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)