The Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into operation on 15.4.2014. CIPAA was enacted to ease cash flow problems in the construction industry by facilitating regular and timely payment, by providing a mechanism for speedy payment dispute resolution through adjudication and by providing remedies for the recovery of payment in the construction industry. Instead of going to Court, many have opted for adjudication proceedings over court or arbitration proceedings. However, others held back as the application of CIPAA to contracts entered into before 15.4.2014 was not clear. The Federal Court, which is the highest Court in Malaysia, recently made a pronouncement which clarified the issue – it unanimously decided that CIPAA applies prospectively.
The Federal Court in Jack-In Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd (“Jack-In Pile”) held that CIPAA could only apply prospectively, i.e. it applies only to construction contracts executed after 15.4.2014, based on the following reasoning:
- CIPAA affects the substantive rights of contracting parties, and hence, it can only apply prospectively.
- Jack-In Pile concerns a “pay-when-paid” clause, a common term found in construction contracts. A “pay-when-paid” clause is a conditional provision where the obligation of one party to make payment is conditional upon that party having received payment from a third party. All condition payment clauses are rendered void pursuant to section 35 of the CIPAA.
- It was held in Jack-In Pile that the “pay-when-paid” clause concerns substantive rights which, “parties have acquired pursuant to the agreement”. The Court went on to say that such right existed even before CIPAA came into force. Therefore, section 35 of CIPAA “which takes away the substantive rights of parties cannot be applied retrospectively” as this right under the agreement existed before CIPAA came into force on 15.4.2014. In the absence of a clear legislative intention, section 35 of CIPAA which takes away the substantive right of parties cannot be applied retrospectively.
- Before the operation of CIPAA, parties were entitled to agree on a “pay-when-paid” payment regime. Section 35 of CIPAA takes away this right and parties no longer enjoy this freedom to contract after the coming into force of CIPAA on 15.4.2014. Freedom to contract is a substantive right, and regulations which affect substantive rights should only operate prospectively.
- The Federal Court also held that the date of commencement of an Act, including CIPAA, is only prospective in nature unless expressly stated otherwise. Therefore, in the absence of an express provision, which can only be enacted by Parliament, CIPAA cannot operate to a construction contract entered into before 15.4.2014.
- The enactment of CIPAA creates an alternative access to justice and dispute resolution forum by way of adjudication. This is a substantive right which can only apply prospectively.
As a result of the Federal Court’s decision in Jack-In Pile, the Asian International Arbitration Centre (“AIAC”) as the adjudication authority, announced that AIAC will no longer register payment disputes arising from construction contracts executed before 15.4.2014. Although statutory adjudication is no longer an option for Pre-CIPAA construction contracts, an aggrieved party may still resort to court or arbitration to resolve disputes over payments.