Jocelyn Lim Yean Tse May 21 2018 Developments in statutory adjudication in 2017 SKRINE | Projects, Construction & Infrastructure - Malaysia Jocelyn Lim Yean Tse Projects, Construction & Infrastructure IntroductionExpansion of adjudicator's jurisdictionConduct of adjudication proceedingsStay of adjudication decisionExclusion from actConditional payment clausesCompetency standard and criteriaAppeal against adjudication decisionInterim and final claimsAggrieved partyConstruction workObjection to adjudicator's appointmentTime extension for payment responseEffect of setting asideLoss and expense claimsTerminated contractRegistration of decision in part Pre-award interestCommentIntroductionMalaysia witnessed considerable developments in statutory adjudication case law in 2017, probably due to the increasing use of this form of dispute resolution mechanism by stakeholders in the construction industry since 2014.This update examines some of the significant decisions that were handed down by the Malaysian courts in 2017 and their impact on statutory adjudication under the Construction Industry Payment and Adjudication Act 2012.Expansion of adjudicator's jurisdiction The adjudicator's jurisdiction, which used to be limited to matters set out in the payment claim and payment response, has been significantly expanded by the Federal Court in View Esteem Sdn Bhd v Bina Puri Holdings Berhad (2017 8 AMR 167). Adjudicators are no longer precluded from considering all defences raised by a respondent in an adjudication response even if such defences were excluded in the payment response. On the contrary, an adjudicator who fails to consider the defences raised in the adjudication response could have acted in breach of natural justice and their decision may be set aside under Section 15 of the Construction Industry Payment and Adjudication Act. This landmark decision, which obliges an adjudicator to consider all of the defences in the adjudication response, will have a significant impact on the conduct of statutory adjudication proceedings.Conduct of adjudication proceedingsIn Permintex JSK Resources Sdn Bhd v Follitile (M) Sdn Bhd (and Another Originating Summons) (2018 1 AMR 693) the respondent applied to set aside the adjudicator's decision on various grounds, including that there had been a breach of natural justice as the adjudicator had failed to invite the parties for a face-to-face preliminary meeting. In dismissing the respondent's setting aside application, the High Court held that:"[The Construction Industry Payment and Adjudication Act] confers broad and vast powers on an adjudicator so that he may proceed with all speed and diligence in arriving at a decision within the tight time frame prescribed… it is within the exercise of the broad discretion of the adjudicator to conduct a documents-only adjudication without the need to hear oral evidence."Similarly, the wide discretionary power of an adjudicator to order and limit the filing of written submissions was endorsed in Tidalmarine Engineering Sdn Bhd v Conlay Construction Sdn Bhd (and Another Originating Summons) (2017 8 AMR 75). The High Court held that there was thus "no basis for arguing that there was a breach of natural justice merely because the adjudicator had not allowed the parties to file their written submissions on the issues raised".Unquestionably, adjudicators rule over adjudication proceedings and may conduct them in the manner that they deem to be appropriate, provided that they:comply with the Construction Industry Payment and Adjudication Act;act impartially; andadhere to the rules of natural justice.Stay of adjudication decision The 'exceptional circumstances' test, which essentially refers to a party's financial status when granting a stay of an adjudication decision under Section 16 of the Construction Industry Payment and Adjudication Act as established in Subang Skypark Sdn Bhd v Arcradius Sdn Bhd (2015 11 MLJ 818), was expanded in View Esteem.Section 16 now has a liberal interpretation, allowing the courts a degree of flexibility to stay an adjudication decision where there are clear errors or in order to meet the justice of the individual case. This appears to be even wider than the 'special circumstances' test, where the paramount consideration is whether in granting a stay of execution, the appeal – if successful – would be rendered nugatory.Although the test for granting a stay under Section 16 of the Construction Industry Payment and Adjudication Act appears to be wider as the financial status of the other party is not the only factor to be considered, therefore allowing more grounds to justify granting a stay, the Federal Court in View Esteem also emphasised that a stay of an adjudication decision should not be readily granted and caution must be exercised when doing so. Whether a stay should be granted under Section 16 must be determined on a case-by-case basis and the financial status of the other party is not the only factor to be considered.Exclusion from actFollowing View Esteem, a payment dispute that is referred to adjudication will be excluded by Section 41 of the Construction Industry Payment and Adjudication Act if it is found to be the subject matter of a dispute that had previously been commenced in court or arbitration. In View Esteem there was a court proceeding