In Bauer (Malaysia) Sdn Bhd v Jack-In Pile (M) Sdn Bhd (unreported) the Court of Appeal considered whether a pay-when-paid clause in a construction contract is void under the Construction Industry Payment and Adjudication Act.

Background

In two appeals before the Court of Appeal, the High Court had dismissed the appellant's application to set aside an adjudication based on its finding that the pay-when-paid clause in a construction contract was void pursuant to Section 35 of the Construction Industry Payment and Adjudication Act, which prohibits any conditional payment clauses in construction contracts.

Clause 11.1 of the construction contract provided as follows:

"11.0 Progress Payment

11.1 All payment shall be made within 7 days from the date the Specialist Contractor received their related progress payment and subjected to 5% retention. The Sub-Contractor shall submit his claims with measurement records of work done including demarcated sketches and/or delivery orders (where applicable), duly endorsed by the Specialist/Main Contractor's and Consultants authorised site staff. The cut-off date for the progress claim shall be on the 20th day of each calendar month."

The main issue before the adjudicator was whether Section 35 applied to construction contracts before the Construction Industry Payment and Adjudication Act came into force. The adjudicator found that Section 35 did apply and therefore set aside Clause 11. It relied on the default provision, which entitles progress payments under the act; a sum of RM906,034 was therefore awarded to the respondent.

The High Court relied on UDA Holdings Bhd v Bisraya Construction Sdn Bhd ((2015) 5 CLJ 527), which held that the Construction Industry Payment and Adjudication Act applies to all construction contracts regardless of when they were made. Therefore, the court upheld the adjudicator's decision.

Decision

Concerning the applicability of Section 35, the Court of Appeal found no provision in the Construction Industry Payment and Adjudication Act governing the inclusion of construction contracts made before the commencement of the act; as such, it determined the government's intention through established principles. The court found that if the legislation does not remove any substantive citizen rights, it is procedural and should be interpreted as retrospective unless otherwise stated.

In determining whether the act relates to substantive rights, the Court of Appeal observed that before its enactment, claimants in the construction industry could resort only to the courts or arbitration to settle disputes. However, claimants now have an additional option through which to claim for contractual fees. As such, the Court of Appeal opined that access to justice is a substantive right and therefore the act relates to substantive rights. It also found that, although the act provides a procedural regime dictating how claims should be processed before an adjudicator, this is merely a consequence of the right created by the act.

Regarding Section 35, the Court of Appeal found that the right to freedom of contract, where the parties are entitled to regulate their business affairs subject to prohibitions recognised by law, also constitutes a substantive right. Section 35 removes the parties' right to have their payment regime regulated by a pay-when-paid clause. The Court of Appeal acted on the presumption that the government will not remove the established right of an individual retrospectively unless clearly stated in the statute. Therefore, the court concluded that the act – including Section 35 – is prospective and Clause 11 of previous construction contracts remains valid.

The Court of Appeal deviated from UDA Holdings Bhd, citing International Contractual and Statutory Adjudication in which Andrew Burr suggested that the Construction Industry Payment and Adjudication Act was not procedural legislation. Burr referenced Section 36(1), which allows parties to contract out of the progress payment regime, stating that such a right is inconsistent with the act's intentions. He opined that the phrase "unless otherwise agreed by parties" in Section 36 should be removed.

The Court of Appeal therefore allowed the two appeals, overturning the High Court and adjudicator's decision.

Comment

The Court of Appeal's decision has altered statutory adjudication practice in Malaysia, which had been governed by UDA Holdings Bhd. The pay-when-paid clauses under a construction contract before the enactment of the Construction Industry Payment and Adjudication Act will remain valid and enforceable, and will be unaffected by the introduction of Section 35.

It is unclear whether the Court of Appeal's finding that the Construction Industry Payment and Adjudication Act "is prospective in nature" means that the entire statute applies prospectively only to construction contracts entered between the parties after the commencement of the act, or whether only certain provisions may be prospectively applied. The case is pending leave to appeal to the Federal Court.

For further information on this topic please contact Shannon Rajan at SKRINE by telephone (+60 3 2081 3999) or email (shannonrajan@skrine.com). The SKRINE website can be accessed at www.skrine.com.

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