CIPAA Adjudication – To What End?

When the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) came into force on 15 April 2014, the construction industry was stoked and at the same time sceptical.Since then, the Courts in the cases that were brought before it in regards to CIPAA have upheld the aim that CIPAA adjudication is meant to achieve rough justice – ‘pay now, argue later’. The industry was somewhat elevated in their scepticism but they continue to watch closely.

9 years on, what of the thoughts of CIPAA adjudication today? Is it really the effective tool that would assist, or has assisted, with the cash flow issues in the construction industry as the policy makers had envisaged?

From when it came into effect, adjudication decisions have gone through numerous litigations in Court typically for setting aside under Section 15 or for stay of the adjudication decision (“AD”) under Section 16 of CIPAA. The threshold to achieve a stay of the AD under CIPAA was a high one, so a stay order was rarely granted. Is this still the case?

In the Court of Appeal case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd and other appeals [2022] 6 MLJ 392, a stay of the AD was granted even though the AD was not set aside and enforcement allowed. The Court of Appeal found that the CIPAA did not prohibit the court from granting a stay of the AD even though it had granted an application to enforce the AD. It recognised that whilst a stay should not be too readily given, the court may exercise its discretion under Section 16(1)(b) of CIPAA to grant a stay of the enforcement of an AD pending the disposal of litigation or arbitration whichever applicable when either there is a clear and unequivocal error in the adjudication decision or that it is in the interest of justice for the court to so direct, following the Federal Court case of View Esteem Sdn Bhd v Bina Puri Holdings Bhd [2018] 2 MLJ 22.

The Court of Appeal reiterated that the fact that the dispute has been referred to arbitration was not a special circumstance warranting the grant of a stay of the AD, thereby affirming the principles espounded in the High Court cases of Subang Skypark Sdn Bhd v Arcadius Sdn Bhd [2015] 11 MLJ 818 and Pasukhas Sdn Bhd v Empire Multiple Sdn Bhd and another appeal [2019] MLJU 1393, and also the principle as espounded in the Federal Court case of Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal [2020] 6 MLJ 224 that adjudication and arbitration are not mutually exclusive to each other and that CIPAA allows parties to take their grievances to the High Court prior to the adjudication process, concurrent with the adjudication process and even after the adjudication process notwithstanding the AD to determine the very construction dispute before the adjudicator.

In its decision to grant a stay, the Court of Appeal found the following factors that created the existence of special circumstances in the case:

    1. there were numerous issues to be ventilated at the arbitration proceeding, of which reference to arbitration of the very same issues raised in the adjudication was made by the respondent (unpaid party) itself before the pronouncement of the AD. This therefore lends credence to the suggestion that by its own prior conduct, the respondent had always for all intents and purposes considered if not admitted that what then became the adjudicated amount was a disputed one pending final determination by arbitration.
    2. the threats of an action for writs of seizure and sale of the appellant’s (non-paying party) land upon which an order for sale for the same had been obtained where the auction of the land would be held in the near future.
    3. apart from the critical risks associated with the execution proceedings against the appellant, the size of the appellant’s counterclaim was well in excess of the adjudicated sum due to the respondent a few times over and that the appellant has properties worth substantially more than the amount claimed by the respondent.
    4. the uncertainty over whether the respondent was financially capable of repaying the adjudicated sum if the appellant succeeded in the arbitration.

That the pending arbitration with the same issues ventilated therein is a factor of special circumstance goes against the very essence that an adjudication decision presents a temporary resolve to address the cash flow issue. Nevertheless, it is important to note the totality or cumulation of the factors found by the Court of Appeal to have created the existence of special circumstances when it allowed a stay in the case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd, which may be a distinguishing factor.

[Note: there is another Court of Appeal case of ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd (Civil Appeal No. W-02(C)(A)-443-03/2021), of which the grounds of judgment rendered by the Court of Appeal is dated 15 June 2023, which is in respect of the same project but relating to payment claims 25 and 26. Whereas the Court of Appeal decision in ASM Development (KL) Sdn Bhd v Econpile (M) Sdn Bhd and other appeals [2022] 6 MLJ 392 relates to progress claims 16 – 24 and under-certified sum under certificate 15.]

In another Court of Appeal decision in the case of Sime Darby Energy Solution Sdn Bhd (formerly known as Sime Darby Offshore Engineering Sdn Bhd) v RZH Setia Jaya Sdn Bhd [2022] 1 MLJ 458, the Court of Appeal allowed an appeal overturning the High Court’s decision in granting a Fortuna injunction restraining the unpaid party in the adjudication from filing or continuing any winding up petition against the non-paying party. The appeal turned on two points:

    • there was no bona fide dispute of the debt;
    • the non-paying party did not have the financial capacity or means to pay the debt.

In concluding that there was no bona fide dispute of the debt, the Court of Appeal observed that the basis for the dispute to the debt was not established as at the date of the hearing of the application for a Fortuna injunction, given that the non-paying party had not initiated arbitration or even a letter of demand to the unpaid party (the notice of arbitration was issued 6 days after the hearing and 7 months after the adjudication decision). This was further propounded by the non-paying party’s admission of the debt due to the unpaid party in the payment response, but for the entitlement which would be set-off by the non-paying party’s LAD claim.

In arriving at its conclusion, the Court of Appeal reiterated the principle pronounced in the earlier Court of Appeal decision in Likas Bay Precinct Sdn Bhd v Bina Puri Sdn Bhd [2019] 3 MLJ 244 in that:

    1. one may proceed to wind up a company based on an AD under CIPAA without having to first apply to enforce the same under s. 28 CIPAA;
    2. the right of the non-paying party as the losing party in the adjudication proceeding to pursue court action or arbitration that may eventually prevail over or reverse the adjudication decision is an uncertain event that should not be used to preclude the statutory right of the unpaid party to pursue a winding up action.

Given the Court of Appeal decision in the RZH Setia Jaya case, it does seem that CIPAA adjudication remains an effective tool towards recovering the amounts due in the construction industry. However, one should be mindful of the facts that can be brought up as special circumstances as in the Econpile case, in particular the repayment capability of the unpaid party which should be considered against the amount of the adjudicated sum in concern.

Author:  Janet Chai Pei Ying


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