be legally binding but if the advertisement shows a clear promissory intention to be legally bound, it may constitute a unilateral offer.

Facts

• Carbolic Smoke Ball Co (Defendant) promises in the advertisement to pay 100 pounds to any person who contracts flu after using their smoke ball.
• Mrs Carlill (plaintiff) used the ball but contracts flu and claims to have relied on the said advertisement.

The issue at hand was whether there was a legally binding contract between the parties?
A valid and enforceable contract requires notification of acceptance. Did Mrs Carlill notify Carbolic of the acceptance of the offer? And thereon, did Mrs Carlill provide any consideration in exchange for the 100 pounds reward?

The Defendant argued that there was no binding contract as the words of the advertisement did not amount to a promise as the advertisement was too vague to constitute a valid and binding contract. Further, there  was  no  limit  as to the length of time and also no way of checking the actual use of the smoke ball by consumers. The Defendant further argued that the terms were too vague to make a valid contract as there was no limit as to time was clearly stated. This would mean that a person might claim they had contracted  flu 10 years after using the remedy.

The Defendant also claimed that there was no contract concluded as a contract requires communication of intention to accept the offer or performance of some overt act.

The Plaintiff’s argument is that the said advertisement was an offer that they were under an obligation to fulfill because it was published so it would be read and acted upon and it was not an empty boast. As such, the promise was not vague and that there was consideration.

Held

There was a binding contract. The advertisement was an express promise – to pay 100 pounds to anyone who contracts flu after using the ball three times daily x 2 weeks. The advertisement was not a mere puff, because of the statement “1000 pounds is deposited with the Alliance Bank, shewing our sincerity in the matter” – as proof of the defendant's sincerity to pay.

• A promise is binding even though not made to anyone in particular  – a unilateral offer  – ie. “offers to anybody who performs the conditions named in the advertisement, and anybody who does perform the condition accepts the offer”.

• The advertisement is not so vague that it cannot be construed  as  a  promise – the words can be reasonably construed.  For example, that if you use the remedy for two weeks, you will not contract the flu within a reasonable time after that.

• Notification of acceptance – notification of the acceptance need not precede the performance – “this offer is a continuing offer”.

o “If notice of acceptance is required, the person who makes the offer gets the notice of acceptance
contemporaneously with the notice of the performance of the condition”.

o Ie. when there is an offer to the world at large, acceptance is legally valid when the offeree communicates
to the offeror notice of performance of the specified conditions.  This means acceptance is not legally valid
when notification of the performance of the specified conditions does not occur.

Consideration

There was consideration in this case for two reasons:

1. Carbolic received a benefit ie. in the sales directly beneficial to them by advertising the Carbolic Smoke Ball.

2. The  direct  inconvenience  (and  detriment) to the person who uses the smoke ball 3 times a day x 2  weeks according to the directions at the request of Carbolic. In other words - performance of the specified conditions constitutes consideration for the promise.

Source : Claire Macken - Sample Case Summary