relating to Interim Certificates 23 to 26R. The respondent initiated an adjudication claim in respect of Progress Claim 28. The Federal Court held that Progress Claim 28 fell within the ambit of Section 41 of the Construction Industry Payment and Adjudication Act as a progress claim does not stand alone in a separate compartment but is cumulative in nature. Therefore, the court found the subject matter of the court and adjudication proceedings to be the same, notwithstanding the fact that the proceedings were based on separate progress claims.Conditional payment clausesIn Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd (2017 MLJU 1342) the High Court held that Section 35 of the Construction Industry Payment and Adjudication Act applies retrospectively and any conditional payment provision in a construction contract will be void, irrespective of whether the parties had relied on such a provision before the coming into force of the Construction Industry Payment and Adjudication Act. This appears to be consistent with the earlier decisions of Econpile (M) Sdn Bhd v IRDK Ventures Sdn Bhd & Another Case (2016 5 CLJ 882), BM City Realty & Construction Sdn Bhd v Merger Insight (M) Sdn Bhd (2016 AMEJ 1858) and Terminal Perintis Sdn Bhd v Tan Ngee Hong Construction Sdn Bhd (and Another Originating Summons) (2017 7 AMR 887).The High Court decision in Jack-In Pile was overturned in 2018 by the Court of Appeal, which held that a conditional payment clause under a construction contract relied on by parties before the commencement of the Construction Industry Payment and Adjudication Act remains valid and is unaffected by Section 35 (Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd (Civil Appeal No: B-02(C)(A)-1187-06/2017)). An application is supposedly being made to the Federal Court for leave to appeal against the Court of Appeal's decision.Competency standard and criteria In considering whether an adjudicator has met the competency standards and criteria under Regulation 4 of the Construction Industry Payment and Adjudication Regulations 2014, the High Court in Gazzriz Sdn Bhd v Hasrat Gemilang Sdn Bhd (2017 AMEJ 1630) adopted the approach in WRP Asia Pacific Sdn Bhd v NS Bluescope Lysaght Malaysia Sdn Bhd (formerly known as Bluescope Lysaght (Malaysia) Sdn Bhd) (and Another Originating Summons) (2016 1 AMR 379)), whereby the courts will leave the matter to be determined by the Kuala Lumpur Regional Centre for Arbitration (renamed the Asian International Arbitration Centre (Malaysia)), which is responsible for setting the standard and criteria under Section 32 of the Construction Industry Payment and Adjudication Act.Appeal against adjudication decision In VVO Construction Sdn Bhd v Bina MYK Sdn Bhd (and Another Originating Summons) (2017 2 AMR 502) the respondent, in addition to its application to set aside the adjudication decision, appealed against the adjudication decision under Order 55A, Rule 1 of the Rules of Court 2012. In dismissing the respondent's purported appeal, the High Court adopted the decision in Bina Puri Construction Sdn Bhd v Hing Nyit Enterprise Sdn Bhd (2015 8 CLJ 728) that, under the Construction Industry Payment and Adjudication Act, there is no provision for appeal and therefore no right of appeal against an adjudicator's decision. This is understandably the legal position because if parties can appeal against an adjudicator's decision, the adjudicator's findings of fact may be disturbed, which contravenes the principle of rough justice under the Construction Industry Payment and Adjudication Act (ie, one of the main features that underpin the statutory adjudication process).While the legal position holds that parties are precluded from appealing against an adjudicator's decision, there appears to be a growing trend for aggrieved parties which were unsuccessful in an adjudication to resubmit the same unsuccessful claim in a subsequent adjudication before another adjudicator. In other jurisdictions, it is regarded as an abuse of process for a party to engage in so-called 'adjudicator shopping' by resubmitting the same claim repetitiously until it obtains a favourable decision. There are a few such cases pending in the High Courts on this issue.Interim and final claims The Court of Appeal in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Appeal (2018 2 CLJ 163) held that the Construction Industry Payment and Adjudication Act applies not only to interim claims but also to final account claims. The court took judicial notice that final claim payments had been lodged and adjudicated without any fanfare and that courts and legal practitioners should be careful in creating an issue when it is settled among the construction industry players that there is no issue as to whether the Construction Industry Payment and Adjudication Act applies to final payment claims. However, the dissenting judge in Martego expressed concern that the inclusion of final payment claims under the act may lead to abuse of process because:statutory adjudication does not dispense with the trial process; andto enforce a final payment by summary adjudication process is abhorrent to the notion of justice and fair play.In Tidalmarine the High Court rejected the respondent's argument that the Construction Industry Payment and Adjudication Act applies only to