The consistent growth of the construction industry in the past few years driven mainly by government projects as part of the Economic Transformation Programme (“ETP”), has continued to rise to many construction-related disputes. Some problems in the construction industry include speculative development without sufficient financial capital, the extensive period of time and the high cost of existing dispute resolution mechanisms, and the unequal bargaining powers between parties have led to abuse. These problems bring undesirable effects to the industry, consumers and ultimately the economy. Insolvent subcontractors and abandoned projects are just some of the many consequences.
To address these problems, the Construction Industry Payment & Adjudication Act 2012 (Act 746) (“CIPAA”) was passed and will come into force on a date to be announced. The purpose of this Act is to facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication and to provide remedies for the recovery of payment. This Act will apply to every construction contract made in writing relating to construction work carried out wholly or partly within Malaysia and will include a construction contract entered into by the government. “Construction” here carries a wide meaning and covers a wide array of works in different areas, even including the oil and gas industry and telecommunications. The Act does not, however, apply to a construction contract entered into by an individual for any construction work in respect of any building which is less than four storeys high and which is wholly intended for his occupation.
The passing of this new Act has brought about a new form of alternative dispute resolution alongside the existing mechanism such as arbitration and mediation. Adjudication has a judicial element in that the adjudicator hears both sides and decides the dispute. The main thing that distinguishes arbitration and litigation from adjudication is that arbitration and litigation are usually the last options resorted to only when parties are ready to terminate the contract. In contrast, adjudication is about getting a quick neutral decision on disputes relating to payments commonly arising in construction projects. It is a summary procedure and an interim solution which in theory should not stop or delay the progress of the contract or works.
The process starting from the dispute until the adjudication decision is as follows:
(i) Payment Claim: to be served by the unpaid party on the non-paying party (section 5 CIPAA)
(ii) Payment Response: to be served by the non-paying party to the unpaid party (within 10 working days) (section 6 CIPAA)
- A party who admits to the claim shall state the whole amount claimed or any amount as admitted while one who disputes the claim shall state the amount disputed and the reason for the dispute.
(iii) Notice of Adjudication: to be served together with any supporting document by the claimant on the respondent (within 5 working days) (sections 7 & 8 CIPAA)
(iv) Appointment of Adjudicator: may be by agreement of the parties in dispute (within 10 working days from the service of the notice of adjudication) or by the Director of the Kuala Lumpur Regional Centre for Arbitration (“KLRCA”) upon the request of both parties or by either party in dispute if there is no agreement by both parties in the appointment (within 5 working days upon the receipt of a request) (sections 21 & 23)
(v) Terms of appointment: to be negotiated and agreed with the adjudicator (within 10 working days, after which the parties or the Director of the KLRCA may proceed to appoint a new adjudicator) (sections 22 & 23)
(vi) Adjudication Claim: to be served together with any supporting documents by the claimant on the respondent and the adjudicator (within 10 working days) (section 9)
(vii) Adjudication Response: to be served together with any supporting documents by the respondent on the claimant and the adjudicator (within 10 working days) (section 10)
(viii) Adjudication Reply: to be served with any supporting documents by the claimant on the respondent and the adjudicator (within 5 working days) (section 11)
(ix) Representation: parties may be self-represented or be represented by any party appointed by them, including solicitors (section 8)
(x) Adjudication proceedings: to be conducted according to the directions of the adjudicator, which may or may not involve oral evidence (section 25)
(xi) Decision: to be delivered within 45 working days from the service of adjudication response or reply, whichever later; or if no adjudication response is received, 45 working days from the expiry of the prescribed period for the adjudication response; or such further time as agreed to by the parties (section 12)
The adjudication proceeding is binding unless it is set aside by the High Court, the matter is settled by both parties in writing, the dispute is finally decided by arbitration or the court, or there is a stay of adjudication decision pursuant to sections 13 and 16. If either or both parties do not agree with the adjudication decision, the case can be reopened by arbitration or litigation at the conclusion or termination of the construction contract.
An adjudicator is a qualified and an independent industry expert who is appointed to assess the merits of the adjudication claim and decide on it. The adjudicator has his duties and obligations under section 24 CIPAA. He shall have the powers and discretion under section 25 CIPAA to establish the procedures in conducting the adjudication, draw on his own knowledge and expertise, carry out inspections as is deemed necessary and to award financing costs and interest, amongst others. Despite the powers and discretion being in the adjudicator’s hands, an adjudicator must apply the terms of the contract. Adjudicators and the KLRCA as the appointing body are also entitled to immunity.
To become an adjudicator, a person must have successfully completed the KLRCA Adjudication Training Programme and awarded the “Certificate in Adjudication”, hold a relevant degree and have at least 7 years of working experience preferably in the building and construction industry.
Five training programmes have been held nationwide and more than 300 adjudicators are now qualified and ready to adjudicate payment claims once the Act comes into operation.
The Appointing Body
The KLRCA is the default appointing authority by virtue of Part V of the CIPAA 2012. It is responsible for the determination of the standard terms of appointment, the fees of an adjudicator, the setting of the competency standard and the criteria required of an adjudicator pursuant to section 32(a).
Society of Adjudicators
The Malaysian Society of Adjudicators (“MSA”) was launched on 5 July 2013 with the object of promoting ethical and professional standards of service of adjudicators in Malaysia. It aims to encourage and develop adjudication as a method of resolving construction disputes (without denouncing other dispute resolution methods) and also to provide a communication channel for which adjudication practices and issues may be discussed among professionals. To keep adjudicators on the edge of current policies, practices, procedures and standards, it is also tasked with providing training and educational facilities for members who would like to become adjudicators and to promote the study of the law and practice relating to adjudication.
Malaysia joins developed countries across the globe such as Australia, New Zealand, the United Kingdom and Singapore where the practice of adjudication has gained popularity as an alternative dispute resolution mechanism.
MahWengKwai & Associates is pleased to offer our clients advise on the preparation and negotiation of construction contracts and representing clients in construction disputes and claims. Our Mr Lim Jo Yan, head of our corporate and commercial practice group has advised on standard form contracts as well as construction joint ventures. Our Mr Raymond Mah, head of our dispute resolution practice group, together with our associates Mr Gan Chong Chieh and Ms Selena Kong have successfully represented clients in a variety of payment claims, disputes on design, defects, supervision and delay, both in arbitration and in court.
By Raymond Mah & Melanie Woo Ching Yie
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.