Your main contractor has defaulted in its payments to you, the subcontractor. After several ignored demands, you initiated adjudication proceedings under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) for the payments due to you. You filed your claim and argued your case. Finally, you obtained an adjudication decision in your favour, and the main contractor was asked to pay you for works done. However, the main contractor still refused to pay you. What can you do to ensure that you receive the adjudicated sum? Under CIPAA 2012, you have a few options:
- Apply to the court under section 28 of CIPAA 2012 for an order to enforce the adjudication decision as if it is a judgment of the High Court;
- Suspend performance or reduce the rate of progress of performance under section 29 of CIPAA 2012; or
- Request for direct payment from the principal under section 30 of CIPAA 2012.
This article explores the possibility of direct payment from the principal under section 30 of CIPAA 2012.
Governing Procedures and Principles
For ease of reference, section 30 of CIPAA 2012 is reproduced as follows:
“30. Direct Payment from Principal
- If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.
- Upon receipt of the written request under subsection (1), the principal shall serve a notice in writing on the party against whom the adjudication decision was made to show proof of payment and to state that direct payment would be made after the expiry of ten working days of the service of the notice.
- In the absence of proof of payment requested under subsection (2), the principal shall pay the adjudicated amount to the party who obtained the adjudication decision in his favour.
- The principal may recover the amount paid under subsection (3) as a debt or set off the same from any money due or payable by the principal to the party against whom the adjudication decision was made.
- This section shall only be invoked if money is due or payable by the principal to the party against whom the adjudication decision was made at the time of the receipt of the request under subsection (1).”
Section 4 of CIPAA 2012 defines “principal” as “a party who has contracted with and is liable to make payment to another party where that other party has in turn contracted with and is liable to make payment to a further person in a chain of construction contracts“.
In Murni Environmental Engineering Sdn Bhd v Eminent Ventures Sdn Bhd & Anor and other suits  MLJU 691, the court held that in the absence of proof of payment after the service of a notice under section 30(2) of CIPAA 2012, the principal shall pay the adjudicated sum to the claimant. While the option to serve a written request on the main contractor’s principal is discretionary, the principal’s obligation to serve a section 30(2) notice in reply to your written request is mandatory. The principal’s obligation to pay you under section 30 of CIPAA 2012 is compulsory as well.
In B Cor Geotechnics Sdn Bhd v Panzana Enterprise Sdn Bhd  MLJU 1030, it was held that there is no prerequisite for a contractual relationship to exist between the claimant in the adjudication proceedings and principal to invoke section 30 of CIPAA 2012. All that is required to “set the wheels in motion” is a written request by the successful claimant in the adjudication proceedings to the principal for payment. However, the claimant must ensure that there is money due or payable by the principal to the respondent in the adjudication proceedings at the time of receipt of the section 30(2) written request. It was also held in B Cor Geotechnics Sdn Bhd that an express term prohibiting any direct payment, assignment or payment on behalf of third parties in the main contract between a respondent in the adjudication proceedings and the principal in the main contract will not bite the claimant. The principal’s obligation to pay the successful claimant in the adjudication proceedings is a mandatory statutory duty. If the principal fails to pay, the claimant is entitled to enforce the corresponding statutory right against the principal.
In HMN Nadhir Sdn Bhd v Jabatan Kerja Raya Malaysia & Ors  MLJU 1859, it was held that an express prohibition clause in the main contract between the principal and main contractor against the subcontracting of works without the consent of the principal is irrelevant insofar as the application for direct payment under section 30 of CIPAA is concerned. The court held that if the main contractor subcontracted works to the subcontractor, in breach of the express prohibition, the principal is entitled to terminate the main contract and sue the main contractor for damages. The contract between the main contractor and the subcontractor is not rendered null and void by the main contractor subcontracting without the consent of the principal. Section 30 is applicable as long as the employer falls within the definition of “principal” under section 4 of CIPAA.
It was also held in HMN Nadhir Sdn Bhd’s case that the interim payment due from the main contractor under the adjudication decision need not be the same interim payment which the subcontractor is seeking direct payment for in a section 30 application. For instance, say the subcontractor obtained an adjudication decision against the main contractor for payment under Interim Certificate No.4, the subcontractor may request for direct payment from the principal under section 30 of CIPAA 2012 for the adjudicated sum so long as the principal owes the main contractor monies. The amount owed by the principal to the main contractor does not need to be the same corresponding Interim Certificate No.4. However, the amount due by the principal to the main contractor must be under the same chain of construction contracts.
Based on the above cases, it appears that the procedure to request direct payment from the principal is relatively straightforward.
Main Contractor Wound Up
What happens if the main contractor has been wound up? Is section 30 of CIPAA 2012 subject to the prohibition of preferential payment under the Companies Act 2016?
In CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd  MLJU 471, the High Court disallowed the subcontractor’s application under section 30 of CIPAA for direct payment from the principal. The Court held that (1) there is no independent obligation and liability imposed on the respondent to make direct payment to the appellant; and (2) payment by the respondent to the appellant would amount to preferential payment since the main contractor, BHL Builders, was in liquidation. However, the High Court decision was overturned on appeal. The Court of Appeal in CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd  MLJU 1215 did not agree with the High Court Judge and held that section 30 of CIPAA creates an independent statutory obligation on the principal to pay the claimant. The principal’s obligation to pay the claimant under section 30 of CIPAA is a separate obligation which exists in parallel with the main contractor’s obligation to pay the claimant under the adjudication decision. Hence, the subcontractor can request direct payment from the principal even though the main contractor has been wound up.
The Court in Bumimetro Construction Sdn Bhd v Mayland Universal Sdn Bhd and another appeal  MLJU 2245 held that the Parliament intended an adjudication decision “to have immediate bite and not just a mere bark”. Section 30 of CIPAA 2012 is a fast and useful provision for a successful claimant to secure payment for works directly from the principal.
By Christine Toh and Celinne Teh
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.