a final progress claim (which is issued before defects and rectification works are completed) and not to a final account claim (which is issued after defects and rectification works are completed). The court held that the Construction Industry Payment and Adjudication Act, which allows final payment claims, would be equally applicable to a claim based on final account as this is still a claim for work done or services rendered under the express terms of a construction contract.Aggrieved party Section 15 of the Construction Industry Payment and Adjudication Act allows an aggrieved party to apply to the High Court to set aside an adjudication decision. Normally, the aggrieved party is the respondent that is required to make payment to the claimant. In Syarikat Bina Darul Aman Berhad & Anor v Government of Malaysia (2017 4 AMR 477) the claimant, whose claim had been dismissed peculiarly, filed a setting-aside application in the High Court even though it was not required to pay any sum to the respondent. Nonetheless, the claimant was held to be an aggrieved party within the context of the Construction Industry Payment and Adjudication Act, as the expression 'aggrieved party' is given its plain and ordinary meaning – a party is aggrieved if it has been adversely affected or wrongfully deprived of its right to have its entitlement validly and justly decided pursuant to the act.In Wong Huat Construction Co v Ireka Engineering & Construction Sdn Bhd (2018 1 CLJ 536) the claimant – who was dissatisfied with the paltry sum of RM29,791 that was adjudged in his favour out of the RM231,277 claimed – was also held to be an aggrieved party within the Construction Industry Payment and Adjudication Act as the term is given an expansive reading to include a person who has received an adjudication decision in their favour but is aggrieved as they should have received more.Construction workIn 2016 the High Court established in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd & Another Case (2017 1 CLJ 101) that consultancy agreements fell within the ambit of the Construction Industry Payment and Adjudication Act. In MIR Valve Sdn Bhd v TH Heavy Engineering Berhad & Other Cases (2017 8 CLJ 208) the High Court decided whether works done on a ship to convert it into a floating production storage and offloading (FPSO) vessel constitute construction work within the meaning of a construction contract under the Construction Industry Payment and Adjudication Act. MIR Valve Sdn Bhd was appointed by TH Heavy Engineering Sdn Bhd to supply valves to be installed onto the FPSO vessel for the production and processing of gas condensate and crude oil. In determining the above, the court considered the functional purpose of the vessel. Notwithstanding that the vessel could still move around, it was no longer a ship in the sense of transporting people or goods from one place to another because the main purpose of the vessel was to serve the gas, oil and petrochemical industry. On this basis, the court concluded that the vessel, which was being converted for the oil and gas industry, fell neatly within the scope of construction work, which includes any "gas, oil and petrochemical work".The High Court observed per obiter that a ship building contract is excluded from the Construction Industry Payment and Adjudication Act as it does not fall within the ambit of structures (which are mainly buildings constructed above or below ground level) or infrastructure (eg, roads, harbour works, railways, cableways, canals or aerodromes). The same sentiment was expressed in YTK Engineering Services Sdn Bhd v Towards Green Sdn Bhd (and 3 Other Originating Summons) (2017 5 AMR 76) where the High Court observed per obiter that a shipping or mining contract does not fall within the meaning of construction work under Section 4 of the act and is therefore not considered a construction contract under Sections 2 and 4 of the act.Objection to adjudicator's appointment In Zana Bina Sdn Bhd v Cosmic Master Development Sdn Bhd and another case (2017 MLJU 146) the High Court held that a party that participated fully in an adjudication proceeding without raising any objection as to the validity of the adjudicator's appointment during the proceeding was estopped from raising the objection subsequently in its setting aside application. An objection to the validity of an adjudicator's appointment must be distinguished from an objection to an adjudicator's jurisdiction – the latter can be raised at any point in the proceeding.Time extension for payment response The issue as to whether there was a breach of natural justice when an adjudicator refused to allow the respondent's application for a time extension to submit a payment response was considered in Binastra Ablebuild Sdn Bhd v JPS Holdings Sdn Bhd & Another Case (2018 2 CLJ 223). The High Court found that it was not a breach of natural justice merely because an adjudicator refused to allow the respondent's application for a time extension. Natural justice requires only that an adjudicator hears both sides and comes to a determination on the issue.In considering the issue, the court commented in passing that it is doubtful as to whether an adjudicator has the power to extend the time for service of a payment response as such response is a matter to be complied