Shannon Rajan December 18 2017 Federal Court decision changes adjudication practice in Malaysia SKRINE | Projects, Construction & Infrastructure - Malaysia Shannon Rajan Projects, Construction & Infrastructure IntroductionFactsDecisionCommentIntroductionIn View Esteem Sdn Bhd v Bina Puri Sdn Bhd (an unreported decision), the Federal Court dealt with three broad issues:jurisdictional challenges under Section 41 of the Construction Industry Payment and Adjudication Act;(1)the adjudicator's right to exclude defences; andthe setting aside and staying of decisions under Sections 15 and 16 of the act.FactsThere were three applications relating to the same adjudication claim, which were consolidated and heard together at the high court. The appellant filed an application to challenge the adjudicator's jurisdiction under Section 41 and filed another application to set aside or stay the adjudication decision under Sections 15 and 16 of the act. While the respondent filed an application to register and enforce the adjudication decision as a judgment of the court pursuant to Section 28. The high court dismissed both of the appellant's applications and allowed the respondent's application. The Court of Appeal upheld all three high court decisions.DecisionRegarding the first issue, the Federal Court observed that the high court had fully considered Section 41 of the Construction Industry Payment and Adjudication Act on its merits, but the Court of Appeal's decision was a procedural one, wherein it had decided that the Section 41 application ought to be dismissed outright because it had been brought as a separate application and not as an application under Section 15. The Federal Court held the view that the Court of Appeal had erred in failing to distinguish between the present case where the act did not apply at all because of Section 41, with a case where the act applied, but the adjudicator had exceeded his jurisdiction under Section 15. The Federal Court found that the appellant was correct in not invoking Section 15 because it could not first complain that the act did not apply to the case and then invoke a provision of the act to seek relief.The Federal Court then dealt with the question of whether the Construction Industry Payment and Adjudication Act applied to the present case when considering the wording of the following sentence: "Payment dispute… commenced in any court or arbitration before the coming into operation of the Act." The Federal Court observed that in UDA Holdings Bhd,(2) the high court had decided that the act applies retrospectively to construction contracts made and payment disputes arising before the act came into force. Therefore, in transitional cases – as in View Esteem – a determination must be made regarding whether the Section 41 exclusion applies. The Federal Court held that it would be sufficient to establish a right of exclusion under Section 41 if the paying party had demonstrated that a claim covering the present claim had been previously commenced in court or arbitration. The Federal Court accepted the appellant's argument that Progress Claim 28 (ie, cumulative of earlier progress claims contained in Interim Certificates 23 to 26R), which was the subject matter of the payment dispute fell within the exclusion of Section 41, as a claim based on Interim Certificates 23 to 26R had been commenced in court in May 2013. Therefore, the respondent's claim was excluded from the act.The next issue dealt with by the court concerned whether the adjudicator had the right to exclude the appellant's defences. The adjudicator relied on Section 27 of the Construction Industry Payment and Adjudication Act to exclude the appellant's defences because they were not stated in the payment response under Section 6 despite being pleaded in the adjudication response under Section 10. The high court agreed with the adjudicator and held that Sections 5 (payment claim) and 6 (payment response) were determinative of jurisdiction and that the adjudicator's jurisdiction did not extend to matters in the adjudication claim, adjudication response and adjudication reply found in Sections 9 to 11. The high court's conclusion was based on the finding that Sections 9 to 11 were only formal manifestations of the dispute.The Federal Court disagreed with the high court's reasoning. It found that the payment response under Section 6(2) requires the non-paying party to state only the "amount disputed and the reason for dispute", while the adjudication response under Section 10 requires the respondent to "answer the adjudication claim". The Federal Court held that the latter is a legal response with the obligation to answer imposed by statute. A similar observation was taken with the payment claim under Section 5 and the adjudication claim under Section 9. The Federal Court also placed significance on the fact that an unpaid party and a non-paying party were referred to as the claimant and respondent, respectively, and that this came about after the initiation of adjudication under Section 8, which signifies the