The Construction Industry Payment and Adjudication Act 2012, often abbreviated as “CIPAA”, was enacted to address issues related to payment disputes within the construction industry in Malaysia. According to the Asian International Arbitration Center (AIAC), over 5,000 adjudication disputes have been registered at the AIAC since CIPAA came into force. The amounts in dispute in 2023 alone total RM1.3 billion.

Adjudication under CIPAA was introduced to promote prompt payments and provide a mechanism for resolving payment disputes quickly. An adjudication decision is expected within 90 days from the date the notice of adjudication is issued.

Adjudication was intended to provide “rough justice.” Adjudication results in a decision which is “temporary.” Section 13 of CIPAA expressly provides that an adjudication decision is binding unless the dispute is decided by arbitration or the court.

In this article, we summarise the adjudication process before diving into one of the remedies provided by CIPAA to enforce the adjudication decision – with a favourable adjudication decision, an unpaid party can suspend or reduce its rate of progress of performance until the adjudication decision is satisfied.

Overview of the Adjudication Process

The adjudication process typically begins with the unpaid party issuing a payment claim to the non-paying party. If the claim is disputed, a non-paying party may issue a payment response and, the unpaid party may issue a notice of adjudication to commence the adjudication process. Once the adjudicator is appointed, parties will submit their respective documents and evidence through the adjudication claim, adjudication response and adjudication reply. The adjudicator will then decide on the dispute within 45 days from the date of the adjudication reply.

Once an unpaid party obtains a favourable decision, the next step would be to cash in the decision. Ideally, the losing party complies with the decision, promptly paying the adjudicated amount within the specified time. However, such outcomes are few and far between. Often, the unpaid party will have to initiate proceedings in the High Court to enforce the decision under section 28 of CIPAA and be faced with an opposing application to either set aside the decision pursuant to section 15 of CIPAA or stay the decision pursuant to section 16 of CIPAA.

However, post-adjudication remedies are not limited to the usual enforcement proceedings. There are alternatives available to the unpaid party. A special feature of CIPAA is that it provides two additional options to an unpaid party to lawfully pressure the non-paying party to comply with the decision. One of these options is to suspend or reduce the rate of progress of performance of the construction works.

Section 29(1) of CIPAA provides:

Suspension or reduction of rate of progress of performance

A party may suspend performance or reduce the rate of progress of performance of any construction work or construction consultancy services under a construction contract if the adjudicated amount pursuant to an adjudication decision has not been paid wholly or partly after receipt of the adjudicated decision under subsection 12(6).

Procedure for Suspension

The procedure or mechanism to suspend or reduce the rate of progress is set out in Section 29 of CIPAA and is as follows:

a) Give the other side a written notice of intention to suspend performance or reduce the rate of progress of performance if the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice (section 29(2) of CIPAA).

b) Only after 14 days from the date of the receipt of the notice has lapsed can an unpaid party reduce or suspend the performance (section 29(3) of CIPAA).

c) Resume performance within ten working days after having been paid the adjudicated amount (section 29 (4) of CIPAA).

Suspension or Slow Down without Penalty

The procedure or mechanism to suspend or reduce the rate of progress is set out in Section 29 of CIPAA and is as follows:

a) Give the other side a written notice of intention to suspend performance or reduce the rate of progress of performance if the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice (section 29(2) of CIPAA).

b) Only after 14 days from the date of the receipt of the notice has lapsed can an unpaid party reduce or suspend the performance (section 29(3) of CIPAA).

c) Resume performance within ten working days after having been paid the adjudicated amount (section 29 (4) of CIPAA).

Suspension or Slow Down without Penalty

If a contract already provides that the contractor can suspend works (for example, clause 16.15 of PAM 2006 Sub-Contract) in the case of non-payment, an unpaid party can choose to suspend works under the mechanism provided under the contract. However, many contracts do not permit the suspension or slowing down of work based on non-payment.

Contractors with contracts that do not expressly allow the slowing down of work have to choose between termination or continuing work without payment. The non-payment of claims does not confer on the contractor a right to suspend work – two wrongs do not make a right.

For example, in the case of Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1996] MLJU 359 the developer exercised its rights of set-off and withheld payment for two payment certificates. The main contractor proceeded to suspend work in protest. However, there was no provision in the contract to allow for the suspension of work. The court held that in the absence of a specific provision in the contract, a contractor has no automatic right to suspend works simply because one or two of his certificates have not been paid. Even if the contractor could have established that the developer was in breach of contract, the contractor would have no right to suspend works, but instead would have had to elect to either terminate the contract or insist on due performance.