with and served before their appointment as adjudicator. While it remains unclear as to whether an adjudicator has the power under Section 25(p) of the Construction Industry Payment and Adjudication Act to "extend any time limit imposed on the parties under this Act as reasonably required", the issue may be immaterial in light of View Esteem, which now requires an adjudicator to consider all defences raised in an adjudication response, notwithstanding the absence of a payment response.Effect of setting aside In Wong Huat Construction the High Court held that the setting aside of an adjudication decision will restore all parties to their original positions as though the adjudication had not taken place. Therefore, a party is not barred from subsequently initiating a fresh adjudication proceeding, arbitration or litigation in respect of the claim.Notwithstanding the findings in Wong Huat Construction, the court may exercise its inherent jurisdiction and decide on the claim itself. In Bina Puri Construction Sdn Bhd v Syarikat Kapasi Sdn Bhd (2017 5 AMR 750) the High Court, in exercising its inherent jurisdiction to ensure convenience and fairness in legal proceedings, allowed the applicant's claim in whole and ordered the respondent to pay the applicant the amount claimed in the adjudication proceedings.Loss and expense claimsIn SBDAB the High Court held that an adjudicator who had erroneously decided that he had no jurisdiction to decide on loss and expense claims was in breach of natural justice. The court found that such claims came within the ambit of the Construction Industry Payment and Adjudication Act as they were due to the delay in completion of works and therefore payable as part of the amount claimable for the additional costs incurred for work done under the relevant contract.However, the court recognised that not all loss and expense claims fall within the ambit of the Construction Industry Payment and Adjudication Act as there may be instances where a claim for special damages arises out of a breach by the employer. Whether a loss and expense claim falls within the ambit of the Construction Industry Payment and Adjudication Act depends on whether:the claim inevitably arises from the carrying out of the work; andthe construction contract provides for the party to be paid the amount claimed in consideration for its performance of construction work.A claim for bonus payment was declared in YTK Engineering to be within the ambit of the Construction Industry Payment and Adjudication Act. A bonus payment differs entirely from profit or loss sharing; the former is an incentive payment paid to a contractor that manages to save costs for the employer or complete the project earlier. The contractor will still be paid the agreed consideration for work done or services rendered except that they will be paid an additional incentive or bonus payment for their exemplary work in completing the project early or saving money. The later sum that is agreed to be paid to the contractor based on its performance will be certified by the certifying officer and added to the contract sum as a bonus or incentive payment. Such a claim would be upheld under the Construction Industry Payment and Adjudication Act.Terminated contractBinastra once again confirmed the High Court's decision in Econpile, which held that an adjudicator has jurisdiction to decide the dispute even though the construction contract has been terminated.Registration of decision in part In Harmony Teamwork Construction Sdn Bhd v Vital Talent Sdn Bhd (2017 10 MLJ 726) the defendant contended that the order for enforcement should not be the same terms as the adjudication decision, but rather for a reduced amount as the defendant had made part payment. The court held that while Section 28(2) of the Construction Industry Payment and Adjudication Act allows the High Court to make an order for enforcement of an adjudication decision "either wholly or partly", an order for enforcement in part is applicable only where part of an adjudication decision has been set aside pursuant to Section 15 of the act. Therefore, an order for enforcement will be registered in the terms of the adjudication decision unless a part of such decision has been set aside.Pre-award interestUnlike the Arbitration Act 2005 which precludes an arbitrator from awarding pre-award interest unless provided in an arbitration agreement (see Far East Holdings Bhd v Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals (2018 1 MLJ 1)), the decision in Milsonland Development Sdn Bhd v Macro Resources Sdn Bhd and another case (2017 8 MLJ 708) appears to confirm that an adjudicator has the power to grant pre-award interest pursuant to Section 25(o) of the Construction Industry Payment and Adjudication Act. CommentThe law on statutory adjudication in Malaysia is developing rapidly. This stream of cases on statutory adjudication will assist further interpretations of the Construction Industry Payment and Adjudication Act and help to fill any gaps in the statute.For further information on this topic please contact Jocelyn Yean Tse Lim at SKRINE by telephone (+60 3 2081 3999) or email ([email protected]). The SKRINE website can be accessed at www.skrine.com.An earlier version of this update was published in Skrine's Legal Insights (Issue 1/2018).