start of the adjudication process. The two-stage process under the Construction Industry Payment and Adjudication Act did not warrant giving reduced importance to the adjudication pleadings under Sections 9 to 11 and greater significance to the initial documents under Sections 5 and 6.The Federal Court then determined the scope of jurisdictional limitation under Section 27(1). First, it stated that Section 27(1) refers to the subject matter of the claim under Section 5, which is the cause of action identified by the claimant by reference to the applicable clause of the construction contract. Thus, if the payment claim relates to Progress Claim 28, the jurisdiction of the adjudicator is limited to this progress claim and nothing else. The payment response is likewise limited to an answer to Progress Claim 28. Section 27(1) had nothing to do with the grounds of the claim or the reasons for opposing the claim. The Federal Court held that in the absence of a prohibitory clause,(3) there was no impediment for the adjudicator to consider all of the grounds of claim in an adjudication claim under Section 9 and all of the grounds of defence in an adjudication response under Section 10.The Federal Court went on to determine the effect of Section 6(4), which provides that if a non-paying party fails to respond to the payment claim, that party is "deemed to have disputed the entire payment claim". The Federal Court found that the high court had wrongfully reduced the significance of the deeming effect where the respondent is entitled only to dispute the claim as it stands and not raise any positive defences. Accordingly, the Federal Court held that the adjudicator had breached natural justice in excluding and refusing to consider certain defences raised by the appellant.The last issue dealt with by the court involved the interplay between Sections 15 (setting aside) and 16 (stay). The high court had held that an application under Section 16 can only be allowed in exceptional circumstances – for example, if there was overwhelming evidence that a contractor would be unable to meet its contractual and financial obligations to the employer. The Federal Court held that such a stringent test is not justified under the Construction Industry Payment and Adjudication Act as Section 16 itself contains no such limiting requirement or intent. The Federal Court adopted a more liberal reading of Section 16, wherein the courts can stay the award where there are clear errors or to meet the justice of the individual case.The Federal Court also dealt with the procedural aspect of Section 16. It reviewed the Court of Appeal's decision that a stay application under Section 16 could be made only after the filing of an application under Section 15. The Federal Court observed that Section 16(1)(A) provides that parties may apply for a stay once an application to set aside an award under Section 15 has been made, but it does not require that this application be made separately. It is wholly appropriate for a stay under Section 16 to be filed together with an application to set aside an award under Section 15 as a matter of practical utility for the high court to make the appropriate order in a joint consideration of both.CommentThe Federal Court's decision on the last two issues have broad repercussions in the way that adjudications are conducted in Malaysia. The Federal Court's decision to allow a respondent to put forward additional defences that were not pleaded in the payment response into the adjudication response is a complete reversal of the court's previous position. This decision mitigates the harshness of the previous position where the respondent had to set out all possible defences available within 10 working days from receipt of the payment claim. Now, the respondent has until the adjudication response to put forward all defences and the pressure is shifted to the claimant which has only five working days to deal with these defences, some of which may be raised for the first time in the adjudication process.The Federal Court has also made it easier for a losing party to obtain a stay of the adjudication decision, which specifically includes "clear errors or to meet the justice of the individual case". This decision means that there is a greater onus on the adjudicators to arrive at a correct decision within the tight timeframes, as material errors could lead to a stay of the adjudication decision, which would in effect nullify the whole adjudication process.For further information on this topic please contact Shannon Rajan at SKRINE by telephone (+60 3 2081 3999) or email ([email protected]). The SKRINE website can be accessed at www.skrine.com.Endnotes(1) Unless otherwise stated, all references to sections in this update refer to the Construction Industry Payment and Adjudication Act.(2) 2015 11 MLJ 499.(3) This is similar to Section 15(3) of the Building and Construction Industry Security of Payment Act 2006 and Section 20(2B) of the New South Wales Building and Construction Industry Security of Payment Act 1999.