Section 29 of CIPAA provides the unpaid party with the statutory right to suspend or slow down work if an adjudication decision remains unpaid. This right should be seen as a boon to contractors who may not have this option included as a term in their contract. It provides the unpaid party with an effective tool to compel payment from the non-paying party. Given that the notice to suspend works can be issued once the adjudicated amount is unpaid past the specified deadline, this provides a relatively quick recourse for the unpaid party.

The statutory right to suspend or slow down works means that the non-paying party cannot retaliate against the unpaid party by terminating the contract or imposing liquidated damages for delays. Section 29 of CIPAA provides that the unpaid party is entitled to a fair and reasonable extension of time and is also entitled to recover any loss and expenses incurred as a result of the suspension or slowdown. What exactly constitutes actual costs claimable is difficult to state categorically since it depends on a whole range of factors.

In some contracts, there may be an express contractual provision that prohibits the contractor from slowing down work in the event of a payment delay. In our view, such a clause will not oust the application of section 29(1) of CIPAA. Under such a contract, a contractor cannot slow down works on the allegation of non-payment but can do so when a favourable adjudication decision remains unpaid.

Concurrent Remedy

Suspending or reducing the rate of progress pursuant to section 29 of CIPAA may be done concurrently with other remedies. If the unpaid party chooses to ‘enforce’ the decision, whether by way of garnishee proceedings or seeking direct payment, it can still choose to suspend the works concurrently.

In Hmn Nadhir Sdn Bhd v Jabatan Kerja Raya Malaysia & Ors [2018] 1 LNS 1938, the High Court deliberated upon the issue of whether the three remedies provided “for the recovery of payment in the construction industry” under Part IV of CIPAA (i.e. sections 28 to 30 of CIPAA) may be applied either concurrently or in combination with each other or singly. Lee Swee Seng J (now JCA) ruled as follows:

[77] “Concurrently” cannot be read as “Sequentially” or “Consecutively” after exercising its remedy under section 28 of CIPAA. That is not borne out by the words used which can only be interpreted one way which is that the successful Claimant may exercise any or all of the remedies concurrently and each of the remedy under sections 28, 29 and 30 may be exercised singly or in combination in the enforcement of the Adjudication Decision.

[78] Again with section 31(2) the Legislature must be presumed to know that there is already a mode of execution available under the Rules of Court 2012 with respect to a garnishee proceeding and to insist on an enforcement order first under section 28 to enforce the Adjudicate Decision as if it is a judgment of the High Court would be to make the remedy available under section 30 a duplication of what is already available under a garnishment order.

[79] The three (3) remedies under sections 28 – 30 may be applied either concurrently or in combination with each other or singly as part of the arsenal available to the successful Claimant to activate and deploy in its efforts to recover the payments due under an Adjudication Decision.

Relief for the Non-Paying party

CIPAA has been described as social legislation that is intended the address the imbalance in bargaining and financial power between developers and contractors or contractors and sub-contractors. However, there may still be valid reasons for an unsuccessful respondent, be it a developer or contractor, to be gravely concerned about paying an unfavourable adjudication decision.

An unsuccessful respondent in adjudication can attempt to challenge the decision by applying to the High Court to set it aside under section 15 of CIPAA or to take the dispute to court or arbitration. While these proceedings are pending, the respondent can also for a stay of the decision under section 16 of CIPAA. Grounds for the stay may include concerns about the insolvency of the claimant and the dissipation of funds before the dispute reaches a final resolution in court or arbitration. However, until a stay under section 16 of CIPAA is granted, the unpaid party can make use of section 29, making it necessary to file any application for a stay as swiftly as possible.

Conclusion

While enforcing adjudication decisions may come with challenges, CIPAA provides mechanisms and remedies that offer parties involved in construction disputes a means to assert their rights effectively and resolve disputes in a timely manner.

Section 29 is an additional remedy under CIPAA to help unpaid parties without going through the process of enforcing a favourable adjudication decision. The benefits of section 29 extend beyond just the ability to suspend works; it also safeguards against liquidated damages claims by ensuring that the unpaid party is entitled to extensions of time and reimbursement for any losses incurred due to the suspension or reduction in work progress.

By Michael Koh

REQUEST A FREE CONSULTATION →

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.